Satia Industries Limited (539201) Earnings Call Transcript & Summary

Good evening, everyone. Welcome you all to this earnings call for third quarter and 9 months ending December 2020. We have reported all the numbers already. And still, I would like to say that in the third quarter of financial year '21, we have reported these results based on contracted average realization of almost INR 44 a kg, which are almost less than 8% of the previous quarter realization. The market was almost in a V formation. And in the third quarter, we were at the bottom of the V. And in the coming quarter, we are already -- in the present quarter, we have already booked a good number of orders, which are almost 10% on the plus side. Volume-wise, you might have already seen that from first quarter, our volume increased by almost 45% from 22,000 tonne almost to 30,000 in the quarter 2 and 32,125 tonne in the quarter 3. And similar increase has been noticed in the production also. We have been able to capture 2 major orders, government orders in this period which are under execution presently, 1 of 5,000 tonne from Chhattisgarh State Textbook Board and another of 7,000 from Orissa Textbook Boards, where average realization is over INR 56,000 a tonne, which is much higher than the average realization that I have given to you for third quarter earlier. We have -- as I earlier told we now -- the market has started looking up. And if we look at our January figures, there is much improvement in the prices. And in next 2 months, and by the end of next quarter, we should be reporting the average realization of almost INR 50,000 a tonne, which will be almost 10% to 12% higher than the third quarter. So next quarter is likely to be very, very -- we are very optimistic in the next quarter. And the additional capacity of 1 lakh tonne per annum, which we are likely to commission by July 2022 because the mechanical erection will be complete in April, May period. And this will help us in getting more orders from the textbook board, and we'll be able to supply much higher quantity to high-value items of Copier paper and Paper cup stock that we made on the same old machine, PM3, which will be in future devoted only to textbook segment. Further, our Table cutlery segment is also likely to be commissioned by end of quarter 4 of this financial year. And this is likely to contribute to our sales from quarter 1 of financial year '22. Satia -- in Satia, we strongly believe that next year, we'll be having a very, very healthy growth of almost 50% in revenue and the corresponding increase in margins in financial year '22. And now I'll be happy to address any questions from the audience. Thank you. Welcome.

[Operator Instructions] The first question is from the line of Varshit Shah from Emkay Global.

First of all, I think congratulations for a great set of volume delivery despite the challenging times. I can see that our performance is much better in terms of utilization versus our peers. Sir, my question is on the -- more on the broader side that we have seen some price improvement already in 4Q. Do you see this trend going into Q1 as well, given the industry dynamics and a lot of smaller units are unviable at -- even at current prices. So the industry price has to move up. Do you envisage that kind of scenario that these prices falling further in Q1 as well?

Yes. Yes. So as you rightly said that in January, our realization is almost 1% higher than the average of Q3 and in February, if I look at my February average realization till date, it is almost 10% higher than what I have been selling in the Q1 average. And if I add the average of the orders that I have already contracted. So I think, as I told earlier in the beginning in the introduction also, we should be -- from average of -- last quarter average of 40 -- less than INR 44, we should be moving up to almost INR 50 a kg in the last quarter. And as you asked me how -- as I already told that we are almost in the reformation, where we were at the bottom of the V in the third quarter because in the beginning of the third quarter, government tried to open the schools and colleges. But with the reporting of COVID cases in schools, they again closed that. So whatever uptrend was seen once that diminished immediately. That went down immediately. So people -- the mills they became little cautious and every body booked orders, which we have to supply, we have to fulfill our commitments of those lower bookings. So many factors are likely to further spike the prices in quarter 1 of next financial year. One is the opening of the schools and colleges, which constitute almost 60% of writing, printing segment demand side, which was line closed for the whole year. So once that opens, you can imagine that, that demand is likely to come in any case, number one. Number two, is the increase in the pulp prices internationally by almost 30% to 40%. Number three, with the increase in pulp prices, both hardwood and softwood, the imported paper that was coming into India that price has gone up significantly. If earlier, it was $650 a tonne, now it is near anything between $850 to $900 a tonne. Now I say that. And fourthly, there is a steep increase in the prices of the newsprint also. You will be surprised to -- you might have already heard also that I was just checking with one of the mills. They said, this quarter, they are trying to sell newsprint at a price of INR 40,000 a tonne delivered in Punjab itself. So which means if newsprint realization is INR 45,000 a tonne ex mill, the writing printing price gap is minimum INR 10,000 a tonne, it should be anywhere near INR 55,000 a tonne. Because most of the mills, newsprint mills, which have shifted to writing and printing because of very, very low newsprint prices, they will again shift back to newsprint. And that demand of writing and printing will be fulfilled by the remaining players. So so many of these factors are likely to keep this spike up and as I said earlier, it is like in share markets, the V formation. So this is likely to go very steep I think for throughout the next financial year. And next financial year, we are very, very optimistic. We should be doing almost similar to '19, '20 or even better than that.

Absolutely, absolutely. So I was getting but that only I think you answered it beforehand that the prices of newsprint has started going up. And sir, just a follow-up on that. So I think if assuming that the schools and colleges open and get normalized next year, and you have already expanded your capacity, which will come on stream latest by June. So you will be penetrating more of the textbook boards because I think you've already started moving -- expanding your textbook board coverage. So would you be -- is that the right expectation from you?

Yes. We will not be starting -- and will be mechanically completing and mechanical trials will definitely begin in June, July, and commercial production may take another 1 or 2 months. So for next year, I am taking 6 months production into my final numbers, number one. Number two, presently, as I have been telling in my past calls also, 2 segments, which are high value, and high growth segment, 1 is Copier paper; and second is Paper cup stock, the tea cups or Coca-Cola cups that we get on the airports and bus stands and everywhere. So those 2 segments, we have been trying to increase our sales in those segments because growth is very, very fast in these segments. So these are also made on the same machine where we make textbook paper. So when we increase these 2 in the present year, we have to sacrifice some of the government sales. So once we start our new machine, the Copier paper and the Paper cup stock item, both these will be shifted to be -- will be shifted on PM4, and we will be giving more focus for supplying higher quantity to textbook board made from PM3. So our share in textbook segment is likely to increase in future. Yes, you are right to that extent.

Sure. And sir, 1 last question from my side. So in spite of lower realization, but we have been maintaining our margin. So is that -- I mean, of course, there is some positive tailwind from raw material costs, but still from -- you had a drag from the operating leverage side. So sir, how have you managed this cost in spite of a negative operating leverage, if you could just explain, apart from raw materials?

Yes. In raw material, I will be very specific. So we have a saving of -- if I add raw material, chemical both, the net savings that we had in the 9 months was almost -- we were 24% less, 23.73%, and we spent INR 52 crore less on these in real number. And second, the major thing is the fuel and power consumption. There we saved almost 21% lesser consumption. And in specific number, it was INR 13 crores. So these 2 segments, we were able to save INR 65 crores, which are the 2 main -- and then administrative expenses also. So these are the main -- earlier administrative expenses were over [ INR 1,000 ]. And in this -- these 9 months, it is almost [ INR 734 ] only. So these are 2, 3 segments where we could save and maintain the EBITDA that -- and did better than most of our peers in the industry, I would say better than everybody, even JK and all, the big players, yes.

Absolutely. And sir, 1 more question. So the way I understand the way the pricing is moving, I'm sure there will be some uptick in your raw material as well, and even some of the chemical prices are going up. But still, if I do a rough back-of-the-envelope calculation, you will -- actually, you still have a scope to expand margin, maybe not in 4Q, but maybe going ahead in Q1 or Q2 of next year, if the price trajectory of the realization pans out the way at least you spoke, would that assessment be correct?

Yes, definitely. If you look at the EBITDA comparison for EBITDA that we had in '19, '20, it was almost near INR 12,000 a tonne. So which is presently anywhere around INR 7,400 or INR 7,500. So even in the last quarter, if I am able to get a better realization of almost INR 4,000 a tonne, which is assured based on the contracted volume that I already have that I'm going to execute. So my EBITDA, even in the last quarter may come anywhere near the peak EBITDA of the last financial year. So far, raw material prices, we have been able to control, rather we are further -- we are able to reduce wheat stock prices in March, April because new crop also comes up after April 15. So in anticipation, once farmer knows new crop will come in April, so whatever the stock they have kept with them, they try to dispose it off. So earlier, if we have been buying which is at 30 -- INR 3,700 a tonne. Now we are -- our present day rate is INR 3,200 a tonne. So we are further saving on the raw material. Our fuel prices was so far controlled. But since rice milling season is nearing the end by March, so it may go up by INR 500 or INR 1,000 a tonne in the coming quarters. But definitely, our margin -- EBITDA margin will be equal to or more than whatever EBITDA margin we had in the last financial year 2019-'20, which is almost plus INR 12,000 a tonne.

Sure, sir. And this is -- just wanted to add on, and this is even after there is some adverse change in the mix, but still, you are able to maintain that. So if the mix comes normalizes, that the mix itself will lend you more support. Is that understanding correct?

What -- sorry, I didn't know what kind of mix you are talking?

I mean product mix. So higher value-added products was slightly lower, I mean.

Yes. I am presuming all other things, they remain the same. The raw material remains the same on averagely. And far -- once we go for new machines, the price for that product will be much higher as we have been telling time and [ year ]. You are right for that. Yes, yes. So that price will be almost INR 5,000 to INR 10,000 extra than the price we realize for our existing production. Because that will be 100% good pace product. Yes. You are right.

So your 4Q performance, the margin will be without the benefit of that, that is...

Yes, exactly. Exactly.

[Operator Instructions] The next question is a follow-up from the line of Varshit Shah from Emkay Global.

Sir, 1 more question, a more broader question on the industry. So I think a lot of the mills are still unviable at the current price point of around -- even if you like add-on around INR 50,000 a tonne. So do you see that the price needs to move up for some of these mills to get viable, for example, JK Sirpur Mills also have recently, they started some production, but they have not been able to ramp up. We're not asking specific comments on any competitors. But just to get a sense that the prices have to move up for some of these to become viable. Is that the right way to understand?

Yes. For being viable, I think you know better than me, the -- this is price going up is being restable at least is one thing. And then economies of scale and then how we control our cost, how we are able to get higher yields, higher savings in terms of energy and water consumption, which is the major contribution -- contributor to the cost of the paper. So all those factors, and whether if you have in-house co-generation facility to meet your 100% power needs where you get power at almost INR 2.5 a unit against a normal power cost of INR 7.5 a unit, a saving of almost -- if you are using 1,200 units per tonne of paper in an integrated unit -- integrated mill, so you save almost INR 5,000 to INR 6,000 a tonne in power itself. So similarly, if you have soda recovery matching to the full capacity of your pulping, so you are able to save another INR 6,000 a tonne there in the casting. So most of the mills, our peers, they are already going into soda recovery like 2, 3 mills in Punjab, then in UP, Uttarakhand area, and people are trying to match their pulping capacity, black liquor generation from the pulp and the capability of the soda recovery to handle that total black liquor. So even if 10% black liquor goes out, that is a headache in terms of pollution, and number two, adds to our cost also. So because caustic is the major chemical that we use. So if we have soda recovery, we use this 10%, we recover 90% to 95% from the affluent itself. So all these factors, they lead to economy, but definitely to work and with so much capital investment, we have to have lucrative prices also where we are able to -- yes, set off the debt and make some money, promoters can also make money for their shareholders.

[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to Mr. R.K. Bhandari for closing comments.

Okay. Thank you, everyone. Thanks for your interest and time. Once again, thank you. Bye-bye.

Thank you. On behalf of Satia Industry [Audio Gap]