Finolex Industries Limited (FINPIPE) Earnings Call Transcript

Ladies and gentlemen, good morning. And welcome to the Finolex Industries Limited Q3 FY '20 Earnings Conference Call hosted by Investec Capital Services. [Operator Instructions] Please note that this conference is being recorded. I'll now hand the conference over to Mr. Ritesh Shah from Investec Capital Services. Thank you, and over to you, sir.

Yes, hi. Thanks, Lisan. Ladies and gentlemen, thanks for joining Finolex Q3 conference call. We have with us from the management, Mr. Sanjay Math, Managing Director of Finolex Industries; and Mr. Anil Whabi, Director of Finance and CFO. I'll hand over the call over to Mr. Whabi for initial remarks. Forward that, we can have a Q&A session. Over to you, sir. Thank you.

Hello. Good morning. This is Sanjay Math speaking here. First of all, good morning to everyone, all ladies and gentlemen, who are there for this call. So on behalf of Finolex, let me welcome you for this call. And I am accompanied here with my colleagues, Mr. Whabi, our CFO, and there are other colleagues from Finance department, who are also accompanying to answer your questions. So we'll be happy to talk to you about the performance of our third quarter results. To begin with, on the revenue, we registered a decline of 7.6% to INR 699 crores from the last year's INR 756 crores. However, on the EBIT margin, we have got a growth of -- growth up to 17.1% against 15.8%. The PBT margins have increased to 17.8% against 16%, and PAT has increased to INR 93.3 crores against INR 78 crores with a margin of 13.3% from 10.4%. So there is a growth in the PAT in spite of there is a decline in the volumes. Sector wise, PVC sector sales volume is lower by 11.5% at 59,154 metric tonnes against 66,838 metric tonnes last year. Our PVT EBIT margin grew to 20.1% against 16.7%. This is because of PVC/EDC delta, which is higher at $589 against $535 last year. Pipes and Fittings segment. Sales volume is lower by 10.8% at 52,815 metric tonnes against 59,179 metric tonnes last year. The EBIT margins are slightly higher, 7.9% against 7.4% last year. The volumes in agri sector were impacted, I think you know, that the Monsoon got extended to mid-November, and that has drastically affected our performance in agri sector. Volume in non-agri sector has shown a double-digit growth against a decline in agri sector. And this non-agri sector, even despite the slowdown in real estate, there is a growth in non-agri sector. And that is why even though our total decline was about 11.8% in non-agri sectors, I think it is compensated partially by the non-agri sector. I think this is the information that I give it to you now, and I will be opening the floor for any questions that we will answer. Thank you, gentlemen.

[Operator Instructions] The first question is from the line of Sonali Salgaonkar from Jefferies.

My first question is, could you help us with the volumes and revenue of both CPVC and column pipes?

You want PVC Resin or PVC Pipes?

No. CPVC.

CPVC and column pipes, sir.

Sonali, CPVC total volume that we did in the quarter was 2,489 tonnes. And in column pipes, it was 429 tonnes.

And versus last year?

Last year, it was 2,281 tonnes for CPVC, which is a growth of 9%. And in column pipes, it was 845 tonnes during the Q3.

Sure, sir. And revenue figures, you will be able to share with us?

Revenue figures I don't have right now.

Sure, sir. Sir, secondly, the raw material prices for PVC, EDC, ethylene and VCM?

You want quarter-wise prices?

Sir, this quarter versus same for last quarter.

This quarter, PVC price average is $868. EDC was $279 and VCM was $740. PVC/EDC delta was $589, and PVC/VCM delta, $128.

Sure. Sir, what is the PVC/EDC spread as of now?

As of now, it has slightly reduced. Presently, it is about $560, $565.

$565, sure. Sir, my last question is, on a 9-month FY '20 basis, would you be able to give us top line growth or the volume growth for agri pipes and non-agri pipes?

For non-agri, it is about 16%.

Sure. All right. Sir, and how are -- how is the demand situation on the ground that you are seeing from Jan to mid of Feb?

In agri, the pickup is yet to happen. We are waiting. It should happen soon any time now.

The next question is from the line of Maulik Patel from Equirus Securities.

Sir, can you highlight on the PVC/EDC spread currently? And...

As I told you, it was -- it is somewhere around $560, $565 at present.

And is there any cost push-up in the EDC or...

I think the dynamics is a little bit changing. EDC, which fell down to around $279 for the quarter -- Q3 -- is coming up. And presently, it is about $330. So from $280 to $330, there is a $50 change in EDC prices. And correspondingly, there is a change in PVC also, which is around $270 -- sorry, $870 to $890. So that has gone up by $20. So the delta has fallen by about $30.

Okay. And VCM has gone up relatively higher currently in the last year.

VCM also has gone up to $790. Now this dynamics is within market position of demand/supply.

Sir, second thing is on the CPVC. Post this anti-dumping duty, everyone had -- the large organized players have raised the prices. What is your assessment on the market where the CPVC industry -- is the volume overall declining in the market? Or is the volume is also growing and the large players are also growing? What's your assessment of the CPVC market, sir?

. I think CPVC market is growing, and it is growing more than the other markets or the pipes. So because of more urbanization that is happening and more real estate business that we grow. There are a lot of government schemes, which are supporting low-budget housing. Here also the shift is coming to CPVC. That is why indoor piping, particularly for kitchens as well as bathrooms, some other things, that it had the 16% increase. And plumbing and CPVC compete with each other.

Okay. Okay. Sir, generally, because of this current market prevalent in the CPVC, has your supplier has asked for a division in the price? Because what we can see from the -- not only from your results, but from the other pipe companies, that all margin has seen an expansion significantly in the last couple of -- in the last 2 quarters. So will the suppliers will also try to take a benefit from this opportunity where the South Korea and the China CPVC is very expensive in the market?

We have a long-term contract with the supplier, which is Lubrizol. And we have recently signed a contract for 3 years. And there is a pricing formula which we are developing. So it is more based on the inputs of the making of CPVC, and that is why it will depend upon the factors that go into making CPVC, other than it has to do anything with the duty structure, which will keep on fluctuating. [ ADD ] was supposed to be there for 6 months initially. And now this has to be reviewed and possibly may get continued. So there will be a decision which will come very soon, maybe by this end of the financial year or maybe early summer. Then we will know exactly how the dynamics of the duty structure will be, and accordingly how the pricing and other suppliers will adjust themselves. But at present, we are insulated with this. We have got a long-term contract.

And, sir, this 3 years you signed up recently? Or it is when you entered into the agreement [ or ] the end of last year?

No. So it is not like recently. It is last year.

Okay. So some time in the 2019 you signed up for this...

Before the duty was changed.

Okay. Before the duty was changed, this agreement you signed it. So there is no...

That is in force. So there is nothing like the...

Okay, got -- no, I understand. And, sir...

Since the pricing is dependent on imports, not on the duties. I really don't see any change that is [ happening ].

Okay. Sir, last question, this last March or April, you started giving more credit to the distributors for non-agri piping. And have you seen a significant pickup after that in the volume, how the market has responded? Because now you're aligned to the other players, which are again giving a similar credit to the distributor in the non-agri segment?

I think we are in this market quite new, compared to the other players. We are just entering into this non-agri market. And we are originally on agri sector. We have cash and carry. So we have started giving credit to improve our market share. I think that is a normal practice by all other competitors. And so we have to follow that, and we are definitely doing that.

The next question is from the line of Ritesh Shah from Investec.

Sir, in the prior question, you did indicate that we have a 3-year volume contract with Lubrizol. So I wanted to understand when do the prices get adjusted? Like, is it on a calendar year basis? Is it on a quarterly basis? How does it work, sir?

Presently, it is on a yearly basis.

Okay. And, sir, is it Jan to December?

Jan to December, yes.

Okay. Sir, have the prices increased for us? That is one question because of -- so how does the sourcing arrangement work? The reason I'm asking is you have 40% of CPVC imports into the country from China. So the smaller players will find it difficult to procure it. So I wanted to understand 2 things. One is, what is the differential in sourcing cost, say, between us and a marginal player, which will put us an advantageous situation? And then secondly, if there is a cost escalation, has it already been passed on into the market?

I think we cannot talk about our competitors, how they source it and how they price it for that. What we have got -- we have entered into a contract with Lubrizol, and it's a branded product of FlowGuard and that is the major advantage that we look at. So we price our products based on how we can sell and what is our targets to sell. Market is growing, and we take this opportunity with the Finolex FlowGuard as a branded product. So we sell on branding, and we sell it on quality, and we sell it on our own cost and price structure. There will be players who will be always trying to get into this business with low-cost and low-priced CPVC from China or any place. I think this kind of competition remains even in other sectors of pipe. So I think it is our own strategy that we would like to give the branded product with a branded quality.

Sir, my question is, has the sourcing cost increased for us since Jan? Is it already in the P&L? Or one can expect that in next quarter?

No, it will not be on quarter-to-quarter basis. I think the sourcing cost is same, like last year to this year.

Okay. So despite this antidumping provisional duties, we have that benefit, which will continue going forward.

Exactly.

Okay. Sir, can you help us with what was the PVC and CPVC price increase in this quarter, in Q3?

Q3, the PVC prices went up by about INR 5 -- sorry, the prices dropped by INR 5.

Okay. And so CPVC, it was flat [ throughout the ] year?

As Mr. Math said, we have a contract. So prices change only because of a change in rupee-dollar parity.

Okay. Okay. And sir, lastly, you did indicate -- can you indicate the agri and non-agri volume growth for the quarter?

Yes. We just mentioned a while back, non-agri grew by about 15% in the quarter.

Okay, okay. And sir, has [ fittings ] ratio change in materially, I know we don't quantify it.

But no, not materially.

We'll move on to the next question, that is from the line of Ashish Poddar from Anand Rathi. .

My question is regarding the PVC Resin margins. I believe the delta, if you look at on a quarter-on-quarter basis from Q2 to Q3, it is largely flat. But we have seen large expansion in the margin profile. So if you can explain what has happened in the quarter 2?

As Mr. Math mentioned, one is -- delta, which is [indiscernible] groups slightly on a quarter-on-quarter basis.

So what was the figure in Q2? And you mentioned $589 in Q3. What was in Q2? I don't think material difference was there.

No, no, no. In that -- there may not be a material difference. But if you are aware, we -- during monsoon season, we cannot import raw material. And most of it is imported in 3 months on period. So our raw material was already there, high-priced raw material, which was used in Q2. But from Q3, we started importing fresh materials, which came at a lower cost. So those -- the reported number of delta is $583 in Q2 and $589 in Q3. That difference is small. But for us, it was a little more because we have imported raw material earlier.

So how do you see this moving in coming quarters, in Q4 and Q1?

That also, Mr. Math mentioned that it has come down to $560 as of present.

Yes. So in Q4, you see that the margin should be a little suppressed.

Obviously, yes.

The next question is from the line of Bhargav Buddhadev from Kotak Mutual Funds.

Sir, just wanted to better understand your CPVC pricing strategy. Is this a function of just the cost inflation from your vendors? Or is it also a function of demand/supply mismatch?

Can you repeat the question?

You know, the prices are fixed on the basis of demand supply and our position in the market.

Because what I heard was that you haven't raised prices in CPVC. Did I hear it properly?

What I heard that we have raised the prices.

So how much has the CPVC prices increased in the last -- since the anti-dumping duty imposed?

No, no. As I said, because of antidumping, we have not changed our prices.

Yes, but sir, I mean, competitors have increased prices significantly since the imposition of anti-dumping duty. So I was wondering why would we also not increase the prices?

I don't think we look at the prices of the competition to fix our prices. So we try to fix our prices based on our market assessment.

So, sir, in terms of percentage, what could have been the increase is the anti-dumping duty imposed of CPVC?

No, no. I don't have that number.

Okay. Okay. Meaning it won't be a significant number. Is it fair to say that?

Yes.

Okay. And on PVCs, since January, how much has the prices changed?

Prices have been raised by almost 5% since January.

5%.

And sir, do you think this coronavirus will sort of have any impact on these polymer prices in your experience?

It is very premature to say how China material will come here. As such, India is importing some PVC from China. So whether that will not come or it will be restricted. But we see there will be somewhere or the other a shortage of PVC coming to India from China. But that space will be occupied by various other players from the other countries. And so the PVC prices going higher is, again, a guess. It could grow by another 10% to 15%, but that will be dependent on the PVC demand in India and it may not be so specifically because of coronavirus.

The next question is from the line of Umesh Patel from TCG Asset Management.

Sir, I missed earlier a couple of questions. So I just wanted to know what was the reason of volume degrowth in PVC piping particularly. Is this due to demand slowdown? Or we have sacrificed on pricing front to gain market share?

The volume -- basically, as we said, it was because of extended monsoon exit and in the cycle thereafter. Now 70% of our supplies go for irrigation. So that is why the volumes were affected.

So do we see quarter 4 would be normal or it would be better?

Quarter 4 will be strong, Rabi season would be...

Quarter 4 will be -- quarter 4 should be good because whatever the loss of Kharif crop is there, I think the Rabi crop is really growing well. So when the Rabi crop is available by plan of Holi, I think the money will be there with the farmers. And for the summer crop, there will be a shortage of water coming from the groundwater. So there will be a demand for parts coming up. So that is why we see that the growth should be there by end of this month to March, April, May, June.

Yes. So does it imply that this...

And then onto onset of monsoon, there should be a very good growth.

So does it mean that there would be 3 crop season this year, summer crop season would be...

I think there are 3 reasons, not only in -- there are places where there are 3 crops. There are places where it is only 1 crop and then third crop. So the market is not necessarily only for 1 crop. If it is for 2 crops or 3 crops or whatever, so the demand will be dependent on that.

Second question is related to the follow-up question on the coronavirus thing and the impact of China import towards India on CPVC consumption. As of now, sir, what proportion of CPVC is coming from China overall?

I think this question is like -- about 30% to 40% of the total CPVC market was coming from China and Korea, and both have got the anti-dumping duty. So before this virus also, there was material which was coming. So -- and the anti-dumping duty was there. Now whether the people have shifted from Chinese supply to other suppliers is a question, which doesn't look like it has happened. So there is not a very great effect that we see at present of the coronavirus. It could also -- if it get extended, then possibly the materials supply may get affected.

Yes. So does it mean that the overall, the 1 lakh or 1.5 lakh tonne is coming from China?

It is not -- see, for example, CPVC is only total market in India is about 150,000 to 200,000 tonnes, somewhere in between. Out of that, 30%, 40% was from China and Korea. And so that was about, you can say, about 50,000 to 60,000 tonnes in the quarter. And that is yearly product, not [indiscernible].

Yes. Absolutely, yes. Sir, the last question was related to anti-dumping duty that you have mentioned, but that most of the players have already increased the prices in CPVC, but not you. So what is the price difference as of now in between other players and, as of now, you -- your product?

No, I don't think there is much high price difference between the competition and us.

The next question is from the line of Dhiral Shah from PhillipCapital.

Sir, when I see every organized player is expanding their capacity. So do you feel that this kind of a demand is there in the market to absorb this capacity? Or we may see a pricing pressure going ahead?

I think the capacity of Pipes and Fittings, we have got about 370,000 tonnes. And our capacity utilization is about 75% -- 70% to 75%. So we have capacity available. Whether it is an overcapacity is a question mark to say, because the market is growing at double digits. Possibly because of the extended monsoon this year, you might have seen us drop in Q2, Q3. But that will recover. That is what we feel. And even we are also hopeful that going ahead, Q4 and the next Q1, we should have better volumes that are coming up. So a temporary setback which is there because of the agri sector is not going to last for long, because next season is going to be better, possibly. Every alternate year, I think we see that the agri sectors are going better.

So what is the one driver for this, be it in agri or be it non-agri. You talked about regarding the non-agri, the low-cost budgeting, housing and all that. So what is the growth driver in agri also?

Agri, there are a lot of -- no, you might have heard the budget of 2020. There is a 16 point action plan, which the government has revealed. And there are a lot of things that are there to support agri as well as rural development area. I think Pradhan Mantri [indiscernible] Awas Yojana is one, but there are a lot of other things which are there in terms of credit to them, in terms of minimum support price, in terms of increasing their income and doubling the income in 2022. So there are a lot of methods that are coming, even the insurance for the crop. And so the credit facility to the farmer, increasing his regular income, and thirdly, he's supported by various schemes to go into increasing his infrastructure, particularly on irrigation. So those types of things are going to help the farmer directly, and that will increase the demand in agri. So how that shapes up the budget proposals are there and how those proposals are getting converted in actual practice, because this will be in the state portfolio, and that we have to see. But farmer is the area where every state is looking at it even from the political point of view, as in they support the commerce. So we also are upbeat on this support that the government has given in agri sector.

So this irrigation is also subsidized by the government?

Irrigation is not subsidized, but there is some credit facility given for irrigation.

Okay, okay. And sir, what about the non-agri part? So apart from the low-cost housing, what are the other...

For non-agri part, there are 100 smart cities. Now they are, again, developing 5 more smart cities. Then the Pradhan Mantri Awas Yojana is there. Then there is AMRUT. And then we have Nal se Jal. So there are various programs under which there will be an allocation of funds coming from the government. So government is already looking at this. One from Swachh Bharat, one from drinking water supply to all the people with Nal and Jal. And then improving the housing for every citizen. These programs are supported for last few years. And this year, the allocation has been increased also. And with this, there will be a demand for housing sector, where the pricing demand will also get reduced.

So in Nal se Jal, are you seeing any kind of a demand there?

I think there are programs which are developed by the state governments. Particularly, there will be a multiple type of piping requirement which will come, which is coming from, say, for example, from the larger mains of the city to the housing and housing to the individual houses and then from housing -- houses, sanitation part going back. And then going back to the city mains for the sewage treatment. So there are multiple products that can go into it. And we also see that the segment which is coming for the indoor piping as well as for sanitation is a area where there will be a growth for PVC and CPVC sector.

Okay. So you believe CPVC and SWR would be the biggest beneficiary of Nal se Jal, right?

ASTM for -- this plumbing also.

ASTM?

Yes. So plumbing, CPVC and SWR.