NOCIL Limited (NOCIL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the NOCIL Limited Q3 FY '21 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. S. R. Deo. Thank you, and over to you, sir.

Thank you. Good morning, and very warm welcome to everyone present on the call. Along with me, I have Mr. P. Srinivasan, our Chief Financial Officer; and SGA, our Investor Relations adviser. I trust and pray that you and your families are safe, healthy and secure. Hope you all have received our investor presentation by now. For those who have not, you can view them on the stock exchanges and company website. To start with, the performance for 9 months of the current financial year got impacted due to lockdown in Q1 FY '21. As the economy started to unlock gradually, we saw our performance started to improve from July 2020 onwards. As stated during our previous earnings call, our business operations started to pick up pace, and we saw a month-on-month improvement in our production levels. It is commendable on the part of the NOCIL team that during the challenging environment, we have managed to achieve highest ever sales volume in Q3 FY '21, even beating our record volume achieved in Q2 FY '21. On a sequential basis, we saw a volume growth of 25%, and we expect to maintain this momentum in Q4 FY '21 as well. Further, the tire import restrictions also helped the domestic tire customers to operate at a higher utilization for the last 4 months, and we expect this momentum to continue as well during Q4 FY '21. The pickup in volumes is backed up by uptick from tire majors in domestic as well as international market. The demand from them has been driven by a buoyant replacement market and improving OEM segment. Given the monthly auto numbers released, we expect the demand momentum to continue in the coming quarter as well. Any resurgence of COVID-19 will have a temporary effect on a particular market, be it domestic or export. The introduction of vaccine augurs well for the citizens at large, and we are quite confident the world will sail through these challenges -- challenging times. On revenue. Our revenue have grown by approximately 25% on quarter-on-quarter basis, indicating resilience in our business strategy. As stated during the previous earning call, the pricing scenario has started showing an increasing trend, and we are confident this uptrend will not only improve revenue but also the profitability aspect during Q4 FY '21. Given the recent performance and on the basis of contracts entered with major customers, both domestic as well as exports, we are revising our guidance upward from a flattish growth for FY '21 to a growth between 8% to 10% for FY '21. This is despite after recording a significant drop in volume during Q1 FY '21. Similarly, we are revising our guidance on the revenue front from -- to a record growth of 8% to 10% on a full year basis, in view of the price corrections put into place from January '21. Given that our capacities are in place, the unutilized capacities will enable the company to continue the growth trajectory going into next year as we work towards being valued as a reliable partner to all the major tire companies. The China Plus strategy has played a pivotal role in achieving that goal. It may be recalled that we had capitalized Phase 2a of INR 140 crores last year. And as indicated during the previous earnings call, we have achieved mechanical completion of Phase 2b amounting to INR 140 crores in Q3 FY '21. We have started trial production from January '21. Apart from small capital work in progress, all the pending capital will be capitalized in the books of accounts during Q4 FY '21. A quick outlook on the industry scenario. The global consumption of both natural and synthetic rubber has shown signs of upward trend. The annualized consumption for the first 6 months of calendar year 2020 showed a degrowth of approximately 15% compared to calendar year 2019, whereas the annualized consumptions for 9 months of calendar '20 degrew by 11%, indicating improving demand in Q3 of calendar year 2020. The auto numbers also echoed some trend of volume pickup aided by increasing demand from OEMs, leading to revival in demand for tire majors in both OEM as well as replacement market. The OEM demand is returning after muted performance in last couple of years as well as disruption due to COVID-related challenges in the initial part of the year. As a matter of additional information, the monthly rubber consumption has reached to early 2019 levels. As per IRSG forecast, the growth for calendar year 2021 in Indian market is expected to be around 7%. This is significant as overall growth in rubber consumption normally is about 3%. Also, as a global sourcing team of customers is increasingly working towards China Plus strategy, the large non-Chinese supplier for rubber chemicals stands to benefit from this shift greatly. With NOCIL being one of the key players in non-Chinese area with presence across entire portfolio of rubber chemicals, the outlook seems to be positive. Our aim is to achieve to continue the ramping up of capacity utilization. And if these indicators are sustained, we are reasonably confident to achieve 100% utilization by September 2023 instead of March 2024 stated during the previous earnings call. This is from my side. Now I would like to hand over to Mr. P. Srinivasan to give you update on the financial performance. Thank you.

Thank you, Mr. Deo, and good morning, everyone. Hope all of you are doing good, safe and fine. Let us run through the financials of the company for the Q3 and 9 months FY '21. The performance for the 9 months are not comparable with the same period of last year in view of the Q1 FY '21 lockdown impact due to COVID-19. On the sales volume front, the volumes grew by 44%, taking base of Q1 FY '20, whereas compared to Q2 FY '21, the growth has been around 25%. As stated in the earnings calls -- the previous earnings calls, on a month-to-month basis, our production has picked up, and we are further ramping up under strict safety and hygiene protocols. On the revenue front, the net revenue from operations for Q3 FY '21 stood at INR 275 crores from INR 222 crores in Q2 FY '21, a sequential growth of 25%. It may be noted that the INR 275 crores is the highest ever quarterly revenues from the automotive segment. The growth has largely been driven by better volume uptake for the reasons already stated by Mr. S. R. Deo. For the 9 months FY '21, the revenue stood at INR 603 crores. On an annualized basis, we continue to maintain our -- we have revised our guidance estimates, as Mr. Deo point out, to increase by 8% to 10% on the revenue front. Value addition part. The value addition for Q3 FY '21 stood at INR 119 crores, which is 43.4% of sales. As stated during previous earnings calls, our absolute EBITDA started improving -- did improve in Q3 FY '21. During Q3 FY '21, there is a drop in gross margin or value addition from 48.2% to 43.4%. Some of the major factors we would like to attribute or assemble. In the previous earnings call, we had assumed a sales volume at an index level of 134 million. In reality, we could -- achieved 144 million as more orders came in from the customers. To cover up the shortfall, we had to buy at an unprecedented high price of some of our inputs, despite the building blocks not displaying such massive increases. This probably happened due to temporary shortage or supply chain mismatches in those particular inputs. We undertook this aspect, keeping in mind the long-term relationship aspect with key domestic and critical international customers. Our long-term goal is to achieve 100% utilization, so we sacrificed consciously some margins to gain our market share. Further, the growth in volume terms were largely out of products where we participate in an aggressive manner, as said, to capture market share. There were some logistic constraints on delayed import parcels. With the result, we were forced to buy some spot buying to maintain and deliver our commitment to our customers. Going forward, we are reasonably confident that in view of unutilized capacities, which even as of date, are expected to record in excess of 50% gross margin on respect of products which are underutilized, and assuming that these temporary price corrections of inputs gets corrected, as per the historical trend and building blocks, our long-term guidance on gross margins continue to remain at 50%. And we will inch towards that over a period of time. On operating EBITDA parameters, the Q3 FY '21 stood at INR 37 crores as against INR 31 crores in Q2 FY '21, a sequential growth of 18%. EBITDA margin for the quarter stood at 13.4%, which was marginally lower as compared to the previous quarter of 14%. For 9 months FY '21, the operating EBITDA stood at INR 76 crores. On the profit before tax. The profit before tax for the Q3 FY '21 stood at INR 29 crores as against INR 23 crores during Q2 FY '21, a growth of 28%. For 9 months, it's about INR 62 crores. Profit after tax stood at INR 22 crores as compared to INR 17 crores in Q2 FY '21. For 9 months, it's at INR 50 crores. With this, we would like to open the questions -- floor for our question-and-answer.

[Operator Instructions] The first question is from the line of Prateek Poddar from Nippon India Mutual Fund.

Sir, a couple of questions. One is when you say that your gross margin has contracted, is it because -- what is the 3 dominant factor? Is it the high input cost because demand sourced in a very material way as a result of which you couldn't -- you had to buy some spot? Or was it sacrificing margins to gain market share? And second question is, when you say long-term guidance is that gross margins will go down to 50%, what -- how do you define long term? Is it when you achieve 100% capacity utilization?

Prateek, we would like to clarify just one point. I think we explained in the -- just in the speech that there is a combination of gaining market share where you have to supply additional volumes. Now the larger picture is that when we originally estimated at 134 million, we were covered for raw materials at a lower price. But when it came to 144 million, we had to cover the shortfall at spot prices, as some of our import parcels got delayed, point number one. Point number two, these products where we gain volume share is basically market share we deliberately took an aggressive intent to capture market share. Now there have been cases in some of the inputs where the price rise has been unprecedented. It is nothing [ warrant ] based on the building blocks petrochemical scenario or base petrochemicals index trend or et cetera. So we believe once these things get corrected, and assuming there are lots of capacities which is underutilized, some of the specialized products, et cetera, once those approvals come in, those ramping up takes place, our guidance towards revenue -- sequential guidance will keep on increasing. What we are saying is it will ultimately inch towards 50%. Today, we are at 43.4%. It will not overnight happen next quarter, but it will ultimately inch towards 50%.

And when you say ultimate journey towards 50%, is it in line with capacity utilizations like in September '23? Or as you said, you are 100%, is it that...

It all depends on the product which is getting approved and as soon as we start ramping up that. What we are saying is today is February '21, and we are talking about September '23. We have a journey of 28 or 30 months. And during these 30 months, if these specialized products or those high-value products get higher market share or higher upliftment, we are going to -- bound to see. And even assuming that raw material price gets corrected over a period of time and it evens out normally, temporary price mismatches doesn't last long in the historical trend. So it gets corrected. Once that correction happens, ultimately, the value addition percent starts getting rectified.

And last question, and I'm jumping back in the question queue, I heard a comment on Jan '21 price corrections that happened. So is that a fair understanding that some of this abnormal rise in input cost has now been passed on to the OEMs?

It's not -- we are dealing with tire customers. We are not dealing with OEMs. So...

Yes. I mean, your tire customers. I mean them.

We have agreed based on the competitive pricing scenario, and we indicated during the previous earnings call that price corrections have started happening in November or December '20. However, in our case, these quarterly contracts we started implementing from January '21, and these have been post to price increase because of the cost increase pressures. So it's a -- and the entire competition is showing the same thing. We have to follow the thing. We need not do anything to [ disrupt ].

So as you said, Q-o-Q, we will see margin expansion on the gross margin side because price corrections are [ happening ]?

Which Q, which quarter?

Q-o-Q. I think in this quarter, the gross margins will be better than the last quarter. I'm not asking for the number, the direction.

Q4, yes, sequentially, that should be coming [ to mind ].

The next question is from the line of Saurabh from Asian Market Securities.

Sir, if I look at your guidance, full year guidance, then it works out that for Q4, we are looking at about 20%, 25% kind of price hike. So is that a fair assessment?

No. I think we never gave a specific guidance for 25% price hike for Q4. What we said is on an overall basis, the overall revenue parameters and the sales volumes for the year-end of the review will be at 8% to 10%. So you do the backward calculations to arrive at that price hike.

Okay. And sir, when you're saying this 50% gross margin guidance in the long term, but in last quarter, you were at almost 49% kind of gross margin. So is it fair that at this next year, we will be at that kind of margin maybe in '23?

We have answered the question just now to the previous gentleman. So I don't wish to repeat that.

Okay. And sir, just a last bit on the volume front. So how quickly the volumes of the Phase 2, which will capitalize in this quarter, will start ramping up?

I think Mr. Deo answered that we are talking about the capacity utilization of targeting September '23 to ramp up the entire capacity utilization. So it's a step-up play. Mr. Deo, would you like to add anything on that?

Yes. I think it's too early. We have 28, 30 months to go.

The next question is from the line of Rohit Nagraj from Sunidhi Securities.

Congrats on a good sales number and the volume growth. Sir, the first question is in terms of the demand side. So in the last quarter, we had mentioned that we have gained certain volumes from the international players both operating at global level as well as domestic level. So what is the current trend? And has it again impacted our volume growth in Q3 and we expect the same trend in Q4?

I think if you look at the sequential growth, we have said that the total Q3 volumes have increased by 25%. What we are seeing for the guidance for Q4 and annually, basically for annual Q4 -- FY '21, we are seeing a guidance of 8% to 10% volume growth. What we are trying to say, the maintenance of the current volume of Q3 will be maintained in Q4 as well, around similar -- around that range. So if you sum -- aggregate the 4 quarters, it will be 8% to 10% growth in sales volume.

Right. Right. I mean, I understand the quantitative part. I was talking more from the qualitative aspect in terms of how the trend has been from the customers, both the domestic and international?

Yes. The trend that has been positive. We are seeing an improvement. Basically, we have been giving guidance in the past calls also that the international customers are making us participate in or requesting us to -- participate on a global scale rather than continuing at a regional scale. And some of those initiatives have translated into additional business volumes in this quarter as well.

Yes. And sir, my second question is, again, we have allocated early utilization of our facility by September '23 based on the current trends. So in terms of the next leg of growth, do we have to plan probably a year earlier before the capacity utilization reaches 100%? And whether we have the ability to debottleneck and further expand the capacity or we'll have to go in for another greenfield project?

I think Mr. Deo will answer this question.

Rohit, I think as the business grows, there are always plans to grow. But before we share it to the stakeholders, we will actually keep on working on that. And at the right time, we will definitely share it with you.

The next question is from the line of Sunil Kothari from Unique Investments.

Very -- the performance in terms of operational parameters, very commendable. Sir, my question is on a larger picture compared to last Q3, competitors [indiscernible] locally and...

Sorry to interrupt, Mr. Kothari, but your voice is slightly breaking. So maybe if you could just...

Am I [ breaking ] now?

Yes, sir.

Okay. My point or my question is, how competitive [indiscernible] after this 2, 3 years, your experience with the China Plus One strategy? We were trying for a high [indiscernible] market, maybe particularly American [indiscernible]. So combine all this point, if you can see some [indiscernible] medium- to long-term strategy in terms of competition and export strategy.

What I said, there are 2, 3 issues. I think some of it has been answered. One is on the market trend, the customers are also looking at the China Plus One strategy very closely. I think China is an essential part of any supply chain of any organization or any sector. So even petrochemicals will also have a similar -- so I don't see that is not happening in any other industry as well. Every industry is going to be derisking its supply chain. The question is when someone is going to derisk their supply chain, whether you are in a -- being a non-Chinese player, are you having additional capacities or spare capacity to offer the market -- to a market what you can? I believe we were in the right place to offer capacities, and that has been -- that has got transferred into additional volumes in the beginning of this year. Very frankly, we were not expecting any sort of rebounds at the beginning of the year, especially when you look at April, May, June thereabout. But the fact that this has given us confidence this year, that we have jumped in a big way, so when I'm looking at the index level of, say, the previous year, December '19 and December '20, we are looking at a number 45%, 48% in jump in volumes. It's a huge confidence booster for all of us. But yes, we are there to supply the market. We believe we are in the right place because we are having a portfolio of 22, 23 products. But also, it augurs well for the business in the sense that a customer comes to you as a one-stop shop. We cannot ask the customer to go to different shops. So if you are able to provide all products under one roof, it generally gives us -- it has its own merits and advantages, and it is our own risk management strategy. So all the combination of several factors we are getting in the right zone, we intend to take it forward. And we intend to consolidate our relationship and deepen our relationship with all our customers.

Great, sir. And anything on this [indiscernible] for exports major -- for major customer [indiscernible] could you...

Yes. Sunil, so I think I can understand the question. What is that you're looking at the sequential growth of exports? Or what is your query?

Sir, there is [indiscernible] approaching year-to-year timing of [indiscernible] supply some quantity. So any larger picture, are you getting any major, I mean, orders?

Actually, in exports this quarter, we have moved from something like a level of 100 million to about 160 million thereabout. That is our long-term strategy that -- long-term objective being export being 40% of revenue. I think in that direction, we have achieved that. And we see more likely to -- more offers likely to come in the next year.

The next question is from the line of Niranjan Sakhalkar from Acuitas Capital Advisors.

Okay. The first question was on ADD. What was the impact on gross margins and EBITDA margins? And when do you expect it to be levied to fund the order?

Sir, I would -- we would like to clarify further. The ADD was filed by us for a single product. The interim duty was recommended at 3 different stages, $1.2 -- $1.25 per kg for China, something like $0.53 per kg for Korea and about $0.80 for U.S.A., in lieu of the price differential. But the anti-dumping duty condonation has not been executed at the moment because the government doesn't see a justification for that. Now the final finding is yet to come. The investigations are on. We are not terminating the investigation. We're investigating on. So once the final finding comes out, somewhere around April, May, whenever the due date comes in, we will know the outcome of it. So it's still a little premature to talk about any benefit to it.

Okay. Okay. Another question was, so on a 9-month basis, I see your cost of goods sold has grown by 15% and volume growth is around 5%. But we see the aniline prices over the same period, that's fallen by double digits. So can you just explain what has happened and what is the current run rate?

I think we have already explained the prices have been constant for the first 9 months. There is no movement, upward or downward. It is more of a representation of a weighted average basket mix. But in raw materials, what we have seen in Q3, some increase in raw material costs. And we are expecting in Q4 also some increase in raw material costs as well. But the important point is in Q4, we expect the price corrections to happen to neutralize all the cost increases. And despite all those cost increases, we are likely to see an increase in profitability margins.

Okay. That's helpful. Last one, the question is what -- can you give you some sense of what would be the expected capacity utilization by end of FY '21?

FY '21?

Yes. Expected?

One minute. If I look at this, I think today, we are operating based on the capacity commissioned. We are operating probably at 80%. Now on the coming capacity utilization, there are some capacities likely to be commissioned end of year. Once that comes in, it may be a different parameter. But as of March '21, I'm looking at current operating rate of 85%.

85%, right?

Yes.

The next question is from the line of Shivan from JHP Securities.

A couple of questions. One is, sir, you said you've aggressively kind of sold quantities during this quarter. So sir, any new client additions that have happened? Any new clients that have been onboarded?

I think we have already answered this parameter or this fact in the previous calls. Basically, this is a relationship. Now a tire account relationship is a global relationship. What it essentially does is that over a period of time, new, new chapters or new, new outlets are getting opened up. So for example, if you are dealing with an international customer in, say, Asia, you may have a plant in Japan, but you may also have a plant in Europe. You may also have a plant in Americas. So therefore, as we start consolidating our relationship, these plants like Europe or Americas also get opened up. So that's how the relationship works. It's not that new accounts are acquired. It's a new relationship. It's a deepening relationship. So new outlets are acquired [indiscernible].

Okay, sir. So putting it differently, sir, I would like to know whether we have expanded our geographical presence, as in we have done new chapters or new countries of the same client but a different plant, something of that sort, that's what I'm trying to understand?

I think we just answered to the previous questioner. We indicated to the gentleman that from a level of 100 million index on exports, we have gone to 160 million level. So that answers very specifically how many geographies we have expanded.

Sure. Sure, sir. I got the point. And sir, you've mentioned in your slide, in one of the -- in the presentation that you have got a pipeline of new generation of rubber chemicals. So sir, if you could just give some color on the opportunity size? And will it be through the existing capacity? Or there will be newer capacities for the same?

No. Those things are in [indiscernible]. This is a continuous process. The [indiscernible] team continuously are in dialogue with the entire technical team. And as and when new products do come up, the preliminary work, the study is going on for a period of 5 years before getting into commercial scale. So none of these are planned or none of these new generation or none of these are in the current plan of the current expansion plan. If and when those things materializes, there will be a new set of commercial or capital expenditure for that.

Okay. Okay, sir. And sir, from -- a bit from a longer-term perspective, sir, we are leaders in the rubber chemicals space. But, sir, do we possess or are we looking at getting chemistry skills in other chemistries? Or is that going on through the R&D team?

I think Mr. Deo will...

Other chemical space?

See, I think if you really look at rubber chemicals space itself, I think we have a huge scope of expanding in rubber chemicals. And as we said that by September '23, probably -- and the earlier indications, which we had given that with this investment of INR 450 crores, we will be very close to 2x. That 2x also, we probably would be a 8% to 9% share in the world market. So there is a huge scope to expand in the rubber chemicals business itself. However, we also keep on working in terms of various other chemistry. And as and when we succeed and we find that there is certainty of the business, we will come back to this.

Next question is from the line of Sachin Kasera from Svan Investments.

Yes. Sir, you indicated that currently, you had 80%, 85% utilization. And you also mentioned that certain new capacities are being added. And you also indicated that now by September 2023, you expect to reach full utilization. So if you were to take the volumes that you have done in this quarter at 100 million in September '23, when you hit the peak utilization, the volume would be, what, 140 million, 150 million versus 100 million that you have done in this quarter?

Yes. I think the 144 million and the [ 1.4 ] is something like 200 million. Ultimately, we are going from 100 million to 200 million. So when I'm looking at 144 million and to 1.4, it will be about 1.96 or 200 million, whatever. Compare -- I mean, the calculation, I may not be accurate on my mathematical. I think your direction -- is, ultimately, when we started in June '19, maybe 100 million. We are now looking at 200 million over a period of September '23.

Sure. You also indicated that the intention is to take the value addition to close to around 50% over the next few quarters. It may happen slowly and gradually. My second question is how -- does export have a role to play in the sense -- you mentioned that export share is also going up. So is it that export value addition is better? And as the share of export keeps going up, this value addition can be further improved? Or if you could just throw light on that?

The exports typically before the start of this expansion plan was at 30% of revenue. We had indicated in our previous earnings calls, we intend to take it to 40% on the expanded capacity. So basically, if -- on 100 million, we were at 30%. On 200, we will be at 40%. So that means indirectly, we are indicating that all incremental growth will have a dominance in export share also on the incremental growth, point number one. Point number two, exports in this basket has certain products specifically meant for exports, which are specialty chemicals and specialized applications, where the competitive parameters and the margin parameters are far different than the commoditized products. So that also helps us to achieve our long-term objective.

So when you say 50% value addition, does that benefit -- does it capture the benefit of higher share of export and exports having more specialized than...

Yes. Exactly, because that is also the plan.

That's correct. Okay. Okay. And sir, just one last question. Do you also expect certain operating rate? As you said, your volumes will approximately grow by 40% to 50% from the current trends in the next 6 to 8 quarters. As that happens, do you also expect some operating leverage from the -- to come in and to give some cushion to some incremental margins?

I think that we have answered this in the past also. We have given a very specific guidance that the conversion cost in -- which is corrected into operating parameters or optimum parameters, earlier was 35%. This quarter, we already touched 30%. And going forward, we -- our long-term guidance of 25% remains there. So EBITDA also will come around 25% out of that time.

So basically, we are seeing 500 basis point improvement in gross margin next 6 to 8 quarters and 400 to 500 basis point improvement in conversion cost next 6 to 8 quarters. This is the direction that we can take.

Yes. We still maintain the guidance, what we have communicated in the past.

Next question is from the line of Avishek Datta from Prabhudas Lilladher.

Just wanted to check, like when you say 8% to 10% volume growth and the same sales growth, does that not factor in the price increase which you are talking about in the fourth quarter?

Of course, it includes that. I think in the speech of Mr. Deo, he specifically referred to that.

So in that case, the sales should have been slightly higher than the volume growth. Isn't it?

So that is the guidance. I think actually, the actual number -- considering we can talk [ it over ], I think what we are indicating is the year-end performance. Year-end performance is what we are looking at and where we are heading towards, the direction, basically.

And sir, secondly, when you say, 80% to 85% utilization currently, so what is the current capacity? Like full capacity will be 1 lakh 10. So what is the current capacity then?

Something like 90,000.

90,000?

Yes.

And now that we're utilizing 85% at the end of the quarter?

Yes.

Okay. And sir, next query, sir, this quarter, the other expenses are set on the higher side. So can we model this as the run rate going forward also, sir?

I think other expenditure consists of 2 components: a variable component and a fixed component. The variable component goes in line with the volume operations. If your operational level has -- is sequentially increased by 25%, those parameters will go in tandem, okay? That's point number. Point number two, the fixed component will be flattish. And that, we are already seeing that.

Okay. Okay. You mean to say that as a percentage of sales, it has come down from 25%...

When we gave you the guidance, we just followed that -- previous investor who had asked this question, we gave a guidance that 30% today is the conversion cost. It will ultimately come down to 25%, and we stand by the statement that we have given in the past.