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

Ladies and gentlemen, good day, and welcome to Solar Industries Q1 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhijit Mitra from ICICI Securities. Thank you, and over to you, sir.

Yes. Thanks, operator, and good morning to all the participants, and thanks for joining in. We are hosting Solar Industries India Limited Q2 FY '22 results conference call. From the management, we have Mr. Manish Nuwal, CEO and MD; Mr. Suresh Menon, Executive Director; Mr. Moneesh Agrawal, Joint CFO; and Ms. Shalinee Mandhana, joint CFO. So without further ado, I'll hand it over to Mr. Manish Nuwal for his opening remarks. Over to you, Mr. Nuwal.

A very good morning, everyone, and welcome to Solar's First Quarter Investor Conference. My name is [ Aanchal ], and I would like to welcome all of you on behalf of Solar Industries India Listed. On the onset, let me recap. We might make projections or other forward-looking statements regarding future events and about future financial performance in this call. Please remember that such statements are only predictions. Actual events or results may differ materially. Our website will be updated with all relevant information concerning guidance. Now I will present CEO and MD, Mr. Manish Nuwal, for his comments on the company's performance for this quarter.

Good morning, everyone. We are pleased to inform you that your company has posted the highest-ever quarterly results in its entire history after an extremely challenging FY '21. Driven by the trust of our stakeholders, we grew at a phenomenal pace in Q1 FY '22, registering an all-time high revenue of INR 825 crores, an increase of 68% year-on-year. Our EBITDA at INR 176 crore registers an increase of 83% year-on-year. The highest-ever quarterly performance coming in such a challenging environment demonstrates the strength and commitment of the entire Solar team. Despite the COVID-related challenges, we ensured optimum production, meeting customers' expectations while maintaining higher standards of quality and safety in our facilities. Our sales have shown substantial increase in market segments like Coal India, Singareni, housing infra and international businesses. Delivery of MMHG have also started, giving a thrust to the defense business. Going forward, the government of India's strong policy support and outlays on large-scale infrastructure projects, housing, mining and providing a level playing field to domestic private sector in defense procurement augurs well for the company. Despite the challenges revolving around the COVID third wave and rising commodity prices, we remain confident of delivering results as per the guidance given for FY '22 by the company. Now I would hand over to [ Aanchal ] for a quick review on quarterly numbers. Thank you.

Thank you so much, sir. I'm extremely happy in presenting the numbers of the record-breaking preceding quarter. We grew at a fantastic base in quarter 1, production revenues of INR 825.23 crores, up 68% year-on-year; EBITDA at INR 175.52 crores, up by 83%, PAT at INR 100.85 crores, up by 129% year-on-year, demonstrating the strength of our business in challenging environment, where we witnessed localized micro lockdowns and restrictions being imposed rather than a nationwide lockdown last year. Now let's review with you the quarter intake. Explosives. The domestic model in the quarter are increased by 45%, that is 107,336 metric tons compared to 70,287 metric tons. And the mineralization of explosives is up by 20%, that is [ 41,161% ] compared to [ 34,240% ]. As such, explosives revenue was up by 74%, registering from INR 240.66 crores to INR 418.95 crores. Revenue from initiating systems was also up by 58%; that is from INR 60.89 crores to INR 96.37. Revenue from our segments. Revenue from CIL was up by 45% year-on-year at INR 142.66 crores compared to INR 98.38 crores. Revenue from non-CIL & Institutional is up by 112% year-on-year from INR 103.12 crores -- from INR 48.65 crores to INR 103.12 crores. Revenue from housing and infra was up by 102% year-on-year from 107.28% [sic] [ INR 107.28 crores ] to INR 216.86 crores. Export and overseas revenue grew by 51% year-on-year from INR 207.08 crores to INR 311.72 crores. Defense revenue was up by 99%; that is from INR 23.46 crores to INR 46.71. Coming to our raw materials. The raw material consumption year-on-year has increased by 1.7%, which is very marginal from 54.92% to 56.89% as a percentage of sales. In absolute terms, raw material cost is INR 469.46 crores against INR 269.73 crores. Coming to employee cost. It has decreased by 1.71% from 9.94% to 8.24% as a percentage of sales. In absolute terms, the cost is INR 67.98 crores against INR 48.84 crores. Coming to our other expenses. The other expenses have decreased by 2.72% from 16.42% to 13.70% as a percentage of sales. In absolute terms, other expenses is INR 113.07 crores against INR 80.64 crores. EBITDA. The EBITDA for the quarter is INR 175.52 crores, a 21.27% margin, compared to INR 95.81 crores at 19.51% margin. Interest cost. The interest has been decreased by 1.26% from 2.50% to 1.24%. In absolute terms, other cost is INR 10.26 crores against INR 12.30 crores year-on-year. Depreciation has increased from INR 22.79 crores to INR 25.18 crores on account of increased production in previous year. The profit before tax stands at 16.97% compared to 12.36%. Coming to our PAT. The net profit in absolute terms is up by 129% to INR 140.8 crores from INR 60.72 crores. Net profit margin is up by 3.27% to 12.22% compared to 8.95% in the previous year. Now we would be happy to take any questions, comments or suggestions that you may have. Over to you, Abhijit.

[Operator Instructions] We have a first question from the line of Sujit Jain from ASK Investment Managers.

Manish-ji and team, congratulations and complements on a very good set of numbers. I have a question on consol management around when I look at those numbers. Across all quarters, the raw material cost is far cheaper than what you will find in [indiscernible]. So the gross margins are very high. So just to put that in context, the gross margins are as high as 64%, 65%. And then obviously, most of these entities' expenditure is higher. Employee cost is higher as a percentage of sales compared to the stand-alone, and -- but yet the OCM margins are higher. So what explains this kind of high gross margin in overseas entities?

The main reason behind increase in margins in our other subsidiaries is increase in sales, and what we have been saying that sometimes there is always a lag between the base raw material price rise and the finished good prices. So whenever there is a lag, sometimes it happens that material prices or raw material consumption analysis will reflect that prices has gone up. But otherwise, by and large, it is in line with our normal business guidance or results, which we have been achieving over the last few years.

Sure. And South Africa and Australia, if you could spell the FY '21 full year profit or loss figures in that generally, where are we?

Sir, those records we'll be publishing our annual report, which will be released in a couple of days. You can see into those numbers.

Sure. But have they turned profitable in FY '21? And what is the growth [indiscernible] from there?

Yes. You can see in the annual results, and then we will comment on -- if there is any query from your side, we will address that.

What I'm trying to ask is that is there a further scope of improvement in margins in overseas entities, because these entities can turn profitable?

Yes, definitely. There will be improvement on -- definitely, there will be scope of improvement in margins once those subsidiaries will start delivering better results. And like we have been sharing that due to COVID, the rollover or expanding into the new customers in those entities was a big challenge. And now we see that in a couple of months, maybe 3 months or maybe 4 months down the line, we will be able to expand our footprint in those countries, and those will definitely help us to improve the margins.

And just to understand, and coming back to question one, is that the raw material by net sales in these entities is a much lower number compared to stand-alone. So what exactly is the difference between the products that we sell in India and we sell overseas in terms of raw material sourcing?

Yes. Basically, like our business is of manufacturing explosives and products, by and large, are bulk [indiscernible] package and initiating systems. So country-to-country, it depends on the logistic cost and the source of material. So there will be differences between those things. Otherwise, by and large, it is okay.

[Operator Instructions] The next question is from the line of Abhishek Ghosh from DSP Mutual Fund.

Hello? Am I audible? Hello?

Yes.

In the earlier conference call, you had alluded to a point that you [indiscernible] [ 30% ] in FY '22 and subsequent year growth of 20%. Strong performance in 1Q despite the second wave. Do you want to alter that guidance, sir? How should one look at it in terms of the [indiscernible] upward into that?

Yes. No doubt the quarter 1 results have been wonderful. But looking at the uncertainty of [indiscernible] with COVID and commodity rising prices and monsoons, we maintain the annual guidance at 30% plus.

Okay. And the other thing is you seem to have done a very good job as far as the other expenses are concerned. So just wanted to know, is there an element of some translation or currency element? Or is it a genuine effort of the cost initiative program that has been carried out as far as the company is concerned?

Yes. Some part is a change in product mix, and some part is on the resource optimization. And the third one, since the top line has increased, so no doubt the other expenses will decrease as a percentage of sales.

So this is sustainable going forward?

Yes.

Okay. And Manish, just one thing. You mentioned that you would probably give us some clarity as far as the capacity expansion in the domestic segment is concerned. Are you able to kind of crystallize on that? Or is it still WIP?

Yes. Like we have told in the last call that we wish to expand capacity, and we wish to expand the footprint, and accordingly, we are working on that to set up the 2 new plants in different parts of the country. Probably in next quarterly call, we will be able to share more on this point.

Okay. Okay. [ That's it ] from my side, but overall, if you look at it, generally, in the industry, there is a lot of disruption as far as the semi-organized or the unorganized players are concerned because of the increase in raw material prices, working capital management. Is that something that you are also witnessing in your segment of explosives? Because I think [indiscernible] there are a lot of smaller players, especially for explosives. So any color in that?

Your point is quite valid when we see the overall phenomena which we have been observing. Whenever there will be dynamic challenges or dynamic changes happening in the market, definitely the weaker players will be eliminated out, and COVID has definitely impacted one and all. But the stronger players or efficient players are thriving, and the weaker players are getting weaker. So that is what's happening in practically all industry segments, and we also believe that this phenomenon will come into the explosive industry as well.

So do you believe this can give you -- already, you have fair amount of pricing power, but that can give you with better pricing power in times to come ahead, at least in the bulk explosives?

We perceive this situation in a different manner. We don't think that it gives usual pricing power but definitely gives you an opportunity to increase your market presence. So that is what we are working on.

[Operator Instructions] The next question is from the line of Rohan Gupta from Edelweiss.

Congratulations, sir, on such a solid set of numbers in the current quarter. Sir, 2 to 3 questions from my side. Sir, first, you just mentioned that in the international market and even in the domestic market, we have seen some benefit coming from the rising commodity prices. Is there any inventory-led gains are there, which you can quantify in the current quarter?

No, we have not said that the commodity prices have helped us in these quarters or specifically in Q1. But I would like to explain that there is no significant impact of the commodity price rise on our quarterly numbers. But we have just, as a matter of caution, have said that the rising commodity prices definitely will impact us in a manner that our finished good prices may not increase in the same month or in the same quarter, but there can be some lag. That's why we have given that statement.

Okay. Sir, second question is on this -- given we are -- now have ambition of growing domestically as well as exports-wise and globally, do you have any plans going forward, and we have such a solid balance sheet, in terms of any backward integration planning to get into and to secure your raw material availability? Do you have, as a company, any such plans going forward, sir?

Yes. We agree that we have a strong balance sheet, and it is all because of our prudent financial practices. We will keep expanding our footprint in India and overseas market, and our main focus is on manufacturing and making these products and supplying to the mining industry and making products for the defense applications. As of now, we have no plans to enter into the backward zone, which is backward integration side may be a [ modern ] matter. We have no such plans.

Sir, coming on sourcing of AN, ammonium nitrate. Can you just quantify, sir, how much sourcing is happening domestically and how much we import?

Yes. By and large, 80% we are sourcing from the local market, and 20% is from the source, especially in Russia and Ukraine side.

And sir, out of the 80% local sourcing, which I believe that primarily will be coming from Deepak Fertilisers because they're the largest producer of AN, how much will be coming from them, sir, of this 80% sourcing locally?

Our basic sourcing is mainly from Deepak Fertilisers, GNFC and RCF.

Right. Sir, this 20% import which we are having, do you see that global logistics supply chain getting impacted because of the shipping issues? Are we facing any issues on this import of raw materials, which are coming from the global markets?

We have faced the impact of this disruption in global supply chain, especially in the Q3 and Q4 of the previous financial year. But now these things are well settled, and we don't foresee any major challenges in the supply chain side.

Okay. Sir, as far as the pricing of AN is concerned, how frequently the pricing of AN is renegotiated with the suppliers, sir, whether it's a monthly contract, 15 days or spot contract? How the pricing happens, sir?

Pricing normally happens on spot partly and annually. It depends on each contract we have with our vendors. So we have the flexibility of fixing the prices as per the contractual terms with those suppliers.

So it's on both the spot also and on a long-term contracts also.

Yes. Yes. Very much.

So sir, can you just quantify how much will be right now on a long-term contract and 'til how long the prices have been locked and at what level of AN, if it will be possible to share those information, sir?

No, we cannot share this information.

Okay. Sir, another question is on our market share. So as far as, I think, sir, CIL comes from Coal India. I think that their 30% of requirement of CIL is met through us. Am I right on that number, sir?

It is almost 28% to -- 28% to 30%.

Okay. Sir, in terms of institutional and housing and infra, can you just give us our market share? How much market share we'll have in institutional and how much in housing and infra?

Yes. It's almost the same, 28%, 29%, something like that, either infra and the institution sector.

Okay. Okay. Sir, if I can take the liberty of going on asking further more questions, and if you are not comfortable, I can come back in queue and ask another time.

Sure. We can have this call separately with you.

Yes. Sure, sir.

[Operator Instructions] The next question is from the line of Pankaj Tibrewal from Kotak Mutual Fund.

Yes. And congratulations on very strong set of numbers in these challenging times. Manish-ji, if I recall, 3 years back, in 2018 annual report, we spoke of our vision of 2020, of different divisions achieving a scale. Yes, in between, a lot of disruptions have happened. COVID has happened. Would you like to refresh that and just give your vision of the next 2, 3 years for the company? How do you see defense scaling up? How do you see export scaling up? And with cyclical uptick in the economy and housing and infra, how do you see the domestic part playing out? That would be the first part. On the second, in terms of capital allocation. We have about now INR 780 crores of debt, and the way first quarter reflected very strong profitability. Even if we account for the CapEx, we will be left with decent amount of surplus. So if you can just throw some light on your thoughts on capital allocation going forward. These are my 2 questions.

Yes. Like you said that what is the growth outlook for the business outlook for next 2, 3 years, I will address it like this. On defense side, like we have almost INR 170 crores, INR 160 crores in the last financial year, and in this year, we are -- we have given a target of almost INR 300-plus crores. And if we go down on next 2 years, we are expecting that from INR 300 crores, we should definitely reach to INR 600 crores. This is as far as defense is concerned. As far as explosives for mining applications are concerned, we believe that this year, we will definitely grow by almost 25%. And in coming 3 years, we would like to grow or we -- our plans are in place where -- which can give us a growth of almost 70%, 20% in the next 3 years. So that will definitely help the company. As far as capital allocation is concerned, definitely the major CapEx programs, which was in place in the last 3, 4 years are almost over. But definitely, capacity expansions, additional products in the [indiscernible] section and increasing the geographical footprint in various parts of the world will always keep going. So that has to be there. And we believe that the net cash flow will be better, and definitely, it will be more than what we will be spending on our CapEx program. The first target for us in the next 2, 3 years to make the company debt-free, and we will follow the same conservative approach of capital allocation as far as expansions and all those things are concerned. But this is, by and large, our policy, and we will be following this.

Okay. Quite heartening to hear this. If I can follow up with one more question. So when you're talking about defense getting scaled up to about INR 600-odd crores and probably this year, INR 300-plus crores, the capital investment which has gone into defense has been quite a substantial number. If I recollect, it was INR 500 crores, INR 600 crores, which was not generating commensurate revenue. Now with defense scaling up, it should reflect on your return on capital. Is that the right thought and the right understanding?

Yes. Like we have been saying that capital employed, the return on capital employed will keep improving our numbers. In this -- based on these quarterly numbers, if you see that the ROCE has almost crossed 25%, and we believe that it will keep improving in the next 3 years.

[Operator Instructions] You have a next question from the line of [ Suret Neerah ] from [ Palladin ] Capital.

I just wanted to understand how you're seeing the demand shape up in the current month, in July. Is there any seasonal weakness or any other weakness that you're seeing in the economy post the second wave?

We don't see any deviation in the market that the mark in the month of today, except the effect of monsoon. So that was expected on expected line. So July, August, September is considered as the monsoon season, but to that extent, the demand is in line with our expectation.

[Operator Instructions] Next question is from the line of [ Nilesh Jagdish ] from Envision Capital.

So my first question was on the export side. So I wanted to understand our export mix. So we export to South Africa and Australia. Can you give some quantum on what are the mix between these 2 countries? And are there any other countries?

We export to around 55 countries, all the business. For South Africa and Australia, we have a plan for the future, and Australia will be coming up in a year. Yes. And we have subsidiaries in 5 countries, so the [indiscernible] goes up supplied from domestic market -- domestic India from India level is supplied to those subsidiaries.

Okay. Okay. Sir, second question would be around our current capacity utilization levels. So can you give some understanding on what our current capacity utilization levels are? And what are the status of the new expansion you were planning, which got delayed due to pandemic?

The major capacity expansions, which was impacted due to COVID, was in the international market. We have already started the facilities in South Africa, but the greenfield facility in the new countries like Australia, Tanzania, Indonesia got impacted due to COVID. So now we have seen that in Tanzania, the things are progressing well. So we are likely to start the facility in the next month, and Australia is again impacted due to COVID. So these things are impacting us badly as far as rolling over the new facilities is concerned. But as far as the capacity expansion in the domestic market is concerned, we have been impacted due to COVID, but by and large, things are very much in control, and we are expanding our facilities, mainly for initiating systems and adding the facilities for the defense products. So that is going on well. But like we have said that we are planning to expand the 2 new facilities in different parts of the country, that got impacted due to COVID.

And what would be our current utilization levels?

As far as utilization is concerned, since the product and portfolio is very large and very wide, it is not possible to pinpoint any single figure for capacity utilization.

Understood. So over this year a target of around INR 300 crores of CapEx, it is largely for the international expansion and some for the defense segment.

Mainly for expanding the capacities of initiating systems and defense, and some portion for the international business.

Understood. Understood. Since we touched upon the point on the defense, I guess last quarter, we were discussing we are developing a certain product for the defense segment. So any status on that?

Basically, what you wish to understand means because what we have told you that we are working on various programs and along with the [ RDO ], and those things are -- and a lot of products had already been developed and reached a production level. So this is a regular process, and we are moving on commercialization of those products now.

Understood. Understood. And sir, last question was on the growth in the non-CIL and the institutional side. When I see the Y-o-Y growth, it is more than 100%. So any guidance on the new mine lease, which were released in the last 1 year or maybe 18 months? Are we getting good traction on that? Going forward, how can we expect the mix from CIL and non-CIL to actually equal? Some color on the same.

If you have -- like Mr. Menon has already explained, we will explain on this point again [indiscernible].

We see a lot of private gold mines being -- opening up, and so we see a growth potential coming from there. We also see infra and push from the government on right from housing, the road and river-linking projects. So we see this growth being maintained and including the new mines that are coming up in the next 1 year. We don't see any letup, and also the private gold mines would be starting up. They may -- some may have got delayed due to COVID, but I think they should be all coming on stream, and this will help to increase our reach and our volume and [indiscernible].

Okay. When you talk about CIL products, which we supply to CIL, are these largely predecided prices or these prices change as per the price of the commodity raw material movement?

We have a tender to CIL, and so we have a price which comes out to a tender, but there is an escalation, plus there is a quarterly escalation plus where we are able to pass on the -- any commodity price increase or decrease to CIL.

Understood. And in case of non-CIS-related products?

Most of the companies, we have an escalation clause. Some are monthly, some are quarterly and some are annually.

The next question is from the line of Abhijit Mitra from ICICI Securities.

Yes. So I have 3 questions, actually. First, on the net debt, if you can tell me your net debt and gross debt for the quarter ending, would be great.

Yes. The gross debt stands at INR 783 crores as compared to INR 788 crores, and the net debt is around INR 650 crores.

INR 680 crores?

Yes. INR 650 crores.

INR 650 crores. Okay, great. And if you can also speak a little about your existing defense order book because I could [indiscernible] the whole and the defense order book this time. So some light on that, it would be great.

Yes. The defense order book stands at INR 632 crores. And [indiscernible] so mainly the [indiscernible] around INR 1,000 crores.

Okay. Okay. Great. Great. Also, last question is on overseas and the export segment. So despite COVID, if I look at your quarterly run rate, it's almost a 60% increase from 2 years back. So majority of this increase would have come from which region? I mean just on a conceptual level, if you can help us direct. Is it from new regions that you are seeing this majority of the 60% growth, almost INR 100 crore plus quarterly run rate? Or is it in all regions which are contributing to the maximum? How do you sort of break it up?

The major increase in the export and overseas is coming due to the maturity of those businesses, especially in Turkish market. 2, 3 years back, there was a big turmoil in the local market, and things were very bad. So those things have improved, although COVID has impacted the business in Turkey. Second positive aspect which we have shared in the last call also that we have started the business in [ Hana ], and now that has reached to a good level, that has helped to increase our sales. In Tanzania also, last 2 years back, we have acquired a company there, and that is also operational and being built, and our facility will also start in next month. So these 3 things, coupled with the increase in business in South Africa and Australia, this is also helping us. In Nigeria also, in the last 2 years, there was a big impact due to the lower prices of crude and nonavailability of currency, but now things are improving. And all these factors are resulting into a good -- good numbers from exports and overseas. And on this quarter, like you said, that we have almost crossed INR 300 crores, and we are expecting that this run rate should continue for the next few quarters until we mature our business in South Africa and Australia.

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

We thank everyone for participating in this first investor conference call of Solar Industries India Limited. We look forward to welcome you again in the second quarter of FY '21, '22. Thank you.

Thank you very much. Participants, on behalf of ICICI Securities, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.