HLE Glascoat Limited (522215) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to HLE Glascoat Limited Q4 and FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Irfan Raeen from Orient Capital. Thank you, and over to you, Mr. Raeen.

Thank you, Nirav. Good afternoon, everyone. Welcome to Q4 and FY '24 Earnings Con Call of HLE Glascoat Limited. Today on this call, we have Mr. Himanshu Patel, Managing Director; Mr. Aalap Patel, Executive Director; and Mr. Harsh Patel, Executive Director, along with other senior management team of the company. Before we begin the call, I would like to give a short disclaimer. This call may contain some of the forward-looking statements about the company, which are based on beliefs, opinions, and expectations as of today. Actual results may differ materially. These statements are not guarantees of our future performance and involve risks and uncertainties that are difficult to predict. A detailed Safe Harbor statement has been given on page #2 of the investor presentation, which we have uploaded on Exchanges and on the company's website. With this, I would like to hand over the call to Mr. Himanshu sir, for his opening remarks. Over to you, sir.

Hi. Good afternoon, everyone. This is Aalap Patel. Just a small clarification, Mr. Himanshu Patel is not present in this call today, so I will be making the opening statement. With that, good afternoon and a warm welcome to all the participants again. Thank you for joining us today to discuss HLE Glascoat's Q4 and FY '24 financial performance. Today on the call, we have with me Mr. Harsh Patel, our Executive Director; Mr. Naveen Kandpal, our CFO; and Mr. Nilesh Ganjwala, Senior Advisor to the company, as well as Orient Capital, our Investor Relations Partner. I hope everyone has had an opportunity to go through our financial results and the investor presentation, which has been uploaded on the stock exchanges as well as on the company's website. Despite the challenging environment, we have managed to grow in terms of revenue. Our Q4 performance remains strong compared to Q4 FY '23. Our order book remains robust. And while the weakness in the chemical sector continues to challenge the industry, we remain focused on our strategy to expand into new products and geography through acquisitions and by also introducing Thaletec products in India. Our acquisition of Kinam reflects our ongoing efforts to strengthen our industry presence. Kinam's reputation as a distinguished manufacturer of heat exchangers, pressure vessels, and process equipment aligns perfectly with our vision of expanding our product offerings and solidifying our market leadership. We anticipate that this acquisition will create valuable synergies, enabling us to drive operational enhancements and provide innovative solutions to our customers. On September 26, 2023, we completed the acquisition of 35.56% profit share with a controlling interest in Kinam Engineering Industries, a partnership firm. Additionally, we completed the acquisition of 0.5% equity shareholding in Kinam Enterprise Private Limited or KEPL. The board has approved an additional acquisition of 34.44% profit share, which will increase our controlling interest, subject to the fulfillment of certain obligations and NCLT approval by the way of amalgamation of KEPL into our company. Our current order book is strong as of March 2024, standing at approximately INR 480 crores, further providing visibility of 4 months for the India business and around 9-10 months for the Thaletec business. As a result of our continued strategic efforts, we are seeing encouraging orders for the innovative range of products of Thaletec in India. Our glass-lined equipment business in India experienced a decline in FY '24 due to a slowdown in the chemical segment, which has impacted our business and led to a decrease in our order book. Additionally, delays from many customers in accepting delivery have also affected our top-line and working capital days. However, we anticipate a strong recovery in this segment, starting from H2 of FY '25 as the sector rebounds. In contrast, our acquisition of Kinam has bolstered our heat transfer equipment business, which has shown robust performance on a sequential basis. We expect this acquisition to continue fostering synergies across our operations. Moreover, our geographical expansion into the U.S. has been successful, growing our order book to approximately $11 million as of March 2024. This expansion reaffirms our commitment to excellence and our ability to meet the evolving needs of our customers anywhere on the globe. I will now request Mr. Naveen Kandpal, our CFO, to take you through the financial performance for the quarter and the half-year performance. Thank you. Over to you, Naveen.

Can I start?

Yes, sir.

Thank you, Aalap bhai. Good afternoon to all the participants. I am pleased to share our financial results for the quarter ended March 31, 2024. The company reported consolidated revenue of approximately INR 307 crores, EBITDA of INR 38.4 crores, and PAT of around INR 15 crores. On a sequential basis, we achieved a revenue growth of 28%, a 34% increase in EBITDA, and a significant 149% growth in PAT. Year-on-year, our revenue grew by approximately 3%, though we faced challenges at the operating level due to the slowdown in the chemical segment. For the full year our revenue grew by approximately 4%, rising from [ INR 968 crores to INR 932 crores ]. Our EBITDA margin stood at 12.5%, which we expect to be in the range of around 15% to 16% moving forward. Our PAT margin was 4.2%. In FY '24, our filtration, drying and other equipment segments contributed around INR 370 crores, up from INR 344 crores in FY '23, representing a growth of approximately 10%. Meanwhile, our glass-lined equipment business generated about INR 497 crores, compared to around INR 579 crores last year, reflecting a decline of roughly 15%. However, our new segment, heat transfer equipment, showed remarkable growth, contributing INR 59.4 crores to our sales, up from INR 29 crores, an impressive sequential increase of over 100%. These results demonstrate our resilience and ability to adapt to market conditions, and we are optimistic about our future growth prospects as we move forward. Now, I would request the moderator to kindly open the floor for questions and answers. Thank you, everyone.

[Operator Instructions] The first question is from the line of Miraj from Arihant Capital.

I have a few questions regarding the performance for Q4 and the full year. So, looking at the performance, I see the glass-lined business margins have skid down to almost 3% in Q4 EBIT margins. The top line has also fallen 30% year-on-year. Even if I look at from an annual basis, then too we see a big drop in the top line as well and in the margins. So, I want to understand first thing on the glass-lined side, if you can explain when do we see a kind of reversal in margins because in Q2's call, we had given an outlook that it kind of looked at the bottom at that point and H2 was supposed to be better. So, if you can just explain what do we see from here for glass-lined business and at the same time, if you can explain with the end-user segments also, where do we see the recovery, at what stage are all the end-user segments right now? That's my first question, sir.

Yes, so the glass-lined business experienced a significant slowdown towards the later part of the year. While we continue to have a strong inquiry funnel, I think the challenges revolve around converting those inquiries into orders as most customers who had those inquiries showed significant delays in finalizing the orders. And obviously, as a result, the top line and the bottom line kind of suffered. Having said that, at the moment, we are seeing already some shoots of recovery. So, as we stand right now for the first two months, we are already seeing an order book that has grown over 50% compared to the same two months last year. Now, yes, while last year is not a great benchmark, but I think it's a great indicator of where things are heading. So, this is that we feel that, you know, the second half of the year, the revenues obviously will pick up as we continue to book more orders and the margins should follow the right way.

Okay. So, if I got it correctly, we don't see an improvement coming in the first half, we see it coming in the second half of FY '25. Can you also explain in terms of the end user? So, let's say specialty chemicals or pharma, where do we see growth coming in or what is the current scenario with all of these segments, clients in these segments?

So, as we are seeing right now, the growth is or rather the order bookings are coming in from a varied mix of orders. So, it's both specialty chemicals as well as pharma. And what we are also seeing is that agro, in bits and pieces, we are seeing both inquiries and orders flowing in. But relatively speaking, it's specialty chemicals and pharma that's beginning to pick up.

Okay. Okay. Understood. And on the color inside, because of my reasoning why I'm asking, sir, this is because we had a similar view in Q2 FY '24 as well. So, I just want to understand how things have changed from Q2 that gives you more confidence right now when we see that orders have actually come up and delays would not happen again in deliveries.

Yes. So, I think the biggest difference between what we had in Q2 versus or rather after the end of Q2 last year and now is that we had a strong order inquiry at the point, but then conversion was a challenge. But as it stands today, we are also seeing substantial conversions happen. So, that's what gives us that confidence.

Okay. Understood. And how do we see the pickup of Thaletec products right now? Are they being well accepted? What kind of inquiries are coming in for that in India?

Yes. So, we introduced the Thaletec products a while ago. The initial response to the Thaletec products is quite good. We have already started not just booking but delivering our Thaletec products as well. So, it's quite encouraging and we feel that there is great potential for Thaletec products in India.

And that would be across all clients? Or is there any specific segment only, which is currently -- Thaletec is being accepted in?

No, no. So Thaletec products are intended -- there is no specific segment that it caters to. So it's suitable for all different kinds of customers.

Sorry, I meant in terms of acceptability. So, when we see, let's say, pharma or specialty chemicals, the order inquiries that are coming from these, when you must have spoken to the clients in these segments, is there any hesitation from any segment where, the product acceptability is taking a backseat right now or is it equal across all the segments?

So, just to clarify, so the first few orders that we have are from predominantly, you know, all the sectors that we usually speak of. So, we have orders from pharma, from specialty chemical. Coincidentally, we also have, you know, from a company that would consider an agrochemical primarily an agro company. So, the products are intended for and are being accepted by all different kinds of customers.

Understood. And sir, just if you could also let me know what kind of margins do we expect in H1 and H2? So, when we say H2, we expect a bounce back. What kind of margins are we anticipating? If you can just give some guidance on the margins.

I think the margins in H1 are more likely to be slightly better than what we have seen in H2 of FY '24. And H2, we expect the margins to come back to normalcy.

That would be 16%, 17%, sir, because...

That's correct. That's correct. That is correct.

[Operator Instructions] Next question is from the line of Rohit Rupani from Motilal Oswal.

Just wanted some understanding on the capacity utilization in all 3 segments, F&D, glass lining and heat exchangers, if you can throw some light on it?

So, in the F&D segment, our capacity utilization is in the 75% range currently. In the glass lining equipment, the capacity utilization is right now in the 55%, 60% range. And in the heat exchanger business, we are probably closer to about 60%, 65%, considering the large capacity that was created about a year before we did the acquisition.

And sir, the Germany plant, what will be the capacity utilization there?

So the Germany -- German capacity utilization is actually about 70%, 75% currently.

Okay. Okay. And sir, what is the kind of peak revenue that we can achieve from the current capacity?

If we take all the plants at peak revenue with very marginal balancing equipment, I think we could be closer to about INR 1,500 crores.

Okay. Okay. So by that logic, we are not looking for any capacity expansion in FY '25? Or are we putting to -- planning to add up more capacities?

No, we are not planning to do any new capacity or -- yes, so there is no capital outlay planned for any of these projects at this stage.

Okay. Okay. And sir, just some understanding on Kinam India. So currently, we are doing an EBITDA margin somewhere around 23% in the entity. So given the synergies of our business, do we see the margin expansion going forward or will be at the similar level?

We expect the margins to be in the 25%, 26% range. This is something that we expect over the short to medium term.

Okay. And sir, another question on the working capital side, since this year, our working capital is a little bit stretched. So going forward, what would be the guidance for working capital? Is it expected to come down or will it be in a similar range?

I think the working capital this year, I think has also.... Can you hear me?

Yes, I can hear you.

Yes. Okay. So the working capital this year has also been -- it appears to be slightly skewed only because of the addition of Kinam into the balance sheet, which was not there in the comparable period for the previous year. On an overall basis, I think we've had a slight bit of a challenge, I would say, in the range of about INR 20-odd crores. I don't have the exact number, but somewhere in that range, which is predominantly due to products ready for dispatch, but where the customer wanted a slight deferral. But over and above that, otherwise, I think working capital cycle has been kept pretty much at normal levels even during the course of this year.

Got it. Got it. Also sir, some color on the debt obligations, annual debt obligations that we have, debt repayment obligations.

Our annual repayment obligations are in the range of about INR 35 crores for FY '25.

Next question is from the line of Anirudh Shetty from Solidarity Advisors.

I had a couple of questions around the glass-lined equipment business. When we -- how should one interpret the EBITDA margin for business in FY '25.....

Sorry, we lost your audio in between. Can you speak to the handset, please come in a better reception area.

Is this better now?

Yes, go ahead.

Sir, I just wanted to understand how do you interpret the margins in the glass business...

Sorry, we again lost your audio. I request you to come back in the question queue? Next question is from the line of Nitin Gandhi from Inoquest Advisors.

A few minutes back, you suggested that your first 2 months order book has been decent. Can you quantify that?

It's just been two months. So I think it would not be fair to give numbers for two months at this stage. And anyway, it's just the order book for the glass-lined business. So it's a very granular information. It was more in context of informing how the market is trending currently, considering the slackness in the previous year.

That's what the worry is that, because [indiscernible] and everybody is in the process of waiting for election results or monsoon, and then release the order book. So I was wondering if there are some thoughts you can share.

Yes. As Aalap bhai suggested, these are actual orders booked. So these are not inquiries. So which is what makes us feel confident for the coming months.

Okay. Regarding goodwill INR 40 crores and intangible INR 155 crores, what's the plan for writing it off? Which model are you likely to pursue going forward?

As per the accounting standards, there is no need to amortize these. We will be testing for impairment at the end of every financial year.

Okay. And CWIP INR 20 crores is regarding what? What Is in process and any other CapEx committed for the...

Nitin. So this CWIP which you are seeing, it is mainly related to the project which is going on in Anand. And it is related to civil building and development of R&D center.

Okay. So there won't be any facility enhancement of production?

No, no, nothing.

Okay. Regarding Thaletec, if you can share some potentials, say three, five years down the line, where do you see? Because when you started, you were very optimistic about this. And now, after seeing the downside of this market, how do you see now three, five years down the line, this project which you can ramp up significantly? Where do you see the potentials of this?

So, Thaletec, I think, if you actually look at it from a payback perspective, I think Thaletec as an acquisition has already paid back for itself. So to that extent, because we acquired it at a multiple of 3.5. And obviously, the actual cash approvals and earnings from revenues has been much higher than that already since the time that we acquired it. So obviously, it's been very successful. Going forward, we are very, very confident that Thaletec will continue to grow as it has done over the last two or three years. In any business, I think one has to be ready for some blips and some ups and downs. And we are ready to ride this out. We still feel Thaletec is an extremely promising enterprise.

So when you say peak revenue, INR 1,500 crores, can you share something on Thaletec and other acquisitions and core companies?

I'm sorry, I did not understand your question. If you could please elaborate?

Yes, sure. A few minutes back, you said that peak revenue potential is likely to be somewhere around INR 1,500 crores with minor balancing equipment. That's right?

That's correct.

Okay. So now I wish to have Thaletec and the new acquisition, I forgot the name and the core company glass-lined. So if you can give some breakup for that?

I think Thaletec itself can probably give us close to about roughly about INR 450 crores of revenue with very minimal investments in balancing equipment. Kinam is capable of giving up to INR 300 crores of revenue with very minimal investments.

Right. The balance will come from this existing...

Yes.

Next question is from the line of Pradeep Rawat from Yogya Capital.

So I have one question. How are you seeing demand from the U.S. market right now?

The U.S. market right now is stable, I would say. There hasn't been any major movement upwards or downwards since the last 2 quarters. That is what we see in the U.S. market.

And can you comment about the Europe market?

Yes. So in the European market as well, I think we haven't seen any significant movement either up or down. So with all the challenges that exist around the macroeconomic situation, things continue to be at status quo. However, what we have seen is that there is more interest from, let's say, the more price-sensitive markets in Europe. So maybe what we lose in terms of opportunities in Western Europe, I think we are more than making up for it from other previously unaddressed markets of Europe.

Yes. Okay. And how much revenue are we expecting from Kinam this year?

So we are expecting revenues in the range of between INR 180 crores to INR 200 crores in that range for this FY '25.

Yes. So we are expecting no improvement in utilization this year, right?

No, there will be an improvement. Last year, the 12-month revenue for Kinam as an entity was INR 150 crores, INR 149 crores to be precise.

Next question is from the line of Rehaan from Sicomoro Advisors.

I just wanted to understand the demand scenario across the sectors you cater to, like pharma, agrochem, specialty chemicals. Overall, what is the outlook from clients in the domestic side of the business?

So the demand scenario in pharma seems to be relatively better than others. So the demand scenario in pharmaceutical sector is growing, I would say growing and better. The agro sector, I think Aalap spoke earlier that agro sector has not really come back, but here and there we see companies coming with inquiries and projects being discussed, which was almost kind of absent in the last quarter. So we feel that the agro sector also is looking up. On the dyes and the colourants sector, what we hear is that for them, the demand has come back to about 70% levels but the pricing has not improved. So I think once the demand comes back and the pricing starts improving, we will also see some movement on that side. So overall on the domestic market, I think we have said earlier, second half of the year, we think will start looking up.

Okay. Got it. And is there any update on the Marine project of pressure vessels? I think we have done a couple of tests. And yes, any update on that front?

Yes. So as you rightly said, we delivered one of the first deep diving vessels manufactured in India for marine applications. And after that first order was delivered, we continue to generate business out of that. And even as we speak, one such project is under execution.

We also executed one more project after the first one and the third large project.

The third one is currently under execution, yes.

Next question is from the line of Miraj from Arihant Capital.

I wanted to understand in terms of growth guidance. If you could just share some light on how do we see n Thaletec growing this year the glass-lined and the filtration three separately, if you could just highlight what kind of growth do we see this year?

I think we feel that given the soft order book and revenue growth last year. We believe that for the year as a whole, we think we can grow at roughly about 18 to 20% growth rates for the India business and between 10 to 12% growth rate for the Germany business.

Okay. 10% to 12%. And sir if you could just reiterate the margins as you said, in H1 you see similar margins what took place in H2 of FY '24, but if we are seeing good order bookings in glass-lined business, don't we expect the margins to improve in H1 itself rather than H2?

The margins will improve in H2 because the orders that come in H1 will actually get dispatched during H2 because of the production cycle requirement. So even if I get an order in May or June most likely they will get dispatched in the quarter three of this year. So that's why the margin improvement will also reflect in H2.

So for glass-lined we expect 16% to 17% in H2. Sir, if you could just throw some light on margins that we expect in filtration business and in Thaletec as well?

The Filtration business has actually maintained its margins during the last financial year. We believe that the filtration drying equipment margins should be in the 17% to 18% range for the entire financial year on an average.

On average. Okay. But is there a trajectory that H1 will be kind of lower, H2 will be better, something like that?

That has also been generally the trend. And also given the way the market is behaving, I think this year, the trend might be a little more accentuated.

Just one understanding on one question on the understanding part why at the margins in India business for glass-lined business has been so low? I don't understand that these are the margins that we've never seen earlier. So if you can just explain a bit in detail that why has been almost 3% EBIT margins we've done this time? If you can just throw some light on that?

I think it's a direct correlation to volumes. I think fixed costs especially remaining more or less the same with a drop in the revenues in the India glass-lined business basically the contribution or the value addition over the material cost has not been able to adequately capture or compensate for the fixed costs. So it's basically a volume situation also given the slackness in the market obviously pricing was slightly under pressure.

Understood. Okay. Understood. And 18% to 20% is the growth in India and 10% to 12% is outside India. Okay.

That's correct.

[Operator Instructions] Next question is from the line of Anirudh Shetty from Solidarity Advisory. Anirudh Shetty, can you hear us?

Yes, I hope I'm audible.

Sir, we can hear you, but your voice is breaking.

I'll just give it a try and probably if my voice isn't audible I'll write an email later on. So my question is actually on the glass-lined equipment business in India. You mentioned there is some pricing pressure in this segment. So can you just call out vis-a-vis a more normal year, what is the discount levels that you had to give in this year? And if the industry is getting aggressive on pricing, what gives us the confidence that the gross profit margin will go back to what it used to be?

So I think typically whenever volumes fall the entire market will readjust prices to ensure that volumes are at least to whatever extent possible are maintained. And we've seen a price variance this year of between 5%, 7% over the entire year from a pure realization perspective. And this is a very normal scenario whenever the volumes pick up the prices would pick up pretty much shortly thereafter. So this is a very normal trend that we see in virtually every cycle.

Got it. And we are looking to grow our domestic businesses 18%, 20%. I presume that's also true for this glass-lined domestic segment. So is this -- what would your assumption be around end industry growth? And do you believe that you all can grow market share further from our current pace and help us grow faster if that holds true?