Pokarna Limited (532486) Earnings Call Transcript & Summary

Congratulations on good set of numbers. So this freight issue what we are facing right now, was it also there in Q1? Or has it accelerated recently?

This has been continuing for a while. So it was there in Q1, it's there in Q2. And if it continues in Q2, I think it would be in Q3 also because of the Chinese...

I'm sorry, sir, the line for the management has been disconnected. Let me reconnect them. Ladies and gentlemen, thank you for patiently holding. Over to you, sir.

Thank you. On the freight side, Ajay, the situation was there in Q1 and is there in Q2 and if the situation continues like this in Q2, I think Q3 would also be largely the same. Because with the Chinese New Year coming, there's a lot of shipping which happens out of U.S. -- out of China to U.S. for Thanksgiving, New Year and Christmas. So usually, we see that period of time, there's a heightened activity on the shipping side of it. So that's our take currently on the shipping.

So broadly, I'm just trying to understand that whatever we have shipped and delivered in Q1 was also with this shipping restriction and suppose if that eases out in a couple of quarters, maybe not till Q3, but post that, the overall delivery in the shipment can see some sort of improvement over the existing numbers.

So again, there are two facts to it. One, we have to remember that end of the year, shipping situation, the deliveries which happen in end of December, customers are not interested in taking the materials coming in after 15th of December, especially in the U.S. because you have your December -- you have your Christmas and New Year coming in. So a lot of staff are on leave and all. So usually, everything is synchronized in such a way that either they arrive before that day or they arrive after they come back from the New Year. So there could be a little lag in Q3 if customers say that -- if the transit times are increasing, because the current transit times in certain places have almost doubled. Like today, I was like -- I was saying last month, transit time to Long Beach on one of the shipping lines, portal was shown as 132 days, which typically was supposed to be less than 5 weeks. So of course, situation is improving in some of sectors, it is not improving in some sectors. So it depends upon how this really pans out. And then only we can say that, okay, what happened in Q1 is something which can happen also in Q3.

But how are the distributors handling this situation, meaning are they looking to stop because the goods are coming a little late or because of the end user demand? How are the things at the [indiscernible] level between consumer and the distributors?

It depends upon the product also, and it also depends upon the distributor. If the product is at a level which is lower to medium level, they typically would be interested in pushing out the deliveries unless they are committed to some programs. Because if you are committed to some programs, then the program customers expect that you have to deliver the product, whatever is the situation. So otherwise, you end up paying some damages. That's the situation which our customers have. So they will have to take a call whether those parts -- those colors are part of any programs where they have committed and how their inventory is currently with them. Because every distributor has a strategy as to how much inventory they want to maintain of a particular [indiscernible]. So that is the answer. There's no direct answer to it. It all depends upon how the -- and definitely, the current demand, as you see the housing numbers are also not that promising. And remodeling is relatively slow as well. Only thing, some of the customers are saying either the high-end homes or some commercial segments where the demand is penting up. So that may also push out certain part of the demand. But if the designs are unique and they're launching the new design, then they want the designs to be shipped without any holdback even if the situations are chaotic.

Sure. So lastly, what we are saying is that till the whole freight situation improves, plus/minus 10% from here should continue. And then since we are at the optimal product mix right now, once the new technology kicks in, say in two, three quarters, then we can see higher realization and basically better margins going forward, right?

Yes. So basically, unless the freight situation improves, the numbers are range bound of course, with the rider as I said earlier, what the product mix in that quarter is going to be. And once the technologies, CHROMIA and Kreos stabilizes, definitely, we are working on our strategies to improve our realization. And that should kick in once we are through that.

Sure. And lastly, just now that we are working with this capacity, when do you think that we can announce the future CapEx?

See, this is something which is difficult to answer because at the management level, we keep exploring a lot of options and opportunities, but nothing at the Board level as of now. And as I said earlier in the call, it takes 15, 18 months when the time we announce. So I think as soon as the Board has made a decision, we will definitely make an announcement. At the moment, we do not have anything on the cards.

The next question is from the line of Chirag Shah from White Pine Investments.

Sir, just first, just a clarification. So you said that you record revenues when the shipment reaches the end destination port, right? And not -- it's not FOB. That is how you record it, correct? [indiscernible].

Revenue for FOB or FCA or CIP when the goods are delivered at the Indian port -- see, basically, we -- let's look at the situation in our...

At the Indian port, right? At the Indian port and not the destination port?

Not the destination port.

And sir, my second question is once the goods reaches to the distributor's warehouse and till the end customer sales, generally, how much time it takes based on your interaction with distributor? Say if the goods have reached the distributor's warehouse today, it's a two, three-month period where the sales happen or it could be even longer or it is a shorter? If you can just through some light on this.

This is a very tricky question, and there's not a straight answer to this. Because there are some materials which are presold. So they are just waiting for the materials to arrive and they sell it up. And there are some materials which typically have a short conversion cycle. They can be sold in one month through three months. But there are certain materials which have a longer conversion cycle, so they can take even up to six months plus. So there's no straight answer to this. It depends upon the distributor, it depends upon the product.

But sir, based on your experience, if we took on an annual basis, 40%, 50% of your revenue would be short cycle based? That would be a right assumption? Or it would be -- a higher number would be a short cycle based?

We actually do not have ability to give an answer with our experience on this. What I can tell you is that typically, [Foreign Language].

Sir, my second question is, if I look at your quarterly profits or operating profits or PAT, however, you may look at it, we are at the peak of profitability because in the past, we have touched these numbers and then cyclicality, demand issues, whatever something comes in, and we have not been able to cross it. So how should one look at the profit? I understand on the revenue front, what you highlighted, but how should one look at EBITDA/profitability absolute number going up from here on. Because in the past, we have been at around INR 65 crores of operating profit and around INR 40 crores of PBT, okay? But we have not been able to go beyond that.

Basically, in any business, there are certain limitations. So it's very difficult to say that -- it's not right to say also that it's not going to happen or it's going to happen. So I think the numbers, as I said at the beginning of my call, some of the numbers are historical. And for EBITDA, we've always maintained that we will have a target between 30% to 35%. And of course, we always want to cross whatever benchmarks we have put. And there are times when we have crossed 35% also historically, if you go look at our numbers years back, then you will see that there was a time and we were very close to 40% EBITDA also. Now having said that, can you do it again? Yes, that there is a scope that can be done. But again, it comes with specific riders, as you said, [Foreign Language]. So the product mix is a factor which drives it. And of course, the demand has to continue to the level that it is today. But then a simple answer is yes, it is possible. But to what extent, that is difficult to tell today.

And sir, one last question, if I can squeeze in, your commentary on the macro demand is not that good. Give the way you understand it. But somehow we are able to deliver strong results. So what is this one or two factors, which is helping you to do this? Is it design and quality itself or it's more about...

If you look at the situation out in the U.S., definitely the situation is not so promising. That has been a situation which neither you can deny, nor I can deny. That's the fact, which is open for everybody. But the fact remains that the differentiation in the product and the type of customer base we have and is what is differentiating us and still helping us to navigate these challenges positively. Because in every adversity, there is opportunity and we are able to use that adversity to our opportunity. That is our strategy. Now, see a lot of people can copy our strategy but it is difficult to execute because if I tell it, somebody can pick up my strategy, document and try to implement it. But then can they execute it, that is where the differentiation. And I think the way -- as a team, we are executing it, that is where we are able to differentiate from other players in the market, both internationally and in the domestic market.

The next question is from the line of Vaibhav Gupta from Bowhead India Fund.

I have a couple of questions. Considering your plans to ramp up in other markets, such as Russia and other plants, how would you grow considering you don't have capacity? Would you consider an acquisition either in India or overseas? I believe there area a lot of surplus capacities available. Any thoughts on that? First question, I have three more questions, if you will give me time.

Yes. So at this moment, we do not have any organic or inorganic plans in our ports consideration. But yes, depending upon the situation, if we have to look at some options, we will look at it. But currently, we believe that whatever capacity we have, we will be able to service the demand what we are seeing in certain markets. And if we see that -- see there has to be a good medium-term promise, which has to come out from the market for us to react and do something. Unless the situation on shipping side improves with Russia, whatever we try to do would definitely not give us or yield any results. But -- and now since already we are implementing our CapEx of Kreos and CHROMIA, our focus is there to make sure that the line commercializes well. And as soon as we believe that we are on the right track, probably we'll do something. But today, it's too early to comment on it.

Sir, you mentioned in the previous comment that the time -- because you're doing higher quality products, the time period to produce have increased significantly. But even in the prior 2 quarters, you have been doing higher quality products. And I also understand based on last few years of your comments that while time increases, but the realization also increased very significantly. In that light when you say that you're running at your optimal capacity utilization, is it like being a conservative management you're just being little -- till you don't see the result, you're being a little conservative or there's some structurally change that the realizations incrementally despite the increasing time are not proportionate like they used to be in the past when you used to talk about these in previous years.

So there are two-part answer to this tonology. One is definitely that when we do a higher realization product, the production capacity comes down. And that is the reason while we produce -- we have a low top line relatively, we have a better bottom line because the realization go up. And secondly, if you see, there is a comment also in my opening comments today, where I said that there is definitely a pricing pressure in the market, which means that we cannot continue to command the product pricing as we want all the time. So we also have to adjust some of our products to the market situation from time to time. So that also has to be factored when we say that pricing realization is higher, but then it is subject to a cap that as and when needed, in line with the market demand, we keep tapering the prices and again start working on new strategies as to how do we come back on a better realization than what we had.

And lastly, sir, any plans to consider a JV seriously in India to ramp up in India, considering [indiscernible] prices. Because the opportunity may not last forever and others may grab this opportunity before us. And can I say that the difference between your production revenue this quarter could be around 10%. Is that a fair assessment?

At this time, we do not have any option, which is at the Board level for a JV, but I don't know whether I will say yes or no to anything at this time because it's too early to comment on it. But I think if there is an opportunity, definitely, Board will explore and give a right direction to that. But I'm not saying that we are averse to it or in favor of it at this time. Second, last question, I could not...

Sorry to interrupt sir, the line dropped, please hold the line. Ladies and gentlemen, thank you for patiently holding. Over to you. Can you repeat your question and please join back the queue for follow-up questions.

So I was trying to ask you two things. The gap between your production revenues of this quarter, would it be like broadly around 10%? And secondly, if the hotels ramp up, would your margins as well as revenues improve? Because whatever I understand is that hotels are more standardized products in bulk orders, but they still command better margins and you have expertise in this compared to some of your peers.

Of course, today even our current mix, what you see, still we do not have a double-digit number coming from the hotel sales or cut-to-size product sales to the U.S. So that is still not reached because, as I said, there's an increased funnel, which is there in terms of inquiry, we are seeing a good amount of conversion happening, but still it is not there at the 20 -- sorry, double-digit number yet.

But if it were to happen, would be a benefit?

Yes, definitely. See if the cut-to-size segment improves, instead of saying hotel, we should say cut-to-size because, of course, largely it goes to hotels, but it could have other applications as well. So if cut-to-size production or sales improves, definitely, it helps us to improve margins. There's no doubt about that.

And gap between production and revenue this quarter? This is a prior question only, which got dropped off.

So can you -- little more -- gap between production and?

Revenues for this quarter, sir, I mean would it be like 5%, 10%? Would it be more than 10%? What you produce versus what you were able to sell.

Yes. It would be less than 10%, but more than 5%.

We'll take the next question, which is the last question from the line of Shreyansh Jain from Swan Investments.

Sir, my first question is what kind of impact would we have seen due to these freight issues, the shipping issues in terms of revenues and also in terms of OpEx?

We have a good amount of raw materials and certain consumables coming from Europe and other parts of the world. Something which was less than $500, the container has become close to $5,000 a container. So that shows you how much impact that would have on all whatever we are importing from those parts of the world where the freights are escalated. So we don't have an absolute number to give you, but it's a good amount of hit at least the way we look at it because those are containers which we buy in bulk from these parts of the world. And in terms of sales, as I said that we have produced the material, we have shipped the material out of the factory. It is lying in the ICD, not yet reached the port. And once it reaches the port, it typically has to be onboard. And only when it is reaching the port or it's onboard, that's when we recognize the revenue. So if you see, there could be definitely more than 5% sales, which is not recognized because the material is lying between the port and the factory. And secondly, this also affects because the cash conversion cycle for us also takes longer time because depending upon our payment terms of -- a large portion of our payment is realized when the material is onboard. So there are times when we are sitting on the materials for more than two to three months also after having invested the working capital and production. And then also that impacts because customer wants the material, we have produced the material, but the material is not still on the water. So it also impacts the overall cash conversion cycle for the customer also. So that means that if he's getting the material delayed, either my product is losing the opportunity or he is losing the opportunity, which means that my next reordering level also gets pushed out. So these are indirect affects of the shipping, which happens.

Okay. So where I'm coming from is the last quarter, we did other OpEx of about INR 34 crores, if I adjust for the INR 14 crores of one-off that you had mentioned, INR 7 crores [indiscernible] and INR 7 crores of inventory write off. So Q-o-Q, OpEx is up by 40%. So I'm just trying to understand the impact of freight that would have come, because that also technically should be a one-off, right, which should -- you're saying Q2, Q3 should normalize. So that's where I'm coming from. My second question, sir, is...

Q2, Q3, it would normalize. I'm saying that if it does not normalize in Q2, it will not even normalize in Q3. Because Q1 situation is continuing in Q2. And if it is continuing in Q2 also for September, then we believe that even Q3, the freight situation will continue to be challenging. That was my intention when I spoke in the previous answer.

Okay. And sir, as far as past conversations, what I understand is the line 1 peak revenues was about INR 400 crores, and line 2 was supposed to be 1.3x. So that comes from our INR 200 crores, INR 250 crores per quarter. And now I think in the call, you mentioned earlier the INR 200 crores is something that you should look at as peak revenues like peak capacities, right? So where is the gap in my understanding? Because from what I understand was INR 250 crores we could have done from the new line.

Let me correct your understanding. I don't recall telling that line 1 will have INR 400 crores revenue ever, because that's a number which I don't know if you guys have given that number based on some extrapolation, that is something which is your crystal-gazing mathematics, but that's not coming from us. So we have done a revenue of over INR 200 crores in the past. So if you look at this thing, number can become INR 250 crores? Yes, it can become INR 250 cores. But there are several constraints which we have to assume. The product mix has to be right. The thickness mix has to be right. The demand conditions have to be right and all that stuff. But then will the bottom line be coming very close to what we currently have, it will be a question mark. So as I said at the beginning of my call, the focus now is not on chasing the top line but chasing the bottom line that it becomes healthier even if the top line is compromised to some extent. So we can do INR 200-plus crores? Yes, provided the shipping situation improves and becomes normal and the demand conditions continue to be normal. But will we be able to get numbers what we currently report in a significantly where can we improve. We think that, that would take a little time because we are working on new products to come in. Once the new products get commercialized, yes, that would be a time where we'll get incremental margins and incremental profitability as well.

Sir, my last and final question is, India as a market of 5 years, 7 years out, how big do you think can India be for us? Can it be 5%, 10%? Why I'm asking you this is when we look at the India real estate market, companies are coming up with INR 60 crores, INR 60 crores, INR 70 crores houses and projects for 1 unit. So I'm just trying to understand the opportunities there. So what is your sense on the opportunity size for us, because INR 25 lakhs, INR 30 lakhs of quartz in a INR 60 crores house, I think we can easily do that kind of business. So just some sense there on the macro opportunity for India for you?

See, there are two parts to this. One part is definitely India as a market is growing, and you have given some statistics. But then the application of the product cannot be as high as a tile or as high as a natural stone, which can be applied at multi-locations, like floorings to exterior claddings to what. So product per se has certain limitation in terms of applications. So largely this product is used for kitchen countertop and certain interior vertical applications. So the overall spend, what happens on a quartz in the house may not necessarily be INR 50 lakhs or INR 60 lakhs, which typically can run into crores even for products like marble. But then coming to your second part of the question, yes, we think that once the strategy is in place in a medium term, we think that we will be definitely able to have a market share in our total portfolio of 10% coming from India, but then it's going to take some time before that happens.

Thank you very much, sir. Ladies and gentlemen, as that was the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Thank you, everyone, and I look forward to catching up again in the next quarter.

Thank you, sir. On behalf of Pokarna Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.