Technocraft Industries (India) Limited (TIIL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 FY '24 Earnings Conference Call of Technocraft Industries India Limited, hosted by Systematix Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Darsha Hiwrale from Systematix Institutional Equities. Thank you, and over to you, Ms. Darsha.

Thank you, Michelle, and good morning, everyone. This is Darsha Hiwrale on behalf of Systematix Institutional Equities, I welcome management to the Q4 of FY '24 Earnings Call of Technocraft Industries India Limited. We thank the management for giving us an opportunity to host the call. So today, we have with us the senior management of the company represented by Mr. Sharad Kumar Saraf, Chairman and MD; Mr. Sudarshan Kumar Saraf, Co-Chairman and Co-MD; Mr. Navneet Kumar Saraf, Director and CEO; Mr. Ashish Kumar Saraf, Director and CFO; and Mr. Anil Gadodia, Group CFO. We'll now hand over the call to the company management for the opening remarks. Over to you, sir.

Thank you, Darsha. I'm very honored that you have given us this opportunity to explain to our investors the growth plans of the company and what we have done so far. In Technocraft, we have always treated the investors as our partners. And whenever any investor meets me, I always tell him that let us do our work and while you do your job.

Sorry to interrupt, sir. Your audio is not clear.

Is it clear now?

Yes, sir. Please continue.

Is it clear now? Okay. So as I was saying that in Technocraft, we consider investors as our partners and partners in our progress. And our endeavor is to deliver highest possible -- best possible results that we can year-on-year. And put the company on the proper growth road, which we have done. We have put up 2 new greenfield plants in Amravati and in Aurangabad, thereby taking the company out of the Bombay circuit. And both the -- Amravati is now in fully in operation. Aurangabad will soon be in the -- already the trial production in Aurangabad has started and it will be in full swing operation very shortly. The results of Amravati and partially of Aurangabad will be visible during the year '24-'25. So with these initial remarks, I would be happy to take any questions from the investors.

[Operator Instructions] We have the first question from the line of Viraj Mehta from Enigma Capital.

Congratulations for the good set of numbers and thank you so much for doing this call for investors. Sir, my first question is to Navneet. In terms of growth plans for the Scaffolding Division, this year we have seen a decline in the volume for Scaffolding and for Formworks. Can you talk about the reasons for the same and what is the outlook for it?

Sure. Thank you, Viraj. Am I audible?

Absolutely.

Okay. Yes. So you have correctly observed that there is a decline this year in volumes for both Scaff and Formwork. So this year 2 issues have contributed to this. One is the slowdown in the European market, which became very prominent from October last year due to the crisis with Ukraine and Russia. And as a result of that, our exports there have declined. And in fact, for the third quarter last year, October to December, we were running our Scaffolding Division plant at about -- so we were -- since October until about February of 2024, the output of the Scaffolding plant was at 2,000 tons a month due to the decline in these markets and the other area where we saw a slowdown was in the infrastructure Formworks segment in India, where we saw delays in execution of the projects. And so even though we were sitting on strong order books, which we still are, the execution of those order books has been slow because the cash flow cycle has been slow between the government and the contractors who are our customers. So that's why that business, which in the last financial year, which was averaging about 700 tons a month was down to about 200-250 tons a month. The third Formworks business, which is our Aluminum Formwork, MACH ONE, has done well on the other hand. There, as you can see, the volumes have increased over last year. But the combined effect of the Scaffolding and Infrastructure Formwork business saw the overall volumes drop. Having said that, from February onwards, things have turned around in Scaffolding. Even though the European market continues to be slow, but we have seen a strong uptick in demand from the U.S. as well as Middle East as well as Australia and our domestic markets. So from April this year, we are back to 3,000 tons a month. April has been 3,000, May has been 3,000. And in fact, next month, June, we are increasing the output to 3,250 tons a month, and that's going to gradually increase as we are now seeing order books increasing. MACH ONE continues to be strong and Infra Formwork is steady at about 250 tons, but we expect that post election results, we expect that segment will also pick up and the execution cycle will increase.

Right. Navneet, my second question was regarding the Scaffolding division only. If I look at the realization of Scaffolding versus Formworks. And again, I'm just doing rudimentary math in terms of tonnage and revenue. And so if you look at that, how will MACH ONE's revenue and profitability stack up vis-a-vis Formwork and Scaffolding?

So MACH ONE is -- it is similar. I mean, as far as it is similar to Formworks. Actually, it's a little higher than the Steel Formworks business, and it will further increase because of our captive aluminum extrusion plant that's coming up in Aurangabad, and it is a little lower than Scaffolding because Scaffolding, the margins are higher because of our captive distribution model. So it's similar to the Formwork, MACH ONE margins, it's about 15%.

Right, right. And over a longer term, not in one particular year, but say over 2, 3 years, when you reach from 3,000 tons a month to probably 4,000, 4,500, 5,000 tons a month with your expansion, which has already come on stage. What is the sustainable margin you can -- you think you can do in this business?

You were asking for MACH ONE?

No, no, for the whole Scaffolding and Formwork business, not for MACH ONE.

Yes. So I think the sustainable margin for the Scaffolding business is about 20%. And for the Formwork and for the MACH ONE business, it's about 15%.

Got it. Sir, my next question, if you allow, is just last question is on Drum Closure. This year, we ended the year at INR 530 crores, but Q4 was very good with INR 150 crores top line. Sir, can you talk a little bit about our market share vis-a-vis Greif today? What will be our market share in Drum Closure business today? And what is the industry outlook for the Drum Closure business looks like?

You see, this is a very typical market. Greif not only makes drum closures and competes with us, but they are also very large manufacturers of steel drums. So they have a captive market for their closure business, which is close to us. So if you remove that market, then our share is bigger than theirs. I would put the share at about anywhere between 55%-45% or 60%-40%. And it varies between 55% to 60%. We have quite a large market share. And we are also trying to increase because there is some markets taken by the Chinese, which we are going to work on and get them back.

And sir, what was our utilization in our Chinese plant for drum closures? What utilization are we running at? And are we doing any expansion in China?

We are continuously expanding in China. It is running over 90% capacity. And every time we are -- from time to time, we are adding machines and we are increasing the capacity. And there will be a further increase in capacity also. I'm happy to say that this is one of the few Indian-owned greenfield project in China that is quite successful, working very well.

Right, sir. And sir, lastly is on textile business. Obviously, we have lost around INR 17 crores, INR 18 crores this year, INR 30 crores the year before. Obviously, we had a bumper year before that. Your views and publicly in one of the channels in media channels, you had alluded to rethinking about strategically having this off or something we can do about this business. Can you -- where are we in that process right now, sir?

This is Ashish Saraf here. I will take the liberty to answer these questions. So in the textile business, we had, in Bombay, we had most of our operations near Bombay, spinning fabric and garmenting over the last 7, 8, 10 years. And we have now gradually shifted our operation of spinning from Bombay to Amravati near Nagpur, where we have a substantial cost and efficiency benefit in the spinning. So the grey yarn manufacturing is now completely shifted there, and that is doing reasonably okay. Even in the last 2 years, we have done close to about 10% to 12% of EBITDA margin in the gray yarn, which used to be a loss-making operation in Murbad. So that part, grey yarn is taken care of by doing this shifting of the operation. We also, last year, consciously took a decision and shut down a loss-making operation, which was a melange yarn operation that was also declared to the Stock Exchange. So I think in October last year, we closed that unit down, which was a drain on the company. And those assets are now being sold as we speak. Coming to the fabric and garment business, the garmenting also because the Bombay costs were very high, we have also now shifted that completely to Amravati, which have a much lower cost of conversion from fabric to garment. And that has happened about 1.5 years ago. We are now training the workers there. We are employing fresh local workers there and training them up. So now the skill levels have improved, and we hope to see a good efficiency in this coming year, which will translate into good sales. We expect -- last year, we did a sale of about INR 50 crores in garments. This year I think we should be touching close to INR 80 crores, INR 90 crores. And I expect that there should be an EBITDA margin of about 15% in that business. Grey yarn will continue. It is expected that this year, grey yarn will continue at this range of about 10%, 12% EBITDA. Coming to the fabric side, yes, this segment has been under stress because last 1.5 years, entire global apparel retail segment has been completely at a standstill, and there has been no buying at all. There has been no sales in the retail stores. So that has taken a hit, that has affected our fabric sales business. But now the U.S. market is picking up back and the buyers, Walmart and Target and all these guys are back in the market to start placing orders. So I think in the next quarter, not this quarter, but in the next quarter, we should see the effect coming to fabric because it takes about a quarter for the effect to come down to fabric and then to the yarn. So have I answered your question?

Yes, yes, you have. I just hope that we don't do this more one-off. I mean we at least do it once every 6 months just to keep the investors, giving them data. And the presentation is fabulous. Thank you so much for the entire thing.

Yes, that's a great idea. We can certainly do this every 6 months.

Thank you for your suggestion.

We'll take the next question from the line of Riya Mehta from Aequitas Investments.

Thank you for giving me the opportunity. So my first question is in regard to specific Scaffolding. So what were the peak volumes which we used to do earlier when the exports were going as per plan?

The peak volumes were 3,000 tons a month for Scaffolding.

And for Formwork in India?

For Formwork, for the steel homework business, it was 800 tons a month. And for the aluminum formwork MACH ONE business, it used to be about 20,000 square meters a month. But we are doing more than that right now. We are doing about 30,000 square meters a month right now. So what we are doing right now is actually our peak volume, and that's continuously growing.

Yes. And currently, for Scaffolding, we are doing around 2,000 was there last month and now it's again back to 3,000, 3,050, right?

Correct.

Right. Sir, my second question is, what is the percentage of export we do to Europe and U.S.? In terms of on Scaffolding. Yes, Scaffolding.

Majority of our export is to the U.S. I think U.S. is about 75% of our Scaffolding business. Europe is very small. Europe is about less than 10%, about 5%.

Got it. So how is U.S. doing for us for Scaffolding because if I see the volumes have gone down, I'm sure this U.S. business is also not doing as much as they had expected earlier. So what is the...

Yes. So actually, the U.S. has not been affected. In fact, our sales -- quantity sale in the U.S. in '23-'24 is higher than the previous year, even though the total sale is lower, but the U.S. specific sale is higher. And so in fact, that demand has not gone down. The reason for the overall fall is, like I said, due to the demand from other markets other than U.S.

Okay. So is it fair to say that the 17% decline in volume in March '24 quarters specifically coming from geographies than your U.S., right?

That's right.

And in terms of Formwork, for steel formwork, what would be the percentage going for residential or because of MACH ONE, everything is converted?

So the steel formwork is entirely for infrastructure segment. It's not residential. And MACH ONE is entirely in residential.

Got it. In terms of drum closure, how much of our revenue will be coming from China in terms of percentage terms?

Percentage would be, I think -- so in terms of percentage, the revenue percentage, I would not be able to tell you because the realizations are different. But as far as the...

It will not be more than 20%.

Not more than 20%.

It is about 15%.

15% to 20%.

15% to 20%, okay.

But there is no export out of China. It's for sale in China.

Yes, I'm aware of that. And in terms of India's drum closure also, what is the capacity utilization we are currently working at?

About 90%.

India's drum closure also. And are we doing any expansion or increasing the number of lines or the shifts?

The expansion is more lateral. We are adding new products, and we have just added the whole range of plastic closures which is quite unique, and we expect good results for the plastics in '24-'25. This is a very new factory already constructed and installed. So we do not expect a large increase in volume of the core products, which are plugs and flanges. But we keep adding new different specialties where the margins are higher.

The next question is from the line of Samarth Singh from TPF Capital.

Am I audible?

Sir, your audio would be clear if you use your handset, please?

Is this better?

Yes, sir. Please continue.

So my first question is on the drum closures, in particular, the plastic closures division. What was our sales for plastic closures in FY '24?

Do we have a breakup, plastic closures? I will just fish out the breakup of plastic closures. It will be, what, 20%? The plastics is a cheaper product and the volumes have not yet peaked. So while my colleague is fishing out the figures, we can go to the next question.

And sir, that's a better margin product than our regular drum closures. Is that correct?

Better margins, but the volume is about 10%, I would say, in terms of value.

Got it. Okay. And you mentioned Chinese competitors are taking some market share. Have they historically been in the market? Or are these new competitors?

A little bit here and there, they are there. But they still have not made any substantial breakthrough. For example, they are there in Russia where we have difficulty in shipping. And they are there in some pockets where the customer does not value any quality or service or anything else, and he simply wants cheap, cheap, cheap, and he doesn't mind even if there are rejections or if there are quality complaints. So in those small, very small markets, they are there. It's not very significant. And at the moment, we are not very much affected nor are we very scared about it.

Okay. And sir on the Scaffolding business, I think like Navneet mentioned that 75% of our sales comes from the U.S. And I think 5% or 6% comes from Europe. I think that the numbers were the same last year as well. So I'm trying to understand how European sales, if they're only 5% of our top line can have such a large effect in our decline in volumes for the year?

So the previous year, in '22-'23, we had higher percentage sales in Europe because we had some products being sold to some key customers in Germany, which actually got affected due to the downturn. And hence, the sale last year was much lower, less than 5%. So that's why that had a material effect in the volumes as well as the sales. And like I said, it was not just Europe. There was also a decline in sales in India because previously, we were also selling a good amount of Scaffolding in India, which we were not selling this year. And so that combined had an effect.

Got you. Okay. And you mentioned U.S. is back up again. In Europe, I think we had hired a new sales head as well. And over the medium to long term, I think we are pretty bullish on Europe as well. And could you just talk a little bit more about that, please?

Yes. So we did hire a European sales head. And in fact, in the medium to long term, we are bullish. There is a key certification that is required for increasing sales of scaffolding in Europe, which we don't have, but we are in sort of the advanced stages of getting that. Once we have that certification in place for our product, which we should get in the next 3 to 4 months, that puts us in a very strong position and at par with European manufacturers. So I expect that while currently, we are witnessing recessionary environment in Europe, but the demand will pick up. And that, coupled with this certification and our local presence, the prospects are good.

Got it. And lastly, are the aluminum extrusion plant, have we completed the full CapEx? I think you were supposed to come up in phases, but I'm not sure whether all of it is done or only a part of it is done?

Yes. No, a part of it is done, but we are in advanced stages of that. Almost 70% of the CapEx is completed, there is about 30% left. We are expecting to start trial production in July and ramp that up gradually. And I think we should be fully up and running by end of this year, end of this calendar year.

End of this calendar year. Okay. And in terms of P&L, that will not affect the top line, it will show in terms of margin expansion. Is that correct?

Yes, because it's all captive consumption. So it will not affect the top line, but it will affect the bottom line.

The next question is from the line of Prolin Nandu from Edelweiss Public Alternatives.

I have one question for each of your segments. Now starting with drum closures. What is our share coming from Europe? And typically, what is our dependence on chemical sectors, the sector in Europe? Because what we are hearing is that there have been a lot of capacities, which have been closed permanently, and those capacities are shifting either to China or some part of it to also India. So overall, medium to longer term, does it require some change in strategy from our end to focus on where these new capacities are coming up?

Our share of drum closures in Europe is about 30%, almost 1/3. Now it has gone down because of the Ukraine war and slowdown in Europe. And as you rightly mentioned about shifting of chemical manufacturing out of Europe. And we are dependent on chemical manufacturing because most of the steel drums go for packing chemicals rather than anything else. So there has been a hit in Europe. We went more aggressively in other markets, and we are trying to make up for the shortfall in Europe. So therefore, overall, our sales have not gone down. We have maintained our level. In fact, we have increased a little bit.

Sure. And that should continue, right? I mean, these other markets that we have ventured into...

Yes, because what we have got, we are not going to let it go. So if Europe sort of recovers, that will be an added benefit to us.

Understood. Now second question would be on scaffolding. This new CapEx that you have announced, right, I mean, which is expected to start trial production in July. What is the capital, what is the CapEx in terms of rupees crores that has gone into this plant? And will it all be only back end in terms of capital consumption? Or will it also help us increase some of our end product sales, and this would be the ALU MACH division, right? Am I correct in that understanding?

The total CapEx that we expect, including working capital, is about INR 280 crores. We have already spent -- incurred about half of that, and the other half is ongoing. Yes, this is all -- the aluminum extrusions is for captive consumption because this is basically backward integration, where we are putting up an aluminum extrusion plant, which for making extrusions. We currently buy that. But then the finished product is MACH ONE, and that is all for additional sales. We are currently selling about 30,000 square meters a month from our Murbad plant. And we are putting up additional about 30,000 square meters in the first phase in Aurangabad. And then so the total output will double of this product.

Yes. So when -- so coming back to this interview that Sarafji gave a few months back, where he mentioned that the top line is going to increase, right? So that increase was this 30,000 square meters of additional capacity that we are putting in Aurangabad?

In Aurangabad. Yes. That's right.

And that in terms of additional top line, when will it start? Or this also, the trials will start in July and it should become fully operational by end of December calendar year, which you mentioned for the extrusion plant?

It will start in phases in this financial year. We will start production from August and it will start in phases. The full effect of this increase of 30,000 will be seen in the next financial year, '25-'26.

Okay. Understood. Right. And my last question is on textile business. When you talked about some recovery in yarn and fabric also will come with a lag of 1, 2 quarters. But if I look at this business from a 10-year perspective, right, cumulative EBITDA is still negative for the last decade. Cash profits have been positive, but I mean those returns on the capital that we have employed are probably at just about fixed deposits or even lower rate. So what is the management's thought process on incremental capital allocation in this business, right? And can we think about going to the board and taking a resolution that we don't want to put any incremental capital apart from any -- only the maintenance capital. Is that something that management can think about?

Yes. So regarding the EBITDA, so the way we are addressing this in the yarn business is that we have -- over the last 5 years, the Bombay region had become very expensive for operations of spinning. And it took us about 2, 3 years for us to shift to Amravati. And since the time we have shifted to Amravati, we have seen the negative EBITDA turn into a positive approximately 10%, 12% EBITDA, which continues to -- which is continuing even in the last financial year. And we expect that this EBITDA will continue even in this new financial year as well. So that is how we have addressed the historic negative EBITDA problem. And coming to the incremental capital. So all of this has been funded under the capital subsidy scheme. And for our -- the first unit, which we started in 2019, out of a CapEx of about INR 125 crores, INR 130 crores we have received close to about INR 35 crores, INR 40 crores we have received back from the government as the grant, as a subsidy as part of the scheme. And then the second unit also, which we have now expanded and commissioned, that CapEx is about INR 150 crores. So now that we will apply, and we will similarly receive INR 50 crores back of the capital from the scheme. So this is how we are planning. Sorry?

You said INR 50 crores, you will get it back from the government?

For our second CapEx, which we have done because we have already received around INR 35 crore, INR 40 crores, we have received for our first CapEx. So we're keeping in mind the utilization of the funds of the company before we do any CapEx in the textile. This CapEx was required because of shifting operation. So the Bombay operations we sold, all the assets were sold and we recovered the money from that sale of assets. But going forward, we don't have any plans for any CapEx now any more in spinning.

[Operator Instructions] The next question is from the line of Bhagyesh Kagalkar from HDFC Mutual Fund.

Thanks for the excellent PPT given. This is regarding your engineering and designing services. Last year, you had done quite okay. The last quarter was a little bit of slippage on the margin front. So can you throw more highlight on this divison? And second is, since we are doing a lot of shipments to U.S. and Europe. So what are the difficulties faced on the logistics front? Essentially the freight cost or even otherwise. Is that going to affect the business this year also?

Sure. So yes, the Engineering & Designing Services division has done well. We have seen good growth over the last 2, 3 years. Last year, in particular, we had a 40% increase in revenue and profitability. So we closed the year at about close to INR 200 crores of top line and INR 37 crores of bottom line. So the prospects are good for this particular division. As far as the slight margin slippage that you saw in the last quarter, no, there's nothing abnormal about that. I mean, compared to the same quarter last year, it was at par. And if you compare with just the October to December quarter, there can be some differences quarter-on-quarter. But that division is -- the demand is quite strong. It's 100% export-oriented mainly from the U.S. and Western Europe and U.K. markets. And so we will continue to see strong growth in that. What was your second -- the second question was regarding logistics costs. So there was some turbulence until about a month or so ago because of the crisis in the Red Sea. And we did see freight costs rise quite substantially. Having said that, that's now cooled down, and freight costs have again come down and they have relaxed. We are able to manage that turbulence. We are able to pass on these freight costs in our price of products sold. So we don't as such take a hit. And the situation has now become better.

The next question is from the line of Ankur Kumar from Alpha Capital.

Sir, I wanted to understand about this new capacity of MACH ONE. What will be our revenue at peak? And how much time, also sir, will it take to reach the peak levels?

So our incremental revenue from MACH ONE, which will be reached in the next financial year '25-'26, would be about INR 450 crores. That is what would be added, and that would be realized in the next financial year, '25-'26.

Only INR 450 crores, sir? Because I think in CNBC interview, Saraf sir was saying it's around INR 800 crores to INR 1,000 crores potential is there?

So that is cumulative. You see, there is also already existing revenue of MACH ONE, which is about INR 400 crores currently done from our Murbad unit. This will be transferred to Aurangabad. And in addition to this, we will produce additional INR 450 crores from there. The total revenue of MACH ONE product line will be about INR 850 crores. It will be seen in '25-'26.