Visaka Industries Limited (509055) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Visaka Industries Limited Q3 FY '20 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jigar Shah from ICICI Securities. Thank you, and over to you, sir.

Thank you. Good morning, everyone. It is a pleasure to welcome you all on behalf of ICICI Securities to Visaka Industries Q3 FY '20 Earnings Conference Call. We have with us today on the call Mr. Vepa Vallinath, Director and CFO Visaka Industries. Thank you, and over to you, sir.

Yes. Thank you, Jigar, and thank you to ICICI Securities for hosting this call. Dear friends, good morning, and welcome to all of you to Visaka Industries Q3 FY '20 Earnings Discussion. I'll straightaway get to the details. As we all know, the quarter has been a really tough one. We also had a union budget fees at the first of this month. So our Board had a thorough discussion on the union budget to understand what the future has in store for the company. We welcome -- the Board welcomes the measures taken in the union budget to improve the rural economy, with the split of measures addressed towards the various sectors. We are quite optimistic that the effects of this budget will be quite positive for Visaka's businesses. Now we shall get to the numbers. The total revenue for the company was flattish at INR 241.44 crore for the quarter under discussion. While the building products segment was at the same level as last year at INR 188.48 crore, the Spinning division revenue went up by about INR 2 crore. For the current year 9 months, the revenue dropped a marginal 1.67% over last year. This is despite a very bad quarter. The Cement Asbestos business degrew by 8% during the quarter and by 7.4% for the current year 9 months over last year. The EBITDA margins dropped to 9% this quarter compared to 14% last year. Hence, this business, which is totally oriented towards the rural economy, contributed to the overall decline in the bottom line of the company. For the 9-months period, the margins dropped to 12% compared to 17% last year. Even 12%, I think, is not bad, but we have seen much higher margins in this business before, and I'm sure we'll see the similar higher margins again in the future. The main reasons for this drop are volumes, which resulted in operating deleverage, coupled with inability to pass on any price increase in the price. However, we expect the scenario to improve in the next 2 quarters. While this is the case with the Asbestos Cement Sheet business which is not -- may not seem to be very encouraging, there's some really good news in other fronts. The Vnext boards and panels division, in which we are the market leader, has done really well in all fronts. The revenues grew 22% this quarter, and by 16% in the 9 months this year, who are corresponding figures of last year. In addition to the top line growth, the EBITDA margins entered double digits this quarter to about 11%. We expect this growth to continue and we are confident that this business will contribute significantly to the overall company's performance for the foreseeable future. These figures of growth and EBITDA margins are at a capacity utilization of 76% at the end of 9 months, and hence, they'll have adequate operating leverage to kick in as we go towards 100% capacity utilization. In this scenario, the work on the fourth plant at Coimbatore is progressing, and I hope to be able to give you an idea about the date by which it will be commercialized in due course of time. This unit, which will cost about INR 80 crores to INR 90 crores, is being funded fully from internal accruals. Like what -- like the way it happened with boards and panels initially, when they were launched, ATUM being an innovative product is taking time to pick up. We have also got international certification called a UL certification, to sell in the U.S. and European markets. We have already participated in 2 exhibitions in the U.S. so far. The latest being in the Intersolar Exhibition at Las Vegas, U.S. We expect this business also to pick up with time, since the inquiries have been great and the customers who have used them so far are very happy. The Spinning unit revenues grew 3.86% this quarter and 1.1% for the 9 months this year over last year. This business being a boutique business, as we always say, in a very bad textile market, we continue to do very well in this business because we have totally differentiated from the run-of-the-mill textile businesses. The EBITDA margins topped a healthy 14.9% this quarter compared to 12.5% last year. The corresponding figures of EBITDA margins for this 9 months in Spinning are 15% this year compared to 12.8% last year. We see good reason to continue good margins in the coming quarters as well. The share of Cements Asbestos' revenue in the overall revenues of the company reduced from 65.3% at the end of last year's 9 months to 61.5% at the end of this year 9 months. Similarly, the share of Cement Asbestos during this quarter came down to 54.7% from 59.8% last year's third quarter. Hence, we are confident that the cement -- while the cement sheets' business will continue to do well, we are slowly improving our alternative businesses with improving margins, which will augur well for the future of the company. And those 2 margins like in the Spinning, we are differentiated, we are the leader. And in the boards also we are the market leader, in the ATUM, we are an innovative product of one of its kind. So that's the kind of a differentiation and positioning we are creating in the other alternate businesses, also for the future. As the overall working capital days remained more or less the same, the net debt has come down to INR 241 crore at the end of December 2019 from INR 291 crore at the end of December 2018, which is a reduction of INR 50 crore. Hence, except EBITDA a bit of pressure in the Cement Asbestos business, which we consider temporary and which -- we have seen this kind of scenarios in the past. But for this, the company is doing very well and improving in all other businesses and on all fronts. As and when we get a little support from the cement sheet business, which may not be far off, we shall see an all-round performance in the company. With this confidence, the Board also declared an interim dividend of INR 10 per share. With this, I think I would end my presentation and would request the moderator to open the forum for question and answers.

[Operator Instructions] Our first question is from the line of Viraj Kacharia from Securities Investment Management.

Congratulations for decent numbers in such a challenging environment. Just had a couple of questions on the cement as well on the roofing part of the business, just I'm trying to understand, how is the pricing environment in the market? So in last couple of quarters, we were talking about certain players in the market engaging in a significant price war kind of situation, how are we seeing that now? And added to that, on the raw material, has that -- prices now stabilized? Or how do we see the raw material environment panning out?

Yes. The raw material environment has stabilized for this year. I think all the prices are fixed per day up to March of next year, up till March of almost FY '21. So that is one thing. And the second thing is the price so far, there's not -- there's no increase in the price because, obviously, the volumes are under pressure. And -- but however, I think considering the reasonable raw material cost increase in the recent past, along with the rupee depreciation, and also when considering the fact that January to March and April to June are seasonal -- good seasons for the business, we expect prices to be firm and maybe grow a little bit during these 2 quarters and then hold them steady for the remaining part of the year. So that is the idea. I think we are optimistic that prices will improve during these 2 quarters and remain so for the remaining part of the year. And the raw material cost will remain the same throughout this year, having already increased and thereby improving the margins.

So on the raw material front, you said it stabilized. So compared to, say, the 9 months, what kind of -- a raw material trend which we have seen over the first 9 months? When we say we have fixed the prices up till March of '21, what kind of further cost inflation we are talking about from that...

Yes. The price increases would be in the order of anywhere between 6% to 8%.

So there's a...

6% to 9%.

6% to 8% further increase from the 9 months base, right?

Yes. You can call it from -- for the 9 months, yes.

Okay. And on the demand side, if we look at the commentary and the numbers of [ major acme ] and certain others, they rule in semiurban. You see the market is reviving and you see sentiment is also improving. So are we seeing any demand coming back for our products? And added to that, on the pricing, and if you look at the steel prices in the last couple of months have started moving up again. So when we say we expect pricing to be firm, what kind of price increase we are talking about? Has that already been taken? Or in the process of being taken?

It is in the -- pricing, definitely, has been the matter of discussion in the last 1.5, 2 months. And the increase in the steel prices is a very welcomed thing for us. Because that gives us the leeway or the legroom to increase our own prices. Demand, yes. I think the demand is not as bad as it was in the second quarter and the first half of the third quarter. But still, I think we are still waiting for a significant improvement in the rural market and the demand for our product. I think the budgetary, the actions and the last year's monsoon and the crop coming in February, March, all these things will add to the rural sector. And therefore, the prices will improve. And what kind of a price increase? I think it's very difficult to guess now, but the price increases will still be, I think, now again we expect is that every month, 1.5 months, there will be some amount of a small, small dosages of price increase. And at least, I am personally looking at, at least 6% to 8% increase in the prices.

[Operator Instructions] We have a follow-up question from the line of Viraj Kacharia from Securities Investment Management.

On the price increase, one, what you said is RM costs which we have built in for the next full year, it's around 60% and the price increase is also what we're talking about, will be in the similar fashion. So when we say we expect margins to increase, where exactly would that come from?

Yes. Actually, after you left the call, I thought whoever calls next time, I would, I think, explain that answer properly. See, when we say 6% to 9% increase in raw material costs, that is a landed price of fiber, right? Landed price of fiber. And while raw material cost is -- will be about 50% of sales and fiber will be about 60% of raw material costs, which means about 30% of the sales price is fiber costs. So the price increase of 68% is on the 30%, which is about 2.4% of sales. Now if I can increase my sales price by about 6% to 8%, that means I'll have an increase of about 4% to 5% increase in the margins to start with. I hope I explained to you properly. You got the point.

How is the rest of the cost components behaving? I mean fiber is only 30% of the sales. And say, the next other 20%, what kind of environment on costs?

I think, yes. We all know that cement prices have been stable, rightly the time to increase but again they are coming down. Cement price is another. The other thing is of fly ash. And therefore, the other costs are more or less stable. They don't -- there will not be much of an inflation there. So it's only the fiber price which is a major factor here. And it's also a significant part of the raw material cost. Other parts will not increase so much. And we expect that some amount of reduction in the freight cost also by better distribution. And therefore, those other things also should add a little more to the margins. So currently, we are at about 9%, 10% of the margin. I think, there is a fairly good chance of going 15%, 16% very soon.

So 9%, 10% is for the roofing part, right? Not the whole -- which we reported...

Yes. 9%. Yes, yes, yes, 9% is the -- 9% to 10% is the roofing part. So that can easily go up to 15%, 16%. That's what I'm trying to say.

In a year?

Because last year's quarter, yes -- no, not in a year's time. If things do well, I think these next 2 quarters, because these are the peak season, right? So during this period, we should be able to demonstrate. The price increases should take place months on months now. And the next 2 quarters, I think we should do well and then...

So because we are already midway into Q4. So...

Yes, yes. We are.

Because Q4 is in a way peak for us and still not taken a price increase, hence, I was trying to understand.

Yes. The price increase is being taken. I think this month some amount of price increase will happen in the second part. And March again, there will be further increase in price. And from then onwards, the increase in prices will be faster. So this quarter should be better. And the next quarter, definitely should be much better. We should be able to get to that good margin. And we also expect the market to definitely improve because this is a season when the government spending also will start taking steps.

[Operator Instructions] The next question is from the line of Ritika Garg from Aequitas Investments.

Sir, could you throw some light on the boards and panels business, like what do we expect going forward? And what are the current margins?

Yes. Boards and panels, I don't know whether you heard my initial comments...

I missed it.

Yes. You heard so...

No, I missed it.

So boards and panels -- oh, you missed it. Oh, that's the most important thing. In fact, I started saying there's some really good news other than grouping. The Vnext boards and panels, which -- in which we are already a market leader, has done on both the fronts very well. The revenues grew 22% this quarter over last year. And by 16 months -- 16% in the 9 months this year over the corresponding period of last year. In addition to the top line growth, the EBITDA margin entered double digits in the quarter to about 11%. And even in that, the Jhajjar plant, which is still -- has to come to a fairly good capacity utilization, if I really exclude the Jhajjar and see, just to see the demonstration of the margins capability in business, I think the older 2 plants together have generated about 13% EBITDA. So that means the margins are now reviving. And there's still further scope for the raw material cost reduction to take place and also further price rationalization to take place even without a price increase. So therefore, these 2 things added together. And right now, we are at a capacity utilization at the end of 9 months of 76%. So with the operating leverage further kicking in as we work towards 100% capacity utilization, as I have always said, that the margin should be upwards of 15% over a period of time in this business. And I think we are now seeing the signals very clearly and firmly and that is really interesting and exciting for the company. And the work on the fourth plant at Coimbatore is also progressing at about INR 80 crores to INR 90 crore being funded fully from internal accruals. As I said, I will be able to give that date when it will be commercialized in due course of time.

Okay. And sir, what is the capacity utilization at the Jhajjar plant? Has it broken even?

Jhajjar plant, close to breaking even, close to breakeven. The Jhajjar plant is about something around 50% capacity utilization.

Okay. And sir, what kind of growth do we expect next year?

20%-plus. And that's a minimum I'm looking at. And I think some inflection point, the growth level should go even higher. Because as we have seen in a bad quarter, even now, we grew 22%. And in this year, total -- so far in 9 months, we grew 19 -- 16%. This figure is not 20% only because of the second quarter of this year. Otherwise, we would have grown 20% even for 9 months.

Okay. And sir, how are raw material prices for this boards and panels business? How are pulp prices?

Have come down to stable levels now. And -- but in our profitability, the average cost which gets debited in the end account is yet to come down to the current prices of raw materials. So there's still further some amount of reduction in the P&L level. But as far as procurement prices are concerned, they have come down to fairly good levels, and they are now stabilized.

Okay. So could you tell me what are the gross margins for boards and panels business?

Our gross margin is, if you just remove raw material costs, if you just take sales minus raw material cost, the gross margin, raw material is only about 35%, 36% of the sales price, where gross margins are at 65%.

Okay. And what are like expected gross margins that we expect for this business? Like what are sustainable gross margins?

I think these gross margins should sustain. The only thing is the power and fuel and other things it will take, then it's about -- if you say remove the power and fuel and some other direct cost, in addition to the raw materials, the gross margins will be -- the margins will be about something around 50% to 55%. So then the next big cost that will come is the freight cost. Now the freight cost is something which is getting rationalized with the plant -- third plant coming. We already got the benefit of that in this patent and more benefit will come even as the Jhajjar plant's capacity utilization increases. And with the fourth plant at Coimbatore coming down, I think there will be a huge reduction in the freight cost. That will lead to much better improvement in EBITDA.

Sir, how much is freight cost as a percentage of sales for boards and panel?

19%. 18%, 19% right now, should come down to 12%, 13%.

Okay. So -- but still now, we've not seen any improvement in freight costs?

There is. Has been about 2% to 3% in -- 2%, 3% improvement. We had been at 20%, come down to about 17%, 18% now. But as -- now the spread becomes 4 plants, and they are there all over there, then the freight cost should come down to about 13%, 14%. So there's about another 3% to 4% in the freight cost, so still the margin to improve. The operating leverage should be another 2% to 3% more.

But then, sir, the EBIDTA for this business can go up to 16%, 17% by this calculation.

Yes. That's what I told the previous questioner, that I'm looking at these margins could go up -- sorry, yes, as I mentioned, in this business, I have always been talking in the conferences and earlier earning calls and all but 15%, 16% is anyhow going to come because if you remove Jhajjar and simply look at the current 2 flagships, Miryalaguda and Delwadi, as of now itself, in this quarter, for those 2 plants individually, if you see, we are already at 13%. So that is a potential. So when -- once the capacity utilization improves in these 3 plants, automatically, 15% will come. So I'm looking at much higher margins for EBITDA. I think this business is going to grow. And actually, the component of this business now. It's growing now, in fact, as this is current share in the overall company's business, has come down to 54.7% this quarter compared to 59.8% last year third quarter, and to 65 -- to 61.5% this year 9 months when compared to 65.3%. So the -- as this current share is coming down and if the high-volume gross margin -- gross business margins also going up, we will see overall balance in the overall company's margins at a higher level.

Sir, can you repeat what is the percentage of Asbestos in 3 months as a percentage of total sales? And 9 months as well?

3 months is 54.7%.

54%?

Yes. And 9 months is 61.5%. As I was telling, we were looking at bringing it down to 50%. I think it will happen. In between, slightly, again, as was mentioned, it will grow a little bit. So -- but again, the boards will be growing at a much higher, faster rate, even on a lower base. And I think it's only a matter time before we see 50-50. And there's good margins and by that time the board gross margins will be very good.

Okay. And what is your outlook on Spinning?

Spinning will continue to do well. This year, we did -- right now, this quarter, I think we did an EBITDA of something around close to 15%. And the fourth quarter's idea, as we talk, I think, is very exciting. It will do very well. The fourth quarter is also already -- we're confident that we'll do very well. Maybe we'll be able to maintain these margins in the fourth quarter also. So this quarter was 14.9% compared to last year's quarter 11.5%. And for the 9 months, it's 15% as compared to 12.8% last year. So I think, I mean, plus/minus 1% or 2%, I think we'll do well. And the volumes also, I think, this quarter will be good.

Okay. And sir, what about our debt level?

You mentioned that. Debt level is about INR 241 crore at the end of December, '19 compared to INR 291 crore at the end of December '18, which is a reduction of INR 50 crore.

Okay. And sir, what about Q-o-Q reduction?

Pardon me?

What about -- like in September, how much was it?

September. I think September, it is more or less same.

Okay. And sir, any debt reduction plans for this quarter? Like Q4? Like what are your debt reduction plans in...

Q4 will be further reduction. How much, I cannot say because mostly raw material cost should have a working capital debt reduction that will take place. But in -- yes, September 2019 was INR 254 crore -- INR 242 crore, so December and September, more or less same. But when compared to last year December, it has come down. I think March also, it will come down definitely.

And sir, how do we expect debt levels to be in FY '21? Do we have any targets, like we want to reduce it by a certain amount or...

And what we have to say is that if I can maintain the debt at the current level or maybe slightly reduced, after incurring INR 80 crores to INR 90 crores for the new project by FY '21. I think you'll be seeing more or less the same kind of a debt, but on a much higher block of assets and more better assets, which itself will be an indirect way of looking at the reduction. Where I'm investing INR 80 crores, INR 90 crores from internal accrual into the project, it is going to generate revenue. So the cash flow is going to service the same quantum of debt, will be much higher.

Yes, yes. And what is your competition in boards and panels business?

What do you mean by -- actually everyone knows...

Sir, if everyone knows your competition, and is a certain part of the market served by import?

Imports are not a big threat. Imports are not much, there's only 1 big company which is doing some amount of import. But we have become the segment leaders now. We are holding a market share of something close to 35%. And with the fourth plant, we'll be growing it further. And therefore, now, I think in this business, I think we are fairly -- very strongly placed, and we are quite aggressive. We intend to be aggressive in this business and also be at the top end of the margins and a much bigger market share.

Okay. So what would be a competition in boards and panels?

Everest Industries is there. The other industries is there. Samko is there. And some amount of imports from Shera as well.

Okay. So this new Coimbatore plant is not going to throw any revenues next year, right, in FY '21?

In FY '21, it will be commissioned, towards the end of FY '21. We will start seeing the revenues from -- reasonable revenues from FY '22, by which time, we would have established 15%-plus margins in the existing 3 brands -- plants. And out of these, a reasonably good capacity utilization. So that these new products' volume will be abrupt.

And how much have you already spent on Coimbatore CapEx?

About INR 15 cores, INR 20 crore we have spent, but now it will be aggressively and it will start increasing. Quarter -- every quarter now, it will be more our effort to make big.

Our next question is from the line of Praveen Sahay from Edelweiss.

What's the estimated total CapEx for Coimbatore?

INR 80 crores to INR 90 crore, Praveen.