Pokarna Limited (532486) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Pokarna Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Gavin Desa from CDR India. Thank you, and over to you, sir.

Thank you. Good day, everyone, and a warm welcome to Pokarna Limited's Q3 and 9-month FY '22 Earnings Conference Call. We have with today Mr. Gautam Chand Jain, Chairman and Managing Director; and Mr. Paras Kumar, Chief Executive Officer, Pokarna Engineered Stone Limited. I trust most of you have gone through the communication and results presentation made to you earlier. In the interest of time, we would like to commence Q&A immediately. So I would like to request the moderator to open the floor for Q&As.

[Operator Instructions] We have the first question from the line of Abhishek Tandon from Bowhead India.

I have just one question, which is what was the capacity utilization of the new plant in Q3?

See, as I mentioned in my previous discussions as well. The ramp-up of capacity is relatively also linked to the shipping situation evolving because I think the availability of container and the spaces on the vessel, and the vessel schedules are still tight. So while we are making all the efforts to ramp up the capacity, but largely, we are concerned because of the availability of the container. So between 60% to 65% is the current number at the Unit 2.

Okay. And just a small question. So as we know, a decent amount of demand comes also from hospitality sector where margins are also good. So have you seen any demand from that sector now?

There is an uptick in the inquiries. So I think probably the case is getting built up. So right now, the demand has still not come back. But I think if the COVID situation normalizes after Omicron, probably there will be a little better situation than what we are today in hospitality segment.

We have the next question from the line of Ravi Naredi from Naredi Investment.

You have given the nice numbers in this quarter. Sir, your quarries, how many years it will long last?

Are you asking about the Granite quarries?

Yes, yes, yes.

See, basically, the quarries, there is no rule how many years it can last because they can be deposits but which are of no commercial value than it is of no use. But more or less, most of the quarries that we operate are all bigger quarries. And we hope that deposits should last another 25 to 30 years minimum.

Nice, nice size. And how much distance from our factory to quarry?

No, there are different locations of quarries, and all the lowest distance is ranging from almost 1-hour drive to up to as good as 24-hours to 36-hours' drive also. All quarries are in different directions and different locations. I think that does not have much relevance to the factory and the quarry.

Right, right. And sir, what is the reason, EBITDA down, but after tax improves in percentage terms? How you manage -- meet this magic?

I can't follow it. Are talking about Granite or Quartz?

You had given a consolidated financial figure, margin 32.2% EBITDA margin versus 34.4% last year. And profit after tax improved 17.58% versus 15.7%. So EBITDA margin down by 220 basis points, but net profit margin improved 188 basis points. So how this magic you have done?

If you look at all the past history, the EBITDA depends on also the product mix that we've made during the quarter and also the thickness. The major reason would be that also if we are making more of 30 mm thickness, and also then the also depends on the foreign exchange fluctuations. You have to look at totality.

The foreign exchange fluctuation is more important than this thickness because ForEx gain will transfer to bottom line. That is important thing, sir. And sir, how is the logistic problem now?

We are living with it. Nothing exception for us. We are managing to push whatever best we can do. But the situation still in some ports of U.S. is very bad. And we don't think there is an immediate solution.

Okay. Okay. Okay. So we have to face in future also.

Ladies and gentlemen, before we move to the next question, we would request participants to ask 2 questions or limit the questions to 2 during the initial round. We have the next question from the line of Pranav Mehta from Equirus Securities.

Congratulations, sir, on a very good set of numbers. Sir, I just wanted to understand on the countertop market. So basically, if you see a lot of the tile players are now entering the kitchen and table countertop markets. And even if you see Caesarstone has acquired really for the same purpose. So if you can throw some light how this market is developing and whether that will impact the Quartz countertop market globally or they can grow parallelly? That was my first question.

Yes. So basically, see the Quartz has been a countertop material for all practical purpose. So largely, it either goes on a countertop or it goes to a vertical cladding, all interior purposes. So like with the many products like there has been traditional, if you look at -- it all started with laminate, then it got into a natural stone like [indiscernible] came the engineered surfaces. So if you look at the entire market size and [indiscernible], engineered surfaces today, you have engineered stone, which is quartz surface then you have porcelain or ceramics slab, then you also have some solid surface. So there are different pockets and there are different applications in the markets. And again, the price points are also different. So we believe that the category into what we are today, which is Quartz surface category has its own niche and its own growth. And we believe that is going to continue in spite of other categories coming in because there's a lot of marketing initiative, which is required to be done to create a category over a period of time. So I think products will keep growing coming, but the focus on quartz is going to continue, is what we believe.

Sure, sir. And sir, just additional question on this front. So apart from U.S., are we targeting the -- to enter other, let's say, mature but still good markets for quartz countertop like Israel, and Australia, and U.K.? Or are we focusing only on U.S. in particular, as of now?

We have different markets, but a large part of the concentration is U.S., definitely. We do have a presence in Palestine. We have presence in other parts of Europe as well, including a good amount of presence in U.K., Canada. And we are also working on expanding our reach within our own country, and also looking at tapping other markets where there is a flexibility to position the product.

Sure, sir. And sir, my second question was on margins. So how are we positioned to improve the margins, let's say, over the next 2 years. So any guidance you can give on whether we can start reaching, let's say, 36%, 37% kind of EBITDA margins, mainly led by quartz, anytime soon?

These are very challenging and unprecedented time. So I think any amount of planning we do today for 2 years is probably guess and rather a wild guess. So it's very difficult to comment on what whether it will become 35% plus or not. But I think, as I was mentioning always in my previous calls, I think 30% plus of EBITDA is what is our internal target. And we want to make sure that we achieve that. And whatever comes on will be all dependent upon how the raw material inflation and the shipping brings in.

We have the next question from the line of Sachin Kasera from Svan Investments.

Congratulations to the entire Pokarna team for such good numbers in this challenging time. Sir, 2, 3 small questions. One was you indicated 60%, 65% utilization that is for the new plant or that is for [ old 3 plants of company ]?

That is for the new plant.

And any sense you can give us on the older plant, sir?

Old plant is running at the optimum capacity.

Okay. Secondly, you mentioned that the challenge still persist. If you could give us some sense, how are you seeing the ramp-up for this new plant. Can we see that every quarter there will be some improvement or at least for next 1 or 2 quarter in range of 60% to 65% range.

I think largely the ramp-up is all linked to how the shipping situation pans out. And with the Chinese New Year coming, I think it's going to be largely in line with what was one of the difficult quarters in the previous one. I think next couple of quarters will definitely be a little tighter. [indiscernible] a large improvement in terms of utilization at least for next 1 to 2 quarters. So that will give us the time to work upon the products and do some [indiscernible].

Sure. And secondly, any sense you can give us on how is the response coming on the domestic market?

The domestic market response has been definitely very pleasing, and it's going in the direction which we have planned. Our digital marketing initiatives and other pull and push strategy, which we have deployed by getting into the kitchen and bath segment positioning the product. That seems to be bringing in the right traction. So I think it's a long journey, but I think the direction is very positive.

Any numbers, worth of sharing for domestic market where we are, in terms of revenue?

We are still in a single digit, but I think the current focus is to get our presence across India. So currently, we are close to at 100 locations. But then as we expand the footprint, that's when the numbers will come in. So I think it's more of a market making activity right now.

And just lastly, on the debt, if you can give us some sense, how do we see the debt reduction plan in the next 12 to 18 months?

Right now, I think we do not have any CapEx plans on board currently. So I think whatever is our commitments, we have commitments like next year. I think we have about almost [ INR 16 crores ] to be paid. And then we have about INR 30 crores onwards from '23, '24 onwards. So I think right now, the same, whatever the annual commitments are there. I think we'll be able to meet those easily. And then unless there is any other investment coming through, I think largely, everything what we earn will only go towards rationalizing our interest expense and it is in the debt.

We have the next question from the line of Pratik Singhania from SageOne Investments.

Congratulations on a great set of results. Sir, my first question is with respect to the utilization like continuing the previous participant question. So like this logistics problem was pertaining like from since last 2, 3 quarters. But despite that, we have been able to ramp up our utilization in the plant when overall like INR 175 crores of turnover. So what stops us for increasing this capacity utilization because in challenging time also, we have been able to ramp-up our utilization?

See basically, we always want to maximize as much as we can. But then sometimes what happens is that it is a continuing business. 1 quarter can be good or 1 month can be good, which will help you to recover whatever you lost. But then there can be 2 months, which in a quarter, which can become challenging and then you will probably not be able to make up what we did in the previous quarter. So we believe that definitely ramp-up is linked to the shipping and that's an impediment. So largely, while we are focusing on getting more and more containers using all our means possible, but then that is something which we actually cannot control and comment upon.

Okay. And in terms of market share with respect to your target customer like as compared to last, say, 2 quarters back, compared to that, like what would be your share of market share into your target customers?

We don't have a defined number in terms of what is our overall market share in the customer's portfolio. But what I can say is that we are definitely having a larger shelf space in our customers' portfolio than before.

We have the next question from the line of Vivek Gautam from GS Investments.

Yes. Sir, congratulations I recently started tracking the company and numbers are really good. So just wanted to know that some of your competitors are not having the -- not exactly competitor, but they are the same basically into the same sector, they are -- the customers have to bear the freight charges? Or do -- or that also has to borne by you, sir?

It depends upon the pricing model that you adopt with your customer. There are some pricing which are on a free-on-board basis. There are some pricing which are on CIP destination port delivered basis. In either -- in any case, basically, the customer pays for the freight, and that's part of the price. So if we are paying and then recovering base for it or sell range as a container or shipping and then he pays for it.

Okay, sir. And currently, the housing boom in the U.S. contributed a lot in our favor. So with this rising interest rate in U.S., and the COVID [ TVs ] getting reversed, how much impact can it have on our business in the U.S.? And any -- in case the U.S. slows down, then what are the backup option for us in other countries and continents, sir?

We operate both in residential and the hospitality or the commercial side of the business, I would say, direct residential and commercial. So right now, the residential seems to be because there is a good amount of renovation market, which contributed and there was also some new development, which came in. But the commercial business was largely down because of obvious reasons. So I think we have a balanced portfolio of residential and commercial client. So I think while we are not insulated completely from a downflow of all of one or the other segment, but largely because we are positioned on both the sides of the business, there is relatively a better position than being on just one side of the game. That's one part. Secondly, as I said at the beginning, our focus is U.S. definitely. So whatever we do to focus on the other market, it's impossible to -- overnight or an unlimited time transfer your entire exposure. So I think the exposure to the U.S. will continue, whatever comes through.

Okay, sir. And sir, [ beyond it's ] a really founder-led organization. You devoted your life to Pokarna and has built it up to such a company level at one generation that is really truly commendable. And -- but now what are the succession plans and what are the professionalizing arrangement you have in mind because the key-man risk is also there in our company, sir?

See, if you look at the entire setup, this company was always run by professional. So while the promoter family is the large shareholding this thing. But there has been always professionals that help them with the affairs from the day 1 when we started.

We have the next question from the line of Hrishikesh Bhagat from Kotak Asset Management. Mr. Bhagat your line is unmuted. Please unmute and go ahead. As there is no response from the line, we'll move to the next question. The next question is from the line of V.P. Rajesh from Banyan Capital.

During the... [ Technical Difficulty ]

Mr. Rajesh, I'm sorry to interrupt, but the audio from your line is not very clear, sir. Could you improve it a bit?

Is it better now?

One moment, sir. Yes, please go ahead.

Yes. So my question is that with respect to our B2C business, what kind of investments are we planning to make in the next 2, 3 years? And what kind of revenue opportunity you see there?

Basically, our B2C largely is targeted in India. And we are -- in the U.S., we are either a B2B brand and largely a B2B brand, we're not getting into a B2C category in the U.S. So all the investments, what you look at in terms of whether it is providing the point-of-sale material to all the other marketing support to what we want to give. It will all be in less than $1 million over a period of time.

Okay. And that's in India, you're seeing? You'll invest less than $1 million, is that right?

Yes, over a period of next 3 years, that's what we are targeting. So it's not a 1-year period because the strategy in India is relatively different, and we are now more focused on digital advertising than on the print heavy. So that... [Audio Gap] We are trying to build a different type of business model in India. We are just not selling a product. If you look at our entire offering, we are a 360-degree company. Only company in the country today to give you a complete experience on the product, some measurement we have placed to the installation of countertop at you place. So within 12 working days, we actually come to a place for half an hour do the measurement. On the 12th day, we come back and install the countertop and we are out of your home after 24 hours. So that is the type of last mile connectivity and the business what we are targeting at. So we are building a service revenue model, along with the service actually in India, which is very unique and we are the only company in this which does it in a professional way, with all safety, all sustainable practices put into it. And then if we don't create any noise or debris or any cutting or anything at your place, every.. [Audio Gap] Installing our countertop. So the companies like all the German kitchen brands and many other Indian brands. We have association with them. So when they sell a kitchen and they order our countertop. We go to the customer's place, we do, we do everything needed to get a factory-finish countertop installed.

We have the next question from the line of Akhil Hazari from RoboCapital.

Sir, I just wanted to know on the overall revenue, could you give us any guidance for the coming 2 years, FY '23 and FY '24?

Actually, we generally do not provide any guidance for the coming years. But I think our last 2 to 3 quarters are largely predictable, if you like, average them out and do whatever relevant modeling you want to do that will probably give you a direction to work upon.

We have the next question from the line of Hrishikesh Bhagat from Kotak Asset Management.

So my first question is related to -- I think in last quarter, clearly with the growth there was definitely a pressure on the working capital. We saw the negative cash generation. So this quarter, the growth has obviously come back fairly strong. So how has been the situation on the working capital front?

See, if you look at the working capital, again, it is largely tied to the shipping situation because what happens is that most of our payments are on the bill of lading. So while we produce and ship it out, it may be at a port. It may not be able to load on to the vessel, and we still do not have a bill of lading with us. So that's where the situation seems to be largely aligned with what you saw in the previous quarter.

Yes. But this quarter, has there been in the generation, any change or it remains the same on [indiscernible] or in the cash generation?

That's how you see the improvement. So I think unless the situation largely improves on the shipping. So dependency, the answer is simple. If the shipping situation improves that the working capital will definitely be in a far better position.

Okay. And on the Granite front, obviously, I understand the focus remains on maintaining profitability with the challenging environment. But whether is just one [ key ] your thought in terms of especially last quarter, there was some indication about some increase in royalty by the states also. So in that -- in that context, where do you see the margins for this business and probably where do you see revenue sector probably out of it for this segment?

The royalty has already gone up. In addition to that, there are additional deposits that government has raised for the quarries that we need to deposit. So that is already part of the business now last more than 6 months. But then more or less, the profit of margin will always remain depending on the production in the quarries because the main profit remains in the quarries. And if the quality of product [ to as ] coming out from the quarries are good, the profitability will increase. And also, it depends on the like, for example, during heavy rainy season, the quarries are closed for more than a month because we have to dewater the quarries. So that also affects. But then it is very unpredictable. We cannot have a consistency, unfortunately in this part of the business, there can never be consistency, either depending on the quality of the product or the duration of operation times in the quarries and also the demand. Sometimes some colors are in good demand, sometimes other colors are absolutely not selling. So this will remain the same as what you see now.

We have the next question from the line of [ Gaurav ] from [ Qualcomm ]. We've lost the line for this participant. We'll move to the next question. The next question is from the line of Anand Jain, an investor.

And congratulations on a great set of numbers. First question that I have is that what we see is that there is significantly higher employee expenses, both Q-o-Q and Y-o-Y. What can we attribute this to?

See, as we expand our -- and ramp up the capacity, especially for the new plant, we had to hire a lot of people. And in this challenging time, talent management is definitely one of the important aspects of the business. So we wanted to hire a little more than what we actually needed to be sure that we are able to retain whom we want to retain, and are able to meet up to our expectations and then also to have some buffer just in case we are not -- there is some attrition. So that's where it is. And I think largely now the employee spend will be controlled.

So if you can quantify the number of employees added in the last 6 months, that would be helpful in this regard or maybe in the last quarter because the expenses have moved up significantly.

Last quarter and before quarter are almost the same.

See what happens in this case is that we also have some employee welfare expenses, which are actually generally coming through in the third and the fourth quarter, especially like we give some increments, annual increments, and then arrears which come through basically. So that's where you see that the third quarter probably had a relatively higher employee expenses than the first quarter. So if you look at the overall number, the number would not be really a big number, but it is because that accrual came in a little later, the decision. That's where the third quarter number came in and also is the [ commission ]. And also because there is some commission expenses base to the management based on the profit that have got provided for. So now I think what you see currently is largely in-line.

So we should expect similar numbers from next quarter onwards?

I think now we are in a range-bound position, so the number should be largely the same.