Orient Cement Limited (ORIENTCEM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Orient Cement Q2 FY '21 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Krupal Maniar from ICICI Securities. Thank you, and over to you, sir.

Thank you, Melissa. Good evening, everyone. On behalf of ICICI Securities, we welcome you to the Q2 FY '21 Investor Call of Orient Cement. On the call, we have with us Mr. Deepak Khetrapal, MD and CEO; and Mr. Soumitro Bhattacharyya, CFO of the company. At this point in time, I will hand over the floor to Mr. Deepak Khetrapal, MD and CEO, for his opening remarks, which will be followed by interactive Q&A session. Thank you, and over to you, sir.

Thank you, Krupal. Thank you, and good afternoon, ladies and gentlemen. Thank you very much for finding time to listen to us and try and understand what we have been doing in Q2 of this financial year. And once I give you the broad highlights, which I guess all of you would have already figured out on your own anyway because all of you are very interested people in our performance, then I'll wait for some questions that I can answer and provide more clarity. Thank you. So here we go. Just as a context to Q2, we have to remember that although we resumed our operations from mid April and we did report our performance till end June, even post that, the COVID-19 situation has continued to be quite fluid. And especially if you look at Maharashtra as a state and the area in which we operate, even Telangana, Andhra was even worse than Telangana also, we had the huge impact of COVID-19 to the extent that including our own -- despite all the precautions taken and despite the fact that perhaps the numbers of people infected in our company would perhaps be the lowest even if we went by -- as a percentage of total population. I know we are a modest-sized company. We had very few people, but even then, we did manage to have the impact of COVID, including one of our people, including one of our unit heads, a very senior functionary, he was infected, #2 in a plant was infected, a couple of other heads of departments were infected. So we didn't completely escape it. And more importantly, the markets that we serve have remained impacted. So that's been, I would say, a huge headwind. That was compounded in this quarter by the monsoon that we had this year. And even before the October disturbance of weather, which I'm sure all of you know that Bay of Bengal, that depression which sort of -- instead of traveling northwards, very surprisingly, this time, the disturbance actually traveled from Bay of Bengal right towards the Arabian Sea. That actually is the swathe of the market that we serve. So obviously, there was a huge impact of that rainfall in October. But even up to September, all, let's say, our plants and our markets have, I think, most of the areas have had at least twice of the normal rainfall, including the plants and the process -- our plants, we don't mind, we've been flooded at times. The markets, obviously, the work that normally you see happening was not happening. So that's been a huge detriment. And as a result of that, we have reported a degrowth in volumes of close to 18% over the same quarter last year, which is, for us, very heartbreaking because we were -- we had taken all the precautions and if the markets were a little more supportive, we would have been happy to sort of report even better numbers. So that's been the impact on volume. And the other development that was caused by heavy rains is that the independent housebuilding, which normally gets done by people who are not as equipped in terms of skills or even in terms of equipment and all, so the independent housebuilding activity saw a little bit of dip compared to the previous quarter. But the return of migrant labor to the infra sites meant that our non-trade segment picked up some momentum. And that seems to be going on rather well as of now, even in October. And our expectation, and that's been the trend also in the past, the independent housebuilding activity, which normally supports the trade sales should resume post Diwali in its full swing. So with the B2B or non-trade business, I would say, not in full swing, but at a fairly fast cliff now, post Diwali, we expect a momentum in the trade sales also, which will be obviously feeding into the independent housebuilding activity in the rural and semi-urban parts of India. In the meantime, obviously, in Q2, when the non-trade business picked up and the trade business, I won't say went down, but didn't pick up, so as a proportion, if we see, the non-trade percentage over the previous quarter definitely has gone up, and that means that the product mix and the realization both get impacted. So that's the other development, which actually, I would say, has been the headwinds that we face. Most of the other things that despite very heavy rains, we managed to retain our efficiencies. Our cost management activities, which has started in the first quarter, have really served us well. In second quarter also, we have been able to sort of manage the cost exceedingly well. In terms of -- I think the best thing that all of you want to hear, and I'm responding to the anxiety I've heard many a times from our investors in terms of -- although we, in the company, knew that our debt was very well structured in terms of repayment but even then the quantum of debt was becoming a concern. So along with the profitability, the way we have managed our working capital and the way our cash flows have been, we have I think the biggest single announcement beyond, let's say, doubling of EBITDA in Q2 and obviously, compared to the loss last year in PBT, PAT levels, obviously, that is a positive. Beyond that, I would say, on cash flow, which are now so much in the public eye, we have had a very strong cash outflow as a result of which we have repaid all the installments of our bank loans, which were falling due till the end of March '22. Not only March '21, we have also repaid all the bank obligation which will mature up to FY '22. So unless we, on our own valuation, we want to prepay some more loans, there is no obligation to be met even for the next financial year. And even after paying that, we seem to be fairly comfortable right now in terms of the liquid assets that we're holding. And we are examining whether this is the right time for us to start picking up some of the important capital expenditures that we had held back earlier. So whether we give priority to our capital expenditure or whether we use this money to repay the bank loan, we're just trying to draw out the schedule of some of the projects that we need to do and then decide whether even if we kick off the CapEx activity, whether the cash flows that will be needed, we need to hold or whether we can reduce the liabilities to the bank. So that decision, hopefully I would say, over the next 4 to 6 weeks, we will be able to take. But all I can confirm to you is that in the current financial year, we've already reduced our debt by close to INR 165 crores. And again, like I said, ahead of the schedule. And unless we are able to convince our Board and convince ourselves that some of the CapEx -- it's time to start relooking at some of the CapExes, maybe we'll try and repay even more of these debt by the end of the financial year. As you know, it works both ways. Either you can repay the loan or you can sort of start taking up the projects which were held up. So -- and like I said, 4 to 6 weeks is the time we're taking in hand to take a decision on that. But I'm sure all of you are happy to see, if I net it out the cash in hand today, our net debt, perhaps, will stand at somewhere around INR 930-odd crores, INR 930-odd crores, which basically, if you look at now, the current net worth at INR 1,163 crores, obviously, it's a very comfortable debt equity position. And given the way we are going and given the way the business seems to be at this stage, I think, by the time we end the year, even the debt-to-EBITDA, which was actually a major concern for the investors, debt equity was never perhaps a problem, but debt-to-EBITDA was worrying people. Hopefully, we should be ending the year with debt-to-EBITDA being just about 2 or thereabouts. So that is, I think, a big relief for many investors who were overly anxious about our debt situation. So in terms of costs, the impact going forward seems to be the concern, seems to be that the pet coke, which in the last quarter, we consumed, for the company as a whole, about 62%. But as you know with Chittapur, Gulbarga plant, that's almost 100% of pet coke and Devapur we mix it. That has been 62% in Q2. But going forward, we are struggling to get hold of enough pet coke. And we are not alone in this. It's actually happening to all the producers of cement. And the large reason behind that is the total oil refining -- crude oil refining that is happening has come down dramatically all over the world. Because of that, the refineries we had even contracted to supply pet coke to us, they are not able to supply. So that's the headwind for people who are dependent on pet coke quite heavily. Fortunately, in our case, it's okay, it's not so bad, because we -- in the past also, we had access to coal. And the good news for -- I think, for all the players who have shifted to pet coke is that the imported coal has been seeing fairly soft markets. And those prices are looking much softer compared to what they had been earlier. And that's the reason why the industry per se was shifting more to pet coke than coal. With pet coke not available and coal having come down in terms of costs quite dramatically, we do believe that while there is some impact, but it may not be as bad in view of the softer prices of coal. So that's the, going forward, a little bit of indication on the costing side. In Q1, we had reported to you, we had a major handicap in terms of our fly ash costs having gone up because we were not able to lay our hands on the normal suppliers of fly ash, so the thermal power plant on which our Jalgaon plant is completely dependent, they were not producing any power, so we were not getting fly ash from there. Similar thing was happening at our Gulbarga plant also where all the plants around that has stopped thermal generation. And we were actually having to bring the fly ash from very, very far for us power plants. That has eased out some bit in the last, I would say, about 6, 7 weeks. And hopefully, going forward, the thermal generation of the power plant should remain all right, and we should have the fly ash availability, as a major crisis point which emerged in Q1 to be over at least for the remainder of this financial year, and we'll see how it goes in the future. But when heavy rains come, I'm sure all of you do realize that heavy rains have caused multiple issues in terms of when the mines are flooded or where the plants have a lot of water. Typically, in the monsoon season, you would expect the efficiencies to go down purely because every material that you're trying to burn is wet. And when it is wet and you try to burn it, try to sort of using nickel, a lot of heat is wasted in first dissipating the water, which is there in the raw material. So despite that, I think with the efficiency focus that we've had, we've actually not suffered at all even compared to our best times. So we've maintained that. So that's definitely good news. Fly ash, I've already indicated to you. Some problems are emerging in terms of, I would say, the latest disturbance in Bay of Bengal. Lots of ships carrying coal to India, which were supposed to dock, their docking was delayed a little bit because of which supplies of coal have been a little delayed by maybe about a week or so. That's the only impact. Plus very heavy rainfall also makes it, I would say, difficult for mining activity to continue at normal pace. So because of that, some of the minerals that we use, they are critical minerals but they're not very large quantities, so the mining of that, the supply of that does get impacted. But overall, I think we had minor hiccups here and there, but largely, we should be fine. Diesel price hike is something which is completely up to the government in India and that we've seen, I think, over the last year, in the states that we are, the diesel costs were up by about more than 12% over the same quarter last year. So that's definitely adding to the transportation costs. Like I said, the overall results, a lot of people would try to see where is the, let's say, improvement in the results, especially in the operating profits coming in. While it is true that despite low volumes that we've had, the pricing has remained robust, I would say, are not stronger. Prices have been a little lower compared to what they were in the month of May and June. More importantly, with the market and our customer mix changing more towards the non-trade business, and as all of you know, the prices that we get in non-trade are always somewhat lower than the trade sales. And also because they take more unlimited cement OPC, the costs typically tend to be a little higher. So despite all that, the -- I think what has helped us is, as I mentioned earlier, a very, very strong focus on the cost. And the increase in profit that we have seen in Q2 and in H1, a larger part of that increase in profit is actually coming from cost management and less than half is due to the, I would say, the benefits that accrued to us from the market, volume and the price. So that's the situation as of now. The -- some of the people would be wondering this cost that has come down in Q2 over last year seems to be very, very dramatic. And can that be sustained for future? Simple answer is, the -- any organization who is operating its plants and markets and everything will need to remain conscious of the fact that there are -- all costs are never bad costs. Most of the costs actually are very good costs to incur. And in the last 2 quarters, if we have sort of managed to limit or eliminate those costs, it's only because of peculiar market conditions. For example, advertising, many of the marketing costs, they've been brought down very substantially. Similarly, the repairs and maintenance costs at our plants, they have been controlled. But these costs cannot be avoided forever. Marketing, branding costs will be critical, will always be critical to any business. And as we see the traction coming up in the market with the volumes picking up and also the independent housebuilding activity going more mainstream, we will have to start investing in the brand and marketing activity all over again. And at the same time, the maintenance expenses at our plants, which -- many of which should have been incurred in H1, obviously, with the plants producing more now, during -- some of that repairs, maintenance expenditure goes still into Q3 and some of it into even Q4. So those costs will slowly gradually start creeping in. And I guess also the question on your minds would be, would this improvement in working capital will be sustained at this level. I would only try and sort of, in a way, answer it through a simple [indiscernible]. As businesses look up, as sales go up, working capital does go up, because, end of the day, number of days of credit that you will always have in the market. So the per day sale is higher, even if you maintain at the same number of days, your debts will be higher. Same thing happens with your inventories also. They're always measured in terms of number of days. So when the per day volume and sales goes lower, we manage that. Part of the improvement will remain with us in terms of the improvement that we found in number of days of either inventory or receivables. But in absolute numbers, rupees crores, obviously, there will be a tendency for the working capital requirement to go up as the business grows. And that I'm sure you know is very much the raw material for continuing to do business. So that is the indication going forward on the working capital side. And a million-dollar question that all of us will now need to find an answer and before you asking the question, maybe someone from you can enlighten me in terms of how the pricing can be in future because we always are taken by surprise with the way the markets go. On the volume front, though, I can sense that there's a little bit of uptick already visible. Up to the month of August, we -- I think most of us in the industry, especially in the parts of the market where we operate, most of us were actually seeing a drop in sales over the same month last year, consistently, at least till August. In September, we have started seeing positive growth over last year. October, the month of October is indicating similar numbers. And if these things go together, for a few of you or some of you who may have heard me earlier when I was talking to CNBC, there was a specific question they had asked me, how much volume do we think we'll be able to do in H2 and for the financial year, what will be the volume? My own bet for the full year volume would be more around 5 million tons for the year. And that, obviously, means that in the rest of the year, we need to do more than 3 million tons in the 6 months that we have, including October. So that is the task that we are taking up for us. Hopefully, the market should support us in meeting the targets. And if the pricing stays on these lines, even if a little bit softer, with the operating leverage turning into our favor, assuming that we'll be able to do volumes of more than 3 million tons in 6 months, we look forward to a steady EBITDA as we have had so far. So that's a quick summary of various aspects of our operations, explaining the profitability, explaining the working capital. On the projects I've touched upon, we are beginning to relook. Last time when I was briefing all of you, I was making the statement that we had pressed the pause button and we were not looking at anything. But I think now is the time when we are beginning to look at the, say, whatever are the essential investment that we had held up, maybe it's time to start that. And also what we -- perhaps as an indication of how we are seeing the optimism in the business, given the fact that we had actually imposed a salary cut on the senior teams in the company effective 1st April in the range of 10% to 15%, we -- yesterday, at the Board meeting, the Board has decided to roll back the salary cuts not with retrospective effect but with effect from 1st of October. So that's a signal to our own team and also to, I think, to the markets of the growing optimism about how the next 6 months might pan out. So with that, I'll perhaps stop here and wait for questions to be asked from your side and try and provide you as much information as we can. Thank you.

[Operator Instructions] We have the first question from the line of Sumangal Nevatia from Kotak Securities.

Congratulations on a great set of numbers. So first, you indicated that you are ready to un-pause on the expansion and the growth projects. So if you could...

I said -- I didn't say, growth, there will be expansion. I just said some of the essential cases. It would be things like waste heat recovery plant. We had some other projects on digital analytics that we were going slow on. Expansion plans, right now, no. Expansion plan, we still wait.

Okay, okay. So what sort of waste heat recovery addition and CapEx are we looking at these projects put together?

You see, typically, now the waste heat recovery project of nearly 10 megawatts, which seems to be sustainable at our plants. The market indicating cost of that, typically, as of now is about INR 10 crores per megawatt. So I would say ballpark about INR 100 crores. But obviously, those projects take 12 to 15 months to get construction -- get constructed, when you start the construction activity. So that's why I said whether part of that will happen, the cash flow will happen in this year or not, that depends on when do we actually kick off. But the only indication I'm giving you is we're beginning to take our finger off from the pause button for these kind of essential CapExes.

Understood, understood. But sir, talking from a 3 to 4-year perspective, I mean, we are deleveraging in a good way. I mean once the debt reduces to INR 500 crores, INR 600 crores over the next 2 years, I mean then, looking at growth, what are our growth options and areas which we would be looking to add capacity?

The growth options, Sumangal, remain exactly the same, brownfield expansion at Devapur plant, brownfield expansion at Chittapur plant and the supporting grinding units, which will be off-site. As I've indicated, I think prior to the COVID hitting us, we've been talking about the adding of clinkerization capacity at Devapur and at Chittapur, obviously, in sequence. So you're not going to be doing both the projects at the same time and grinding units somewhere in the markets where we are not currently present. Chittapur will need a grinding unit supporting it in southern part of Karnataka to be able to address the Bangalore, Mysore, Kerala, Tamil Nadu, kind of markets. And for Devapur, I think the direction would be going north from Devapur to take us into maybe towards the border of Vidarbha in Maharashtra and Madhya Pradesh, somewhere in that side.

Understood. And sir, given that these are brownfields, so whenever we decide and Board approves maybe anywhere, let's say, by end of next year, it would take for us 2 years to get on track?

Typically, yes, from the time the Board approves, I would want to target it within 18 months because, obviously, by the time you go to the Board for approval, a lot of other activity primarily would have -- we would have done. So I would say 18 months for one. And as the first -- I would say, the first expansion plant starts nearing completion, we'll start the activity on the second one because we want to do it sequentially, right? So our total put together, both the things, we would like to see up and running at about 3 years time from the day we get the approval from the Board.

Understood. That's very helpful. Sir, secondly, on the demand, and you said that last 1, 2 months has been good. So now going forward, what's your expectation? Can we expect something like a mid-digit -- mid-single-digit to high single-digit growth on a normalized basis from our markets going forward?

For H2, yes. For the financial year, given the fact that in the first half, we've had degrowth, there will be -- at the year-on-year basis, for the full year, I still think there'll be some degrowth. Like I'd mentioned, my ambition perhaps now for this year is to do a total volume over 5 million tons, which is lower than what we did last year, right? And then for the rest of the industry also, I believe for the full year to expect growth, to me, its looking a tall order right now unless the market surprise us.

Okay. Okay. And sir, just 1 last...

In H2, I would certainly see -- I mean, I would say a high single-digit growth is feasible in H2.

Perfect. And just, sir, one last question, if I may. You were doing -- you're doing some good work on the premium product segment. Our sales have increased from -- last quarter, you said that it's almost now 7%, 8% of the overall sales volume. So what's the latest trajectory there? And what are our medium-term targets for that?

Yes. So StrongCrete is the brand that we are talking about. In -- see, one of the key things in our premium product, which is StrongCrete, is that we have targeted that product only at -- on the Indian independent house builders. We're not giving it to the B2B segment because they won't pay us the price. As I mentioned to you in Q2, because the overall trade sales or rather our independent house builders activity has been a little soft, the growth that we were expecting, the plans that we had for StrongCrete, obviously, in Q2 have not materialized. They have been a little soft, but that's also the function of -- if independent housebuilding activity comes down, StrongCrete sales will not go up. We know that. So that's been a bit of a headwind right now, but the plans are very much there. We'll try and sort of push it, as I mentioned to you, post Diwali, post Pooja, whenever the independent housing activity picks up. We have absolutely complete optimism on the product that we have. One of the key things besides the independent house building activity being on, second, very important thing for StrongCrete sales is the fact that we -- at every site of the customer, we depute our technical officers who guides them to make best use of the product that we are giving because if they pay a higher price and use it as they use any other product, then the value to the customer is lost. So our technical services support is critical for that product. And given COVID situation in the market, we were not very keen to start sending out our technical teams to every sites to support the customer because there was a risk of they bringing back COVID back to our company again. So those have been the, I would say, headwinds against StrongCrete but the product is absolutely good and the market knows it. And the activity needs to come back to normal, and we'll report better numbers again. But yes, we would be just about -- maybe just a little under of our total sales compared to the previous quarter because of the market mix having moved.

We have the next question from the line of Amit Murarka from Motilal Oswal.

So my question -- first question is on the realization front. So we see that Q-o-Q, there has been a decline of about 6.5% in your realization per ton. Like, could you help us understand like how has been the performance on pricing generally in October? And what's the outlook for 3Q?

Sorry, could you just repeat? I missed some bit of your question. Can you just repeat a part of it, please, the last part?

No, I said that the realization has dropped, 6.5%, while it remains very strong Y-o-Y. So like in October, generally, have the prices softened further in your core markets?

The softening of the price is perhaps just marginal in October. It is there, but it's marginal. The larger impact, as I've been saying earlier, would be of also the customer mix. If the non-trade sales as a proportion of total sales go up, your total realization looks down, not necessarily because the prices have gone down, it's just that the product mix has changed, right? So that does impact. So I -- as of now, in October, while there is some pressure, but it's marginal. I wouldn't be too worried about the pressure that we've had in October.

But what was the trade share in this quarter?

Trade share total in this quarter was 60%.

So down from 75% is what I remember prior quarter...

Yes. The 75% was only -- an exception in Q1. We -- even in the past, we never reported 75%. You know that. In Q1, definitely because of no B2B activity, no non-trade activity in Q1 or rather not no -- low activity because of the migrant labor having moved out from the infrastructure projects, you all know that, so as a proportion, obviously, trade sales will always look higher when non-trade is not happening.

Sure. And you said that demand has improved off-late. Is that improvement led by largely non-trade? Or even trade is continuing to improve?

No, largely non-trade. Trade, as I said, we expect it to improve post Diwali when the independent house-building activity resumes.

Okay. And in the last call, you had mentioned that Kaleshwaram Phase 2 is expected to start soon, but I believe there is some NGT issue now on the project. So where do we stand on that?

Yes. We are also waiting for the government to give us clarity. Right now, there's no clarity available.

So it's fair to assume then that it will take time, that the Phase 2 will take time to start then?

Look, everybody wants it to happen. Let's see when they're able to clear out with their internal clearances from NGT and all. These things can get -- I mean, either can get blocked for years together or they can get approved in 1 hearing. I won't take any hazard -- any guess on that.

And the last question on the cost side. So you mentioned in the opening comment as well, the pet coke has gone up. So generally, I mean, the lag impact is expected in this quarter of the increase in pet coke. So what kind of cost inflation are you seeing on the power and fuel side because of that?

Look, again, I would just remind you of what I said earlier. Pet coke is one fuel. That's not the only fuel, right? So if pet coke has gone up and if imported coal is becoming available at a price which is not as high as the pet coke price is, obviously, the impact will get muted. It's not directly transferable, right? Not that...

I understand that it is mute -- it is lesser than using pet coke, but there would still be an increase, right?

Correct, correct, correct. So -- and now that is a function of the location of each plant. You can't generalize for that because each location of the plant will depend on their source of coal because the source changes, right? So it's very difficult for me to give a generic answer for the entire industry. But I personally do think there would be an -- for the industry as a Whole, I mean, we may be placed very differently given our location compared to rest of the industry, but many people, I think, will need to get prepared for -- even after -- because the pet coke prices have moved up from about $70 to close to $100, I mean, in high 90s the prices have gone, right? Now that would actually mean a 40% jump. But I think between 10% and 15% increase in cost, if people are able to get enough imported coal, they should be able to contain the impact within that.

We have the next question from the line of Pritesh Sheth from Edelweiss.

You gave us a very detailed initial brief. My first question is on your comments on volume recovery that you are seeing in the month of -- that you saw in September and continued in October. So is it now a very broad-based recovery across regions we are catering to or still regions like Maharashtra are a bit lagging behind the other regions?

Well, as we see, definitely, Maharashtra is still impacted, but Maharashtra also has the benefit of more proportion out of the infrastructure projects, right, currently going on. The roads project, for example. So yes, Maharashtra has gained, but largely the growth in Maharashtra is coming from infrastructure. And the other sectors, like I mentioned, hopefully, in the next few weeks, we'll get to see. But as of now, like I said, there is growth but the larger part of the growth is coming from the infrastructure and the non-trade sector.

Okay, okay. But considering the higher base that Maharashtra has in last year and even previously, would we still see a decline on a year-over-year basis or it's a growth?

In volumes?

Yes, yes.

No, Maharashtra is showing some growth right now. And that's why I'm a lot more hopeful that when the trade sector starts picking up in Maharashtra, we should actually see a compounded growth coming from both infrastructure -- infra sector and also from the trade sector. We need to watch how the trade demand in Maharashtra picks up post Diwali, that we have to still watch.

Okay. Got it. And lastly, on your cost. So diesel price hikes have already been there since last quarter. Now has that completely reflected in our cost structure? Because I -- on a quarter-on-quarter basis, I still see at a similar level, your credit cost, on a quarterly basis. So would we still -- would you see the impact in next quarter? Or is it all reflected?

No, it's already there because diesel is not something that we carry inventory off, right? And most of the diesel cost comes in the form of the compensation that we pay to our transporters. And that is linked to the -- whatever the diesel price, the same day, it's an automatic switch that happens. Diesel prices going up, we increase the per kilometer per ton cost price that we pay to them. And now it's a function of in future how the diesel -- if the diesel prices are pushed up again by the government, there will be further increase.

Okay. And that's what I wanted to understand. So your efficiency, I think, have off-setted that hike because quarter-on-quarter, we are not seeing that increase.

Absolutely, absolutely, absolutely.

We have the next question from the line of Milind Suresh Raginwar from Centrum.

A couple of questions. So first, on the P&L. We have seen the run rate of other expenditure sharply going down if I had to look at the past 3, 4 years. So with the volume coming back, where should we see this stabilizing?

Look, it will never stabilize. It will go -- it will keep moving the volume not in direct proportion, but there is something which will always happen. Now the other expenses, for example, if I tell you and for the whole industry, other expenses include the royalties and things like that also. Now every ton of limestone mining that you do, it will go up, right, although it's passed into other expenses. So similarly, as I mentioned earlier, there will be costs like advertising that we'll have to start looking at as the markets pick up, especially when the trade segments start picking up again. Repairs, maintenance costs are chunky cost. The more the equipment gets used, the more those costs will be. They're not directly variable costs, but they are still semi-variable, right? So when we say at what level will they settle down, it's a function of what is the volume in the market or what's the volume that we are producing and selling. So none of these costs are -- I mean, unlike -- there could be a few costs which are discretionary, advertising, for example. We may decide not to spend anything to show higher short-term profit in the short run, but that will start hurting our brand position in the market and slowly, gradually, we'll start -- in due course, we'll start losing the volumes to the competition. So that's why I said, we are not sitting here judging, saying all the costs are bad costs and it must be brought down. The important -- for example, even the -- let's say, one of the costs which normally remains fixed through the year is the manpower cost. And I've just mentioned to you that looking at the performance of the company, looking at the momentum in the market, also looking at the impact to the morale of the company, we decided to roll back the cuts, right? So it's all a function of where the business is headed. Costs do not exist in a vacuum. That's what my hypothesis is. You always have to take a call on which cost you will incur when. So I'm saying if I really have to sort of, in a way, support the markets well to take best advantage of whatever is the volume uptake coming up, we'll have to start incurring the cost again. It's a very dynamic situation. I don't think anybody can sit down and say, "Don't spend on advertising because we want to see Q2 profit next year higher." That will kill my Q4. I need to be prepared. So if my maintenance of the plants, which if I need to sort of, in a way, spend money, otherwise, there might be breakdowns, that is one category, which is unavoidable, we'll do it. Second is, supposing now this -- at the rate at which the equipment is running, the maintenance falls due in the month of February, and I realize that February, March is going to be the peak demand time, I may prepone that to December or January. So these are very dynamic situations which we manage based on what we see of the market, what you see of the requirement for that cost to be incurred. There is never a situation where we say, "This is a perfect decision for a cost." It can never be, because the markets are dynamic, we need to be also agile. I can't give you a very straight answer on that because we don't have any answer. If we started working with such fixed ideas, then I think the computers can run the company, and we don't need human beings deciding on based on our -- on what we are seeing in the market and how do we sort of take those calls. But yes, would the costs remain under continuous surveillance and management? Yes. Would we keep eliminating all the costs which are not required to be incurred? Yes. But essential costs will be incurred, and they will always be reported other than revenue, other costs, other expenses.

The next question is again related to the cost. Did we take any shutdown in the September quarter?

No, in Q2, we've not taken any shutdown. But as we speak, our Line-3 at Devapur is under shutdown in the month of October. In Q2, we didn't do any.

And how was the status in September '19? I mean did we take any...

Yes, yes, yes. Last year, we had done. We had done -- one shutdown had happened. That's why in repairs and maintenance costs, in our case, it's about half of last year same quarter.

Okay. Second question is, sir, you said that we are targeting something like 3.1 million tons from hereon. I mean the focus will be at achieving that target by forgoing some pricing? Or how would be the mix in terms of gaining the market share to the realization gain?

So we will always fight to defend our market share and always make an attempt to grow, if possible. We don't concede market shares because that is a long-term damage to the company. The pricing assumption, we are going by experience so far. But would there be, let's say, deliberate call to reduce the volume to show -- let me ask you a question. I can very easily show much higher profitability by selling within 100 kilometers in our plant, right? So per ton will look fabulous. But where will the volumes come from? So you -- again, in terms of, when you are present in the market, you have to realize that you cannot keep conceding ground. The only things we might decide to do, if there's a non-trade opportunity which is coming at a cost which we -- at a price which we don't want to sell, we might give up on that. But in the trade segment, in the penetration of the markets, we'll never step back. It is -- we'll go by whatever the market pricing is. On our own, we will not sacrifice either the price or the volume. We will always try to maximize both within the dynamics of the market.

Understood, sir. Understood. And third question was the incremental CapEx, whenever we plan, post the Board approvals, we will still require the EC and all the statutory clearances, right?

That, in any case, we'll not stop. That process continues even now. It's just slowed down because of all the other priorities that the ministries and governments have, but the process is very much on. So that process is not stopped because the Board has not approved. Getting approval from the government always is an enabling thing. That we're pursuing.

Okay. So that -- okay. So effectively, post approval, that's the reason you're saying it will -- the plant is to be commissioned by 18 months? Is that correct?

Yes, yes, absolutely.

We have the next question from the line of Prateek Kumar from Antique Stockbroking.

Sir, just a related question to prior participant. So status of Environmental Clearance for the project, you still expect by April -- March, April next year?

What do I say? Now as of now, if you ask me, every week, we are finding some more ministers going down with COVID. Now in last few weeks, we've lost -- the Minister of Mines is down with COVID. So actually [Technical Difficulty].

Okay. And sir, on fuel cost. So our fuel costs used to be in the range of INR 1,000-plus, INR 1,050-plus, I mean, last year or in FY '19. We are now at around INR 850, INR 880. So due to this fuel inflation, do we expect this to go back to INR 1,050, or it should be somewhere INR 950, INR 1,000, I mean, by end of this year?

Frankly, that's too long a call on the fuel cost at this stage. My own assumption would be that at some point in time, the crude refining activity will pick up, the pet coke will start becoming available and will start coming -- the prices will start coming down again. At what point it happens, whether it happens in the next 4 weeks or 10 weeks, I have no idea. So for the full year, I can't give you a forecast. Given the current situation of not enough supply of pet coke, currently, everybody is under pressure on fuel costs. But also the expectation is maybe in Q4, the pet coke supply position improves and the prices are back to where they need to be. And these are -- again, I keep reminding you people, commodities are very dynamic globally. So to give you a forecast of full 6 months is very tough. Next 2 months, definitely, as I mentioned earlier, I do believe there could be inflation in fuel cost of the industry of between 10% and 15%. That's what my hypothesis is.

And sir, freight mix -- sorry, this freight cost we have been able to control very well. So have you seen any material difference in railroad mix in the quarter or direct dispatch mix, which we said last quarter, 25%...

Yes. What's -- the good thing that has happened is that in the, I would say, last 2 quarters, what we've seen is and also it's a reflection of the pressure which is there on the railways, because their capacity has been grossly underutilized, that normally from October, they withdraw all the lean season concessions that they give to us and the peak season surcharges start. This year, they have not imposed them. So railways are also trying to be more competitive. So obviously, we've taken full advantage of dispatches by railways. As a percentage, I might not be able to flash it to you right now. But definitely, railways as a percentage of our dispatches have gone up. And also we are trying to see that we can sell more of our volume to the markets which are closer to us. Now that, as a strategy, is something that we have adopted, and we are beginning to see more volumes in markets which are closer. Because of this, the average distance travel also comes down, right? So more volume we sell close to our plants, the better off we are. Partly it's coming from that and partly also coming from more dispatches happening using trains -- using rakes.

Right. My last question on your product mix. Trade mix has fallen to 60% versus 75% quarter-on-quarter. How is this PPC mix would have dropped?

Similar, similar. Trade and PPC roughly both are some 59%, 60%.

The trade is -- so PPC mix is also 60%?

Correct, correct, correct.

We have the next question from the line of Sanjay Nandi from Ratnabali Investment Private Limited.

Sir, I just wanted to know like you mentioned in the second half, you are targeting like 3 million ton kind of production level, so which will yield to a 75% kind of utilization. So can we expect like the realizations to just stay at these levels for this first half or would you expect it to drop down in the second half?

My expectation is they'll not only stay here, they should actually firm up. As I mentioned, when the fuel costs for the entire industry go up and the volumes in the market are also looking better, there is every reason for us to start looking at firming up the prices rather than the prices going down.

Okay, okay. And could you just share the production number for this quarter?

10.21 lakh tons. Production was similar which is around -- we normally don't stop the inventory. So if I had given you a sales number, production will be very, very similar, maybe 10,000 tons here and there. That's all.

No, I'm talking of the September '20 quarter, like this Q2. What has gone exactly, actual numbers?

I'm giving you the sales number. That's more important for us, 10.21 lakh tons. 10.21 lakh tons.

We have the next question from the line of Amit Murarka from Motilal Oswal.

Sir, I just wanted to check on this -- there is this relaxation on the mini rakes which has been given. So I just wanted to understand like are you availing of this and trying to reach out to some other markets, which was earlier maybe not possible?

Yes, absolutely. That's why I said -- that's why I mentioned earlier, the railways are actually adopting very industry-friendly stance right now. And many of the markets where the full rakes could not be sold, obviously, we were depending on road dispatches. But with the mini rakes being available, we find there are many more markets which can absorb in mini rakes. So you're absolutely right. The part of the reason why we benefit in freight cost is because of this industry-friendly policy, which have been adopted by the railways. Yes, we are benefiting from that.

Okay. And like, what distance is it possible to go now with this?

Now they are allowing mini rakes even beyond 500 kilometers, which earlier they never used to do.

Okay. So you can then reach basically the Central India markets also comfortably in the...

Yes, yes, yes.

And what percentage of volumes, let's say, would be happening through the mini rakes?

That again is a too minor a detail for me to be having in hand for this conference. So if you want, we can separately...

Sir, just a ballpark number, like will it be less than...

I -- look, I -- no, I really don't have a number only for mini rakes right now with me.

We have the next question from the line of Gaurav Rateria from Morgan Stanley.

Sorry, if it is a repeat of any of the old questions, but I just wanted to get some clarity on the non-trade comment which you were making, which has come back pretty nicely in the current quarter and you're talking about visibility also going into December quarter. If you look at the top-down data of the government spending, it is kind of weakening every single month. It doesn't kind of tally. So I'm just trying to understand government spending doesn't look like to be coming back so strongly. Then what is really driving the incremental volume coming back in the non-trade segment and how sustainable is this?

See, non-trade has 2 parts. One is the infra projects in which you're talking about the large headline government expenditure. But non-trade also happens in the non-infra projects and which happens in many, many small projects, which are continuing, which are not independent house builders, but they are being done by contractors for some other outfit or the other. So non-trade is -- and within non-trade, I think infrastructure perhaps would be -- if we assume the pan-India or at least in the markets that we operate largely in, let's say, Karnataka, Maharashtra, if we assume non-trade total demand to be maybe 40-odd percent of the total sales that we do, the infra out of that would be just about half. And rest of the half happens in non-infra projects, which could also be in private sector. So it's a -- and on top of that, we have the situation where the headline numbers don't tell you the reason why you breakdown of the government expenditure also. So currently, as I mentioned earlier, Maharashtra is benefiting from very strong progress on their road projects that are happening, which are funded, obviously by the government, right? So we're benefiting from that. It does not extrapolate by itself to the government expenditure pan-India. Yes, it's specific to our markets that we are servicing right now.

Got it. And what kind of visibility do you have with respect to this continuing over the next 3 months, 6 months -- and probably you know where you supply materials, you would know...

Yes, yes, yes. Going by the current demands that are being placed on us, I do think it should last at least through this financial year. And that's why my optimism on the volumes also.

Got it, sir. Last question for me. On the other expenses side, I understand you've done a lot of work with respect to variabilizing some of the fixed costs in the past. And I'm just trying to understand that when we get back to the normal volumes, some expenses will come back as you indicated. But on a structural basis, this number will look like how much lower than what it has been in the past?

Look, you are assuming the cost -- incurring cost is bad. I'm not assuming that at all. If the business justifies, I might increase the cost. Why would I reduce them? Let's get rid of this mindset that all costs are bad costs. All costs -- I mean, if you are here sitting, you're incurring bad cost, we shouldn't be in our jobs, simple. Every cost that we incur is required in some context. So as I said earlier, if the businesses pick up, and I need to support the business, I will incur the costs even if they go up. It doesn't matter. Because the business will pay for that cost. I refuse to make any commitment saying, I'll reduce the cost always. I can't make that commitment. If required, I'll increase the cost, simple. As long as the cost is functional, constructive, contributing to the company's overall business, we will increase the costs. Absolutely no problem.

We have the next question from the line of [ Harshal Kothari ], an investor.

My question would be, does Orient Cement see any threat of not having a development in the or not having any capacity in the central part or the northern part region? And -- because most of the capacities are in the southern part? And how do you see the demand going forward for this? And how do you see this too?

Look, I completely agree that our exposure to the markets is rather limited. And we need to have more diversified exposure to multiple markets. It could be in center, it could be in east, it could be in north, it could be anywhere. So yes, we are too exposed. For example, Maharashtra, which is 50% of our market, is a very large exposure for a country -- for a company of our size to one single market. And then we are in Telangana and then we are in Karnataka and then in maybe smaller proportions elsewhere. So definitely, is it an ideal footprint? No. But to have a diversified footprint, we also need more capacity, more plants, right? Now that, as I mentioned, is a function of -- if you people recall, now it looks like old story, when we made the bid and wanted to acquire the capacities from the Jaypee Group in Bhilai and then at around Satna some mines and all, the purpose of that approach to Jaypee and making that offer was actually to find diversification in our markets. That was the whole logic because without you having your limestone in those areas, without you having some access to service those markets, you can't reach. And like I said before, whatever were the circumstances, we dropped the deal. And the deal also was not being liked by many of our very large investors. So we are aware of that. So it's a question of having a wish, but not wanting to have -- put your money behind it. So, so far, that's been the story. And that's why after having our strategy to acquire capacities in other markets, we came back to the strategy to grow in our markets based on brownfield expansion. But within brownfield expansion, what we're trying to do is by increasing our reach through putting up grinding units which are away from the clinker units. right? So as I mentioned earlier, if, for example, from our Telangana plant, if we can actually take the clinker there more towards Madhya Pradesh, within the radius where it makes sense, typically 500 kilometers is the radius within which you can put up a grinding unit. So we do have a tentative site in mind where we can put up a grinding unit where fly ash will be available in plenty within a distance of about 500 kilometers. So that takes us in terms of diversity. We may not have a clinker unit, but we will attempt to reach out to the markets in Central India using that route. So we are trying to create that as a part of the strategy. And same thing we will do with the Gulbarga, Chittapur plant from where we want to go deeper south, because Gulbarga is too far north in Karnataka, and that's why we ends up selling more and more in Maharashtra, whereas a grinding unit, which is fed by the same clinkerization plant to more lucrative markets like Tamil Nadu and Kerala and Southern part of Karnataka, certainly, that's part of the strategy to minimize the damage that we suffer because of too higher concentration in our current markets.

[Operator Instructions] We have the next question from the line of [ Prashant Shah ], an investor.

Hello, sir, am I audible?

Yes, yes, you are very well.

First of all, congratulations on an excellent set of numbers. Some of my questions have already been answered. So I have basically 2 follow-up questions. For our blended cement, how much percentage of fly ash is being -- is the proportion as of now? And second is, is the company looking for a captive solar plant of -- if yes, I mean, if you can provide some details about that?

So you asked 2 different questions. On solar power, yes, we are currently considering what we call a group captive scheme at our Jalgaon plant, which does not have any captive power at all. It depends on grid power. We are looking at an opportunity where we'll be putting up a small solar plant of our own. And we will not run it. It's called group captive in which we will be participating only to the extend of 26% in the equity. And the balance funding 74% equity and the loans part of that will be by the specialist in solar power. So we are considering that for our Jalgaon plant in Maharashtra which is just a grinding unit. The other 2 plants have their own captive power. And where, as you might have heard from me earlier, the waste heat recovery plant that we speak of is the priority over solar because waste heat recovery actually gives us cost of generation which is the lowest, including from solar. Because the CapEx and other things, if you look at it, the waste heat recovery should benefit us more. So we will certainly be doing that on this part. And the -- sorry, just remind me of the first question that you had asked. I'm an old man, I keep forgetting.

No problem. Sir, it's just that for a blended cement, how much of percentage of fly ash are...

Yes, yes. The ISI permits you to add fly ash to the extent of 35%. And we do sort of stay within that range. Everybody, I think it's largely between 32%, 33% and 35% in that range. We also do that, like anybody else. But nobody can exceed 35% because that's the statutory limit.

Yes. So I'll put it other way. So if the BIS guidelines are revised upwards, say, for example, 40%, are we ready to go to that level?

Yes, very much so, because I think in terms of -- see, it's a function of how good is the clinker quality compared to competition. I think the quality of limestone we have and our clinker quality is good enough. So if BIS accepts 40% fly ash with the -- you see, it's not just fly ash percentage that's limited, it's also the performance of the cement, the setting time, the strength that you gain in 1 day, 3 days, 7 days, 28 days. So fly ash is just one component, which is a recipe, but we also need to meet the other criteria which the BIS will prescribe for the industry, right? So I personally do not see with our quality of clinker 40% fly ash failing with any of the requirements of BIS.

Okay. Just sir, on the CapEx -- I mean, on the solar part, other players are also exploring on OpEx model for solar power. I mean, has our company explored that? And what are your views on that?

Yes. We definitely keep our mind always open on OpEx and CapEx both. We have definitely examined that. But even after examining that, we think the group captive under which we are putting up at a very small investment, we get a committed capacity of power for our Jalgaon plant, and we are taking that route. But yes, while examining, all the aspects are examined.

Ladies and gentlemen, we have the last question from the line of [indiscernible] from [indiscernible].

Am I audible?

Yes, very much, sir.

Yes, yes. Are you saying that till date your debt will be much less than Q1? Can we see any improvement in the share price till the year-end? Like right now, it's at INR 64, right? Today, it closed at INR 64.

I don't run the share market. Let the shareholders and let the traders decide that and investors decide that. I will do my work. Price will be determined by the share market.

Ladies and gentlemen, that was the last question. I would now like to hand the floor back to the management for closing comment. Please go ahead.

Well, I have already said whatever I had in my opening remarks and in the answers that I give to various questions. So Krupal, it's up to you to wind it down.

Sure, sir. Sure, sir. So, thanks, sir. On behalf of ICICI Securities, we would like to thank the management of Orient Cement for the call and thanks to all the participants for joining the call. Thanks, Melissa. And you may now conclude the call.

Thank you, gentlemen.

Thank you. Thank you, everyone, for participating, and thank you, [ Isaac ] and Krupal for organizing it. Thank you so much, and thanks to participants for their time and attention. Thank you.

Thank you. Ladies and gentlemen, on behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.