Visaka Industries Limited (509055) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '20 Earnings Conference Call of Visaka Industries Limited hosted by Anand Rathi Share and Stock Brokers. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Manish Valecha from Anand Rathi Shares and Stock Brokers. Thank you and over to you, sir.

Thank you. Welcome you all to the 1Q FY '23 Results Conference call of Visaka Industries Limited. We have with us from the management, Mr. Vamsi Krishna, the Joint Managing Director; Mr. S. Shafiulla, Chief Financial Officer; and Mr. Vinay Bathija, which is the Head of Investor Relations. I would now like to hand over the call to Mr. Krishna for his opening comments. Over to you, sir.

[indiscernible] very good afternoon. Thank you so much for the kind introduction, Mr. Manish. I welcome you all for the Q1 FY 2023 call. Thank you all for joining and participating. We shall start by giving our views on the macro picture, the major economies of the Western worlds are forecasting a recession by the end of the calendar year. The pressure of the Russia-Ukraine conflict is seen quite evidently across the world, especially on our raw material prices, the crude oil commodities, while China is still in lockdown in quite a few cases, the supply chain constraints due to those actions. The central banks around the world are pushing the rates in terms of money supply and the demand. However, I feel India is in a well-positioned situation with inflation lower than other economies and the demand being robust. Coming to our company's performance. This year, the revenues have been the best ever in the company's history. The margins, however, have had an impact due to the entire supply chain being disrupted because of the war and logistics and other supply chain issues. But the turnover is only a signal to show us that the demand and the future outlook is positive. I shall start with the board segment first, the Vnext division. The Vnext boards and panels have been doing exceptionally well over the years. What the company has been committing in terms of sustainable and eco-friendly construction materials is showing the way forward, with a volume growth of 62% compared to the corresponding quarter of previous year. Sequentially, we have also grown 7% compared to the March '22 quarter, the last quarter that we've seen. The export market for this product also is good, and we have grown by almost 26% over last quarter itself. Though the major economies are not faring well on the demand side, our exports to countries like the GCC, the South African markets and others have increased and exploring new markets further to make our export division stronger. We are able to maintain good margins in this division in spite of the supply chain pressures and the cost of inflation. This mirrors the market strength we hold and the brand presence that we have created over the years. The product Vnext cement boards is a revolutionary product. It can replace majority of the traditional building materials and offers better quality than the conventional materials or construction methods. Many corporates are using the products in various applications in commercial, residential and industry. We are seeing a good growth in terms of the housing projects as well. Our Vnext boards are tested and certified to the water, fire and termite-resistant in all the agencies across the world, be it [indiscernible] or our Indian IGBC certifications. The product is gaining continued acceptance and momentum where we have also done some high profile projects like Virat Kohli's restaurant in Pune or Manipal Institute across the educational institutions and others to speak of. We are able to reach customers through all the verticals of our business development through social media, through our influencers reach, our network expansion. And the focus is on to increase our ground base in terms of business management, increasing our network across various hotels. The affordable housing sector also is helping us see a good conversion in terms of looking at Vnext, and a good alternative to traditional construction methods. Post COVID, major commercial projects and all top corporates of the country have realized the advantages of Vnext boards wherein we take almost half the label that is required with conventional construction, thereby boosting us forward. Our fourth plant that was the Coimbatore factory, which began production in Q4 last year is seeing increasing utilization rates for the forward integrated panel factory that we had set up at Coimbatore has also commenced production in July this year. We are happy to announce that we are at full capacity across all the 4 Vnext factories that we have across the country. And we are very happy to announce that we are setting up a fifth cement board Vnext factory in the eastern part of the country in West Bengal with a capacity of 72,000 metric tonnes per annum. This will cater to the increasing in demand in the East and Northern markets of our country. With this, we will be officially having a plant in each of the zones across the country, across pan-India. We keep our targets intact for growing more with good margins in this division. We foresee a growth rate of almost 30% to 40% year-on-year the way things are going in this division. Coming to our ATUM Solar group. It has also been seeing great momentum in the market. The product is patented, and the product itself 2-in-1 solution, a hybrid product, wherein it acts both as a roof and a solar module, wherein its saves costs compared to traditional groups plus solar. [indiscernible] awareness is that we are trying to create across various platforms about the roof generating product ATUM is what the talk of the industry is. People are observing what this product is achieving in terms of its technical parameters. The product is unique. And because of this uniqueness, players like the Mahindra Group and the COVISHIELD guys, all of the product is going into prestigious projects wherein people are aware of the utility that we provide. And our job right now is to create this awareness amongst traditional solar adopters to make the next step in terms of roofing and power generation. We have started appointing EPC contractors across the country, aiming a good target in the remaining quarters as we have a good long-term, mid-term, short-term orders in the pipeline. We are also observing that the steel prices are stabilizing, which will act as a benefactor to this division. Our concentration is in segments like new industries, commercial projects, hospitals, hospitality and residential projects. We had another breakthrough in terms of ATUM Solar Group, wherein we can now retrofit existing roofs with that of ATUM Solar Roof. What I mean that, that is earlier, we would cater only to projects that would start from the scratch, which were greenfield projects. Today, with any product that is installed already as a roof can be replaced with that of ATUM solar, thereby opening up a totally new market in terms of potential and growth that we see. We are having great breakthrough in terms of the export market as well. We have added orders in Thailand. We are having some talks in Australia, in Kenya and South Africa. And going forward, we are looking at good demand in other parts of the world for ATUM Solar. Our Yarn segment, the Wonder Yarn, a green yarn that is, with all the R&D that has gone in, in the back end during the COVID times has paid off. We are one of the first guys to have an interesting breakthrough in terms of creating sustainable fabrics with our PET recycling yarn as well. The free trade deal in the textile segment regulations is increasing our volumes in this segment as well. The traditional yarn continues to do a good business in the traditional markets, but the new sustainable yarns with green and first green eco-friendly touch point is helping us enter new segments in the market. The yarn segment sales for the current year grew by almost 200% compared to the previous year. That was because of a complete lockdown and the negative effect of textiles in the previous year. We are happy to share that we are back to full capacity, both in terms of production and in terms of sales for the yarn segment. This also has a 7% increase compared to March of last quarter. The current geopolitical instability in the Euro region has hampered our exports to that space. Nevertheless, we have covered that with increase in demand from our Indian domestic market. We continue to explore new markets while creating value-added products that fit the market. Coming to the traditional roofing business, we are doing very well in the rural network in terms of market demand. We grew almost 13% sequentially. And we continue to focus on all our segments, and roofing is one of the most important. Though there were challenges in terms of increase in costs, the rupee depreciation against the USD due to the Russian-Ukraine war and other global factors, the Roofing business has done reasonably well. We expect the challenges to remain for some more quarters due to the conflict that is happening in the global atmosphere. The company always takes appropriate measures to remain competitive and show that we can perform in tough times. Though the margins have come down in the roofing segment due to the rise in input costs, we are confident that we will continue to perform well where the demand is picking up, is always the best and the right segment in terms of the industry direction. The company so far has looked at alternative materials to counter the upsurge in demands, which is carrying on in the right direction. During the current quarter, we have commenced commercial production of our second line of the Raebareli plant in roofing. The capacity of roofing segment now is at 9 lakh metric tonnes for this year. Speaking on the new initiatives, let me begin by saying that all the new developments that we have taken are being in good demand for our core businesses. The visibility of our application of our innovation and the products that we are developing with our strong R&D base are all adding to the core business development in terms of volume and the turnover growth that you see. The use and the likes of the Vnext solutions and the ATUM life is helping us enter new arenas in terms of catering markets wherein we are getting into strong tie-ups with the corporate segments wherein we are having an opportunity to build larger in the market. We are very happy to share with you that though there is a tough time that we are seeing in terms of the overall global scenario, we are confident that we will be on the right track and the company is taking the right decisions to have account of balance to the challenging year that we foresee, but our position remains to be positive. The Vnext growth is strong. The ATUM positioning is consolidating and here to take off. The textile business is robust and ready to take on the market expansions. And the AC, at last, is seeing a good demand even though the input costs are increasing. So all in all, we are seeing a good positive year to go ahead, yet even though it is going to be a challenging one. Thank you all, and hoping we can open up for questions.

[Operator Instructions] First from the line of [Vibyanshi] from [Harvest Investments].

My first question is on ATUM. Sir, you have directly discussed ATUM roof, and you said that it's in its national stage. Wish to know the progress on the same as other companies like KPI, Green, Zodiac, et cetera, have jumped leap forward and which year we shall reach full capacity utilization?

Yes. So ATUM is a new product, actually it was just [indiscernible] in terms of market shipment. It is an indigenously developed product wherein it is a roof infused with solar cells. So basically, it is a single roof that generates power for you. And we have got patents for that in India, in America and South Africa. So the market for, say, the roofing segment is huge in terms of almost the target that we have taken as a country, is almost 10 gigawatt for the year. Our capacity that we have set up is 30 megawatts to start with. This year, we are trying to almost about 15 megawatts to 20 megawatts in terms of the outlook, the year outlook that we have. I think comparing with traditional solar margins will be a challenge in terms of the utility that we provide. So traditionally, we don't compare with the traditional solar modules. What we look at is as a BIPD category, wherein we are trying to replace roofs, be it a metal roof or the traditional aluminum sheets wherein we are trying to replace those with ATUM solar roofs, which generates power. So what we are foreseeing here is in the next 2 years, we will be reaching full capacity and increasing our output in terms of 30 megawatts upwards to 60 megawatts as well. So that's a brief outlook on ATUM solar group.

Sir, I have another question. Can you please explain the cost difference between ATUM roof and a traditional solar roof? Like how much one hundred square feet of ATUM cost versus 100 feet of additional roof. And what will be the cost of setting up the 30-megawatt factory we have and the margins we expect at full capacity utilization?

Surely. So coming to margins, I think we will be looking at almost about 10% to start with once we reach full capacity. That is in terms of a nascent progression that we are looking at. As we increase the output, we will definitely get better economies of scale in terms of increased margins. Coming to the plant setup cost, we are looking at -- the setup cost is quite low because of the technology that we've developed in-house. We will be seeing hardly about INR 20 crores to INR 25 crores in terms of setting up a brand-new facility of a large-scale system of around 60 megawatts to 100 megawatts. But the CapEx is limited, but it's more of an OpEx year in terms of the working capital required will be quite high in terms compared to the CapEx. In terms of the cost, we will be the same cost as a traditional roof plus a traditional solar module. We will be equaling the same in terms of net value in terms of price comparison. But in terms of energy generation, we will be almost 30% to 40% higher in terms of energy output. To give you an example, ATUM Solar roof will generate 1 kilowatt of power in hardly 60 square feet, whereas a traditional solar will generate 1 kilowatt of power in 100 square feet. So that is really the value add that you get. Apart from a roof generating power, the energy, the output that comes with ATUM per square feet will be higher compared to the traditional solutions available in the market.

Sir, can you please give unit economics, if possible?

Surely, I think we have a detailed presentation that we can share with you regarding the complete picture of ATUM. But in terms of unit economics, in terms of pricing, we can tell you that it is around the same cost as traditional available solutions. We are not even positioning or selling ourselves at a premium at this stage. And the margins that I'm talking about are taking that into consideration. Once the product sets in, we will definitely be looking at bettering our premium that we can demand for our product. Thank you.

Thank you. The next question is from the line of Subham Agarwal from Aequitas Investments.

Sir, my first question was regarding the board division. So clearly, we have achieved INR 96 crores, almost close to INR 100 crores run rate now, and management is putting a lot of confidence at the new CapEx. Sir, I wanted to know your vision with regards to this division. How much this division can become in, let's say, 3 to 5 years from now and the key areas or the key milestone that you are looking at achieving to get to that goal?

Yes, sure. So just to give you an idea, I think as you rightly said, we have been very bullish on the Vnext division right from the very beginning when we started off in 2010. The product literally grew up from scratch in terms of the turnover that we are looking at today. This year, we have projected to reach around maybe anywhere between INR 350 crores to INR 400 crores for this segment alone. Going forward with the growth rate that we are expecting, we would need to set up almost a plant every 2 years is what we are expecting in terms of what we are looking at. Something to compare with what Visaka experienced from 2000 to 2008 in terms of the growth in our roofing segment where we had set up almost 5 manufacturing plants in a span of 7 to 8 years. We expect that kind of growth going forward for the Vnext alone. I think by 2030, we should be looking at adding at least around 4 to 5 plants of Vnext alone, where then we'll be able to 25,000 tonnes additional to what we are doing in terms of a monthly output sale. So the growth that we are looking at is quite robust. I think Vnext is going to take off in a big way in the coming months and the coming years. And the consumers are also showing us that confidence in terms of the premium and the brand equity that we are able to get in the market. So going forward, I think Vnext will be a wonderful division to look out for.

Fair enough. And sir, secondly, so in this division, if we talk of margin, it has remained quite low compared to the CapEx that we are doing in plant. So with scalability, what kind of a sustainable margin are you targeting to achieve to get a decent IRR or ROE from these projects?

Surely. So I think margins point of view, I think we've always been indicating that we will do anything in between 12% to 15%. And I think you will be seeing that very shortly. In fact, the first quarter of this year also has seen a good uptake in terms of the pricing that we've got in the market. Going forward, I think definitely, we will be seeing a very positive sign in terms of the margins this year and going forward. In spite of having severe challenges in the supply chain and cost pressures, Vnext will be doing well in the overall margins point of view.

Okay. Good to hear that. Sir, and lastly, on the cost front, so we import a lot of paper fiber for this division. And 3 months back, there was a certain problem regarding to import of product, and we were looking at different geographies to import. So what is the current situation there?

So I think for Vnext particularly, I think we should credit experience of the team that has had a lot in terms of dealing with the reducing fiber costs. We have been doing very good R&D in terms of offsetting the cost with other materials. What I mean to say is the recycled content in Vnext or be it the substitute products for the pulp that we use, I think our team has done a tremendous job in terms of offsetting the cost that we are experiencing. In fact, that you will be able to see that very clearly in terms of our margins that you'll be seeing, the input cost in Vnext is being very efficiently managed by our team in terms of the R&D that we are doing to offset. So I would like to say that, yes, though there are pressures, I think Vnext should be in a comfortable part in the months to come.

Okay. And sir, lastly, just to summarize the entire discussion. So with the growth rate that you have projected, it seems like in 3 to 4 years down the line, we can achieve INR 1,000 crores from V-boards. So do you see this achievable? And with the margin, it looks like almost INR 130 crores to INR 150 crores of EBITDA we can generate out of this division.

I would -- you think from committing to your comments that I would definitely say, yes, by 2030, we should be able to look at the numbers that we are talking about, yes, definitely.

The next question is from the line of [Ankit] from [Oculus Capital Group Fund].

Sir, I'm looking at the shareholding and there is shareholder vigilant security services. So I wanted to know if this is part of the promoter family?

Yes. It is actually not -- I think there were some articles also that unfortunately got posted. We are aware of that. We have nothing to do with that company.

Okay. So this is not related to promotor at all.

No.

Okay. So it's just an investor who used to hold 10%?

Yes. Yes, it is an investor. And actually, if you take a look at our overall direction that we are doing itself, we are trying to bring in more institutions across the company. In fact, we are also trying very effectively to reduce our recent shareholdering and bringing institutional shareholders that will create a good growth for us, so that is the direction we are in.

Got it. And sir, anything on the asbestos roofing, which is basically the majority -- I believe, majority of our EBIT will be coming from that division. So just wanted to know your views on that with respect to the bans that we have seen across the world on asbestos. How it can affect our company if something happens in India also in a widespread way. What can be a solution for that? What are the options that we can provide if there is some -- like if government says that you have to remove asbestos roofing and replace it with something else, what are the decisions that we are having with the government with respect to asbestos roofing, et cetera. So I just want to know your thoughts on that.

So first off, I think this has been a point of discussion for so many years. I think ever since I joined there 12 years ago, that the whole discussion was on this, and rightly so. The point of asbestos in terms of our product, first off, I would like to reiterate that we are in complete -- the thought of safety compliance is very high in the country. I must speak about all our competitors as well because of the experiences that the blue asbestos usage has created across the world. The industry as such has faced a lot of turmoil and shutdown in brand in many places. But in India, we are very stringent in terms of the compliances, what we do and how we use asbestos, and we use only the white asbestos which unlike for blue asbestos is much safer in terms of the usage. Having said that, the cost of the product that we look at and the roofing sheet, the cement roofing sheet cost is hardly INR 15 per square foot. Whereas if you take a comparative of a metal sheet, the cost is almost INR 45 per square feet. So the roofing sheet, the cement roofing sheet that we offer is actually a poor man's product. India being a rural market, the demand comes heavily from the lower section in terms of the demand. And that is where the pricing point has stabilized. Having said that, we have been very active again. I must reiterate we have a non-asbestos product ready already. It is in use and in the market as well. But the quantum of that right now taking the cost into account is very limited. We have the technical ability to shift over to non-asbestos if the time of need really comes. But keeping the cost in mind, we always have to make sure that our product is available at the right price to our consumers. Having said that, we have also got into a very interesting mix of where we can create a product with good strength without the use as well. So that is point #1. Point #2, in terms of our margins, yes, predominantly, the roofing sheet business is the main margin earner for the company. But we are seeing a good change in that in terms of the contribution that we are getting from the textile division and the Vnext boards division, both of which going forward, I think we will be seeing a good contribution compared to cement roofing as well.

Got it. And Sir, basically, when we give the segmental breakup of the roofing, the building products versus the yarn business, can we give the -- going forward, whenever this becomes material, can we give the breakup in terms of your Vnext and ATUM plus your asbestos sheets and the yarn. So basically the 3 segments. What I understand next future growth drivers will be the Vnext and the ATUM ones, the ATUM solar.

Surely. I think a fair ask in totality. We are actually working on that space. We will let you know at the right time. I think we are just seeing how best to [indiscernible]. So yes, point noted.

Thank you. The next question is from the line of [Mukesh Panjwani] from [Value Securities].

Am I audible.

Yes.

Yes. So we can see that the Vnext division is growing very, very well. And despite that, you can also see that the valuations of company are really, I can say, deeply undervalued. So is it possible to demerge this Vnext division so that it can unlock the value for shareholders?

Yes. Yes. Again, I must have to respond in a similar way I just did, unfortunately. We are exploring options in terms of how best we can unlock untapped value for the Vnext and the new age products. I think this has been a point of concern for most, and we are looking at options to explore.

The next question is from the line of [Dinesh Shah] from [Equinox Funds].

My question would be on the yarn segment. How will the free trade agreement benefit us in this segment? Or in the both products.

I'm unable to hear you clearly.

Yes. Can you hear me now?

Sir, I would request you to speak a little bit far from your breath, we can hear your breath also along with your voice.

Can you hear me now?

Yes, please proceed.

So my question would be on yarn segment. How will the free trade agreement benefit us in this segment or in the both products, Vnext and yarn. What percentage of sales are we exporting in each product, the geographic division, if you can help.

Sure, great. I think, first off, I think to mention, our company is very heavily focused on the domestic growth. I think Indian story in terms of the market and in the terms of the base business, economics is very strong. And we have always been a very bullish outlook in terms of the India story. So almost all the products that we are catering to today are, I think, around 25% to 30% is what we export and that too given at the right price and at the right contribution for our company. So something like a free trade helps us to look at countries where we can explore markets in terms of what we are doing. But I would like to reiterate that our focus has been majorly in the domestic market where we are seeing a very robust growth in terms of the India growth story. So that's where we stand.

Okay, sir. And my second question would be on Vnext board. Even, considering the demand at 25% growth target a little too conservative? What is the market size of the product and our market share?

Sorry, can you repeat the beginning, please?

Yes, is on Vnext board. Isn't considering the demand a 25% growth target a little conservative?

Sure, sure. So I think in terms of the demand, what we are really seeing is the conversion from segments like the plywood market, from the gypsum board market and where the external walls are concerned, the brick walls as well, right? And what we are looking at is really expanding in terms of growth cycle. So, if you really look at our growth story over the past 10 years, the growth rate that we are achieving today has not been achieved by any company, and not by us either earlier. Today, what we are seeing is post COVID, the uptick has been very strong. And in that, I think I'd be very happy to say that we are ahead of the curve in terms of the growth cycle and in terms of product adoption. I think going forward, to give you a good number, I think we will stick to 30% to 35% in terms of what we are looking at as a strong growth rate, and a sustainable growth rate to reach out to a larger market. I think I should not say that it is too low. I think we are the right space and we have a good growth rate. I wouldn't agree that we are the growth rate is low in this front.

Sir, just getting to my first question. So what's the geographic division?

In terms of our plant locations?