Pokarna Limited (532486) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Pokarna Limited Q2 FY '25 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, Nirav. Good day, everyone, and a warm welcome to Pokarna Limited's Q2 and H1 FY '25 Earnings Conference Call. We have with us today Mr. Gautam Chand Jain, the Chairman and Managing Director; Mr. Paras Jain, the Chief Executive Officer at Pokarna Engineered Stone; and Mr. Vishwanatha Reddy, the CFO. Before we begin, I would like to mention that some of the statements made in today's discussions may be forward-looking in nature and may involve risks and uncertainties. I now invite Mr. Paras Jain to open proceedings of the call and share perspectives on the business and outlook. Over to you, Paras.

Thanks, Gavin. Good morning, everyone. Thank you for your continued interest in Pokarna. It's a pleasure to connect with you today and share updates on our performance and progress. I'm pleased to report that Pokarna Engineered Stone Limited, the wholly owned subsidiary of Pokarna Limited, has delivered another strong quarter. This reflects the success of our targeted sales strategies, operational efficiencies and disciplined cost management. Our performance in the first half of FY '25 underscores the resilience of our business and our ability to adapt to evolving market conditions. Let me walk you through the consolidated financial highlights for the half year and second quarter ended 30th September 2024. For the half year, total revenue was INR 150.8 crores, a growth of 22.47% compared to H1 FY '24. EBITDA of INR 154.1 crores, a growth of 26.55%. EBITDA of INR 132.22 crores, a growth of 31%. a PAT of INR 78.05 crores, a remarkable growth of 54.18%; EPS of INR 25.17, a growth of 54.18%. For the second quarter, that is Q2 FY '25, total revenue stood at INR 253.46 crores, a growth of 24.33%. EBITDA of INR 88.29 crores, a growth of 20.67%. EBITDA of INR 77.76 crores, a growth of 22.44%. PAT of INR 44.96 crores, a growth of 37.49% and EPS of INR 14.5, a growth of 37.49%. This robust growth reflects the success of our ongoing efforts to optimize our product mix, improve operational efficiencies and focus on high-value markets. macroeconomic environment. In the U.S., we are observing signs of stabilization. The U.S. Federal Reserve rate cuts totaling 0.75 percentage points, along with the rising home equity values should support economic activity and drive remodeling projects. We are closely monitoring these developments as they align with our opportunities in our industry. Strategic growth initiatives: Our focus remains on sustainable growth. We are actively launching new quartz products and expanding market efforts to reach a broader customer base. At the same time, we continue to prioritize operational efficiency and cost management to effectively navigate pricing pressures. Capacity and technology expansion: We are making significant strides in capacity expansion and technological advancements. INR 440 crores investment in Mekaguda facility. We are expanding our state-of-the-art quartz manufacturing facility in Telangana by adding a third Bretonstone production line scheduled to be operational by March '26. This new line will significantly enhance our capacity while maintaining high standards of sustainable manufacturing. The investment will be funded through a mix of debt and internal accruals. Technological upgrades: The Kreos line is progressing towards commercialization in Q3 FY '25 with exciting product launches planned in Q4 FY '25. The CHROMIA line designed for high-definition digital printing is expected to be operational by Q4 FY '25, enabling us to deliver unique and differentiated products. Market opportunities: We are encouraged by growing interest in newer markets, including Canada, France, Mexico and Russia, which present promising growth opportunities. However, we remain cautious in managing competitive pricing pressure from producers in India and Southeast Asia. Our strategic focus on innovation and differentiation positions us well to address these challenges. Granite business: Turning to our granite business. The environment continues to pose challenges as reflected in this quarter's results. We are implementing cost control measures and exploring opportunities to increase revenue in this division. While the near-term outlook remains cautious, we are committed to addressing these challenges with a focused and measured approach. With PESL's robust balance sheet and healthy cash flow, we are confident in our ability to execute quartz business strategies effectively while delivering sustained value for our stakeholders. Thank you for your continued trust and support. We look forward to addressing your questions.

[Operator Instructions] The first question is from the line of Naman Parmar from Niveshaay Investment Advisory.

Congratulations on a great set of numbers. So sir, firstly, I wanted to understand with the new capacity coming in, how much revenue potential can be done? And I think from existing capacity, you can do around INR 1,000 crores of revenue, if I'm not wrong.

That's the only question you have?

No, no. Secondly, I wanted to know on the U.S. demand side as the Caesarstone, the largest company in the U.S. for the quartz has announced its results. So it is not as up to them. So what's your take on the demand side on the U.S. And thirdly, I wanted to know the change in the presidential change in the U.S. So you expect any dumping duty to impose on the quartz to increase from current level? As of now, you have no...

Okay. So now coming to your first question, see, historically, we have maintained that the asset turn is about 1 to 1.25. So depending upon that, we'll have revenues around INR 450 crores to INR 525 crores is what we foresee at this time. But again, as you know, this plant is going to be operational about 2 years from now, approximately by the time we stabilize the capacity and everything. So it will be too early to comment what that number would be. But typically, we have historically seen 1 to 1.25 turn. Now coming to the second question on the U.S. demand. So I cannot comment on the results of Caesarstone. The results of our company are before you, so you can understand that U.S. is our primary market, and we have performed relatively better than our competition in those markets. And definitely, the demand is not coming back immediately because over a period of time, there has been inflationary pressure, the mortgage rates have gone up. And only in the last couple of quarters, we have seen -- Fed has taken some steps to reduce the mortgage rates. But still the -- if you look at the national average, the mortgage is about 6.9%, which is historically very high compared to what U.S. used to have in the past. So I think as the mortgage rates become more stable and come down, we'll see more activities happening. But then as we are positioned on a different footing compared to majority of our competition, we are focusing on mid- to top-tier products. So there, our differentiation strategy is able to bring us the faith of customer and also the related sales out of it. Now coming to your third question on when Trump is back, what would happen? So let me correct you, there is already an antidumping duty on our product. So we have approximately about 2.34% countervailing duty. The antidumping duty for this POR was set as zero. So there is a countervailing duty of 2.34%. Now after Trump comes back, it would be like premature for me to comment as to what he is going to do. But whatever happens, it's going to happen for everybody across board. So I don't think only one country or one company would be singled out. So I don't think we have to worry at this point about Trump's coming back.

Okay. And any other economy that you think will be performing good, like you have shown in the presentation that you will be tapping the Canada, France, Russia. How much they will be contributing in the revenue?

See, today, U.S. is the primary market. These markets are promising and growing markets. Canada is growing for us. France is growing for us. Russia is growing, but again, has logistical challenges to service that market. So I think for the near term, at least short to medium term, U.S. will continue to be focused while we develop the markets like which we have mentioned a little while ago.

[Operator Instructions] Next question is from the line of Harikesh from Kotak Mahindra Asset Management.

It's Rishikesh. So first question is now this expansion, once -- since you are pursuing, will there be any disruption to the existing line during the course of the expansion during or do you foresee anything? Second, is considering -- is it a brownfield expansion? So to that extent, could the asset turn be higher in this case?

See, this facility is going to come up at our existing facility in Mekaguda, Telangana. So when we had originally designed our Hyderabad facility, Mekaguda facility, we had provided enough space for the future expansion. So this line is going to come there. But of course, having said that, there's going to be a little disruption because we are going to expand in the same facility. And of course, we are also adding a couple more sheds so that once we have 2 lines functioning, we need some space for our inventory and other work in progress items as well. So disruption will be minimal. So we don't see a very large disruption happening. So that answers your first question. On the second question, while it is a brownfield facility, but the type of technology what we are bringing in, so there are some more new additions what we are doing in how we work and bring out the product. So at this time, we believe that it's going to be 1 to 1.25 turns. But then as we move closer, we can probably see if we are able to get some more benefit of expanding on the brownfield side of it.

Next question is from the line of Dixit Doshi from Whitestone Financial.

In some of our previous interaction, you have always mentioned that when it comes to product mix, 30% to 35% high value; 30%, 35% medium and 20%, 25% basic plus hospitality is a very good ideal mix. So have we reached that kind of product mix in the second plant because first plant was running at the ideal mix before the CapEx?

So we are pretty close to the ideal mix, except for that, the hospitality has still not picked up, but it is far better than what it was in last year same time.

Okay. So considering that, do you feel that from today to, let's say, March '26, when new plant will come, we are more or less at the optimum level in terms of revenue? Or you feel that there is still a room for growth in revenue with some change in the product mix?

See, always, there is a scope to improve. So this is always a journey. It's not a destination. So depending upon how the new products come out, whether it is our Kreos products and our printing products, there could be an improvement in the revenue possible and also how the product mix continues to evolve over a period of time.

Okay. And one last question. Considering the current whatever logistics and raw material cost and everything, do you feel we will be able to sustain the margins we have done in H1? Hello?

Participants please stay connected. The line for the management dropped. Ladies and gentlemen, please stay connected while we reach on the management back to the call. Ladies and gentlemen, thank you for your patience. The line for the management reconnected. May I request you to repeat your question once again for the management.

The last question was considering the raw material cost and the logistic issues, you feel that more or less we will be able to sustain our H1 margins?

Yes. I think at this time, we believe that the H1 margins more or less are in line with our expectations. And we believe that H2 would also be pretty close to that.

Next question is from the line of Vaibhav Gupta from Bowhead India.

Congrats on a great set of numbers. Sir, my first question is, how is the freight rate situation? Has it normalized now? And are we seeing ordering from distributors in U.S. who were earlier deferring their orders?

Yes. So I think the freight rate situation has definitely improved compared to what we have seen in probably 2 to 3 quarters back. And of course, because this is the end of the year now, so except for that situation where distributors typically say that we want less arrivals around Christmas and New Year. Otherwise, the ordering is not impacted by the freight rate situation anymore.

Got it, sir. And sir, how will the presence of new CHROMIA and Kreos lines change our product launch cycle for next year?

Kreos is under trials now. So our R&D team is making some trials and trying to understand the technology better and develop products. So we see that Kreos products, effectively, the large launches would happen in Q4 of FY '25. CHROMIA line is still to be installed. So it's going to be installed and operational, we are foreseeing it in Q4 of FY '25. So we expect that Kreos typically would help us sustain or improve our margins and realization. And CHROMIA is more of a decoration and also looking to service some other segments. So we'll have to see how it evolves in terms of the realization. But Kreos, we believe, is going to help us to definitely maintain and sustain the realizations what we see.

So sir, Kreos line is specifically for wall cladding and thin slab purpose or it can also be used for countertops?

It can be used for countertops. It can be used for wall cladding. So depending upon what thickness of the product you produce from Kreos line, the end-use application would be determined. And also the market is also a factor because there are certain markets where they use even thin slabs for the countertop or the furniture tops. And there are some markets where they prefer to use a thick material for the countertop. So what Kreos is going to do is they are going to -- it's going to give us a slab of different thickness. And now the application based on thickness will vary from market to market, application to application.

Got it, sir. And one last question from my side. Tax rate was a bit high this quarter. So what would be the tax rate going forward?

So we are expecting 25% also for the next -- like for the full year.

Next question is from the line of Kushagra from Old Bridge Asset Management.

Congrats on good set of numbers. Two questions. One on the new CapEx program. So maybe if you can give us some more idea about from the third line, how different are your products going to be versus what you're doing currently? And hence, how different would be the profitability on that 1 to 1.25 asset turnover, which you mentioned? And the second question is, you said mix of debt and internal accruals. So what kind of peak debt levels you're anticipating with this INR 440 crores of CapEx? That's question one. I can ask after you answer this question.

The first question, you have 3 parts. So basically, the new CapEx program is supposed to be at this time, foreseen to be completed by March '26. So we are adding some new robots in this line. We're adding Kreos also in this line. And then with our experience of the existing production line, we have made some more improvements for the operational efficiency as well. So all these are expected to improve the product efficiency and also probably help us to efficiently manage the costs and the other working environment. So profitability, see typically, we expect that the EBITDA from this would be in the range of INR 145 crores to INR 165 crores is what we are foreseeing at this time. And PAT also, we are expecting it to be in the range of INR 100 crores to INR 110 crores is what we are expecting at this time. But as you know that we are 2 years down the line, we're talking ahead. So there could be a certain change depending upon how the markets perform and how the demand conditions pan out to be. So in terms of the investment mix, we expect to do about INR 300 crores of debt and another -- the balance INR 144 crores, we are expecting to fund with our internal accruals.

Sure. This is helpful. And the second question is on your industrial segment mix. So you keep highlighting and talking about hospitality, retail and in certain cases, in the office areas as well. So maybe if you can help us understand how that industrial segmental mix has changed for you, let's say, in the last 3 years? And given that you're launching newer products more on the high end as well, how do you expect that mix to change over the few years -- next few years?

See, as this commercial segment improves, typically, the demand for offices or hospitality and all that will improve. So that's also an important part of our customers' business. So as a specification business, what we call it as where the products are specified and then they get used by the fabricators and installed. So as that segment improves, definitely, the demand from our customers those who are servicing in that segment would improve. And if you look at -- before COVID, there was a good amount of improvement in the hospitality because a lot of new hotels were coming up in the U.S. and then their existing hotels were also getting refurbished. So there's a lot of demand of renovation and remodeling, not only in the housing, but also in the hospitality, which is hotels and that part of the business. So that post-COVID, a lot of projects got on hold and also coupled with the interest rates going up, a lot of builders actually shelved their projects or they kept their projects on hold. Now with the change in the Fed's approach towards the market and the rates coming down and probably with Trump in back, there is some euphoria that some improvement would happen in the U.S. economy and the construction and remodeling would start. So if that starts, typically, that would help us to also tap into that growth opportunity. So I think at least I would say that to really see the results, we have to spend at least 3 to 4 more quarters because by the time projects are back on track and they need the material, it typically would take a 12-month period. So we all have to hope that the office construction, home remodeling, hotel construction and all those come back.

Next question is from the line of Shreyans Jain from Svan Investments LLC.

Sir, my first question is on the CapEx. Sir, just wanted to understand, so this is a brownfield and we're doing about INR 440-odd crores of CapEx. So my understanding was a greenfield would require this kind of amount. So if you can just explain a greenfield and the brownfield, sir, what would be actually the amount that you would need to spend, sir?

So it depends upon what type of CapEx you are incurring. So if you are like -- there are companies who have been able to also do the CapEx at probably half of it or 2/3 of it. And there are companies would also invest. So it depends upon what you are adding to the line. So if you look at when we originally started, we did not have Kreos. We did not have 6 robots what we have today. So this facility, what we are talking would have Kreos also by -- from the time it is actually commercialized, it would have 6 robots also in place. So all that typically warrants this level of investment.

Okay. So if we were not to add... hello?

Yes, go ahead.

I'm saying if we were not to add robots and Kreos, then this amount would probably have been a little lower, right?

Yes, of course, because there is an investment in the equipment. So that is where the investment is higher compared to what you would be envisaging.

Okay. Okay. And this would be lower by how much, sir? If you could just give us some sense or it's on a per square meter basis, can you help us what is the CapEx?

I think I would refrain from answering that question because that's more on our commercial side of it. I'm so sorry about it.

Okay. Okay. No worries, sir. Sir, my second question is past interactions have suggested that peak revenues from our current capacities could be INR 200 crores, INR 225-odd crores. So this quarter, we've done about INR 250 crores. So I'm just trying to understand, was there a spillover of last quarter because I think you had some freight issues in the last quarter. So out of this INR 250 crores, is there some revenues which were pertaining to last quarter and which got actually booked in this quarter?

Yes. So there is some spillover also. And then, of course, it also depends purely on the product mix for that quarter. So we had some benefit of the previous quarter also coming in.

Okay. And sir, last question on the gross margin side. Q-o-Q, we are seeing some dip. So any reason for this 67.6% has gone to 64%. So I'm assuming product mix would have been equally or maybe better than last quarter. So what justifies this decrease in gross margin sir?

I think this decline is not really a big number to be concerned because it also depends upon what type of raw materials you are using in that particular period because if you're using a lot of your imported sand in that particular quarter, then it would be -- so I think the number is very negligible in our view.

Next question is from the line of [indiscernible] individual investor.

So I was saying that as you said, freight rates are pretty much normalized right now, right? There is -- we are a little bit far from correction. And the second question was if you can longer-term frame, 3 years down the line, can we say that maybe 70% to 75% would be U.S. and 25% would be rest, including domestic -- and third question would be -- so broadly the optimism, as you said, for the first time you are seeing the markets -- U.S. market will stabilize and with the [indiscernible] happening. Can we see the [indiscernible] around about INR 200 crores of quarterly run rate should be doable at least in the new facility of CapEx comes up and full-fledge of the 2 new technologies commercialize. So if you can just throw light on all these 3 questions, that would be very helpful.

Actually, I did not get your first question because there's a lot of disturbance when you were speaking. So...

So first question was on the freight side. So the freight rates are very much normal to the normal levels or just corrected from previous quarter.