Pokarna Limited (532486) Earnings Call Transcript & Summary

Conference center. [Operator Instructions] Ladies and gentlemen, good day, and welcome to Pokarna Limited's Q3 and 9-Months FY '23 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, Mr. Desa.

Thank you, Nita. Good day, everyone, and a warm welcome to Pokarna Limited Q3 and 9-month FY '20 Earnings Conference Call. We have with us today Mr. Gautam Chand Jain, Chairman and Managing Director; and Mr. Paras Kumar Jain, Chief Executive Officer for Pokarna Engineer Stone Limited. Before we begin, I would like to mention that some of the statements made in today's discussions may be forward-looking in nature and may involve risks and uncertainties. I now invite Paras Jain to open the proceedings and share some perspective on performance and outlook. Over to you, Paras.

Thank you, Gavin. I'd like to again welcome all of you on this call. To comment, I'd like to put our Q3 FY '23 performance in perspective and share some views with regard to the business environment and our outlook. After a strong half year of FY '23, our revenues and profitability declined in Q3, owing primarily to factors related to the U.S. housing market. Building materials product demand in the U.S. is fraught with uncertainty through FY '24. In our view, the U.S. housing market has been one of the most significant casualties of the Fed's aggressive interest rate high policy to combat rising inflation. This has resulted in a sharp drop in new home sales and renovation, resulting in lower spending on building material products, including quarter basis. We see a significant slowdown in new housing activity and any pullback in residential remodeling spending may only offset modest growth in nonresidential end markets. New home construction is an important factor contributing to building material sales. According to our sources, new home permits in the U.S. are reported to be down by 11.2% in December. This represents about 22.4% year-over-year decrease, owing primarily again to rising mortgage interest rates and price inflation. Further, as per as sources, housing starts in the U.S. sell 0.5% in November after falling 2.1% in October. The most significant drop is in single-family starts, which are down 4.1% in November and 32.1% year-on-year. Housing permits and starts are leading indicators, and they are expected to continue to be stocked in the coming months, according to reliable economic age. In a is, -- the current U.S. economic situation is largely to plan of declining housing activity. While the visibility and depth of depth and duration of this cycle is limited, it has a sudden and direct impact on our sales and sales of our customers. Having said this, I would like to say that Pokarna has demonstrated on several earlier locations, its ability to manage downturns by leveraging on its strong industry understanding and capabilities. In the face of these recent challenges, we are taking several proactive steps towards enhancing the resilience of our business and creating value. First and foremost, we will be driving our innovation engine to deliver on our design R&D roadmap. We are pleased with the recent release of a strong portfolio of new exacting designs. Our new portfolio of designs offer a compelling value proposition. While it is still early, customer feedback on the new design has been very positive with something that these are the best products we've ever launched. Given the positive response, we believe that these distinct designs will protect margins in future. Secondly, we continue to provide an exceptional product and service experience. The scope of our ambition, however, it states taking a long-term view, which we've always done, done since the company's inception. A third standout area is clearly our infrastructure and team. We have made significant progress on design development by combining robotic technology with proprietary manufacturing know-how. We are well positioned to deliver on our long-term value creation strategy to state-of-the-art manufacturing facilities and talented and motivated workforce and a portfolio of all inspiring design. Lastly, but no less important is just on diversifying our geographic presence. This was unfortunately pushed back because of the onset of the pandemic. Our current focus is on penetrating our products in Europe, Canada, and other markets. We have identified potential customers and have begun the sampling process with them. While I don't have a firm time line yet for starting business with these customers, we are absolutely committed to penetrating these markets with our offering, and we are working very hard to do so. As we look ahead and separate the signal from the noise, we intend to take material but thoughtful and targeted expense actions throughout FY '24 to build a stronger and more resilient business that can rise even in these difficult times. I reiterate that our business is well-positioned to manage the current cycle and to drive future business and growth in line with our long-term vision. Thank you. We can now move on to Q&A session.

Thank you very much. we will now begin the Question-and-Answer Session. [Operator Instructions]. Ladies and gentlemen, we will wait for a moment while the question queue submit. [Operator Instructions]. The first question is from the line of [indiscernible] from Milestone Financial. Please go ahead.

A couple of questions. Firstly, on the demand side. So, in the last con call, you mentioned that obviously, there was some slowdown due to the inflation and recessionary environment in the U.S. But there was also one reason that you were mentioning that, due to the uncertainty over the antidumping duty, some of the importers had imported much larger quantity, and they were having a much larger inventory. So, how do you see that scenario panning out now? I mean, have they started the inventory level has come down and the reordering has started?

Okay. Do you have any more questions or this is the only question you have?

Yes. So, second question is on the gross margin this quarter, the gross margin has improved quite a lot. So, is it due to the raising prices? And how do you see the raising prices moving -- going ahead compared to what we have seen in Q3?

Okay. Thank you, Licht, for the questions. On the inventory levels, what we are seeing in the U.S., as I said in my opening remarks, there is definitely a demand softening. So, the inventory in the channel still seems to be high. So, I don't think that the pain of inventory being dumped due to the dumping scenarios with the other card players has completely eased out in the industry. It could have probably eased out by this time, had the demand factors also being equally good. But I think that's not the case. So, we think that there's still pain of inventory left in the channel. So, that's on your inventory side on the reordering level. Coming to the gross margin, yes, it's basically a function of both the parameters. One is definitely the cost of the raw materials and also the product mix. So, we've seen a little softening of raising prices. That's also partially been shown in the margins what we have repeated on the gross margin side. And also, with the certain new designs, which we have launched, which got shipped in the last quarter at the end, which is contributing to the product mix is also resulting in a higher gross margin. And that's the reason, if you look at my opening remarks, I had mentioned that we are happy with the performance so far on the feedback that we have received from our industry on the new products, which can, to some extent, help us to insulate the margins in these uncertain times.

All right. Thanks. Has the prices still coming down, raising prices?

So, it's like not coming down steeply. It seems to be now finding a level. I don't see any further down in the immediate term, but it seems to be finding a level -- a reasonable stable level now.

Okay. And just one last question. On this expansion to the new geographies like Canada, Europe, Russia, typically, according to your experience, how much time it takes to get the feedback of the distributor, appoint distributors, and get the reasonable volume?

Basically-- typically, around 6 months of time just goes in developing the business to come to a potential where we can start shipping out. So usually, the turnaround time or getting the reorder or the second order typically takes about anything between 9 to 12 months. So, we've done enough progress in some of the markets where we have crossed initial milestones. So, while I don't have a complete exact time line, but I think we are working very hard towards it and we'll be working more aggressively now with these times and try to crack this market as soon as we can.

A request to all the participants. Please restrict to 2 questions for participating. [Operator Instructions]. The next question is from the line of Sonaal Kohli from Bowhead Investment Advisors. Please go ahead.

Now, thank for this opportunity. I have 3 questions. So, the rates have collapsed, whether it's 9 is evitable, but it's collapsed and that was one of the key reasons for your lower margins. Have you seen the full benefit of that in Q4? Or are you likely to -- sorry, in Q3? Or are you likely to see it in Q4, Q1 or Q2 going forward? That's my first question. Secondly, you refer to product mix improvement, obviously, that's come -- that has happened that sharp increase in gross margin, but also happened because your revenues have fallen. So, in case your revenues were to revert back to what extent this kind of margin will be sustainable? And you're launching a lot of new products, as you mentioned, you've been experimenting with a lot of products. So, when do we see benefit of that? And whether this gross margin plus minus 2% range could be sustainable or not sustainable. Third question, regarding the inventory levels. You mentioned that the inventory levels remain very high. But at some point of time, the impact of this entry dumping is going to go away. Once it goes away, do you see a better traction of revenues. Now whether that takes one month, 2 months, 3 months is not what I'm trying to ask, trying to ask whenever at some point of time, the antidumping innovative level will obviously normalize and U.S. housing sales have remained on the same line now for the last 7, 8 months, like they've been improving on a relative basis. So, if your sales been fall at that point of time, maybe there was some impact of the excess inventory? And if it normalizes, would it help you improve your revenues from your current run at?

Thank you, Sonaal, for your 3 questions. So, let me start with your fleet rate impact. See, in fact, freight rate has been a double-edged store. So, if you remember what I spoke on the last call, the freight rate first is definitely a pass-on item. We don't actually benefit from the freight rate significantly because it's something which we pass on to the customer or which can be positive or negative, whatever it is passed on. So, the negative impact of the dramatic fall down in the freight rate is actually happening at the customer's end because all of a sudden, they are seeing that the inventory, which is actually on water is more expensive than the inventory, which is about to be shipped. So, that's where they have taken a little cautious approach and also had to put on certain orders and also that they're able to liquidate the materials, which they have in hand or at or they're about to be receiving them. That is one side of it. And secondly, when the antidumping scenario happened, a lot of trade channels had imported materials at a very high freight rate. And then coupled with the other congestion problems, they ended up paying a lot of damages on the containers also. So, that also created a little stress in the system. So overall, the free rate impact typically has been more on the trade side than on exporters like us. So, that is one part of it. But the good part is that once the free rate typically normalizes and all the pain which has got developed in the system eases out, it typically would give confidence to the trade to come back as soon as the demand factors normalizes. So, that's on the free trade impact. Now, coming to the product mix improvement on revenue definitely if the product mix improves as we are expecting or targeting, definitely, the margins would be in the range, which we normally enjoy unless otherwise like high raw material scenarios, which we had in the recent past where everything was climbing up significantly. So, if product mix stabilizes, as we plan to stabilize it in the near future, I think the margins would more or less be in the range bound and probably will have a positive impact if there are no other challenges coming out from the uncertainties, what is wavering currently. Now, coming to the inventory level impact, definitely, once the hangover of inventory is eased out from the system, there would be tempered to the demand, at least from the ordering side of it. And that will lead to, largely, to some extent, impact our revenues also positively. But I think there is a question which is like a crystal gas today is when will this inventory hangover be complete when the demand is a little softening. So, I think this is something which you will have to see in the next 1 quarter before we can comment with certainty as to when will it happen and what impact will it bring on the revenues?

Sir, just a follow-up on your answer, sir. On the freight side, in some of the past calls, you had mentioned that you had to take an accounting margins because you could not pass on the freight to the customers. So, wouldn't you get at least some benefit on your orders, you were taking and hit on your margins because of freight rates and those having normalized, you may benefit at least to some extent, I understand the demand is soft, you do not benefit at least to some extent, you'll win to retain. And secondly, on the product mix side, did you sell more of high-quality product mix and the sales decline was more on the lower margin product mix and that exchange your gross margin?

Yes. So, now coming to the first question first. In fact, your first question is interesting and a good one. So basically, the free rate impact, which we have on the imported items, which we buy from other countries. Typically, there are some raw materials which come from certain parts of Europe in bulk. So to that extent, whatever for normalization of freight rate has happened, that would positively add to our margin. Now, how much of that is not again depends upon the product mix because not every product has that particular ingredient coming into it. But definitely, whatever savings we have on the freight rate on the import side of it, will definitely add to our margins. That is one. And on the product mix, yes, in the quarter under consideration, we had not a majority of high-margin products being sold, but we had a good volume, which got sold. So if this volume typically improves, then to that extent, positively, it will impact, and it can be other way around also if it does not.

Thank you, Desa for answering me. If you may allow me, I can ask you one more question.

I think everybody is in the queue. So, I have no issues unless -- that does have some.

Answer the question and come back and join the queue. Thank you. I request all the participants, please restrict to 2 questions per participant. The next question is from the line of Tushar from Komal. Please go ahead.

As soon as we have seen you are working on new designs, I just want to understand the -- with this new design, what will be the improvement in our margin and the boost to our revenue? That would be my first question. And second would be, sir, what is the average realization in the unit one and unit 2 of the current utilization in unit one and unit 2 combining this imminent capacity, what will the peak revenue from this capacity? That would be my second question, sir.

Yes. So, coming to the new design, basically, again, as we have mentioned that new designs definitely have a higher gross margins for the simple reason that these designs come with a very high level of design detailing and aesthetics. And of course, it also impacts and gives a higher production cycle time. But I think in these times, when capacities are relatively less absorbed, that typically does not completely create a negative factor. But at the same time, that is a factor which has to be considered. So, the average realizations can be very varying. There can be a difference of -- between the -- like the sales prices can differ between anything between 50% to 100% also between lower-end design to a higher end design. But not everything is getting translated in terms of cost and the consequence. But at the same time, both cost and consequences are also equal in fact, important from realizing the full potential. But it's very difficult to predict what will be the total peak revenue with new designs because the new design has only a portion of the business, they are not the complete business. And it is not practical to say that overnight or over a limited period we'll be able to replace entire product portfolio with higher design and only not have any other designs. So, in a best-case scenario, we have seen that the revenues came over anywhere between INR 650 crores to INR 850 crores, depending upon how the product mix and the demand scenarios taper out. So, this broadly answers your questions on how the new designs and what the average realizations can be. So as I said, the demand is a little soft. So, the capacity utilization about the units is not at the optimum. We are definitely having a good amount of spare capacity, which will get used as the demand improves. Thank you.

Sir, any CapEx plan for this new design year for FY '24?

Not any large CapEx, but depending on new equipment we may add for some more new innovations that are possible. So not a major CapEx on the --and right now at...

Thank you. The next question is from the line of Viraj Maia from Equirus Portfolio. Please go ahead. We move to the next part --our next follow-up question is from the line of Dixit Doshi from Whitestone Financial. Please go ahead.

Good afternoon. Thanks for the opportunity. Now, once the China has opened up, how do you see the Granite business outlook? I know it's a small part, but it started making losses. So do you see a turnaround and getting reasonable business?

I don't think that though they talk about China opening, but no customers are at coming into the quarries to mark the material. So, we'll have to wait --I don't think China is open as what we've seen in newspapers. There is also still market is not so good in China. Apart from the coil effect, the market is still slow in China. So, I think probably, that is the reason that Chinese buyers have not started coming yet. So, we hope that with this kind of limited opening else or next one or 2 months, people should start coming in. But right now, the market is still as good as closed in China for Granite business.

Thank you. [Operator Instructions] The next question is from the line of V.P. Rajesh from Banyan Capital Advisors. Please go ahead.

Yes. Thanks for the opportunity. My first question is, if you can break down the improvement in your gross margin because the raw material advantages you bought versus the new products, which are higher value added. What would that mode?

Yes. So basically, the majority of improvement what you see in the gross margin is primarily coming from the product mix side of it and not completely from the raw materials I don' think.

Okay. And then the second question is as you're going into the new domes, how is the competitive scenario there? Because in the U.S., you had the antidumping on the Chinese buy. And I know you just said that the Chinese guys are not coming back in the market, but in the other markets in Canada and Europe, what is the situation on the duty side?

Okay. So, I think the comment was the same Chinese are not coming back, that is now related to India market and Granite part of it, not cars. So anyway, now coming and answering your question on the new geographies, basically, after the dumping happened, Chinese influx into other markets has definitely increased. So whether it is Canada, or any of the Southeast Asian countries or Africa. But having said that, as I said, that our Fortis basically a differentiated distinctive design. So we are looking at marketing those designs in the new geographies and not compete at the lower pyramid level. So, we do have competition, but then the only way to find the competition is to be innovative and give them distinct design, which will help us to keep our margins intact and also get some wallet share from the client.

On the debt side, if you can just give us a number for the debt at the end of this quarter? And what is the motor debt in that? And what is the lesson the debt?

The debt is actually regulated by actually INR 26 crores in last 9 months. The outstanding long-term debt is outstanding is actually INR 36 crores. Promoters is actually close to INR 90 crores.

Okay. Thank you.

Thank you. [Operator Instructions] The next question is from the line of Abhishek Tandon - sorry, Gamaleri, individual investor. Please go ahead, sir.

Yes. My question is, I understand counter costs are classed in the low, mid and high range. Where we fit and do we -- and what is our market share? And my next question is any plans for entering into domestic now?

Okay. See, basically, we are in medium to high range of the pyramid. We don't compete aggressively at the low end, but we have to be at below end because we have to complete the offering and take more wallet share from the customers. Now, coming to the domestic market, yes, as a retail brand, as a consumer-focused brand, we are already present in over 120 dealers in India. We are also working on aggressive institutional selling policy. So, I think as the year progresses much, we'll be able to give you more insight as to how we cater to the Indian market in the times to come.

Sure. So just to follow up with this. I mean do we have any exclusive EBO or something within our 2020 or we are just focused with the dealers?

We do not have any flagship stores because our product profile is a little different from a stand-alone product profile or having a flagship store on just one product, typically, will not be able to give you that retinal investment. But we have different types of dealers. We have preferred dealers premier dealers. So premier dealer is the one who predominantly carries our product and does not carry a large basket of our competition products. Preferred dealers are the ones who are carrying multiple products from multiple product lines and also from multiple manufacturers. But of course, the focus is to capture more and more of premier dealer market where we get a higher shelf space and also the visibility at the store.

Sir, last question. Is there any plan for entering into stronger purpose on the cost market?

Yes. I don't know what makes you ask that question. But as of now, we have no other plans. We want to stay very close to our kit and focus on our existing businesses, of course.