Pokarna Limited (532486) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Pokarna Limited's Q1 FY '24 Earnings 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, Aman. Good day, everyone, and a warm welcome to Pokarna Limited's Q1 FY '24 Earnings Conference Call. We have with us today Mr. Gautam Chand Jain, the Chairman and Managing Director; Mr. Paras Kumar Jain, Chief Executive Officer at Pokarna Engineered Stone; and Mr. Vishwanatha Reddy, the CFO. 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 Mr. Paras Jain to open the proceedings and share perspectives and performance and outlook. Over to you, Paras.

Thank you, Gavin. Good day to all of you, and thank you for joining us for this call. I won't go over the numbers as they are already in your hands, but I'd like to provide some insights into the current landscape of the engineered stone industry. These insights will help contextualize our financial and operational performance. The global environment remains challenging, especially for residential remodeling due to a slowdown in U.S. home sales and project delays. This challenge is compounded by heightened competition, particularly from manufacturers in India and Southeast Asia using Chinese technologies, impacting both demand and pricing. Also, our understanding indicates that channel excess inventories haven't fully depleted, suggesting that there might be more time before hitting the bottom. This insight encourages us to create cautiously, maintaining a balance between our efforts and exercising patience and foresight. In this backdrop, as mentioned earlier, the present situation is so dynamic that offering near to midterm forecast would be premature. Amidst these challenges, our primary focus is on improving efficiency, exploring new markets and expanding our distribution network. The quarter's robust gross and EBITDA margin reflect our efforts to enhance productivity and manage costs. Our goal, as previously mentioned, is to maintain EBITDA margins between 25% to 30%. To address certain rumors, I want to clarify that we haven't encountered any client loss. In fact, our counter customer base has expanded previously compared to the previous financial year. In terms of diversification, we are pleased with the advancements in markets such as Canada, France, Mexico and Russia. We are also actively exploring opportunities in India. While these endeavors are still in their early stages, we hold optimism regarding their long-term potential. Our priorities to effectively address current challenges and position ourselves to seize opportunities as the environment and demand stabilizes. An example of this proactive stance is our focus on developing alternative product formulation, meeting the demand for low, respirable crystalline silica products. Which helps mitigate the risk of silicosis. This approach ensures we are prepared to meet evolving needs as and when they are needed for the market. While the near to medium term remains uncertain, I have confidence in Pokarna's capabilities. Our design expertise, robust manufacturing infrastructure, strong customer base and relationships and expanding -- and expansion and certain other markets reinforce my confidence in our ability to perform and continue creating value through our quartz business. With that said, we are now ready to address any questions you may have.

[Operator Instructions] The first question is from the line of Karthikeyan from Suyash Advisors.

Very, very impressive results in terms of profitability. So just wanted to understand, how much of that would have been driven by product mix, which you had spoken about elaborately last time around and cost reduction? And while you indicated 25% to 30% EBITDA margins, how much of that is general conservatism? And how much of that is in the -- later of the business?

Yes. So largely, what you see the benefit of margin improvement is coming from the new design introductions. And maybe some part of it, but not a large part of it, comes from the cost initiatives which we have undertaken at the moment.

Okay. Okay.

And EBITDA, see, always we have maintained a range of 25%, 30% in the recent past. So while this is a conservative number, but considering the fact that the demand outlook is still to be stabilized, we will go on to be a little more cautious, rather than more optimistic.

Fair. If I may ask you one question regarding share. So if Q4 volume was [ 100 ], what would have been the volume number in Q1, sir, on an indexed basis?

So volume is typically more or less -- it's range bound, so we don't see much coming because of the volumes out here in the Q1.

Correct. But I'm saying Q4 and Q1 were similar volume revenue numbers, but the profitability was substantially higher, and you said new design introduction...

I cannot give you the absolute number for certain reasons. But I can tell you that whatever is coming is coming largely from the product mix, which is a high-priced designs.

The next question is from the line of Sonaal Kohli from Bowhead India.

Congratulations on great improvement in your margins. So I had 4 questions, with your permission, may I ask them?

Yes, go ahead.

So sir, firstly, the U.S. housing market has not revived in last 3, 4 months. So if you see the sales are same about 4 years ago, in the 3-week, 4-week period in absolute terms, and now the trend has been there for about 3, 4 months. But what lag would this impact your business? I understand there would be a lag in your business. So whatever slowdown happened 18 months back would be impacting you now. But what is a typical lag? A broad range would be very helpful in getting the context of what could happen in the company over, let's say, next 12 to 24 months. My second question was regarding hospitality industry. We've read some reports about CapEx revival in hospitality industry in terms of renovations. So how much are we seeing designs of this? And are we geared up to benefit from it? And what could be the context of the benefits, how historically those numbers were before the COVID period? The third question was we have taken several new initiatives which you started mentioning from December quarter onwards in terms of new geographies, new products, designs, but you also alluded that these are long-tail cycles because of the distribution and the pre-pack and the initial orders are small and always ramp up. So what is the right time frame for you to say that whatever you've done so far, not the incremental asset, would fortify, if they have to fortify, would that be a 6-month period, would that be a 12-month period? The last question was that your Q3 margins were highest ever in history than your gross margins, your Q4 was the lowest. So was there any one-off in Q4? And can we say that we wouldn't see a Q4 kind of situation again because the margins are in ended very strongly?

Yes, Sonaal. Thank you for the question. So typically, the U.S. housing, while the U.S. housing starts also have increased compared to what it was in the recent past, it typically takes 12 to 15 months for the demand actually to start picking up because the countertop is one of the last elements to be installed in the house. So we typically feel that if this trend continues what we are seeing in the last quarter, also for next couple of quarters as well, then I think by end of this financial year, probably the lag time should be more or less be done or maybe plus or minus 1 quarter is what I can say. Coming to hospitality industry, yes, definitely, the inquiry fund is increasing. And in good times, we had almost 10% volume of our business coming from this segment. And right now, that's not yet at that level, but definitely, things have improved than what this was in the last quarter. So if things go like this, I think definitely hospitality would be one of the segments where we can see a good demand picking up in the near future. And typically, the new markets and the new product designs take anywhere between 12 to 18 months depending upon which market you are, and like in Russia, it can take a little more longer time because the shipping time, initial shipping time itself are typically quite longer than what it used to be for a place like France or a Mexico market. So depending upon what products we are offering and which market we are going, anything, it takes 12 to 18 months for the relationships to stabilize, the products to start generating recurring demand and acceptance in the market, supply chain situation is getting completely addressed. So that's typically 12 to 18-month period is what we have seen on our historical experience. Now coming to what you saw in Q3 was largely the case driven with the product mix, in which we believe that can be considered as a one-off event. And we don't think that type of situation would come very often in our business.

So you meant Q4 basically.

Yes.

And sir, even in counter to what you just said, sir, you said that it takes certainly 12 to 18 months, but for the existing designs in the existing markets, such as U.S., would that also take 18 months? Or there, the period would be more like 9, 12 months?

Basically, again, there are 2 aspects to this, why I say 12 to 18 months. It depends upon what channel the product is going. Suppose the channel -- if the product is going to a home improvement center, like let us say, our customer is offering to Home Depot, then the cycle is relatively lower because Home Depot has 1,900-plus stores. And sometimes, actually, the cycle is more because the customer is supposed to get the samples done at 1,900 stores before the demand start generating out of that store. And vis-a-vis, if somebody who's just not carrying in the home improvement center, but maybe it is 30, 40 locations what they have across U.S., there, it typically has to just start unveiling the product and start going and replacing the product in this marketplace. So depending upon which channel the product is finally -- because ultimately, when we launch a product, we are not aware whether the customer of ours is taking the product to the home improvement market, home improvement centers or is it going directly through distributors. But sometimes we know, and those products, we think that if it is going through home improvement centers, typically take a little longer time compared to what is getting distributed directly.

Sir, my last thing on the hospitality side itself, what was the peak revenue share from hospitality? And considering relative weakness in the U.S. housing and boom in hospitality, is there a possibility that in next couple of years hospitality could be back to that peak level? You mentioned about 10% in pre-COVID, but my question was more about, during the good years or the best year, what has been a hospitality contribution to your revenues?

The hospitality business, if it is really peaking out and reaching the good level, and especially with a lot of hotels postponing their renovation in the past for several reasons they're now going back to it. I think considering the capacity, product and the pricing needed for the hospitality segment, all those factors, anything around 10% to 15% typically could be the revenue which can be factored it, if all the metrics are properly met. And that typically, I think it would take anything between 1 year or 2 for it to happen.

[Operator Instructions] The next question is from the line of Ritik Chopra from Buoyant Capital.

My question...

Ritik, can you pick up the handset, you're not audible clearly.

Can you throw some guide on the domestic demand?

Yes. So basically, we've just started like -- as I was telling you in our previous calls, we started building up the market in the domestic by tapping into the kitchen and bath segment. Now we are realigning our strategy for India market because we see that the product demand and acceptance in the market also has grown substantially. So we are looking at building up new channels of distribution as well, both company-owned and even through different channel partners. So demand is definitely good, but of course, it's going to take some time by the time the sales and marketing strategies are fully implemented.

Sir, do we have any company-owned store right now?

Right now, we do not have any company-owned stores at all. So around 110 stores, you can see our product, and all those are our dealers, basically, those who sell our products in different parts of the country, right, from Kochi to Dehradun.

Okay. And sir, can you tell the capacity utilization?

Yes, I think I have already -- we've already stated that in our presentation as well, if I'm not wrong, that the capacity utilization has been muted and has stood lower actually. I can't give you the number for certain reasons, but definitely, the capacity utilization, we have a good amount of capacity to utilize.

The next question is from the line of Ajay Vora from Nuvama Asset.

So sir, just wanted to get a sense in terms of post the action taken by the U.S. authority against the competitors for the cartelization or whatever the allegations were. Have we started seeing any sort of benefit out of it? Or how is the U.S. market behaving post that action taken by the authorities?

I think reaction is a little different from what you understood. So basically, there was an anti-dumping and a countervailing investigation which was launched against China first, and then India and Turkey. So today -- and of course, then subsequently, they had certain other transhipment related issues against next quarters out of Southeast Asia. So basically, quartz from India today is subject to antidumping duty, countervailing duty in the U.S.. So I don't think it has benefited anyway and -- any of the exports out of India.

But I thought that the percentage-wise was much higher for players from China, and therefore, we would have benefited in terms of pricing.

Basically, by the time India subject got stabilized, COVID came in. And by the time COVID went out, the Chinese approved majority of their production lines and put this production line in Southeast Asia like Vietnam, Cambodia, Philippines, Malaysia, Indonesia. So all that also brought [ out there ]. So India typically did not get any price advantage. Of course, India has got some volume advantage, which I think majority of the players, especially using the Chinese technology, did not take any advantage of and other started selling at very low prices.

Okay. Okay. And just lastly, say, over the next 3 years, where do you see the domestic revenue as a percentage of our total revenue? I know it's very small right now, but where do you see that over the next 3 to 5 years?

We think India would definitely be 1 of the top 5 markets underway in terms of our volume in the next 5 years.

Can you just quantify the total volume, how much would that be?

There is a certain reason because the ongoing proceedings and all, I cannot give the number, but I can tell you that it's going to be one of the focus markets.

Okay. And lastly, where do you see our debt levels moving over next 2, 3 years? So do you think that has peaked in terms of the CapEx and everything, and going forward, what is the plan to reduce that?