Balkrishna Industries Limited (502355) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Q2 FY '22 Earnings Conference Call for Balkrishna Industries Limited, hosted by ICICI Securities Limited. 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 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 that this conference is being recorded. I now hand the conference over to Mr. Nishant Vass from ICICI Securities. Thank you, and over to you, sir.

Thanks, Nirav. Good day, everyone, and thanks for joining us today for the call. From the management side, we are represented by Mr. Rajiv Poddar, Joint Managing Director; Mr. M.S. Bajaj, Chief Financial Officer. Now I'd like to hand over the call to the management for their initial remarks. Over to you, sir.

Thanks, Nishant. Sorry for the delay in starting because of some technical glitch, but I'm glad we can get going now. Good morning, everyone, and thank you for joining us today. Wishing you season's greetings. Hope all of you, along with your near and dear ones are safe and healthy. Along with me, I have Mr. Bajaj, President Commercial and CFO; and also SGA, our Investor Relation Advisors. Let me begin with performance updates. Demand continues to be robust across segments and geographies. Accordingly, we have topped our highest ever quarterly sales and reported 72,748 metric ton for the Q2 of financial year '22. We expect this momentum to continue, and therefore, we are increasing our guidance to 275,000 to 285,000 metric ton for financial year '22. This guidance is on the back of strong demand trends. Some portion of the incremental logistic costs have been passed on to the customers, which is reflective in our Q-on-Q increase in average selling price. In order to meet the buoyant demands, the Board has decided to continue operations at the old Waluj plant. To achieve this, there will be a CapEx of INR 350 crores in form of installation of latest machineries, replacement of certain machineries, upgradation of certain systems and some portion of civil work. The advantage of this CapEx will be to get the much-needed capacity enhanced in a short period of time. In old Waluj plant, all this CapEx will be able to produce 25,000 metric tons per annum. This CapEx will be incurred over a period of next 6 to 9 months. We expect this capacity to be available from Q3 of the financial year '23. The current achievable capacity is 285,000 metric tons per annum. This includes the new Waluj plant that commenced operations in September '21. The brownfield CapEx at Bhuj announced in February will add 50,000 metric ton per annum. And now the old Waluj revamped plant will add additional 25,000 metric ton per annum. Therefore, the entire capacity by the end of financial year '23 will be 360,000 metric tons per annum of achievable capacity. During October '21, the company raised long-term finance of INR 500 crores. This was done in form of rated, listed, unsecured, redeemable, nonconvertible debentures having a base value of INR 10 lakh per debenture. In order to leverage the interest rate scenario and our euro receivables, we have swapped the debenture liability to euro fixed liability. Therefore, the effective interest rate will be 0.055% per annum. The repayment of this debenture would be spread over 3.5 years. With this, I now move on to operational highlights. Our sales volume for the quarter was 72,478 metric tons, This is a growth of 19% year-on-year. For the first half of financial year '22, sales volume stood at 141,356 metric ton, registering a growth of 42% year-on-year. Our stand-alone revenue for the quarter stood at INR 2,080 crores, which includes realized gain of foreign exchange pertaining to sales of INR 30 crores. For the first half of financial year '22, revenue stood at INR 3,908 crores, which includes realized gain on foreign exchange pertaining to the sales of INR 45 crores. For the first half of financial year '22, 54% of the sales came from Europe, 17% from India, 17% from Americas and the balance from rest of the world. In terms of channel contribution, 70% was contributed from replacement segment in the first half of financial year '22, while OEM accounted for 27% and the balance came from offtake. In terms of category, Agriculture segment contributed to 66% in the first half of '22, while OTR, Industrial and Construction contributed to 31%, and the balance came from other segments. The stand-alone EBITDA for the quarter was INR 564 crores with a margin of 27.1%, while the first half EBITDA stood at INR 1,099 crores, with a margin of 28.1%. Other income for the quarter stood at INR 62 crores, while unrealized gains stood at INR 27 crores. For the first half of financial year '22, other income stood at INR 102 crores, while unrealized gains stood at INR 43 crores. Coming to the net ForEx item. For the quarter, we incurred a net ForEx gain of INR 71 crores, which includes realized gain of INR 44 crores and unrealized gain of INR 27 crores. For the first half of '22, we incurred a net ForEx gain of INR 110 crores, which includes realized gain of INR 66 crore and unrealized gain of INR 43 crores. Profit after tax stood for the quarter at INR 377 crores with a margin of 18.1%. For the first half of '22, profit after tax stood at INR 708 crores with a margin of 18.1%. The contingent liability as of 31st March '21 was INR 65.4 crores as disclosed in our annual report. In the quarter 1 of financial year '22, certain tax assessments have been completed and the liability was crystallized at INR 35.7 crores, which was included in the tax expense in Q1 FY '22 as income tax of earlier years. In Q2 FY '22, remaining tax assessment has also been completed and the balanced liability has also been crystallized in the quarter. And the same has been included in the tax expenses as income tax of earlier years. Our gross debt stood at INR 1,443 crores. Our cash and cash equivalents were at INR 1,659 crores, implying a net cash position. For our first half of financial year '22, we incurred a total CapEx of INR 838 crores. Of this, approximately INR 700 crores has been spent on the new CapEx program of INR 1,900 crores. For Q2 FY '22, the euro hedge rate was at INR 87.75. Forward hedge rate currently stands at INR 89.70. The Board of Directors have declared a second interim dividend of INR 4 per equity share in addition to the INR 4 per equity share in the Q1 of financial year '22. With this, I conclude my opening remarks and leave the floor open to Q&A.

[Operator Instructions] The first question is from the line of Ashutosh Tiwari from Equirus Securities.

Congrats on good volume performance.

Thank you.

Firstly, we are seeing very sharp inflation in RM cost on a quarter-on-quarter basis. If I look at the per ton number, it's almost gone up by 12%. So why it has gone up so much basically? Because I think generally company was seeing 4% to 5% increase in this quarter.

We are able to pass some shipping cost to the company and we have recovered the shipping cost. That is why our RM cost is showing less.

Shipping cost was ideally part of other expenses, right?

So raw material cost, because we are importing the raw materials and 45 days inventories in transit. So that is why the main reason the raw material cost is lower.

Okay. And secondly, on the Waluj plant, because we are seeing such a strong demand, and the old Waluj plant was operational till I think September, because all productions have been from that plant only. So why can't that plant be operated even now if the demand is so strong? Why we have to refurbish and then only restart the plant in, say, next year?

So certain equipments were shifted to the new plant, which were already in operational condition. So that has already got shifted. So we need to create the whole pipeline and everything. And also the civil work was very old, the pipes were very old. So that was the whole reason why we went out to a new plant. So those things need to be repaired. The utility section needs to be revamped before you start up some new production there. So we have taken this call to do it and get going. So it will take us 6 to 9 months to get going on that.

The next question is from the line of Nishit Jalan from Axis Capital.

Congratulations on very good set of numbers. So my question is on the cost front. You did talk about that the ASPs are higher because some of the abnormal increase in freight expenses has been passed on to the customers. So just wanted to understand what is that quantum within the revenues? Basically, trying to understand where will ASP settle down once this freight rates normalize? So what is the underlying business ASPs? And how much ASPs are higher because of this higher freight costs?

So basically, if you see, our earlier realization was about INR 266, which is now currently at INR 286. So we have passed on around 2% to 3% of price hike, which is coming in July. The rest was, majority of it was owing to shipping cost reimbursement. So we expect it to be at those levels only. So that is what we expect it to be at.

Got it. And secondly, on RM cost, we have seen a further spike in crude in the last 3 to 4 months, right? It has gone up almost 35%. So are you seeing inflationary pressures in crude derivatives, such as synthetic rubber, carbon black, tire cord fabric and all, and in that context, how do we see RM cost increasing over the next couple of quarters?

Yes, next quarter, definitely, some cost will increase of the raw materials; 2% to 3% cost increase will be there.

Next question is from the line of Jinesh Gandhi from Motilal Oswal.

My question pertains to the price hikes. In July, we took 2% to 3%. Any further price hikes post-July or we are waiting for the price hikes from the competition?

No, we are proposing to take from January. We are working on the percentage yet. But from January, we are expecting to take another price hike.

Okay. Okay. And with respect to the CapEx, earlier we were guiding for about INR 1,000 crores of CapEx in FY '22. Now given that we are expecting our CapEx in old Waluj has also come in, what is the CapEx for FY '22 and FY '23?

So earlier our guidance was INR 850 crores to INR 900 crores in this financial year, but now we are looking to revamp it to INR 1,100 crores in the CapEx of this year and similar amounts in the next financial year. which will cover both the project costs.

Okay. So second half, we will be investing just about INR 300 crores, when the first half was INR 800-odd crores.

No, INR 400 crores. I said in my commentary that about INR 700 crore was given in the first half of this financial. INR 800 crores was total CapEx. I'll repeat my statement.

Okay. Old Waluj project.

Yes. So I'll repeat my statement. For the first half of financial year '22, we incurred a total CapEx of INR 838 crores. Of this, approximately INR 700 crores has been spent on the new CapEx program of INR 1,900 crore. So we are now saying that for this financial year, we will spend about INR 1,100 crores. So that means about INR 400 crores will be balance.

Right. Right. So INR 1,100 crores is the project CapEx where there will be maintenance?

Yes.

Got it. Got it. And one last question on the logistics side. So freight rate seems to be coming down after seeing a substantial spike. But are we also seeing any improvement in availability of containers?

So firstly, the price hikes, I mean, we are seeing stability. We are not seeing the price going higher now, but we don't see it coming down at least in this quarter. And yes, some availability has improved, but yet it is a challenge to get the container that we desire and the volume that we look at. But yes, from before, it is slightly better in terms of availability.

The next question is from the line of Joseph George from IIFL.

I just have two questions. One is on the ASP, you mentioned that the ASP for the quarter is slightly inflated because of the freight cost. So what I wanted to understand is, in the December quarter and possibly in the March quarter, if the freight rates remain at these levels, so the 2Q level of ASP should be expected to continue, I mean, if you take further price increase and go further. But the freight element in 2Q would be expected to repeat in 3Q and 4Q as well? Or did 2Q include some freight elements from the previous quarters as well, because of which this quarter is artificially inflated?

No, Q2 did not have anything from Q1. So it was that. Q3, we expect it to be at the same level. Q4 may go up marginally because we are suggesting -- I mean, we are going to look at a price increase in the last quarter. So that impact may come in, but shipping cost will maintain itself if there is no further increase.

Understood. And the second question that I had was in relation to our capacity. So you mentioned that currently it's about 285 and with the 2 phases coming in, the new Waluj and -- I mean the refurbishment of the old Waluj and the new Bhuj, total will go to 360. But would it be right for me to assume that for the next, say, 4 quarters, still the old Waluj refurbishment happens, your capacity will stay at current levels of 70 to 75, which is 285 divided by 4.

Yes. Yes, you're absolutely right. We start seeing some increase from Q3 and Q4 of next financial year.

The next question is from the line of Vimal Gohil from Union Asset Management.

Congratulations on very strong volume performance. Sir, my question is on, basically, you've sort of given out a volume growth guidance of almost 25% for FY '22, Just wanted to get a sense on how much has the industry grown? Or what is your expectation of the industry to grow? And the connected question would be, if you could just share what is then your market share globally, the OHT tires? I just have a follow-up question on that one more.

So you want to go ahead with the other question?

Yes. I'll just go ahead. Yes, sure. So if I heard you right on the CapEx, you mentioned that you will spend INR 1,100 crores plus maintenance CapEx for FY '23 and '24 each, right? Have I heard that right?

Yes.

Okay. Fair enough.

So coming to your first question, there is no authenticated data on market growth per se, but our estimate is the market has grown about 4% to 4.5%.

Okay. And what would be your market share in Agri and other segments?

So overall, if I look at it, overall, globally, on off-highway, we are about 5.5% to 6%.

5.5% to 6% is your market share. Okay.

The next question is from the line of Mr. Arun Subrahmanyam from Ampersand Capital.

My question is that at the end of quarter 1, you had said that your cost rises are higher, but still the actions that you're taking, you will be able to maintain your EBITDA margin at 28% level. And then quarter 2, we have seen it falling below that. So do you think that your full year guidance still can be achieved?

So as we have always maintained, our endeavor has always been and will be in the long term to maintain an EBITDA margin of 28% to 30% on a long-term sustainable basis. So that is what we plan to do. And quarter-on-quarter is very difficult to see, but we are close to the 28%. We are not very far out. And we expect that for the year we will make our best endeavor to maintain 28% to 30%.

Understood. And sir, now that you are seeing all this capacity constraint, forget about the shipping side, your own capacity, you have an issue there in terms of meeting higher demand. Do you have a flexibility to improve your product mix, that is give preference to higher-margin product or something which can help you achieve better margin.

We normally don't do that because eventually, you have to serve the market. Every product of us is important and it's all needed. I can't only give the tractor rear tires and not give the front because you need all tires to operate the equipment. So we have to service the market also. So it's very difficult to do those changes for a quarter or something in that sense because eventually in the long term you have to give customer care and customer service also.

Okay. And lastly, sir, if I can just understand that your total capacity, you are increasing it by just about 20%, which means that you may end up, again, facing capacity constraint very soon. So it looks like you have underestimated the market, the demand for your products or whatever. So it looks like you are running behind the curve in terms of your ability to push out more sales. So are you kind of thinking of doing something so that such a situation may not recur too frequently?

So firstly, I think we estimated the market to come like this, and that's why we started our projects about a year back now, where we started planning and we made announcements and we started working on that. And that is the reason by the time we are hitting our full capacity, our new production will be up. So as we say, Q3 onwards, we will start getting more products with us. So that was our estimation, which we had done. And in the long term, we are again looking at what is the possibility and working. And that will be our next round of CapEx, which we will do as soon as we start completing this round of CapEx.

Okay. Okay. Okay. And you have enough land and all those things in place?

Yes, yes.

The next question is from the line of Sonal Gupta from L&T Mutual Fund.

Sir, one, I wanted to understand, there is a sharp increase in other expenses on a sequential basis also. So just wanted to understand is that related to the shipping cost? Or is there some other factor?

So the other expenses has risen by about 70 basis points Q-on-Q, which is mainly on account of shipping costs, which we were not able to pass on to our end users.

Okay. And just on the shipping cost, I mean what portion of shipping cost can we say, ballpark, you're passing on? How much is pass-through for you?

Sorry, we don't have that number readily available with us, but we'll take it offline.

Okay. No, where I'm coming from is that, I mean like right now we're seeing a very high increase in shipping cost and that has meant that you have, like you mentioned in your realizations also, seen an improvement because there's some pass-through of the shipping costs. But these things can change sort of rapidly. So I'm just saying that -- so once the shipping cost comes down, those charges to the customers will also come down, right?

Yes. Yes, 100% will come down. So I mean, approximately -- very approximately, about 50% of the shipping cost has been passed on.

And what could be the total shipping cost? Any number you can give for us?

One second. Approximately 6% to 7%.

This is at current rates of -- I mean like it could have been lower in the past, right?

Yes. It has been lower. It's been about 2% in the past -- 2% to 2.5%.

Okay. And just my last question. I mean like more from a longer-term perspective, like you mentioned that the current expansion is taking place. But are there any product lines or new product areas that you want to get into? Or I mean like I understand we have a significant runway in terms of the market share gain that you can achieve. So it's just more of a market share gain? Or do your product lines also need to change a little bit as you try and expand further?

So it's mainly the same product line and off-highway tires. So meeting all the demands of the mixed geographies and the segments.

The next question is from the line of Kaushal Maroo from DSP Mutual Fund.

So you talked about a very strong demand environment. Can you give us more color between Agri and Mining and the different geographies, what gives you the confidence for your volume guidance?

So I think overall we are seeing strong demand in all sectors. So it's difficult to say Agri or Industrial or Construction. So all sectors have been -- all segments have been good and robust. And also the H1 performance has been strong enough, where we clocked nearly 140,000 metric tons. So with that -- on those bases is what we are saying that we can probably get these numbers of what we are talking about.

How has been the demand in U.S. per se and in Mining?

Sorry, I lost your voice. How has the demand been in?

U.S. overall?

Yes, U.S. has also been good, and we are gaining market share also over there. So it's been a good quarter.

Overall, on Mining side, apart from the new product line that we are starting around, is there visible improvement in market share in the Mining sector.

Yes. So if you see our -- from our product basket, earlier what was 8% has gone to 13% in OTR and Mining.

So is your product praise going up, sir?

So from our share of product in the segments, 66% came from Agriculture and OTR contributed to about 13%, 1:3, which was earlier about 8% to 9%. So there is a significant gain in that.

The next question is from the line of Ronak Sarda from Systematix Group.

Sir, firstly, in Q2, can you just give us a ballpark number of what was the cost of natural rubber to synthetic rubber and all the other costs in terms of per kg.

So natural rubber average cost was around INR 137/kg and synthetic rubber was around INR 152/kg.

Okay. Okay. The other question was, I mean, after almost 2 or 3 years, we are operating at 100% utilization now. So excluding the shipping costs, can you highlight where are we seeing the operating leverage benefit? Because despite 100% utilization, the margin both in terms of per kg or percentage seen in the package looks to be on the lower side.

No. I think if you see the things that are the staff cost, et cetera, is all down. But unfortunately, the RM cost and shipping cost has gone up so significantly that they have overshadowed the cost-benefit that we have got. But if you see where the RM cost should have been and impacted in the shipping cost, if we had passed on that without having these other improvements, the margins would have been on a different page. So because we were able to get those gains, it is not down to the extent that they have impacted us.

Got it. Got it. Sure. And just a clarification on the previous question. Our mix on OTR is almost 31% odd. You meant Mining of that has gone up to 13%?

So OTR, Industrial, and Construction contributed to 31%. Of that, 13% came from Mining business.

Okay. And that used to be 8% few years back?

8% to 9%. Yes.

Okay. Sure. And is there a possibility, given how the demand scenario is, you will have to start prioritizing the sales to different geographies right now? Or are we able to manage the production over the next 2 or 3 quarters?

No, we are managing that. Our customers knew that we are at these levels. So they have been placing orders based on their requirement. So at the moment, we are managing it.

[Operator Instructions] The next question is from the line of Pramod Amthe from InCred Capital.

So the first question is with regard to the European Agri demand situation. So if I had to look at ETRMA data, so it shows a 16% decline for September quarter for the replacement market. What is happening on the European replacement market for tractor tires? And do you see this deceleration to continue?

So I mean we are seeing a good demand in European tractor replacement market and we expect it to continue.

But if I had to look past the last 2, 3 years trend, wherever such prolonged downturns happened, you also usually follow the industry, right? So what are you doing this time which can make you to outperform consistently forward?

I think all the branding efforts that we have been doing, the marketing and branding in Europe is coming into play now. So that is one aspect which we have been doing differently. Our channel partners have also been planning better. So I think the combination of a lot of things put together is what is there.

And would you be able to give what is the market share increase you might have had in first half in especially European replacement market?

No. It's difficult to give those numbers because there's no authenticated data to what is the market share and what is that. So it's difficult to give those numbers.

And with regard to Waluj plant, with the new CapEx, is there going to be a product profile change which is going to happen from the same plant?

Yes. Marginally, it will be different, what they were doing earlier and also what the tires are required. So very marginal, but it will be in the same segment, and that's why these CapEx is required to adhere to that production capacity.