Hi-Tech Pipes Limited (HITECH) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Hi-Tech Pipes Limited Q2 FY '24 Earnings Conference Call hosted by PhillipCapital India Private Limited. [Operator Instructions] Please note that the conference is being recorded. I now hand the conference over to Mr. Vikash Singh from PhillipCapital India Private Limited. Thank you, and over to you, sir.

Good morning, everyone. A warm welcome to Hi-Tech Pipes Limited Q2 FY '24 Earnings Con Call. On behalf of PhillipCapital, I would like to thank management for giving us the opportunity. From the management side, we have with us Mr. Anish Bansal, Whole-Time Director and Promoter; and Mr. Arun Sharma, current Company Secretary. Without taking any much time, I would hand over the call to Mr. Anish for the opening remarks. Over to you, sir.

Good morning, and welcome, everyone, in our Q2 and H1 results ended 30th September 2023. I'm joined on the call by Mr. Arun Sharma, Company Secretary of the company. I hope everyone has had a chance to go through our results and investor presentation uploaded on the exchange. Now let me take you through our financial highlights. During this quarter, we have recorded ever highest revenue from our operations of INR 746 crores as compared to INR 598 crores in Q2 FY '23, a growth of 25% Y-o-Y. Overall revenue from operations for H1 FY '24 elevated by 25% to INR 1,388 crores from INR 1,115 crores in H1 FY '23. Sales volume increased by 18% year-on-year to 100,475 tonnes in Q2 FY '24 as compared to 85,500 tonnes in Q2 FY '23. Sales volume for H1 FY '24 increased by 19% to 184,964 tonnes versus 155,567 tonnes in H1 FY '23. PAT increased by 143% year-on-year to INR 10.54 crores in Q2 FY '24 as compared to INR 4.34 crores in Q2 FY '23; and 109% in H1 FY '24 to INR 18.48 crores as compared to INR 8.82 crores in H1 FY '23. EBITDA increased by 13% to INR 26.75 crores as against INR 23.57 crores in Q3 FY '22; and 15.83% growth to INR 47.95 crores in H1 FY '24 as compared to INR 41.4 crores in H1 FY '23. Our financial performance surpassed the previous quarter results. We witnessed a steady demand in our key demand drivers in this quarter such as Jal Jeevan Mission, 5G telecom network augmentation, bullet train project, airport and railway upgradation projects, affordable housing, warehousing and solar power energy sector. These sectors are continuously aiding us in maintaining our good momentum. Our key products gained significant traction in the market, and our focus on increasing the market share of value-add products helped us to keep ahead of the competition. Now I would like to take you through the ongoing project developments. Our greenfield facility of large-diameter pipes and solar torque tubes at Sanand, Gujarat, Phase 2, is about to get commissioned. This facility will be capable of providing the complete size range of ERW pipes available in the segment under one roof. The commercial production is expected to start from Q3 FY '24 onwards. This unit will not only enable us to penetrate in large-diameter segments, city gas distribution, green energy, oil and construction centers, but also add significant support to our sales volume and EBITDA in medium to long term. We are confident that our pan-India B2C distribution network, multiple manufacturing plants and strong B2B clientele, we would be achieving excellent reach and regular supply of these products. We remain optimistic on demand front and aim to deliver a strong performance in the rest of the year, thanks to the healthy order book and government focus on Jal Jeevan Mission and other infrastructure projects. So to sum it, we at Hi-Tech remain very positive on India's structured growth story. Now we can open the floor for questions.

[Operator Instructions] The first question is from the line of Jatin Damania from Swan Investment Managers.

Sir, just wanted to understand, once we commission our greenfield Phase 2 at Sanand in the next quarter, what will be our capacity and the road map to increase our capacity to 1 million tonnes because we're targeting by FY '26 a 1 million tonne capacity? And secondly, to continue with the same question, what will be the incremental CapEx that we'll be requiring to reach that 1 million tonnes?

Mr. Jatin, thanks a lot. Our Phase 2 at Sanand, the ultimate -- the installed capacity will be 170,000 tonnes. Out of this, we'll be commissioning 120,000 tonnes in Q3 of this current financial year. So there are 5 lines in total, and we have started trial production of 1 line. And we'll be starting 1 line every month from this month onwards. So basically, the incremental CapEx for this entire project was around INR 100 crores, and it has been funded through internal accruals and through some equity infusion.

And sir, the road map for 1 million tonnes, because this 1.7 million will take your installed capacity to 7.5 (sic) [0.75] million tonnes. So from 7.5 (sic) [0.75] million tonnes to 1 million tonnes, what is your strategy? And by when can we achieve that 1 million tonne installed capacity?

So from 7.5 million tonnes -- sorry, from 0.75 million tonnes to 1 million tonnes, we'll be doing it through brownfield expansion in our Khopoli unit and our Bangalore and Sikandrabad. So 3 locations, we'll be ramping up the capacity at these 3 locations through brownfield route. And by FY '25, we are quite optimistic and confident of achieving the same.

And the CapEx for the same?

CapEx will be in the tune of around INR 125 crores to INR 150 crores.

And that will be funded through internal accruals or the warrant that we issued the last year, right?

Yes, mix of both.

Okay. Sir, another question. When I look at the profile mix and the product mix, definitely, we have seen a change in the value-added products, which we are increasing on the year-on-year. But if you look at EBITDA per tonne, which is largely hovering around INR 2,500 to INR 2,700, so are we seeing any headwinds where we are not getting an operating leverage? Or when can we see our company achieving the higher numbers in terms of the operating performance?

So Jatin-ji, so basically, there has been like a lot of steel price volatility in this H1. Steel prices are fluctuating because of the coking coal prices and, of course, due to this Russia and Ukraine war. So coking coal prices have gone up. So the orders -- the Jal Jeevan orders, the Jal Jeevan Mission orders that we are having, so those are on fixed pricing basis. So that takes a bit of toll. But like nevertheless, once this Sanand Phase 2 and our color coated roofing get well established, then this is surely to go up in the next coming quarters. So H2 is one of the best periods for real demand and the opportunities.

So I mean, if I'm not wrong, we were guiding somewhere INR 5,000 when our capacity or the value-added products reaches 50%. So are we still maintaining that guidance or probably we would see lower numbers once we reach our 1 million tonne capacity?

So once this Sanand Phase 2 will be commissioned, so out of this blended, it should be 4,000 tonnes. But then certain SKUs and verticals, we'll be getting INR 5,000 per tonne.

Okay. With blended, EBITDA will be INR 4,000?

Yes, sir.

And last question from my side. Sir, we were also working on the API-grade pipelines. Even in the last interaction, you said that the line was supposed to start in Q3. So have we got any approval? What is the status on these API-grade pipelines?

So as I said, 120,000, so remaining 50,000 will come from API pipes. The trials -- we have started trial production of water and structural pipes of this line. So we will be getting the approvals, the BIS licenses and the other approvals in the current quarter. And we are optimistic in like 6 to 9 months' period, we'll be venturing into the API pipes. So that is the next step.

So largely, we'll see a benefit of the API coming in FY '25, that is also second half of FY '25?

Absolutely. Absolutely.

And sir, last question, can you help us in terms of the volume guidance for '24, '25 and '26 since you are clear with the road map to a 1 million tonne capacity?

So this year, the total volume should be between 4.25 to 4.5 lakh tonnes. And next year, FY '25, definitely, with the higher capacity, we'll be targeting like 5 lakh tonnes plus to give a very conservative figure.

The next question is from the line of Aadesh from Motilal AMC.

Congratulations on the ramp-up. On the previous question, when it comes to EBITDA per tonne, sir, are you confident of INR 4,000 EBITDA per tonne this month onwards, but you' know that's an expectation for next 12 months. So what kind of quarterly run rate EBITDA per tonne can we see as we ramp up?

[indiscernible]

Okay. And then this is possible, sir, by 4Q?

Q4 onwards.

The next question is from the line of Darshit from RoboCapital.

So congrats on the good results. I just wanted an idea about you've given the target for volume, but say, realization, what do you think of the realization going forward? Are they going to stabilize where they are? Or are they going to increase?

So sir, realization is a function of like our normal prices. Steel prices are fluctuating a lot in the last like 5 to 6 months. But going forward, I think the prices should settle down, and the sales utilization will go as our value-added share that goes up. So that will happen gradually. So definitely, the sales realization will be moving forward, but we'll have to see once these steel prices get settled on an annual basis.

Right. But as you say that VAP is going to increase, so margins are to increase gradually, right?

Yes, sir. Yes, that will happen gradually quarter-over-quarter.

Quarter-over-quarter, all right. And you specified about CapEx, but are we like planning to do it all internally accrued? Or are we going to take some debt?

Those are internal accruals. All the CapEx has been funded through internal accruals and the equity infusion.

[Operator Instructions] The next question is from the line of CA Garvit Goyal from Nvest Analytics.

Congrats for a good set of numbers. You mentioned to the earlier participant regarding the guidelines for FY '25. That seems to be very conservative. So is there any kind of headwind that you are expecting in FY '25 or how the situation is likely to be?

Sir, the volume growth will be almost 25% from last year. So -- and the kind of capacity we are currently having, I think because that is the most -- the ideal case situation. So once this new capacity at Sanand Phase 2 does get commissioned in this quarter, we'll have a good headroom for the next financial year. So right now, all the plants are almost at their peak utilization levels.

That thing, I'm getting, but the thing is you mentioned the volume should be 5 lakh tonnes -- around 5 lakh tonnes in FY '25. So that's why I was asking, are you expecting any kind of headwinds in that year because if the capacity of 170,000 gets commissioned by H1 FY '25, then we are having a good way to grow, right? We are also...

We will have 7 lakh tonnes in our hand, and I take 75% -- or 70% as our utilization rate on an annualized level. So that will be approximately 5 lakh tonnes.

Okay. And the 70% utilization is our peak utilization, right?

Yes. Yes, absolutely. For the entire sector, yes.

And can you please give a revised -- give an indication on the EBITDA per tonne guidance for HY -- H2 FY '24?

So basically, we are still like waiting for steel prices to stabilize because there's a lot of fluctuation that has happened in the last 6 months. And we are still careful here for the next 1 or 2 months because internationally, the prices are still volatile. So once this is settled, like we are targeting a INR 4,000 per tonne EBITDA, but this steel price only has to be stable. So that is all.

The next question is from the line of Aadesh from Motilal AMC.

Just a simple bookkeeping question. Sir, what could be our EBITDA per tonne run rate in September? And since October is already over, any sense on what EBITDA per tonne you're doing in October?

Sir, the October month, we have maintained INR 3,000 plus. But like since we have this -- this is still going on. So on a quarter basis, we'll be knowing in November, December like what it's exactly. But we will -- definitely, we will be moving the -- it is going ahead.

Right. And September, what was the number, sir?

Sir, that was in the similar price band, INR 3,000.

Okay. So September ended at INR 3,000 and even October was at INR 3,000. It was the first 2 months which actually led to some EBITDA dip, EBITDA per tonne. Okay. So going forward, it should at least -- it should sustain if there is no volatility in HR coal prices?

Absolutely, sir. Absolutely.

The next question is from the line of Dhyey Desai from Niveshaay Investment.

Congratulations on a good set of numbers. I just wanted to ask that you talked about that when we increase our share of value-added goods, our realization will go up. So when we talk about value-added goods, are we talking in terms of the pipes or the sectors we cater to?

Mr. Desai, so basically, when I refer to value-added products, so it will be mainly our products, which are pipes and roofing and, going forward, special SKUs and black tubes, DFT pipes. So all those will contribute to our value-added products.

Okay. And apart from the government contracts, like we are seeing a huge CapEx on the government side. So apart from that, are we seeing any further CapEx to be initiated by the private sector as well? Or it is just the government that we'll be catering to?

Sir, private sector is also contributing. Like 5G network augmentation is all private. The solar is all private. The affordable housing and the warehousing is all private. Bullet train project, again, is semi-private because the contract has been given to L&T. And all the metro rail projects is also like semi-private. NHAI projects are also -- like the projects are going to the EPC players, and they are buying from us. So private sector is also contributing a lot. But you are right, there is a good scope for private sector in the future. They will also raise their volumes and their demand.

Correct. And is there any price escalation clause in like for the private sector? Or the clause is same for the government as well as private sector?

Sir, it depends on the pricing. But where there's a mix of both in some and if it's a long project going to from 3 months to 6 months, then there is a price escalation. But if the supply period is less than 3 months, then the prices are generally fixed.

The next question is from the line of Varun Arora from Safe Enterprises.

Just one question. Could you talk about the cost initiatives that you are taking to drive the EBITDA per tonne? It could be in terms of your procurement of raw materials, what cost initiatives are being taken? And also if there are any levers to improve working capital post our Sanand facility kind of stabilizes?

Mr. Varun, thanks for your questions. So the cost initiatives, they're on a continuous basis. You are right, the raw material, since it is the biggest portion, so as the volumes, they go up gradually. So definitely, there's a raw material price -- there's an optimization on the raw material price cost. Apart from that, like on the operational front, we are utilizing like solar power. So we have reduced almost -- like we saved almost around INR 2 crores per year on the account of solar power sector. And all the new machines and the new plants that have been set up, they have been set up with the world-class machineries, which give us the best deal in the industry. And working capital, like we are focusing there. So currently, the net working capital cycle days is around 40, 45 days. So we are -- our target is to bring it to 30 days. But there are a lot of other factors that come into play. So I think that should happen gradually once the channel finance factoring that takes place.

And would we be in better position to get the channel financing in place once our volumes increase post Sanand facility?

Yes, sir, we are quite hopeful for that.

Sure. Just one bookkeeping question. What was the impact of inventory loss this quarter?

Sir, this -- I think I can talk to you after the results to assess the exact impact of this.

The next question is from the line of Rahil Shah from Crown Capital.

So given the general scenario in the market, can you tell us how have you seen quarter 3 pan out so far in terms of the demand environment and other factors and how they're likely to go on for the rest of H2 FY '24? And also for the next year, if you can give a general outlook. And based on that, do you see the similar kind of growth rate continue, which you see in quarters ahead year-on-year basis, and also for the next year, a general idea?

So sir, Q3 and Q4 are generally one of the best quarters for the entire year. So after this facility, then we see a strong pull in demand because of the favorable climatic conditions. So I'm quite hopeful that Q3 and Q4 will give us more volumes compared to H1.

So from a revenue and margin perspective, what we have seen historically, like if not way back, just like in the past year or so, how H2 has always been more favorable in terms of revenue, so the kind of 18% to 20% growth, can you...

Yes, we should be also in the same range.

On a year-on-year basis, correct, for the quarter?

Yes, yes. Yes, that's right.

Right, right. And margins, you are comfortable at these levels? Or like...

Yes, our conversion margins are intact. But the normal prices, since they are fluctuating a lot, that is taking a toll. But let's see like how this war situation and the commodity prices shape up.

But other than that, these are sustainable, 4%...

Yes, absolutely. Absolutely.

The next question is from the line of Akshada Deo from Vivog Commercial Limited.

I just wanted to know a couple of things. Number one, what's the percentage of value-added products so far that you have done in H1 from revenues?

So in H1, our share of value-added products is around 29%.

Okay. And what are you aiming for the percentage of value-added products to be by the end of commissioning of the Sanand plant?

So our FY '25 target is -- will be hovering between 40% to 42% for FY '25.

Okay. And so I would just like to know how -- or how are you having the confidence and what is the strategy that you're looking forward to increasing the value-added products?

So we are adding new special SKUs. We have installed one like hot-dip galvanizing facility in Sikandrabad. We'll be venturing into large-diameter pipes through Sanand Phase 2. We'll be coming in like solar torque tubes in a big way. So all these things are new applications, new products, the downstream facilities like galvanizing. So these will aid our higher share of value-add products.

Okay. So have you received any specific orders or any intent of orders for the same, the new SKUs?

Yes, absolutely. Like as I said, solar torque tubes is a -- there's a lot of excitement building around this area because traditionally, they were using like open sections. But now with the solar trackers, the requirement for torque tubes is rising day by day. So that is -- that works in our favor. And the Sanand facility is designed in such a way that it can deal with any kind of demand from solar torque tubes from domestic and international markets both. So this is one example, and there are similar cases in other products as well.

Okay. And secondly, what I wanted to know that is the contract like on Jal Jeevan prices, where it is difficult for you to -- because it's in a fixed base and you cannot pass on the cost, is that the reason that your EBITDA per tonne is lower than your peers?