Pokarna Limited (532486) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Pokarna Limited's Q3 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, Enrico. Good day, everyone, and a warm welcome to Pokarna Limited's Q3 and 9 months 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 Store Limited; and Mr. Vishwanatha Reddy, 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 of the business and outlook. Over to you, Paras.

Thank you, Gavin, and good morning, everyone. Thank you all for joining us today. It is always a pleasure to connect with our investors and share insights into our performance, strategy and outlook. I'm pleased to report that Pokarna Engineered Stone Limited has delivered another strong quarter, demonstrating consistent execution, operational discipline and a clear focus on value creation despite continued macroeconomic uncertainty. Let me first take you through a consolidated performance for the 9 months and third quarter ended December 31, 2024. Nine-month FY '25 versus 9-month FY '24. Total revenue stood at INR 667.45 crores, reflecting a 26.81 percentage year-over-year growth. This growth was driven by the exceptional performance of PESL, our wholly-owned subsidiary. EBITDA came at INR 242.45 crores, up 36.64% year-on-year, completely supported by improved operational efficiency and margin expansion at PESL. EBIT reached at INR 209.96 crores, an increase of 43.84% year-on-year, reflecting higher profitability at PESL and disciplined cost management across the business. PAT rose significantly to INR 128.65 crores, marking a 79.33 percentage year-on-year increase, further reinforcing PESL's strong contribution to our overall financial. Earnings per share for the period stood at INR 41.49, up 79.07% year-on-year underscoring the impact of PESL's growth in consolidated earnings. Now let's move to the Q3 FY '25 versus Q3 FY '24. Total revenue for the quarter was INR 223.61 crores, around 35.84% year-on-year with PESL continuing to drive strong market traction for high-value Engineered Stone products. EBITDA for the quarter came in at INR 88.35 crores increasing by 59.22% year-on-year benefiting from an improved product mix and operational excellence at PESL. EBIT stood at INR 77.73 crores up 72.92% year-on-year, reflecting strong execution and [indiscernible] primarily led by PESL's performance. PAT for the quarter reached at INR 50.60 crores, a substantial increase of 138.34% year-on-year, demonstrating PESL's strong business momentum and its impact on overall profitability. EPS for the quarter was INR 16.32, up 138.25% year-on-year, reinforcing the strength of PESL's performance in delivering long-term shareholder value. What makes this performance even more noteworthy is that it was achieved despite almost 15 days planned closure of our Unit 2 facility for the installation of KREOS line. This underscores the resilience of our operations and our ability to execute strategic updates while continuing to deliver strong financial results. These results clearly reflects the pivotal role of PESL in driving our consolidated business and financial performance with strong revenue growth, enhanced margins and disciplined execution. Our strategic focus on high-value Engineering Stone products and operational efficiency at PESL continues to yield the exceptional results, positioning us for sustained long-term growth. We understand that some investors may have questions regarding potential changes in the U.S. trade policies and the new administration. While it is too early to predict any specific policy changes related to Engineered Stone import, here is what we do know for certain. PESL maintains a strong and compliant position in the U.S. market. Anti-dumping duty assessment rate for the third revenue period remains at 0%. This underscores our commitment to fair trade practices and strong regulatory compliance. Regarding counterweighting duties, no parties have requested a second or third review. As a result, the CVD of 2.34% said during the original investigation period, remains the final assessment rate for the third review period as well. Now let's move on to key strategic and operational highlights. Product launches at KBIS 2025 for expanding our market presence. We're excited to share that Engineered Stone products from KREOS and Chromia lines will tell you at KBIS 2025 in Las Vegas on February 25, 2025. This marks a significant milestone in our innovation journey, allowing us to showcase cutting-edge Engineered Stone design to a global audience, expanding the presence in the international markets. We continue to see stable demand and strong interest in our Engineered Stone from Czech Republic, Canada, France, Mexico and Russia amongst other countries. This market offers attractive growth opportunities. And we are actively working to expand distribution and deepen customer engagement, investment and capacity expansion and technology. INR 440 crores expansion in Telangana, a third Engineered Stone production line is on track, reinforcing our long-term capacity growth and sustainable manufacturing initiative. All the initiatives will further enhance our market positioning and operational efficiency. Let me now discuss something about the Granite business. Turning to our Granite business. We acknowledge that the market remains challenging, and this is reflected in our quarterly results. To address these challenges, we're implementing targeted strategies including strict cost control measures to drive efficiency and exploring new revenue streams to optimize profitability. While the near-term outlook remains cautious for the Granite business, we are committed to sustaining operational improvement and unlocking new opportunities. As we look ahead, we remain well positioned for long-term success. Our Engineered Stone business' financial performance remains robust with strong revenue growth and improving profitability. Our strategic initiative in Engineered Stone innovation, expansion and capacity enhancement will drive sustainable growth. With a strong consolidated balance sheet, disciplined execution and a clear vision, we are confident in delivering long-term value for our stakeholders. Thank you for your continued trust and support. We now look forward to address the questions.

[Operator Instructions] The first question comes from the line of Shreyansh Jain with Swan Investments.

Yes, can you hear me?

Yes, we can hear you now.

So my first question is coming back to the tariffs, so India is at 2%. I'm just trying to understand Vietnam has increased its share in terms of U.S. imports. So what's your sense on the duties for other countries? And until now, we haven't heard anything on Vietnam being -- put some tariffs on Vietnam. So what's your sense there? Is my understanding correct that a lot of Chinese imports would have started to come in from Vietnam?

Is that the only question you have, Shreyansh?

No, I have 2, 3, but I would want some clarity on this and then probably make second question.

See, Vietnam currently does not have any antidumping or current counterveiling duty, unlike India. And your sense that lot of Chinese players would have probably moved to the other geographies including Vietnam and also some Vietnam players would have increased their capacities or added more capacities.

So in that sese, that understanding is correct, right, that some of the Chinese players would have moved to Vietnam?

Yes, yes. That is okay.

Okay. Paras sir, second question on this is, if tariffs were to be levied and say we go from 2% to say anything like 10%. So when we sell at about $8 to $12, what's your sense on the margins? I mean, do we have some understanding with our clients that it should be a pass-through or who takes the hit here because ultimately, the end customers -- and my sense on the quartz imports total into the U.S. is just 6% to 7%, 8%. So the other hard surface products that are being imported, do they also have some duty or how should we look at this whole piece?

See, at this stage, no official changes have been announced regarding tariffs on Engineered Stone imports. So what you and I can do is we can only speculate, which I don't think is right in any business. So I would not really be able to crystal gaze anything about what tariffs would be likely for India. But overall, I can say is that we also do not have any understanding of the customers about tariff pass-throughs because I think we are a very compliant company and under U.S. trade laws, you're not supposed to get compensated or you not supposed to compensate for the duties as well. So we don't believe in those type of business practices at all. So what happens will happen across the Board, across the country, and it will not be been specific to a company. And I think all we can do is just wait and see what Donald Trump comes with.

Okay. And my last question before I jump back into the queue is, say if production were to happen from the U.S., are there any existing players manufacturing Quartz Surfaces in the U.S.?

Yes, there are multiple players already manufacturing in the U.S. and on and off some new lines keep coming up in the U.S. So it's not that U.S. is not a manufacturing hub but is it sustainably possible to manufacture in the U.S. is something which is a question mark in our view, but it does have some manufacturing facility.

The next question comes from the line of Sneha Talreja with Nuvama.

Congratulations on great set of such numbers. Just a couple of things from my end. I think your line is about to come for both new product lines and about to start from Feb 25. So just wanted to understand what will be the current utilization that we are operating at? And what's the order visibility that we have for these new product lines?

At this time, like in Q3 also KREOS did not contribute to revenues or margins. Similarly, Chromia has also not contributed to any margins in the Q3. So we expect that typically both KREOS and Chromia will contribute positively to our margin profile over time in FY '26. So I think nothing we expect in FY '25 from these 2 lines in terms of large revenues or large margin contribution.

I just wanted to understand, we are already sitting with high margins, about 34%, 35-odd percent that include the other income. Of course, you mentioned it as 40-odd percent. Where could these margins actually peak out because we're looking at more positive contribution coming in from both these lines?

See, if you have been following us in the previous calls or in the discussions we've had, we've always maintained a margin -- EBITDA margin to be around 35%. So -- and we always try to beat that to the extent we can. So while the margin may positively improve with KREOS and Chromia coming, but I think that is something which we'll have to see how it really pans out. What I can say at this stage is that based on our current estimates, we aim to maintain EBITDA margins around 35% plus in the near term.

Understood. And what about the last utilization levels?

Utilization, we are in the optimum. We actually don't give the absolute number for strategic reasons. But what I can say is that we are at the optimum level.

The next question comes from the line of Naman Parmar with Niveshaay Investments.

Congratulations on a great set of numbers. So firstly, I wanted to understand how has been the demand overall in the U.S. market? It has been started to pick up in, let's say, September or October. So how has been the demand scenario currently over there? And secondly, I wanted to understand how has been the granite market from the Chinese players? So how is the outlook over there also?

So the demand scenario for Engineered Stone business in the U.S. seems to be picking up slowly while the macroeconomic uncertainties are still not completely gone away. But there's a slow uptick and we expect 2025 to be a better year is what we are getting at this point in time.

Regarding the Chinese demand for granite, unfortunately the Indian government still does not give visas to Chinese to visit India, and that is one of the prime reason that not many visitors or not much sales is happening on account of granite to China. Whatever is happening is a little bit based on the local agents who are able to market this fast. But I don't foresee much support [time] because till the Chinese visitors don't come to the quarries and inspect the material, the offtake will continue to be weak.

Okay. And lastly, I just wanted to know how has been the demand on overall other economies also, even though U.S. is the major contribution to you, but how much the other country will be contributing in the future? And how have they performed in the current quarter?

See, as a part of our strategic approach, we do not actually disclose regional specific contribution outside the U.S. In that sense, we continue to strengthen our presence in international markets, broadening our customer base across the regions.

Okay. No, means other economy, I think you previously told that Russia and Canada were doing very good. So in current quarter, which other economy...

If you followed my opening remarks, I did mention that Germany, Russia, Canada, Mexico are doing well, but we do not actually break and give you the numbers. That's what I said.

The next question comes from the line of Sonal Kohli who is an investor.

Congratulations on another great quarter. I must add since you said that you've always been doing 35% margins, you have been conservative and essentially given 25% margins. But nevertheless, from [indiscernible] it by a large mile over the next few years. Sir, I have 3 questions. Firstly, is my understanding correct that there's only one line of quartz in the U.S. and currently it's for sale? That's the first question. I will ask you the other 2.

If I rightly got your question because your voice is little feeble and some background. So your question is, is there only one production line in the U.S. manufacturing quartz?

Yes. And is it up for sale because it's not been able to utilize properly?

Is it up for sale? Is that your question?

Yes. I heard from one of the updates.

Okay. Okay. See, basically, there are more than one production line in the U.S. And I think what you are referring to one production line up for sale, we are aware of one production line which was up for sale for a long time and I'm not aware if there's any other production line that is up for sale. So there are multiple production lines currently working in the U.S. And I think there are probably 1 or 2 production lines under construction also in the U.S.

So then my follow-up question is, what could be [prohibiting] factors for these U.S. players to ramp up in case a steep tariff was to happen? I'd be talking about the worst-case scenario over the years. Is it like available on quartz end, is it like designs, it is like hazardous nature, overregulation, labors? If you can just tell us the top 3 to 5 most important factors, if any at all, which would come in the way of U.S. being able to ramp up this quarter? That was my first question. Secondly, what do you benefit by anyway because of Canadian imports if these were to sustain, the tariffs were to sustain? Thirdly, would your new lines increase your revenue or relations by 20% as and when they stabilize because of the new technologies? What are the initial signs of total CapEx? I can repeat later, you could just answer it one by one.

Okay. So if I rightly got your questions, there could be multiple factors for anybody to expand their business. And more specifically, the question relates to the U.S., one could be that somebody may be speculating that there could be a potential tariff. But if you go by the past, like the China or India which went through tariff and I think it's over 5 years plus now that tariffs were imposed on product outside of U.S., so we did not really see any market expansion for the production out in the U.S. So while tariffs were imposed all the way in 2019 on China and then 2020 in India, but that did not lead to any player adding any capacity exceptionally to their lines just to meet the demand which is coming because of the tariffs. Secondly the factor which could be driving somebody to add capacity, definitely, you want to be closer to the marketplace and the U.S. is a marketplace. So they may have a strategy or they may have a view that if we are in the marketplace, we will probably be able to compete better. So this is what I think there could be 2 reasons because many other factors, whether it is availability of raw materials and all probably are not that lucrative in those markets, including availability of both semi-skilled, unskilled and skilled labor for this type of industry. So I don't see any -- personally, I don't see anything exceptionally changing that people will start putting up their capacity just because tariffs are supposed to be coming in. Now coming to your second question about Canada market getting impacted because of the tariffs which the new administration in the U.S. has imposed on Canada. See, production of quartz in Canada is miniscule. And that does not really contribute a large to the U.S. per se. So we don't see anything demand spilling from Canada to any other geography because of the tariff on some products there.

Is it a $50 million number? Or no, I'm mistaken about this number?

I was -- the number what we track is not a $50 million number to be honest because I think there could be more of a transfer pricing story between -- because the company which is a producer in Canada actually has the majority of sales in the U.S. It's a large conglomerate for them because it's a small part of the business.

The remaining two questions, sir. New lines, how much price increase? Is 20% a fair assessment and total CapEx signs of it?

You mean to say the third production line of Engineered Stone, which is going to be operational?

Sir, the new technologies you invested in, sir? Is my understanding correct that there could potentially [indiscernible]-- increasing by 20%?

So we anticipate that both KREOS and Chromia will positively add to our margins over a period of time once they are operational and stabilized. So I think while there will be an initial stabilization period, we expect meaningful contribution to margin starting from probably FY '26 Q2 or Q3 onwards as we scale up because there are a lot of R&D and lot of marketing which we will have to do for the product. So it is going to take some time before you start a meaningful contribution. Yes, but we do expect some positive addition to the margin because of these 2 lines.

Lastly, sir, total CapEx early signs and the new capacity, would it take as long as the previous capacity increase to stabilize or the reason why it could be quicker this time, if at all?

Basically, we expect the stabilization of the new line of Engineered Stone third production in stone line to stabilize relatively quicker because if you look at our experience of the first line and then the second line, the stabilization has been very quick in the second line. And third line also the stabilization will be quicker because the equipment what we are adding, some of them, we have already recently assessed in terms of robots and other things. So we expect that the stabilization will be relatively quicker than the first line. And working capital cycle and all those things, I think those will continue to be what you see today. So I think -- and more can be said about third line probably the same time next year when we are speaking and we are closer to the commercialization, and then we see how the market dynamics are moving.

Lastly, total CapEx, signs of what you're seeing as of now, will there be a huge pent-up demand because nothing has happened in the last 5 years?

I think there is some background, I'm not able to...

If you can talk little softly probably. We are unable to follow what you are talking.

Sir, may we request you use your handset if you're using any Bluetooth device right now?

Is it by any chance little better right now?

No, it's actually not clear. There's a lot of, I think, echoing of the sound.

I'll take it offline with you then.

The next question is from the line of Ajay Vora from Nuvama. As there is no response, we move to the next question that is from the line of Hrishikesh Chandrakant Bhagat from Kotak AMC.

So you spoke about micro -- challenges in the micro markets or in terms of U.S., but if you can throw some light in terms of which segment of demand is now pulling up? Because I clearly understand housing still remains fairly in terms of nascent recovery stage, but any other segments where you see recovery in U.S. side?

At this time, what we are largely seeing is that there is a demand for residential, which is relatively growing. And the new construction, while the new housing permits and the new starts are getting to come and there is an increase in the number of projects being launched, but then the cycle is going to take some time by time that comes into the picture. And commercially, something which has not been really moving a lot in the past. And that is one phase we think once the new administration has provided some clarity on how they're seeing that phase, they think that the commercial moments has to happen. Hospitality in slowly picking up. Residential continues to be strong. So basically, new construction and commercial is area where we think some improvement is yet to come.

Okay. And the second is post commissioning of new capacities, is there any internal targets you have in terms of non-U.S. mix in overall revenue mix? And specifically, is there any target for India also?

Basically, if you have been following us in the previous calls also, we maintained that we always want to diversify our risk. But then for all practical purposes, U.S. will continue to be the major market in terms the consumption. So our -- we'll be having a positive bias towards U.S. for some time. But having said that, we are definitely looking at many other geographies where we want to expand. And India is definitely one area where we want to actually significantly expand our presence.

But overall can non-U.S. be, say, 15%, 20% over the next 2, 3 years, probably with new capacity?

That is what the target is that we have to bring it to the levels closer to what you are mentioning.