Satia Industries Limited (539201) Earnings Call Transcript & Summary

A very good afternoon to all of you. On behalf of Prabhudas Lilladher, I welcome you all to the Q3 FY '20 earnings call of Satia Paper. We have with us Dr. Ajay Satia, Chairman and Managing Director of the company. We also have Mr. R.K. Bhandari, Joint Managing Director; and we have Mr. Inderjeet Monga, who's the Assistant General Manager, Accounts and Finance. At the very onset, I would like to convey my congratulations to the management for a strong set of numbers this quarter. Mr. Bhandari, I would now request you to take us through the quarter numbers and make your opening remarks, post which we may set the floor open for Q&A. Over to you, sir. Thank you.

Bhandari this side. Good afternoon, everybody, and thanks for the introduction. First of all, we welcome you all to our earning conference for the third quarter 2020. For those who are participating for the first time, let me give a brief introduction about the company. Ours is one of the largest integrated wood- and agro-based paper manufacturer in India based in Muktsar, Punjab with a total capacity of almost 1,25,000 tons every year. And we have the flexibility to use agro pulp, wood-based pulp and to some extent, wastepaper pulp also. Our total integrated pulp and paper production facility gives us advantage in term of cost efficiency and environment compliance also. Our commitment to environment is reflected through our chemical treatment plant where we not only treat our chemical effluent and rather, we regenerate caustic soda by trading it in the soda recovery boiler, which is again used in our pulping process. This is also a major profit center for the company. We also have in-house cogeneration facility where the total requirement of power is met from our own generation, and the cost of the power is very, very economical. No effluent is disposed to any water body as per the national government policy. And whatever wastewater is generated after treatment, it is diverted to a eucalyptus plantation of over 500 acres, which is done based on the Karnal Technology, which gives us a tax-free agriculture income also every year and handle our water disposal problem also simultaneously. The company product profile includes various grade of writing printing paper, including photocopier paper, cupstock paper, colored paper, ledger paper and other offset printing and exercise book and textbook manufacturing paper. Now we would like to take you through the financial highlights of the company for the third quarter. Operational revenue stood at almost at INR 201 crore as compared to INR 173 crore in quarter 3 financial year '19, and there was a year-on-year increase of almost 16.2%. EBITDA for the quarter was reported at INR 46.3 crore, and EBITDA margin stood at 23.02%. Net profit for this quarter stood at INR 24 crore, and PAT margin stood at 12.08% in the current quarter. Talking about the performance for 9 months for financial year '20, operational revenue for the first 9 months were at INR 629.6 crore as compared to INR 539.9 crore in 9 month in the previous year, implying an increase of over 16% on a year-on-year basis. EBITDA stood at INR 137.7 crore, and EBITDA margin have stayed in line at 21.8%. Net profit increased to INR 75.8 crore as compared to INR 59.3 crore in the previous corresponding period, implying an increase of 27.8% on a year-on-year basis. PAT margin for 9 month ended for this year were reported at 12.04% as compared to 10.98% in the previous corresponding period. Regarding operational highlight for the quarter, with the great enthusiasm, we share the news of our case being recommended for environment clearance for capacity expansion. And simultaneously, company has already done the financial closure for the project. The order book is very strong even at this moment. We have almost 2 months order in hand, and prices are looking upward in the current quarter. And raw material prices, they have especially reached -- they have started coming down in this quarter because of good rains in Rajasthan, and demand for wheat straw is on the decrease in the Rajasthan, which normally controls the pricing of the wheat straw. So we hope with all these things, we should be going ahead with the implementation of the project. Civil work is already owned. Plant erection, commissioning and trial run, we hope that we will start maybe by end of 2020. And with the state-of-art new European paper machine and with our plans to use wood pulp as our raw material for this machine, we ensure higher quality produced equivalent to A grade mills on that machine, and this is definitely bound to improve our realization in the coming years. Now we would like to open the house for questions. Thank you.

[Operator Instructions] The first question is from the line of Shailee Parekh from Prabhudas Lilladher.

Mr. Bhandari, my question was regarding -- I mean they're actually just data points. Would you be able to share the volumes for this quarter and for the corresponding quarter last year?

This quarter, we produced [ 33,813 ton ] paper. And last year, in this quarter, third quarter, we made 29,220 ton paper.

29,220?

Yes. And the clearance was -- the sale was 29,109 in the last year third quarter. And this year, we were able to clear 34,176 ton paper, tonnage-wise, yes.

Right, I got that. But sir, I mean, if I can see the -- there has been a decline in the realization per ton over the last 3 quarters. So would you be able to sort of tell us what's happening on the pricing front? And even with coronavirus in China, I mean, how do you see this impacting the paper industry in the segments that we are in?

Yes. Prices, definitely, they are on the decline. They were on the decline until the last quarter. But in this quarter, prices have started looking up. But if we look at that end, even in the last year, in the first quarter, the prices were anywhere around INR 53,000 a ton. And in the last quarter, the prices were INR 60,000 a ton. The average was INR 56,560 only. Similarly, if we look at this year average, it comes to almost INR 58,675 a ton. So on the average, if we see, there isn't much decrease. But definitely, in the market, the prices were down in the third quarter. And since we sold more paper in the market instead of to the government, so our price realization was slightly higher -- slightly lower, and that led to overall decrease in the total sales volume also, yes.

Okay. But -- so then going forward, sir, what would your guidance be? I mean is this like a quarterly phenomenon? Or is there like a seasonality element where there will be certain quarters of the year where we know in advance that the mix will be skewed in favor of what goes into the market versus to the government?

Yes. No. Actually, the last quarter is always good for the paper industry because a lot of demand is for the exercise notebooks, number one. And all book season for the schools and -- it starts in the month of April only. So last quarter is always very, very good and second quarter is also good. Normally -- third quarter is normally down always. But still, this year, we have been able to maintain the profits, yes.

Sir, when you're talking about you're seeing prices, witnessing an uptick, does that have anything to do with the China factor?

China corona factor, I don't think it has made any impact so far because the Chinese, as we have got reports, they feel that they will be able to control everything maximum within a month's time. So rather, I would say it has happened. Otherwise, the pulp prices have gone up by almost $30 a ton. And even wastepaper prices, they are on the increase, yes.

Okay. Right. And sir, what's the CapEx? I mean I first wanted to know what is the debt as on date. What will be the debt by the end of this financial year, please?

Yes, just a minute. Yes, debt as on date is INR 193 crore, which consists of INR 142 crore old debt and INR 51 crore debt against the new expansion.

Okay, sir. And -- but this is your long-term debt, right, basically?

Yes, yes, this is the long-term debt, and working capital is separate. Total fund based, non-fund based, if we include that, that comes to INR 286 crore, yes.

Okay. And where do you see this debt peaking out, sir?

I think by, I would say, in the first quarter of the next year, yes.

At which point it would be?

All our machinery is likely to be dispatched by 31st March. So yes. So in the first quarter, all dispatches for the new project will be through. If the dispatches are through, only then we can do the erection, commissioning and then think of taking trials in the third quarter of 2020 or latest by fourth quarter of next year, yes.

Right, right. So this INR 193 crore would peak out at what level, at about INR 220 crore or higher?

By the end of 31st March or what?

In Q1. Once you said all dispatches for the new project will also be through, where do you see this debt peak out?

I think it should be anywhere around INR 350 crore because we'll be paying part of the debt for this year, and our old debt should be anywhere around INR 90 crore to INR 100 crore by that time. And INR 260 crore will be the new debt. So total should be anywhere around INR 340 crore to INR 350 crore.

And this is your long-term debt you're talking about?

The interest cost -- even presently, with my INR 140 crore term loan, the interest cost comes to me almost INR 1,100 a ton. So with the new INR 350 crore and my average interest going down to almost 6%, 7%, my interest cost should not be more than INR 1,500 a ton, which will not be a significant increase over the last year -- a production of almost 2 lakh ton.

Right. So this would be a long-term debt of INR 340 crores?

Yes. It should be INR 340 crore to INR 350 crore peaking out, yes. Then we will be further paying in the next year also for the old debt also.

Okay. And what would be your working capital requirements?

Working capital requirement for the additional, I think we'll be taking another INR 40 crore to INR 50 crore.

Okay. I got that, sir.

Yes, our debt equity will stay lower than 1 in any case.

Okay. And sir, what tax bracket will we fall under?

Tax bracket, I think I'll give -- hand over to Mr. Inder. He will let you know better, yes.

Yes. Our normal tax rate is around 21% tax cost. It's because we are getting a [ DIA ] benefit, and we are also getting from tax-free agriculture income. So it is around 21% to 22%, yes.

[Operator Instructions] The next question is from the line of Abha Kant from Peerless Securities.

My first question would be regarding capacity utilization for '22, if we can get an idea about the old capacity utilization and the new capacity -- new additional capacity.

Yes. This year, we hope to achieve a production of 1,35,000 ton, which would be an increase of almost 10% to 11% over the last year. And yes, once we come into production, maybe by the end of this year, December, maybe we could give some numbers in the last quarter, in the next year. And from that -- from next year '21, '22 onwards, I think we should be adding minimum another 100,000 ton, and the total production will come to almost 2,25,000 plus.

Okay. Okay, sir. And another question would be the cash levels are going to be really good, if we touch that sort of levels of utilization. So any target that we have set for that repayment by '22 or -- like '21, '22?

Pardon, I could not get your question.

Is there any targets that we have set for '22?

Excuse me, this is the operator. Ms. Abha Kant, your voice is breaking a little.

Yes. I think now it's better. Is it properly audible at your side?

Yes.

Yes.

Yes.

Is it audible? My voice is audible or not?

Yes, yes. No, it's perfectly fine.

Okay, okay.

Hello? Yes.

Yes. So my other question would be, any debt repayment targets that we have set for FY '22?

Yes. Actually, our -- every year, we pay almost INR 50 crore for the old debt. And our debt repayment for the foreign currency loan is starting 2021. Once we start the production from December 2020 onwards, that repayment starts and the rest of the payment, again from 2021, yes.

Okay, sir. Sir, any -- like net sales realization has improved for this quarter? Or what would be the outlook for the FY '21?

Yes. We are seeing that over the last quarter. Already in January, the prices have increased by almost INR 1,000 a ton, and we expect another increase of INR 2,000 a ton in the rest of the 2 months, February and March. And for next year, I think the prices are likely to remain within the same bracket, which we have seen in this year, unless something big happens like this Ballarpur issue. Maybe if anything, let's hope nothing goes wrong with them. And otherwise, prices are likely to remain in the same bracket, yes.

Okay. And one, sir, qualitative question regarding international pulp prices. To which extent do they, like, affect our production?

Yes. Not much because we plan to use not more than 5% to 10% of imported pulp. Already, we are planning to go in for almost 300 ton of wood pulp in-house. And from agriculture pulp, we are planning to make 250 ton. So our major dependence is going to remain on the agriculture pulp and in-house made -- the wood pulp only. So I don't think it will affect much to us.

[Operator Instructions] The next question is from the line of Jaineel Jhaveri from JNJ Holdings.

I just wanted to know that we had other expense dropped quite a bit in this quarter. So if you could explain what happened in other expense.

Actually, normally, our sales have 2 segments, 2 areas: one is the government sale and second is the market sale. So in this quarter, our government sales were on the lower side. Normally, we sell almost 60% to the government sector and the 40%, we sell to the open market. But in this quarter -- in the last quarter, the sale was almost 25% to 30% to the government sector, and the market sector was almost 60% to 70%. So expenses in the government sector are on the higher side. We have to pay more to the dealers who are getting the orders for us. So that is why the commission is booked on the lower side. So that is the main reason because government sale is less and expenses are on the lower side, yes.

Okay. So what -- is it [ tagged ] to a percentage -- so say, if the government realization is INR 60,000 per ton, do they get paid as a percentage of that? What I'm trying to understand is, isn't it -- is it better to sell in the open market then? Or is it better to sell through government orders?

In the declining market, it is better to sell to the government segment. If we get the orders -- like if the tenders, they come at -- in a period when the prices are on the higher side, so then we get the orders at that rate, which sustained throughout the year because it is an annual contract. So -- but if prices are down, we -- when we get the order and then prices are increasing, then sometimes we stand to lose also. But in this year, the government prices are very, very good. And though market has come down, still our sale realization -- like in this quarter, we are selling more to the government. So sale realization is bound to go up in this last quarter, as we hope, yes.

Okay. And so how do we -- so next year with the increased capacity, would we expect more government orders? Or would we expect more in the spot market?

No. Actually, what we plan is we intend to increase on our old production, which is almost 1,35,000 ton will be this year. So earlier, we were doing 50-50 or 60-40: 60, government; 40, market. We intend to increase on the old production to 70-30 ratio. And the new production will go totally to the independent market and to export markets because that is totally a different segment of market in which will be equal to A grade mills, anything -- any mill like JK, Ballarpur, West Coast and all these mills because we'll be using wood-based raw material, number one. Number two, the machine is brand-new European machine with all the feature, which any good machine of JK or Ballarpur or West Coast has, maybe better features because this is being installed in the -- as in 2020, and their machines are much older. So we hope that our product range will be on the much higher side and our target market for that will be of that segment and price realization will be almost 10% to 15% higher than the present realization in the open market.

Okay. Okay. And another question that I had was that if you could just give us an update on the paper cups and some of the new initiatives that you already taken.

Yes. Actually -- yes.

Yes. Sorry. So if there's any update on that.

Yes. Actually, our MD, he was supposed to go to Taiwan for finalizing the machine order, yes. But due to this corona issue, we had to postpone the visit. So I think if within a month or so, if this problem ends, we have already shortlisted the machinery. What we are going to buy, we have already shortlisted that. And the moment this issue is clear, our CMD, Dr. Ajay Satia, will be going and will be finalizing that order. And within next financial year, definitely, we'll be coming with cutlery segment -- in the cutlery segment, yes.

Okay. Final question is regarding the cash flows. And so in the first 9 months, what are the cash flow from operations?

Yes. I will give to Mr. Inder. He'll let you know about the cash flow in the first 9 months.

Yes. Our first -- cash flow for the first 9 months, it's around INR 115 crore. And that goes to some internal accrual and repayment of borrowings. Around INR 55 crore to INR 60 crore for new [indiscernible] number, that part of the [indiscernible] for INR 400 crore. And INR 10 crore to INR 20 crore is normally for -- its routine upgradation, capitalization, and the remaining is for the repayment of a loan.

Okay. So it is INR 120 crore and then INR 50 crore, INR 55 crore was for the new CapEx, INR 20 crore for maintenance and the rest for debt repayment?

Yes. And INR 10 crore to INR 20 crore for the normal upgradation -- normal capitalization.

The next question is from the line of Akhil Jalan from Kamal Kumar Jalan Securities.

I just wanted to reemphasize on the point you had mentioned earlier in the conversation, is that you were shifting a lot to government tenders in the current quarters. So I wanted to understand if your EBITDA margins would be sustainable at 20% going forward. I mean are the margins the same for the government orders and the other orders, government tenders and the other orders which you're taking?

Hello?

Hello.

Yes, please.

I wanted to understand that you had mentioned in the conversation that you're shifting to government tenders. I mean there's been a shift from private to government tenders in subsequent quarters. I wanted to understand if the EBITDA margins would be sustainable at 20% going forward with the added capacity.

Yes, yes, yes. We shall -- because the government realization is -- as we have seen in the past, number one, it makes us use the total capacity of all the different segments, like we are able to use full pulping capacity when we make more because government orders are of heavy GSM. That is a thicker paper. We are able to make maximum power. We are able to use full capacity of soda recovery plant. So that -- all that leads to higher contribution from different segments of that, number one. And higher focus on government order is only for the old capacity, which is 1,35,000 ton. And new capacity, we are focusing only on the A grade mill market only, which is a precise Maplitho paper and photocopier paper, so which is having almost INR 10,000 a ton higher realization than our current realization. So looking to all these factors, even if within a year, we are able to get our share of that target market and establish our product, so maintaining that EBITDA margin should not be a problem with the very, very low cost of the project for this expansion, yes.

[Operator Instructions] As there are no further questions from the participants, I would now like to hand the conference over to Ms. Shailee Parekh for closing comments.

Thank you, gentlemen, for joining us on the call. Thank you, participants, for having taken the time out to hear what the management had to say. We wish Mr. Satia and Mr. Bhandari all the very best for the quarters to come and all the new projects that Satia are undertaking. Thank you, everyone. Bye-bye.

Thank you. Bye-bye.

Thank you very much.