Welspun Corp Limited (532144) Earnings Call Transcript & Summary

Ladies and gentlemen, good day. And welcome to the Welspun Corp Limited Q3 FY '20 Earnings Conference Call, hosted by Axis Capital Limited. [Operator Instructions] I now hand the conference over to Mr. Ankur Periwal from Axis Capital Limited. Thank you, and over to you, sir.

Thanks, Azan. Morning, friends, and welcome to Welspun Corp's Q3 FY '20 Earnings Call. As usual, the call will be initiated with a brief management discussion on the quarter as well as the 9-month performance followed by an interactive Q&A session. From the management side, we have with us Mr. Vipul Mathur, Managing Director and CEO; Mr. Percy Birdy, Chief Financial Officer; Mr. Akhil Jindal, Group CFO and Head Strategy for the Welspun Group; and Mr. Harish Venkateswaran, AVP, Group Finance and Strategy. I'll hand it over to Mr. Vipul for his initial comments.

Very good morning, friends, and thank you very much for joining this call on a working day. As we start, I'm sure you have -- we have -- we had our Board meeting yesterday, and we had announced our results. I'm sure most of you had a chance to go through it. It has been a very exemplary quarter for us, as you would have seen. We have been -- we had been showing a sort of a consistent growth on a quarter-on-quarter basis for the last 6, 7 quarters, and this particular quarter has been a very outstanding quarter, and it truly reflects the operational excellence and the efficiency which has been shown by all my 3 geographies where we are operating. Just to take you through some financial numbers for this particular quarter. We did a production of 473,000 metric ton in this quarter, which is the highest ever production in any quarter in the history of Welspun. We also logged in a sales of 428,000 metric tons, which is the highest sales ever being logged in any quarter in the history of Welspun. This year, our operating EBITDA for this particular quarter stood at INR 372 crores (sic) [ INR 371 crores ]. Our profit after tax was INR 234 crores. In comparison, if I look at the way -- how things have moved on 9 months basis, in 9 months, we have done more than 1.2 million tonnes of production. We have logged in a sale of more than 1 million tonnes of sales. Our operating EBITDA stands at INR 950 crores, and this is based in Ind AS. And if I also add the Saudi operations, just for the comparison sake and our share only, it has also contributed more than INR 200 crores in our EBITDA. So if I consolidate, let's say, Ind AS plus Saudi operations, we have done an EBITDA of more than INR 1,150 crores in 9 months' time. Our profit after tax over 9 months is INR 533 crores. And accordingly, if you would see, our EPS has now moved to INR 20.4, our ROCE has moved to 30.9%, and our return on equity has gone up to 25.2%. And these are all historical landmark numbers in the last 10 years of our operations. This performance, as I said, has been because of the operational efficiency, the diligence at which all the geographies, which is U.S., Saudi and India, has performed. This -- in this particular quarter, I'm sure you would have noticed that the performance of India operations has also significantly ramped up. So all -- Saudi and U.S., in any case, were doing extremely well in this particular quarter. The U.S. -- the Indian operations also significantly ramped up. So -- which has set the tone. Moving forward, we are fairly optimistic that the subsequent quarters also are going to show us more and more robust growth as we are very optimistic about it. And as we go into this particular call, we will like to explain you what is the business scenario, what is our strategy on CapEx, what is the business play looking to us for 3 years, how are the geographies, U.S., Saudi and India geographies from a business standpoint of view are going to look. I think so this is how -- when we get into this particular call, we will talk a lot, and we will give you a complete clarity around that. With this, I think so we want to keep this opening pretty short and sweet so that I have -- give most of the opportunity to my investors to directly ask their questions so that we are able to address any questions they have in their mind. Thank you very much.

[Operator Instructions] The first question is from the line of Jyoti Amonkar from NMV Securities.

Actually, I had a question regarding the EBITDA per tonne was up to about INR 11,900, was very good EBITDA, I assume. But could you just provide me with the breakup for U.S.? Because in the previous quarter, I think so you all had provided for the U.S. as well, which was doing really good.

So what you're seeing INR 11,900, Jyoti, is a blended EBITDA out of U.S. as well as for India. In this particular quarter, the EBITDA per tonne out of U.S. was close to $260, whereas the EBITDA per tonne for India operations was close to $120. So that is how -- what you are seeing is a blended at INR 11,900 at this point of time.

Okay. Sure. And sir, the order book which we see has come down a bit, right, from June. So it's just the impact of the overall slowdown? Or -- and how are we expected to pan out in the future?

So if you look at the order book, order book is still at 1.3 million tonnes. And more than that, I think so if you look at the bid book, we still are maintaining a healthy bid book of almost 25 million tonnes of bid book. So I don't see any slowdown there per se. It is just a matter -- and if you go -- if you look at it in the quarter 3, we have booked almost -- while we have executed 428,000 tonnes of orders, we have also booked 376,000 tonnes of order in Q3. And in -- corresponding to that, in the last quarter, we booked only 130,000 tonnes. So I don't think so that we are looking at any slowdown per se. So I think so it's just a number. And moving forward, this is only going to improve from here.

Okay. Okay. Sure. And sir, how are we seeing our Saudi operations forward as it has turned positive now? And I think so we have 2 to 3 quarters of...

Saudi operation has been a complete turnaround story. And I think so we have been very consistent in briefing our [ friends ] that this is going to turn around. And in the last 3 quarters, you have seen that the way things have turned around, from a cash loss position to significantly bringing EBITDA on the table INR 200 crores -- or INR 400 crores EBITDA on the table as an operation as a whole has been a turnaround story. I think there are 2 aspects to that. Number one, a, our order book in that region has been very strong. We still have a very strong order book at this point of time. It is almost booked for next 4 quarters at this point of time and a very high visibility even for the future, number one. Number two, the efficiency in the operations, the way they have been performing has been absolutely robust. And you see they have been -- it's been a very, very consistent performance. And number three, I think so for the margins on those orders have also been -- have been very nice, and they are now turning around, and they are getting clearly reflected in our numbers. So Saudi is a clear, clear turnaround story. It has been significantly profitable in the last 3 quarters. It looks very, very -- it is likely to look at -- it is likely to be extremely profitable at least for next 3 to 4 quarters more.

The next question is from the line of Nirav Shah from GeeCee Holdings.

Congrats on excellent set of numbers plus a very industry -- investor-friendly distribution policy. So congrats on that, sir.

Thank you, Nirav.

Sir, I have a few questions. If I look -- first is the bookkeeping question. If I look at the last 2 quarters, sir, on a consol basis, Ind AS basis, our -- we have seen an inventory pile up of around 96,000 tonnes in Q2 and around 35,000 tonnes in Q3. So does that indicate that there is this much [ roundabout ] material which is in transit as of December and which should be executed in Q4?

Percy, can you take it?

So some of the inventory numbers that have gone up compared to the previous quarter is largely in India. And the reason is that there are some export orders that we are executing. And the revenue recognition standards require us to book the revenue only as and when the goods are delivered. So this export is to a large North American customer. And since the goods are in transit, it reflects in the inventory for December.

So that execution should be in Q4?

Yes.

That sale would be in Q4. Yes, execution...

Revenue recognition will happen in subsequent quarters.

Perfect. And sir, the second question is on the Saudi operations. Our press release mentions that we have a very healthy prospects from the oil and gas. And last quarter also you mentioned that the prospects from the water segment is pretty strong over there. So can you just highlight on this visibility component of Saudi operations? And how do you see this pipeline in -- we have booked for CY '20 or next 4 quarters, but -- and what's the pipeline for CY '21 like for us over here?

So very rightly you said, Nirav, we are booked till the third quarter of the next financial year. Beyond that, we have participated in quite a few projects out there. We are favorably placed in at least 2 of the projects out there, which are again of significant quantities. And as and when they get materialized, which I hope that they should get materialized over next quarter or so. So if they get -- if they do get materialized, that will bring in sort of an additional visibility for a minimum of 3 more quarters. So that is the way it looks like. So all in all, what we are seeing is a very strong, confirmed order pipeline for at least 8 quarters from here on. On top of it, all what we're also seeing is the way the businesses are shaping up both in SWCC and in Saudi Aramco, I think so that will -- that itself brings -- give us the comfort that it is not a story of 8 quarters, it is a story which is going to stay much longer, probably next 3 to 4 years.

Perfect. And these 2 contracts where we are favorably placed, they are in the oil and gas or water segment?

They are in the water -- I mean they are again with the same customer, SWCC, for the time being.

Okay. Perfect. Perfect. And sir, just very recently, I mean because of the correction in the oil prices and gas prices, there are concerns about the prospects in the U.S.A. So how would you address this event of lower oil and gas prices?

See, we have to understand that, okay, oil and gas prices has an influence per se, but it has a very limited influence on what we do. Our -- what is the purpose and what is the play, what we are in? We supply pipes, right? Now why are these pipes -- I'm specifically talking about U.S. They require pipes -- they are continuously drilling, number one. While they are drilling, they are getting -- they have gas -- associated gas, which is coming out of it. So they have to evacuate the gas. I think so that is the major play in which we are -- right now all what we are doing in the U.S. is all -- 90% of the business what we are doing is the gas pipeline. So whether the oil remains at $50 or at $60 or the gas be at $1.8 to $2.5 per MMBtu, the fact of the matter remains that they cannot flare gas, they cannot release the gas, they have to evacuate the gas. And that is what has been the genesis over the last 2 years. That is going to be the genesis for the next 2 to 3 years' time. So even - we see sort of a volatility in the oil price, a slight volatility. If you see that the oil is still around $50 -- the play is between $50 to $70, it is -- it has stood all its [ odds. ] But despite that volatility, I think so the play which we are into is all about pipes, and the reason for that pipe is not going to get diminished.

Got it. Perfect, sir. Perfect. And sir, we've generated -- I mean very strong ROEs and ROCEs in this year. So our capital policy -- allocation policy remains restricted to pretty high threshold IRRs for new projects, sir?

So you have seen that -- I mean we have been talking about CapEx and CapEx -- we are doing CapEx in a very, very measured and focused manner. I mean there is an extreme diligence which is being done before any CapEx is being made, it has to pass through a litmus test where it has to justify high returns. Our policy would still remain the same. And we have -- unless and until we see a high ROCE or a strategic play, we would be very, very averse to CapEx.

The next question is from the line of Vikash Singh from PhillipCapital.

Congratulations on a very good set of numbers, sir. Sir, my question pertains to your bid book commentary. If I remember correctly, just couple of quarters back, you used to say that your bid book is 3 million to 4 million tonne and suddenly you're talking about 25 million tonne. So if you can just explain then on which geography this has gone up?

No, if you look -- Vikash, if you look at it -- our bid book, bid book has 2 components: one, which is an active bid book at this point of time where we have participated and the bids are active; and then it is a prospective bid book. Always our bid book, a combination -- addition of these 2, currently active and future bid book, have been in the vicinity of 22 million to 25 million tonnes. So even today, it stands around 25 million tonnes, out of which almost close to 1 million tonne -- more than 1 million tonne is active in nature and around 24 million tonnes is prospective in nature.

So the active bid book has come down from almost 3-plus million tonne to 1 million tonne, right?

See, active -- it has come down from almost 2 -- yes, 2.5 million tonnes to 1.1 million tonnes because quite a few projects got awarded in the whole process. So it is a dip what you are seeing. But what is to be focused upon is that what is the prospective bid book. If there is a dip there, then there is an issue. I -- we are not seeing any dip in that side of it. So I think so the future -- the prospective pipeline looks extremely strong and robust.

So just a little clarification. This prospective pipeline is from 4 to 5 years' perspective. Is that correct assumption?

3 to 5 years.

3 to 5 years. Okay. And sir, secondly, our India performance has been pretty good because of that 1 niche export order. So how much we have already done? And what was the total quantum? Just wanted to understand if it would flow to -- till 1Q or it will end in the 4Q itself.

No, no. It is -- I'm sure you're talking about the North American order, right?

Yes, North American order.

In this -- see, the total order is close to 167,000 tonnes, right? And in this quarter, in the third quarter, we would have done close to what we would have recognized the sale is only close to 15,000 tonnes and the balance would get -- balance execution and recognitions would happen over next 3 quarters' time.

Next 3 quarters?

Yes.

So only 15 KT. Then what are the other orders which have actually inflated overall the volumes and the EBITDA per tonne for India? Because this only 15 KT is like 7.5% of the total volume percentage in India. That couldn't have alone pushed up the EBITDA per tonne over INR 8,000, right?

So what -- so we have orders -- significant orders from the oil and gas sector, right, which was primarily from IOCL and GAIL. That was one. Our presence in -- our dominant presence in the water sector still remains very strong. All the 3 locations, which was Anjar, Mandya and Bhopal have seen a significant ramp-up of their production and order execution in the water sector. So...

Hello?

Yes.

Yes. So sir, just to -- going forward, sir, Indian business performance you believe is expected to remain strong for next couple of more quarters? Is that a right assumption?

Absolutely fair assumption. And I'm sure everyone would have seen the recent announcement which has been made in the budget, where the government announced that they are going to exponentially invest into the pipelines. They are going to increase pipelines to -- from 11,000 kilometers (sic) [ 16,200 kilometers ] to 27,000 kilometers. That's the number one. Gas grid, basically. So that is -- this is what the Indian business thrives on. Then you would have also seen that the investment in Nal se Jal, what is being conceptually discussed now, they have made sort of a budgetary allocation for that. So we will see a lot of traction coming into that. Third, we are seeing an exponential growth in the CGD business. And in this recent budget announcement also a lot of emphasis was being given, that the intent is to bring more than 300 cities into the network -- more than 350 cities into the network. So I think so the Indian business, the dynamics, the projections look pretty robust and strong. And being a leading player in this territory in all the 3, being in water, being in oil and gas and being in CGD, I'm sure we are likely to capitalize upon the same.

Okay. And sir, just one last question, if I may ask. So is it a fair assumption, right, sir, because last 2 quarters, if I see the cash inflows because of very good performance and our debt reduction, it is not actually matching. So the entire additional cash has gone in the working capital requirement, right? Or there is something else in it?

So there are 2 components. Because the operations have significantly ramped up, so -- of course, the working capital requirements have gone up. There's no doubt about it. Also part of the cash utilization also has been in terms of CapEx. We have been doing some -- the Bhopal CapEx is in the last phase, so a little bit of a cash utilization has also happened there because there was no external borrowing around that [ there ]. But if you see that from a debt point of view, we are continuously focused. We are reducing our debt. We have now come down to an absolutely striking range of INR 171 crores debt. And I think so we are pretty much on the track on that front, Vikash.

The next question is from the line of Siddharth Shah from MK Ventures.

Congratulations for a great set of numbers. Sir, basically, I wanted to check on Saudi operations. You have mentioned in the press release that you have started repaying the shareholder loan.

Right.

So how much amount has been repaid in this quarter?

Percy, can you...

So in this quarter, about $4 million worth of loans have been repaid to us and now shareholders' loans, another about -- in rupee terms, about INR 150 crores is remaining. So we are expecting that even this will be repaid as we get towards the end of next year's Q1, by June.

So by June, we are expecting INR 150 crores additional amount to come back to us?

That's our target. Correct.

Yes. And what is the total shareholder loan outstanding from all shareholders?

It's an equal amount, so same thing. So it moves in proportion with our JV partner. Same number.

The next question is from the line of Dhananjay Mishra from Sunidhi Securities.

Congratulations on a very good set of numbers. Sir, just wanted to know this INR 8,500 EBITDA per tonne we have done. So earlier you used to guide about INR 5,000 EBITDA per tonne for India business. So what kind of EBITDA we are -- I mean normal EBITDA we should expect for next 3, 4 quarters?

See, our -- see, this -- in this particular quarter, as I said, the blend has been more towards oil and gas side of it. And we have some extremely profitable orders out of IOCL, GAIL and an export order to Southeast Asian region. So that is why you are seeing a little -- slight -- you are looking at this particular number. Having said that, we will continue to maintain our guidance that our India EBITDA should be in the vicinity of $75 to $80 on a weighted average basis. And even if you look at the 9-month basis, it is close to $84.

Okay, sir. And what is the breakup of order book between India, U.S. and Saudi, outstanding order book as of now?

So at this point of time, we have still -- as I said, the breakup of 1.3 million tonnes is, we have close to 625,000 tonnes of business in India; we have close to, I would say, 380,000 tonnes in Saudi; and close to 300,000 tonnes in America. So it's a fairly, fairly even split between all the 3 geographies.

Okay. And sir, in the U.S. business, given the demand outlook and our installed capacity over there because we have -- in terms of volume, we have been flat or slightly negative. So are we planning to do some CapEx over there? Or this business is going to be like this only, and this capacity is good enough to continue at this level?

See, in the U.S., we are the leaders. We have a leadership position. When you are saying about the volume slightly -- little lower than the last quarter, it is all about the product mix what you run. So -- but from a capacity point of view, I think so we have a sufficient capacity at this point of time. We -- our focus will be to bring more operational efficiency, more higher asset utilization by virtue of certain innovative. Are we going to invest anything new at this point of time? The answer -- or are we going to make any major CapEx around it? The answer is no. But just to let -- just to add, we will continue to invest in technology so that it enhances our operational efficiency and throughput capacities and higher asset utilization. So to that extent, whatever maintenance budgets we will have to do in terms of automating and digitalizing our whole processes, we will continue to do that.

Okay. And what is your view on India water segment in terms of ordering or [ reducing? ] Do you see any pickup happening post budget or before that?

I would say, there has been no slowdown. I mean I'm not worried about the pickup. I'm more -- I'm very, very optimistic, very bouyant about the water sector. If you look -- if you look at -- in the south, our Mandya plant has a very, very robust order booking and the visibility, the way we see, it could be booked for another -- next 2 or 2.5 years. We are seeing a similar buoyancy in Central India, Madhya Pradesh, where we have moved our plant in Bhopal. We are hearing that the government is making significant investments in the second round of bidding for developing the water infrastructure. So I'm sure we are going to capitalize upon it. Third, we are also seeing investments coming in Chhattisgarh and Rajasthan as well in some times to come. So I think so there is -- I mean we are not seeing any slowdown whatsoever in the water sector. Rather, we are seeing a buoyancy in the water sector. And more importantly, with this Nal se Jal scheme also now coming on track, now with allocations happening in play, it is only going to further grow from here rather than slowdown.

Okay. And sir, lastly, about this coil business amount we have to receive. So this delay is happening almost 6 months. So any possibility of further delay for this, receiving this amount?

See, we got the CCI approval sometime in end of -- towards mid of December. And if you see, there are certain condition precedents which every party has to do. But the fact of the matter remains that both the parties have reiterated their sort of commitment to go ahead with the deal and -- so much so that they have also paid an advance to us. So -- I mean -- so what better situation you could be in that -- there's a reiterate-ment of a commitment, party has already paid in advance. I think it's a matter of time that the deal will get consummated. We are very, very optimistic around it.

The next question is from the line of [ Sneha Ghoshal ] from [ SKS Capital. ]

I was just asking, there was a major order expected from Saudi Aramco in the last quarter that you said. What is the status on that?

It's a work in progress. We -- I mean looking at the order book, what we already have in our Saudi operations at this point of time, we are calibrating it slightly. And -- but having said that, does it mean that we are not in contention? We are very much in contention. Just to give you a [ context, ] it is a long-term frame contract agreement which we are contemplating. We are very, very favorably positioned there. It's just a matter of time. It should happen.

Okay. And secondly, sir, there was a large export order dispatched from India, which led to an increase in the working capital. What is the working capital status right now? Has it come under control?

Pretty much under control. Percy, can you just give her the statistics around that?

Sure. Working capital in terms of number of days, it stands at about 38 days on a consolidated basis. While it just looks as it has moved up from September status of 25 days, however, this is largely due to the gap between production and sales. So if you look at our volumes, you will see that the production volume is substantially higher than the sales volumes. And some of these export consignments are on their way to the North American customers. And as per the accounting standards on revenue recognition, we can book the revenue only as and when they reach the customers' location. So you will see some of these sales getting accounted in the subsequent quarter.

Okay. So can we expect it in the near term to come to 25 again when these orders are...

It should stay in the range of 25 to 30 days.

The next question is from the line of Sangam Iyer from Subhkam Ventures.

It's Consilium Investments, not Subhkam Ventures. Congratulations, sir, for a great set of numbers. Can you give me a breakup of the India order book between oil and gas and water?

So let's say, in India, we would have -- just one second. Right. So let -- as I said that we have -- in India, we have an order book of close to 626,000 tonnes or 625,000 tonnes, out of which it is, let's say -- it's an even split. We have close to 300,000 tonnes in API and almost 315,000 tonnes in water.

Okay. And sir, regarding the Kinder Morgan order, which was almost at the final stage of ordering since last September, October, any update on that? Because that's the large order that we were looking on given that we were more favorably placed for that.

You're asking about the U.S. piece?

Yes, U.S. piece.

Yes. So I mean we got -- as you -- we got a large order in the U.S., and that is what has brought the U.S. mill visibility till the third quarter of this year. And then -- so right now, as we speak, we have a order book for the large diameter till the third quarter of this year. And beyond that also we are looking at one major potential order, which is also under very active discussion. And if that -- once it gets materialized, which should be a matter of time, possibly it will take us to additional 1 year. So I mean as I earlier said as well, the order pipeline in U.S. for the large diameter still looks very, very robust to us. We are very, very confident around it.

Got it. And sir, given the fact that once the plate mill money also comes in and we have a very, very strong free cash flow generation, what could be the dividend policy post this [ budget ] going forward?

So we -- first, we have discussed this matter with the Board, and the Board was of an opinion that whenever we have -- whenever we see a sort of a performance and whenever we are seeing earnings coming up to a -- let's say, in this particular quarter, when the performance has been very nice, the Board has been more than generous in terms of approving the dividend. I'm sure as we move forward and as the performance and the earnings are consistent and it meets the standard at the Board level, they are of a very similar view that we need to -- we continue to reward our shareholders in whatever fashion, which is the most tax efficient manner.