Pokarna Limited (532486) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Pokarna Limited's Q4 FY '24 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, Michelle. Good day, everyone, and a warm welcome to Pokarna Limited's Q4 and FY '24 earnings conference call. On the call today, we have Mr. Paras Jain, the Chief Executive Officer at Pokarna Engineered Stone; and Mr. Viswanatha Reddy, CFO. Before we begin, I would like to mention that some of the statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. I'd also like to state that this is a 45 -- the duration of this call will be 45 minutes and we will conclude at 10:45 a.m. I now invite Mr. Paras Jain to open proceedings of this call and share perspectives and business 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 and year at your disposal, I'd like to share some insights into the quartz surfaces industry to provide context for our financial and operational achievements. Despite the ongoing economic headwinds in the U.S. impacting the stone industry and quartz industry, our results for the quarter and full year reflect the relatively positive effect of the actions we are taking to enhance our performance. This quarter, we have seen stable margin in our quartz business, largely in line with Q3. However, these were somewhat offset by a marketing expense of around INR 7 crores and a markdown of certain finished goods inventory by INR 7 crores in Q4. Let me provide an update on the ongoing capital expenditure in our quartz business. We are investing in two technologies, Kreos and Chromia, both from Breton of Italy. We foresee to commercialize the Kreos line in Q2 of FY '25. Kreos is a new generation mixture extrusion and distribution system designed to produce full-body ultra-thin, and uniquely innovative aesthetic slabs. Following this, in Q4 of FY '25, we foresee to commercialize Chromia line, which is designed to decorate glass with a high definition digital printing. This technology allows for printing precise intricate patents and vibrant colors, enhancing the aesthetic appeal and customizability of slabs. Turning to our granite business. While the environment remains challenging, we are moving forward with a renewed focus on our quarrying business to navigate this condition. Our efforts are directed towards getting this division back on profitability track in FY '25. Additionally, the Board has approved the transfer, sell, lease, exchange, hive off, or otherwise dispose of the apparel business on a going concern basis. This practically marks our exit from the apparel business, allowing us to focus entirely on our stone business. We are hearing from our U.S. quartz sales channel about a pickup in consumer optimism and a rebound in the housing market in certain areas. The forecast for U.S. new home starts and existing new home sales predict a slight increase in 2024 with a greater improvement in the second half of the year. We are receiving enthusiastic response per our quartz from customers in Canada, France, Mexico and Russia. Looking ahead, we are optimistic about FY '25. Our strategic initiatives and investments are positioning us for a better year with improvements already being seen on the demand front. Our broad and innovative quartz offering, combined with our commitment to quality and service, will continue to drive our business with both new and existing customers. As we navigate current market dynamics, our strategy remains firmly focused on enhancing innovation, developing our brand and expanding our geographical range. Thank you once again 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 Karthik from Suyash Advisors.

I hope I'm audible.

Yes, you are.

Yes. Okay. So one question on the 2 technologies that you're launching. What is the current market demand for these products? As in, are these existing product categories or completely new product categories, how would business development happen? Some color on that would be interesting.

That's the only question you have, Karthik?

And what's the CapEx on these two machines? Yes.

So now coming to this Kreos and Chromia technology, these two technologies, we are bringing from Breton of Italy. So Kreos is a new-generation mixture extrusion and distribution system where the products are actually made -- today, currently, we make a 12-millimeter product, 20- and a 30-millimeter product. Kreos would allow us to make a 7-millimeter product also, which has certain different applications in certain markets. Apart from that, it would also allow us to make products with a unique aesthetic. So currently, this technology from Breton is available with 2 to 3 players across different parts of the world. And Chinese have been trying to copy this technology, but we have not seen a good copy as of now in the market from the Chinese side of it. But from Breton, we have 2 manufacturing companies, one in Korea, another in Italy, who already have introduced this product last year. So in that way this technology is relatively new compared to the other quartz technology, which has been involved. Secondly, coming to the printed Chromia. Chromia Is basically, if you have seen the ceramic slab or the porcelain slabs are actually printed. There is a printing technology. So hitherto, in quartz, there was no printing technology. So now Breton has introduced a technology called Chromia, which will allow us to decorate the slab with certain printing apart from bringing whatever aesthetic we bring from our existing production line. So this technology typically has been growing in the last 2 to 3 years. There are some Chinese players in it, there are some Italian players in it, but we have decided to go with Chromia because we believe that this represents that technology currently available in the market. Coming to CapEx. So if you recall in, I think, our last or call before that, we've announced that we are doing about EUR 10 million CapEx, which is across these 2 products, these two equipments.

And if I may add one quick question. Would this help you to improve realization at least by $1 on average or more?

The current focus is on improving the product aesthetic and we believe that as we improve the product aesthetic, the realization should also get better. So I don't have the number. But definitely, the focus for investing in this technology is to be able to offer innovative products, which would help us to increase our net realization.

We'll take the next question from the line of Manav Singh from Auralis Capital.

My first question is the exclusive contract that we had with Breton, it's not there anymore.

Can you be a little more closer because your voice is not so loud.

[Operator Instructions]

Hello?

Yes, sir. Please continue.

Yes. The exclusive contract that we had with Breton is not there anymore. Now many other companies make the quartz slabs. What is the competitive advantage that we would be having over others? Can you please explain a little bit on that?

See the exclusivity with Breton is, I think, was finished, I think, about 5, 7 years back. So I don't think that has hindered our progress or our positioning in the market, rather if you see our performance has improved over last 5 years period of time. Because this industry no longer is dependent on what the technology supplier provides. It is your R&D, which actually positions you differently from the others in the market. It is your innovation, which keeps you ahead of the competition. So our strength is our research and development where we are able to bring in aesthetic and innovatively driven product ahead of the market, and also our understanding of the fashion. Because this industry, unlike a stone industry, natural stone industry, which is predominantly driven by what the nature has provided you, is largely driven by the fashion coming. So I think our taste for fashion and our innovation and R&D is keeping us ahead of the market, and we believe that we'll continue to be differentiated on those 2 fronts as we move forward.

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

A couple of questions. Firstly, on the margin. So obviously, we had some one-off this quarter and also quarterly comparison is slightly not proper. So on a yearly basis, we have done 32% EBITDA margin. So do you feel more or less going forward will be in this line only? And my second question is regarding these 2 new technologies. So one, we were also trying -- or doing some R&D for alternative raw materials, so will these 2 technology is related to that also or that will be a completely different product? And in one of the earlier calls, you have mentioned that these 2 new technologies will give us altogether a new segment. Right now it is mainly a kitchen counter top. If you can elaborate on that also.

Thank you, Dixit. Coming to your first question on EBITDA margins. So we believe that 30% to 35% guidance, what we have traditionally provided, is a good number to look at for FY '25 as well. And coming to your second question on the alternative raw material. The alternative raw materials typically are to substitute certain raw materials in the formulation so that we have lower crystalline silica products. So if we were to produce a lower crystalline silica slabs, we could still use the Kreos technology, we could still use the Chromia technology. So formulation is relatively different and technology, Kreos and Chromia, works with both with our existing formulation and also will work with the new formulation as and when that gets ready. Now coming to your third question on the new segment. So what I meant there was and if you recall a little while ago, I said, there is a possibility of Kreos helping us make a 7-millimeter product. So 7-millimeter product typically is used for as a furniture top in Europe and certain other areas and also in applications, where they want lighter materials or thinner material. So currently, because the density is quite high in 12- or 20-millimeter or a 30-millimeter product, the application is limited. So we are trying to explore the possibility of pushing this product in a segment where we can open up the market for shower wall surrounds, the furniture tops and all using a 7-millimeter or thinner slabs in that segment. That was my context when I said new segment.

The next question is from the line of V.P. Rajesh from Banyan Capital Advisors.

Just 2 questions. With respect to these 2 new technologies, do we have any geographic descriptions? Or given what you said that there are 2 other players, everyone can sell in any of the markets across the world. So if you can just give some color on that side.

Yes. So basically, there is no restriction from Breton to any of the existing users of this technology or on us as to where this product has to be sold. Wherever the market is there, wherever we have customers, all of us are allowed to sell wherever there is a demand and supply.

And are these 2 players equally strong in the U.S. market, which is very core to us?

Sorry, I'm not able to follow. Your voice is not clear to me.

[Operator Instructions]

Is it better now?

Yes.

Paras, I was asking that whether these 2 companies, which have the same technology, are they also very strong in the U.S. market, which is our core market?

They have been in the marketplace much before we came into this marketplace with our old technologies as well. So they have a position in all these markets. But I think our trends are relatively different is what is our assessment, and we should be able to position our products well in this market space in spite of a couple others having the position or their presence there in those markets.

Got it. And then if you can just talk a little bit about the international forays that we started last year? We were expanding in Russia, then Canada and some other countries. So what's the update on that in terms of the business traction you're seeing there?

So we started in Russia and the market there is doing good in terms of the product acceptance and the repeat order. Currently, the only challenge what they are facing is the lead times because not every shipping line goes to Russia. So there are very relatively smaller services, which are available to get the product delivered there. In spite of that challenge, I think the product presentation, the reach and the client or the distributor who we have currently is doing a good job, and they response what we have received from him and his client is exceedingly well. And we believe that as we ease out the situation on the shipping and as we move forward, I think the business is definitely poised to grow. And coming to Canada. Canada is doing a good. Our distributor is able to expand his reach beyond the geography, what he was currently working. So he is looking to expand his operating geographical reach with Quantra as well. The product is well marketed, displayed, and is getting a good action out there as well. Mexico. Our distributer is doing good in spite of Mexico being a very challenging market because of the presence of low-cost imports. But since we are positioned on a different side of the market, we are looking at positioning as a niche and a luxury brand than at a bottom of the pyramid out there. So there also the traction is good. France, we are working with a client, who is one of the largest in his segment there. And they're also doing a good traction out there in terms of repeat orders and the product acceptance, expansion of range and everything. So I think we are pretty much happy with the geographies which we entered last year, with the progress what we have made so far because it usually takes a longer time for the product to get accepted and the repeat orders to start flowing. But with whatever constants we were operating in certain markets, I think the response, which we got at the rate, at which it came is really increasing. And again, we are looking at exploring further more opportunities in the different geographies. Let's see how it pans out, but the focus on expanding beyond U.S. continues and also the expansion within U.S. is also happening. Like we are looking at adding some more distributors of our brand in certain geographies, apart from adding some private label clients.

Got it. And just one last thing. What was our percentage of revenue last year from these new markets?

So right now the percentage from the new market is in a single digit, but I think that is very promising compared to what we were before we got into this market. And as the market, our penetration in those markets increases, I think, it has a potential to consolidate, be a double-digit number there.

[Operator Instructions] The next question is from the line of Vaibhav Gupta from Bowhead India Fund.

Sir, in the opening remarks, you mentioned there is an incremental marketing spend of INR 7 crores in Q4. So is it linked to the new product launches we did at KBIS?

Yes. So basically, KBIS is a very large show where we participate and all these shows in America are relatively very expensive to participate. Considering the booth size what we have and the relative handling expenditure and all the other marketing expenditure, what we -- so all these were related to the KBIS, which happened in February '24.

So sir, can we assume whenever we do a product launch, which generally happens around January, February in KBIS, the marketing expense or other expenses would go up slightly?

So usually, on a yearly basis, currently, we have about a couple of million dollars, which we spend across 3 to 4 acquisitions. So KBIS has got the largest chunk actually of all these things.

The next question is from the line of Vivek Tulshyan from New Mark Capital.

My first question was on the tax rate. Our tax rate currently seems to be at about 35%. So do you think this will continue at this rate? Or we will move to the 25% rate in the coming 1 or 2 years? The next question is on capacity utilization. What is the current capacity utilization? And this EUR 10 million CapEx that we are doing, what will be the asset turn for this one or both the plants are ready?

I think currently, we are at 35% tax rate. And then '24, '25, we think we'll move to 25% tax regime there. On current capacity utilization in the quarter in progress, we are very close to the -- our optimal capacity utilization. I didn't get your last question because I think there were some disturbance. Can you just repeat on the CapEx, something you asked? .

Yes. I was asking what will the asset turn for that EUR 10 million CapEx that we are doing on the 2 new products?

Historically, if you look at our asset turn has been always around 1 to 1.25. So I don't think it's going to be more than that and that's going to start once we have a complete stabilization of the product, of the technology and then R&D to be completed where the products are to be established. But it could be relatively lower also because -- or could be higher also. It depends upon how finally we bring out the products from this. So I think we'll have more clarity after 2 quarters once the R&D is completed and the product comes out. Because when you buy these technologies, typically, you have very limited visibility from the OEM or from the supplier as to what designs can be made. It is your own R&D, where you go beyond and try to achieve something more than that. So I think 2 quarters will have more clarity, and then I can give you a right number, which is more precise.

Understood. Sir, just a follow-up on the capacity utilization, you said we are now operating at optimal capacity utilization on our quartz facility. So is there a plan to set up a new line in the coming year or do you think that -- when is that decision going to be taken?

I think that decision, the Board will take at a right time, so I don't have an answer for that at this time. But I think definitely Board will consider whatever is right depending upon what they see about this business in the near future.

We'll take the next question from the line of [ Shreyans Jain from Svan Investments. ]

My first question is, sir, could you give us some sense on how a product mix was in FY '24 in terms of general and high-margin product designs that we were talking about in the previous call.