Tega Industries Limited (TEGA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Tega Industries Limited Q2 and H1 FY '23 Conference Call hosted by PhillipCapital (India) Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Dhiral Shah from PhillipCapital, PCG Desk. Thank you, and over to you, Mr. Dhiral Shah.

Thank you, Mike. Hello, and good afternoon, everybody. Welcome to the 2Q and H1 FY '23 Earnings Conference Call of Tega Industries Limited. First of all, we congratulate to the management for the strong set of numbers. Today on this call, we have Mr. Mehul Mohanka, Managing Director and Group CEO; along with Mr. Syed Imam, Director, Global Product Manager and Head of Sales; and Mr. Manoj Kumar Agarwal, Director, Global Finance and CFO of the company. Before we proceed in the call, just a small disclaimer that the conference call may contain some forward-looking statements, which are based on beliefs, opinions and expectations of the company as on date. A detailed statement has been given on the company's investor presentation, which was uploaded to the stock exchange today. I would now like to hand over the call to the management, Mr. Mehul sir. Thank you, and over to you.

Thank you. Good afternoon to everyone, and welcome to our Q2 earnings call. In Q2, despite unfavorable global circumstances, our company has delivered double-digit growth across our key metrics. Even though the macro environment continues to be challenging, I'm happy to report that we have built upon the momentum and delivered robust growth. Yet again, underlying strength in our business is evident in our performance. We have seen robust sales growth almost across all our geographies. It is especially heartening to note the growth trajectory in Australia, which was lagging behind due to prolonged COVID-related restrictions. As we grow our scale of operations, our operating leverage enhances the profitability. This is evident in significant margin improvement in both annual and sequential terms. We have a strong pending order book of INR 345 crores as on September 30, 2022. The world that encapsulates the personality of our company is future facing. We are a technology-led and specialized competence-driven company that addresses complex customer needs. We have an exciting lineup of projects to unlock the next leg of growth, including capacity expansions in both Chile and India. The growth will be driven in a holistic manner with prudent capital allocation, not compromising on the strength of our balance sheet. Our capital expenditure during the quarter was funded through internal accruals, and we have not added any fresh debt on our balance sheet in this financial year. Our extensively underleveraged balance sheet will graduate us into the next orbit. We are on an ambitious path to translate the goals into achievements. We are poised to launch globally disruptive digital products across all our customer offerings. Our uniquely differentiated flagship, DynaPrime, product is likely to grow attractively and sustainably. I'm confident that We, Tega, is in a prime position to capture the opportunities in the sector we operate in and aim to generate value over the long term for all our stakeholders. Now I would like to hand over to Mr. Manoj Agarwal, our CFO, to take you through the financial performance of the company for the period under review.

Thank you, Mr. Mohanka, and a very good afternoon to all the participants. I'll share the highlights of our performance for the quarter, following which we'll be happy to respond to your queries. So company reported net revenue from operation at INR 276 crores, has delivered a strong growth of 19.7% Y-o-Y and 13% quarter-on-quarter. Operating EBITDA stands at [ INR 54 crores ], growing at a rate of 37.5% from INR 39 crores in the corresponding quarters. Sequentially, operating EBITDA margin improved 70 basis points from 18.9% to 19.6%. Profit after tax registered a strong growth of 56.8% Y-o-Y and 53.4% quarter-on-quarter to stand at INR 35 crores. Profit after tax margin is up from 9.8% to 12.8%, an increase of 300 basis points Y-o-Y. In actual terms, revenue up by 28.9%, which is from INR 404 crores to INR 521 crores. As mentioned by our MD before, our improving leverage led to the significantly higher operating EBITDA. We have seen 370 basis points improvement in operating EBITDA margin rising from 15.6% to 19.3%. Our profitability has clogged a robust growth of [ 69.6% ], increasing from INR 34 crores to INR 58 crores. Profit after tax margin has expanded by 270 basis points from 8.5% to [ 9.2% ]. We have been able to manage our working capital, which was on a higher trajectory last year because of supply chain issues, which has improved to 143 days against [ 169 ] days in March 2022. Pending order book, as of September, stands to INR 345 crores. We are in net debt positive by about INR 28 crores as of 30 September. We may now open the floor for Q&A. Thank you.

[Operator Instructions] We have the first question from the line of Sandeep Tulsiyan from JM Financial.

My first question is pertaining to the revenue numbers. I think in the previous call, we had highlighted that there was a INR 15 crores revenue loss in Chile entity, which was supposed to be made up in coming quarters. So has that completely been booked in this quarter? And we have given an annual revenue growth guidance of 15% to 20%, given there is a strong 30% growth that you've done in first half. Would you want to revise this guidance upwards or would you still maintain the annual growth guidance in the same range?

Thank you, Sandeep, for the question. Let me take that. So this INR 15 crores of revenue in Chile, I believe it was quarter 1 last year, not this year, as far as my [ memory ] goes. But just to tell you, those revenue has never been lost by us. It is more of a carry forward to the next quarter because supply chain challenges were there in the quarter 1 in Chile. As far as the DynaPrime growth is concerned, we always said that we are of the targeting 25% plus growth, we are in that trajectory. So at this moment, we are not going to kind of revise the growth target of DynaPrime, but we are sure that the trajectory will be more than 25%, and that is what we have achieved until H1 this year.

Okay. Got it. Second question is on the logistics cost. In the past call, you've highlighted, this was somewhere around 7% of sales, and that gradually had gone up to more than 8% of sales. Of course, the world freight container rates are coming down. And if you could highlight, has that trickled in for our contracts as yet? What proportion of margin savings or margin increment can we see in terms of cost savings from lower freight cost in the coming quarters?

So on that freight side, yes, it has got normalized now in terms of what we had in quarter 4 and the quarter 1. So we have been able to around -- kind of recover 50% of what we've lost last year. We lost about 1.5%, and we recovered about 70 -- 0.7% as of now. Now we have the view that in next 2 quarters, we have been able to recover the entire logistic margin loss, which we had last year. So maybe in quarter 3 and quarter 4, we will come to normalization of logistic cost, which we have lost last year.

Understood. Sir, a couple of bookkeeping questions. If you could also share the numbers for the traditional mill liners, DynaPrime, and non-mill liners with the comparable numbers last year that would help?

Okay. So as we said that in DynaPrime, we've done about INR 115 crores in H1, with a growth of about 32% Y-o-Y. In non-DynaPrime mill, we have done INR 252 crores, with a growth of 20%. And non-mill is INR 126 crores, with a growth of 40%.

Okay. And what would be these numbers for 2Q, if you can share?

2Q will be, Dyna is about INR 70 crores. So growth is about 1% to 2% because we always have a lumpy business. You should always see as a YTD number. On the mill side, we've done INR 113 crores, growth of 9%. On non-mill side, we've done INR 80 crores, growth of 60%. Non-mill side, I just want to clarify that 60% looks to be very, very stupendous growth, but this is only because of the fact that the reason Australia was kind of impacted most in COVID, as we discussed last time also. Now Australia has fully opened up from last 2 quarters. And we are seeing they are getting more of a base correction. So hence, 60% growth is coming as far as non-mill side is concerned.

Understood. And if I may just ask a last question. In last call also, you had shared the pricing and volume growth and ForEx impact in the total sales growth of 41%. Similarly for this 20% growth, if you could share the similar breakup, that would help?

So 20% growth quarter -- Y-o-Y quarter 2, around 18% is volume growth, around 2% price and exchange growth -- exchange impact is nil.

We have the next question from the line of Simran from Omkara Capital.

Sir, there's couple of questions I want to ask. First of all, are we still maintaining earlier double-digit trends of 21% to 23% for FY '23 in terms of EBITDA margins that we had discussed in the last concall?

Sorry, Simran, we are not able to hear you. A lot of echo is happening.

Yes. If you could kindly go off the speaker phone, Simran, your audio will be clear.

Now It's fine? Now it's fine?

It's still hazy a bit on the call.

It's hazy or if you just go little slow, we'll try to pick up your queries.

Okay. Okay. Sir, my first question is, can we still able to maintain the double-digit margins of 21% to 23% for FY '23? Can you give some guidance on that? And secondly, what will be the PAT for FY '23? Can you give some guidance on that also? Can we maybe able to cross INR 130 crores to INR 140 crores of PAT in this FY '23? Can you give me some idea about that? Can you give some guidance on that?

Yes. So let me try whatever I picked from your voice disturbance. So as far as EBITDA -- operating EBITDA is concerned, we always said that our ambition is always 21% to 23%. And we are on that path, as far as this is concerned, with the fact that we are an operating leverage company and supply chain also improved, logistics cost also improved. So we are still very, very kind of upbeat about the fact that [ we will ] kind of reach in that range at the end of the year. On the PBT -- PAT side, basically, see PAT is more of a play of the ForEx also. So if I elevate ForEx, again, our aspiration is to about 15% PAT net of ForEx if I say so.

Okay. Okay. And sir, for the full -- because you have given the revenue of...

Sorry to interrupt. Simran, your audio is still not very clear. Please go off the speaker phone and use the handset.

Yes. Just a minute.

Simran, your background noise is also very, very loud.

Exactly.

Hello? Hello? Now it's fine? Now it's fine?

Much better.

Yes.

Yes. Great, great. Sir, my last question is that because we have done 29% of the revenue growth in the first 6 months of FY '23, can we still expect the same run rate for the rest of the year?

So in our previous calls, we always said that our CAGR target is 15%, right, 1-5, with upper trajectory. And we are in that upper trajectory, right? Where we end up? We can't kind of give a guidance to that, but the run rate is very, very great as of now. And we will be 15% target, that's what we aspire for.

[Operator Instructions] We have the next question from the line of Sagar from PhillipCapital.

This is Sagar [ Shah ] from PhillipCapital. My first question was related to actually our gross margin. I can see there has been a decline in gross margin 90 bps quarter-on-quarter. So can you get suggest what are the reasons for this fall, sir?

So quarter-on-quarter, if you see that, decline is mainly because of product mix and geography mix, right? So we have done the mix -- if we would have been -- had the same mix, the margin would have been same. So we have lost about 90 bps on the product and geography mix. So if I go with the same mix, we'll be having the same margin as far as quarter-on-quarter is concerned.

Okay. Okay. Got your point. My second question was related to our order book. Can you give a breakup of the order book...

Sagar, I'm sorry again, but I believe there's a lot of background sound is coming on your line. If you could kindly go off the speaker phone?

Yes, sure. Sure. Now -- you can hear my voice now?

Let's continue.

Yes.

Yes. So my question, sir, was related to our order book actually. Can you break your order book between DynaPrime, non-DynaPrime and non-mill line?

So on that breakup side, we just intend to not to kind of give public things on that breakup side. But I can assure that the mix is this kind of impact of what we are doing as of H1.

Okay. Okay. Sure, sir. So -- and can you -- okay, sure. And my next question was related to actually -- can you -- on your geography side, which are the 3 key regions for our growth areas, going ahead, can you suggest, sir?

So if I talk about H1 Y-o-Y, the growth has come from all the geographies, except North America because they tend to perform in H2. So we have grown in kind of almost all the geographies, be it your South America or kind of Africa, including West Africa and South Africa; be it Asia Pacific, be it [ EMEA ] regions. So all the geographies have given an upper trajectory growth on Y-o-Y, except North America, which will kind of ramp up in H2.

Okay. Okay. Sure, sir. My next question was to related to our CapEx guidance. Can you give any guidance for CapEx for FY '23 and FY '24?

FY '23, major CapEx is already done. We have spent about INR 57 crores and it is from internal accruals. So we don't see much of the CapEx in rest of the quarters, maybe hardly about INR 15 crores, INR 20 crores. FY '24 will be a spent year for us because we are going to put up a project in Chile and followed by FY '25.

Okay. So we have the visibility from [Technical Difficulty] years in terms of CapEx -- recent CapEx amount is concerned. Okay. Sure. My next question...

I'm struggling to hear you.

Sorry, Sagar, but your audio is gone again. Can you come on the headset? I believe you're still on a speaker phone.

Because I have not heard the last part also.

I mean -- sir, I'm all done with my questions.

We have the next question from the line of Bhavin Vithlani from SBI Mutual Fund.

My question is, if you could help us understand any new customer wins in the first half of this financial year?

So Bhavin, actually, as you know, we are not going to disclose any names here, but it is a fact that we have done about close to 25% conversion. When we say conversion of revenue, it's through a [ mill ] customer, right? So that is what the way we work.

Sure. So without taking names, if you could give us some color in terms of new customer winning for the copper, for gold, for iron ore in geographies, maybe numbers? Some color would be very helpful.

So what we do, Bhavin, maybe we'll just -- we'll discuss internally. And maybe through our Investor, we will just take this separately in that case.

No worries. So second is for DynaPrime. I mean if you could help us understand the kind of trial -- there are products, which will be running as trial with the customers or maybe in part of the mills. If we were -- wherever the trials have been successful, customer has accepted a product and where customer is partially using a product. If these were to get converted, what could be the revenue potential just by increasing the wallet share within the customers where we have our products accepted?

Imam here. The growth in DynaPrime, we have always said that it will be 25% and above on a CAGR. Our whole business model is to increase the business according to that CAGR. As far as details about customer, how many sites or how many trials are going on, this -- I think, these details we will not be able to disclose on this for quite a few strategic reasons. So as far as the first half was, we got an increase in the revenue by [ 38% ] and above for DynaPrime. And we have strong order booking and outlook in the next [ year ] listing to continue to do the trajectory of 25% and above. And that will be for the next couple of years also.

Understand. So just a follow-up on DynaPrime. What I understand, Chile or South America has been our key geography. If you could just give us some color, do we have similar wins in other geographies like South Africa, North America, et cetera?

So as far as Chile and Latin America was concerned, it was a historical area where we had developed the DynaPrime. DynaPrime now we are taking globally. And we have now DynaPrime in North America, Africa, Australia, okay? So DynaPrime will continue to grow not only in Latin America but other territories. But copper and gold being largely concentrated in Latin America, Latin America will always see a better trajectory than other parts of the world.

Understand. The other question is on the non-mill business. We have seen growth rebound, and you're attributing it to restart of Australia. But what we understand from a historic conversation is that you have changed your business model slightly and upgrading into a dealer, distributor model. Could you throw more light on that the kind of new dealers that we have appointed, the kind of reach that we want to target? Where are we in that journey?

I think -- I mean going into these kind of details on this call is not okay. I think if you see the revenue, how it is being impacted by whatever strategy we have said, both on the territories we are opening, Australia revenue upside as well as the distributor that we are using and which countries, these are early days, and we're -- as far as distribution network changes are there, and strategic moves usually takes a few quarters to fully get affected. But we are on the right path, that you can see through the growth that is already happening.

Understand. Lastly, maybe if Manoj can help us with the revenues geography-wise and the kind of growth that we have seen in the quarter or first half, whatever is convenient?

So geography-wise, Bhavin, in South America, we have up by, I'm talking about H1 Y-o-Y, 31%. Africa is 14%; [ EMEA ] region is about 80%; Asia Pacific, 43%; India, 37%; North America, we are down by 7%, as I said, that will kind of ramp up in H2 . So in all the geographies we have, we have grown, except North America, which is a little flat because they tend to be do better in the quarter 3 and 4.

We have the next question from the line of Arijit Dutta from Kotak Mutual Fund.

Congratulations for the great set of results. Two questions from my side. First is on the cost part. So unlike what we have seen across industries, your costs have been pretty subdued. It didn't get much impact because of inflationary pressure, be it Q1 or Q2, on a Q-o-Q basis. So -- neither we see anything significant in the inventory. Any color why we are so good in cost? I mean what happened to our cost? Our cost cycle has been moved up or we changed a mix kind of thing? Or any guidance for the next upcoming quarters?

Yes. So on the first part of yours in terms of inventory, so you can recall that in the last year, because of a lot of supply chain challenges, we build up inventory strategically, right, so to ensure that our operation does not suffer. And hence, in last year full year, we have kind of created inventory more than required in that year. And hence, our working capital days were higher, close to over 70 days as of March. Now because of supply chain logistic got normalized and we're not seeing much of the challenge in terms of container availability or supply, those are getting normalized, that is giving advantage. And even our volume is going up, our inventory is not going up because we were having that kind of cushion earlier. And we intend to take it to around 130 days, going forward. On the cost side, one is that, yes, inflation is there and the cost has increased in some of the areas. But at the same time, because of high operating leverage and kind of good growth, we have been able to absorb the fixed costs much better than otherwise. And whatever increase happened in the other part is more a volume-based increase, and some participation is also there. So volume also played a good amount of role in terms of cost kind of absorption. And yes, there are eyes in terms of how to manage the cost structure so to kind of ensure that we have been able to play with inflation.

Perfect. I mean heartening to see that you have maintained your costs well by keeping good inventory. If I can probe a bit more into it, that also means that we are currently getting benefit of the low-cost inventory that we built up last year. Is there a chance that since the prices have moved up and now it's coming down with easing of logistics, but still it is up on a year-on-year basis? So can we have some cost pressure coming because of the newer inventory replacing the older one?

So it's, in fact, otherwise because what happened when we have built up the cost inventory to withstand the cost to a higher otherwise, right, so as of now -- until now we were consuming the inventory which we built up, right, in the high-cost environment. Now the cost of commodities kind of are coming down, not to the extent what we are thinking of, still. But if it comes down from here onwards, maybe the impact of that will be seen later quarter 3 or early quarter 4, but not before that.

Understood. Very clear. The second question is on the industry. For example, iron ore, copper, all these minerals, all these ores have seen a big correction in the price. On the incremental order book, do you see some pain point in these ores, especially iron ore and copper?

When you say pain point, in terms of order book or in terms of value of order book?

I mean order book and value of order book, I guess, will be same.

As far as copper is concerned -- I think two areas we need to be concerned about is copper and gold. Copper has been -- in the last 8 months, there has been a production increase of 3.3%, which is a massive increase on copper production in the last decades, I would say, okay? So trajectory of copper, going forward, which was projected at 3%, 3.5% CAGR, will continue to grow, and we are not seeing any impact on -- as far as the price is concerned. As far as the price of copper is concerned, over last year 2021, the price has gone down on an average basis by 2.7% only, okay? The likelihood of copper demand of shipping supply is also there. So I think as far as copper is concerned in the near future, we don't see any challenges. Iron ore prices have gone down. But iron ore prices in India with the steel manufacturers where we are mostly in India and Brazil on this thing, and in the plants, we have not seen any impact because the plants which we are having in our customer base, most of them are low cash cost companies. And in the near foreseeable future also, we are not seeing any impact on the price of iron ore affecting consumption of our product lines. Gold continues in an even [ trend ] for the first 8 months. And as far as gold prices is concerned also, it's still stable, not as high as what it went up, but it's still in a case where most of the mines are profitable. So again, we monitored this on a continuous basis, and we don't see any challenges in the next couple of quarters on any of the macroeconomics affecting our order booking.

We have the next question from the line of Anupam Gupta from IIFL Securities.

A couple of questions from my side. Firstly, the DynaPrime, obviously, has been growing well. But -- and you have in the past call said that the non-mill liner products, goods should catch up along with DynaPrime as you're able to cross-sell. So are you able to -- are you witnessing that's already happening? Or is it still some time away?

So that's already happening. If you can -- if you see the growth, both DynaPrime, which is 32%, and the non-mill, we have grown on the last quarter to 63%. So both are happening as of today.

Okay. So that trend should continue to accelerate? Or -- how do you see that?

No, as far as 63% is there, we have already said, there are some impact of Australia market opening up after the COVID, they were working with a lot of restriction. But now in 2022, now they are working, most of the mines are open. So there is some impact of that. But still, the growth of non-DynaPrime will continue to grow.

Sure. Okay. And secondly, in the opening remarks, Mr. Mohanka said that you're looking at a few more innovative products to capture more value from the customer. Can you talk a bit more about that because DynaPrime, obviously, has stood out for you in its product, which is driving your growth? But apart from DynaPrime over the next -- over the medium term, what sort of products are we looking at or which segments are we targeting to penetrate more?

A little premature to -- I mean we just gave an indication. We have close to around 4 products, on which we are filing patents. Some of them are in trials at customer places. So we'll wait for the patent to be approved and the trial result to come before we announce that in a public forum.

Okay. And just to clarify, if you're willing to answer, is it still -- is it related to the grinding process itself? Or is it outside the grinding process?

No. It's in the grinding process itself.

Okay. I understand. That is helpful. Thirdly, I just want to just recollect, what sort of capacity expansion are we seeing over this year and next year in like Chile and whichever CapEx that you have done? What sort of broadly capacity expansion has happened, if you can quantify that?

Yes. So if I talk about value terms, we intend to make the capacity double in next 3 to 4 years.

Okay. And this is specific to DynaPrime and mill liners, right?

Yes. You're right.

Okay. Not too much happening in the non-mill liner space in terms of capacity expansion?

So non-mill is more of a fabrication, where you can -- to get in the capacity enhancement is not a big challenge in terms of both in-house and through third party.

Right. Okay. And just one last question. In one of your answers, you said that the freight costs, you are able to recover some portion of it. So when you say recover, are you recovering your older costs also or your pricing is normalized for the -- getting normalized for the future contracts to account for the new freight rates?

Yes. So when I say recover, recover by way of reduction in price of freight cost, not recovery from the customer itself.

Okay. So customer pricing basically will reflect the current cost of raw materials, plus freight, plus ForEx, right?

Maybe not be entire -- yes, going forward, yes because what I see that freight cost has now came down heavily from what it was in quarter 3, quarter 4. So that makes our life little easier to discuss with the customer and maybe a little less challenging to pass it on.

[Operator Instructions] We have the next question on the line of Sandeep Tulsiyan from JM Financial.

[Technical Difficulty] so the main mill products as well by acquisition of the defunct company under NCLT, so where is that bid progress right now? If it does not go through, are there any alternate plans we have to enter this segment, if you would give some color on that, please?

Sandeep, can you repeat the question because I just lost the first few words of yours?

In terms of company's ambitions to enter the milling -- mill parts segment through acquisition of that NCLT company, McNally Sayaji, which was there in the news. So just wanted to check regarding that, where is -- what is the status on that one?

So that procedure is still on, and we are yet to get any kind of final outcome of that. So it's still in process.

But in case if it -- so there are, of course, multiple bidders for this entity. And if in case it does not go through, then what is the alternate plan over here, if you could throw some color on that?

So our alternate plan, maybe actually, we are in the kind of -- we have to look for some other company who are -- maybe opt for partnership or sale or maybe establishing our own kind of process and production. So we have not thought of it that right because we are still awaiting this particular outcome and basis that maybe next strategy will be finalized.

Okay. And any other new products that you would want to highlight, which probably would have got developed and now pushed into the channel -- existing sales channel?

So as Mr. Yaver said that, that is always in pipeline, and we're in the process of patenting and trial is on. So once we do the patenting, then maybe we'll just kind of come to the market and disclose it.

Got it. And on this other income, if you could just quantify what was the ForEx gain that you would have booked in the current quarter?

So in the other income, we have a mix of about -- 24 million is your fair value gain of our -- basically that mutual fund. Mark-to-market is 29 million, entirely analyzed. And ForEx is about 11 million, so the breakup of 67 million.

Okay. So 24 million is fair-value gain on mutual fund investments, is it?

Right, right. You're right.

And the balance, other 29 million is what MTM gains?

It's a mark-to-mark. So we have term loan, which has been fully hedged on that mark-to-market entry. It is income on [ legs ] and other expenses.

Understood. Got it. And also, if you could, lastly, share the volume and pricing growth segment-wise, like we had shared in the last quarter, if that's possible?

I'll share with you, Sandeep.

I'd now like to hand our conference to Mr. Nachiket Kale from Orient Capital for closing comments.

Yes. Thanks, everyone, for taking the time out for joining the conference call today. [Indiscernible] Tega Industries...

Mr. Kale, sorry to interrupt you, sir, your audio is not coming very clear. If you could come closer to the microphone?

Yes. Yes. Orient Capital is the Investor Relations to Tega Industries. Please feel free to [Indiscernible].

Thank you, on behalf of PhillipCapital (India) Private Limited, that concludes the conference call. Thank you for joining us, and you may now disconnect your lines.