Satia Industries Limited (539201) Earnings Call Transcript & Summary

On behalf of Satia Industries Limited, I welcome you to the Q3 and 9 Months FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Runjhun Jain from EY Investor Relations. Thank you, and over to you, ma'am.

Thank you, Manav. Good afternoon, everyone. We hope you would have got the chance to review the results, which are available on exchanges and on our company's website. To discuss the company's performance in the quarter gone by, we have with us Mr. R.K. Bhandari, Joint Managing Director; and Mr. Rachit Nagpal, Chief Financial Officer of the company. Before we proceed with the call, a disclaimer, please do note that anything said on this call during the interaction and/or in our collaterals, which reflects the outlook towards the future, or which should be taken as a certain forward-looking statement must be viewed in condition with the risk the company faces and may not be updated from time to time. More details can be found on the company's website. Should you have any queries or need any further information at the end of this call, you can reach out to us on the e-mail addresses mentioned in the company's earnings presentation. With that, I would now like to hand over the call to Mr. Rachit Nagpal. Thank you, and over to you, sir.

Thank you, Runjhun. Good afternoon, everyone, and thank you for joining us today. Before we discuss the financial performance for the quarter, let me begin by setting the context for the macro overview and its impact on the industry. The industry witnessed a challenging quarter, including subdued demand, declining prices and increased imports fueled by the Red Sea crisis. This situation has led to a shortfall in exports by domestic companies disrupting the supply chain equilibrium and impacting the overall industrial revenue growth. In addition, the delay in full implementation of the new education policy has led textbook vendors to adopt a cautious approach, vary of potential syllabus changes affecting inventory levels. These headwinds have had an impact on our financials for the quarter, resulting in a 10% year-on-year decline in revenues to INR 4,357 million. However, we achieved a 17% sequential revenue growth that highlights our brand strength and operational capabilities. Despite the challenging environment, we were able to record a moderate growth in volumes in both year-on-year and quarter-on-quarter basis. Our financial resilience comes from a 40% to 50% revenue contribution from State Textbook Board, acting as a natural hedge and reflected in our improved gross margin. Additionally, during the quarter, prices of wheat straws have also come down, safeguarding our gross margin, which improved to 55.2% during Q3 financial year '24 as compared to 52.9% same period last year. Our EBITDA margins remained healthy at 21.2% for the quarter and at 25.4% for 9 months financial year '24. Our year-to-year PAT has grown by 18% to INR 1,717 million, with 260 bps improvement in net profit margin. On the operational front, we have successfully done modernization of all the 6 digesters to thereby marking the completion of our backward integration chain. This will reduce steam consumption and increase wood pulping efficiency with full benefits expected in financial year '25. Looking ahead, we believe it will take another 1, 2 quarters for the demand-supply mismatch to normalize. Until then, we expect the industry to face challenges at lower prices. However, given our strong foothold in the market, especially with State Textbook Board, we continue to maintain our guidance of 200 bps improvement in EBITDA in financial year '24 over financial year '23. We remain committed to financial prudence, having prepaid around INR 65 crores in debt during 9 months financial year '24 on back of our strong cash generation capabilities. With this, I open the floor for questions and answers. Thank you.

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to Ms. Runjhun Jain from EY Investors.

No, no, sir meanwhile there are questions coming, I just would like to ask something. If you can throw some light about the pricing environment? How it is going and how you see the industry is moving in that face? Sir, meanwhile, the questions are coming, I just would like -- if you can throw some light about how the pricing is moving up? And how the industry is facing the challenges and what is your outlook for the coming time?

At the moment, paper industry, which is under a lot of pressure, mainly, number one, from the dumping paper by overseas suppliers -- and because last year, the increase in imports has gone up by almost 45% to 50% already, that is one thing. And second, because of the delayed implementation of new education policy, the printing segment, they are on the cautious note, and publishing and printing is on the lower side. People are going cautious so that they are not left with printed books, which are not -- which may not be used in the next session. So because of these 2 factors, at the moment, the demand in the paper industry is dull and prices are under pressure. So overall, industry has been in a very many slow mode at the moment, though in Satia we are having enough orders. We have more than 30,000 plus orders with us, and we are good for another 3 months. We have no issues as far as the quantity that we are going to produce. But we have to keep the prices at par with our competitors so that our distributor network doesn't suffer. So that is how I explain the present condition in the market. So let's hope within next 2, 3 months, things improve for the betterment, yes.

Manav, you can take the next question.

We have our next question from the line of Parikshit Kabra from Pkeday Advisors.

I'll first just put a caveat that I'm very new to the industry, I'm just taking the opportunity to learn about it. Can you just first guide me as to while we are facing temporary headwinds, how -- what is the horizon in which you're thinking these headwinds will last? And what would be a long-term outlook for this business, let's say, 4 years, 5 years? How do you see this growing in that kind of time horizon?

Actually, in the long term, the situation is very optimistic because we have a very low per capita consumption, which is almost 17 to 18 kg. But if we look at the Asia average, it is almost 45% -- 45 kg per head, and Gulf countries, it is over 200 kg plus. And with government's stress on literacy, increasing literacy level in India, which is almost in the range of 75% to 80%, so there, too, we have a lot of margin and positive signal for increase in, especially writing and printing paper, in which segment we are. So future is very good. And with our economy growing and GDP growing at almost 6% to 7%, the same growth rate comes in the paper and paper board consumption also, but corresponding investment is a little slower to come. So existing players should not have any difficulty and should be making good margin in the coming period. So raw material prices, which were earlier under a lot of pressure, they were increasing like anything. Now they have started coming down also. Wheat straw prices, agro-based prices have started coming down. Waste paper prices are coming down. And similarly, wood prices have more or less stabilized. So that challenge is also now on the lower side. So within the next 4, 5 years, I think the outlook should be very, very positive. And with the new education policy coming in the implementation in the next 1 year -- 1 or 2 years, the demand is going to be bullish. There is no [indiscernible]. So that's how I see it, yes.

Understood. But what gives you this idea that we get dumped with excess inventory in India and so that crashes the prices? Again, as I said, I'm new to the industry, but I suspect this happens every few years, right? Is there any way to -- any solution that is coming up that will protect the industry from these kind of dumping?

On dumping because industry can only represent to the government only. So if we are having a policy where we import duty free paper from ASEAN countries, so industry can't do anything about it except representing to the government and making itself more and more competitive day after day, so that we are able to compete with them both in quality and in the pricing segment. And that is what most of the industry has been doing and still making good margins, as you might have seen because with lot of dumping, almost with 45%, 50% increase in imports, still we are able to maintain our EBITDA level of almost 20% to 25% in the industry. So I think it's not a bad performance, it's rather very good performance.

That's very interesting, sir. So basically, you're saying that even with the dumping, we are so much more cost efficient, that even though they are dumping at very low prices, we are able to still outsell them and maintain a margin of 20% to 25%. Is that a fair understanding?

Yes, because we are using agro-based raw material, which is almost 45% to 50% of our pulp furnish. So when we use that raw material, that is the cheapest in total furnish. If we compare it with the wood pulp, so it's cheaper by almost INR 20,000 a tonne. And if you compare it with the waste paper, it is almost cheaper by INR 15,000 a tonne. So that gives the mills with agro-based a competitive advantage.

Got it. Got it. Understood. And sir, how is the industry looking like within India? Is this a fairly fragmented industry? Is there a lot of unorganized play here?

Definitely, we have almost 550 to 600 units working. And the biggest player may be having a capacity of not more than 10%, the biggest player. While overseas, we have players who are almost 23%, 25% who are producing the total quantity to that extent. So definitely, in India, the capacities are on the lower side, yes.

Is there a reason for this to be the case? Why is it more consolidated abroad than in India?

It is the way the industry grows here. China was -- similarly, they had a lot of fragmented industry, but government there being dictatorship, they decided [Foreign Language] the units below this capacity we will shut them. And in India, the people -- the industry, which were in small, like, we were also small. We were making almost 6,000, 7,000, 8,000 tonnes paper way back in 80s. So we grew ourselves with time and now we are making over 200,000 tonnes every year. So because at a scale only you can have latest -- you can afford latest technologies, number one. And you can have soda recovery, which leads to the major tight competitiveness by recovering the caustic cost and co-generation. So these are the 3 things that industry has over a period of time, those who have adopted this, they are making good margins, and they are able to sustain the competition.

So then surely, we are -- India is also going through a phase of consolidation?

Consolidation, not in terms of amalgamation or acquisition, not that way, but industry is trying to strengthen itself by modernizing and increasing their capacity the way they can.

No. So, when I say consolidation, it could happen through acquisition or it could happen that the bigger guys are becoming bigger. And so the smaller guys are basically losing market share and getting bullied out of the market. And the big guys, the sophisticated players like you are getting bigger and bigger and bigger. So even maybe it's just organic consolidation, but it's consolidation nevertheless. Is that a fair statement?

You can call it that.

Okay. Sir, I can learn a lot more from you, but I just don't want to take up anyone else's chance. I will jump back in the queue if no one else is there.

[Operator Instructions] We have next question from the line of Nitin Gandhi from Inoquest Advisors Private Limited.

Yes. Can you share some thoughts on your eucalyptus plantation? What you plan? How existing residue is used? And how do you propose to go ahead with 1 lakh saplings and other things?

Pardon, I could not get your question. Will you please repeat the question?

I just wanted to know something more on your eucalyptus 540 acres plantation. How do you use existing residue? What is the costing of that? And how much more you propose to continue future for next 2, 3 years? And how much of supply -- so relating to eucalyptus, whatever you can share.

Yes, actually, this eucalyptus plantation started with the government policy of not allowing industry to discharge the water into any water body. So government came up with this idea, you plant eucalyptus tree, which is planted as per Karnal Technology. There is a soil study institute in Karnal, which did a study on this, saying, if we plant so many trees at such a gap on the barn and you have burrows where you feed the affluent, so a grown plant can in a day evaporate 120 M cube of water. So that was the basic idea in the beginning. So based on that, industry stopped discharging water into any water body, any drain or any canal and we started having our plantation. We started with almost with 100, 150 acres. But as we kept on increasing our capacity, today is over 200,000 tonnes. So now we are having almost 560 acres plus plantation where we have both eucalyptus plantation. And now recently, we have started doing even bamboo plantation. So in this area, we discharge our treated affluent water, which goes up through the stem of the eucalyptus plant and evaporates through the leaves in the atmosphere. So that way, we are able to, number one, meet the challenge of pollution control department. So we are not polluting any water body. Secondly, we get the raw material for our plant and the bigger plant -- the plants with bigger dia, we sell to the plywood industry also. So besides this, our own plantation, we are distributing every month, saplings to the farmers all around our industry villages so that farmers also plant these saplings wherever they have the space, either on the barns or edges of their fields or in the wasteland also. And we have contacts with them to buy back that wood from them. So that is the second part of the Project Green that we are implementing in our area. So value -- once we grow it for almost 4, 5 years, so then you get fair value for this, which is almost in the range of INR 8 to INR 9 a kg for the wood, yes.

And at present, it is meeting 100% of our requirements, right? Or with whatever expanded capacity or upgraded...

No, no. It is not meeting our requirements. Main requirement, the object is to handle the affluent only.

Correct.

So that is the side benefit that is accruing that is, number one, we are getting agriculture tax-free income. But it doesn't meet our 100% requirement. That is partial.

So how much it is meeting?

It's almost very marginal.

Less than 10%?

Maybe even less than that because our main furnish at the moment is we are mainly using bamboo in the Wood segment. Because if we are able to sell this wood at INR 9,000, INR 8,000, bamboo we are getting much cheaper. So we are using mainly bamboo and veneer based. And some quantity we are using eucalyptus wood, yes.

Okay. And with whatever CapEx is there, that's completed and you are expecting 2.5% increase in margin. So we'll be back to -- do you think that historic -- whatever FY '23 margins are there, that's achievable in the next 1 or 2 years?

As Rachit-ji already said that by the end of this year, we expect to improve our margins by almost 2% and EBITDA should be anywhere around INR 200 crores plus with INR 192 crores -- near INR 192 crores -- sorry, PAT. And EBITDA should be INR 400 crores plus, almost same as it was during the last year.

Right. And what do you expect for next year...?

Next year should be, I think, better with the new education policy coming and with the ups and downs that we saw this year because people were having high hopes a lot of demand will come with the new education policy. But the delay in that dampened the sentiment this year. And with the exports settling down to a reasonable level as we have seen now because people are -- traders are losing lots of money because of that. Because when they place the orders and the deliveries come almost after 2 months. And in the meantime, by the time, the deliveries come, the local prices, if they have come down, so it's a net-net loss to them. So people are also having second thought. So all things, I think, will lead to normalization of even imports in the coming time. So with that, I think next year should be better.

Okay. Regarding education policy, if at all it comes, as and when it comes, what are your estimates of the expected demand to shoot up? And what do you think that how the top 3 or 4 players of industry will get? And where do you stand?

With the change in the syllabus, the demand should be almost -- if normal growth in writing printing segment is 5% to 6%. So it should be more than 20%, 20% plus/minus. That is how I see it once the new education policy is there because all textbook boards will be reprinting all their books and private publishers, the guides, everything, all those things will be new publishing, new printing. So it should go up at least for a year or two almost by 15% to 20% in writing and printing especially.

[Operator Instructions] We have our next question from the line of Parikshit Kabra from Pkeday Advisors.

So what I've been noticing is that we don't seem to be generating much cash flows -- free cash flows over the years. We seem to be investing a lot into the fixed assets. And I'm just wondering how long is -- how long are we going to keep investing in CapEx? When are we going to start generating free cash flows? And is there a plan to start giving out dividends at some point?

No, we are already giving dividend and management, given in this Board meeting, we had a fair discussion on that. And if we have the present level of PAT margins and distributable profit, so management intends to maintain anywhere between 30% to 40% dividend at a minimum every year.

When do you plan to start that?

Pardon?

Sorry, you're saying if you are able to maintain this level of PAT, then you want to give out 30% to 40% as dividend. When do you want to do that by?

We are already doing it, and we will continue even in this year. Yes.

Okay. For some reason, it's not showing that there is a dividend payout. It's showing that all the money is going back into fixed asset purchases.

No, I think Rachit-ji, you can better tell this [Foreign Language] how much dividend...

Yes, we have already paid INR 10 crores interim dividend this year. And yes, I agree that we are investing more into fixed assets. Senior management has the plans for backward integration like we have invested in boiler, which is coming up in this year. So going forward, like we don't have any major CapEx plan, so we have free cash flows in the coming years and we will stick to the dividend policy, which Bhandari Saab has mentioned.

Got it. And based on the current CapEx that you have done, I noticed that FY '23, we doubled -- more than doubled our revenue. Based on the current CapEx that we have done, how much more headroom do we have? I understand there is a price fluctuation that has to be built in. But assuming on current prices, how much more headroom in terms of revenue growth do we have potential of?

So the CapEx which we have done in this year, so like there is no such CapEx, which attribute more to the top line. It is more about backward integration only. So you will see the jump in the EBITDA margin this year as compared to the last year and still backward integration is going on, like we are going to install another multi-fuel boiler which is majorly on rice straw instead of rice husk. So you will see the EBITDA margin growth in the coming years so the revenue is more dependent on the NSR which is -- as Bhandari sir has mentioned, which is little down in this quarter. So yes, but still we've been able to achieve INR 1,700-plus million in this year.

Got it. Okay. So basically, the CapEx has been done to do backward integration, which will increase the EBITDA margin. So I noticed that the June quarter, the Q1 quarter this year, we had an EBITDA margin of 31%, and now we are at 21%. I'm assuming this is because of the pricing pressure. And so do we think that once the pricing pressure has gone, we'll be going back to 31% kind of levels?

Well, 31%, I would say we will try to achieve that, but first quarter was an exceptional quarter, I would say. So we can expect somewhere around 20% to 25%. That is a normal margin. I would say 25% is the average margin. So that is quite achievable.

Actually, the first quarter was the peak prices where prices were over average, was over INR 90,000 a tonne, which has now come down to anywhere between INR 75,000 to INR 80,000 a tonne. So that kind of margin, which we saw last year were exceptional. So normally, as we declare always, we should be always giving minimum consistent EBITDA margin of 22%, 23% plus/minus. That is the range in which we should be doing consistently. So here and there, if we have some good season, price-wise, then EBITDA may increase or we have some pressures from raw material side or fuel side, so within that range still we will be operating. And as far as the total, there is still margin for almost 10% increase. Because PM4 still hasn't gone to it's peak level of 300 tonnes per day. It is now running almost at almost 200 something per day. So that production, 10%, we should be achieving plus next year by all means. So that is the target. And if prices remain the same, minimum 10% increase in the top line even at the current prices should be there.

Got it. And there are 2 thoughts on my mind, sir. I noticed that in FY '19, FY '20 also and '21 also, you were already at a 22% EBITDA margin. If we are saying that the new CapEx has allowed us to do backward integration and hence, increased our EBITDA margins, I'm surprised that we're saying that it will be around the same even post it.

Yes. Because the other factors -- there are so many factors. The wood prices which are -- which in financial year '20 were anywhere around INR 5,000 to INR 6,000 a tonne, they went up to almost by INR 9,000 a tonne. So that 40%, 50% increase was absorbed because we had the sense of backward integration. So all those things you not only to make money, to make yourself more resilient. I hope you will understand it.

Got it, sir. Makes sense. And so -- but if you're expecting a 20% increase in overall market. If the education policy comes through. And of course, I'm sure we'll be aspiring to increase our market share with time. Do you think that you will be running out of your capacity, and I'm not talking about the backward integration capacity, I'm talking about overall capacity, within a year or two, if the education policy comes in and hence, would it require more investment?

Yes. We are planning to -- as we have announced even in the past to modernize our PM3 in the next financial year. And by modernizing that, we intend to reduce steam consumption, water consumption, power consumption per tonne of paper. And without any increase in pollution load, we intend to increase our production capacity also. So from today's level of 600 tonnes, we intend to raise it to the level of 700 tonnes per day capacity level. And we are already working on that plan. And once it is finalized, and we get necessary permissions, we will go ahead with that, yes.

Got it. And the 600 tonnes that we currently have, what is the utilization, sir?

Our utilization is almost 90%. We would be doing 210,000 this year. So that means we'll be making 575. So it is almost 96%.

Got it, sir. So again, I'm really sorry to repeat this, but it feels like you're 90% capacity and you will take at least a year or so to increase it by another 10% and you're expecting a 20% increase in market if the policy comes through. Won't we be ill prepared to grab the opportunity?

If you want to increase your capacity, the minimum lead time in paper industry is 3 to 4 years. It takes you 1 and 2 years, almost 1.5 years to almost get the environment clearance for that. And you cannot do anything before that. So lead time is very long in this industry being in the red category. So what you can do best is without increasing pollution load, so whatever you can do and get early permissions, so that is the way to go, yes.

Got it, sir. And sir, what is the defensibility in these -- the natural hedge, the state books that we supply, the contracts that we have, what is the defensibility of those contracts? What makes us sure we won't lose them?

Because we have been doing this almost for the last 25 years, and we have been continuing with that. So still, I think we'll be getting that. So that is enough proof in itself that it is consistent, I think.

Got it. And sir, my last question is that among the sophisticated players, such as yourself, what would be the differentiation? Is this a cost leadership industry? Or is there an element of distribution is the strength? Or is it the product differentiation is there? How do we differentiate ourselves?

Yes. Definitely, all factors, they are -- they make the leaders. Number one is the quality of the product and the range that we give to the industry and then the cost competitiveness and technology adaptation that we have done so that consumption of power, steam, which are very costly. And the yields are good. You have good recovery boilers so your margins there are very important. So all this and the strong distribution network also besides government segment, if we are, let's say, giving almost 40%, 80,000 tonnes to the government, so we are giving 120,000 tonnes plus to the market also, which is distributed through our network of almost 100 distributors throughout India. So it's -- altogether that make a good player, yes.

But sir, would you say one as the most important, any one of them?

I would say, quality should be the main thing, yes.

So this is -- you're saying it's much more focused on quality than cost?

See cost competitiveness with the quality you have to maintain the -- that's what I said earlier because everything is important. No, no, you asked for one, so I gave you one.

Yes. Understood sir. Fair enough. Thank you so much for your time. Really appreciate it.

[Operator Instructions] We have a next question from the line of Nitin Gandhi from Inoquest Advisors.

Sir, this 560 acres of eucalyptus, which we are having, who is owning that land?

Part of the land is company owned, and the rest is owned by long lease.

So how much is owned by the company?

Company has almost 10% to 20% of the land in different areas, and 80% is on the long lease.

Okay. And you propose to keep adding some 2, 3 acres like this every alternate year or something? Because your requirement will keep growing.

Yes, yes, because whatever land we get. So any farmer who wants to be, "I want to take back my land", we'll keep it free. We just uproot the trees and keep it free for 1 year, plant the normal crop, wheat or rice and then hand over in the original condition that we took it from him. And whatever new offers that we keep getting, we'll keep on taking that. So that process is continued. Yes.

When was the last land added by us? Did we acquire anything?

Yes, maybe 2, 3 months -- every 2, 3 months, some land is either taken over or given back. Yes.

So when you give back, how is it accounting happens?

When?

You said you give back also when they want, right?

Give back -- we pay just the lease amount, annual lease amount. So we after -- once the lease is over and farmer wants to take back. So there is nothing to give or thing.

There is no -- for cleanup or anything, no other charges or cost to be paid back to him.

No, no. We don't charge anything. We are -- in the agreement itself, it is written that we'll turn the land in the condition we have taken from them.

Okay, okay. Fine. And this -- regarding tax rate, can you share, will it -- how -- what are likely to be impact going forward for current year as well as next year?

Tax?

Tax rate.

Rachit-ji, I think you will...

Yes. So coming to the taxation, we are under MAT regime. So we are paying almost 17% tax on the book income, right? So we are availing deduction of 80IA, that is almost INR 125 crores to INR 150 crores and some deduction on agriculture income. So we are paying MAT.

Okay. And it will remain for MAT at least 3,4...

For the next 10 years, it will remain. That's I hope -- I believe it will remain the same.

That was the last question for today. And I now hand the conference over to the management for closing comments.

Yes. Thank you. Thank you, everybody, for the interest in the company. We hope to come up to your expectation in the coming time. Thank you. Thank you once again for your interest. Bye.

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