Vishnu Chemicals Limited (516072) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and I welcome you to the Q4 FY '23 Earnings Conference Call of Vishnu Chemicals Limited, to discuss the quarterly and annual business performance. We have from the management, Mr. Siddartha, Cherukuri, Joint Managing Director; and Mr. Hanumant Bhansali, Vice President of Finance. [Operator Instructions] Please note that this conference is being recorded. Some of the statements made in today's call may be forward-looking in nature and may involve risks and uncertainties. For more details, kindly refer to the investor updates and other filings that can be found on the company's website. Now I would like to hand the conference call over to Mr. Siddartha for his opening comments, and then we will open the floor for Q&A. Thank you, and over to you, sir.

Thank you, Mr. Nirav. Good evening, everyone. Thank you, everyone, for joining this call. Our company has witnessed a remarkable performance in the financial year '23 with a 31% increase in income and a 68% surge in profit on a consolidated basis. The year gone by was an important year for us, and we ticked most of the boxes and improved in all areas fundamentally. Our consolidated EBITDA margins have increased by 550 basis points over the last 2 years. Our consolidated debt-to-equity ratio stands at 0.9x now compared to 1.3x a year ago. Our ROCE is over 35% compared to 28% on Y-on-Y basis. That's a 14% increase over the last year. The primary factors driving the company's consistent performance includes size and scale of operation, manufacturing and building sustainable and environment-friendly practices in our day-to-day operations, mitigating cyclicality to a large extent through a flexible product mix and backward integration process. At Vishnu, manufacturing is our core focus. And the chemistry we operate is an essential engine for performance, aesthetics and longevity in the applications across pharmaceutical, consumer and industrial sector. Lastly, we express a sincere gratitude to our shareholders, stakeholders, lenders, customers and suppliers for their continued support. And we remain committed to the highest levels of corporate governance. I will now hand over to Hanumant to share the financial highlights. Thank you.

Thank you, Mr. Siddartha, and good evening, everyone. Manufacturing is our core focus. After giving you an update on the overall performance from a holistic point of view, let me now speak about the financial performance. Consolidated domestic and export sales continued its growth trend, growing by 36% and 26%, respectively, on a year-on-year basis. The consolidated total income for FY '23 was INR 1,406 crores as compared to INR 1,075 crores in FY '22, a growth of 31% on a Y-on-Y basis. Our consolidated EBITDA margin for FY '23 was 17.4% compared to 15% in FY '22, an increase of 200 basis points on a Y-on-Y basis. In FY '23, we also achieved INR 137 crores of PAT compared to INR 81 crores in FY '22, an increase of 68% on a Y-on-Y basis. Our PAT margins have increased from 7.6% in FY '22 to 9.7% in FY '23. Coming to Q4 FY '23 performance, the consolidated revenues were INR 339 crores as compared to INR 336 crores in Q4 FY '23 -- FY '22, up by 1% on a Y-on-Y basis and 2% on a Q-on-Q basis. The consolidated EBITDA for Q4 FY '23 was INR 64 crores compared to INR 53 crores for the corresponding quarter previous year, up by 20% on a Y-on-Y basis and 10% on Q-on-Q basis. Our consolidated EBITDA margins were 18.9% in the quarter Q4 compared to 15.8% in the corresponding quarter previous year. The consolidated PAT for Q4 FY '23 was INR 36 crores compared to INR 29 for the corresponding quarter previous year, up by 25% Y-on-Y basis and 12% on a Q-on-Q basis. The net profit margin of the company in Q4 FY '23 was 10.5% compared to 8.5% in Q4 FY '22. The Board has recommended a dividend of INR 0.4 per equity share of INR 2 face value for the financial year ended 31st March 2023. And the same shall be paid subject to the approval of shareholders at the ensuing AGM. The performance of Vishnu Chemicals is an outcome of its consistent focus on manufacturing, resulting its highest ever EBITDA and PAT margins since inception, a reduction in leverage metrics and generation of free cash consistently for 5 years now. The release of pledge by our lenders is a milestone for the company, and we are thankful to our consortium of banks for their continued support. With this, I would like to conclude my remarks. We can now commence the Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Dhaval Shah from Girik Capital.

Am I audible?

Yes, you are.

Yes. Great set of numbers. A couple of questions from my side. So first, to start with, we have around INR 98 crores of CWIP on the balance sheet. So how will this convert into revenue for us over the next 2-year period? Secondly, our margins have improved, and I believe a lot of it has to do with the -- our logistics costs are coming down and other operational expenses also reducing, while top line has remained same. So is there a phenomena where the chemical prices have reduced? There would be a volume growth, but there's a value degrowth. And our per tonne EBITDA or per unit earnings what we have, we have maintained it. That's why it is reflecting in a higher percentage EBITDA margin. So these are my first 2 questions.

Good morning, Mr. Dhaval. Thank you so much for your questions. I'll answer your first question. Yes, the CWIP is INR 98 crores as of 31st March 2023. I'd like to explain the breakup of this. Out of this, INR 93 crores is CWIP towards our Precipitated Barium Sulphate Project, which is currently going on in our barium subsidiary, Vishnu Barium Private Limited. It is expected to be completed in the first half of the current financial year. The remaining is our replacement CapEx in chromium chemicals, which is CWIP of INR 5 crores. So over here, firstly, I'll talk to you about our barium -- Precipitated Barium Sulphate Project. We will be the only producers of this chemical in India. Once it is operational, it will give us a first-mover advantage to tap the existing customers, who are currently relying on imports for their material needs. Overall, this will help us create a new market in India for a new product. There is a very good demand of this in countries, like -- in continents like North America, Europe and also India. Upon commissioning, overall, we will become the largest producers of barium chemicals in India, giving us an opportunity to meet Indian consumption needs, while tapping our overall existing network of international clientele. So from 40,000 tonnes of capacity in barium chemicals in January 2022, we will operate on an installed capacity of 90,000 tonnes upon the commissioning of this project.

Which is by H1 FY '24?

Yes. In the next one -- I mean in the next 3 to 4 months, it should be fully operational.

Okay. So from the third quarter, we should see the numbers, okay.

No, no, within the next 3 months. So from the -- yes, from the fourth quarter, correct. We will be able to see the numbers.

Okay. So third quarter will have the full number. Okay. Okay. Now this is used in paint industry, right, this Precipitated Barium Sulphate?

Precipitated Barium Sulphate finds its application in the paint industry, in the powder coating industry, in the battery industry. It is also being researched by some of the most acclaimed scientists globally to create the whitest paint in the world directly from Precipitated Barium Sulphate. It has also entered the Guinness Book of World Records last year for its ability to reflect 98% of sunlight. So it has the ability to cool outdoor surfaces, let's say, your rooftops by more than 4.5 degree Celsius just by application of this paint. Recently, even in Telangana, state of Telangana, the government announced a rooftop cooling policy, wherein they will start making it mandatory for residential and commercial complexes to apply certain cooling agents on the roof. And this can also be propellent towards that.

So we are adding -- could you be specific, this product, what is the capacity that we are adding?

Mr. Dhaval, right now, the plan is to add 30,000 tonnes.

Okay. Okay. So the 40,000 we had in Jan '22, there were the various products of barium. 30,000 will be barium sulphate. And so that will be 70,000, and another 20,000 is which product to take it to 90,000?

Yes. So the breakup of 90,000 is, we have 60,000 tonnes of barium carbonate and 30,000 tonnes of precipitated barium sulphate once it will be operational.

Understood. Okay. And this -- the entire 30,000, we plan to sell the entire volume over -- like in the first year itself, are we having enough domestic and export demand? How will you plan to consume the volumes?

We have already spoken with some big end users, and the response is good, but they would like to test it and see how the end product works. I'll request Mr. Siddartha to give more insights on the marketing and sales prospects of this product.

Mr. Dhaval, it's Siddartha with you. We are -- I mean, as the project is progressing, we are already in discussion with some good end users as well as distributor in India as well as we already have some good existing channels outside India as well in Europe and North America. So we are seeing a lot of interest, I mean, for them to work with us for this product, especially in India, since it's a complete improved replacement. What's more interesting is, there has been a consistent growth of 12% on Y-on-Y basis as in a -- so because it's directly related to the powder coating industry. If you go back 4 years ago, the powder coating production in India was about 67,000 tonnes. Today, it stands at 1,40,000 tonnes. So in this 1,40,000 tonnes, barium sulphate is used as a primary filler to replace titanium dioxide because it has -- it is very close in terms of oil absorption and the printing strength, and it's more economical to use barium sulphate versus titanium dioxide. So people are increasing the volume of barium sulphate to bring down the overall cost and get the same effect of the final product.

Interesting. Okay. So this will also be used -- this is only for powder coating. And in the regular paints, TiO2 is also used. There...

It is used to give a gloss effect on the paint, let's say, your automobile car. Like if you go back 10, 15 years ago, most of -- even your Maruti was mostly a matte finish. Even a very -- a midsized car has a very nice gloss effect. So that gloss effect in that paint is coming from barium sulphate.

Understood, understood. Okay...

To add to it aluminum profile coating, your white goods, your air conditioner, your fan, all are powder coated because it was a gloss effect. And powder coating has the unique advantage of corrosion resistance versus a normal paint.

And sir, for my second question regarding what would be our volume growth at the company level for FY '23? And how do you see the volume growth for FY '24 and '25?

In FY '23, the growth came predominantly from value growth in both our chromium chemicals as well as barium chemistry. And FY '24, we are going to witness volume growth in both these chemistries as we are seeing that barium chemicals is doing well now. And gradually, it is expected to even pick up better pace from where it was in Q4. Q4 was the second best quarter in terms of volume offtake in the entire financial year FY '23 in barium chemicals. So we are looking forward that, that momentum would continue in the quarters moving forward. In the chromium chemical side, we had a very good year. But we also took a maintenance in the December quarter, which overall impacted our capacity utilization, though did not have an impact on our top line due to the value growth. We don't expect to take any major maintenance in our chromium chemical plants this year. So we will see the full -- we will see the effect of the 10,000 tonnes that we have added in capacity in July to be realized in this current financial year.

Correct. Okay. Sir, let me talk to large chemical distributors. What they comment is that since China has opened up, there is a lot of supply of chemicals coming from China into India as well as the global market, which is hurting Indian exporters as well as domestic demand. In your business, what is the trend you see?

Well, in a standalone business, the chromium chemicals, China is not a competitor for us or not an immediate peer because whatever chromium chemicals produced in China are sold in China. And on -- and so we are competing with U.S., Turkey and South Africa, who are our main peers. In barium, yes, China is an important player. I mean we are not witnessing, I mean, a lot of price pressure at the moment. And also, we are not seeing any volume decreases, although there was an impact on -- during quarter 3 because of high gas prices. Now the demand is coming back slowly.

Okay. Okay. And so basically, you are not getting impacted by any sort of dumping from China at the moment.

Yes. And also the product, which we are going to launch, barium sulphate, is more of a technical product. So we already are seeing a better quality versus what Chinese are supplying in India. So I think it's not just commercial, but also on the technical side, we'll be able to prove that there are benefits of using our product in terms of consumption and quality to get a better gloss effect versus what Chinese are doing. Although it will take time, but we are confident on that aspect.

Dhaval, sorry to interrupt you. I'll request you to join the queue for a followup question. The next question is from the line of Ranvir Singh from Nuvama Wealth.

Congratulations for a good set of numbers. Just on chromium side, 10,000 capacity we have added. So after this 10,000 capacity, after addition of this capacity, how has been the utilization for the full year?

So we have added 10,000 tonnes capacity. As we don't share the volumes on an annual basis or on a quarterly basis, I won't be able to share the actual numbers with you. But bearing Q3, which was a quarter where we took a maintenance, on an overall basis, our plants operated at more than 80% utilization. And we also crossed 90% utilization in certain quarters.

That you said about barium, right?

About chromium chemicals.

Chromium...

In barium chemicals, our capacity was at the range of 55% to 60% of 60,000 tonnes of installed capacity of barium carbonate. The reason being last year was a tough overall quarter that we saw in Q2 and Q3, where the natural gas prices had gone up in Europe, which they are not the consumers of, but our customers are. And now we are witnessing that the overall natural gas prices have come down significantly. So it's a good sign for our customer.

So 40,000 metric tonne capacity we earlier had, and then 20,000, we have already added there, that was utilized in this year?

We have added it, but we did not operate it at full utilization. So more or less, we operated at the same utilization as we did in 40,000 tonnes.

So what remains here is a 30,000 barium sulphate capacity is likely to -- that would be added this year in first half, right?

Correct.

And sir, INR 91 crores -- INR 93 crores, which was that CWIP, that was mainly related to barium sulphate and whatever we had to spend on barium carbonate, 20,000 is already capitalized, right?

Absolutely. The entire project of barium carbonate is fully capitalized in our balance sheet as of 31st March 2022. So that project is fully completed.

Okay. Although you are not disclosing the products and utilization, but just for indicative purpose, if you could highlight about the realization, how in chromium, whether the realization we have seen improving quarter-on-quarter or this is stable? Or how do you see even the short-term outlook, if you could comment on this, both for chromium and barium?

Thank you, again, for your question. I understand it's a very important question. Let me start off with this way that on a year-on-year basis, there is more than 30% value growth in chromium chemicals. At the same time, what we have witnessed is, from the Q2 of this financial year onwards, the prices started coming down, both from the freight point of view, and that was passed on to our customers. Similarly, when the prices had gone up, we had also charged our customers. So it is our duty to pass on the benefits back to our customers. Despite the reduction in prices that started from mid of Q2 and it continued till Q4, what we have not seen is any volume degrowth. There's a very good demand for our chromium chemicals as we are seeing. And on a year-on-year basis, the value growth was more than 30%. And going forward, we believe that there will be a good volume growth to support this revenue trajectory. But the focus of our business is not really to target a certain revenue. What we are focusing is to target certain EBITDAs and meet those margins.

Understood. And for barium, how is the trend?

On the barium chemicals, like I said, last year, there was not -- there were no major volume growth. But overall, what we are seeing is from January onwards, the volume is picking up. And going forward, it will be -- it will improve gradually as we see. Last year, the top line growth was predominantly driven by our improved blended realization, which increased by nearly 8% on a year-on-year basis.

Right, right, right. Okay. So I think going forward in FY '22 -- '24, growth would be mainly from that capacity volume side. And we can expect a marginal improvement in pricing. That is what we should take here.

Like we said, in both these chemistries, the pricing is determined based on 3 factors. Factor number one is the raw material cost. Factor number two is the freight cost. Factor number three is the overall demand and supply of the market sentiments as we call it. Now factor number one is pretty strong as of now. So the raw material prices for some of the key materials that we procure has not really come off. But the freights have come down, and that is also leading to an overall correction in realization. It's not huge correction, but it's under 10-odd percent right now. So as we go, if there is an overall correction in raw material prices, we will obviously pass it on to our customers. But the overall endeavor will be to work on a certain EBITDA and maintain that EBITDA going forward.

The next question is from the line of Ravi Naredi from Naredi Investments.

Sir, how much CapEx is still due in financial year '24? How much CapEx is due in March?

Mr. Naredi, near about INR 10 crores is pending as a CapEx, which has to be spent during this financial year.

INR 10 crores. And it -- this all -- once all CapEx completed, can you give some guidance of what will be top line in financial year '24 or you will skip it?

We won't be able to give a guidance at this juncture. But our endeavor will be to grow at a similar levels of what we have seen over the last 2 years. And now that this new product addition in barium is happening, we are very confident that the growth trajectory will continue.

So any margin expansion are you seeing in this financial year '24?

Yes, we are expecting a margin improvement in chromium as well as barium. Barium, in view of a backward integration, what we have done, our raw material costs will further improve. That can be leveraged for us to gain more market share globally as well as attain desired EBITDA margin -- achieve desired EBITDA margin.

Okay. And any planning to reduce the debt in current year?

Yes. I mean nearly about INR 40 crores debt will be reduced during this financial year.

Next question is from the line of Rikin Shah from Omkara Capital.

Congrats on a good set of numbers. Just wanted to understand on the margin front, we have seen a contraction in gross margins, but EBITDA margin...

Rikin, sorry to interrupt, your voice is coming muffled. Can I request you to speak through the handset?

Yes, it's my handset. Am I audible?

If I may request you to speak a little louder, please?

Sure. So I'm asking that we have seen a contraction in gross margins in both barium and chromium, but EBITDA margins in chromium have improved. So can you help us understand this?

Mr. Rikin, the gross margins have been more or less the same on a year-on-year basis. Last year in chromium chemicals, we had a gross margin of about 43%. And now it's about 44% in FY '23. Our EBITDA margin in FY '22 was about 14.5% in FY '22, which has now increased to 18%. The raw materials side, overall, the prices of -- like we said, the prices of our key raw materials have remained high during the financial year FY '23 compared to FY '22. And that's the reason why we have not seen any major reduction in the overall value, the blended realization for chromium chemicals. Overall, the next important part is our conversion cost, which has reduced by 1% on a year-on-year basis. Our employee costs, which was 3.5% of our revenues, have come down to about 2.9%. But the major reduction is in our selling and administrative costs, which consists of our shipping and forwarding expenses. It has come down from 12.3% last year to 10.5% on a standalone basis.

Right. So within barium if I evaluate Q-on-Q, last quarter, we did INR 28 crores, and we broke even on a PAT level. In this quarter, we have done INR 37 crores, INR 38 crores, and we are still breaking even on a PAT level. So what has happened in the year?

Thank you for observing this. There's an increase in finance costs in the Q4. At an EBITDA level, at Vishnu Barium, we had a pretty good quarter. We did about 11% EBITDA margin compared to 9.5% in the same quarter last year. However, our finance cost was about INR 2.8 crores in Q4 FY '23 in the barium vertical out of the total INR 6.6 crores that we expensed throughout the year. So that led to a decline in our PBT and hence, the PAT.

So going forward, some of these cost structures, we expect them to reduce a little bit?

Like we said, we are seeing that the markets are coming back. The Indian markets as well as the global markets are showing resilience for barium carbonate. It is a non-substitutable product used in the ceramic tiles and bricks industries. So as the demand comes back, as we produce more, overall, our operating levels will directly drive the profitability upwards.

I'd like to add to it as well. So our focus will continue to remain on improving the EBITDA margin. So following changes are going to be adopted, like the backward integration in barium.

All right. All right. So regarding soda ash, would love to hear the outlook. So we were not expecting much of a global capacity addition, but with some capacity of 5 million tonnes coming Inner Mongolia, you are seeing domestic price cuts as well. So how does this impact us? And what do we expect? Is there a change in outlook for soda ash?

On our side, there won't be a lot of changes per se because for this commodity, like soda ash, logistics will still remain an important price component. So the prices in India, although there'll be some changes coming over the next few quarters, we have not witnessed them yet. There are few drops, but nothing significant. But logistics will play a very important role moving forward, and a duty component also will impact it. In our backward integration, just to reiterate, it's not just for us saving on soda ash. We have also negated another important raw material, which is sulfuric acid, which is also helping us overall.

All right. All right. And with -- so basically, we are, I think, approximating it for INR 12, and right now, the going rate is INR 33, INR 34, if that's fair?

I think -- well, the going rate is close. Maybe you're talking on basic levels, yes. Yes, that's about where we are.

Next question is from the line of Rohit Nagraj from Centrum Broking Limited.

Yes. Am I audible?

Yes.

Congrats on a good set of numbers. My first question is in terms of competition. So given that the costs have come down, except for RMs, and we have also had a strong traction on our margins because of that. Are the other players who are probably sitting on the sidelines or were operating at a lower rate, they have again come back into the system, and that is impacting pricing and probably will have even repercussions on the volumes. Any sense on this from your end?

Thank you, Mr. Nagraj. The way we look at the whole business is with respect to the product mix and how the industry is doing. So here is what we are witnessing. We have seen a very strong growth in the automobile industry, the key factor for our chromium chemicals, per se, whether it could be electroplating, it could be leather, it could be metal treatment. So we are seeing a very strong traction from that application side. Also the superalloy industry, now that the aerospace, there's a good growth given that the Airbus and Boeing are receiving good orders, not just from India, but around the globe. So that will need more chromium metal in the application of superalloy. And that's going to keep the volumes up in the years to come, that how we see. We see a strong growth in the superalloy industry.

All right. I was primarily talking from the competition perspective. I mean are we seeing any kind of short-term or midterm impact from the competition coming in? I mean on a longer-term basis, as you explained, probably things are quite favorable, but on a short-term basis?

We have already seen some price adjustment, and we are not seeing the prices correcting any further. And whatever raw material price adjustments and the freight adjustments, we have passed it on. And the way we look at it is the prices have adjusted and have already bottomed.

Right. Got it. My second question is in terms of margins and growth. Last year, as you explained that it was primarily driven because of the value or pricing, favorable pricing. Incrementally, the volume growth would be a large driver for us. And that would primarily determine how much absolute EBITDA increase will happen and flow to the bottom line? And probably our margin trajectory will remain at, say, 18% plus/minus odd levels incrementally, given that the prices -- considering the prices, stable pricing for both barium and chromium chemicals.

Yes. I think our objective is to target an 18% EBITDA and could be even upwards. So for that, we are -- we have to carefully understand the demand and supply for the product mix, what we are producing. And moving forward, what will -- the question was what would drive the volume growth?

Right. I mean last year, it was primarily value-driven growth. So incrementally, I mean, how much volumes we produce, I think concurrently, a similar kind of growth we'll be able to see in EBITDA. Is that assumption right?

Yes, yes. So like we did -- I mean, like we have given a guidance that the 10,000 tonnes of additional capacity is going to come in during this financial year. Now the idea is we will be focused more towards producing chromic acid, where we are seeing a good traction from the wood preservative and plating, or it will go more into chrome oxide, which will eventually lead to chrome metal production. So I think -- we will take a call on that. And also, we'll see a good volume growth in barium, and now there are 2 -- because of this barium sulphate expansion, product launch, which is going to happen in the next quarter. Mostly, the volume growth will be coming through barium chemistry. That's how we are seeing that.

Right, right. My last question is from a growth perspective or strategic perspective, from a 3 to 5 years horizon. So are we going to go in for any product line expansions or any other new areas, maybe catering to a different user segment? Or we will be primarily focused on the existing product lines and expand further ourselves into penetrating the market?

Yes. I mean there's quite a good opportunity within both the verticals, chromium and barium. So in chrome, we are working very closely with our R&D team to produce chromium metal, which will help us to go into superalloy industry as well as welding electrode, and there's a good opportunity as the defense sector is growing in India. And we see a good growth coming over the years. And as there is no domestic producer, most of the chromium metal is imported. So it will be a good import substitute opportunity. And on the barium, we are also working on other value-added products or high-purity barium carbonate, which is used in the semiconductor industry, which has a good growth prospects as well. Although there is no much consumption in India, it's mostly in Korea, Japan and U.S., where this product is. And we are also working on some battery chemicals, which could fit into our portfolio.

Next follow-up question is from the line of Dhaval Shah from Girik Capital.

So I wanted to understand, since we don't share quarterly volumes, is that now -- like if we did X tonnage of barium and chromium in March, so do we see a growth in June quarter and September because by July, our new capacity will come on stream, so definitely get the volumes. But for April, May, June, are we seeing growth? Is there any seasonality? I just want to understand that side.

Thank you, Mr. Dhaval, for the question. We won't be able to comment on the ongoing quarter. But what we can see is that the volumes in both the chemistries are quite resilient. And that is continuing to grow as I'm speaking to you. From our point of view, we are looking at driving more volumes than trying to look at a particular realization per kg because that Automatically takes care of my desired EBITDAs and desired gross profits.

Okay, okay, okay. So for barium chemistry, if I understand correctly, you mentioned the utilization was around 55% to 60% for FY '23. Is that number right?

That's correct.

Okay, okay. Fine. And now that was 60,000 and now another 30,000 will come by in next 3, 4 months?

Yes.

Fine. So that's 55% to 60% of barium carbonate utilization, how do you see that going forward in '24 and '25?

Yes, we are targeting to utilize the capacities upwards of 70% through the year.

Through the year. Okay. And does barium carbonate act as an input material to make this precipitated barium sulphate?

No, it is not a feed for Precipitated Barium Sulphate. It's -- in fact, synergies -- I mean both the products have synergies because both of them have the same origins from barytes, which is the mineral coming out from the planet. But production process...

Not a starting raw material, yes.

It's not a starting raw material. Barium carbonate is not a starting raw material for Precipitated Barium Sulphate.

Okay. So whatever we produce of barium carbonate and sulphate is all sold out in the market. Nothing is captively consumed?