Pokarna Limited (532486) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Pokarna Limited Q4 and FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Gavin Desa from CDR India. Thank you, and over to you, sir.

Thank you. Good day, everyone, and a warm welcome to Pokarna Limited's Q4 and FY '22 Earnings Conference Call. We have with us today Mr. Gautam Chand Jain, Chairman and Managing Director; and Mr. Paras Kumar Jain, Chief Executive Officer for Pokarna Engineered Stone Limited. I trust most of you have gone through the communication and the results made to you earlier. In the interest of time, we would like to commence with Q&A immediately. So I'd like to hand it over to the moderator to open the floor for Q&A. Over to you.

[Operator Instructions] The first question is from the line of Pranav Mehta from Equirus Securities.

Sir, just wanted to understand on what was the impact on the margins because of the increase in freight cost and the raw material inflation, which has been impacting all the companies? And my second question was more related to how the -- what is your thoughts or what are your thoughts on the U.S. countertop market as expected to grow with now the interest rates increasing? And the third question was related to any update that you might have on how the investigation on the Malaysian quartz imports, which U.S. ITC has started. Any update on the same would be quite helpful.

So on your first question, how the raw material inflation and the freight costs are impacting. As you see that the inflation in commodities is happening across all the industries and not specifically to quartz. So typically, the raw material prices have increased significantly, especially the polyester resin. We've seen year-on-year over 100% increase in the polyester resin prices. And same has been with the freight also. And apart from that, be it all the other raw materials, we've seen significant increases between 30% to 100% happening only on the other basic raw materials. And also with the fuel prices going up, given the local transportation and the other services costs also have gone up. So typically, all these factors impact anything between 5% to 7% on the EBITDA margin. That's the reason you see that on overall basis, there has been a contraction of the margin. And that is a primary factor. And secondly, also the product mix is also an important factor in the margin determination. Because if we are able to sell a high-value product at a particular price during a particular time frame, the margins typically tend to not contract as much as they would have contracted had the price for the product been on the lower side. So predominantly, I would attribute the product mix and the inflation as primary reason for the contraction of the margin. That's point number one. And coming to your second question on -- what was your second question?

Demand of U.S.

Demand, sorry. On the U.S. demand, see, we don't currently see any demand-related challenges in the U.S. market, while the stimulus has been rolled back and also the mortgage rates have gone up and probably will go up. Because we believe that our product positioning and the customer profile is a little different, and we typically cater to middle to higher income related housing. So that predominantly doesn't get impacted by the mortgage movement, what currently has happened. So we don't see any demand-related challenges in the market, and that has been our visibility even for the current quarter and also for some of the coming quarters as well. Now coming to the third question on Malaysian investigation. The -- whatever information what we have from the publicly available sources is that the department has issued questionnaires as to the importers of Malaysian quartz and also to the producers of Malaysian quartz to determine the scope. So a lot of companies have filed response. Some of them have not filed response. So in case the department views that there has been a circumvention and Chinese have been trying to sell quartz made in China into U.S. via Malaysia route, then there is a high probability that the U.S. Department of Commerce may determine a circumvention case and applicable duties would come into force. But I think that's going to take time is what is our assessment at the moment.

Sure, sir. And sir, just a related question on margin and also on the working capital side. So have you taken any price hikes because some of the competitors in the U.S. have already indicated they have taken price hikes in order to pass on the RM inflation. So were you able to take any price hikes? And second, the working capital seems to be a little stretched in FY '22. So if you can throw some light on why that has been the case.

We have a different approach on our pricing policy. So it is not necessarily be a price hike on the existing product. We also try to sometimes compensate our pricing by introduction of new products and trying to compensate what we are losing on certain products by getting some new products into the market. So we need not necessarily follow what competition does. And we have successfully introduced certain new products, and we've been able to get the price what we believe on those. So that's point number one. Point number two, on working capital, yes, it is stretched as you see from the cash flow because the sales cycle at this time, because of the shipping challenges relatively longer than what it would have been in the normal circumstances. Because usually, the payments are due when the bill of trading comes in or when the material is on board. So like typically, when we ship out of certain ports, what happens is like we've seen containers reaching the ICD but not reaching the port for 60 or 80 days within India itself because of the blank sailings, the nonavailability of space or whatever it is. So unless the containers reach the port, we don't get the -- are onboard the ship, we don't get the bill of trading. And then that's how we are not able to get on our payments also processed. But I think with the container situation now dramatically easing at least in the last couple of months than what it was in the last financial year, probably the sales cycle and the working capital cycle should become healthier than what it was in the recent past.

The next question is from the line of Dixit Doshi from Whitestone Financial Advisors.

My first question is regarding the utilization of the new plant, if you can mention for the Q4 -- I mean how much of the utilization? And whatever sales growth we are seeing as of now? It's like you mentioned that we are not increasing prices. So whatever sales growth we are seeing is predominantly volume like growth? And my second question is you also highlighted about the product mix also changes the margin. So how do you see FY '23? Because obviously, I think when the new plant has started, we started with the basic products. And as the utilization goes up, we try to play with the design and colors and all. So how do you see it going forward?

Typically, the utilization levels are now around 70%, and now we are looking at going beyond that. And what predominantly in terms of the revenue, what you have seen going up or for that matter, contraction in the margin is also because of the new plant where, as you rightly said, we are largely concentrating on basics. And now we have started the process of getting certain medium to high-end designs. And then eventually, we'll have a optimum product mix, as I can say, which can balance out both the capacity utilization and also give us the right numbers. So that is where our focus currently is. That focus on capacity utilization to be maximum possible and then start getting in the new products where the realizations are better than what we currently see.

Yes. And so how do you see the margins for FY '23? Can we come back to, let's say, in a couple of quarters come back to what we used to make?

Yes. I believe that if the shipping prices has become normalized and if this inflation are tapering, which is happening and goes in the same direction for a couple of quarters, I think bouncing back to the better numbers than what we currently reported is definitely possible.

Okay. And one last question, and then I'll join back to the queue. How is the scenario from the hospitality segment now that everything is opened up because that's a high-margin business also?

Yes. Hospitality industry is relatively today in a better position than what it was about 6 months back. So the inquiry, the order -- the inquiry funnel is definitely better. Now we have to see how the order funnel comes into. So I think if things are better and if there is no another monkeypox or COVID story coming in, probably hospitality will revive sooner.

The next question is from the line of Pritesh Chheda from Lucky Investment Managers.

Sir, just wanted to know this debt of INR 500 crores plus, how do we see this moving over the next couple of years? And when should -- when will you take the next round of capacity expansion?

So debt, our decision is that now we have to keep reducing the debt. So our Unit 1 is already debt-free. So debt what you see is basically the new debt of the Unit 2 and some promoter debt, which is still not paid. So we, for sure, will be bringing down debt. That is our first target now before we will embark on a major expansion.

Okay. And these 2 units, do they have scope for any brownfield expansion, if any, if you want to take your peak revenue potential at these plants by a minor tweaking here and there? Or how you will need a new plant?

I understand your point. So as you know that both the units have sufficient land available. And originally, the plants have been put in such a way that we can do brownfield expansion, whether for major expansion also or for minor tweaking for new product mix. So that, of course, we will be continuing to do it, but not with the major investments.

Okay, okay. And sir, my second question is, in the past call, you were expecting the capacity utilization to be like 100% and you were viewing a fairly robust demand scenario. The capacity utilization expectation of 100% was in this year, FY '23. Are there any changes there? We're already at about 70% for the second plant. Is there any change on thought process there?

I would first mention that we never say that we will utilize 100% capacity because it is very subjective. The capacity utilization depends on the order mix, the product mix, the thickness mix. So the -- this kind of plant will never have 100% capacity utilization. So it all depends on the orders. And we will be always aiming at optimum utilization of the capacity, and we have already been working on 3-shift production facilities. But don't forget that we need to spend time on cleaning of the machines. And it all depends on what color we are making and when we are cleaning the machine. So our optimum utilization is a target, but it can never be 100% capacity utilization.

Sorry, the word is optimum and apologies for that. So that optimum utilization, do you see it happening in '23?

Yes, definitely.

Okay. And sir, my question on granite. When do you see normalization of business profitability there or absolute? Because that business hasn't grown. It's been in a certain range. Do you foresee it coming back to that range? Or there are any challenges?

I don't foresee any large expansion or growth in the granite business. Presently, if you see, it is basically because the block sales have come down, and that reason is being that the Chinese buyers are not allowed to come to India, they don't get Visa for coming to India. And then -- also there are shipping challenges. So a lot of blocks which have been produced are lying unsold or unmoved to the port and not shipped to the country. So it all depends on how the situation will improve. But I don't foresee a great double-digit growth or substantial growth happening in granite business. Also because the business has become very competitive and we have no interest to do business without profits. So we are very particular that whatever business we do, we should not lose money. And in quarrying operations, again, it depends on the yield coming out of the quarries. So I will sum it up that I don't foresee a great growth happening in the granite business.

Sir, on the debt figure, would you be able to repay at INR 100 crore per annum run rate per debt figure? Or is that optimistic?

Maybe around INR 100 crores, we should target.

The next question is from the line of Karthikeyan VK from Suyash Advisors.

A couple of questions. One is that you had a fairly large amount of inventory lying at the end of the year. How much of that would be transit inventory? The reason I'm also asking if this is the large inventory, does that make it difficult for you to improve profitability? Some thoughts on that would be interesting.

Are you asking about the granite company?

No, sir. I'm talking about the consolidated numbers and most of the inventory anyway, I thought was at the subsidiary level. So...

See, if you see the inventory, there are 3 reasons for this inventory. When you talk of granite, the inventory was lying in the quarries. When we talk of quartz, lot of inventory has been in transit within the factory to the ICD to the port. And then it is not recognized because we don't recognize the sale until the bill of trading is received.

So this should get converted in the first quarter, but that would be a substantial number because I remember seeing INR 175 crore of inventory, which is quite substantial, even if I assume a 60% gross margin number?

So typically, what happens is that specific to the quartz, about a month sale is always more or less within the pipeline somewhere or the other pipeline. It's better it in -- and sometimes it is more than a month, especially if it is out of Hyderabad because it's not a core unlike Vizag where we directly put the material on port -- Vizag port. Here, it is typically at ICD or sometimes sitting in Nhava Sheva and then onwards. So typically, I think this cycle will -- unless the shipping scenario completely improves, including on the granite side, unless the Chinese story is sorted out. So I think 30 to 45 days typically will be in the transit for some more time.

And also, please don't forget that this inventory is not finished product. It is also a work in progress and also the raw material inventory. All together.

And at times when the supply chains are completely broken down, we are forced to keep inventories of certain items beyond our regular stock level because we don't know when -- like suppose we are importing some items from Europe or some other parts of the world, we have to actually order more than what we need and to keep the -- make sure that we don't lose out on the demand opportunities. I think all related to the supply chain scenarios. If there is an improvement in supply chain scenario, I think largely this should get addressed.

Great, great. Just to understand the pricing mechanism better, sir, is there -- can I assume that all of this would be priced -- passed on to the customers? How should one understand pricing?

No if it is passed on to the customer, then it is priced as per our inventory valuation policy. So we don't value that on the basis of the sale price. Whatever the cost of production or the purchase, whichever is below or realizable value, whichever is low.

Sorry. Let me clarify my question. What I'm asking you is assuming you buy inventory today based on future orders, right? Do you know how exactly does the pricing mechanism work for your customers? Are you able to pass on the cost increases to your customers? Or that risk is with you? That is what I'm trying to understand.

One point is that our pricings are relatively fixed. So we don't have a pass-through mechanism that if I buy something at INR 10 and if I can pass on additional INR 10 extra to my customer, that doesn't work. It's a fixed price. That's the reason all this typically impact to some extent. So this is taken care and the inflation of the raw material what we have currently.

Right. Second question related to the Malaysian issue that you spoke about, sir. Would Malaysia be a large player in the game? And therefore, can the opportunity be substantial for the Indian company?

I don't consider that because when China was there, it was a substantial opportunity, some lower demand happened. If tomorrow Malaysia is closed, the guys may look at Indonesia, Philippines and Vietnam. So that story keeps the producers, typically Chinese, they'll keep looking at some options apart from over ours. So I don't think we should read too much into Malaysia spillover getting into India.

Right. Right. And sir, you said you would reach optimum utilization sometime this year, which means that you would have to think in terms of expansion very soon. So what are we missing out here?

Typically, what happens is that the -- always in business, there are several opportunities we keep evaluating. So there is definitely a process of evaluation, which happens on a regular basis. So it's difficult to comment at the moment as to what we will do and when we will do it. And whenever we will do, we'll definitely keep you as informed.

Okay. So the next round of expansion, would it be, say, an order of magnitude lower than the last CapEx you did? Because you said that the substantial provision has already been made for expansion at your new unit action because the CapEx was INR 450 crores or so.

Chairman just pointed out, the focus is definitely on debt reduction. But at the same time, we'll also keep the opportunities which sting in the mine. So maybe the second expansion need not necessarily be of the magnitude of what we did because we already have certain land building and other infrastructure in place. So it need not be of that scale.

The next question is from the line of Devansh Nigotia from SIMPL.

Couple of questions. One, I just want to reclarify, you mentioned that the sales growth this year in quartz is largely volume related, and you have not taken the price increase. Is that the correct understanding?

Yes, because we had our Unit 2 coming up, so we had a lot of volume coming out of Unit 2. So we are doing our basic material at the moment.

Okay. So there is an impact of raw material inflation? And then also, there is a mix which is towards the basic products, which has compressed the gross margin.

The impact of raw material inflation, there is an impact on all other services costs, including shipping and also definitely the product mix.

Okay. And in case of receivable, so basically, when we look at the delta, if I look at last year, the receivables were around INR 43 crores. And this year, it has become INR 143 crores. So considering the scale has doubled from March '21 to '22, even after adjusting for that, how should we look at -- I mean, has there been any changes in our payment terms or is this largely to do with the consignment, which is in transit and for which money is yet to be received? So I mean how should I understand the receivable will be?

Typically, it is a combination of both. As I said at one of the previous questions that the cash conversion cycle is relatively longer now because of the shipping challenges. So that is also impacting these better sales. And also with the addition of certain large volume customers, there has been change in certain payment terms as well. So these are the 2 factors which actually has got us. I think to some extent, it should get adjusted in the next quarters.

The next question is from the line of Fathima Khan from Khambatta Securities.

So I have a follow-up question on the margin side. The current presentation mentions that the operating margin was impacted by container unavailability and increased freight cost. But if we look at the previous con call, which was the last quarter, it was mentioned by the management that the trade cost is typically borne by the buyers. So how does that impact the margin? It's like -- I can understand the impact on the revenues, but not on the margin compression part because of the freight cost.

There are 2 aspects to it that one is on the input, when we buy a lot of raw materials from Belgium, Norway and other parts of the world. So if whatever buying at EUR 500 a container is now EUR 4,000 a container, and that's the bulk buying. To some extent, the raw materials also get impacted because of that shipping cost, which is actually borne by us, that is point number one. Point number 2 is that in the past, the way we price it, we consider the shipping costs and give the complete proposal to the customer that obviously is going to be a landed price. Now the buying prices have significantly gone up, while the selling prices has remained same. So while we pass it on, the margin actually has contracted. So what otherwise I would have gained extra over the shipping, I'm not able to gain today. So that is again impacting my margins.

In addition to that, the marketing shows that we do sell through the last quarter and that also has impacted the margins.

Okay. So when do you expect a normalization in this?

Typically, with the inflation cycle relatively being better than what it was in the last year, I think, second half of the year probably will give a good clarity and probably will help us in getting the margins back to a better level than what you saw in the last financial year.

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

Yes.

Sorry to interrupt, Mr. Sachin, but we cannot hear you clearly, sir.

This one?

Not that clear, sir.

Okay. My question was on the working capital cycle, sir. You have mentioned there are certain one-off factors because of which is elevated, both on the inventory as well as on the debtor side. If you could give us some sense how much reduction that could be possible in the next 2, 3 quarters once things stabilize in the working capital?

Actually your voice is not clear. Can you please come back?

Sure, I'll come back in the queue.

The next question is from the line of Rupesh Tatya with Intel Sense Capital.

Can you hear me?

Yes, please, go ahead.

My first question is on sales and marketing event costs that came in Q4. Can you please provide the number, what was the quantum?

INR 3.5 crores on sales and marketing...

Give us a moment. We'll give you the number. 272, 2.7 crores.

Okay, okay. And sir, this INR 183 crores of inventory, roughly, what would be the finished goods inventory and what would be the rest?

In addition to [Audio Gap].

I'm sorry sir, we cannot hear you. May I request management, sir, we cannot hear you. [Technical Difficulty]

I think at the -- on the...

Sales are actually INR 1.6 crores, INR 2.4 crores marketing expense -- no, no foreign exchange loss. Foreign exchange loss is…

INR 43 crores -- INR 42 crores is finished goods. No, no it's consolidated level, [indiscernible]. Finished goods is INR 85 crores and raw material is about INR 38 crores and work in progress is about INR 13 crores. And then consumable stores and spares and all that is about INR 39.5 crores. And then [indiscernible] materials and all about INR 7 crores.

Okay. Okay. And so I think Chairman sir was trying to say something INR 2.7 crores and then maybe there were some other costs. I think we lost the management line heading.

On the year -- On the overall year basis, we also had a bit of foreign exchange fluctuation because when we made our payment towards the capital goods, which we bought for Unit 2. We took about INR 7 crores foreign exchange fluctuation loss also on a full year basis.