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

Ladies and gentlemen, good day and welcome to Technocraft Industries India Limited Q2 FY25 Earnings Conference Call 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, ma'am.

Thank you, Yusuf and good morning, everyone. This is Darsha Hiwrale on behalf of Systematix Institutional Equities. I welcome you to the Q2 FY25 earnings call of Technocraft Industries India Limited. We thank the management for giving us an opportunity to host the call. Today, we have with us the senior management of the company represented by 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. Thank you, Yusuf. Navneet, will you give the opening remarks?

Thank you, Darsha. On behalf of Technocraft Industries, I would like to extend a warm welcome to all our investors who have joined our Q2 earnings call. This has been a mixed quarter for Technocraft in Q2. As you've seen, you know, compared to the last quarter -- compared to the same quarter last year, while our sales have increased, the profits before tax have been flat. At an operational level, there has been a decline in certain segments. Mainly, we have seen some challenges owing due to increase in freight costs and geopolitical conditions, mainly in markets like Europe. Overall though, the prospects of the company are quite good. Our new plant in Aurangabad, I'm pleased to announce, has now started production and we are slowly ramping up. The drum closure division has also been doing quite well. So I look forward to discussing the key highlights and details of the quarter performance further on this call and I would now like to hand it over to questions and answers.

[Operator Instructions] First question is from the line of Rohan Randery, an individual investor.

So my question was -- first of all, good performance on the drum closure and the Scaffolding division. But my question was more about the textile division. So, I just wanted to understand, what is the motivation for running it? What is the edge that you all have, which can help to generate a good return on capital in that business?

So you know, about 2 or 3 years ago, we decided to relocate the manufacturing location of our textile business from Murbad, which is close to Bombay, to Amravati near Nagpur, because of cost advantages and the incentives available over there, because Murbad was starting to become unviable as a location to have any manufacturing. So, we slowly, slowly moved our spinning about 2 years ago. And so excluding this current year, the last year and the year before also, we had cash profit in the spinning once we moved to Amravati. And last year, we have started to move the garmenting also from here to Amravati, which is now trying to take shape. So that is one strategy we have used to help improve our bottom line of the textile division. The second idea is to move more towards the garmenting side of business, where the value addition is higher. So we are trying to ramp up that capacity and reduce our sale of cotton yarn and other commodity businesses and use more of our raw material and convert into finished product and sell that rather than selling the commodity product. So this is our way forward that we think right now.

Okay. So in the long run, what kind of return on capital you think you can generate in this business?

Return on capital, I have not calculated, but I have envisaged that all put together, this business can generate about 12% EBITDA, not more -- 12% to 13% EBITDA -- 12% to 15%, let's say, higher side 15%.

Okay. At one point, you alluded to a demerger of this textile business unit at the appropriate time. So what are the triggers which you are looking at, which will motivate you to demerge it? Because the financial profile of the other 2 businesses are very different from the textile business?

Yes. So we thought about it in the past. We consulted some experts also, but the cost is just exorbitant to do this. So it kind of took a backseat this particular topic.

Okay. So I think in the longer run, it might still make sense, right? I understand there will be immediate...

Yes. I mean, our mind is open. We are open to look at different forms of restructuring and we will be happy to again revisit if it makes commercial sense.

[Operator Instructions] Next question is from the line of Riya Mehta from Aequitas Investments.

My first question is in regards to the Scaffolding division. So I am assuming that since 50% of our scaffolding goes to U.S., there will be some impact of freight. So if we remove the incremental freight impact, what kind of margins we would have seen?

Yes. So Riya, you are right. There has been an impact of freight. The freight impact has been quite severe actually. The freight rates almost doubled in this particular quarter from where it used to be around $4,000 a container, it went as high as $8,300. So I think the impact of that was roughly about 7% on the margins. Yes -- so that was the impact. Had we removed that, then I think the margins would be very similar to what we had in the previous quarter as far as the U.S. business is concerned.

And what kind of price increase, if any, are we seeing that we are able to pass on to the customers in U.S.?

So price increase happens gradually. So it takes a quarter or so. So we have been able to increase prices now. Actually, we have been able to increase prices to this tune, 5% to 7%. On the other hand, going forward, I think we are a little on a stronger footing in the U.S. as far as price increase is concerned, because the tariffs on Chinese imports are now fully back on. In between, the tariffs for most of the scaffolding imports from China had been relaxed. Now they are back on and with Donald Trump coming in, I don't expect there to be any relaxation that the stock may further increase. So yes -- so for now, we've been able to increase the prices to absorb the freight cost increase. And going forward, we may be able to increase further.

Got it. And what kind of demand scenario, since I think in our presentation, we mentioned we are seeing some tepid demand from U.S. and Europe. So have we seen any improvement post the elections?

Too early to say. It's -- the demand, we have definitely seen reduction and slowdown in Europe. That's been ongoing for the past few quarters because of the geopolitical situation around Ukraine and all that. U.S., it's been mixed. There have been certain segments in the U.S. where demand has been slow, like the commercial and infrastructure segment. We see the demand coming from segments like semiconductors and high tech and those areas. People have been on wait and watch mode owing to the result of the election. Now with the election result being out, I think first quarter next year is when we should see some pickup in demand in the U.S.

Got it. So basically from H2 -- Q2 of India's results, we'll see improvement in U.S. business.

Yes.

Okay, got it. So can we assume that typically, Scaffolding for H1 is better than H2 because U.S. gets consolidated with a lag. So, considering that, will we see a degrowth in FY '25 versus FY '24 for Scaffolding?

Difficult to say. At the moment, it's looking pretty much along similar lines FY '25. If we see H1 of FY '25 and compare with H1 of FY '24, we are sort of pretty similar. I think another thing that will impact this year in Scaffolding will be the additional depreciation that we have taken on board due to the Aurangabad unit. So in fact, that has been more of a material reason for the reduction in profit. There's almost INR 4.5 crores of additional cost that has come in this quarter owing to depreciation on the new plant in Aurangabad, and that will come this year. And we will not see the full effect of 100% capacity utilization this year.

Got it. So -- okay. So now second, coming to the domestic business. So basically, which is Mach One. So Mach One, we're seeing good amount of growth for us. I just wanted to understand that lately we've been seeing some real estate project delays, et cetera. So are you seeing some slowdown in Mach One?

No. There, we are not seeing any slowdown. The demand is extremely robust in India. The order book is also quite steady and we are not seeing any -- we are seeing only increase in demand there.

Got it. And in terms of our backward integration, which we were doing, and we would have INR 500 crores of savings. So will that be coming this year entirely on stream?

Yes. The plant has started in Aurangabad. The extrusion plant has started. We are currently in de-bottleneck mode and getting that streamlined. We will certainly not be seeing that at 100% capacity this year. We expect to reach full capacity utilization of the extrusion plant by end of this fiscal year. And we expect to see full capacity utilization next year, in FY '26.

So maybe part of the benefit around INR 200 to INR 250 crores we expect this year to come?

No, no. The benefit is not INR 250 crores. The incremental increase in profit from the Aurangabad unit is about INR 80 crores, which we expect to get added next year.

Okay. Got it. I think it is INR 400 crores total savings, right?

No, that was increase in sales.

Right, right. Total.

Yes. The profit from that is about INR 80 crores.

Okay. Got it, got it. Sorry, my miss.

Next question is from the line of Chetan Vora from Abakkus Asset Managers.

Sir, we'd like to understand what's the outlook on the Drum Closure. Do you have...

Sorry to interrupt, Mr. Vora. Your voice is sounding muffled. Please use handset.

Yes. So what I was asking that in the Drum Closure, the growth since last 3 quarters has been quite great, above 15%. So what's the trajectory going ahead for the Drum Closure?

So drum closure, yes, the growth has been quite good in the last 3 quarters, certainly higher than last year, and the trajectory going ahead is also good. We are -- one of the contributors at China. We are seeing good increase in China. The demand there is quite steady. We are also increasing our output in our China plant. And demand from the rest of the world, barring Europe, is also quite good, quite steady. So I think going forward, next few quarters, we should be similar to what the last 2, 3 quarters have been, similar trajectory.

So for next 3, 4 quarters, we would be seeing the growth what we have been seeing in last 2, 3 quarters, right?

Yes.

Okay. And the next question was on the Scaffolding. The growth has started coming in. But in terms of the profitability, the margins are quite volatile. I understand that the freight cost has increased because of the high depreciation, because of the new plant getting commissioned. So for the full year -- on a full year basis, how do we see the Scaffolding division on the revenue growth and on the profitability front sir, on a full year basis?

Yes. So this year on a full year basis, the revenue growth will be similar to what we've seen half year. We are on track to do about INR 1,250 crores in revenue this year FY '25. Profitability, as I said will be lower because mainly on account of depreciation. There will be almost INR 10 crores of depreciation in the full year that will be accounted for in FY '25, which was not there in FY24. And the incremental revenue of Aurangabad plant this year will not be so high, it will only be about INR 20 to INR 25 crores. And so that will impact the profitability. Freight also impacted the profitability in the first half of the year. The second half of the year, I don't think freight will impact because the freight prices have now cooled down. And so that that pressure will go away. So I think second half of the year should be better than the first half of the year in Scaffolding. That's, that's how we see it.

And for the full year basis, as earlier in the last con call, you had said you will be looking at the margin on the range of 19% to 20%. So where do we see? Because last year for the full year, it was like close to 18%.

Yes. So this year, it will not be that. Because if we take into consideration the additional depreciation cost, it will be to that tune without the depreciation of Aurangabad. But if you take in that additional depreciation cost, we'll be lower than 18%.

Okay, fine. And on coming on the engineering front, the growth has moderated on the engineering front. Any view on that? If it is a quarterly base?

No, it is -- so what has been happening is the business is pretty steady. We have actually invested this year in expanding our sales team in the U.S. and Europe. As a result, our SG&A costs have increased to the tune of about $150,000 a month. We've added salespeople across all our territories. It generally takes about 1 year or so for that to start translating into significant material increase in revenues. So while some new large accounts have been opened up, currently we are not seeing a very large material revenue from them visible to in our books. Again, that will start happening next year -- in the next fiscal year. So as a result of that, what we are seeing is we are seeing a small increase in revenue and actually a reduction in profits because we've added sales and marketing costs this year. That will translate to increase in revenue and profits next year.

All right. And coming to the Scaffolding, so the FY '26 will be the full first year wherein Aurangabad will be operational for the entire 12 months. So we could see a sharp jump on the execution front, right?

Yes.

Okay. And the potential of the Aurangabad plant revenue would be what, close to you said?

About INR 450 crores in revenue and about INR 80 crores in profit.

[Operator Instructions] Next question is from the line of Vikas Gupta from Wealth Guardian.

So my first question is related to the CWIP. There's an entry of INR 111 crores. So can you just guide me, this is related to which segment?

Anil ji, I request you to answer that question.

Yes, you're talking about CWIP, right?

Yes.

Yes, this is basically a few machines that are coming in Aurangabad. See, what has happened is we have started the production in March 2024. And few machines were required to be imported. So that machine -- those part of the machines are already received, but those are under commissioning -- let's say, 50% of the plant is under commissioning. So that, we have kept it under CWIP. Once the commercial production is successfully starting, then we will be converting the CWIP into fixed assets.

So that was related to the Scaffolding segment, right?

Yes. This is for Scaffolding, mainly Aurangabad plants.

Okay. Is there any additional CapEx which is envisaged for this particular segment?

No, I don't think there are any CapEx that are being planned apart from de-bottlenecking and routine kind of CapEx. There are no major CapEx that are planned.

But just to add, the total planned CapEx of Aurangabad is not fully completed, so that will get completed.

Okay, how much is that spending amount?

About INR 50 crores.

Okay. So second question is related to the textiles. Is there any CapEx or de-bottlenecking planned for this year or for the next year?

No.

So no incremental CapEx?

No, no.

All right. So the last one is, can you help me with the net debt figure? You have cash balance as well as gross debt as well. So can you just help me with the net debt?

Yes, one second. So total investable surplus available in the company is around INR 392 crores. This is cash and cash equivalent. And the working capital and term loan in the books is around INR 400 crores. So almost same, INR 400 crores of cash and investable surplus versus INR 400 crores of liability.

Okay. So no net debt, it's a net cash positive?

Yes, it's a net cash. Because whatever liability is there, majority of the liabilities for the working capital, which is against all the current assets in hand.

[Operator Instructions] Next question is from the line of Samarth Singh from TPF Capital.

Just one question on the Drum Closures. If you could provide an update on if you had any – any major success in the Plastic Closures part of the business?

Yes, the Plastic Closures part of the business has -- I would not say we've had major success in that. It's been growing at a small percentage, and it continues to be a small part of the overall Drum Closure segment. It is quite a competitive segment. And unlike the metal closures, there are many competitors, mainly from China there. The margins in that segment are also not at the same level as they are in the metal closure segment. So we are also quite cautious. We don't want to take on business and bring down the overall margin percentage. So we are quite choosy about the type of business that we pick and pursue. So overall, it's been slow, and it's been a very small incremental increase.

Got you. And Navneet, were there any regulatory issues as well in Europe regarding this business?

No, no regulatory issues.

Okay. So we didn't and how large is this business for us in Europe?

What, the Plastic business?

Yes.

We wouldn't have data on Plastic business separately. Maybe if my CFO has it, he can let you know. Anil ji, if you have that data available? Maybe, you can...

No, I don't have any available how much plastic is going in exports. But I can tell you, total revenue for the last 6 months was around INR 16 crores, INR 18 crores and marginally, reasonably good. We are trying new products and new models are being made. But overall scenario is not that large. So if required, we can take out the details and send it to you, Samarth.

[Operator Instructions] Next question is from the line of [ Uttam Reddy from Reddy Enterprises ].

Sir, about 2 quarters ago, you had mentioned that you are pursuing some...

Mr. [ Uttam ], your voice is very low. Please use handset.

Can you hear me now?

Yes, please go ahead.

Sir, about 2 quarters...

No, you are not audible.

Mr. Reddy?

Yes.

Yes, please go ahead with your question.

Sir, my question is about 2 quarter ago, the management had said that they were pursuing some applications in the defense space. Can they shed some light on that?

I'm sorry, I didn't quite hear the question. Application with?

Applications in the defense space. I think you were making some sensors and that was waiting for some approvals? I think Mr. Saraf had spoken about this briefly about a quarter or 2 ago. So I was just wondering if you have made any progress in that space?

Anil ji, would you be able to update on that?

Yes, Navneet ji, I can tell you. Basically, there was a very niche product called JT coolers. The government of India, the Defense division has placed orders on a test basis to produce and supply 50 pieces, 5-0 pieces to the defense department. And they have awarded us all certificates and the product has been approved. Everything is absolutely fine. Our plant has been duly approved. They have visited 2, 3 times and they are very happy. Now, what happens, the JT cooler is put on the tip of the missile and there is a sensor in which the JT cooler needs to be inserted. Somehow, this sensor in which the JT cooler goes is supplied by a French company. Now, the Government of India, the defense division told us that you need to supply the JT coolers to the France company and the France company can insert JT coolers produced by us and give the entire sensor to the defense division. Now, initially, the France company was not okay, with getting this high-tech product from India. But somehow, now they are convinced and we have sent few pieces of JT coolers to them, and hopefully, it will be approved and we will be able to supply to the defense division via France company because they would not like to have defense division -- defense -- Government of India, defense department would not like to have directly from Indian manufacturer as of now. So we are quite hopeful the product which has been supplied to the France company will be approved by them and we will be able to supply them. So somehow, defense per se is a typical sector. It takes time to crack.

Right. Yes, sir. How large of an opportunity could this be sir, just as a follow-up question?

Opportunity in defense?

Yes, sir. Especially, these JT coolers, the sensors you are mentioning, how large of an opportunity can this be?

Yes, it will be quite large. If it really goes well, probably it will be as big as our Drum Closure division or even more than that. 50 pieces were of INR 10 crores. That was only a sample. You can understand, imagine how big it can be then.

Fantastic, sir. As large as the Drum Closure, that will be very significant.

But as I said, it takes time. It is a very niche product, very high-tech product. Very few in the world produce this kind of product.

Next follow-up question is from the line of Chetan Vora from Abakkus Asset Manager.

I just would like to understand your view on the FY '26 margin with respect to Scaffolding once the Aurangabad is fully operational. So can we see the margins again to get restored to 20% plus levels?

Yes. So in FY '26, once the Aurangabad Plant is fully operational, we do expect the margins to be at the 20% level.

Okay, great. And the other thing was that, in the last con call you had guided out here for the FY '25, we are looking for the PBT of INR 350 crores and a PBT of INR 500 crores the next year. Where do we stand with respect to that guidance?

See, as far as FY '26 is concerned, we will be adding -- we expect to be adding about INR 80 crores in the PBT of Scaffolding division on account of full utilization of the Aurangabad plant. Other than that, we expect some steady growth of 5%, 6% in the Drum Closure division. And we do expect a good increase in the PBT of the Engineering division because we expect revenue increase in FY '26. So I think -- I would say, overall, we should expect an increase of about INR 100 crores in the total PBT of the company. So that should put us at close -- I think this year our PBT is tending to be around INR 400 crores. So I think that should put us at about INR 500 crores in FY '26.

Because then the Scaffolding -- I understand the incremental INR 80 crores is coming, but the existing Scaffolding business also will be moving towards the restored normalcy in terms of profitability, right, sir? Which is right now a drag down. So the existing Scaffolding business also will be giving out some delta in terms of the profit?

Yes, yes. So these are conservative, obviously estimates at the same -- while we expect existing Scaffolding business to also give out some delta in profit, but one should also take into account there could be some unforeseen negatives as well. There could be increase in raw material costs, there could be increase in other commodities, which could weigh against that. So all put together, what we know for sure is that Aurangabad will come on stream. Others, it's difficult to speculate on movement in commodities, movement in freight and other things, which are all moving targets.

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

So Navneet ji, would you like to give the closing comment?

Sure. So thank you, everybody, for participating in this conference call on the Technocraft Q2 Earnings. We truly appreciated your interest and the questions that you have asked. I hope you have now got a better understanding of where the company stands and prospects in the future. Please be rest assured that we are always available to answer further questions at any time, and we look forward to future calls in the future. Thank you, everybody.

On behalf of Systematix Institutional Equities, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.

Thank you.