Pokarna Limited (532486) Earnings Call Transcript

Yes. Yes. The second question is on the granite business. I know we generally used to comment that it's a fairly steady state business. But clearly, the quarterly volatilities are somehow do not seem to indicate the steady-state business. So if we can give some highlight in the sense what's happening on the granite side that's impacting creating so much volatility on the sales front?

The bigger volume in turnover comes from blocks. And China, which is the major buyer for the blocks is in bad shape even today, in fact, worse than earlier it was. So, there is no shipping happening, no sales happening to China and no buyers are coming for additional markets. So till some of those situations improves in Chanda, we are sitting on the stock inventory but unable to sell them because of the Chinese problems. We don't foresee any bigger turnover coming up from the slab business, which basically happens with American market because the demand for granite is day by day going down and the whole market is moving towards [ sparse].

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

Sir, I would -- so my first question is with regards to this duty, which is proposed to be implemented, say, in the November end. So what kind of a scenario you paint given -- speaking to your distributor that once this antidumping or CVD rolling out, however, you want to name it, gets implemented, then export from India to US, how it will get affected? And how we stand to benefit or lose out of it?

Pratik, you have any other question or this is the only question? I can probably answer all or stick to that.

So in terms of cost of resins, you said that it is of 15%. So 15% is from the peak, or you would say 15% from the Q1 or Q2 average resin prices, which you would have incurred? This is second question. Third question is with regards to freight also, just similar to the 30% to 60% comment that you said. I wanted to know, in comparison to the average freight cost that you would have incurred in, say, Q1 for our sales, Q1 or Q2, how much has been it further came down as of now currently? So these 3 questions, sir.

Okay. So coming to your first question on the duty, as I said at the beginning, basically around December 6th or January 6th, depending upon what the US Department of Commerce decides to take, would be the time when the duties would come out. In the scenario -- so there are basically -- if you look at 2 scenarios. One is a scenario that Commerce actually upholds what it already did it and does not want to change its position in the final. In that case, typically, around 50-plus companies which are in that bracket would typically get impacted because the cash deposit rates would undergo a significant change, which typically a US customer is supposed to deposit to clear the goods. Those companies typically, theoretically, will have challenge in shipping out because their rates can be anything between [ 3% to 162% ]. So that is one scenario. The other scenario is that out of all this 51, probably 50 come out because they are presenting their arguments to the DOC and DOC says that some companies are impacted and there are 50 out of it, then typically, more or less, the industry situation becomes normalized. So in that case, US customers typically will not have significant challenge what they would have had, had all the 51 companies got into that trap. But then it also depends upon the fact that the order is limited probably to the 51 companies who are part of this review. And of course, Pokarna is excluded from that review, and we are not impacted by that. But then there are other Indian companies who are not impacted by this because they are under a different basket of all other exporters. So, they may not get impacted by these duties and they may probably get a spillover of business from some of these companies who may be impacted by the order. So, this is a very peculiar situation. I think only once the order is out, more comments can be made. But this is how it could pan out to be. Now coming on to your cost of resin, yes, from the peak level, we have seen a 15% decline. So as things stabilize, probably we can see a little more coming from there. Now coming to your third question on the fleet cost. Yes, there was a time when a ship to New York would have probably cost you anything about $10,000, $11,000 was also a time. Today, probably at sub $6,000 and sometimes probably at $5,000 levels, you are able to get a product shipped out on the East Coast. The West Coast states where we don't typically have a very larger shipments out have dramatically fallen. There was a time when we looked at a rate of $12,000, $14,000. Now the rate of $3,000 have come into place also in some locations. So that is how the freight costs have actually behaved, dramatically causing a little stress on the existing inventory and typically also on the new demand as well.

Okay. Sir, can you give me a trend about the resin prices consumed per kg for Q1, Q2 and currently, so that we can get exactly how it is shaping up?

Basically, as I told, I think, to Sachin before this call, giving you an exact metric would be a challenge because it is part of our chemistry. But what I can tell you is that resin is a substantial component of our raw material prices. So any movement there would typically get reflected in the margins directly.

If you can, sir, if not per kg, if you can, say, take Q1 as a base of INR 100, index at INR 100 and then if you can just guide us if INR 100 was the base in Q1, then Q2 average would be how much? And currently, it would be how much?

Typically, I'd rather give you a different scenario. I would say that at some point in time, we used to buy at INR 100. At some point in time, maybe last 12 months to 18 months, we started buying at INR 200. That was the fluctuation.

[Operator Instructions] The next question is from the line of Manan Shah from Moneybee Investment Advisors.

Yes. What would be the pricing differential between the premium design versus the basic design? Would it be 10%, 20% higher? And what sort of a mix would we endeavor to achieve, say, over the next 2 years, 3 years between the basic and premium? And what would this mix be currently in our both the units? That would be my questions.

See, the price difference can be as large as even 100% between an exotic design and a basic design for various reasons because the cycle times, the chemistry getting involved and the design expectations and there is host of other facts. So that's how the differentiation is. Typically, overall, it's the balance of 30% exotics, 70% -- sorry, 40% basic range and 40% medium range, 30% basic. If that equilibrium can be established, that's definitely a good scenario to be into. But then, again, that is something which we cannot completely control because it's purely market-driven.

Right. And what would this mix currently be at both our units?

In Unit 2, it would be typically that you have over 80%, 90% coming from the basics. In Unit 1, it would be typically about medium range and the basic products actually giving you about over 60%.

Okay. Understood. So just by changing this mix, we can still achieve like a 15%, 20% growth on our revenue from a long-term perspective, right?

Yes. So theoretically, it is possible that if we are able to establish a right equilibrium on the product mix, both the margin profile and the top line can be improved.

[Operator Instructions] The next question is from the line of Karthikeyan from Suyash Advisors.

Yes. Just one question. You referred to additional shipments from India in anticipation of these duties by the players. Rough sense, what could be the kind of inventory pile up, plus of course, the higher freight cost base inventory? So could you have some sense of the level of pile ups that could have happened?

It's actually a good question, Karthikeyan. We expect that anything between 3 months to 6 months of inventory of certain designs and certain customers would have got piled up in anticipation.

Right. And what would be the extent of erosion best case scenario that has happened in your assessment? Would it be like 3%, 5%? Or will it be a much bigger number?

What do you mean by erosion? Can you be a little more specific?

I'm saying when you talked about slowdown, I'm asking you in terms of indicative offtake.

I think probably it will be in double digit is my sense.

Right. Double digits. Okay. Yes. Sure.

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

Just one question was on the receivables. So despite the sales being lower than June quarter, if you see, versus the March quarter, the receivables are INR 20 crores. So would you like to make any comments on that? Have you seen any increase in terms of -- because of the softness that we are seeing in the market? Is there any increase in terms of the trade that we have to offer to the terms?

See, if you look back, historically, the shipping challenges was one of the reasons for the working capital to be tighter because we had little shipments getting tied up at the port and then the bill of lading not coming on time. So all that typically got bundled and with little aggressiveness in the market approach, we will also have to extend some terms. All the terms, what we extend to the trade in the US market are largely backed by the underwriting from the Export Credit Guarantee Corporation of India. So, we very judiciously offer with -- even the limits to the trade.

No. That's perfectly fine. I'm asking about the cycle in terms of number of days. There seems to be some increase. So that is...

So with the demand getting muted, that is one reason where we have to be a little aggressive. Secondly, with the sort of some shipment delays, which were still involved during the second quarter, the bill of ladings and all that did not come in time and for us to get the payment from the suppliers, from the buyers, we need to present the bill of leading. So, these are 2 factors which actually caused the receivable days to go relatively higher.

And with the shipping-related changes now becoming better, can we see some...

On that side of it, yes. We'll have it. But depending upon the demand scenario, we'll have to still take some calls from time to time.

Sure. And one question was on gross versus net debt. If I see the balance sheet that has been presented results, we are sitting close to around INR 40 crores plus.

You are not clear, Sachin. Can you be a little more audible or closer to the mic?

Sure. Yes. If you see the balance sheet that has been presented with the reserves, the cash and equivalent is close to INR 40 crores plus. So are you comfortable with keeping such a high level of cash and bank balances? Or would we look to -- while our scheduled repayment is not much, would we look in terms of maybe prepaying some bit of loan and hence, having a lower gross debt?

Maybe actually -- there's a balance sheet as on debtor because due to the reserve issues of the last 2, 3 days of month, then automatically, we're going to use the balances in the next financial year.

The next question is from the line of Hrishikesh Bhagat from Kotak Mutual Fund.

Yes. Sir, just one follow-up question. I understand probably the challenges -- challenging demand environment. But just wanted to understand, even if the end market is probably not growing or probably slightly shrinking, but considering the probably a duty on probably the other peers and if this inventory pile probably dissipated over the next 3 months, 6 months, has it any way allowed us to improve our market share?

Basically, we have looked at 2 aspects of this duty. One is, definitely, we are trying to approach the trade where we feel that we can add value to their portfolio by presenting our design and probably take some additional market share, which otherwise would not have been available because of various other reasons. So while that has not completely panned out fully yet because the duties are not completely final yet. So, I think once the duty imposition happens, which way it goes typically, we will give a guidance. Because it is not so easy in this trade to simply shift the supply chain that, okay, today, we'll buy from X, tomorrow, we can go to Y. So before that decision from X to Y is taken by the trade, it takes some time because the way the product is marketed, the way the products are shown in the US marketplace, there is lot of activities. So it's just -- gaining a supplier is not the end of the day because you have to change the sampling across the whole. You're at 5,000 locations. So it means that 5,000 different locations, the samples have to be changed. So anybody wanting to take that call typically will take some time to get more clarity, which way we may be going to slow. So, I think in nutshell, to answer your question, we've not completely seen the benefit of spillover from the duty yet.

[Operator Instructions] The next question is from the line of Sachin Kasera from Svan Investments.

Yes. Sir, has the distributors or our clients started to see offtake at the end consumer also slowdown? Or is it that they are trying to reduce their inventory in anticipation of expected sort of a slowdown in consumer demand?

We have seen mixed reactions from the trade channel, which we have said. There are some people who have not experienced some slowdown yet. There are some who have done reduction in anticipation as already the inflation challenges or the demand challenges are going to pan out. And then there are some who are actually seeing. So depending upon what segment they are largely exposed to is what typically is giving them that direction.

Sure. And most of the commentary that you're hearing from consumer companies is that the upper end -- the mid upper segment is where the demand is still relatively stable and it is a value -- lower end segment, which is experiencing softness. So, have we also experienced that? And second, in terms of geography, US is relatively doing better than Europe. So are you also [ seeing on ] the similar lines?

Yes. So basically -- typically, depending upon the income level and the investment level, the impact of inflation typically pans out in that velocity. So, our experience has been that usually at a higher income level strata, the inflation does not really impact much. And specifically, also on the custom housing at a very different level of pricing, they don't really get impacted because the overall component of quartz in the housing will be relatively lower than what otherwise the building materials would have got into it. So that is answering to your question that, yes, of course, at the commercial project level, at multifamily housing, which are relatively low priced and very sensitive to inflation, they typically get impacted much than the others is what is our personal experience so far. Now what was the second question?

In terms of geography, is Europe little more soft than US?

No, I don't think so because the situation out right now, both in the Western world, whether it is Europe or America, the situation, I think has become more cautious now. So whether it is a kneejerk reaction to what is heard and the news you've seen in the newspaper or what is the perception one has built, but I think the slowdown is consensus, is largely there in the building material category.

And just to your previous comment that in Europe, we're also witnessing that demand is relatively better and stable in the higher end. Can you give us some sense? Is it that -- are we -- what is the sort of mix? It's like a balanced mix between the commercial end and the lower end and higher end? Or is it that we are more tilted towards the higher end and exotic? If you could -- if not specific number, just some ballpark sense, how are we positioned in that?

See, we don't have a right number because what happens is that our consumers -- different consumers have different distributors and the trade partners in US have a different level of exposure to the market segment. There are some customers who are very heavily dependent on new home building and commercial specifications. And then there are some customers who are largely into remodeling at the higher end of it. But I think overall, probably the balance is in favor of the low end and commercial specification market.

Sorry to interrupt you, Mr. Kasera. May we request you to please rejoin the queue?

Sure.

The next question is from the line of [ Vikram ] from [ Vesta Investment Advisors ].

Sir, is it possible for you to share the breakup of operating margin in our old plant and new quartz plant?

So typically, I think we've always maintained that, that data is little proprietary and we'll not be able to give a breakup between the 2 units. Consolidated numbers are there in the presentation.

And sir, if possible, you can share margin of a premium product and margin in basic product?

See, as I told a little while before that the realizations can differ even 100% between a basic and exotic at a gross market level because of various factors, whether it is a cycle time to specialist to chemistry and a host of other products. But then overall, what is the contribution of that particular product is also equally relevant for it to impact the gross margin significantly.

Okay. And sir, one question on who are the major quartz exporting countries to the U.S?

Yes. So basically, Spain is one, along with us, then we have -- Vietnam is also there. Then you have Israel and then you have some parts of Europe, like as I had mentioned, Spain and there is some coming from Belgium, some coming from Italy. And of course, our Southeast Asian neighbors like Philippines, Malaysia and Taiwan I already mentioned to you. Thailand as well.

So these European players are facing any kind of energy crisis you've seen?

I think what we have heard is definitely energy is a big challenge for all the European producers. But I really do not know how they have been able to mitigate and to what extent they're impacted. But whatever hear and say what I can say -- tell you is that, yes, we've heard that energy is a big crisis for the European manufacturers of building materials, whether it is ceramic to quartz or anything in between.

Ladies and gentlemen, this was the last question for today. I now hand the conference over to the management for closing comments.

On behalf of Pokarna, I thank, everyone, who's participated in the call, and I look forward to talking to you again in our Q3 call. Thank you so much. Take care.

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