Balkrishna Industries Limited (502355) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Balkrishna Industries Limited Q4 FY '20 earnings conference call hosted by Axis Capital. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Nishit Jalan from Axis Capital Limited. Thank you, and over to you, sir.

Thank you, Vikram. Good afternoon, everyone. Welcome to Q4 FY '20 Results Conference Call of Balkrishna Industries. From the management team, we have Mr. Rajiv Poddar, Joint Managing Director; and Mr. B.K. Bansal, Director of Finance. I'll hand over the call to the management for his opening remarks, post which we can move to Q&A. Over to you, Mr. Bansal.

Yes. Thank you, Nishit. Good afternoon, everyone. I welcome you all to the Q4 financial Year '20 earnings call of our company. I'm joined by Mr. Rajiv Poddar and Mr. Shogun Jain from SGA. Let me begin with update on the performance of the company. During the last earning call in Feb 2020, we had indicated that we should be able to cross 2 lakh metric ton sales volume for FY '20. I'm happy to inform you that we have crossed this benchmark and have achieved sales volume of 201,760 metric tons for FY '20. This is despite shutdown of manufacturing operations and dispatches across all our plants for 8 (sic) [ 7 ] days in the month of March '20 due to lockdown on account of COVID-19. The COVID-19 situation led to lockdown of entire country, and as a result, our manufacturing activity as well as dispatches remain suspended on March 22 and then from March 25 to later part of April 2020 when lockdown was lifted gradually by the respective state governments. We have undertaken safety measures across all our plants and followed increased protocol to ensure safety and wellbeing of our staff and workers as well as outsiders interacting with our staff and workers. After resumption of manufacturing activities and dispatches, we were gradually able to ramp up our activity and are happy to inform you that we have gradually gained normalcy in our manufacturing activity as well as dispatches to a large extent. Our diversified product portfolio, strong presence across the globe, multiple sourcing bases of raw materials and strong balance sheet with no long-term debt makes our company resilient to face any challenges and to maintain competitive edge in the global market. Our Carbon Black project is also running smoothly, and we are able to ramp up our production continuously. Let me now update you on the CapEx front. As you know, the first phase of Carbon Black project is already up and running, the second phase of the project with a capacity of 80,000 metric tons per annum was commissioned on March 12, 2020, much ahead of its schedule date of completion. Now we have a total capacity of 140,000 metric tons and are self-reliant in terms of our Carbon Black requirements. The third-party sale of the Carbon Black was well accepted in the market on the strength of our quality. The remaining CapEx program of the company are broadly on track. However, the completion will depend on the COVID-19 situation, which is changing rapidly. I now move on to performance highlights. Our sales volume for the quarter was 57,966 metric tons, showing a growth of 5% Y-o-Y, and around 22% quarter-on-quarter. For FY '20, sales volume stood at 201,760 metric tons, showing a degrowth of 4% Y-o-Y. Our stand-alone revenue for the quarter stood at INR 1,389 crores, showing a growth of 3% on a year-on-year basis. This includes realized gain on foreign exchange pertaining to sales of INR 32 crores. For FY '20, stand-alone revenue stood at INR 4,898 crores, which includes realized gain on foreign exchange pertaining to sales of INR 115 crores. On the EBITDA front, for presentation purpose, we have shown the interest income from investment and unrealized gain/loss below the EBITDA, while realized foreign exchange items have been shown above EBITDA. Accordingly, the standalone EBITDA for the quarter was at INR 407 crores with a margin of around 29.3%. The stand-alone EBITDA for FY '20 was at INR 1,381 crores with a margin of 28.2%. Other income for the quarter stood at INR 66 crores, which includes net gain on foreign exchange to the tune of INR 29 crores and other income from investment of INR 38 crores. For FY '20, other income stood at INR 249 crores, which includes net gain on foreign exchange to the tune of INR 131 crores and other income from investment of INR 117 crore. Coming to the net ForEx items. For the quarter, we incurred a net ForEx gain of INR 29 crores, which includes realized gain of INR 35 crore and unrealized loss of INR 6 crores. For FY '20, we incurred net foreign exchange gain of INR 131 crore, which includes realized gain of INR 132 crores and marginal unrealized loss of INR 45 lakhs. Profit after tax stood for the quarter was at INR 257 crores, showing a growth of 39% on a year-on-year basis, while for FY '20, it was recorded at INR 945 crores showing a growth of 21% on a year-on-year basis. The profit after tax has been higher on account of reduced taxation rate pursuant to changes in the corporate tax rate during the year as well as remeasuring of cumulative deferred tax liability. We continue to be a 0 long-term debt company. Our cash and cash equivalents were INR 1,086 crores implying net cash position on the long-term side. For FY '20, we incurred a CapEx spend of INR 761 crores, and we expect to spend another INR 600 crores during current financial year, largely towards the ongoing CapEx program as well as routine maintenance CapEx. Since the current environment is very dynamic, it is difficult to estimate the level of operations which may -- which we may achieve in the current year, and that is why we are refraining ourselves from giving guidance for the current financial year. However, if everything remains what it is as of today, we should be able to maintain the similar level of performance what we have achieved during last financial year. We will keep updating going forward with all the changes, which may have a major impact on our business operations. With this, I conclude my opening remarks and leave the floor open for question and answers. Thank you.

[Operator Instructions] We have our first question from the line of Ashutosh Tiwari from Equirus.

Yes sir, congrats on those set of numbers, especially on the volume. Yes. Sir, firstly, can you share the geography-wise mix for the year and for the quarter?

So Europe for the quarter was around 58%, and India was around 17%, 18%. America was around 15% and balance was rest of the world. And for the year, the Europe is around 51%. America is around 17%. India is at 20% and balance is the rest of the world.

Okay. So India was higher for the full year. Okay. And so how you're seeing the improvement, I mean, over the last 2 months, across geographies, including India as well as across segments like agri, construction, mining and all that?

Yes. So it is quite encouraging across geographies, and across product segments and more particularly into agriculture segment the response is very good.

Okay. So is it like -- at least in terms of retail, are things back to normal like pre-COVID level?

Yes, it looks like. It looks like. Because initially, we were also [Technical Difficulty]. Yes. Yes. So now the -- based on our last 2 months experience, we can say that now it is very stable kind of demand.

Okay. And construction segment, construction is -- how is demand shaping up?

Yes. It is shaping up pretty well.

Okay. There also things are good?

Yes, yes.

And sir, lastly, with this Phase 2 of Carbon Black, will you be selling Carbon Black outside also because I think we have more than what we require now?

Yes, yes, yes.

So roughly what quantities can you consume at 2 lakh production level?

So at 2 lakh metric tons, we would need around 55,000 to 56,000 metric tons.

Okay. So remaining we can sell outside?

So remaining, we can sell to outsiders.

We have next question from the line of Gaurav Khandelwal from Mirae Asset.

Congratulations on good set of results.

Thank you, Gaurav.

And I hope that things are safe at your end and at your team's end. Sir, I have a couple of questions. Sir, firstly, if you look at the demand side, although India started to shutdown at around 22nd, 23rd of March, I think Italy started to shutdown at 7th of March and then progressively other European geographies where we have 56 -- 58% of the sales, like you mentioned, started to shut down even earlier. So on demand side there would have been higher pressure. So are you indicating that it's not just the 7 days of production shutdown in India, it's 25 days or maybe 28 days of shutdown that has impacted your sales, and your volumes would have been much higher if not for the 28 days of shutdown in Europe?

See, Europe did not have a complete shutdown. They have shutdown, but it was a partial shutdown. So their agriculture activities and other type of activities were not going on. So when we had a shutdown, they had inventory and they took care of their sales from that.

Okay. So basically, from your warehouses in Europe, you were able to still...

Not only from our warehouses, but even our distributors, generally they keep inventory of 2 to 3 months. So during this period of lockdown, they were able to take care of their customers' requirement.

Okay. Okay. Understood. And then, sir, on your raw materials front, I think on a per ton basis, if I do a quick calculation it has increased by around 3% to 4-odd percent, while the crude, I think, which is the main cost element, and its derivative. But I think on -- if I take a -- like calculate it from a lag also, I think there was a decline. So can you give us color on what happened on that front?

So basically the raw material cost per se has come down. If I see my raw material cost for both the quarters, December quarter as well as March quarter, it has come down from INR 101 to INR 98 per kg while it is looking at elevated level because of the inventory adjustment. So during this particular quarter, there has been a decrease of high-value stock, which came for consumption. So that is why the full impact was not seen during this quarter.

Okay. Okay. And sir, just last question from my side. On your commentary, the number of days of shutdown in the -- in FY '21 will be higher than FY '20. But still you expect that you'll be able to maintain the volumes in FY '21. So -- and also I think there will be some impact on the construction segment and OE segment, but still, your commentary looks very bullish. So can you provide further color on that?

So basically, the demand in agriculture sector has been very robust. For last 2 years, the agriculture demand in Europe was not good because of the failure of rabi season. But that season has been good. So overall, the agriculture demand in the Europe region as well as in the U.S. has been very good. And in India also, the last -- for last 2 years, monsoon was good, this year also, it is expected to be good. So the demand of agriculture tire will be very good. And for OTR segment, I would say it would be very stable.

Okay. So it's basically -- you expect agriculture segment to pull up the volumes for...

Yes, yes. This is what was seen in the third -- fourth quarter also.

We have next question from the line of Bhaskar Bukrediwala from ASK Investment Managers.

Just wanted to, sir, understand on the realization front, our utilization on a Q-on-Q basis is down from INR 250-odd to around INR 239 to INR 240. So why is that? And how do we look at the realization going forward?

So this is on account of 2 things. One is product mix, which is always the case. So that is why the price realization is not same across the quarter. And secondly, some price reduction or whether, I would say, discount, et cetera, we offer in the Europe market. So that is why it is down. Going forward, I think the realization should be anywhere between INR 240 to INR 245 per kg. For the full year, our realization has been INR 243. So next year also, I'm seeing around INR 245.

Okay. Okay. Okay, sure. And sir, just one question on the -- your CapEx side. So how much is currently pending on Bhuj plus Waluj put together? And of that, if you could give us a schedule, how much would be done in '22? And how much will probably spill over if at all to '23?

Basically, now 2 projects are left. One is Waluj and another one is Bhuj. The residual CapEx on both the sites would be around INR 500 crores that we spend during the current financial year. We are trying our best to complete it in the current financial year, but with the caveat of a delay of one quarter, maximum.

Okay. Okay. So INR 500 crores is what is left for both put together?

Yes, for both put together.

And on this asset base currently, what you have, just a couple of questions. What would be your run rate of maintenance CapEx going forward, including this year?

I think it should be around INR 150 crores.

INR 150 crore of maintenance CapEx. Okay. Okay.

We have next question from the line of Sanjay Bembalkar from Canara Robeco AMC.

Good performance. Sir, 3 cost items, I wanted some clarity on. One is our advertisement -- hello?

Yes, yes. Please go ahead, I can listen you.

Sir, on the advertising expense, considering most of our advertisement spends are happening on the sport leagues in Europe and U.S. I wanted some clarity on that for FY '21, '22. And the second was on the ocean freight and third was effective tax rate for '21, '22.

So effective tax rate would be 25.17%. Hello? Yes. And coming to the next question ocean freight. Ocean freight is around 6% to 7% of the export. So it would be in the similar range. And as far as advertisements, publicity and sales promotion, this would be around -- in the range of INR 75 crores to say INR 85 crores, INR 90 crores.

This is for the full year. So considering...

Full year, full year.

Last year, we had spent INR 280 crores odd on the advertisement and promotion, that will come down to INR 75 crores, INR 90 crore. Is that understanding...

No, no, no. Advertisement, publicity and sales promotion...

I think what Mr. Bansal is saying is what you were asking, sir, about the sporting activities, so that is the breakup that Mr. Bansal is giving, the promotion activities for those. And that will continue in this same year -- in this year also. So we'll be in the same range as this year. The other things were including all other promotions and branding activities, which will continue.

We have next question from the line of Vimal Gohil from Union AMC.

Yes, sir, if you can just provide me your breakup between agri, OTR and other segment sales of volume? And OEM, replacement as well?

Yes. So agri is 65%. And OTR is around 31%, 32%. And remaining 3-and-odd percent is on account of ATV and lawn and garden. Now coming to channels, so OEM for the full year is around 25%. Replacement is 71% and offtake is around 4%, 4% to 5%.

Sir, this agri, OTR and others that you provided was for the full year?

So agri -- no, it was for the quarter, but full year, agri is 61%, and OTR is 35% and remaining is ATV and lawn and garden.

Sir, I just missed your effective tax rate for FY '21. So can you just highlight that?

25.17%.

For FY '21?

Yes, FY '21.

Okay. Okay. Okay. And sir, secondly, sir, your -- if I were to look at the commentary of some of your customers that has been sort of slightly downbeat and -- or probably even they have refrained from giving guidance. So just wanted to understand, once again, what is leading us to be sort of positive about our volume outlook in FY '21?

Yes. Yes. Basically, as I said, in the last 2 months, we have seen a good demand in agriculture segment across geographies. And we continue to see that this demand will be maintained. Last 2 years has been very challenging in Europe because of the drought and heat waves, and fortunately, this year, this is not the situation. So overall agriculture activities in Europe are very robust. And so is the case in U.S. because U.S. last year was impacted because of the trade war between U.S. and China. Now with some variation, the demand of the agriculture products from U.S. is also good. And on India front also, it is very good. So basically, agriculture is driving the whole demand. And on OTR front, while new CapEx, et cetera, may be delayed, but since we are gaining the market share, so we will continue to maintain our share, and we will have a stable demand.

Right. Right. And sir, ad and promotion expenses for this year should be around INR 85 crores to INR 100-odd crores, right?

No, no, no. That was some particular -- see. Now when we say -- talk about advertisement, et cetera, there are promotional items. We have sponsored various sports activities. So including that, the amount will be similar to what it was last year.

Which is?

This should be around that number...

So basically, while Mr. Bansal is finding the exact number, the range will -- the spend range will be similar in the percentage basis as what we've been doing in the last few years, so that will be continuing.

And sir, last question from my end. How should we think about gross margins? I mean you're sitting on life high gross margins right now. How should we think about gross margins from a longer-term perspective?

I think you should take it at around 58% to 60%.

58% to 60%?

Yes.

Okay. Okay. Fair enough. And this incremental gross margin would be driven by your Carbon Black...

Carbon Black and lower raw material cost and some better realization on account of better currency realization.

[Operator Instructions] We have next question from the line of Bharat Shah from ASK Investment Managers.

What is our exposure to China in terms of raw material? And is there any kind of a dependence wage, but for them, we can't fulfill?

I'll answer that question. So as of now the -- I'll answer it in 2 parts. First is the dependence of China, that without that, we cannot do. So there is no such raw material as of now that we have to -- we don't have alternates to. So in fact, over the last few years, we have been looking at various options from across the globe. So there is a very little part, which is coming currently from China. And that is also just to -- as a backup. So there is nothing that we would need for our raw materials to depend fully on China. And as of today some very small percentage is coming from here.

How much is it?

Exact breakup, I would not have, but it would be around 10%, 10% to 12%.

So what I understand is current percentage itself is low. And if push comes to shove, we can substitute by any other substitutable vendors or source?

Yes, yes.

It is not as if China playing funny can stop our operations.

No, not today. Because we have developed alternate vendors over the last few years, and from different parts of the world. So there is no dependence on any particular geographical region. So we believe in the raw material sourcing in that sense.

We have next question from the line of Siddhartha Bera from Nomura.

And congrats on the good set of results. Sir, can you give us some more color on how the trend has been on the agricultural side for May and June? Are we seeing growth? And like as you have said that some sales have also happened from the inventory where it is around 2 to 3 months. That means that, I mean, there will be -- I mean, how much scope will be there to again refill the inventory and drive sales from it?

So as Bansalji said earlier, basically, if you see in the last few months, there has been a good demand coming in from the agriculture sector. This has mainly been because the -- everybody -- the cycle of agricultural dry is coming. And also last year, there was a weather issue, which is not here this year. So keeping all those factors into mind, there's been a good demand, which is coming. And we are geared up to supply that. And you can see the -- what we demonstrated in the first quarter of -- sorry, last quarter of this financial year, which is visible, had it not been lockdown it would have -- we would have hit plus what we were expecting to, also there has been a good demand, and we expect things to be similar, subject to no other sort of a scenario like COVID extensions, say, wave 2 or -- if no other factors come in, these factors come in, then we should look at hitting numbers what we've hit this year.

Okay. And on the commodity side, I mean, when you indicated that average cost will be around INR 98 per kg in fourth quarter. So can you indicate what are the trends as of now? I mean, this quarter, how much benefit can we -- more benefit can we look at given the way how commodities have moved?

So commodity prices, if you see the trend, it has been declining, whether it is natural rubber or whether they are crude derivatives. So a similar trend is being maintained. There is no fresh development on the raw material side, which can lead to any increase in their prices.

Okay. Okay. Okay. So any blended number, can you share? I mean, how much will be the cost?

It's difficult to say that, but I can give the directional view that it is on the declining mode.

Okay. And lastly, sir, on the CapEx side, we have indicated INR 600 crores CapEx for FY '21. So with this now, most of our greenfield projects are over. So I mean, how -- what is the sustainable number to look at from FY '22 onwards? Any broad color?

From FY '22 onwards, there will be maintenance CapEx which will be around INR 150 crores across all the 4 plants.

We have next question from the line of Puneet Gulati from HSBC.

Yes. Sorry, I joined late, so I might have missed. I have 2 questions. What is the plan to do with the extra cash that you would have post this CapEx?

See we -- as of now, there are no plans so that would remain as an investment. And this -- the level of operation increases then 2 years down the line we may have requirement of the further CapEx. So as of now, there are no plans.

Okay. Okay. And what about the Carbon Black, which will also be surplus now that you have full 140,000 commissioned, how are you planning to sell it as a business?

So we have contacted ... Yes, Rajiv.

Yes, sorry, Bansalji. So yes, basically, our Carbon Black has been well accepted in the marketplace. And lot of the leading rubber and tire manufacturers are already -- we've gone through the phase of testing with them, and then we got approvals. So we are already supplying to leading companies in India at the moment. So we are quite confident that the extra capacity, which we have will be easily sold and our capacities will be occupied.

Okay. Okay. So can you give some sense of what kind of realization you're getting? And what is it costing you to produce the same?

Those numbers are readily not available, but I can say that the -- it is giving us a good margin, what we had indicated earlier it was better than that.

We have next question from the line of Bharat Gianani from Sharekhan.

Yes, congratulations on a good set of numbers in a challenging scenario. Sir, 2 questions from my side. And if I take your overall raw material basket, then how much of it is the natural rubber and how much of it is group-based derivatives? Just a rough indication will be fine.

Yes. So natural rubber is 35% and then there is 3% of lead wire. So other than that, so remaining around 60%, 62% are crude derivatives.

Okay. Okay. Okay. And sir, next question from my side is in FY '20 we achieved -- approximately 201,000 of finished goods of sales in metric tons. So my question is that how much of the -- because 60,000 MT was the capacity that we achieved towards the end of the year. So my question is that in FY '21, how much was the Carbon Black that we could actually use? Or was it that full was utilized in FY '20? So that was my question.

No, full was not utilized. So in FY '21, the internal consumption would be around 55,000 and balance we would try to sell in the open market.

Okay. No, no. Sir, I'm talking of FY '20. So FY '20, we would have required 54,000. So were we able to source the entire 54,000 from inside or we had to source from outside, that was my question, for FY '20.

FY '20, since the time we started our manufacturing, we have been sourcing internally only. So we've been able to do fully from inside, in-house. Because, I mean, basically, I'll reclarify that. So the hard line on the Phase I, which was there, started off in June or July last year, since then the hard category, we stopped importing, buying from outside. And the soft, which we just started. So we've just stopped that. And going forward, the full impact will come in this financial year. But we will be 100% in-house self-sufficient from this year for all the grades.

Okay. No. But for FY '20, how much was -- how much we were self-sufficient that was my question?

So from the time we started our hard line, we were fully self-sufficient on hard grade. Soft grade, we just started a few weeks back -- a few weeks before year-end. So that's why that impact would not have come in that year. But from the time we've restarted, we are fully self-sufficient. We are getting everything in-house. So because there are 2 different grades now, hard grade and soft grades. So we didn't earlier make this upgrade, so which we had to keep on procuring from outside. We started our plant and overall there was a lockdown in the factory. So that's why we could not utilize that. And once we've restarted, everything, but that was in this financial year, everything, both hard and soft, both have been self-sufficient in-house.

So just let me put it this way, then what is incremental margin benefit that we are expecting from Carbon Black this year in FY '21?

Around 100 basis -- 100 to 150 basis points.

We have next question from the line of Nishant Vass from ICICI Securities.

I hope everybody is well at the company. Sir, first question is more in European agri market. I think, Poddar sir, if you could shed some light in terms of some of the countries which have outperformed, as export data indicates, France has been quite a big outperformer. So have we also gained market share there? Is something on that side happening?

Yes. Rajivji, can you answer this?

Sorry, we lost the question. We lost connectivity a little bit. Can you just repeat the question?

Yes, yes, sorry. Sorry for that. I just -- I was saying in agri Europe, you have been -- you're saying that there has been a strong traction. So the data that we see from exports indicate that France is doing extremely well. So I was just trying to understand, is that also one of our strong markets? Have we gained some overall market share in the European region last year on the agri front?

Yes. So basically, France has been one where we've actively been doing branding and sponsorship with the title sponsorship of the Coupe de la Ligue football. So we are seeing the impact coming in through that. There has been a good pull for us intheFrench market also. So it's sort of giving a payback on that now with the brand recognition going up, so it's gone up nearly 10 to 20 basis points from where we started off. So you're seeing that in the numbers coming up. And France has been a good traction point for us.

Okay. So basically, the A&P spend that we have been doing are basically now starting to reflect on our market share side. That's how we should think about that?

Yes.