NOCIL Limited (NOCIL) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the NOCIL Limited Q2 and H1 FY '21 Earnings Conference Call. This conference call may contain forward-looking statements about the company which are based on the beliefs, opinion and expectation of the company as on date of this call. These statements do not guarantee the future performance of the company and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. S.R. Deo, Managing Director. Thank you, and over to you, sir.

Thanks a lot. Good morning, and very warm welcome to everyone present on the call. Along with me, I have Mr. P. Srinivasan, CFO of NOCIL; and SGA team, our investor relation advisers. I trust and pray that you and your families are safe, healthy and secure. Hope you all have received our investor presentation by now. For those who have not, you can view them on the stock exchange and the company website. Coming to the business. First half of the financial year was a mixed period for NOCIL. The first quarter of our business was impacted due to lockdown on account of COVID-19 pandemic. But from July onwards, that is, from the second quarter, business environment improved and operating levels increased on a month-on-month basis. Utilization levels have increased from July '20 and helped cross pre-COVID levels on a monthly run rate basis. In Q2 FY '21, the company achieved highest sales volume. Also, volumes for the coming quarter are looking positive. Operating levers at tire measures also started picking up. There is a medium-term positive commentary, both from domestic and multinational tire companies. Revenue also saw substantial growth despite softer realization. Though volumes have started picking up, we expect pricing to improve in the coming quarters. As indicated in the earlier calls, pricing have bottomed out, and it is getting confirmed as there was a recent price hike taken by the competitor in the marketplace for most of the products. As demand is showing encouraging sign, we are quite confident of ending FY '21 on a flattish note in spite of COVID impact in Q1 FY '20. Also to continue our well laid out, focused approach of garnering high volumes and reaching more geographies, we persisted on capacity expansion plan. Phase 2, INR 140 crores have been capitalized, and Phase 2(b) of INR 140 crores. Mechanical completion will be done in Q3 FY '21. Trial production to start from Q4 FY '21. So we expect to capitalize it by March-April 2021. The delay was on account of nonavailability of labor due to COVID situation. Absolute EBITDA improved compared to Q1 FY '21 on the back of improvement in the absorption of fixed cost and on account of volume pickup. It may be noted, to generate operating EBITDA margins at this rate, even in this difficult market conditions, is commendable. This gives us the confidence that absolute EBITDA will improve once market conditions stabilize. On the industry scenario, we witnessed good growth in automobile sales in October and vehicle manufacturers ramped up production. Most OEMs were of the view that Q2 FY '21, there was pent-up demand, and now from Q3, they are witnessing demand with onset of festival season and preference for personal mobility in the pandemic situation. Some OEMs believe and are confident that the demand will continue even after this festival season and have started ramping up the utilization level to meet this growing demand. Also global sourcing strategy is changing with China + 1 strategy as most of the players, both domestic and international, slowly reducing their dependency on China and finding ways to tap alternative supply chain as a part of strategy. India being a smaller player in rubber chemical industry will be beneficiary of diversification of supply chain by customers. NOCIL is expected to benefit in view of available capacities. In terms of future growth opportunities and wind of change in global sourcing strategies with China + coming in focus, there has been an increase in the number of inquiries from the global players, and we are confident of converting these opportunities into concrete business. Looking at current operating environment, we expect a much better performance in the second half of FY '21 as compared to first half of FY '21. We continue to explore new opportunities with the customers and alternative raw material supplies in the domestic market under the AatmaNirbhar Bharat initiative of the government. The new capacity built up is coinciding with several tailwinds in our business, which will enable us to grow our revenues and profitability at a faster pace in the next several years. That's all from my side. Now I would like to hand over to Mr. P. Srinivasan to give you update on financial performance. Srini, over to you.

Good morning, everyone. Thank you, Mr. Deo. Hope all of you are doing quite well. Let me take through the financials of the company...

Sir, I'm so sorry to interrupt. May I please request you to speak closer to the phone, please?

Thank you, Mr. Deo, and good morning, everyone. I hope all of you are doing quite well and safe. Let me take through the financials of the company for Q2 FY '21 and H1 FY '21. The performance of H1 FY '21 are not comparable with the same period compared to the last year in view of the performance of Q1, which was impacted by COVID-19. As Deo -- Mr. Deo mentioned, the company reported the highest volume -- sales volume in the Q2. So the Q2 volumes grew by 15%, taking base of Q1 FY '20. As compared to Q2 FY '20, it also grew by 15%. On a month-to-month basis, our production has picked up, and we are further ramping over our capabilities -- capacity utilization under strict safety and hygiene protocols. Revenue. Net revenue from operations for Q2 stood at INR 222 crores as compared to INR 210 crores compared to the corresponding year -- quarter of the previous year, reflecting a growth of 5.7%. Revenue growth was impacted by lower realization, which we expect to pick up or get corrected in the coming quarters. For H1 FY '21, revenue stood at INR 328 crores, largely impacted by the COVID lockdown during Q1. Insofar as value additions are concerned, value addition for Q2 FY '21 is INR 107 crores, indicating 48.1% of sales as compared to 48.6% of Q1 FY '21. We are still hopeful to maintain our long-term guidance of 50% as situation improves and returns back to normalcy. Coming to operating EBITDA parameters. On the operating EBITDA for Q2 FY '21, it stood at INR 31 crores as compared to INR 48 crores compared to the previous year, reflecting a de-growth of 35%. EBITDA margin, even in these depressed conditions, stood at 14.1%. For H1 FY '21, the operating EBITDA stood at INR 39 crores. We are quite confident and hopeful to improve the absolute EBITDA in the coming quarters. On profit before tax, the PBT for Q2 FY '21 stood at INR 23 crores as compared to INR 42 crores in the Q2 FY '20, de-growth of 45%. For H1 FY '21, it was INR 32 crores. On profit after tax parameters, the profit after tax for Q2 FY '21 stood at INR 17 crores. It is not comparable as there was an income tax credit in the previous year on account of the deferred tax -- the tax regime, concessional tax regime adopted by the company. For H1 FY '21, the PAT stood at INR 28 crores. On the balance sheet front, we have about, as Mr. Deo said, INR 140 crores of capital availabilities to be capitalized by the end of this year or April '21, that's pending. The company has comfortable liquidity position as at 30th September 2020. We have continued to be debt-free, and we are able to take care of our funding requirements through our internal approvals. With this, I would like to open the floor for Q&A, question and answers, please.

[Operator Instructions] We take the first question from the line of Nirav Jimudia from Anvil Research.

Hope everyone at your end is safe and fine.

Yes. We're good. Thank you.

So I have 2 questions. Sir, first is for Mr. Deo, and the second is for you. So if Mr. Deo can help us explain, sir, this volume growth, what we have done for Q2. If you can just explain us that like is this volume growth is because of some new customers in new geographies or the existing customers taking more volumes at the new locations? Because what I understand is like tire companies have plants spread across the world. So is this growth predominantly from the export market where the new customers have started taking some additional volumes at the other plants globally? Or it's more because of the existing plants taking -- started taking more volumes because we have now all those capacities to offer them on the table? So if Mr. Deo can explain it.

As I explained in my speech, the tire industry is -- whether they are domestic or whether they are international, they are looking at alternate sources. And since they are looking at alternate sources, what they have done is they have transferred some of the volumes which were predominantly they were buying from China to NOCIL. Now this has happened both at domestic industry and also at international level. And that's where we see a volume growth.

Okay. Okay. But sir, have we also invested in terms of expanding our distribution network in the export market or else in the domestic market also? Because importers also have a distribution base here in India. So how we score above all those parameters where we try to provide them something on the table like just-in-time supply? Because I think pricing is one of the aspects. But what other parameters you would like to score in where you can provide some edge vis-à-vis the competitors?

See, as far as the domestic car industry is concerned, we don't have any distribution network. We deal with our customers directly. As far as our delivery to customers are concerned, we assure our customers that we are going to be a JIT company. And I think of all these years since we have been doing the business for last more than 30 years, they know the strength of NOCIL in terms of delivering the product when they want. So -- but this is not only restricted to domestic industry, even our international customers, when they give us a schedule, we ensure that every schedule is honored. And that's where, I think, obviously, we have absolutely no problems in terms of delivering the product to customers nationally and internationally. But -- and besides the product quality, besides the volume available with NOCIL, of course, the pricing and the delivery, in all the 4 parameters, NOCIL is at least much better than many of the Chinese companies. And that's where the shift is happening because most of the tire industries are looking at alternative source of raw material.

Okay. Sir, my second question is to Mr. Srinivasan. So sir, you mentioned in the presentation that fixed cost absorption have started reflecting in the numbers. So if you can just give us some perspective in terms of Q2 of last year and Q2 of this quarter -- of this year? So how has been the fixed cost looking like? So has there been any reduction in terms of absolute numbers or whether it has grown from a base of last year? Because I think we have seen a very healthy volume growth. So I just wanted to understand your perspective on the fixed cost, like, how it has been panning out?

Nirav, I can say only one thing, on index parameters, I think we may have seen a positive impact of 5% on fixed cost parameters.

Okay. Okay. So let's say, if the base was 100 last year, it can be 95, despite such a high-volume growth what we have seen?

Yes, yes, yes.

The next question is from the line of Rahul Jain from Credence Wealth.

Sir, my first question, so with regards to the pricing, you mentioned about a recent price hike by a competitor, and pardon me for my ignorance on this, but -- and also with regards to our case, you have mentioned that pricing will gradually improve in the coming quarters. But if you could share some more details -- I'm not asking for the exact price hikes or price erosion. Like I found one very interesting slide in your presentation with regards to volume where you have taken the base at 100 and then put the volumes right up to quarter 2 one, where we have shown the volumes to be at 115. So just wanted to understand if you can relate the same thing with the pricing, say, last 3, 4 quarters, in terms of the index again? So if the price was 100, say, 4 quarters back, how has that moved in last 3 quarters? And as we speak today, where could be the price?

Can I answer in a different manner?

Sure.

See, Q2 FY '20 included a portion of antidumping duty for the month of July '19.

Yes, sure, sure. I will exclude that. So maybe we can speak after that.

Okay. If I compare Q3, Q4, Q1 and Q2, see the pricing consists of 2 parameters, the composition of the volume mix. So the average [indiscernible] changed because of the volume mix because if you have a high-value product going in a higher share in a particular quarter, the weighted average will go up. Similarly, if a low-value product goes up a higher share, than the value -- weighted average value comes down. Now looking at all those parameters, I can say that from, I would say, say, January '20 or maybe December '19 onwards, the prices have remained flat. It has not gone down further. It has remained flat. What we are saying is we have started hearing from the marketplace, at least from certain cohorts, we are hearing we are yet to confirm when we get into the, say, January, March deals, probably we'll understand how prices have increased. Yes, we are hearing news that the prices have started showing signs of increase or improvement from the base level. And we have always been guiding the investors that all along, the prices are coming to rock bottom, and that's the reason it remained flat for almost 9 months. Despite a de-growth, despite the COVID situation, the prices did not go down. That reflects how the competition is viewing the pricing parameters. So we believe we have seen the price increases across all segments. It may be varying size of 5%, 3%, I don't know how it is. But we have to -- when we get into the actual deal, we'll come to know the real effect. But we are hopeful that from January onwards, we should get some increase.

Sure. And sir, with regards to this guidance which you have given on the presentation, FY '21 being flat, I presume on that presentation slide both volumes and revenue would be flat as compared to the last year. Is that a correct assumption?

No, I think we are talking about sales volume.

We are talking about sales volume, not the revenue...

Because revenue is not comparable. As I said, it includes the antidumping for 4 months. So that's not reflective.

Sure. And sir, lastly, just to carry forward what the previous participant asked. With regards to approval, we have been talking for probably last 3, 4 quarters with regards to you're now trying to get into new customers with whom probably we have never done business or with existing customers for new regions, new geographies. And you alluded to that in your opening remarks also that we are actively pursuing that. But in that journey, sir, where do we stand today? Do you feel that in the next 3 months or 6 months, we are quite hopeful of tying up with, say, 1 or 2 large customers which can help us to have a sharp improvement in the volumes maybe in the next year going forward?

See, basically, we are having a relationship with most of the account -- big tire companies across all -- across the globe, we have a relationship. Now the tire companies typically start a business and allocating the business to a particular region or a particular country. Now what we have seen in the last 3 months or last 4 months, there have been inquiries from their side, and the discussions are going on wherein they want to expand the servicing locations for NOCIL. So the other locations which were not hitherto taking any volumes from us, they are getting into discussions on the trial and the samples and approvals, and those processes have started. Typically, this takes -- real credential comes in maybe 3 to 4 quarters. But we are definitely hopeful that some improvement is expected on the cards. But I cannot tell you the time horizon. I think that's a little premature to talk about it.

[Operator Instructions] The next question is from the line of Rohit Nagraj from Sunidhi Securities.

Sir, just again on the volume front. So we had this import of -- ban on passenger vehicle tires sometime in the month of June. So has it also benefited us during the quarter? And for the current quarter, almost 40 days have gone by. So is there a month-on-month improvement also during the current quarter?

I think -- yes, I think in the past, in the earlier calls, we did say that the tire restriction -- import tire restriction does play a role, and it has played a role here in the operating capabilities of domestic tire companies. And being a domestic supplier, we have also gotten a benefit to improve our capacity utilization. That's one part. Coming to the current ongoing trend post-September, I think we are still seeing this momentum being positive.

Sir, the second question is we had indicated in the last call that we have developed on the accelerator and we started initial sales, and we saw improvement probably towards the end of Q1. So how has been the trend in Q2? And what do we expect in terms of incremental size of opportunity from this particular product?

I think on that product, we are about 50%, 55% utilization.

Okay. And any opportunity size on this in terms of revenue?

I didn't get your question, please.

The opportunity size in terms of revenue. So at 100% utilization, probably, the opportunity size is INR 40 crores...

The net product is about INR 250 crores thereabout per annum in the domestic market. So we -- our capacities, we are already utilizing 50%, 55%.

Sure. And sir, just last question on the financials. What would be the debt by FY '21? Currently, we are debt-free, but after this, INR 140 crores CWIP at the end of FY '21.

Debt, there's no debt.

No. After the remaining CWIP at the end of the year, I'm asking.

We are a debt-free company, so there's no debt today.

The next question is from the line of Rohith Potti from Marshmallow Capital.

My first question is on the gross margins. Despite having the highest ever volumes in our history, we have seen further compression in gross margins. Could you please elaborate on this further?

I think it's about 0.5% lower. So in absolute term, we are talking about maybe INR 80 lakhs or INR 90 lakhs thereabout. So we had some abnormal situation in certain raw materials. So probably that has impacted us. Other than that, nothing.

Okay. So it's not -- so there's no pricing pressure per se. It is more of the inventory-led issue that led to the compression, is it? And we are on track eventually to reach on a steady-state margin -- gross margin guidance of 50-odd percent or more?

See, the point is we have to look at the current situation, how the market is playing out and how competition is playing out. So in this quarter, we have seen -- in a few products, there were some price -- I mean availability shortage or price hikes, et cetera. The combination -- we have covered our inputs quite well. But maybe some shipment delays, so therefore, we have to buy a local source or something like that. And probably that impacted our maybe INR 80 lakhs, INR 90 lakhs. That's all as compared to Q1. So otherwise, 48.6%, we could have maintained it.

Okay. But the long-term intent is to be at 50 or a little more. Would I be right in thinking that?

Today, it's a depressing market conditions. I believe once the market situation normalizes, our guidance remains at 50% impact.

Understood. My second question is, sir, historically, you have had a very close relationship with all your customers. And you're, I believe, more of a solution provider and partnered with customers in product development, et cetera. So given the whole shift in the ecosystem that is happening, are there customers that are approaching you for other products other than what you're already manufacturing right now in terms of China + 1, et cetera? And is there anything in the pipeline for the next couple of years or so?

I think Mr. Deo will answer this.

I think you have asked a very good question. Yes, the domestic and international customers are asking this question. As you are aware, at present, we are busy in completing our projects which we have started, and we are likely to complete all the projects by March 2021. I would say we are only on the drawing board in terms of many of these questions. And if we succeed, we will share that information with you.

Understood, sir. Last question as part of a follow-up is, given the demand increase that we're seeing right now, is there any product that you intend to add more than whatever you have in terms of capacity currently? I mean I know you're coming at the end of [ 465 crores ] capacity that you had planned 2, 3 years back, but is there any particular product which you're seeing more demand than you think? And are you planning to expand capacity in any particular product further?

As I said, I think our first objective is to complete the project, look at the market, look at the demand, look at the sincerity of AatmaNirbhar Bharat and China +. And once we collect all the data, we will think about it.

[Operator Instructions] The next question is from the line of Niranjan Sakhalkar from Acuitas Capital.

I had one question. So how do you view this Merchem capacities which are coming onstream -- they're expected to come on stream, as a threat to NOCIL?

Thank you very much for giving me this information that their capacity is coming up. I think first and foremost thing, it needs to be watched. Second thing is we don't see any threat as far as the business is concerned.

Okay. And a follow-up question the previous participant asked. I wanted to know if -- your guidance on the slide, you say that the sales volume as well as the revenue will remain flat compared to FY '20, right? Or only sales volume?

I mean I didn't understand the question, please?

Your guidance on the presentation for FY '21 volume as well as revenue will be flat, right? Is that correct? Or only sales volumes?

No, no, we just answered to the previous investor. We are saying it is sales volume is expected to be flat for FY '21. Though in the first quarter we had talked about de-growth, now we are talking about a flattish performance as far as FY '21 is concerned. We never talked about revenues. Revenues was actually not comparable because of the antidumping effect in the first 4 months of the previous year.

The next question is from the line of Sanjaya Satapathy from Ampersand Capital.

So my 2 questions. One is that what is your sustainable EBITDA margin that one can look forward to from your business?

I think we have been giving guidance all along that in a stable market condition and at the peak level capacity utilization, we are talking about a 25% EBITDA margin. And that's the guidance we have given. And I believe -- we still believe we have been in the same -- in the race to achieve that.

Understood. And sir, what is your -- what will be your full capacity annually after you complete the ongoing CapEx?

Today, the total installed capacity, including intermediates post commissioning of all projects is 110,000 tonnes -- metric tons. And today, we have completed about 85,000 tonnes.

No, sir, basically, your quarterly volume this quarter was -- what is the current utilization? And when will you reach full utilization?

Today, we are, on the available capacities, we are utilizing at 75%.

75%. Okay. Okay. And your total available capacity will go up by how much from here after the last round of CapEx which has been done in quarter 4?

I guess maybe you didn't follow it. We have today set up 85,000 tonnes production capacities, including intermediate as of now. We expect to reach to 110,000 by the end of this year. And currently, we are utilizing 75% of the available capacity.

Understood. Understood. And only after you reach somewhere near your full capacity that your EBITDA margin will move towards 25%?

Yes.

The next question is from the line of Avishek Datta from Prabhudas Lilladher.

Sir, just wanted to know, if I have to compare last year, the capacity, when you say it has grown 15% volume, what was the capacity last year? Can you say 85,000 tonnes currently?

Last year, I think at this time, it was about 70,000-odd tonnes.

And what was the utilization at that time?

Maybe I would say it was 70%.

So both 70,000 as well as 70% utilization?

Yes. Yes. Maybe 70% or 72%...

And sir, have you seen any -- what is the outlook on the CapEx for the tire plus? Any new players have committed CapEx? Or has there been any deferment in the CapEx or the tire plus?

Mr. Deo will answer that.

I think the new -- 2 new announcements which we see, these are basically in the what is called as off-the-road tires, OTRs, okay? One plant is coming. I think it's completed and it has been inaugurated in the state of Gujarat, and one plant is in plans. But as far as the standard tire industries are concerned, whatever CapEx they had announced earlier, they continue to say that the tires -- they will go ahead with the CapEx and many of the companies like Apollo Tyres commissioned their plant in Andhra Pradesh. There are no new CapEx which has been announced in last 6 months.

Okay. And secondly, when you say that NOCIL has benefited from some of the demand which has been diverted by international and domestic tire players, what was it led by? Was it because of the cost efficiency whatever? Can you just explain that part?

See, basically, a few things. First and foremost thing, I think the Prime Minister of the country laid down an objective for all the industries to be aatmanirbhar. And I think this has been taken quite seriously by the industries, and industries have started looking more inwards at domestic source rather than importing from China. And if you look at rubber chemicals, the rubber chemicals, more than 90% of the imports are from China. That was one change. Second thing is the tire industries were also given an upper hand by putting tire under restricted list. So -- and the expectation was that they will also promote the domestic industry. And I think these are all the reasons which have come together where they are looking at domestic supplies as their priority.

Okay. And sir, lastly, can I -- with new capacities available by -- post the trial runs by Q1 of next financial year, where do you see this 85% utilization -- 75% utilization going up to by the end of this financial year?

See, basically, we are ramping up. I think what we have been guiding -- our guidance is that we, in the last call, we said, we expect to ramp up over 4 years. We still maintain that we can achieve that a little earlier.

Okay. No, sir, just wanted to know, like, 85,000 tonnes available capacity, right now, we are utilizing it at 75%. Where do we see it ending at?

I think the way things are looking at, we will be -- I mean if I may answer a little differently, I think currently, we are what, yes, 80%, we can say.

Okay. From 75%, it will go up to 80% by the end of this next...

[Operator Instructions] The next question is from the line of Anupam Agarwal from Lucky Investments.

My question was on the volume front. Can you break up the volumes of 15% into how much domestic was and export was in the quarter?

Largely domestic. Exports, not much significant.

So basically...

One minute. Let me complete. As compared to the corresponding quarter of the previous year. If I look at pre-COVID levels, I think we have grown by 10% plus in domestic and about -- remaining about 5% or thereabouts de-growth in exports or minus 4%. So net-net 6%.

Okay. Also, sir, in your earlier guidance, you've spoken about domestic and export mix at 65%, 35%. So do we stand by that? And what was the mix in the current quarter?

Current quarter domestic export mix, I think, it's -- one minute...

70-30.

70-30. Domestic is 70, 30 is exports in value terms.

Right. Sir, coming to cash flow, our business has a very unique property of throwing great cash and that -- and the fact that we don't have enough CapEx plans going ahead. What is the plan for utilizing that INR 130 crore, INR 150 crore cash that we generate?

I think we are working on that. Today, we don't have any plans to announce it. It's -- coincidentally or parallelly, some work is going on in evaluation of other avenues. So as and when a suitable investment decision comes in, we will definitely let you know.

So based on pecking order, CapEx is first and then rewarding shareholders second?