Sanghi Industries Limited (SANGHIIND.BO) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Sanghi Industries Limited [Audio Gap]. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vaibhav Agarwal from PhillipCapital India Private Limited. Thank you, and over to you, Mr. Agarwal.

Thank you, Janice. Good afternoon, everyone. On behalf of PhillipCapital India Private Limited, we welcome you to the Q1 FY '22 call of Sanghi Industries Limited. On the call, we have with us Mr. Alok Sanghi; and Ms. Bina Engineer, Holding Director of the company. I would like to mention on behalf of Sanghi Industries Limited and its management that certain statements that we made or discussed on the conference call may be forward-looking statements related to future developments and current performance. These statements are subject to a number of risks, uncertainties and other important factors, which may cause actual developments and results to differ materially from the statements made. Sanghi Industries Limited and the management of the company assumes no obligation to update or alter these forward-looking statements, whether as a result of new information or future events or otherwise. I now hand over the floor to Ms. Bina Engineer from Sanghi Industries for opening remarks which will be followed by direct Q&A. Thank you, and over to you, ma'am.

Thanks, Vaibhav. Good afternoon, friends. We are reviewing 30th June 2021 quarter, which was the second lockdown. And fortunately, it was -- the lockdown wasn't as severe as in first one. And the overall impact on the industry and businesses was significantly lower compared to the first lockdown. During this quarter, we have made a total sales of about 6 lakh tonnes compared to 322,000 tonnes in the June '20 quarter, of this 5,29,00 tonnes was cement sales, all of which was domestic and about 71,000 tonnes are clinker sales. [Audio Gap]

Trade, nontrade mix has remained same, roughly around 31% is trade and remaining is nontrade.

Okay. And what is March quarter?

It's pretty much same. I mean, it's about 30 -- 30-70.

Okay. 30-70, and same with the blended cement also was 30-70 in March quarter?

Yes.

Okay. And in terms of -- what is the progress on...

In March quarter, the blended cement was a little higher.

Okay.

In this quarter, the blended cement is -- as a percentage is lower.

Yes. How much was in March quarter?

Just 1 second.

33%.

And on the clinker exports, what is the progress that we have -- how are things progressing on that front?

Clinker export is going fairly okay. In first quarter, we have exported roughly around 60,000 tonnes of clinker. So yes, so we are on track. There is enough demand in the international market.

And how are you looking at this number quarterly -- this would be impacted even by COVID, even other markets were impacted? Or is it like your normal run rate that you're looking at for the next few quarters?

No. So what I've always reiterated is that clinker for us is a good strategy for export markets like Africa and various other countries. We are able to export clinker. How much of that will be in which quarter is difficult for me to predict right now because of the fluctuating freight number.

Yes, correct. On an annual basis, what sort of sales you're looking on the clinker side?

We are looking at roughly around 0.5 million tonnes of clinker exports in this year.

0.5 million, okay. And on the project commissioning, what is the time line currently we are looking at?

Projects has already been commissioned as in March quarter. We have taken some production on the new line during this quarter also.

Okay. No, in terms of the commercial...

But as of accounting, it has been treated as trial production. So we have not provided you interest depreciation during the quarter. But there is a production from both the line.

So when is that trial production expected to end and commercial production to be effective?

We are testing all parameters for the input-output ratio consistency of performance, et cetera. So it's a technical call, but I would expect another 3 months at least for the same.

Okay. And why I'm asking this trial production and sales, this is being reflected in revenue in terms of -- how is that accounted to, ma'am?

The trial production has been [ merged ]. So for all expenses, which has been taken into account for the preparation of profit and loss account, except interest and depreciation. And we have taken sort of transfer pricing benchmark for calculating the effect of trial production.

Okay. So the employee cost number is largely reflecting the...

Normalized P&L.

Normalized P&L. Okay, both other expenses and employee cost.

Yes. The entire P&L is normalized to remove the impact of the trial run and interest depreciation are still capitalized, I mean, interest is capitalized that decision not provided for the asset continues to remain under CWIP.

[Operator Instructions] The next question is from the line of Mangesh Bhadang from Nirmal Bang.

Sir, a couple of questions from my side. So we are at 6 million tonnes of capacity. So -- and we see that the market with the infrastructure boost that the government is giving real estate revising. We have seen growth across most of the markets, even though where -- whichever the markets are stagnant, we are seeing at least the smaller capacity striving to improve the volumes and improve the utilization of their plan. When can we see that happening with Sanghi given that now we have 6 million tonnes of capacity, most of the infrastructure is there, but it is still not able to go beyond that 2 million tonne sales that we do in a year. So can you just give us some guidance that when can we at least reach the 60% or 50% capacity utilization?

Yes. So a very good question. As I've mentioned on all my call, the target for the companies to reach a normalized industry capacity utilization will be anywhere between 2 to 3. We are on track for that. I mean if you look at it, our sales growth is much, much faster than the market growth which has happened. So that is on -- in terms of the volume expansion, which will happen. However, the key critical thing, which I would like you to note is that we are more focused on sustainability of our margin. While volume growth is one of the key driver for the company. But at the same time, we are very conscious about the profitability and the sustenance of the profitability. So these are 2 levers which we'll have to balance and improve the volume.

[indiscernible] say that or the industry utilizes that means 75% to 80% in 3 years?

You could expect that. Anywhere between 70% to 75% is what we can achieve within 3 years.

Okay. Because at least now if I see from March '17, in fact, we have declined, whereas the industry has grown, so...

Yes, if you look at the last 6 months, in the Q4 and Q1 number, if you add it together, we have already done 1.4 million tonnes of sales in Q4 and Q1. So if you look at the recent history of the last 6 months, we are moving towards our goal and with the sustainable profit margin.

And sir, so it's a big scale than going from 2 to 4 or even 5 or 6. So have you looked at any or done any organization which has added new people on various -- if you can give some color on that?

Naturally, I mean, any time you have to increase your capacity, we have to have bandwidth in terms of management. We have to recruit people, both at the plant side as well as in the market. The advantage for us is that we are looking at growing within our existing geographies. So we are not looking to scale up or rather to penetrate into new geographies where we don't have understanding or we don't have any hold in the marketplace. So Gujarat, Mumbai, Cochin, all of these markets we have been operating for some time. And so the incremental manpower, which is recruited over here is not so substantial. More so, at large level, we had to hire a lot of people. In projects side, we also hire a lot of people. But at the plant, at the market organization level, it has not been so stark.

Okay. Sir, one more question I had was on -- there have been talks that Adani is previously looking at expanding in Kutch, and we are hearing that they have started hiring people also in that area. So do you see that -- obviously, if it comes up, it will be a very significant threat? But do you see that this plant can actually come off of production in foreseeable future?

I would not like to comment on any other competitor or how they plan their strategy. As a company, we can only play on our strength. Our strength is to be a cost leader. Our strength is to be a quality leader and our strength is to remain focused in the markets in which we operate. There are so many operators in the market, many other producer funds. Obviously, we'll have to face it at that point in time. But as a company, we are -- like we said, we are focused on maintaining our cost leadership. We are focused on maintaining our profitability in this region.

But do you expect this Adani plant to come up, sir, any time soon?

I cannot comment. I am sorry.

We can't -- we are not be able to comment on when they'll be able to come or not. I don't know what the plans are. So difficult for me to judge and give you a firm comment on this.

[Operator Instructions] The next question is from the line of Romil Mehta from DAM Capital.

So my question relates to the pricing. How are these panning out? So firstly, how was the quarter 1 over the fourth quarter, obviously, the price have improved, what have been the pricing trends in Gujarat and Bombay? And also how the prices have shaped up in July and August, considering monsoon has been setting. So have they seen some kind of correction or are they stable and your views on the same moving ahead? That's my question.

Yes. An excellent question again. The prices are continuing to move up. If you look at the Q4 pricing versus the Q1 pricing, there is an improvement of almost about 6% in pricing. Y-o-Y, as what Bina has already mentioned, there is a 7% improvement of 7.5% improvement in the pricing on a yearly basis. The reason for this is the strong demand environment, which we are seeing if you look at it, of course, factoring the base effect of lockdown 1, there is still a very sharp improvement in demand across the country in terms of cement consumption. Even in July, we are looking at close to about 7% to 8% demand growth in our geography. So demand momentum is there, and therefore, that is able to sustain the pricing environment. And I expect that this will continue to remain strong. The issue which most of us are going to face going forward, is the cost pressures which are coming in because of higher coal prices which obviously will mean that higher power prices and the increased diesel prices, which is forcing renegotiation on freight. And that is what will probably ease a little bit into the improved pricing environment that we are enjoying right now.

Okay. So can we see some contraction in the margins, which companies have been posting, it's been almost all the companies that have been posting 1,000-plus EBITDA per tonne for quite a number of quarters. So will we see this, I mean, coming off now the cost increasing and prices, price increases that's getting offset by higher costs?

I'm not foreseeing that, only for 2 reasons that the demand environment is strong, which is adding that we are able to push up the prices in the market. So increased cost pressure is being offset by improved pricing environment in our region. And that is the reason why margins are sustaining. The question is how quickly we are able to absorb the cost pressure at the same time, how quickly we are able to pass on. So the timing mismatch may be there from quarter-to-quarter. But on an overall yearly basis, I'm quite confident that companies will be able to maintain this kind of a margin.

[Operator Instructions] The next question is from the line of Sanjay Nandi from Ratnabali Investment.

I just missed out the initial conversation, ma'am. Can you please share me the volume numbers for this particular quarter?

For the current quarter, we have done 6 lakh tonnes overall volume of which around 5,29,000 tonnes were cement and 71,000 tonnes was clinker.

71,000 tonnes was clinker. Okay. And sir, what is the demand that you see going forward? Like what kind of things you are expecting to shape up in this quarter compared to last quarter?

So like I said that without taking Q1 into effect, the Q2 has started off the -- Q2 in July, the demand has grown at roughly around 7%in our region. So demand environment seems to be healthy. If you don't see any further lockdown or if you don't see another third wave, I suspect and my view is that we should see a strong double-digit demand growth in the entire nation. And if that happens, obviously, there will be price support, which will help us maintain margins.

So did you take any price hike, sir, from the exit of last quarter, like Q1 '22 or we are maintaining the same...

Yes, margins will -- if you see Q2 generally is weak quarter where prices come down. This is -- in this quarter because of a good demand environment, the prices are sustaining and rather it is slightly higher than Q1.

Sir, what kind of exit thinking of for FY '20, sir, if you can tell me the volume numbers for the full year?

Again, it's very difficult because, like I said, we don't know the status of -- if you see a third wave or not, so I would like to refrain from giving a firm commentary on what is the expected volume for the company in this year. But as you can see that we are outperforming the market by significant rate, and that is the same which we'll continue to do.

Got your point, sir. And what is your outlook on that hiking the recent power and fuel costs, sir? Like the petcoke is at its hike. So are we thinking of using more lignite things into our plant or what is our view going forward?

Yes. That has already started as, again, what Bina mentioned during her opening remarks, that in order to substitute rising international coal prices, we are trying a level best to improve the lignite blend. And that is -- that remains one of the focus areas for the company. But all said and done, we believe that this coal prices have continued to rise. The trades are at all-time high, which is fueling increased transportation cost. So these cost pressures are bound to be there in this inflationary environment today.

Okay. And what's the gross debt level, sir, trending in the books as on debt?

The gross term debt is about INR 1,120 crores, and we have working capital limits of about INR 280 crore.

Working capital limit INR 280 crores. And what is our payment obligations for this particular year?

What -- our debt servicing, is that what you're asking?

Yes. I'm asking what kind of debt levels you are trying to like repay at the end of this FY '22?

We have settled our debt over a period of next 10 years, and we don't have any very large payouts of the debt during the year. So it will be scheduled. We have scheduled in a manner where our principal obligations will be towards end of FY -- end of December '20 -- I mean calendar '22. So during this year, it would be somewhere around between INR 50 crores to INR 60 crores.

INR 50 crores to INR 60-odd crores. Okay. And ma'am we have found that we don't have any tax like we're not paying tax like in the last couple of quarters. So we will be continuing in that chapter or leaving?

Yes. We have -- last year, we have shifted to the new regime of a single rate taxation. And we have benefits of broad depreciation and losses as per the tax calculation. So we don't expect that we would be required to actually have a tax outflow in -- at least for the next 4 to 5 years. However, there will be a notional impact of that prospect.

Okay. So net-net you're not going to pay any kind of like tax effectively for the next few years? That's what you mean to say.

Next 4 years, I can foresee that at least for the next 4 years, we will not have tax outflow, and we are seeing -- we have referred the option under 115BAA.

[Operator Instructions] The next question is from the line of Indrajit from CLSA.

Apologies if you have already addressed this in your initial comments. I have 2 questions. First, on your power and fuel cost. So what is our booking cost -- thermal coal booking costs this quarter versus spot price, both for thermal coal and petcoke.

So we haven't been using petcoke. We have used -- both combined for the power as well as fuel, we have used around 85%, 86% of thermal coal and about 14%, 15% of lignite. The per CAGR cost of thermal coal was around INR 1.09 and the lignite cost -- there is no significant change. It remains around -- between INR 0.85 to INR 0.90. Going forward, we will attempt to maximize or improve up on lignite component in our fuel cost to offset the rise in the coal cost. But I don't think anyone in the industry will be able to escape the hike in the full cost. So that is something which I think you will see across the industry in coming quarters.

No, I want to understand, sir, the INR 1.09 that you explained for the coal cost, if I were to buy, would that on a like-for-like basis?

If you were to?

At today's coal price, what would be that INR 1.09 move up to? Will it be more like INR 1.60, INR 1.20 or lower than that?

I mean market -- as the market intelligence it appears that it is INR 1.70 or a little even more than that.

That's very helpful. And secondly, you touched about the demand is very strong -- are you seeing any significant...

Sorry to interrupt, but your audio is not clearly audible, sir. Can I please request you to speak little loudly.

Okay. So in -- you talked about demand being very strong. So can you highlight where are you seeing the higher demand from? Is there a significant difference between retail and institutional demand? Or is it uniform across? And how do you expect this to shape up in the next 3, 4 quarters? Assuming there is no...

We are seeing a very strong demand in the institutional side. So one on the government infrastructure, there is a very strong momentum. So road building, low-cost housing, various other infrastructure works, there is a strong demand momentum. We have also seen an uptick in the industrial consumption. So a lot of companies have started looking at expansion of their existing facilities, which had come to almost nil in last couple of years because of various reasons. So we have seen an improvement in both the industrial side as well as the infrastructure spending by the government. Real estate for us has still not picked up as strongly. It remains -- we have not many new launches in our area right now. So people are still completing their old projects which have been announced are partly completed. And retail remains stagnant. There is not again significant demand uptick in the retail side, at least in Gujarat.

Sure. So has the price difference trade and nontrade reduced as a result of that or that meant broadly flat at about INR 40 odd out of this event?

Yes. First, the price difference is not INR 40-odd in our area. In our region, the price difference is anywhere between INR 20 to INR 30, more in the range of over INR 25. This is the price gap. So if you look at it, net of taxes and the additional handling which we have to do for trade, as a company, there is no difference for us, whether we sell in trade or nontrade.

The next question is from the line of [ Ramakrishnan ] from Equity Intelligence.

Sir, I have one -- I think I missed that initial comment by madam. Sir, there is a 14% degrowth in the revenue, but there is a 50% increase in the power and fuel. So is it -- what was the reason and this is going to be similar in the going forward also?

Yes, on a broad basis, what you are saying is right. Revenue fall as while the price realization was better, volumes were affected during the last quarter on account of lockdown almost while it was state-wide lockdown, but it was still that throughout the country. So volumes were affected compared to March quarter. Price realization was better compared to March quarter. And clearly, the power fuel cost has moved up on account of the higher cost that we have incurred for the coal.

So this is the -- this will continue for going forward also?

I believe so, that at least for the next 2 to 3 quarters, there will continue to be the impact of coal hike because whatever we purchase now, we'll be using at least over next 2 to 3 quarters. The positive side for us is that we are able to make lignite. And we've mixed around 15%, and we can ideally go up to about 40%, 50%, which may take another 2 to 3 months to reach that level, but we can move up on our lignite consumption. So we will be able to offset it over next 1 or 2 quarters. So probably, to some extent, we'll be able to avoid the change of the higher cost.

What is the price difference, lignite and thermal coal now currently?

So as somebody just asked before you, he asked what is the current coal cost on a per kg basis and I said that as per the market intelligence, it appears to be around INR 1.70. There is -- lignite would be somewhere around INR 0.90. There is a significant saving on lignite.

[Operator Instructions] We will take the next question from the line of Shanti Patel from Shanti Patel Investment.

What is our capacity utilization today? That is question number one. Question number two, what is our market share in the area of Gujarat. And are you going -- who are our main competitors in the Gujarat? These are the 3 questions.

So sir, the capacity -- the new capacity has recently been commissioned. So obviously, the capacity utilization numbers are fairly low. The company has not ramped up its existing capacity. As far as the demand or market share is concerned, we are about 8% market share in Gujarat. And therefore, we have a significant room to improve our market share in our core market of Gujarat. And our market share of Mumbai and Cochin, we are below 5% in terms of market share. The other question you asked was who are the major competitors in Gujarat, UltraTech remains the largest operator in Gujarat market, closer to almost about 35% to 40% market share. Ambuja is the second largest player in Gujarat, closer to about 14% to 16% market share.

Sorry, our share is how much in Gujarat?

8%.

8%?

Yes.

And do you think that in future we will be able to maintain or increase the market share?

Yes, we are growing faster than the market demand, and therefore, we should see an improvement in the market share number. But again, I would like to bring you back to the topic that we are not focused too much on market share. We are more focused on the profitability and sustenance of the profitability.

The next question is from the line of Rajesh Ravi from HDFC Securities.

Yes, sir. When you -- ma'am talk about the current prices of lignite and thermal coal while thermal coal prices have shot up from INR 1.1 to INR 1.7 lignite is flattish. And we see that in Q4, you had done around 57% in lignite usage. So why have that -- why has that dropped to 15% in Q1 and what specifically is leading to lignite remaining flattish and all the other fuel prices are on an upward trend?

So lignite, we have not tested in the new line because we are in the stabilization process and therefore, the impact of the percentage utilization of lignite appears to be low because we -- both in the thermal power -- new thermal and new -- clinker line, we have not used lignite. We will do that once the process has stabilized. Therefore, it is only allocated towards the first line. So once it normalizes, we -- as I said, we can easily move up to 40%, 50% of lignite use.

Okay. And what is the reason for costs not moving up? 90% is too low and given that differential of 15%, 20% coal is understandable but from -- almost half of coal prices -- so any upside risk that you...

It generally had a stable price history. And they don't change the prices very quickly. So it is their frequency, they weight it out. There are times when clinker -- I mean, coal cost was even lower than lignite they didn't drop the price at that time. And now there are times when the coal cost is significantly high, still they are maintaining. So it's a steady price scenario for lignite.

Okay. And ma'am, this is the availability of lignite near your plants, what is the maximum you can lift from there?

CNBC has almost 60% of its lignite reserve out of cuts. And we have recently opened a new pits where the quality is also quite good. And availability is also good. So we don't see any shortage of lignite in near future.

Okay. So and potentially even at your 6 million tonnes, suppose we are able to achieve 70% utilization. So for this 70% utilization, can you -- what sort of proportion is it, can it go north of 50% lignite usage? Or are there any up limit you're looking at?

Technically, we are capable of using higher components of lignite. However, there are other effects of that. So we'll always keep examining its impact on the quality or various other aspects on the plant health, et cetera. Because as you understand, lignite is a difficult fuel to use. So we have to be cautious in how much we use. But as you know, we have a history and experience of having done up to 50% very comfortably. So that would be the immediate target.

We will take the last question, which is from the line of [ Nagraj D.] , individual investor.

I have 2 questions for you. Are you planning any QIP to reduce debt, is number one. Number two is, are you planning any capacity expansion from 6 million tonnes to 8 million tonnes in the immediate future?

No. So we don't have any immediate QIP plans because as I said, we are not under any kind of debt pressure. While the debt number as of today looks on the higher side because the EBITDA from the new unit is yet to get generated. Otherwise, we are very comfortable on a 6.5 million tonnes. We have overall INR 1,400 crores debt, which is not a very high number. So we are quite comfortable on that 4 million tonne capacity only and to allow for the ramp-up of the new capacity, we have ensured that there is a good amount of staggering and we have a longer tenure available for our repayment obligation. So we don't foresee any urgency to tap the market for any kind of debt reduction. We will be very comfortably paying out all our debt obligations from our business cash flows -- operational cash flows. So I think that answers the first question. And could you remind me for the second question again, please?

Are you -- when are we planing to ramp up your capacity from 6 million tonnes to originally planned 8 million tonnes?

So as we had already planned the Surat unit and we have already acquired the land there. We are waiting to improvise the utilization of the existing capacity to reach at least around 70%. Thereafter, we can parallelly look at adding the new grinding capacity. As you know, we have 6.5 million tonne clinker capacity. So potentially, we can produce up to 10 million tonnes of cement. However -- so we have built in all the future growth, future CapEx already -- future capability already in our current expansion plan. So we will be adding grinding units, not essentially 2 million or 4 million, but we will definitely be adding more grinding units to convert our clinker into cement, but we'll wait out until our current utilization improves.

Okay, madam. One last question can you throw some light on the pledge, madam, promoter pledge?

Yes. Good that you asked because this question is or this aspect is generally misunderstood in the market, and I would like to clarify that promoters have 70% shares with them. Of which roughly about half of the shares are pledged to the lenders of Sanghi Industries Limited itself, the company itself. There is no personal borrowing against that. About half the shares are pledged for the company. And there are no margin calls or LTV calls, et cetera, because these are merely collateral security. So we don't have any tension or stress on account of the pledge of shares to any of the lenders because, A, there is no personal borrowing. B, it is against the company without any margin requirement. And the other half of the share are under nondivestment undertaking to the lenders of the company. This means that the promoters will continue to maintain the shareholding level, majority shareholding level in the company, that is the undertaking we have given to our lenders that promoters will not divest during the course of the loans. And therefore, that agreement has to be registered with SEBI and that is called NDU. We have even given clarification in our shareholding pattern submitted to BSE NSE that this is under NDU. They are not pledged, and there is no clause in that NDU where it can be even converted in pledge in future. It is merely a negative lien on those shares, that promoter will not dilute the majority stake. So first and foremost, that 98% pledge appears because of the SEBI requirement is a little bit of misleading because half of it is not even pledge. It is merely an NDU. Other half is pledge where, as I said, there is no promoter pledge, it's only for the company's benefit. And that too, over a period of next 3 to 4 years, once our loan levels are reduce the company has ability to take back those pledges. The next 3 to 4 years, we'll be able to unwind most of these pledges. I hope I've clarified -- I attempted clarify at length.

Ladies and gentlemen, that was the last question for the day. I would now like to hand the conference over to Mr. Vaibhav Agarwal for closing comments. Over to you, sir.

Yes. Thank you on behalf of PhillipCapital Private Limited, we'd like to thank the management of Sanghi Industries for the call and many thanks for the participants joining the call. Thank you very much, sir. Thank you very much, ma'am. You may now conclude the call. Thank you.

Thanks, sir, and thanks to all the participants.

Thank you. On behalf of PhillipCapital India Private Limited, that concludes this conference. Thank you all for joining. You may now disconnect your lines.