NOCIL Limited (NOCIL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the NOCIL Limited Q1 FY '22 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 date of this call. These statements are not a guarantee of future performance and involve risk 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 very much. Good morning, and a very warm welcome to everyone who is present on the call. Along with me, I have Mr. P. Srinivasan, our Chief Financial Officer; and SGA, our Investor Relations adviser. Hope you all have received our investor presentation by now. For those who have not, you can view them on the stock exchanges and the company website. We trust and pray that you and your families are safe, healthy and secure. We'd request you all to follow highest safety precautions and ensuring adherence to COVID-19 protocol. We at NOCIL have always believed in following strict safety culture and COVID-19 protocols to ensure safety of all employees during the pandemic. All the directions published by various government agencies were strictly followed and were included as COVID-19 SOP. We wish to even add that we have encouraged all our employees, contract workmen to strictly adhere to vaccination schedules. We are happy that we could conduct vaccination camps and ensure that 100% employees, their spouse and regular contract labors are vaccinated at both the sites. Second vaccination will be completed in October. Coming to performance of Q1 FY '22, of course, it cannot be compared on Y-o-Y basis with Q1 FY '21 since during Q1 FY '21 due to the national-wide lockdown, the plants were down for some time. As can be seen, this financial year has started with a better performance. This was possible due to selling price upward revision from April '21 to offset the significant increase in the input costs. This came in handy to offset the loss of margin due to dip in sales volume when compared with volume parameters in QE March '21. The dip is largely due to the lockdown imposed at our customers and consequent to second wave of COVID-19. On an average, customer plants were shutdown in certain specific regions for 2 to 3 weeks, reflecting the lower sales volume. Resultantly, the absolute EBITDA and EBITDA margins have improved. Going forward, we expect better utilization of our capacities with some legacy cost on account of high cost of raw material likely to be consumed in Q2 FY '22. On the industry scenario, we have seen a steady recovery in the entire industry in India after the impact of COVID-19 pandemic and the long-term outlook is expected to be favorable. The pandemic did hamper the industry. However, reports from tire companies do indicate positive on mid- to long-term outlook. This has also been endorsed by a report of a reputed credit rating agency of India. Recovery in demand for both replacement tires and OEM segment is expected, along with increasing demand for Indian tires in export market. Restrictions on imports of tire continue to help the domestic tire companies to operate at high operating rates. This is, of course, subject to COVID-19 interruptions in future. The China Plus strategy is also shaping well in achieving our growth trajectory. NOCIL will be the one who stands to benefit the most with capacity availability and better cost position and long-standing relationship with both domestic and international tire majors. The global consumption of rubber data for both natural and synthetic rubber continues to show signs of upward trend. The annualized rubber consumption for January to March '21 shows a growth of approximately 10% compared to full year -- full calendar year of 2020. It is important to note that calendar year 2020 registered a degrowth of 6% as compared to calendar year 2019, which indicates that calendar year '21 is likely to register a growth of approximately 3% to 4% as compared to calendar year 2019 based on the trends we witnessed in first 3 months of calendar year 2021. Considering our recent capacity additions, our endeavor will be to capture a large share of this volume growth, thus improving our market share. We will continue to monitor the domestic market and automobile business to dovetail our growth plans at appropriate time. This is from my side. Now I will hand it over to Mr. P. Srinivasan.

Thank you, Mr. Deo, and good morning to everyone. Hope you all are safe and in good health. Let us run through the financials of the company for the Q1 FY '22. As Mr. Dave indicated, due to the lockdown situation, which prevailed in large part during Q1 FY '21, the performance of Q1 FY '22 are not strictly comparable to Q1 FY '21. Now coming to the sales volume. Volumes for Q1 FY '22 grew by 29%, taking a base of Q1 FY '20 -- or 30%, I would say. In the index terms if Q1 FY '20 was 100; in Q1 FY '22, it's 130. On a sequential basis, volumes for Q1 FY '22 were impacted due to second week of COVID-19 in the customers' end and more specifically in the domestic market, whereas volumes and exports registered a growth. Net revenue -- on the revenue front, net revenue from operations for Q1 FY '22 stood at INR 345 crores from INR 322 crores as compared to Q1 -- Q4 FY '21, a sequential growth of 8%. The sales growth was largely driven by price hikes taken during January '21 and April '21. The price hike was taken across domestic as well as export markets to commensurate to mass the cost increase significantly, which started from October '20 onwards. On the value addition front, Q1 FY '21 recorded INR 170 crores. As stated during our previous earnings calls, our absolute EBITDA margin has improved in Q1 FY '22 as compared to Q4 FY '21. As indicated earlier, our aim during the quarter was to maintain and improve absolute profitability rather than on a percentage basis. And fortunately, our strategy of consolidating the profitability has turned in our favor. Coming to the operating EBITDA parameters. Operating EBITDA parameters for Q1 FY '22 stood at INR 73 crores as against INR 50 crores in the previous quarter, that is Q4 FY '21, and a sequential growth of 40-odd percent. EBITDA margin stood at, as a percentage for the quarter, stood at 21%-plus as compared to 15.5%-plus in Q4 FY '21, representing an increase of 540 basis points. As already said indicated, EBITDA is driven by the corresponding sales price increases. That's the benefit. Profit before tax for the quarter June '21 stood at INR 63 crores as compared to INR 43 crores for March '21 quarter, a growth of 45%-plus. Profit after tax stood at INR 47 crores for the quarter ended June '21 as compared to INR 36 crores for QE March '21. That's it from the financial parameters. With this, we would like to open the floor for question and answers.

[Operator Instructions] The first question is from the line of [ Dhiman Shah ] from [indiscernible] Finance.

Just 2 questions. You mentioned that you are still in the process of garnering market share and you see a favorable tailwind as far as the size of opportunity goes -- So where would you be in the journey of kind of being the second preferred supplier, which you have alluded to many times in the past, as far as your approval for the new plant goes? So if you can just help us understand that, number one. number two, moving forward, would you say that these margins are maintainable given the course correction in the raw material and our ability to kind of also pass through whatever costs have gone up in the recent past. So if you can answer these 2, please.

Mr. Dhiman Shah, the issue has 2 points, twofold. I think we have already indicated that our market share, our aim is to ramp up the capacity utilization to 100% of the facility setup by September 23 or thereabout. So we are targeting that as a journey, and we want to achieve that around that time. We would be happy if we could achieve much earlier, but we have to give the space and the time for other customers to open out additional operating plans to supply our materials.

But in last 2 years, we have already been -- once the Phase 1 was open, I presume you would have done a fair amount of sampling and allowed enough time to the customers for approval of the samples. So possibly that journey is almost over. Would you kind of agree to that statement or...

No, we -- the journey of -- basically, unless we get the orders in that -- to that size, the journey is not over. Yes, the discussions have started, the sampling have started. But ultimately, as we start supplying, as we build the confidence to the new -- the customers, it takes time to -- they start depending on us and trusting us. So you have to give them the time. And once the supply started, it takes over 4 to 6 quarters before we mature into full business. Now -- that's number one. Number two, we are a multiproduct company. So it's not that a customer is only taking product A. There could be other products, also product B and C. It's a combination of several products per basket, which we want to offer to the customer. And wherever we are not present in a particular set of products, we would like to expand there and enlarge our market share or presence there in that customer's portfolio. So that's how we look at it. So we are looking at a horizon of 2 years or 1.5 years from today to 2 years, 3 months more specific to achieve this entire objective. And if assuming that we come to the September 23, the market share automatically goes up to maybe 7%, 8% by that time. So that's the target which we are looking at. Now on our global rubber chemicals market share. As far as India is concerned, we are already a dominant domestic manufacturer. Of course, import is the main competitor, plus we all understand that. Now coming to the profitability parameters, this all depends on how each player plays at each quarter or each period of time. What we have seen in the last 6 months and that's what we have been communicating to investors at large, that the cost increases are being passed on in the form of proportionate price increases, essentially, which indicates that the market, the so-called temporary surplus, which was there on account of degrowth, et cetera, has probably evened out or maybe some supply at certain locations are having some difficulties. So that's why the cost increases are -- have been in a position to being positive. Of course, with the lag, there could be some time lag, et cetera, here and there. But the principle is if you look at a horizon over a period of 2, 3 quarters, everything gets evened out. So assuming that there is no further supply-supply surplus, we are reasonably confident to pass on the cost increases or mitigate the cost effects.

Great. And sir, you mentioned that our objective in your opening statement, you mentioned that our objective was to kind of maintain absolute margins rather than percentage margins. And I believe that we have about 25% to 30%, which is a specialty grade. So would this statement be more applicable to the nonspecialty grade? Or I mean it is applicable across the board?

It is mainly for nonspecialty grades. Active competition is there. In specialty grade, the competition is there, but it's relatively minimal.

The next question is from the line of Madhav Marda from Fidelity Investments.

I just wanted to understand if you could give us just like an overview of the rubber chemicals industry globally in terms of the current demand-supply dynamics and what sort of -- what's the capacity utilization right now. That's the first part of the question. The second part is, what is the new supply or any supply shutdowns especially in China that you expect in the next 2, 3 years. Just to give an overview of the industry.

I would say on the global demand, you should look at the global rubber consumption parameters. If you look at the January, March data, we are looking at something like 30 million tonnes of rubber. So we have to take 3.5% of that as the rubber consumption or rubber chemicals consumption demand. So that's the key point. We have already indicated in the past that more than 75% of the supply is originated out of China. And maybe about 20% is coming from Europe controlled units, and others -- then India is -- NOCIL is the third in that sense, in the sequence of this. What we are trying to give a message or communicate is that China has dominant share in the supply chain of rubber chemicals. With China Plus One strategies, customers are looking at a situation where to derisk some of China, we don't know how they -- it will actually unfold. But the action points or the reactions from the customers over the last 1 year or 1.5 years, we have seen that customers are looking at derisking a little bit of China. And therefore, it spreads out an opportunity, it creates an opportunity for a non-Chinese player. And mostly being in the non-Chinese player category and having expanded capacities are in a position to offer or service the same. This is the key point which we would like to say. As far as the shutdowns or supply shortages from China, I think it's very difficult to predict. To get information from China is $1 million -- it's a mystery all over. So if we get anything, we will let you know.

Understood. Sir, is the 1.1 million tonne broadly the demand price for rubber chemicals? How much would the installed supply be right now? Is it like balanced out? Or is it a little bit on the higher side than that?

See, if you look at the rated capacities on record, it is still the capacity is supply excesses there. But at operating level, we don't know what is exactly the operating level. We reduced from the operating level and because the trades are done at the operating level capability-wise. So it's difficult to guess who is operating at what level, et cetera. So that's what -- and moreover -- see, as far as NOCIL is concerned, we generally discuss a strategic level with customers, not getting into day-to-day operational level. At strategic level, if the relationship is good, then the business automatically gets passed down to NOCIL and we are in a position to service the same, and we are able to encash that opportunity.

And just one last question. Generally, what we see is that in many of the chemical products, the cost structures of Indian companies are actually becoming stronger versus the Chinese players in some of the categories. In rubber chemicals, would we say that our capacity is now at par or maybe a little cheaper versus China that you produce? Or is that still China cheaper on the cost structure, sir?

To answer this, we have to look at the Chinese economy principles. And as per WTO legislation or the World Trade Organization often categorizes China as a nonmarket economy principle. They don't believe in following the market economy principles. So the pricing parameters, the state interference is regularly there, and that's why it has been categorized as NME in the WTO parlance. So strictly, the cost positions of a non -- of a market economy player versus a nonmarket economy are not strictly comparable because we don't know what sort of subsidies, what sort of benefits are they entitled to from the government. So it's anyone's guess to get into the specifics. We don't have full information out, but we have a range idea. And that's why they are in a position to compete. So whereas NOCIL is competing -- say, for example, let's assume for a moment, our product is cost at INR 100, 100, just a unit of 100 and China is getting 10% subsidy or 20% subsidy, so they are coming at 80, and that's where they price their product. NOCIL is able to still match that price and achieve or compete in the marketplace and get some ideas to support sufficient volumes to that. So it indicates indirectly that NOCIL technology capability is reasonably strong and competent enough to match the same.

Okay. And just is there any new supply which is expected in the rubber chemicals market? Like any announced supplies or capacities that we are aware of coming in the next 2, 3 years?

No, no, no. Not that any fresh announcements are there. The reason there is no reason at all in there.

The next question is from the line of Bhargav Buddhadev from Kotak.

My first question is that you mentioned in your remarks that you want to reach 100% utilization by September 2020. So are we factoring in a significant shift in terms of export mix from presently 35%? Or do you believe that the domestic mix will broadly remain the same?

Gentlemen, we have already answered this in the past, that our objective is to take the export share in the overall revenue market [indiscernible]. So though we may be 30%, 35%, but we intend to take it to 40%, and that's why we have envisaged the plan on that basis.

Okay. So mix really, we are factoring in from 35% to 40%.

Yes, yes, yes.

So does that mean that we are sort of banking upon this significant opportunity coming in from the Indian tire supplier in the entire company revenue? Or are you looking at that mix also changing from that present 65% of revenue?

Wherever the growth opportunity come, we would be very keen to encash the same. But the discussions are already on with both the domestic tire industry for a long-term basis as well as the international tire companies.

Okay. And do you believe that the Indian tire company will also be looking at a significant export opportunity as this -- as the China Plus One opportunity goes up?

Indian tire industry, I think they are exporting about 20% of their production to the export market. So we don't have any other details at this stage. So I think with tire restrictions in place in, tire import restrictions in place, obviously, their domestic needs are much higher. So I don't know what is the future plan. I don't have -- we don't have right now with that information with us.

In terms of your margins of about 21%, which we reported, these are margins similar to when there was an antidumping duty. So now that the duty doesn't exist, what has led to such margins coming back? I mean, is there a change in the cost structure? Or is there a sort of reducing input from China? What is driving this margin back to 21%?

I think twofold. One is the improvement in the cost structure in terms of better technology, optimization of resources on a higher volume plate. And market conditions, the degrowth parameters, which was existing maybe 2 years before, that has probably tapered off. So these are 2, 3 factors which we can attribute to that.

So the share of Chinese imports continues to remain at the earlier levels? Or you have seen some reduction in the size of the...

Some marginal reduction, nothing great. It continues to be the imports into India and rubber chemicals parameters at both 48%, 50%.

And any update on this antidumping duty or we don't believe that this will sort of come back again?

I think the recommendation has come from the commerce ministry. Now the ball is in financial ministries, maybe it's a due process and we'll know after some time.

But our expansion plans are not on the basis of any duties being [ leveraged ], right?

We didn't factor this -- factor -- that antidumping duty should continue because the conditions at the time of -- business conditions at the time of consumer expansion plans was quite different.

And lastly, have you seen any expansion from your domestic competitors like LANXESS, PMC or Merchem? Is there none at this time?

Some marginal expansion, we have heard about it. They are not in the listed companies. So obviously, unlisted companies don't announce openly. But we heard from the market sources that there are some expansions, marginal expansion, not great. Not as significant as NOCIL.

[Operator Instructions] The next question is from the line of Abhijeet Dey from BNP Paribas.

Congratulations on a good set of numbers. Just 2 questions. We have seen an increase in staff costs quarter-on-quarter. So has that to do with the new capacity expansion, I mean, the last phase which you did? Or is there some one-off in there?

There is an element of one-off thing because there were some welfare initiatives which the company had to incur on account of the COVID aspects, number one. And number two, typically in the June quarter, you will have the retiral provisions going on the higher side because of the actual valuation. It will taper off during the subsequent quarters.

Okay, okay. Could you just quantify the amount of one-off, if possible?

I think it's not appropriate to get into some such [indiscernible] to explain.

Okay. And secondly, sir, what has been that you mentioned that export volumes have grown actually even on a quarter-on-quarter basis? So if you can just quantify that, how much was the growth in exports, and if possible, the revenues from exports for the quarter?

I think revenue is about INR 135 crores for the quarter. And I think all-in index parameters, I think maybe 155 thereabout.

The next question is from the line of Rahul Jain from Credence Wealth.

Congratulations on a wonderful set of numbers, sir. A couple of questions. In the previous quarter con call, you had mentioned the capacity, which was capitalized was additional [ 20,000 ] [indiscernible]. At the end of quarter 4, the capacity was 90,000. So additional 20,000 has been capitalized in this current quarter. So today, the capacity will be 110,000?

Yes, 110,000.

And sir, what was the capacity utilization for quarter 1 when I take the rated capacity at 110,000?

Maybe 60%, 62% thereabout.

60%, 62% based on 110,000.

Yes, yes. My mistake, my mistake, my apologies. One minute, I'll just get you that. It should be maybe around 70%, 68%, 70%.

And I'm -- and sir, in yesterday's AGM, the management stated that the current year, we are at around 80% capacity utilization. So I assume we are talking about the month of July, where we must be now operating at 80% of [ 1 lakh 10,000 ]. And secondly, management spoke about the statement given was at full capacity, turnover will be 2x than now at today's prices. So just to get a clarity, when we speak about 2x at today's prices, because when our expansion started, we had stated that with the asset turnover, somewhere at March '19 prices, we should be doing a 2x top line, which would have meant somewhere around INR 1,800 crores of top line. So yesterday's AGM statement, I'm a bit confused when we speak about 2x sales. What could that amount be at full capacity?

Gentlemen, 2 things. One is to clarify, when we conceived the project, we always set 2x at 2018 prices, not 2019 prices, point number one. Point number two, as far as capacity utilization of 80% is concerned, I think Mr. Chairman indicated that this was the question related to FY '20, '21, what was the operations in the last quarter. So that is how we have entered. So we are not talking about '21, '22 capacity utilization. We only talked about '20, '21 parameters and most specifically the fourth quarter, okay? That's the second clarification. Thirdly, the revenue parameters today is very subjective because it depends on at what cost price you are going to procure your input. So it's a cost-led situation or a cost equivalent situation. So if the crude goes to 75 to 100, the whole equation changes. The crude goes to 60, the equation changes. So what we have only given a guidance is it's 2x on 2018 prices. We also modified that if it was 2019 prices, it was something like 1.85x. So we continue to maintain it will be around 1.85 to 2x.

And lastly, sir, as you mentioned, we operat at around 70% capacity utilization at on a rated capacity of 1 lakh 10,000. So expecting the utilization to move further up as the quarter goes by -- as the next few quarters go up. There could be some amount of operating leverage, which would be possible. Is that assumption right?

Yes. If we are going to utilize more capacity, definitely, operating leverage is an automatic result and effect.

[Operator Instructions] The next question is from the line of Aditya Khetan from Stewart & Mackertich.

My first question is, sir, we are seeing some inventory gain in this quarter. So have we utilized some low-cost inventory, which we had and that led to an inventory gain? Is this assumption correct, sir?

I think inventory gain in the financials is a reflection of the production exceeding the sales volume. So that's the important effect. Yes, we had some low-cost material at the beginning of the quarter, that could consume. Definitely, as compared to the previous quarter, the inventory for the raw material consumption cost is high per unit. But in relation to the high-cost materials, yes, there is a reason. We also clarified that there could be some legacy costs coming in Q2.

Okay. Okay. Sir, second question is [indiscernible] prices on a sequential basis have gone up, but still our margin has improved so that is offsetted by [indiscernible]. Now when can we see the full impact of raw material to take effect in the coming quarters, so by Q2 or Q3?

Q2, mostly it should be over. That's our belief. Now it all depends on at what rate the -- see, basically, there is an issue here now is that the COVID interruption is coming. So if there is no COVID further interruptions, I think mostly Q2 will be over. But if there is some COVID interruption, there could be some spillover to Q3, but I don't think we'll be -- let's keep our fingers crossed.

Okay, okay. Sir, one last question. Sir, now we are seeing significant free cash flow generation will be done for the next 2 years. So what is the plan there to deploy this money now going there?

I think Mr. Deo will answer that.

Okay. I think this is a question which is very frequently coming and yesterday is addressed by Chairman. He partly answered it, and I'll repeat the answer. See when we expand the capacities and we start streamlining the capacities, the first thing which we start looking at is what are the avenues of debottlenecking, which are our short-term goals, okay? Because debottlenecking of the plant is low-hanging fruit. And that's what we would like to end cash and spend some money on that. Simultaneously, we keep on doing the long-term planning in terms of what NOCIL should do in next 3 to 5 years, okay? Of course, when we do that planning, we look into the cash generations and how the business is going. So short term, if you ask me, I think we are going to concentrate as we streamline the plants and as we keep on increasing the volumes, maybe majority of the CapEx will get into debottlenecking. Long term, we always keep on looking at long term, but I think at this point of time, unless and until we consolidate it, okay, and get it approved from our Board of Directors, we cannot share.

The next question is from the line of Avishek Datta from Prabhudas Liladar.

Congratulations on a great set of numbers, sir. Sir, can you just give us some update on what is the total tire industry CapEx in next 2, 3 years, which you have come across?

See, if you really look at our industry 3 years back, 2 to 3 years back, we said about that domestic car industry is investing about INR 25,000 crores to INR 30,000 crores. Now out of which some capacities have already been commissioned, like if you are aware, Apollo Tyres have started their plant in Andhra Pradesh, okay? Similarly, MRF has started their plant, which was in the state of Gujarat. Okay. CEAT has started their plant in Chennai. So basically, what we will have to do is we'll have to now start looking at how much has been invested and whatever commissioning. But one thing is certain. We see optimistic view of tire industry -- of tire sales in India by the tire industry since we have been very, very close with all our domestic customers, okay? Barring some COVID incidents here and there. They are very optimistic. They have plans to expand their capacities. And that's something which is very positive for the future of rubber chemicals.

Okay. And sir, secondly, despite the fact that the Q1, the volumes were down around 13% on a Q-o-Q basis because of disturbance at the customer's end, what is the volume growth we are targeting for FY '22?

We would prefer to answer at a later date, not today because we still feel that the third wave, we have to overcome that challenge. So it's a little premature. Obviously, we would look at higher volume numbers in Q2 as compared to Q1. Our target is that let's see how reality unfolds.

Okay. And sir, lastly, sir, just on lower volumes, you managed to do margins of around 21%, partly because of price hikes and operating leverage. Now that the volumes are -- assuming that everything is normalized and no major disruptions to come for the -- by day of third phase, can we safely take -- can we take around 20% margins for FY '22?

Avishek, I wish I think we should not get into a percentage basis. We should look at what is that -- ultimately, we have been given a guidance -- giving guidance that when your high-cost materials or the input costs are on a higher level, you cannot expect the same 20% margin, et cetera. We have to look at what is the return coming back to you. And if the return coming back to you is appropriate and adequate and reasonable, I think we should be considering that. It all depends on the price range and the range at which the input price are going up and the corresponding finished good prices. So one cannot get into specific numbers or percentage basis. We would -- our endeavor is to sustain these EBITDA margins in absolute numbers in that range as we go along. That's -- our objective will be there. Let's see how the market conditions unfold.

And sir, lastly, like from Q1, have the raw material prices inched up further? Or do you need to take more price hikes in the near term?

We are seeing some softening of the raw material prices. So obviously, there have been some products where the input costs have further gone up, so we have asked for a price correction. There have been some products where the input costs have come down. So it's a mix -- it's a weighted average mix. So that's how good it is.

The next question is from the line of Viraj Mehta from Equirus PMS.

My questions have been answered.

The next question is from the line of Rohit Nagraj from Emkay Global.

Congrats on a really good set of numbers. Sir, the first question is in terms of strategy. So in the presentation, we have actually, on the first slide, indicated accelerating momentum. So any specific reason of putting up this particular tagline? And what is our strategy behind this accelerating momentum going forward?

I think, Rohit, from last few questions you must have understood that the objective is very clear. We have invested INR 450 crores in expanding the capacity. And now what we have to do is we'll take the momentum in the marketplace to put these capacities so that first thing is our global presence increases in this business, okay? And the second thing is we ensure that the capacity utilization is very fast. So the objective, I think, in next 1 or 2 years is a very high momentum in terms of acquiring the market and ensuring that our capacity utilization, as we have been saying, by September '22, it should be 100%. And that's the momentum which we are looking for next 18 to 24 months.

Got it. Sir, the second question is in earlier calls, we had indicated that we have developed a new accelerator, which is an import substitute with a domestic market size of about INR 250 crores. Sir, any more update on the same?

Yes. So as far as this accelerator is concerned, we have already sampled it to all the tire industries. We have got approvals from major tire industries in the country, and we have started the supplies. That's the status.