Pokarna Limited (532486) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Pokarna Limited's Q3 and 9 Months FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over Mr. Gavin Desa from CDR India. Thank you, and over to you, sir.

Thank you, Rio. Good day, everyone, and a warm welcome to Pokarna Limited's Q3 and 9 Months FY '24 Earnings Conference Call. On the call today, we have Mr. Paras Jain, the 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 proceedings call, and share perspectives and performance and outlook. Over to you, Paras.

Thank you, Gavin. Greetings, and thank you all for joining us today. While you have the financial numbers for the quarter at your disposal, I'd like to share insights into the quartz surfaces industry to provide context for our current financial and operational performance and the future. This quarter, we have seen stable margins compared to the last quarter with the improvements over the same quarter in FY '23. This stability and improvement were driven primarily by innovative product designs, a strategic mix of product thicknesses and favorable ForEx conditions. Our commitment to expanding our products range with more stylized collections and the adoption of new technologies is unwavering. This not only delivers great values but also aligns with our long-term strategy and immediate operational adjustments to market shifts. We are actively pursuing initiatives to cut cost, boost efficiency and optimize material use. Moreover, we are focused on developing alternatives that lower respirable crystalline silica content in the products, meeting sustainability objectives and market demand. According to the latest National Kitchen & Bath Association of America report, Kitchen & Bath revenues in the U.S. for calendar '24 are expected to fall by approximately 3% year-over-year. New construction and remodeling expenditures are projected to decline by 4% and 2%, respectively, in 2024. Despite the recent increase, the supply of existing homes remains below a balanced market levels, with expectations of continuation until mortgage rates approach around 5%. The demand for new homes remains strong, leading to a predicted price increase of 1% in 2024 and 3% in 2025. However, higher interest rates are causing difficulties for smaller builders, thus benefiting large homebuilders. Our industry deeply influenced by the perception of quartz countertops as more of a luxury than a necessity, faces heightened vulnerability to economic shifts. The considerable fixed costs associated with producing quartz surfaces bring to the core the importance of maintaining the sales momentum and managing our financial resources with products, especially during the market slowdown. To navigate this challenge, we've embarked on a strategy focused on regularly unveiling distinctive designs and expanding our reach with precision. This ensures we not only sustain our sales volume but also safeguard our margins. In tandem with these efforts, we are working on diligently optimizing our capacity utilization to resonate more closely with marketing and our strategic growth ambitions. Initially, this focus on optimization may slightly compress our margins. However, this is a strategic choice aimed at fortifying our market positions over the long haul. We are confident that the strategy will not only bolster our competitive edge but also significantly enhance shareholder value in medium to long term, underpinning our commitment to sustainable and strategic growth. This approach represents a deliberate and thoughtful progression from responding to immediate market pressure by maintaining sales and managing costs through optimizing operations to better meet market demand to ultimately repositioning our product offering towards more lucrative segments. Each step in this journey is designed to strengthen our market presence and ensure our long-term success. Looking forward, despite short- to medium-term uncertainties, I remain optimistic about our prospects. Our play for design, state-of-the-art manufacturing capabilities, steadfast customer relationships, and our expanding presence instill in me a strong belief in our future success. We are not merely weathering the storm. We are navigating it with precision and ready to capitalize on the opportunities that lie ahead. Once again, thank you for joining the call. I'm now open to answer any questions you might have.

[Operator Instructions] The first question is from the line of Dixit Doshi from Whitestone Financial Advisors.

A couple of questions. Firstly, so during the last quarter, we have seen that how the Australia has banned the product. So are you seeing anything -- any talks or anything happening in the U.S. as well? And my second question is regarding the current problem in the Red Sea. Are we facing the delay in the shipment and also on the cost of logistics side?

Yes. Thank you, Ankit (sic) [ Dixit ]. So coming to your first question. See, Australia, the ban has taken place. And the reason what they have outlined is relatively different and not -- we don't necessarily agree with what has been said in the Australian ban. When coming to the U.S., the State of California has already passed the regulation as to how the products with silica have to be fabricated and handled by the -- fabricated at their shops. So basically, the regulatory in the U.S. specific to the State of California wants the engineering controls and the fabrication controls to be implemented by the fabricated at the workplace, which includes like doing a wet cutting or putting the material underwater, submerged under the water and cutting it so that the crystalline silica does not get into the atmosphere and then back into the lungs. And also, you are supposed to where the PPE and subject employees to regular conditions and do the air monitoring in the workshop. So we don't -- to the best of our knowledge and abilities, what we have currently of the situation, we don't see that U.S. would be going in the path of Australia because the problem is not with the product. The problem is the way it is processed at certain shops. So I'm not saying that all the fabricators don't process it right, but there are certain fabricators who are still using the rudimentary techniques to fabricate it. If you are fabricating the product under the wet conditions and have the right engineering controls and the PPE and the health conditions been monitored regularly, we don't see any challenges. Because quartz is not the only product which has crystalline silica. Crystalline silica is there even in natural stone. It's even there in certain engineered surfaces like porcelain. It is there in concrete work tops. So by taking a stringent action against a particular product does not solve the problem, the problem has to be addressed at the fabrication level. That is where California has taken a right approach and they have gone about enforcing the occupational health and safety as a rule for fabrication shops. So that's my take on your first question. Now coming to your second question on Red Sea, definitely, yes. Red Sea has not only caused some chaos in the marketplace, it has also caused some incremental cost for both customers and also for inbound logistics for us, like we import a lot of material from Europe, for raw material consumables and other stuff. So all the freight costs have gone up. The transit time has gone up. And because it was relatively sudden when it started, it also created some mismatch, so certain things had to be airlifted and stuff coming on to the water. And then the customers also are saying that the costs have almost doubled. So they are -- some of them are delaying the shipments to see that the situation -- when it normalizes if they can come back to the normal levels. So we also, based on the understanding we have of the industry and with the discussions we have with the liners and the forwarders believe that situation may not really be a long situation, and we expect that next 2 to 3 months, the situation to normalize.

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

Sir, my question has already been answered.

The next question is from the line of Shikhar Mundra from Vivog Commercial Limited.

I want to understand what is the demand scenario? How is it looking right now? Do you see a revival in demands in the U.S. market? Hello? Hello?

Members of the management, can you hear us?

Hello.

Yes, sir, we can hear you now.

Do you have any other question, Shikhar, or that's the only question you have on the demand side?

Plus, I want to understand about the Indian markets also, like how do you see our market developing in India?

Okay. So on the demand scenario, we think that in a quarter or maximum 2 quarters, we expect the demand to come back. We just looking optimistically to the U.S. elections getting completed and the demand scenario has also started picking up. As the new home sales are improving, I think as the demands are counted up in those houses come back, things should become normal. So on the demand side of it, we expect in a quarter or another, we should be seeing a positive upturn in what is our sense as of now. We see that hospitality industry has definitely picked up as we were projecting in the past because it was lying low for a long time. But recently, the activities of refurnishing the hotel rooms or breaking the new ground, that picking up well. Coming to -- while the other markets continue to be growing decently well for us like Russia, Mexico, Canada, and certain markets in Europe are doing good. Now coming to the Indian market, yes, Indian market is definitely an important market for us, not only being in the backyard and their home country. We are taking certain steps now to increase our presence in the local market, and we're tweaking our strategy to go beyond what we were currently doing. Within that next couple of years, we'll be having a strong presence in the local market. And we're building an experience center also in Hyderabad, which can be within the reach of the architects, designers, and the retail consumer. And in line with this, we'll also have more touch points available across the country, either directly or indirectly to a channel partners in medium to long term. So focus for India, India market is definitely one of our top 5 markets to focus on, and we are allocating increased budgets and the management time on creating the region market.

But don't you see the pricing can be an issue? Is the Indian market ready to accept our premium products because...

The pricing is a perception. And if you are good at addressing the perception, you can still get the price you want to give. Now do you want to chase volumes or you want to chase value or you want to create a brand equity as a part of our strategy? So while I expect your viewpoint, but I believe that there is a way to address all the perceptions. And if needed, we are willing to tweak a lot of things in the process.

[Operator Instructions] The next question is from the line of Shreyansh Jain from Swan Investments.

Sir, my first question is, we were made to understand that a player has shut its plant in Israel and there were some supply issues into the U.S. So I just wanted to understand have you benefited from that? And just on the Q-o-Q side, you'll be seeing some pace. So what is your perception of how have we done Q-o-Q because you were expecting slightly better numbers in terms of your sales?

Let me first correct you. There is no plant of Engineered Stone in Switzerland. I think you probably were referring to Israel.

He has mentioned Israel.

I mean probably the phone made it out as Switzerland in any case, I'll come to the point. So the Israel manufacturer who has shut its plant typically operate in a different segment where we operate. And they are looking at low-cost solutions for their products and which is not the place where we operate. Our operations are relative in a different set of customers and categories of pricing. So we have not necessarily benefited from the shutting down the manufacturing facility in the U.S. or Israel, which has been publicly announced. So I don't think anything much has contributed to our success or otherwise because of something happening in Israel.

Okay. And my second question is, sir, what would be your volume growth Q-o-Q or degrowth?

As we have always maintained, we actually do not give operational metrics out, but what I can tell you is that we have capacity, which we can still absorb. And the reason for us -- while you would have done some factoring of Q-on-Q growth, but I've always consistently maintained that we are at least a couple of quarters away from things bounce back in the volumes. So how do we counter the bounce back in the volume in the short term was our strategy of introducing new products. That's the reason you see that while the volumes have not significantly grown compared to what has happened in the quarter before. The margins are still intact because we are not chasing growth at the cost of margin yet, and we believe that there's still about a quarter or 2 away from the volumes to start picking up.

Okay. And sir, my last question is on the India market. So you mentioned that there are various options that one has to consider. So just wanted to understand what is our strategy, where do you see Pokarna? Do you want to chase volumes? Do you want to create brand equity? And the other part to this question is we're seeing houses of INR 30 crores, INR 35 crores selling in India. So are we looking at connecting directly with the developers and getting them onboard? How are you thinking on that part of the business?

We have a go-to-market strategy for India markets. So India, of course, if you look at the INR 35 crores house, what is the cost of a countertop in the kitchen? Maybe INR 4 lakh, INR 5 lakh. So not necessarily INR 35 crores is translating into INR 1 crore for a company like us, because our product has application, which is predominantly a vertical application or horizontal countertop. So typically addresses that our share in the high-end dwelling does not necessarily mean that we'll have 20%, 30% or 10% of what the cost of production or manufacturing of that construction with that house could be. But having said that, we have done a lot of high-end houses in India. We do several projects like we have done large banks, U.S. banks, offices in India. We have done large projects where we've done about hundreds of villas, high-end villas, where our product has been used as a kitchen countertop and the wall claddings. We are also working aggressively to work with certain prestigious developers to bring our product to their projects apart from expanding our reach in the domestic market to kitchen and bath dealers and selective retail channel. So we don't want definitely to be a product, which is available at every nook and corner, because we are working to create a product which is desirable and available with dreams and it's not easily -- it's a luxurious product. It is not an official product like a tile that you go to hundred tile shops and you'll find the same product around the tile shop. That's not our market strategy. So we have a different go-to-market strategy, which is largely in line with what we see the established players doing in the Europe and U.S. markets.

Next question is from the line of Akshada D. from Vivog Commercial Limited.

I wanted to understand the product market mix basically, how American market is doing? Is it doing better than other markets? Or if there is a specific market which is driving growth? And any market, which is now taken back?

See, basically, we are the largest exporter into the U.S., of course, and U.S. continues to be our primary focus. So while there could be a temporary few points here and there in the U.S., but U.S. continues to be our main market. Our growth in other markets like Canada and certain parts of Europe, Mexico is growing quarter-on-quarter, and we are quite positive about it. And we believe that our presence in the U.S. with our distributors and our strong relationship with our customers are only private label and the new markets that we are tapping will definitely give us a good positive growth in the next couple of quarters.

Okay. Can you tell me the percentage of revenue that you're currently getting from America?

As I said in the previous calls also, over 90% of our revenue comes from America.

Okay. And you are planning to launch some new designs in America, as you mentioned in the last con call as well. Where are we on that front? Can you see any visibility of when you can launch the same?

We've already launched. And as I covered in my opening remarks, we continue to launch. So the next launch is scheduled in end of this month in Las Vegas at KBIS.

So what percentage of -- or even if it is in your own internal computations, are you expecting it to add to the margins in a significant way by next year?

The new product launch always will add to the margins. Now how successful the new launch would be? It takes 6 to 9 months for us to figure out. So while what we have done in the past is already reflected, and I hope the same would continue in the future as well.

Okay. Because in the previous con call, you mentioned you're taking things month-on-month basis. So I was just wondering if you're seeing a larger future at this point in time?

For next quarter or 2, I continue to have the same view what I've had in the past, but I have a very strong view that after a quarter or 2, the forecast or the visibility would be relatively longer term.

Okay. And my last question was on the CapEx and the Euro plant. Where are we on that front? Is it done? And should we see results in next quarter or so as we predicted before?

I don't think we predicted the results to come in next quarter or so. The shipments are under -- are already on water and certainly would be leaving it. So we expect that Q3 FY '25 or Q4 FY '25 is when both our CapExes of 2 different technologies to commercialize. So we have to start installation of the machines and then the hard run, cold run have to get completed. The R&D has to get completed. So I think I would say that probably last quarter FY '25 is when we'll have a very large visibility to give you as to when will the revenue start growing from that CapEx.

Okay. Okay. And last quarter, you also mentioned about the U.S. Bath Association. Were you expecting a 12 to 18 months in the last period? Do you have any update on this front?