Q1 20/21

Aug 13, 2020

Slides

Good afternoon and a very warm welcome to everyone. Along with me, I have mister Anurag Jain, our CFO, and SGA, our investor relations advisers. I hope you have received the result and investor presentation by now. For those who have not, you can view them on our website. I hope you and your near ones are all safe and healthy. The last few months have been tough for everyone, and I'm sure all of us in our work and personal life have discovered a whole new way of living. For the company, the first during the first quarter lockdown, there has been significant loss in production and business. Our revenues have fallen due to lower production and reduced demand across domestic and international markets. We were at approximately 45% of last year corresponding quarter. Our expansion was also affected because of the availability of labor. However, in August now things have picked up and we are still hopeful to commission the line in quarter one of next financial year. The Indian auto industry, while still building under the COVID-nineteen impact, saw a significant sequential improvement in July sales. Even for the tire industry, sales have increased in the last few weeks due to increased demand in the replacement market and the trend is expected to continue in the coming months. The tire industry would witness better traction post lockdown as the replacement demand would provide faster. And the major demand driver for tire and hence insoluble sulphur is actually the replacement market. Also in order to promote domestic manufacturing, the government has imposed curves on imports of certain pneumatic tyres. This would lead to increased domestic production of drys, which will then drive the demand for insoluble sulphur further. Overall, putting the quarter one results into the context of the situation, I would say we have done quite well to breakeven at a flat level. This was possible because our team put in immense effort and sacrifice to make the best of things that were controllable at our end, and I would like to thank all of them. Our vendors and other stakeholders have also contributed to this performance. Firstly, I can see this quarter one results in a positive light. To breakeven and have a cash profit at less than 40% capacity utilization actually shows how strong and resilient the company is. This was literally the worst external scenario possible, and we withstood it while emerging even stronger. All the various initiatives as well as customer engagements have remained on track during this quarter. We have seen demand come back in July and actually currently projecting the performance in the nine months July to March, which will be similar to the corresponding nine months of the previous year. With that, I would like to hand over the line to Mr. Anurag Jain to update you on the financial performance of the company. Thank you, Akshar. I would first take you all through the stand alone financials of the company. Total income for Q1 FY21 is Rs. 46.9 crores as compared to this Rs. 95.3 crores in Q1 FY20. Revenues have been impacted on account of lower production due to shutdown of facilities and lower demand because of COVID-nineteen pandemic lockdown. And sport sales were also affected due to lower demand from global tyre companies because of COVID. EBITDA for Q1 FY21 stood at INR9 crores as compared to INR26.6 crores in Q1 FY20. EBITDA margins for the quarter stood at 19.1% due to fixed expenses being spread over lower quantities. Profit after tax for Q1 FY21 is Rs. 1.5 crores. Our PAT margins for the quarter stood at 3%. Now, I would like to take you all to the consolidated financials of the company. Total income for Q1 stood at Rs. 51.5 crores as compared to Rs. 106.9 crores in Q1 FY20. EBITDA for Q1 FY21 stood at Rs. 8.5 crores as compared to Rs. 38.4 crores in Q1 FY20. EBITDA margins for the quarter stood at 16.5. Profit after tax for Q1 FY21 is INR0.6 crores with net margin for quarter at 1.2%. With this, I would like to open the floor for questions and answers. Thank you very much. We will now begin the question and answer session. May and press and 1. Ladies and gentlemen, you may press and 1 to ask a question. Question is from the line of Sarwandan Ramakrishnan from LIA Capital. Please go ahead. So my question is not regarding financing, but mainly from a complete medium to long term expectations that we have. So one of our clients recently announced that they have on the company's analyst sales. So I just wanted to see if there would be any chemical competition that we can take with this one. So as far as your first question is concerned, you you were talking whether we are there's going to be any change in the chemical composition of the product. Am I right? Correct. Correct. Correct. Okay. So insoluble sulfur is basically a polymeric form of sulfur, and we mix it with oil to make the product. So there is hardly any chemical composition change with the envisage. However, quality wise, we keep on consistently improving the product and its performance to meet the latest requirements and the improved, you know, requirements of the tire companies. But as far as technical composition of the product is concerned, there is hardly going to be any change. As to your second question about our forays into the American market and the Chinese market. We are continuing our improves more into American market right now than the Chinese market where we are going slow a little bit just now. Okay. So any new additional capacity that has come in basically from our company that is to their in Shikaku? No. There is no recent capacity expansion that has come in, and and we are not even aware of any plans for them to add any kind of capacity. Got it. That's it from me. I'll put it on the Q4 for a moment. Thank you very much. Next question is from Krishna Bharat from Samitra Capital. Please go ahead. Hi. I just wanted to know when is the commissioning of the first phase of the 107 standard checking separately happening? And how is the progress? I have addressed that in my opening remarks. We Oh, sorry. I joined the program late. To happen in '1 next financial year. And the progress has kicked off in August and if it continues to increase and fix up further, then we're on track for quarter one of next year. The only challenge that has been there in the last few months has been the availability of the labor to actually do the construction. But now they're coming back. Next question is from Hanover Pawan from MNCN. Please go ahead. Hello. Yes. Hi. Good morning, sir. Thanks for taking my question. So sir, recently, there was a news flow on Yokohama increasing its capacity in its Haryana plant. I just wanted to know if any of our clients are also expanding right now in domestic or foreign markets. What is it status quo for them? So what I'm understanding is that everybody who had planned capacity expansions is continuing with them. No one has put anything on hold or stopped anything with Stream. We are not aware of any fresh announcements apart from that that has already been announced. Okay. Okay. Understood, sir. And, sir, so, I mean, is there any plan of diversifying the top line? I mean, because we are predominantly a single product company. So I mean, is any thought being given to that right now? Thought has been given, and there is no plan to get into any other product right now. Okay. Okay. And just the last question. We have concluded, analyzed the situation and decided that right now we will remain a single product company. Okay. Understood. Understood. And sir, right now, what will be our short term and long term debt and the cash position? Yes, we have. Long term is around 100 crores and short term would be around INR40 crores. How much, sir? Short term is INR30 crores. And the cash position, sir? Receivable, I mean, immediate cash sitting in outside deposits and all would be around $1.50. 1 50 crores. Roughly. Roughly. Basically, let me put it this way that the cash available is is more than the long term and short term debt combined with the. Understood. Understood. Sure. Thank you. I'll be listening to you. Thank you. Thank you very much. Anyone who wishes to ask a question, you may press and 1. Next question is from Abhisher Jain from Monarch Capital. Please go ahead. Sir, I must recommend that the performance has been quite good, as you mentioned in your opening remarks, with the kind of utilization we saw. Sir, so just wanted to understand that the demand visibility now, is it better in certain markets versus others or better in exports versus domestic? Could you give any color on that? So we've actually seen a revival across all markets, and that's why we expect that the sales in these nine months, July to March, will be similar to the sales that took place in the corresponding previous, you know, nine months. Domestic has certainly revived much more because domestic had also fallen more. So the the uptick in domestic has been more, but I think all markets are recovering. And I think we go to closely watch the situation. And by October, we should have a better idea of what will be the outlook in the coming financial years. Right now, we have an outlook for this financial year. Right. And in that sense, Akshay, we believe that the last indication that we had given on the expected negative impact on this year's profitability, that would be less than that, right, considering that the nine months can be similar to last year? We have these calculations now. You can all do yourselves. I've given a Keep on changing. Yeah. No. Because I understand. Earlier when we had given that, that was based on the situation in April. And and even in the June conference call, had said that situation is better than that indication that we had given. And now now places this latest indication, it is easy for you all to calculate. Right. Understood. Yeah. And, you know, just one last thing is that, you know, in our effort of basically, you know, continuing to build market share at a a bigger level in this business. So how would you, you know, kind of now, sir, if you look a little bit medium from three to five year, where would you think that OCC would like to be in terms of so not as considering numbers, but in terms of its own standing and market share, if you can give any color. So in in three to five years, which will, you know but we'll also have significantly more capacity than what we are selling today. Yes. We would basically like to be present and have a reasonable market share in all markets that we are not present. In markets that we are already present and will interest, we would like to maintain and maybe incrementally increase the market share. But but I don't expect a huge jump in market share in in areas that we are well placed. But there is plenty of places where we are not there, and there we should have a decent presence, which will then result in overall market share also going up. Okay. Okay. Understood. Sir, just to follow-up on this, out of the total market, how much percentage we will we might not be there, say, like, in the single market, would we not be there today in, say, 20% or 60% of the market at all? I would say that I mean, I don't have these figures offline, but in a very significant portion of the world market, our presence would be very limited. More I think in more than 30% of the world market, maybe even 40% of the world market, we would have very limited presence today. Right. Which you would aspire to have a a meaningful or similar presence in five days. Right? Yeah. So we would want to have a reasonable presence. That is how all the capacity would also get sold out. Great. Great. Great. Thanks for the clarity, and thank you, and best of luck. Thank you very much. Ladies and gentlemen, you may press and one to ask the question. This question is from Aditya Chet from Eastern Debt Securities. Please go ahead. Hello, sir. Sir, my question is, so what are the cost reduction initiatives which has been taken in in this quarter? So there have been some short term cost reductions in terms of salaries, in terms of repair and maintenance. Obviously, that did not happen. Handling was down a huge lot, nearly zero. It was a significant cost reduction. And then on other overhead also, initiatives have been taken, some are short term, some are long term. So which are going to, you know, keep us in good shape on a long term basis. But the major hedge, as far as this quarter is concerned, where we have saved costs, other than those which are directly related to sales, for example, electricity, etcetera, freight. These are directly related to sales. But other than that, that's in repairs and maintenance because the plants operated lower on the for a lower number of time and on salaries and travels. Travel and other over at 20 and stationary, etcetera, is also very significant. One of the way to look at it is that all our costs have come down in proportion with the reduction in turnover. So the only cost that naturally could not come down in the same proportion is salary and wages. So our part of all costs have come down in the same proportion of that. That's why our EBITDA margins are close to 93 Even for this quarter, there's low utilization. Okay, sir. Okay. And, sir, can I get a breakup between power and fuel cost also, sir? How much would be on coal and how much it would be on electricity purchase? That we cannot give the breaker on coal and electricity. Coal is what I can tell you, the major part is electricity. Coal is not a very huge part of it because we use coal as fuel only in Mundra and not in. Okay, sir. Okay, sir. Thank you, sir. Thank you, sir. That's all from me. Thank you. Next is HDFC Asset Management. Please go ahead. Yeah, sir. Thank you. So a few questions. Firstly, on the if you can share anything, any comments on the June and July run rate, and this the objective is I'm just trying to understand how the run rate has been just to probably forecast if the remaining ten months can be probably better than the last year. You mentioned that you didn't put it out, but just to understand probably it could be better on that that angle. So any future in July June, July, run rate? July has been similar to previous July. Almost the same, I would say. Okay. So we have briefed almost this in now. And, sir, there any sense on how the realization and the cost moving in terms of spreads? How are we seeing? Any any pressure there or any upside there? Realization, there has been a slight upside, you know, just because of the country. As far as raw material costs are concerned, some of our raw materials were lower than last year, mainly sulfur. Sulfur has now steadily started moving up. But for the quarter, it was lower. It still continues to be lower than last year. Okay. So sales broadly should be marginally higher or better. I mean, marginally higher. Sales, mean, RM minus the raw material cost should be better versus what they were last year. Okay. But in your comments, you mentioned about the plan for some of the players. Is it possible to quantify what the benefit could be if this all the material is manufactured in India, given that you have dominant share, in some sense on what the upgrade could be in terms of volumes? We did a very rough ballpark calculation, and it it it appeared to be, you know, the benefit of entire industry to the tune of around 5%. Okay. Okay. So this means of which of the production of India, up to 5% from that. Look. This is we are not experts on this. Right? So so they ballpark. Yeah. Of course. I understand. But just sometimes in this. Hello? Yeah. Yeah. Please go ahead. Sorry. I think I missed you there. I was seeing broadly 5% upside to what the existing numbers were what the existing run rate was in terms of high production in India. Yes, that's a reduction. Got it. Sir, one more dollar question. As I look at the numbers over the last many years, say, five, seven years, we have seen a significant increase in production from about, say, FY 'fourteen, about 80,000 plus to probably assuming some number some inflation number now, FY 'nineteen, about 30,000 tonnes in terms of production. But the other expenses have broadly remained flat. And if I go particularly deep, it seems the power and fuel expenses have declined. So despite a significantly increase in production, there is a sharp decline in the fuel cost. So what so what's driving this, and what is the further optimization that we can, you know, keep doing here? So what has happened is that, obviously, you know, all the if you are looking for the ten, fourteen, most of the production has shifted has been from Munsha. There, our power cost is less than Harvira. Secondly, we we started utilizing more steam from our from our strategic asset plant, eliminating the cost of fuel. Thirdly, we have shifted to gas in in in down the cost earlier we used to do. Now we are also planning to shift to gas in Mundra. So so if that happens when that happens. Mhmm. Mhmm. Okay. And and during last year, we have we have started rooftop solar in Aurora as well as the fact that we are now entering to an agreement for captive consumption of solar power in Dharwara also. So these two items, that is gas in Mundra and the captive power consumption captive solar power consumption in Narwhara. These are the two new cost saving initiatives. So these are two new cost initiatives which are now under the pipeline. SolarWinds is pending approval from the statutory authorities. So there is some approval which needs to be done, but we are hopeful that we should get these advantages starting next year. Got it. So on an incremental basis, it will be gas in Mundra and the in the solar luncheon in in Hariharan. Yes. Got it, sir. Thanks a lot, sir. Thank you very much. Next participant is Anupam Agarwal from Latif Investment Managers. Please go ahead. Thank you so much. Thank you. Next question is from Shikhar Mundra, an individual investor. Please go ahead. Hello. So in your initial comments, you talked about the demand coming back in the auto and auto industry sequentially. So can you quantify that numbers? Do you have the data for that? I don't have the data for auto and sales offline. We also access it from public sources. Auto auto sales in July has been same as July. Fact, one or 2,000 cars more. So that is a that is a combination. So we're talking about wholesale wholesale numbers. Yes. Okay. And and now and what gives us the confidence? Is it a sustainable demand coming back or is I mean, can we just pick up the for picking up the sales from May, June, and we might schedule further? So or this is the confidence that it's a sustainable one, which is Look. We derive our confidence from our customers. Okay. We don't form a view on pent up demand and all that is for our customers and their customers to evaluate. But our conversations with our customers tell us that this looks to be how it will influence in the coming months and quarters. So that's where we derive our confidence from. Okay. So that's it from me. Thanks. Thank you very much. Question is from Sarwananda Gavrishnan from LIA Capital Partners. Please go ahead. Yes. Thanks for the follow-up, Mr. Goenka and Mr. Sarwananda. So I have questions regarding this strategic governance scheme. So if I'm to understand your question, your first question was whether because of capacity expansion there has been any contraction in the selling price. Am I right? No. Actually, my question was, which is about to be one that, again, can have large capacity. So what I'm trying to understand is that now is there any is complete of the customer's fund if not due to current due to the situation? See, insoluble sulphur is a product which caters to the requirement of the entire industry. It's not like you know you you you have a different product and, again, go through the channels. So the tire industry is like to have a product which runs with them and which, you know, which which is as per their recipe of tires. And this is what we need to supply, and that is what we have been doing. The thing is that, you know, whenever there is a there is a demand for a better product because of the tires getting better, we need to meet that we need to come up and meet the demand of the tire industry. So whether in some of whether Flexis is expend Eastman is expending does not have any impact on on this metric sector. Will we also, like, imagine the way for Michelin portfolio? So we are as as Chef already pointed out, there are there is about 30 to 40% areas where we are less. These are geographic areas as well as some major tire companies, and we have a plan on how to progressively enter those markets. And Okay. Accordingly, we will do. Very much. Next question is from Naval Bhardwaj from Anandpur. Please go ahead. Thank you for taking my question. So sir, just a short just to give a view as to how do we usually go about our contracts? Are they more of spot or are they more of long term rolling contracts? And do we have, you know, past few past few mechanisms in our projects? Do we have what? Past few mechanisms for the cost, like, you know, any surge in prices or any any any of raw materials. Okay. So we have long term contracts. We have annual contracts. Normally, a tire company, once they start consuming from one one one producer of insoluble sulfur, they like to continue with the same product. So in many cases, we have long term understanding that the prices are revised either quarterly or six monthly or annually. In in some places, we have a pass through formula. In other places, there is a revision on a quarterly or a six monthly basis where all these things are considered, but they are not a part of the formal understanding of formula that is with them. I hope that answers your question. Hello? Nava? Hello? Are you able to hear him? I can hear him. Yeah. I can hear you. Am I audible? Yes, sir. Go ahead. Yes. Yes. K. So another so specific point for this question would be that the orders that we get from the tire manufacturers, usually, they are on a rolling monthly basis, like, even though we have a contract. Or is it like, you know, they give us give us a vision for the next quarter that this is. So, again, normally, they are on a rolling monthly basis, but in some cases, we get for two months also. In some cases, we get for three months also. But, normally, they are predominantly they are on a monthly basis that we get the actual dispatch order. So what when we say order, we mean the dispatch schedule. Alright. That is the looking up for us. That is looking good. I mean, as Akshay has pointed out, our confidence that we are on the same basis is rises out of those order zone. Great. Well, thank you so much. All the best to go ahead. Thank you very much. Ladies and gentlemen, that was the last question coming in. I will now hand the conference over to the management for closing comments. I take this opportunity to thank everyone for joining on the call. I hope we have been able to address all your queries. For any further information, kindly get in touch with strategic growth advisers, investor relation adviser, or RK. Thank you once again.