Surya Roshni Limited (SURYAROSNI) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Surya Roshni Limited Q1 FY '22 Earnings Conference Call. This conference call may contain forward looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involves risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Raju Bista, Managing Director, Surya Roshni Limited. Thank you, and over to you, sir.

Good afternoon, everybody. Myself, Raju Bista, Managing Director, Surya Roshni. Good evening, once again, everybody, and a very warm welcome to everybody present on the call. Today, again, I am joined by our ED and Group CFO, Mr. R N Maloo; Mr. Tarun Baldua, Executive Director and CEO of Steel Pipe Business; and Mr. Nirupam Sahay, our Executive Director and CEO of Lighting and Consumer durable. And, SGA, our Investor Relations advisers. I hope everyone got an opportunity to go through our financial results and the investor presentation, which has been uploaded on the stock exchanges as well as on the company website. We hope all of you and your loved ones are healthy and safe in the wake of ongoing pandemic. The downward trend of COVID-19 cases is certainly a good sign, and we sincerely hope that the pandemic gets over soon with the aggressive vaccination drive going on across countries. We have been following all the necessary guidelines to safeguard our employees' interest and also ensuring that our operations are running smoothly and healthy. I will now share a few highlights for the quarter. And after that, I will request Mr. Maloo to share his thoughts on the financial performance of the company in detail. A sudden spike of COVID-19 cases during the second wave increased fatality and infection rates, which ultimately resulted in dampened consumer sentiment and disruption in supply chain and production. This was coupled with increased commodity prices and lack of ability of the workforces. However, during this difficult times, our first preference remain towards employee safety, offering support to the affected employees and their families, vaccination and standing with the entire community. We leverage technology to enable our teams to work efficiently from their respective homes. On the vaccination front, 100% employees at our corporate office and 85% -- about 85% of our employees at manufacturing location and branch office has been vaccinated. Even in such a difficult and challenging environment, we were able to improve our operation and achieve growth on the revenue as well as profitability front. Our revenue for quarter 1 FY '22 grew by 64%. EBITDA grew by 112% and cash profit registered a growth of about 221%. This, we believe is a testimony to our strong fundamentals, operational excellence, top notch domain knowledge of our management and sheer dedication of our entire workforce. During Q1 FY '22, the steel pipe and steel business performance has demonstrated strong growth in spite of facing challenges in the form of increasing raw material prices and COVID-19 led restrictions resulting in lower demand. The raw material prices in the international market has been on an uptrend since April 2020, with a peak around mid of May 21; however, the domestic prices continue their upward trajectory till June 2021. We try to mitigate this by our continuous pursuit to increase the shares of high-value, high-margin lucrative products like API coated pipes, GI pipes, export and high-margin value-added products. As a result, we reported revenue growth of 77%. EBITDA growth of 143% with the highest ever EBITDA per tonne of INR 5,033 compared to INR 2,463 in Q1 of FY 2021. The cash profit also witnessed a strong growth of 289% for Q1 FY '22 when compared to -- compared on a year-on-year basis. This performance was led by strong growth of 109% in value terms for export along with API-coated pipe registered a growth of 112% due to the timely start and aggregation of expanded capacity of 3LPE coated facility, which supported in a robust execution of orders. Being the largest exporter with a longstanding relationship with marquee customers and being reputed for maintaining the highest quality standard, our export revenue and realization are expected to accelerate further with global business relooking at the supply chain and working towards China Plus One sourcing strategy. We have witnessed a broad-based demand surge for our product from various countries. China has withdrawn export incentives and is planning to impose export duty. The export demand is expected to improve further. This, coupled with better pricing gives us confidence to achieve around 30% plus volume growth in export business for FY '22. We remain positive about steel consumption and demand for Steel Tubes and Pipes driven by increasing economic activities, and the wider reach of our vaccination program. India is well on pace to become a preferred destination driven by various initiatives by the government such as making India vocal for local, PLI scheme and China Plus One strategy. We are participating in the tenders under the various government initiatives like Jal Jeevan Mission and city gas distribution across country and have received a good quantum of order. Also from a long-term perspective, the decreased share of unorganized small players and the increased presence of larger organized pan-India players is expected to result in better opportunity and margins for the larger players, especially in the ERW segment, which has been the most fragmented segment historically. Our lighting and consumer durable business has also registered a good growth, which is driven by strong growth in value-added products like LED lighting. LED lighting grew by 29% in terms of volume, whereas conventional product, we saw a degrowth by 14%, which was natural, which the overall consumer lighting registered a 61% growth on consumer lighting segment. We have registered healthy growth across all regions, even in the face of COVID-19 second wave. The plants remained underutilized in May and June, in 2021 due to decreased demand due on account of market closure due to the spread of second wave of COVID. This, along with higher price of natural gas impacted profitability for the quarter. During the quarter, we have also observed increase in raw material prices in lighting, and we are passing on the same with continuous price hike in the market. We have witnessed a strong momentum of project inflow of our professional lighting business where we have completed several marquee projects like Bhandari Bridge Facade at Amritsar; Cricket stadium at Hyderabad, Vadodara; Mumbai Expressway projects by NHAI. And we have also received order for Nandgaon Facade lighting, Delhi, Vadodara, NHAI; [ package 22 ] Tala Bridge, NHAI, Kolkata, [indiscernible] 56 Street Lighting during the quarter. Several marquee projects under implementation like facade lighting of [ Kesaria ], Guwahati and Lucknow airport projects and additional projects from NHAI like Aurangabad and Delhi Vadodara package of 5 and 6 will enable us to strengthen our credential for further project wins. We remain confident of maintaining the growth trajectory that we have witnessed during FY '21. A favorable product mix towards value-added products is expected to drive the margin expansion. We are focusing on high-value product mix like LED battens and downlighters also on smart lighting LED, which has a very good growth potential. To augment the growth momentum further, we will continue to launch innovative smart lighting solution and new products. We are also continuously working on in-house automation initiative at our manufacturing facility and R&D to improve our productivity. Consumer lighting, professional lighting and consumer durables are expected to drive our growth as we keep on introducing new products in the transition to being FMEG company. The PLI scheme for manufacturing of component of LED lights will enable accelerated growth in the medium term, medium and short term. As we are participating under the large investment category, we are planning a minimum cumulative investment of INR 25 crores within 3 to 5 years during this peak period. This will also enable us to augment our manufacturing facility further through backward integration leading to reducing reliance on imported components. To further enhance our brand-building initiatives, we have appointed Ogilvy as our creative agency from last month, June 2021. Ogilvy will work with us on brand building and on developing advertisement campaign across TV, print, digital, et cetera. We firmly believe in creating values for all our stakeholders, including our employees. In continuation of our policy of rewarding employees' dedication and hardwork, the company has granted INR 9.17 lakhs ESOP in the second tranche to 234 key executives and employees under the trust route. Cumulatively, it will be around 2.8% of the equity. We remain confident about the opportunity across all our businesses, focus on value-added product offering along with the improving operating efficiencies will enable us to achieve strong growth and profitability and create value for all stakeholders. I would like to thank all the employees, customers, suppliers, bankers and shareholders for their constant support and faith on us during this challenging time. Now I will request Maloo ji to update you on the financial performance in detail. Over to you, Maloo ji.

Thank you, Mr. Bista. Good evening, everyone. Thank you for joining us on this call today. I will now take you through the quarterly financial update on a consolidated basis. For quarter 1 FY '22, the revenue growth grew by 64% year-on-year to INR 1,453 crores from INR 887 crores. The EBITDA registered a growth of 112% year-on-year [indiscernible] from INR 44 crores along with 144 points improvement in EBITDA margin [ trends ] to 6.41% from 4.96% in this quarter. This was primarily due to secular growth across the regions, better product mix, reduction in finance costs. The diluted EPS stood at INR 6.86 for quarter 1 FY '22 as compared to INR 0.41 in quarter 1 FY '21. Continuous reduction in debts driven by repayment of term loans of INR 102 crores during quarter 1 FY '22 led to further improving debt equity ratio to 0.51. Even during the current challenging quarter, we have been able to reign in working capital days. Overall, as a company, we have been able to improve working capital days by 50 days to 73 days as of 30th of June 2021 from 123 days as of 30th of June 2020. I will now take you through the performance of the Steel Pipe and Strip division. For Steel Pipe and Strips, revenue grew by 77% in quarter 1 FY '22 to INR 1,239 crores from INR 702 crores in quarter 1 FY '21. The EBITDA grew by 143% in the Steel Pipe division in quarter 1 FY '22 to INR 77 crores from INR 32 crores in quarter 1 FY '21. We achieved highest ever EBITDA/tonne of INR 5,033 in this quarter which against INR 2,463 EBIDTA/tonne in quarter 1 FY '21. Steel profits grew by 289% in quarter 1 FY '22 to INR [ 52 ] crores from INR [ 15 ] crores in quarter 1 FY '21. As mentioned by Mr. Bista earlier this robust performance was driven by our continuous pursuit to increase the share of high-value margin lucrative products like API coated pipes, GI pipes and exports, coupled with the strong growth of 109% in value terms and 36% in volume terms for exports. In API pipes, we registered a growth of 112% due to the timely expansion of the 3LPE coated facilities resulting into robust order execution for this sector. Our strong order book of INR 847 crores in hand for API coated pipes as on 30th of June 2021 will be one of the key growth catalysts in the commencing of the 72,000 metric tons per annum manufacturing capacity of section pipes to 300 mL with Direct Forming Technology (DFT) at Gwalior [indiscernible] unit for next quarter will also add the growth momentum. On the working capital front, we witnessed an improvement to 66 days as of 30th of June '21 from 101 days as of 30th of June 2020 in the Steel Pipes division. Moving to performance of Lighting and Consumer Durables division. For Lighting and consumer durables, revenue grew by 15% in quarter 1 FY '22 to INR 215 crores from INR 186 crores in quarter 1 FY '21. EBITDA grew by 31% to INR 16 crores from INR 12 crores, the EBITDA margin for the Lighting and Consumer Durable also saw improvement of 93 basis points to 7.6% in this quarter from 6.7% in quarter 1 FY '21. [ Steel ] profits grew by 83% in quarter 1 FY '22 to INR 14 crores from INR 8 crores in quarter 1 FY '21. There was a sharp movement to 113 days on the working capital front as of 30th of June 2021 from 208 days as of 30th of June 2020. With aggressive vaccination campaigns by The Government of India, falling cases of COVID-19, economic activities are returning to normality adequately. Demand for fans and the consumer appliance is expected to remain [ biased ] driven by continuing work from home, elevated commodity prices are expected to [ develop ] in the medium run, which will, in turn, help us to improve the margins further, a growth of 51% in Consumer lighting with a strong growth across all other regions demonstrate the strong fundamentals in both the businesses. We are confident of the robust performance in the next few quarters, which will be driven by strong fundamentals of [ our stores ] , our product portfolio and businesses. I will now request the moderator to open the floor for the questions and answers. Thank you.

[Operator Instructions] The first question is from the line of Kunal Shah from [indiscernible]

Congratulations on good set of numbers as well. I have 2 questions for 2 divisions. One is in the Pipe and Tube business, you've got an EBITDA per metric ton at INR 5,033 which is one of the best so far, right? And we are also seeing good traction when it comes to exports. So how should one look at it for the whole year? And what is your take? How is the management looking at it for the whole year along with the volume growth in this particular segment?

Next question?

The second question is pertaining to the Lighting segment. So we have got EBITDA margin of 7.6% when it comes to basically Q1, which was basically in Q4 at 11.4%. So there has been a revenue drop for sure. But any specific reason as to Lighting margins being dropped and also what we understand is in the Lighting segment, pricing has kind of bottomed out, right? So how should we see margin for the Lighting segment going ahead from here. And also, how is the scenario we're looking out there because B2B, we understand it's still kind of [ pending challenge ] but if you could help understand how are you seeing traction when it comes to consumer durable business and also the pricing part when it comes to the Lighting segment. Yes, that's it.

I'll start with the second question. About the Lighting segment of which you asked on EBITDA front. I think in quarter 1, we have raised a 7.6% of EBITDA. [Foreign Language]

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So in the first quarter, our home appliances businesses grew at 80%. So very good growth in all our home appliances business, and we plan to continue that growth momentum. We will have a whole slew of new products across categories lined up for this quarter and the next quarter. So we expect that growth to continue. So it will be a major growth driver for us this year and going forward. On Cables and Wires, we are in the process of finalizing the plans. We'll take it to the Board and after approval from the Board, we'll definitely share it with all the investors as well.

The next question is from the line of Bhavesh Chauhan from IDBI Capital.

Congratulations on a great set of numbers. Sir, my question is on the Bahadurgarh plant, where it's a very old plant -- and if I understand correctly, if we do some CapEx, our margins could improve there. But management has paid INR 100 crores of debt and not undertaken CapEx at Bahadurgarh plant. What is the reason for that sir?

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[Operator Instructions] The next question is from the line of Mahesh V., an individual investor.

I had a couple of questions. One is regarding this Ogilvy and Mather being appointed, what is the nature of mandate given to them, and by when would we see -- I think the general public will see the new ads, all the new branding whatever they are undertaking -- efforts that they are undertaking, the results of that.

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So with Ogilvy, there is a full-fledged agreement that we have. So they will work on brand building with us, which includes advertising across all media, including digital, so TV, print, radio or digital, et cetera. We already started to work with them. And the first campaign, the first national campaign will be out in this quarter itself. So you and all consumers will be able to see a refreshed brand and the refreshed campaign in this quarter itself.

[Foreign Language] But even from your own talk about your own business, there is a lot more optimism today than 2 years ago. So do you think that we are being a bit too conservative now, the opportunities are bigger and probably the CapEx could be higher than our depreciation?

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One small question, Maloo ji. So basically, quarter end [Foreign Language]

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

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Yes. Tarun Baldua here. [Foreign Language] because recently the tender has been finalized for Himachal State where we are also participants and we will get some orders. And today, our team is there in Jammu Kashmir, there also Jal Jeevan mission orders are under discussion. So there is no slowdown, and we are getting orders regularly.

Okay. Okay. And sir, in the Lighting segment, how is the competitive intensity in the marketplace?

Yes. So you have a whole host of established players who've been there for several years, who continue to be there. One trend that we've seen is the small-scale players are starting to die out. So we've seen that trend over the last couple of years. And particularly in the COVID time over the last year, we've seen a lot of the small scale sector actually die out. So that leads to higher market share for the branded players. The second factor is China imports. So there was a lot of not quite legal imports that were happening for traders going across to China and getting a lot of material. That has pretty much stopped completely because of geopolitical reasons, because of restrictions due to COVID. So really, I think that import component has gone down dramatically as well, again, leading to Indian players like us are really gaining market share. So those restrictions and the whole Make in India initiatives that the government has taken and Surya as a proud Indian multinational, is obviously fully integrated into that initiative of Make in India. So -- and as we mentioned earlier, in the PLI scheme as well, we are trying to invest so that our dependence on components from China also goes down dramatically by increasing the components manufacturing that we do ourselves. So all these factors are leading to branded players and particularly Surya being in a very good position to take advantage of these trends in the market.

Okay. And sir, would you help us with what would be the proportion of the import and small sector in the overall Lighting segment, would it be like 40%, 50% or higher, if any sense you can give us?

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And sir, just 1 last thing. [Foreign Language]

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Sir, just a last question, if I may. April, May, June impacted but July [Foreign Language] that is virtually back to normal levels after the trade has opened up?

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The next question is from the line of Rakesh Parikh from Barclays.

Congratulations on good set of numbers. Sir, I will first like to understand about this margins on the Steel side where we have done a highest EBITDA margin of INR 5,000 plus per metric ton. So how far this is sustainable -- how far this is sustainable as such?

This question has already been taken up by MD sir. And I will just, for your clarity I will check up this, that the higher margin is basically on account of increased volumes in this quarter 22% and also the high profit margin products and the markets, exports has increased by 36%, and API has grown by about double in volume terms. CR quantities are more or less 3 times the end of last year. The price margin is already increasing in case of CR products. So this all has added with slightly the store gains. This margin has come and as told by MD sir, that we are expecting about INR 4,000 plus sort of EBITDA for [ whole of the years ].

Second, sir, coming to the PLI scheme. So what is the kind of opportunity you are looking at? And have we participated over there and any investment of what we have planned over there?

Nirupam ji.

So we are planning to invest, as we shared earlier, we are trying to invest a minimum of INR 25 crores over the next 3 to 5 years under the PLI scheme. So as you probably know, for LED lighting, it is now purely on component. It's not on the finished product. So we'll be investing the INR 25 crores plus on components, and this is across categories. There are multiple categories available. We'll be doing it across multiple categories within -- till [ list set ] is available. So we already have the plans in place, and we'll be putting in our application very soon.

Okay. So once it is approved, then we will go forward with it, right?

Yes, absolutely. Absolutely.

And my last question is on the -- we had talked about this investment into Wire and other business. So -- what is the kind of CapEx we are looking at? And what exactly we are looking at as a broader picture down the line?

Yes. We will obviously have to go to the board, as I mentioned earlier, but we are looking at an investment of INR 30 crores plus in the wires and cables business in terms of CapEx.