Tinna Rubber and Infrastructure Limited (530475) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Tinna Rubber and Infrastructure Limited Q3 and 9 Months FY '24 Earnings Conference Call hosted by Ventura Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Tushar from Ventura Securities Limited. Thank you, and over to you, Tushar.

Thank you. Good day, ladies and gentlemen. On behalf of Ventura Securities Limited, I welcome you all to Tinna Rubber and Infrastructure Limited Q3 and 9 months FY '24 earnings conference call. The company is today represented by Mr. Gaurav Sekhri, Joint Managing Director; Mr. Subodh Kumar Sharma, Director and Chief Operating Officer; Mr. Ravindra Chhabra, Chief Financial Officer; and Mr. Anurup Arora, Senior Vice President. I would now like to hand over the call to Managing Director of the company, Mr. Gaurav Sekhri, for his opening remarks. Thank you, and over to you, sir.

Good morning, everybody. Moderator, am I audible?

Yes sir.

Okay. Good morning, everyone. It's a pleasure to welcome you all to our earnings conference call for the third quarter of the financial year ending 2024. It gives me great pleasure to inform you that we are very pleased with the achievement of the company during Q3 and up to Q3 of this financial year. Operationally and financially, this performance is a testament to our unique business model, strong growth strategies and our extremely hardworking and dedicated professional team. As you may be aware, Tinna was founded in 1977, and we have been in the rubber processing business for almost 5 decades. We are pioneers in the recycling of end-of-life tires. Our infrastructure is spread across India with deep-rooted global procurement network. This is a fantastic moat in our business that we have created for us. We work closely with our customers to provide them customized and diversified product solutions, which is why we have approvals from all major tire companies in India. Capitalizing on these moats and the industry tailwinds, we have embarked upon an ambitious growth plan with our Vision 2027 to achieve a 25% plus revenue CAGR to reach INR 900 crores by FY '27. We are going to aim for EBITDA margins of 18% plus. Now, let me give you some of the key operational highlights for the quarter under review. Our tire crushing capacity was up by 20% year-on-year. Our overall volumes were up by 19% year-on-year and driven by robust 38% year-on-year growth in the infrastructure sector sales and 100% growth year-on-year in the consumer sector sales. And even though the sales to the industrial sector were stable, the sales of micronized rubber powder, which is our most premium product offering, witnessed a growth of 35% year-on-year. It is relevant to mention here that the MRP is one of our most efficient forms of material recycling as it enables rubber from the end-of-life tires to go back in making new tires with the least carbon footprint as compared to all of the other forms of recycled materials. On the raw material front, although prices remain stable during the quarter, we foresee some escalation in cost due to the ongoing disturbance in the Red Sea. We are fully aware of this and to mitigate its impact, we have already taken proactive measures, including adjusting sale prices to offset potential raw material cost increases, as well as increasing use of materials from alternate origins where the impact of this increase in freight is comparably less. Our most important asset is our people. I am pleased to inform you that we have introduced ESOP plan for our leadership team, and we have hired fantastic new talent as well from related industries for our new business, the Elastomers business, which Subodh will talk more about in his comments. Let me -- with that comment, pass on to Subodh, our COO to brief you on the specifics and the financial performance of the company. Over to you, Subodh.

Thank you, Gaurav ji, and good morning everybody. Am I loud and clear? Moderator?

Yes, sir.

Okay. Thank you. So let me first brief you on the third quarter financial performance first and then 9-month performance. The operational revenue for the third quarter of FY '24 stood around INR 93 crores, which grew around 24% year-on-year basis. EBITDA was reported around INR 16 crores, which grew by approximately 88% year-on-year basis, and the EBITDA margin stood at 16.77% with net profit was INR 10 crores, which grew around 113% year-on-year basis and the PAT margin reported at 10.75%. Coming to the consolidated year-to-date performance for the financial year 2024. The operational revenue was around INR 253 crores, which grew by approximately 14% year-on-year basis. The EBITDA stood around INR 40 crores, which grew by 36% year-on-year basis, and EBITDA margin stood at 15.84%. Net profit stood at around INR 25 crores, which grew by 64% year-on-year and PAT margins were 9.72%. In light of this performance, the Board has recommended an interim dividend of INR 3 per share. Regarding our ongoing expansion plan, the work on the Thermo Plastic Elastomer is progressing well. As you are aware, this plant has been set up within the premises of our existing tire recycling plant in Panipat. I'm pleased to inform you that this plant is commissioned and we are in the trial production stage. Also, the state of the art R&D lab has been set up where work has begun to develop customized compound formulations for specific application areas. We expect to commence sales from this plant during Q1 of next financial year, which is as per schedule. Work at our new plant coming up at Varle is also progressing nicely and we expect the production to start sometime in February, and the major volumes and the net sales will contribute in the next financial year. As already informed in earlier calls, we are on a schedule to commence trial production in Q4 of current financial year. We expect this plant to become fully operational from early April onwards. So like I mentioned. Some of the other key points I wanted to highlight here. There is a drastic drop in our average day sales outstanding, which has reduced from 1.5 months to 30 days now. Similar way, inventory holding days also has been reduced from 2.5 months to nearly 2 months. So that also has contributed. In addition, in the previous financial year 9 months, the company has -- where the cost of interest INR 5.71 crores over the sale of INR 222 crores, whereas in the current financial year up to 9 months, company has grown in the sales and we have made INR 254 crores and the interest burden on the company is reduced and this only INR 5 crores, which has contributed to the PAT margin of the company. In addition, some of the points I wanted to highlight here, the company has participated in the Indian Road Congress session in the month of December. And during this session, the Indian Road Congress, which is a key body for setting out the specification of modified bitumen, flexible payment, et cetera, they have released the recent version of modified bitumen specification and its inclusion for the major highways and expressway, and they have also drafted the new specification, which is supporting usage of rubberized bitumen for the bituminous roads. I am also part of the task force committee, which has been formed by Ministry of Surface Road Transport, to promote the use of waste material for the road construction. So with these numbers, we are very, very hopeful and confident to reach somewhere around INR 350 crores of top line in the financial year and to align with the vision what we have aspiring to reach in 2027, Majority of the CapEx has been done in the current financial year so that we reach 2027 vision as we have declared in our previous earnings call. So with that, now I'm opening the floor for question-and-answer. Thank you so much.

[Operator Instructions] First question comes from [ Rahil Shah ] from [ Crown Capital ].

With this INR 350 crores of revenue target which you expect to achieve this year. So how will you end the year in terms of EBITDA margins then? Is there a scope for improvement from the current 16.7%, which you just reported?

Thank you, Mr. Shah, for your question. So as we covered in the speech, we're yet to assess the impact of Red Sea on our -- the raw material cost. So then only we shall be able to -- but we are fully aware and we are trying to at least maintain if it doesn't go -- improve or doesn't go below than this. So we have to assess the impact of Red Sea. I think it's too early to comment on the maintaining -- increase in the EBITDA margin.

And same -- like the same applies for next year as well, like early FY '25 as well? Do you think the impact will linger? Or maybe it's also early to comment on the next year?

I think the Red Sea impact, it's -- we are just closing this month, January, and the impact is yet to be assessed because most of the shipments are still on the water. So once we have a clarity and as per the market and as per the understanding during the discussion, we got to know this issue is likely to remain by end of this quarter and maybe end little bit in the next quarter as well. If not the fully, maybe by April. So then only I think we shall be able to comment anything on that.

Okay. So there are no improvements witnessed yet over there?

As of now, we don't see. Ultimately, we will try to share some of the burden with the customer, but you can understand, even the burden also -- the customer takes time to consider the increase in their cost. So -- but the team is fully aware and they have initiated the process for the increase in the sale price. But that impact will also start coming in maybe from February or by mid of February. So I think that will help us at least to maintain the similar level of EBITDA, if not increase.

Okay. Got it. And you say the Vision FY '27, it's intact, right? So you're on the right track to achieve the target set by the company.

Yes. As of now, you're very, very confident and the whole groundwork has been done. And you can see in the FY '24 itself, we did CapEx somewhere around INR 40 crores, INR 45 crores. That will set the stage for the next financial year and that will take us to the path of 2027 vision.

Okay. And lastly, just other than this Red Sea impact, any other major challenges you foresee which can hinder the growth?

As of now, not really. Because the post winter, normally the peak months for the business are February to July, August, and especially these are the months where our infrastructure business, it's right on the track. So, as of now, we don't see any other challenge other than the Red Sea impact.

[Operator Instructions] Next question comes from Khush Nahar from Electrum PMS. I repeat, question comes from Khush Nahar from Electrum PMS.

So I had a couple of questions. First, sir, what would be our growth drivers for this EBITDA margin expansion that we're expecting around 18% in our Vision '27? So would that be only the operating leverage? Like you said, the CapEx will be done by FY '24 or it will also involve a change in product mix or launch of new products?

This is Gaurav Sekhri. There are many levers at play in the EBITDA enhancement that we are foreseeing. See, we are already at about 16%, 16.5% is the run rate that we have already achieved with a INR 350 crore top line. So with our Vision of '27, which is going to INR 900 crores, we expect the EBITDA margin improvement to come on many accounts. One is operating efficiency. There are many benefits of scale which will start emerging. As we have also seen already, we have harvested some benefits from where we were about 1.5 years ago when we were a roughly INR 200 crore business to now we are INR 350 crores. So those operation efficiencies are visible. So we expect some of these to further come in as we go towards INR 900 crores plus. Our focus is to get into premium value products, and that will assist as well to get us to our aspirational number of 18%.

Okay. And sir, what would be the competitive intensity as of now in our products? Who are our competitors? What are our advantages, our moats over them?

See, a lot of this information is in our presentation, and I would request you in your spare time, please go through that. But see, the moats that we have come at a fundamental level have come on account of 3 or 4 basis points. One is our pan India business footprint, to which we are unique. We were a pan India business 3 years ago and till date, we are the only pan India tire recycler in the country. We are further enhancing our moat here by setting up a new plant as you are aware. Also by us going into Oman, we are the only large tire recycling business from India, which is operating in another geography outside India. As a result, we are also seeing benefits of that, both in terms of sourcing of materials, as well as in our sales of products. Our second moat and advantage comes from the fact of catering to many different sectors. We have products for the industrial sector, consumer sector, infrastructure. There is no other recycler who's doing that. And we are deepening our moat in this space as well. So, we are not doing anything unique. Tire recycling is tire recycling. Many people do it. There are many companies who do recycling, but nobody does it in the way we are doing it. I hope that answers your question.

Right. And just one last question. Sir, are we expecting any slowdown because of the elections in our -- in the infrastructure spend industry, which will affect our sales as well?

On the contrary, usually, we see when elections are announced, state level or federal level, the spend on infrastructure increases. So we expect some benefit from that because a lot of road projects, infrastructure projects, government rightly so is always pushing to finish them, to announce them and commission them and inaugurate them. So I see that as helping us.

Next question comes from Smita Mohta from Kredent InfoEdge.

Yes. Am I audible, sir?

Yes.

Okay. So, sir, my question was on your Oman plant, which you had been talking about and for which you were very gung ho. So can you just let us know that what the contribution from the Oman plant to the current financials? And what do you see going ahead in next 2 to 3 years?

So I'll take this question regarding Oman. See, Oman plant was commissioned in July 2023. And yes, we are very excited. We've always been very excited about Oman. We -- it is our first venture to do something outside India. And I credit my team and everyone working in Tinna to set up a plant in record time. They have also brought the plant in EBITDA positive within its first quarter of operations and a net positive number we have seen from Oman in our second quarter, which is Q3 of this financial year. So we are very pleased with the progress we have made in Oman. We have already taken initiatives to expand the production there. We had started off by operating at around 30%, 40% efficiency. Now, we are getting to about 70% to 80% plant capacity utilization. So, Oman is proving to be -- and validating our decision of being the right strategy to go into Oman.

So can you diversify, sir, that what percentage of revenue was contributed through Oman plant?

Our numbers with Oman are consolidated. Chhabra ji, can you maybe throw some light on Oman numbers?

Yes. Actually, Oman has contributed turnover of about OMR 80,000 every month. And in this quarter, actually, Oman has acted as a cost reduction for us because most of the things we are developing our unit there and which has been bought. So that turnover is not reflected because in consolidation it is eliminated. But there is an impact of INR 18 lakh in the quarter [ compared ] of Oman's operation. So it has acted more as a cost reduction. And because we are developing that market, gradually they will be selling directly also.

Okay. Second of all, sir, as you had pointed out in your investor presentation that it's 30 kilometers of road today. So if we [Technical Difficulty] compared to what it [Technical Difficulty]. So do [Technical Difficulty] any government initiative in this regard of making it [Technical Difficulty] 30 kilometers?

Sorry, we are not able to hear your question properly as the line was having some disturbance. Can you please repeat the question?

Yes. So in your investor presentation you have mentioned that the road construction is 30 kilometers, right, per day. So if we go by the China data pointers, which is much higher. So do you see any [ impacts ] by the government of doing it better going ahead? How do you see your order book on that [Technical Difficulty] next 2 to 3 years?

So, Ms. Mohta, I'm Subodh, trying to reply your question. See, the government as of now is reaching a target of 30 kilometers per day, whereas they aspire to cross 60 kilometers per day, number one. So that speed is a slow because there's extended monsoon was there and now in the northern region, it's extended winter also there. That has been point number one. Second number is, in the road construction, in 30 kilometers per day, the calculation is all sort of road, whether it is 50 MSA and above or low. So that cover all sort of roads. So national highways and expressway and the roads which are having the higher axle road requirement that only consumes the modified bitumen or rubberized bitumen in the top layer. So 30 kilometers per day construction covers all sort of road but still our product goes right on top of the road layer which consume the modified bitumen. So I think I'm right on your question.

Right. So I want to know, sir, what about the order book currently which you're holding?

Order book as such, the demand comes directly to the Indian oil refineries wherein we are processing their bitumen by supplying the crumb rubber modifier. So we see an excellent order book in the time to come. The season is yet to start from 15 February onwards when there is a little bit temperature goes up. So this year, we estimate to sell crumb rubber modifier and the crumb rubber to the road sector itself is somewhere around 7,000 tonnes in total. The value wise, the figure...

Got it. And, sir, the segregation that you have put in the segment wise, are they expected to remain more or less in the same region? And in this segment wise, which segment gives you more amount of margins than the others?

So the segment wise, like there are products in the industrial sector, there are the products in the infrastructure. So combining all, we are trying to maintain 15-plus sort of EBITDA. So like in the non-road sector, in the -- sorry, industrials and sector, we have a product which is a micronized rubber powder and we have refined the quality of the product, we have upgraded the specification of the product. So that is also contributing good to the EBITDA margin. Similar way, on the infrastructure business side, we also have modified the product, we have upgraded the specification and recently, we have been awarded with our roads of Adani Infrastructure Limited, wherein we are using a specialized modifier which is also contributing a major net margin on the product side. So both -- all the lines are having specific product which contributes to the EBITDA. But in a nutshell, we are trying to maintain 15-plus sort of EBITDA across all the sectors.

Next question comes from Ajay Surya from Niveshaay.

Congratulations, sir, on good performance. Sir, my question is more on the update of the EPR policy. So is the EPR policy effective from now? Or do we still have some time for that to go live?

We are seeing --. This is Gaurav Sekhri here. We are seeing much, much more engagement now from Ministry of Environment, as well as CPCB, especially in the last 3 to 4 months. So we are seeing high level of seriousness to get this EPR policy now activated and operational. I am more confident now than I was ever before to see this policy taking shape and EPR credits being generated for recyclers like us which will become a tradable instrument and hopefully, a new revenue stream for us within the next 3 to 6 months.

Got it. Sir, further follow up on this, sir. So if you can just throw more light on the supply side of this crumb rubber, bitumen or micronized rubber powder? How is the supply side on this front and the industry like? Is it more towards the organized players where only few players are manufacturing and catering the majority of the market? Or if you can just guide us through what is the market scenario or the industry dynamics over there?

Sure. So let me attempt to give you some answer and maybe my colleagues who both can add on to it. See, on the micronized rubber powder, we have probably more than 80% market share in India. It's because of the efficiencies that we have developed and being end-to-end tire recycling business, we command that position, as well as another factor is that, the MRP usually goes to large, organized players like the tire companies. And the approval processes here are very cumbersome, very long. One has to go through various audits. So we are among the very, very few people who are shortlisted to supply. So the supply to MRP is largely to very organized and specialized users like tire companies and conveyor belting businesses. Of course, we are also working on some new uses of MRP, and that is why we are very bullish on the demand side of MRP. Reclaimed rubber on the other hand, is a product which is made by probably over 50 companies in India. But within that there are only a handful companies, maybe under 10, who make a higher quality, higher tensile strength reclaim and again, approval processes from tire companies become an entry barrier for others. So, I guess, to answer your question, what I wish to state is, on reclaim, many producers in India, but to make high-quality product and have approvals, it again becomes very, very select few people. Crumb rubber is a product which is not very specialized. It is again maybe made by a 100-odd people, 100 businesses in India. But our ability to make crumb rubber competitively, which has happened because of our pan India presence and the optionality we have created for our business. That makes us do that business very efficiently versus others. I hope that helps to clarify your question.

Got it, sir. Better understanding on that. Sir, and my final question is on the -- you said the working capital cycle has reduced from 1.5 months to 30 days. So, is it a one-time scenario or how do we see things going forward? Like what has changed? Because is it going to continue or how should we see this going forward?

Subodh, would you and Chhabra ji like to take this?

Ravi Chhabra this side. So more or less, we will continue like our data would be in the range of 1 month and inventory 1.5 to 2 months. We expect this to continue for near future.

And, sir, is it due to some industry change with any revamp of demand in the industry which is reducing our inventory cycle? Or is it the product which is commanding better premium in the market, which is allowing us to have a shorter debtor? So if you can just throw, what are the reasons behind this for this huge change? Because the industry hasn't moved in that way previously and now it has suddenly changed. So if you can just throw or if you have some more confidence or light onto it? Hello?

Yes. Could you please repeat the question?

And, sir, because if -- previously, if I look at the recycling industry, so the working cycle hasn't been this short. So is it -- what is that that Tinna Rubber is doing differently, which is having a shorter working capital cycle? So on the inventory side, is it that the demand has shot up rapidly and we are seeing a shorter inventory cycle? And on the debtor side, is it our products which is commanding better premium or better demand from, again, the industry that has reduced the debtor days? So just more light or more...

So it's a combination of things. Of course, as -- with time we have learned to anticipate and manage our inventory cycles much, much better. Also, as more and more of our business is happening with organized players, it also helps us manage our inventory better because our customers are very well organized and they give better visibility of when their schedules are for taking deliveries. What has also helped us tremendously again, and I cannot stress enough on the benefit that we have because of having a pan India business. That has helped us tremendously as well because, as an example, if a tire company has plants in North, West and South of India, we are able to service them far more efficiently, far more in a shorter span of time because of the optionality we have created ourselves by having plants also in all parts of India. And now with the Oman plant also coming in, very interestingly, we have seen we can service the Kochi market, for example, the rubber matting industry customers far more efficiently from Oman than we can do it from our Gummidipoondi plant. So these are the kind of benefits that we are seeing because of creating a business of scale and that is helping us operate at these more efficient levels.

Got it. And, sir, again, one last question on the new segment which we are going into the Thermo Plastic in Elastomer. So if you can just add more information on what is the market size or how is Tinna Rubber going to...

Sure. So, Anurup, my colleague will take this. Anurup, can you just maybe give a brief overview of where we are on TPE?

Sure.

And also on the application of the product. I mean, if you can just add to that?

So this is Anurup. See, with Thermo Plastic Elastomer business, as explained by my colleague earlier also, we are already through the -- most of the R&D works. We are developing customized applications, customized recipes for different applications. And these applications include products like rubber shoe soles to fenders to mud flaps, as basic products, as dust bins or traffic management products. So these are very well diversified application base. And one of our core strengths which we are trying to use in this is the usage of recycled rubber along with the polymer. And we are already having well laid out recycled rubber products. So this -- we are trying to leverage our strength and bring up a new product in the market which can replace products which are made from recycled plastic or virgin plastic and offer better costing with unique quality of combining rubber and plastic together.

[Operator Instructions] We have a follow-up question from [ Rahil Shah ] from [ Crown Capital ].