Pokarna Limited (532486) Earnings Call Transcript

Yes. See basically, that's a marginal percentage of what we are talking. If shipping situations improve, probably the numbers can be better than those.

Sure. And my question around the COVID impacting was more from a supply side in the sense, due to the restrictions and all, is it impacting nor is it now we are fully vaccinated? And as far as the production goes, we have not seen any change due to COVID in the plant?

Basically, fortunately almost 100% of our workforce on all the factories across the group and headquarters are all vaccinated. So the COVID related, we are predominantly see it on the import of the raw materials because most of the chemical manufacturers, for some or the other reasons are declaring force majeure or having challenges. So that's where the COVID is impacting the procurement ability to some extent, and that means that we have to block our working capital a little or plan ahead. And of course, inflationary cost tendency is definitely quite high there.

Sure, sure. Second was the result medium-term question, sir. You mentioned that the plant is coming up well and you are seeing strong demand. And I hope this -- at some point of time, next 2, 3 quarters, the shipping things should also get sorted out. So over the next 3, 4 years, the priority would be if you see strong demand, we may look at further additional capacity? Or because now that there's some debt that has come to the new plant, the first priority would be to significantly bring down the debt levels over the next 2.5, 3 years? And then maybe look at some sort of an expansion?

We've just completed our expansion. I think we should give us a reasonable fair time -- amount of time for planning for expansion. And obviously, it is subject to the demand that we see in the market and the opportunities that we think that we should encash on it. So it is a little early to talk about future expansions today.

[Operator Instructions] The next question is from the line of Anish Jobalia from Banyan Capital Advisors.

It's reassuring to see the climbing up of the [ gross ] revenues in this quarter. One is, I just wanted to understand the gross debt a bit better. Because if I were to look at your results and you have mentioned the borrowings in the long term to be INR 380-odd crores and the short term to be INR 118 crores so that's close to INR 500-odd crores. And you've been mentioning -- you just mentioned it's close to INR 375 crores. So what am I missing? And if you could help to reconcile that would be very good, sir.

The short-term rate [ isn't ] actually the working capital only.

Right. So the total debt would be INR 500-odd crores, right? So that's the right way to think about it?

Yes. Yes. Including working capital, it's INR 500 crores, yes.

Okay. And secondly, I just want to understand in terms of the margins. So could you give a sense of how the margins are -- what kind of margins we have been rating at the old plant versus the new plant and whether the new plant has already reached a breakeven? And how -- what's your outlook on the margins given the inflation in the raw materials? Would be helpful to know that, sir.

Mr. Paras has already explained to you the reason for the change in the margins. Obviously, we may -- if you want, again, to understand, let me once again put it back to you that one basic reason is obviously definitely the price increase happening on the raw material trend. But also, the new plant as a strategy, we make low-priced product so that it's easier to ramp up the capacity. And then the customers who want those products in a bigger capacity and quantity, it is easier to sell. So margins will always keep bearing a few percentage here or there. But it's also -- it also is the reason being that when we make more of 20 mm, the price realization is less than then 30 mm we make the volumes, the realization is more. So it is the product mix, the thicknesses, the margin, depending on the raw material, again. So it will be difficult to stick to one margin throughout. We will always have this challenge.

No, sir, but what I'm trying to understand is that given our first plant or the old plant is operating at 80%, 85%. So in the past, you used to do 40% margins over there. So are we closer to that? Or we are getting impacted because the raw material prices? And can we get back to that number in the next few quarters? So because of this raw material inflation, and obviously, you are doing other things around the product mix. So on a blended basis, we are expecting 35% kind of margins when the utilization ramps up by the end of the next year. So literally, is there any change in that thought process?

I think if you go back to our previous discussions also on the previous calls, we believe that between 30% to 35% is the margin, which we are targeting. Anything above that for various reasons is a bonus. So I think you can consider those numbers.

The next question is from the line of Hrishikesh Bhagat from Kotak Mahindra Asset Management.

So first question is related to the negative cash flow from operations. If I look at it, it is largely driven by the higher inventory. So how should we look at this? Is it related to an anticipation of higher demand? Or is it something related to attributed to shipping rates itself? So if you can throw some light on that?

Yes. Predominantly, the inventory rise is because of the shipping related challenges. And also, to some extent, we are also building up some of the raw materials in anticipation of the delays in shipping and all which where we import. So predominantly, everything is attributable to the shipping.

Okay. And that also explains the higher payable also, right? Because that's also on...

Exactly. That's how it's tying up.

Okay. Okay. The second is on the granite side. If I look at it, I think the sales has been fairly muted for a multiple years. I'm not talking about this quarter itself. And I understand the end market of granite, at least in the past commentary, has been that it's a fairly challenging market in terms of competitive intensity and everything. So I just want, in sense of the presence in this segment, how does it help? Does it have to be just filling a product gap with our probably sort of vendors and anything or probably channel partners who [indiscernible] with you? Or is there any strategic reason to be in this segment?

No. In addition to what you are talking, there is another new challenge that is the royalties on the raw material have been increased by the Andhra Pradesh state government. So the right business, what we see for our service is going to be stable. It will not going to have any adverse, but at the same time, no big ramp-up possibility. As a strategy also, because the competition between organized players and unorganized players is large, and for the domestic market, it's very difficult to compete with unorganized players. So as a strategy, we would like to continue what we are doing, work with our quarries, our own raw material, and the processing in the factories, preferably from -- coming from our own quarries. So as there is not big margins available in outsourced products, we would continue to do what we are doing today.

[Operator Instructions] Next question is from the line of [ Ayush Jagani ] from [ Nevatia Investment Advisory ].

Hello?

Yes, please go ahead.

Sir, I wanted to understand the revenue from different regions set up. What are the exports in -- because I've lost that [ lost your voice in between ], so what is the domestic sales? And what is the export sales? And which region is your contributing -- has shown significant improvement. Is it mainly from the U.S.?

So as I said, predominantly, they come from North America. So today, as I said at the beginning of my call, domestic sales are currently negligible. We are building up our domestic sales gradually. Today, if you go to our website, you can find where all -- we are available. And you will see that gradually the things will keep improving in terms of how we ramp up the domestic. But always, the exports market will out shadow and outpower the domestic market.

Okay. And the region-wise export data, if you can share that, how much it is contributing from U.S. or Australia?

That's what I told. So when I say over 95% is -- sorry, over 90% is going to U.S., that itself shows that all the other countries have a very limited role.

The next question is from the line of Karthi Keyan from Suyash Advisors.

Congratulations on a very interesting performance. But just trying to understand the utilization that you expense. Do you anticipate any demand-related, if at all, in the U.S. market due to this inflation aspect? And secondly, a slightly longer-term question related to what was asked earlier. Say, is there a reasonable visibility for you over a 5-year time frame, for example, to say double, triple year capacity? Some thoughts on that would be interesting because it would give us a perspective on the sustainability of the growth there.

As you are aware that we've been focusing on export market from the long period, and we would continue to do that. And for long term, 5 years, I would say that the market remains [ behind ]. Our relationships are very strong, and we definitely look at increasing our revenues, top line as well as bottom line, from the same customers in the same markets. But then again, it all depends on the market, how it will remain after 5 years. Today, we see the market for quartz is very stable, growing and growing continuously. Anything else you want?

No, that is comforting, sir. That is comforting. I am assuming also that as the product mix improves, profitability automatically will improve commensurately, and therefore, all the other things will happen automatically. So congratulations and [indiscernible] to you, sir.

The next question is from the line of Pratik Singhania from SageOne Investments.

Congratulations for a very good set of numbers. Sir, my question is with regards to the quartz, basins and things that we do. So given like one of the other listed companies have a good sales, and they have some kind of a technology which enables them to deliver good quality product. Sir, do we have such kind of technology in-house? Or we have procured from outside for us to manufacture sinks and basins? And how do you see this business getting up?

I assume you are talking about Acrysil quartz sinks.

Sir, right.

See, our product is completely different from their product because when we say it's a quartz sink, the percentage of quartz when compared to resin is quite different. Our stone has all the way up to 93% quartz. So this product is completely different, that entity is different, and the market is also different because the price points and the target consumers are also different. The technology is completely developed by Quantra team. So we have not got any technology. We, in fact, have -- we funded this research for almost 3 years within our company. And over a period of 3 years, we've been able to successfully commercialize the product. And for the first time, we displayed it in the Marmomac exhibition, which happened early this month in Delhi. So slowly, it's a new product category because we are the first company which has got this complete range in the world. So the end consumers are different. In fact, our buyer -- the consumers for us also are different. So we are developing this category. It's a long race, so it's very, very difficult to predict as to where we will land in 1 of 5 years. But it's an interesting journey. It's a new product, and we are working on creating a category for this product now.

Sir, can you please elaborate on the differentiation in the target customer? Like how would you rate our customer versus...

Today, a quartz sink, which any other so-called quartz sinks which are sold in the market, you buy them at INR 5,000 or INR 6,000. But if you go to my website, you can look at different products and you can find the pricing yourself. So the consumer who are affording a INR 5,000 sink will not typically buy a INR 25,000. So there is a completely different -- and the concept where we are -- how we are selling is different because our product is supposed to be integrated along with the countertop. So basically, your sink will look like your countertop. Whereas all the other quartz sinks, what you buy from any other manufacturer, be it in India or China, they all look like a solid color. Today, you can make a sink which looks like a marble countertop or a quartz countertop, which we have. So it's a completely different approach to the product line, and that's the reason the consumers are different and the market is different.

The next question is from the line of [ Fatima Khan ] from [ Kamada Securities ].

I have 2 questions. First is, when are you planning to go from B2C? And the second question I'll follow up after this particular question, please.

Already, we are in B2C segment today in India. If you look at our website, you can find more details about how we are on B2C. So we offer some of our products today on e-commerce. So you can buy a product on our portal, that is one way. Secondly, today, right across India, we are doing a countertop installation services for our product. So basically, anybody in India can order a countertop from us and can have it installed at their place in 15 days. So we have already taken the journey what we started with IKEA, driven all the other customers. So in -- on our website, you can find where all we are currently available in India, who are our channel partners. And gradually, we are expanding the channel partner reach as well.

Okay, so you're offering the service only in India? Or abroad as well?

No. Right now, the focus is in India, and I believe that it will continue to be in India for at least the near future.

Okay. My second question would be about the unorganized pure competition which you had mentioned. Post [ your city ], we have been seeing a consolidation in the market. But you mentioned that the competition from unorganized is pretty tough in your place. So are you not seeing a consolidation in this market?

That's what I was talking was about granite industry because in granite, it's a god-made product, it's not a man-made product. So the same material can be available from unorganized small-scale industry where the product quality is different and which is already being sold in Indian market from the small-scale industries where the machines investment is very low, the raw materials that they use is all leftover blocks from quarries where the cost of raw material is also very low. So obviously, the price for those kind of products are much lower. Also, they have tax benefit in terms of royalties, and they don't need to pay royalties to the government because there is a separate category for royalties for those kind of industries. So that's what we call as unorganized sector. As far as we are concerned, we use all the best of the Italian machines. Our product quality is of international standard. And our focus on finished product is also on such products which are meeting the international standards. So obviously, we cannot do change in processing capacity that we have. And therefore, we don't see that going forward also, there is not much of any new colors available in the granite quarrying operations. So basically, almost we are working with the same colors over the years and years. The quartz is a different market where we can create new designs and the customers and the architects prefer to use quartz more and more today for kitchen countertops even in India. So granite, I was talking about was with granite industry, not quartz.

Next question is from the line of Sonaal Kohli from Bowhead Investment Advisors.

I had 2 questions. Firstly, sir, do you expect at any stage, your contribution in your old plant? So in your new plant to match your old plant? And would you expect at some point of time, when 1 year away or 1.5 years away, it to be higher than your old plant in terms of contribution margins?

Going forward, obviously, we have new technology in the new plant and then the efficiencies, we hope will be better than the old plant. So overall impact, at least will be more or less same or even more than the old plant. That's -- the ramp-up will take some time because the acceptance of the new products, developing new products takes time. And then as already told earlier, we look at 2 to 3 years' time frame to achieve better margins and utilization. And you'll see those numbers in top line as well as bottom line.

Sir, considering your historical margins have been way higher, and the shipping is, assuming it's not another 2-year phenomenon. As -- is the particular reason why you don't expect -- and considering your group plant is more efficient than the old plant, at least as good as the old plant? Two years down the line in a normalized world, why wouldn't you expect your old margins to come back at this 30% to 35% EBITDA margin was more short-term-ish and not the long-term EBITDA margin guidance?

Basically, if you've been following my commentary on the call for the last 3, 4 years, you'll always see that we maintain that range of 30% to 35%. So because there are many things which are not in our control. When we were doing a 50%, things also -- a lot of things are not in our control. We had a stabilized raw material situation. So that was a different scenario. So in a utopian world, yes, the things can come back. But in a normal world, I don't know really as to where we will land. But I think the focus has been on 30 to 35, and it will continue to be on that.

Sir, but do you expect the normal world going forward to be way worse than the normal world in the past?

Everybody has an opinion. You have 1 and I have one. The world is very subjective. So I think we'll maintain as to what we think. We think that 30%, 35% seems to be the right margin to target.

Or shall I read your statement has says that 30% to 35% is the minimum you are aiming to make, and there's a possibility of you reverting back to the past?

You can't put your words into my mouth. Whatever I have said, I maintain that. Thank you.

The next question is from the line of Sachin Kasera from Svan Investments.

Sir, just 2 queries more. One, once things stabilize in the next couple of quarters, how should we look at the working capital cycle for the quartz business?

So I think the working capital, the cycle should also normalize once the situation in terms of shipping improves.

Yes. So it's a little higher now. So we should expect improvement by at least 8 to 10 days or even more in quartz?

Yes, yes. If the shipping cycle improves, the working capital situation will definitely improve.

Okay. And secondly, even in terms of inventory earlier because we had only 1 plant. So is it that now with 2 plants being there, in terms of number, while absolute inventory may obviously will be much higher. But in terms of number of days, once again, the new plant stabilizes, the inventory in terms of number days would be lower than what it used to be historically when we're only having 1 plant?

Yes. See, basically, the dynamics of both the units are same. So more or less, it should be in the similar lines.

Okay. And just one clarification on the debt part. The INR 500 crores debt that was mentioned, including working capital, that includes the loan from the promoters, right? Or that is a one in a [indiscernible] INR 500 crores.

That includes the promoter contribution.

Ladies and gentlemen, we'll take that as the last question. I will now hand the conference over to the management for closing comments.

Thank you, and I wish all of you a very happy and prosperous Diwali. See you on the next conference call. Thank you.

Thank you very much. On behalf of Pokarna Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.