Solar Industries India Limited (SOLARINDS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Solar Industries India Limited Q3 FY '20 Earnings Conference Call hosted by BOB Capital Markets Limited. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Rohit Ahuja of BOB Capital Markets. Thank you, and over to you, sir.

Hi, everyone. Thanks for logging in. I welcome you all to Solar Industries Post Results Conference Call for Q3 FY '20. I welcome from the management, Mr. Manish Nuwal, MD and CEO, Mr. Nilesh Panpaliya, Group CFO; and Mr. Suresh Menon, Executive Director. I now hand over the floor to the management for introductory comments, and then we can start with the Q&A. Thank you.

So very good afternoon to all the valued investors, well-wishers and potential investors of Solar Industries India Limited. On behalf of Solar Industries, I Nilesh Panpaliya, CFO, welcome you all to the earnings call for Q3 for the financial year 2019/2020. I would like to remind you that during the call, we might make projections or other forward-looking statements regarding future events and about future financial performance. Please remember that such statements are only predictions. Actual events or results may differ materially. And our website will be updated with all the relevant information from time to time. So to begin with, I would request our Managing Director and CEO, Mr. Manish Nuwal, for his comments on the company's performance for this quarter.

A very good afternoon, everyone. Monsoon this year has surprised one and all. It was initially predicted well below normal but finished with excess rain, not just for the year, but highest in last 25 years. Excess and prolonged monsoon affected mining, infrastructure and well sinking activities. Very heavy rainfall in Eastern, Central and Northern part of India had a major impact on the sale of packaged explosives as well sinking operations were totally stopped. The demand in this segment will continue to be muted in the fourth quarter due to continued unseasonal rains. Coal India's monthly production dropped to a record low as the heaviest rains in 25 years flooded mines and hindered shipments. And as a result, the total coal production was down substantially in this third quarter. However, there has been an uptick in the Coal India production in December 2019 and January 2020, hence, should see some improvement in the fourth quarter. The follow-up from trade tensions across major economies, most notably the U.S. and China, political uncertainties and a slowing Chinese and Indian economy, negatively affected global growth. Industrial production, market sentiments and our operations in Turkey is a major fall out of that. Coming to defense. We have the order book of INR 377 crores, but the delivery schedules have been extended by the customers, resulting in lower revenues in this quarter. Under government's program of indigenization for the best defense procurement, our defense revenue will certainly go up once the RFP under Make in India get finalized. We have also participated in RFP for multi-mode hand grenades and Pinaka rockets, along with few other products. Though government has been articulating the need to involve the private sector in defense for a long time, but progress is quite slow. But we are hopeful of achieving FY '20 revenue guidance of INR 300 crores in FY '21. Though we are very confident of pickup in domestic economic activities, led by revival in investment cycles, higher coal production, higher CapEx spending announced in the budget '21, but continued unseasonal range global slowdown and the recent coronavirus threat are posing risk in the near term. But our team is very well-focused, making all the efforts to meet these challenges. Now I will request Mr. Nilesh to share the financial details of quarter 3 in details to you all. Thank you.

Thank you. So coming to the third quarter financial numbers. In the third quarter, our consolidated revenue was down by 14%, that is INR 561 crores from INR 653 crores. Due to extended rainfall in the third quarter, our domestic volume was down by 10%, that is from 95,719 metric tonnes to 86,386 metric tonnes. Our domestic explosives revenues were low by 21%, that is from INR 353 crores to INR 278 crores on account of fall in ammonium nitrate prices, which resulted in fall of the realization of explosives prices as well. However, during the period, the initiating system revenue grew by 17%, that is from INR 63 crores to INR 74 crores. Our export and overseas revenue stood at INR 222 crores compared to INR 239 crores. That is a decrease of 7.45%. This was because there was an overall fall in the commodity prices globally, which resulted in lower revenues in the countries we operate. Another reason is on account of translational loss of INR 13 crores, which were coupled with lower revenues from Turkey, which is facing slowdown -- which is facing economic slowdown. Now the revenue from defense is INR 26 crores in the current quarter compared to INR 41 crores as we have mentioned earlier that the deliveries dates have been shifted by the customers. Coming on to raw material consumption. The same has decreased by 3.8%, that is from 57.4% to 53.60% as a percentage of sales when we compare year-on-year. This is on account of change in the product mix. The employee cost in absolute terms has increased from INR 46 crores to INR 49.41 crores, that is by 6%. However, it looks marginally higher as a percentage of sales in this quarter by 1.67% from 7.14% to 8.81%, that is on account of lower sales. The other expenses in absolute terms has reduced by 11% from INR 110 crores to INR 98 crores in the current quarter. However, as a percentage of sales, it seems to be increased from 16.86% to 17.39%. That is by 0.3% on account of lower sales. For the quarter, we report an EBITDA of INR 123 crores, which is 21.87%, up from 19.12% when we compare year-on-year basis, and is in line with our earlier 2 quarters, that is 21% plus. Just to remind you, in Q1, it was 21%, and in Q2, it was 22.28%. Interest and finance cost is almost same in absolute numbers, that is INR 14.64 crores in Q3 FY '19 compared to INR 14.11 crores in current quarter last year. However, the same has increased by 0.27% from 2.24% to 2.51% as a percentage of sales when we compare year-on-year. Depreciation in absolute terms, it has increased by 47% from INR 14 crores to INR 23 crores. However, as a percentage of sales, it has increased from 2.29% to 3.93%, that is by 1.64% due to increased CapEx in the previous year. The profit after-tax margin stands at 15.43% compared to 14.58%. When we compare on year-on-year basis, the current tax rate for the quarter is 25% as the tax rates were reduced because of the budgeted provision of 2019. The net profit is down by 11.7% year-on-year. That is INR 65 crores compared to INR 73.67 crores. However, the net profit margins have improved by 0.31% that is from 11.28% to 11.59%. Coming to the CapEx. The total CapEx in Q3 FY '20 is INR 65 crores. We have a planned CapEx of INR 250 crores for the year. The total order book is INR 1,396 crores, which comprises orders from Coal India around INR 840 crores, Singareni Collieries around INR 180 crores and defense order book of INR 377 crores. So these are all the updates for the quarter. Now we would be happy to take questions, your comments and suggestions. So back to the operator. Thank you.

[Operator Instructions] We have our first question from the line of [ Nilesh Soni ] from IndiaNivesh Securities.

Sir, I have couple of questions. Sir, can you please give the split between the export and the international business revenue for Q3 as well as for FY -- 9-month FY '20?

So our total exports for the quarter is around INR 52 crores. And our overseas turnover revenue is around INR 170 crores.

INR 170 crores, correct?

Yes.

And for 9 months, sir, if you can give that?

So our 9-month exports is around INR 118 crores, and our overseas revenue is INR 502 crores.

INR 502 crores. Okay, sir. And sir, one more question. Sir, can you please give -- I mean, quantify, what orders you won from the defense space? What all orders you won from the defense space in Q3 as well as for 9 months?

So as we have mentioned earlier that we have orders from all the sectors that is high energy materials, we have from delivery system, pyros, igniters fuses. So it's a complete basket of all these products.

We have next question from the line of Shreyas Bhukhanwala from Canara Robeco Mutual Funds.

Sir, couple of questions. So you did mention that Q3 was largely hampered by your -- by rains. So how do you -- how are you seeing infra segment performing in Q4?

So typically, as we have mentioned that because of this waterlogging and this thing, the well-sinking activities, which is a critical part of infra, we'll still have a subdued demand from this sector. And we do expect that now probably the housing and the road construction activity should eventually pick up.

Okay. But are you seeing some time...

That will be from March onwards. January because we have still witnessed the rainfall.

Okay. Sir, secondly, like considering 9 months degrowth of around 6% in revenues. How do we see full year revenue growth?

So it will be, earlier to our projections, this will be down by almost 7% to 8%.

On the full year basis as well?

Yes.

Okay. Sir, thirdly, on the defense side. So how much are we targeting for this year on the revenue side?

It will be somewhere close to around INR 150 crores to INR 160 crores.

Okay. Okay. Sir, on the order book side, on the Coal India, have you seen any downsizing on the ordering, order book basically? Because last quarter, if I see our order book was almost INR 1,070 crores, which has come down to INR 840 crores?

Yes. So it is basically a running contract. But now because of the change in this thing, prices of the ammonium nitrate, the prices have come down. So because of that effect, we are seeing it.

Okay. And how much has been the price change in ammonia were, if I see sequentially?

The price change in ammonium nitrate has been almost 8%.

Okay, quarter-on-quarter?

Yes.

Okay. And lastly, on the translation loss, you said it was INR 13 crores this quarter. If you can just help me how much was the same in last year same quarter and 9 months, if you can just help me with that?

Yes. So for the 9 months, we have lost an total revenue of INR 56 crores because of translation.

Okay. And how much it would be, maybe if you can just guide on the 9-month last year?

Last year 9 months. I'll give you that figure in some time.

[Operator Instructions] We have next question from the line of Jasdeep Walia from Infina Finance.

Sir, do you provide the blasting services as well? If yes, what's the contribution to sales?

Yes, blasting services we are providing only in Turkey, not in India.

Could you describe your services, sir. What all do you provide?

Full blasting services.

Got it.

We load the hole and fire the shot, the full blasting services. We have not done drilling so far.

Okay. And sir, I was just going through the presentation of the global competitor of yours Orica. They have started providing digitally enabled blasting services, something like wireless blasting, et cetera, and that component of the revenue is growing really fast. So are you also investing in that segment?

Yes, we are also getting into that segment. That's still in the development stage today. I think it'll take about a year to get back -- get -- to reach on that. For getting a digital detonator -- wireless detonators.

Got it. And sir, all your global competitors already provide that service?

No. The market is yet to develop in that segment. Though competitors may be claiming that they have done, they are also in the trial stage.

Okay. And you guys would launch it commercially by next -- end of next year?

Maybe a 1, 1.5 years probably. We are still in the development phase.

[Operator Instructions] We have next question from the line of Santosh Yellapu from IndiaNivesh.

I had a couple of questions here. First question, if I -- as sir said, if you award Aspire to have 7% to 8% growth for the full year. And if we do the back of the revenue calculation, then we need to do a 40% kind of growth for Q4. So if we go by the first 1, 2 -- first 1.5, 45 days of the quarter, have you got those kind of fillers that we can attain this kind of growth?

Santosh, what we mentioned was, that will be a negative growth, means it will be down by...

Okay. Okay. My mistake, my mistake, sir, I'm sorry. I got it. Sir, second thing, I just want to get a sense how much has the ammonium nitrate prices fallen Y-o-Y? Just a percentage sense because if I see the degrowth in the realization, that is 13% Y-o-Y. Despite having such low growth across the -- all the segments in the domestic market, our volumes have also grown. So did we resort to any kind of aggressive discounting in housing and infra and despite that also we ended up with the volume degrowth?

So the ammonium nitrate pricing has gone down by 8%.

Okay. Okay. Okay. And sir, lastly, what's the rationale for an increase in the long-term borrowings we see in the domestic segment? And similarly, for the stretch in the working capital cycle of the overseas business, especially in the scenario, when we are not -- our business is not growing?

The business is not growing, but since the economic conditions there have slowed down, so we are thinking like, there is some delay in getting that payment cycle as well, but we have taken various measures to ensure that we are -- better days are well as per our given guidelines. And similar situation is there in local market as well, even -- especially Coal India, where we are -- and even Singareni. So there, whatever were the earlier payment term, now there is a delay. So this was a short-term challenge, and we are hopeful that by this March end, things will be back to their original levels.

And then one last question, if I may. So how do you see the domestic market performance? That means you just said that a few minutes back that the road in in infra segment should start picking up in -- from March onwards. But the Coal India expects similar kind of volume what they did last year. So where do we get the visibility that the revival would happen and it would contribute to our numbers?

I think first let us talk about Coal India. Currently, their production is down compared to last year. As already explained to you due to the unseasonal rains, heavy flooding in most of the mines, the production has dropped. But Coal India has taken a target of 660 million tonnes for this year, which they will not be achieving. They'll be down by about 7%, 8%. Next year's target has already given to them by the government of 720 million tonnes. They have already started procuring high capacity equipment for about INR 7,000 crores this year. They are already gone in for increasing the rate availability because evacuation was one of the major problems. And INR 700 crores have been spent on that to get additional rates. The railway lines in Southeastern Coal Fields and in Orissa that Mahanadi Coal Fields have already been completed, which will release about 200 million tonnes of coal. All in all, Coal India has to see that the imports of coal is restricted to 200 million tonnes. Currently, we are importing 234 million tonnes of coal at a foreign exchange out growth of INR 1.6 lakh crores. So from -- ministry has mandated that this should come down or at best it should not increase. We expect the coal demand to pick up the powers have come -- the generation has started increasing, power consumption has started increasing. In January, we have seen that about 3.7% increase is there in the power demands. So we expect that 4.5% to 5% power demand will increase in the coming years. So this will save us a big opportunity. All as already said in baring the short-term glitches that we are having due to coronavirus and flooding of states, this and the coal segment should look up in the next 2, 3 years, and they have mandated to produce 1 million tonnes by '23, '24. The infrastructure segment side, the road construction is a major trust area. We are only about 2.5% of our roads are 4-lane roads. We are gathering about 135,000 kilometers of 4-lane and a 5.7 million kilometers of road. The government has plans to do 2 lakh kilometers of roadways in the next 5 years. So this should see the rate of roads 4-lane production going up by about 10,000 to 12,000 for every year. This will give a big boost to the cartridge explosives market. The major depression this year we had is in well sinking operations. As you know, the cartridge explosives and detonators are used largely in the well-sinking segment. Because of the very heavy monsoons, most of the well-sinking operations in the Western Coast, particularly where the water tables are very low, have been postponed. We hope that with the normalcy coming in, the well sinking operations will start operating after the next monsoon. Every time there is a good monsoon, we get open wells and the villages are filled. And therefore, the need for deepening is not there. Once -- after a good summer, the water dries up, and then they have to do the blasting to generate sources of water from the underlying springs. So these are areas where we find that if you look at the budget, INR 1.7 lakh crores has been allocated for transport infrastructure, which is a very big amount allocated. And hopefully, we see that this could improve. They have extended the release given to the housing sector by 1 more year. We should see the housing construction improve as well. Cement Manufacturing Association has forecasted a growth of 6.5% for the next 2 years on cement demand. And that should -- it will reflect in our growth as well. So we are quite positive about the next 3, 4 years cycle. We should look at -- we should see that the things will be back up to our normal growth patterns. Thank you.

Okay. Sir, and do we see any slowdown because of the global slowdown or global concerns? Do we see the Ghana and Australia plants getting delayed by any chance?

The plant is not likely to get delayed, the plant will be ready by March end in Ghana and probably by September in Australia.

We have next question from the line of [ Shithish Chitransh ], individual investor.

So sir, I've been investing into the company and I've been tracking the company since a long time. And if I look at the previous year -- previous quarter's con call, then there were several reasons that I found have continued into this quarter as well. Please do correct me if I'm wrong. So last quarter, it was said that the rainfall has impacted. The economic conditions domestically was not good. The U.S.-China trade tension and the revenue from Turkey was quite adverse. This quarter, the Coal India production was also pretty low. So the only thing that has added to the adversity was the Coal India production, right? Anything else that has reduced the volume and revenue?

Yes. So definitely, as one of the factors we said was Coal India. Secondly, what we mentioned was because of this heavy rainfall, there has been waterlogging, and the well-sinking activities, which is a part of this infrastructure activities, where a lot of explosives are used. That has -- was completely not there. Demand was not there. And even the commodity prices were down. So that also resulted in lower realization, which again resulted. And even if you talk about defense revenue also, that also came down because of the delay in the orders by the customers. So there are -- these -- all these factors, which has affected the quarter. And earlier, like we said Q3 is normally is a monsoon quarter where demands are low. But Q3 is now these 2 months, both October and November, we did sales trend and even in this part of Maharashtra, where they're [indiscernible] and January was one of the wettest month like what they sold in 15 years. So there was higher rainfall. So these parameters are beyond our control.

Right. So -- and sir, from the -- there was a supply order received from ISRO and you'd also like invested into this start-up or that was launching satellites. So is there any growth regarding maybe this time?

So yes, we have made that investment in the start-up of -- and we also received the first order from them, and we are developing the Propellants. And as far as, that we will give in the first quarter of -- by of 2021. And as far as this -- Brahmos is concerned, so whatever Propellants we've supplied them, they have trial -- flight trails have concluded successfully, and we have also received supply orders for Brahmos Propellants.

Okay. Sir, I will just follow it up with the tradition that [Technical Difficulty] are on the basis of [Technical Difficulty]

Voice is not clear. Can you please repeat?

Sorry to interrupt, sir. You voice is not very clear. Please use the handset close to your mouth please.

Can you hear me?

Yes. It is good.

Yes. So sir, just wanted to confirm if the sales that was started and sir, then you have this same being consolidated into these numbers of Q3?

Yes.

We have next question from the line of Shreyas Bhukhanwala from Canara Robeco Mutual Fund.

Sir, a couple of questions. On the well sinking, you said, so how much proportion would be well sinking in our infra, can you guide us?

So if infra was around 30%, 35% of our total revenue, 1/3 of that is well sinking activities.

Okay. Okay. Sir, secondly, on the Coal India side. So last quarter, we were expecting some incremental orders to come in from Coal India. So have they fructified? Or are we seeing that coming in this quarter?

At same level.

Okay. So the orders are at same level. There are no further orders flowing in as of now.

But are the -- have we bidded? Or have we put in any tenders?

Yes, we had bidded, we have tendered. And it's now a part of the total order book, which we have mentioned.

Okay. So already we have received the incremental orders, which we are supposed to receive.

Yes.

Okay. Okay. Sir, thirdly, on the margin side. So I see gross margins have improved 300, 350 bps in -- if I'm not wrong you mentioned that is because of the product mix. Whereas I see in our domestic business, infra has actually not -- actually it has degrown wherein majority of the explosives used are packaged, which have higher margins. So is that because of the overseas business, we have seen better product mix there and better margins there?

It is because of increase in initiating systems sales both in domestic and as well as export markets.

Okay. So majorly because of the IS...

Yes. Yes.

How much was the growth in that? If you can just help me?

It was roughly around 17% growth.

70%?