DCW Limited (DCW) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the DCW Limited Q1 FY '26 earnings conference call hosted by Arihant Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ayush Chaturvedi from Arihant Capital. Thank you, and over to you, sir.

Thank you, Manav. Good evening, everyone, and thank you for joining us on DCW's Q1 FY '26 Earnings Call. We would like to thank the management for giving us this opportunity to host. On this call, we are joined with DCW's management represented by Mr. Saatvik Jain, President; Mr. Amitabh Gupta, CEO; Mr. Sudarshan Ganapathy, COO; and Mr. Pradipto Mukherjee, CFO. I would like to invite Mr. Saatvik Jain, to initiate the proceedings with his opening remarks, post which we will have an interactive Q&A session. Thank you, and over to you, sir.

Thank you. Good evening, everyone, and thank you for joining us today for our earnings call for the first quarter of FY '26. We entered the new fiscal with the global and domestic chemical industry still navigating significant headwinds. The macro environment remains challenging with multiple forces at play. Globally, geopolitical tensions and tariff actions continued to alter trade dynamics. The U.S. reimposed tariffs on a broad range of Chinese origin chemical products and also now on select Indian origin intermediates. These developments disrupted traditional trade flows, introduced pricing uncertainty and prompted global buyers to recalibrate their sourcing strategies. Closer to home, the continued flow of low-cost imports, particularly from China, has further intensified pricing pressures in key chemical segments like PVC and Soda Ash. Policy measures to safeguard our domestic industry, such as the much anticipated antidumping duties on PVC and soda ash are yet to materialize. This has kept domestic realizations under pressure despite healthy underlying demand across several product categories. That said, India continues to be one of the most attractive long-term chemical markets globally. Government-led investments in infrastructure, housing, et cetera, are sustaining demand growth. We are also seeing continued structural shifts in supply chains that favor India over the medium term. These tailwinds, combined with our strategy of value addition, diversification, and execution discipline position us well to navigate the short-term volatility. Coming to our Q1 performance. Revenue declined sequentially primarily due to a correction in PVC realizations and lower sales volumes, partly on account of higher internal consumption. In addition, sales of Synthetic Rutile were lower compared to the previous quarter, reflecting the skew in our order book from Q2 onwards. A particular highlight this quarter is the significant improvement in our profitability at the bottom line despite the lower top line and uncertain market conditions. Our PAT grew by 70% year-on-year, aided by disciplined control over the below-the-line expenses. Notably, our finance cost this quarter is the lowest it has been in the last 32 quarters, reflecting the combined benefit of debt reduction and improved cash flow management. Our EBITDA mix continues to shift in favor of Specialty Chemicals, which now contribute a significant share of our earnings. This reinforces the success of our portfolio strategy and strength of our high-margin, high-value products. On the growth front, our C-PVC expansion of 20,000 tonnes was commissioned ahead of schedule and has begun contributing from July-August onwards. The balance 10,000 tonnes expansion is progressing as planned and will further strengthen our position in this segment. We also commissioned our 44.5 megawatt solar project during this quarter, as mentioned earlier, with generation ramping up in phases. Once fully operational, this will meet about 25% of our Tamil Nadu units power requirements from renewable sources. Apart from the tangible cost savings, this project supports our broader sustainable goals and reduces our carbon footprint. Our priorities remain clear for FY '26. One, accelerate growth within our specialty chemical portfolio, where customer retention, application diversity, and pricing power remains strong. Two, drive our cost improvement in our basic chemical portfolio to enhance competitiveness and stabilize our margins. And three, the most important one, is maintain our balance sheet discipline. We remain committed to our growth with deleverage strategy and are on track to reach our balance sheet targets by the end of this fiscal. We are targeting to end FY '26 with a net debt-to-EBITDA of less than 0.5x on the back of significant debt reduction through the year. By the end of this fiscal, we will have created a resilient base, one that consistently delivers quality margins capable of withstanding near-term market volatility. In my closing remarks last quarter, I had spoken about building a foundation for the next phase of growth. Our leaner balance sheet, enhanced specialty product mix, and ongoing efficiency gains will ensure that when we move forward, we do so from a position of strength. We have always believed that the best time to prepare for growth is during challenging times. And FY '26 will be a year where we complete that preparation and position ourselves for the next chapter of our growth journey. With that, I will hand it over to our CFO, Pradipto, to talk on our financial performance. Thank you.

Thank you, Saatvik, and good afternoon to everybody in the quarter 1 FY '26 earnings call. The quarter revenue stood at INR 475 crores, which was down by 4.8% Y-o-Y from INR 499 crores. This, as earlier said by Saatvik as well, is predominantly lower because of lower sales volumes of PVC, which has been used for our internal consumption for C-PVC production. The sales volume across all other product segments remained higher, but that got offset by lower realizations predominantly from PVC and also from C-PVC. On a sequential basis, the revenue was lower by 11.5%, which was down from INR 538 crores to INR 475 crores. Here as well, the PVC volumes were down due to similar reason of product being diverted for internal consumption of C-PVC. Further, the sales volumes for SR was also down for the current quarter. The lower volumes of these products had impacted the revenue by approximately INR 65 crores. While the SR sales will pick up from quarter 2 based on firm delivery schedule from awarded export contracts, PVC sales volume will continue to remain low due to increased consumption for C-PVC production. EBITDA, including other income for quarter 1 stood at INR 58 crores, which was up by 12% year-on-year from INR 52 crores, predominantly on account of increased profitability of Basic Chemicals. During the comparative period, the Basic Chemicals EBITDA increased to INR 11 crores from just INR 1 crore due to the increase in caustic soda prices and lower energy costs on account of solar power substitution. This was partly offset by EBITDA drop in PVC due to reduction in PVC/VCM spread. On the Specialty Chemicals, the EBITDA remained more or less stable with a negative bias due to fall in C-PVC realizations. On sequential basis, the EBITDA dropped by 6.5% from INR 62 crores to INR 58 crores, and this fall is due to reduction in the PVC and C-PVC prices, as has been earlier spoken. The EBITDA margin, excluding other income, stood at 11.3% versus 9% in quarter 1 of last fiscal and 10.4% in the previous quarter. Coming to finance cost. The finance cost stood at INR 15 crores, which was down by 10.6% from INR 16.9 crores in last year quarter 1. On a sequential basis as well, it was down by approximately 5%. This was the lowest, as mentioned in a span -- lowest in the span of last 32 quarters, and it is expected to go down on scheduled repayments of our term loan. Depreciation more or less remained flat at INR 25 crores across all the comparative quarters and is expected to increase as we capitalize for the C-PVC CapEx in future. PAT for the company stood at INR 11.4 crores, up from INR 6.7 crores, which is a jump of 70% Y-o-Y, driven by the EBITDA increase of 12%, as mentioned earlier, and a decrease in below-the-line cost reductions driven by financial and other disciplines. On a sequential basis, the PAT has been on similar lines. With this, we can now open the floor for Q&A. Thank you.

[Operator Instructions] We have our first question from the line of Pujan Shah from Molecule Ventures.

Sir, my first question pertains to the tariff, and we have been hearing...

Sorry to interrupt you, sir. Your voice is quite muffled. Can you please use your handset?

Is it clear now?

No, sir.

Is it clear now?

Yes, much better.

Yes. So my first question pertains to the tariff as we're recently hearing about the tariff in the chemical space. So just wanted to understand what percentage of our total revenue we export to U.S. specific? And what will be the impact of tariff in our product? If you can tell product-wise, it's okay.

It's Amitabh Gupta here. Frankly, our U.S. exports are only of SIOP. And there is absolutely no change in -- there is no effect on this tariff introductions by U.S. And we continue to get the orders from our existing buyers on the same basis what we were getting earlier, and there is no change in the prices also.

My second question pertains to the PVC. So in PVC, we have recently seen that there was one plant being shut down in the European region. So just wanted to understand on a broader dynamics, first, what is the installed capacity in the Europe, which can be -- which is possible that the plant will get shut down or the possibility because of the higher energy cost and due to the sluggish scenario right now? And just wanted to understand, is that the China surplus capacity will start supplying over there? Or will the India will be so positioned to export the PVC to the European region and that will help us to increasing realization? So can you just give a broad thought about it?

See, I will go from the bottom. I don't think even if Europe will reduce their operating rates or reduce their capacities, we will -- India will be a keen exporter to Europe because Europe, there are a lot of entry barriers. You have to be reach compliant and all those things. I think they have only reduced capacities which are in surplus. So I don't think Europe is going to totally go out of PVC production, number 1. Number 2, Chinese products are not entertained in Europe because they don't satisfy the stringent quality measures that has -- that one has to qualify for selling into Europe. So I don't think China will be a beneficiary even if Europe reduces their operating rates. What could happen is that there could be some market realignment. There could be some Asian producers who can sell into Europe and the markets where they were selling earlier, China can maybe sell there. So it may not be anything significant, but even if Europe reduces their operating rate or shuts their capacities, it will be an opportunity for, say, producers like Korean producers who have been selling in the past to Europe to up their sales in Europe and the markets where -- Asian markets where Koreans are selling, the Chinese can sell. So that will be only a market realignment. I don't think it will have any significant, I would say, tailwinds for the PVC players to increase their realization or market will get readjusted. That's all.

Sir, just on a follow-up this part. So what will be the current installed capacity in the Europe?

I don't have offhand. I can check back and then get back to you.

Just to answer your question additionally is that the Europe drop in production will and may lead to exports from Korea into Europe, which eventually means that the Chinese products may find a place in the Asian market, which eventually means that the pressure of the Chinese volumes into India may reduce. Indian players, existing PVC players predominantly will continue to focus on the demand in the country because we anyway run -- the product runs an import substitution in India.

My last question will pertain to the China evolution policy, the measures which right now they've been taking too. So what are your thoughts on that part? And how we have been -- it is a long-term alignment, I understand. But do you feel that will be a very positive outcome for the other countries as well?

You're talking about the Chinese rationalization of their old capacities?

Yes, yes, yes. The new...

What happened -- I'll tell you. What has happened is that China has come out with a policy whereby their old polluting carbide capacity plants, which are less than some threshold capacity needs to shut down. So if that happens, there will be an 8% drop in their overall capacities. But we also understand that there are also some new capacities being planned in China. So what is going to be the actual impact, we will come to know only post this entire thing pans out. At this juncture, it is difficult for anyone to predict what China is going to do and what is going to be the impact. For example, tomorrow, if we have this Ukraine war getting resolved, there is going to be a boost in demand to rebuild that country. And that will see a lot of flow of products from various countries to that place. Similarly, if there is any improvement in the Chinese internal demand, even that will also will help the overall domestic demand. You see, per se, no country would like to export their product unless they are compelled to because the best realization you get is only when you sell locally.

[Operator Instructions] We have our next question from the line of [ Dwiti ], an individual investor.

I had a few questions. First one is on the SIOP. So our SIOP utilization has seen a dip in the quarter. So any specific reason for that?

I think SIOP production is basically dependent on the kind of product mix we prepare. When you -- when we are comparing capacities, it's on an arithmetic basis on the tonnage versus the nameplate capacity. We have been producing certain kind of lighter shades, which require more cycle time. And hence, the volumes, what you see would have dipped in terms of production.

Sir, what will be our power cost benefit for the quarter after commissioning our solar project?

See, the power energization of the part, which is supplying our solar has started somewhere in April beginning, but we are drawing power on a phased manner. I think roughly what benefits we would have got by now would be around INR 4.5 crores, INR 5 crores for this quarter.

Our ECU realization for the quarter, and how much was the chlorine negative, if you could share that?

Our ECU is INR 33,000 per tonne. And chlorine, frankly, since we are the captive consumers of chlorine and SCL -- sorry, chlorine and SCL, so the negative on chlorine and SCL is not much in our case.

[Operator Instructions] We have our next question from the line of Ayush Chaturvedi from Arihant Capital.

So firstly, I would like to understand that the price volatility and the variation and stress that we are witnessing currently. What is basically the outlook on price realization for our key products? That's one. And if there has been any significant change in demand patterns for domestic vis-a-vis export markets? And if anything of a very significant nature of realignment is foreseen given the tariff situation that we found ourselves in.

So we'll take your last part first. You see price volatility is bound to be there, as told by Saatvik also in his opening remarks, that till we see some stability across the geopolitical situation and within the country, we will have a price volatility and also demand volatility. What we can see is that the demand is likely to remain robust because we are one of the very few green spots in the world where we are seeing a growth. Having said that, if you see our products, caustic soda demand is consistent. Only thing is the realization will depend to a great extent on the chlorine HCL negative. So the months where we have that prices going down, we will have a lower TCU. Soda ash demand is more or less constant. Only in the monsoon months, we have a lower demand because the soda ash, what we make also is predominantly going to detergent and all other products where the demand usually is a weak in the quarter 2. PVC, C-PVC demand tend to go in tandem. PVC, C-PVC, there is no death of demand. Only thing is that there is an oversupply of PVC, which has resulted in some sort of, I would say, cautioned buying by the customers. So that has tend to have an impact on the price because there's an oversupply in PVC. And PVC sentiments also carry into C-PVC. So we are seeing a correction in the prices of C-PVC as well. Iron oxide, fortunately for us, more than 50% of our demand is met by imports where we don't see any significant, I would say, concern. The only concern is that even going by our past trends, the quarter-on-quarter demand is -- there could be some variation. So year as a whole, we will do better, but we will see some quarterly blips here or there. I hope I have answered your question.

If I may squeeze in one more. So with the ongoing investment to expand our C-PVC capacity, so I mean, how -- if you could elaborate on how this scale-up will be reflected in the mix in the next 2 to 3 years because we vis-a-vis the product mix and also the margin profile. So yes, that will be very helpful.

I would say it's very premature on my part to really comment what's going to happen after 1 year. All I can say is that by end of the year or end of the financial, we are hopeful of completing our CapEx on C-PVC, where we will be at 50,000 tonnes capacity. Having said that, in the next few years, we are also expecting certain additional capacities being announced and which are going to come out. So I personally feel that availability more domestically will propel demand. And there could be some temporary phase where we may have an oversupply situation. But overall, we feel in the long run, the demand will grow.

[Operator Instructions] We have our next question from the line of Aditya from Sowilo Investment Managers.

See, my question, I did hear your comments on PVC. Generally, there was this notion that when the housing sector is -- I mean, they are doing quite strong in terms of pre-bookings and presales and collections. So now there will be this demand for PVC, but that has not really kind of played out, right? So any -- I mean, can you shed any light on why this has happened? Like, I mean as...

Yes, yes. What I say is based on what I have heard from other processors' investor calls. You see, the dealer stocks plays a big role in the overall consumption -- I mean, what we sell is to the producers. And when they sell their product, it is sold through their dealer network. So the stocking at the dealer level plays a significant role in this entire supply chain management. And from what I understand is that because of the uncertainty on the various ADD still not coming, we have been waiting for more than 6 months, 1 year, and there has been a continuous dumping of PVC from China. So the stocking levels have come to significantly lower levels of the PVC products at the dealer levels, which has an impact on the overall demand. So even though the real estate infrastructure demand, what you say is correct, is looking robust, but we are not seeing that on the ground as yet.

So is it like -- I mean, they are anticipating prices to go down even more --

We are anticipating some positive sentiments to come because we have had a couple of false runs that it is going to come. So I think we will have --

No, I'm talking from the point of view of, say, the stock with the dealers or not? Are they anticipating prices to go up or below?