Carborundum Universal Ltd

NSE:CARBORUNIV

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, good morning, and welcome to post Earnings Conference Call of Carborundum Universal hosted by Spark Capital Advisors (India) Private Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Ravi Swaminathan from Spark Capital Advisors (India) Private Limited. Thank you, and over to you, sir.

[Ravi Swaminathan, analyst]

Thanks. A very warm good morning to everyone. On behalf of Spark Capital, I would like to welcome you to the Q1 FY '23 Earnings Call of Carborundum Universal. We have the management today being represented by Mr. Sridharan Rangarajan, Director, Financing and Strategy; Mr. Ananthaseshan, Managing Director; Mr. P. Padmanabhan, CFO; and Mr. G. Chandramouli, Advisor, Investor Relations.

I would like to hand over the call to Mr. Ananthaseshan for his initial remarks, post which we will open the floor for Q&A. Over to you, sir.

[N. Ananthaseshan, executive]

Thank you, Ravi. Good morning to all of you. Before we begin, as a practice, we will now have Mr. Chandramouli read out our disclaimer, and then I will take the call.

[G. Chandramouli;Investor Relations, executive]

Good morning. During this call, we may make certain statements, which reflect our outlook for the future or which could be construed as forward-looking statements. These statements are based on the management current expectations and are associated with uncertainties and risks are more fully detailed in our annual report, which may cause actual result to differ. Hence these statements must be reviewed in conjunction with the risks that the company faces.

Thank you.

[N. Ananthaseshan, executive]

Thank you, Mouli. Thank you all for joining us on this call, and welcome to the first quarter FY '23 earnings of CUMI.

Before highlighting the performance of the period, I hope that you and your family members are safe and healthy.

Today, we are joined on the call by my colleagues, Mr. Sridhar Rangarajan, Director of Finance and Strategy; Mr. P. Padmanabhan, CFO; and Mr. Chandramouli, Investor Relations. I will start with providing an overview of the company performance and the commentary on the outlook, followed by Padmanabhan, who will walk us through the financial performance and Sridhar will take you through the performance of the newly acquired subsidiaries and VAW, Russia.

The quarter started on a volatile note with geopolitical tensions impacting global economy. The current macro environment is more challenging compared to the previous quarters, with headwinds like inflation, raw materials availability, supply chain disruptions, foreign currency rate fluctuations, higher cost of capital and expectations of a global recession. We had sensed and shared some of these during our last call. Economies across the world, including India, are facing inflationary pressures. Hopefully, as the supply side situation improves, inflation should come down. This was also highlighted by our recent RBI report that India is today better positioned to mitigate external risks and global spillovers as compared to other economies. That is the good news.

Coming to the company's performance, we are glad to report yet another quarter of robust performance and a reasonable start to FY '23. Our performance yet again is backed by strong demand of our products, solutions and also backed by manufacturing and research capabilities and the timely execution in domestic and overseas markets. For the quarter, our revenues has grown by 60% quarter-on-quarter to INR 1,129 crores at a consolidated level and by 29% to INR 600 crores at a stand-alone level. The quarterly revenues at consolidated and stand-alone level has crossed the milestone of INR 1,000 crores and INR 600 crores, respectively. The growth was driven by all 3 segments. All the major overseas subsidiaries have performed well on top line and also the newly acquired subsidiaries have contributed additional sales of INR 181 crores during the quarter.

As far as the bottom line performance goes, profit after tax and noncontrolling interest grew by 10% to INR 86 crores against INR 78 crores in Q1 of previous year. The negative variance when compared on a Q-o-Q basis have come from our power generation subsidiary, SEDCO, due to significant increase in gas prices and reported losses from newly acquired subsidiaries, which Sridhar will cover later. Also, the incremental growth in top line of our Russian subsidiary did not translate proportionally to bottom line due to the strengthening of the ruble against all currencies. At the stand-alone level, profitability for the quarter recorded strong growth across minerals and ceramic segments, and the PAT increased to INR 73 crores from INR 63 crores in Q1 of last year. However, the profit margins were impacted due to cost inflation.

Coming to the demand side, the outlook remains positive, but could be phasing supply challenges and cost pressures going forward due to inflation and commodity price increases. The auto sector performed well compared to the previous year, but still in some segments due to pre-pandemic -- below pre-pandemic levels. The construction-linked sectors have grown, but margins are likely to be impacted due to increasing input costs. However, led by policy tightening and expectations of a slowdown in global growth, some cool off has been witnessed in the commodity prices since the start of the Russia-Ukraine conflict. In the base metals, iron ore has corrected by 49% and aluminum by 37% from their respective piece, and this gives us some respect. The outlook remains positive for other sectors like steel, cement, power, glass, carbon black, solid oxide fuel cells, et cetera, to whom our company caters to. We do have good order bank at present, and we expect the demand to be robust in coming quarters for all the 3 business segments. However, maintaining or increasing margins will be a challenge, considering higher input costs. The certainties due to the geopolitical tensions, but have to be managed through price hikes and prudent cost management.

On the health front, the COVID cases in India once again saw an increase in June '22 after witnessing a decline in May. However, the rise was not significant, thanks to the large-scale vaccination drive. The lesser severity and fewer fatalities has revived confidence in improving risk conditions, but the businesses are well prepared with safety protocols and vaccination, with nearly 99% of our workforce having received at least 1 dose and around 91% with both the doses.

In terms of CapEx, at a consolidated level, we spent INR 56 crores in the first quarter.

I will now request Mr. Padmanabhan, our CFO, to walk us through the financials.

[P. Padmanabhan, executive]

Thank you, Ananth. Good morning, everyone. Let me summarize the financial performance for the quarter ended June 30, 2022. The consolidated sales for the quarter has increased by 60% to INR 1,129 crores from INR 706 crores in the corresponding period of last year, mainly driven by the standard steady performance across business segments and additional sales of INR 181 crores from newly acquired subsidiaries.

Profit after tax and after -- noncontrolling interest for the quarter was at INR 79 crores as compared to INR 77 crores in the corresponding period of last year. PAT margin dropped from 10.9% during Q1 of previous year to 7% in the current year on account of the cost increases and the losses at the newly acquired subsidiaries, which will be covered in detail later. The stand-alone sales increased by 29% to INR 600 crores from INR 465 crores. PAT grew 16% to INR 73 crores from INR 63 crores. PAT margin decreased from 13.6% to 12.1% during this quarter, mainly on account of increasing input costs.

Coming to the segmental performance. Abrasives consolidated sales for the quarter increased by 88% to INR 513 crores from INR 273 crores in the corresponding period of last year. Stand-alone sales increased by 20% to INR 269 crores from INR 224 crores in Q1 of last year. Russian subsidiary Volzhsky Abrasives and domestic subsidiary Sterling Abrasives registered double-digit growth. The newly acquired subsidiaries, RHODIUS and AWUKO added additional sales to the top line. At the consolidated level, the PBIT for the quarter was INR 18 crores, decreasing from INR 38 crores, mainly due to the cost push in domestic and overseas subsidiary performance.

In the Electro Minerals division, the consolidated sales for the quarter increased by 41% to INR 406 crores from INR 288 crores in the corresponding quarter of previous year. Volzhsky Abrasives, Russia and Foskor Zirconia, South Africa registered significant growth. At stand-alone level, sales increased to INR 179 crores from INR 134 crores in Q1 FY '22. The consolidated PBIT of the Electro Minerals segment for the quarter increased to INR 59 crores from INR 49 crores in last year. Profitability growth was significant at the stand-alone level, driven by the volume growth and higher realization. Russian subsidiary recorded a drop in profits on account of the rupee depreciation.

Ceramics consolidated sales for the quarter grew by 40% on a quarter-on-quarter basis from INR 173 crores to INR 243 crores. The stand-alone sales grew by 37% on a quarter-on-quarter basis to INR 193 crores despite logistics and cost-related challenges. Subsidiaries in Australia and America also registered significant growth. Consolidated PBIT of the Ceramics segment for the quarter increased to INR 58 crores from INR 33 crores in Q1 of last year, mainly on account of growth in volume, realization, better product mix and --which was further aided by the ForEx benefit.

On the finance side, there was a working capital debt of INR 148 crores in the stand-alone books as of quarter end. The total debt on a consolidated basis was at INR 254 crores as compared to INR 212 crores as of March. The debt equity ratio was at 0.09 for the consolidated as of Q1.

On the ForEx cover, CUMI is typically a net importer in dollar terms and net exporter in euro terms. We cover the net exposure as appropriate and in accordance with the ForEx policy.

On the cash flow front, our strong balance sheet is evidenced by the net cash position and low debt equity ratio. The net cash available was at INR 118 crores.

This concludes my update on finance. I'll now request Mr. Sridharan, our Director, Finance and Strategy, to walk us through the performance of the Russian subsidiary, VAW, and the recent acquired entities.

[Sridharan Rangarajan, executive]

Thank you. Thank you, Ananth, and Padmanabhan. Good morning to all of you. I would walk you through both Russia as well as the recent acquisitions update on them. First of all, let's start with Russia. I would say the team in Russia has managed the business well in a very, very challenging environment, complying with all possible restrictions imposed on them. We saw that the local currency, the sales has grew by 22% on a quarter-on-quarter basis on account of higher volume and realization. Sequentially, sales grew by 9% on account of higher volume, as well as some realization -- lower realization put together. We see that the silicon carbide segment also has done very well, both in terms of volume as well as in terms of the realization. We saw that the Abrasive business grew double digits. Both the segments achieved higher sales for any quarter so far, that is silicon carbide as well as the Abrasives.

Considering the current challenges, particularly the logistics-related challenges to sell outside of the Russia due to Russia-Ukraine conflict, the business had explored opportunity to sell more with domestic market and increased its volume share in Russia level from 45% to 55%, as well as selling more to India, and they are able to sell within Europe as well with a small decrease from their earlier position, complying all the logistics norms that they need to follow. There has been no impact on the operation and installed capacity utilization due to this conflict. Also collections are on time. In the logistic front, they have definitely improved far better from the initial stages when we talked to you about 3 months back. They were able to develop logistic routes, which will work properly both to Europe as well as to India.

Coming to the bottom line, the performance of the operational PBIT definitely improved far better, at least by 800 and 340 bps in Q1 last year -- compared to Q1 last year. However, the profit after tax, in local currency, decreased, largely due to the restatement of their receivables and payables in foreign currency to ruble, this is a big impact. The impact due to that ForEx loss was RUB 372 million, roughly one can state it's about INR 37 crores to INR 40 crores of impact. You would note that when this conflict started, it was about RUB 75 to RUB 77 to a dollar, it went as high as about RUB 135. It fell down to RUB 56. And right now, it is in the range of RUB 60, RUB 62. So there is a wide fluctuation as far as the currency movement is concerned. And this cost, the receivables, both in terms of dollar and in euro, have to be restated from their earlier position of what they booked in March to June, and that restatement effect is what we are seeing. So as and when these position changes, that is, if suppose it starts improving in this quarter, obviously, there will be a restatement gain that we will have from the earlier close. So this is a normal, I would say, unrealized position at this point in time. So it could change depending on the quarterly movement that would happen.

We feel the outlook remains very positive in the upcoming quarters. The team in Russia is exploring all possible options in minimizing the cost and optimizing the opportunity. We expect yearly performance to be in line with the business plan and better than previous year, both in terms of the top line, as well as profit after tax.

Now coming to RHODIUS. Just to recap, during the year, CUMI made a significant acquisition of RHODIUS Abrasives in Germany at an enterprise value of EUR 55 million and took control of the company effective from April 1, 2022. RHODIUS manufacturers in Germany, globally best quality cutting and grinding disc. They lead in product innovation and quality with unique professional segment product suit. They have proprietary production process setting industry benchmark. They have a strong legacy of 7 decades of successful business serving more than 100 countries. We took control of the company 3 months back to like to tell you that RHODIUS Abrasives was supported by RHODIUS Holdings in terms of common financial and IT leadership across their various businesses. It used the common infrastructure, both IT and electrical and electronic support and resources. These resources will be available until December and CUMI has to create the team and the infrastructure by then to in-source these resources and infrastructure. The progress so far in the last 3 months is very good. We have now a CFO for the company, recruited and joined the company. We have also now an IT head, recruited and joined the company. We have appointed a consulting company to work on providing the IT infrastructure. We have engaged recruiting agents to set up a proper team. We are progressing well in this regard.

We are also happy to share that the RHODIUS delivered better than our internal plan and last year, achieved net sales of EUR 18 million. We expect the full year sales to be EUR 70 million to EUR 75 million for this year. I would like to recall that we communicated in our last call, we said the EBIT margin of RHODIUS used to be 7.5% to 8% with high-teen return on capital employed. We also said that we expect a drop in margin, as well as ROCE. We expect the EBIT margin of 12% to 14% by FY '26. As far as this quarter is concerned, the sales are better than planned. However, we made a loss of INR 6.5 crores. This partially in line with our forecast. RHODIUS was impacted by higher cost of input material and logistics costs. RHODIUS has implemented a planning -- planned price correction. But of course, the catch-up game is on. Of course, this can only be progressively be done. We expect the full year impact of this would be around EUR 3 million. Besides this, as explained earlier, we expect additional costs to setting up the leadership team, the infrastructure costs, as well as the depreciation of intangibles. Considering all these, we expect the full year would be a breakeven. Losses in Q2 and Q3 will come down, and we expect a profit in Q4.

As far as AWUKO, just to recap, during the year, the CUMI acquired main assets of AWUKO Abrasives from insolvency administrator. The assets included land and building, plant and machinery, fixed assets, leased assets, brands and trademarks, patents, technical know-how, et cetera. CUMI paid EUR 8 million, and we also paid the settlement cost for the reduction of labor force. AWUKO has got 2 makers, flat belt and loop drying machine with wide width capability. CUMI will gain access to the quoted abrasive capacity in Europe with global distribution base and an experience process and application engineering team. CUMI is currently working on stabilizing the AWUKO's business and expect them to take a couple of years. CUMI expect AWUKO to break even by FY '24. CUMI expects to reach a sales of EUR 22 million to EUR 25 million by 2026, with high-teens returns on investment. All these statements, what we made last time still hold fine, we are progressing right on target.

We have taken over the company 5 months back. We are in the process of strengthening the local leadership, as well as facilitating by providing shared services in the areas of finance and HR. This will be common to RHODIUS and AWUKO. We are reestablishing relationship with suppliers, who stopped supplying as the company was earlier in financial problems. Setting up the supply chain is the priority. We are doing that. We expect the supply chain will become normal only in H2. We are also reaching out to the customers and distributors. This process is going well. CUMI's name and Murugappa Group backing helps a lot in this process. We feel we will be able to set up the full leadership team, reestablish the supply chain and bring back the customers by Q4 of this year. We feel this -- the process of morale building, reestablishing supply chain and customer relationship is progressing in the right direction. We are now a dedicated leader appointed for the integration of AWUKO and RHODIUS. This quarter, they achieved EUR 2.7 million sales. We expect the full year sales to be EUR 12 million. We expect the full year loss to be INR 20 crores to INR 25 crores and Q1 loss is about INR 4.8 crores. As we earlier said, that AWUKO will break even by FY '24.

Now I'll go to PLUSS. As far as PLUSS, the performance -- the sales for the quarter was INR 11 crores. We expect the full year sales to be INR 50 crores. We expect that they will break even at full year level. For Q1, there was an operational loss of INR 2.6 crores. We feel we need to nurture this company. CUMI believes that PCM is a growing technology. PCMs are thermal storage materials with versatile applications in pharma cold chain, refrigeration and food supply chain, medical devices, buildings and HVAC applications. As communicated earlier, CUMI would take a year to present and discuss the future opportunities for PLUSS.

So this is the update from my side as far as performance of Russian subsidiary and the 3 recently acquired subsidiaries. All of them are on track and as expected in terms of our own decision-making process. We feel that I think we need to give some time to make sure that we stabilize these operations well, and then we will start reaping the benefits.

With that, I will conclude my opening remarks and probably we can open up for question-and-answer.

[Operator]

[Operator Instructions] The first question is from the line of Sujit Jain from ASK Investment Managers Private Limited.

[Sujit Jain, analyst]

Just to get the numbers right, ex of these 2 subsidiaries, German subsidiaries, at the company level, if you can give a sense as to what the volume growth and the pricing growth would be or at the division levels?

[Sridharan Rangarajan, executive]

Yes. I think I would say the company level is a bit difficult because of the varied businesses. Let's try by segment. Now as far as the CUMI stand-alone is concerned, I think Abrasives, there's a volume -- lower volume compared to Q4 of the last year, but higher volume compared to Q1 of the last year. Prices are soft, and that is why it starts reflecting it in the PBIT margin. As far as Ceramic goes, very strong volume growth, moderate price growth. EMD, both volume and price growth very strong. This is, I would say, a broad number I would be able to give you.

[Sujit Jain, analyst]

The Ceramics and EMD commentary that you gave would be Q-on-Q, right?

[Sridharan Rangarajan, executive]

Q-on-Q as well as sequential, both are doing fine.

[Sujit Jain, analyst]

Right. And in terms of the staff cost at the stand-alone, they are up at INR 50 crores. So what exactly has led to this increase Q-o-Q?

[Sridharan Rangarajan, executive]

You're talking about the employee cost. Is that correct?

[Sujit Jain, analyst]

Right.

[Sridharan Rangarajan, executive]

So employee cost, both stand-alone and consolidated, since this question has asked, I am sure there will be a question relating to consol also. The increase in consol is largely a function of the cost in AWUKO, cost in RHODIUS and the cost increases in CUMI stand-alone. All these 3 contributes to the employee cost addition, which reflects largely a function of salary increases in the domestic subsidiary because the Q1 of the last year compared to the Q1 of this year, there will be a salary correction that would have happened, plus people addition that happened all through the last year. And as far as AWUKO and RHODIUS is concerned, it was not there, hence, both of them got added to the consolidated result. That's a broad -- of course, there is a rather big entity is VAW because there also, there's a price -- people addition and the salary corrections. We feel it is normal, nothing abnormal.

[Sujit Jain, analyst]

Right. And the depreciation rate at the consol of INR 43 crores per quarter, that will continue?

[Sridharan Rangarajan, executive]

You are talking depreciation at the quarter level? Yes. So this INR 42 crores would include a portion of the depreciation that would come from AWUKO and RHODIUS, which is just coming, right? So hence, it is going up. This would -- I think, for you to estimate, you can take this as a base for you to estimate the full year.

[Operator]

The next question is from the line of Rahul Gajare from Haitong Securities.

[Rahul Gajare, analyst]

I've got 2 questions. One, you briefly touched up on [ outbound ] and supply chain constraints during the quarter. Can you please elaborate on this? And how do you see this impacting your full year performance? That's the question.

[N. Ananthaseshan, executive]

Yes. So the supply chain constraints, I would say, is largely on the inbound side. So where we get our raw materials from China, plus in countries from Europe. So we did have disruptions in materials coming in from Europe, especially on the Abrasives because many of these are from Scandinavia, some other countries like France. And there, the shipments got delayed and also because of their production disruptions because of these energy limitations also caused a delay in supplies. On the outbound, we still see some disruptions, but definitely, it is better than the previous 2 quarters.

[Rahul Gajare, analyst]

Okay. Sir, my second question is, I think you had indicated earlier that South African operations will take a couple of years to turn around. So I was pleasantly surprised to see profits. Can you discuss what happened in South African operations, please?

[N. Ananthaseshan, executive]

So the South African operation, we...

[Sridharan Rangarajan, executive]

I don't think we said 2 years, perhaps it must have been 2 years back conversation because we introduced quite a few new products. They also changed their business model to get into kind of shorter working capital cycle. They also introduced a tilt firm furnace from their stationary furnace. These 3, coupled with few other local changes and the demand side in terms of the availability of the products, pushed the prices as well. That resulted in a quick turnaround of the company. So for the last 4 quarters, they are consistently performing and delivering profitable resources.

[Operator]

The next question is from the line of Harshit Patel from Equirus Securities.

[Harshit Patel, analyst]

Sir, my first question is on VAW. So our earlier [ inspiration ] was that there could be some translational gains over there because the ruble has appreciated significantly over rupee. So sir, could you explain as to why as to there is INR 37 crores to INR 40 crores of kind of ForEx losses we have made? So is it because of translating those receivables in Europe to translating that euro receivables to ruble and then into INR? Could you explain a little bit over there?

[Sridharan Rangarajan, executive]

Yes. I think good question. I think, see, they -- as we said in the earlier calls also, they have almost more than 50 percentage of their business in silicon carbide getting exported out of Russia. They are predominantly invoiced either in euro or in dollars. The receivable in euro and dollar have to be converted into rubles. And if you see that, the ruble appreciated, like, for example, if I have to get $1 million and if I have to restate this $1 million, let's assume at RUB 80 to a dollar in the last quarter. I'm just giving you an example only. And then it appreciated, let us assume it goes to RUB 50. So that would result into an exchange loss in the ruble books. And that ruble loss will now have to be converted back into INR. So hence, the same exchange loss will translate back into Indian rupees, and that is how it comes.

[Harshit Patel, analyst]

Okay. Sure. Understood. Sir, just a follow-up to this. Could you state as to what was the geographical mix of Russia in the last quarter? I mean, how much of the volumes were sold in Russia, Europe, India and the rest of the country?

[Sridharan Rangarajan, executive]

Around 55% in Russia, 17% in India, the balance is Europe and rest of the world.

[Harshit Patel, analyst]

Understood. Sir, my second question would be on our industrial ceramics portfolio. So could you throw some light on our portfolio in anti-corrosives and composite? I think you have given quite a lot of flavor in the annual report. So what is the overall addressable market that we are catering to through these categories of products? What would be our revenue size at the moment from these and how fast it can grow?

[N. Ananthaseshan, executive]

The anti-corrosives product portfolio, what we have is largely for floorings and coatings, which are used in asset manufacturer, sulfuric acid or fertilizers or very corrosive chemicals. So these are industrial coatings. And as to your question of how fast they can go, we do believe that, one, as a coating and also as what we call as bricks, these are specialty lining and they do -- they are project based. Today, in terms of size of the business is about...

[Sridharan Rangarajan, executive]

It's a small portion, the anti-corrosive side of it. So there are 3 components to that ceramic segment. There is industrial ceramics, refractory and anti-corrosive, these 3 components. And industrial ceramics has got wear as well as the higher end of the industrial ceramics application. So these are -- this is how the industry has to be looked at. And that's how if you look at the annual report, it would have covered all the 3 sides of it.

[Harshit Patel, analyst]

Right. Sir, what would be our broad mix of the sales between these 3 categories, the refractory, the industrial ceramics and then these anti-corrosives and composites?

[Sridharan Rangarajan, executive]

I would encourage you to look at it together rather than splitting it because it's a mix that sometimes gives us ability to sale through and then service various industries. For example, the same industry served through all the 3 different products. If you take a cement, it can -- we serve cement industry by all the 3 product lines. So we don't distinguish it that way.

[Harshit Patel, analyst]

Understood, sir. Sir, if I can just squeeze in one last question. If you can give some flavor on the CapEx plans? I think the CapEx in the first quarter at INR 56 crores was a bit on the higher side. Also, we see the Electro Minerals space ramping up very fast in India helped by China Plus One. So here, what are the product lines that we are expanding? I think you had previously mentioned about synthetic brown fused alumina. But...

[Operator]

Sorry to interrupt Mr. Patel, your voice is echoing.

[Harshit Patel, analyst]

Is this better?

[Operator]

Yes. This is better.

[N. Ananthaseshan, executive]

Yes, better now.

[Harshit Patel, analyst]

Sure. So sir, my question was on the CapEx plan. I think you have already done around INR 56 crores in the first quarter. I think that is slightly on the higher side vis-a-vis our own historical average. We also see the Electro Minerals space ramping up very fast, helped by China Plus One. So here, what are the product lines that we are expanding? Are there any new product lines? I think you had previously mentioned about this synthetic brown fused alumina. So how is that product line doing? And what would be our overall CapEx for the next couple of years? That would be my last question.

[P. Padmanabhan, executive]

Yes. So the CapEx plan, yes, your observation is right. We have -- it does seem that we are spending a little more than what we normally do. It's also the effect of the spillovers of the Q4, which gets capitalized in Q1.

As to your question regarding Electro Minerals, the product group, as you rightly pointed out is a brown fused alumina, which came into, I would say, full capacities in the second half -- late in the second half of last year. So you are seeing the benefit of that. So the synthetic brown fused alumina is running well, and that was going to deliver volumes in EMD. So is the case of the white fused alumina. So the capacity increases in white fused and brown fused alumina, which is the core products have significantly resulted in the EMD business doing well.

[Operator]

The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.

[Bhavin Vithlani, analyst]

My first question is on the stand-alone Abrasives division. We see some softness sequentially as well as on the margins, which were hovering around 18% in the last 7 quarters, we saw 14.5%. So could you just help us with the volumes as well as the margins impact in the stand-alone Abrasives division?

[P. Padmanabhan, executive]

The stand-alone, if you were to take the 3 broad segments, we have the Abrasives, Ceramics and the Minerals, while the Minerals and the Ceramics had a good run because both in terms of the volumes and also the margins. The Abrasives is the one which has been impacted, and this is largely due to a combination of cost push of all the input raw materials. And we would also remember that this cost push came into from Q3 on. So a significant increase in the case of the input materials. So not all the costs have been able to -- we have been able to pass on because there is always a lag in the abrasives industry, so to putting up the prices and implementing it in full. So that's largely the reason for this lower margins.

[Bhavin Vithlani, analyst]

Sure. On the volumes front, the softness and what's the kind of growth that we should expect on the Abrasives side for the annualized basis?

[P. Padmanabhan, executive]

I would say the volume has been -- I mean, if you look at the sequentially, yes, there has been a drop in volume. That is also due to the fact that we have not been able to get, I would estimate about INR 15 crores, INR 20 crores, we have not been able to deliver more because of nonavailability of specific raw materials. Otherwise, the sales would have been better. We do see that there is definitely a more positive mood in terms of the consumption. So we expect that it to be better and positive. Around 10% is what we expect.

[Bhavin Vithlani, analyst]

Sure. And would the margins come back to that 18% levels as we -- as the lag impact is covered?

[Sridharan Rangarajan, executive]

No. I don't know where you get the 18%, Bhavin, because I'm just looking stand-alone. The best in the last 8 quarters we delivered is about 16.8%. So -- but I think still there is -- the point that you're making is, yes, from -- we have come down in the margin. We clearly see that. I think we'll be back. My guess is that, at last year full year level, we were at 12.2%. And we think that we should get back to that level at the full year level at the end of '23.

[Bhavin Vithlani, analyst]

Sure. The last question is, if you could just help us again with the losses which were there in the German subsidiaries and the kind of crisis that we are seeing on the energy side, prices as well as availability. How do you see the impact of the energy availability and the prices on the operations? And what's your plan of action to overcome these difficulties?

[Sridharan Rangarajan, executive]

Yes. I think that's a good question. So first of all, we need to split this into 2 broad areas, AWUKO and RHODIUS. I covered about AWUKO. To really see, we took the assets of the AWUKO when it was under the liquidation for almost 2 to 3 years, they were reeling in the [indiscernible], supply chain disruptions happened, customers started moving away from them. And that's the kind of situation we took over this company. And we know that it's going to take time. And we said then we communicated that it will take at least 2 years, FY '24 to even come to breakeven. So in that regard, I think the losses that we are seeing, and I think I said that we will be -- full year loss could be about INR 20 crores to INR 25 crores is very much in line with our expectation.

Now to the question that you asked, how is the gas price playing around? A few good things that in our favor is that, we have contracts for the full year, that this calendar year. So the availability of gas is not an issue. Cost also, we are -- in terms of the current situation, we are very well under control. We would like to enter, and we are in the process of entering into contracts for the next year. So we feel that though the headline newspaper-led gas price cost increase, et cetera, is one. But in reality, there is a -- that's not going that alarmingly high. But it is definitely on the -- I would say, at least a minimum 3x higher compared to what we have been looking at. So which means we need to start preparing putting the price back to the customers, as well as work on the energy saving measures, product mix changes and some productivity work. So this is what currently we are looking at. Looking forward to the next year, not for this year, we -- as I said, that we are fine as far as this year is concerned. And we have to wait and see how things turn. There are signs of positive things coming along in terms of this conflict. Probably people will start realizing that gas price also is not sustainable at this level. It will start coming up, alternate energies will start appearing. So we'll have to wait and see. But definitely, we are watching this trend.

The same goes for the comment for RHODIUS, I think they have a very well-entrenched contract with the local suppliers. So we are fine as far as this year is concerned, and we are working on contracts for the years to come. And this is -- we see this across the entire Europe. We see this across the other geographies as well. So there's going to be a lot of pressure. And so that pressure will start reacting on bringing this cost back. And if you really see that 18 months back, we all saw the commodity price going up. And then now suddenly, there is a big drop. Of course, it is not comparable to the earlier price, but it is still a huge drop of 40% to 50% drop has happened. So I think we are pleased of this particular fact, and we are working on that.

[Bhavin Vithlani, analyst]

Sure. I just missed the RHODIUS loss number for the quarter and your expectation for the current year?

[Sridharan Rangarajan, executive]

I said the expectation for the full year, we will breakeven. And the loss for the quarter, I said about INR 6.5 crores.

[Operator]

[Operator Instructions] The next question is from the line of Mihir Manohar from Carnelian Asset Management.

[Mihir Manohar;Carnelian Asset Advisors;Equity Research Analyst, analyst]

Sir, in your opening comments you mentioned about some logistics...

[Operator]

Mr. Manohar, we cannot hear you properly.

[Mihir Manohar;Carnelian Asset Advisors;Equity Research Analyst, analyst]

Yes. Is it audible now?

[Operator]

Yes.

[Mihir Manohar;Carnelian Asset Advisors;Equity Research Analyst, analyst]

Yes, sure. Sir, I wanted to understand that, I mean, in the starting of the comments, you mentioned about some logistics and supply [Technical Difficulty] and some now be converted into also [indiscernible]. But despite this [Technical Difficulty] growth...

[Operator]

Mr. Manohar, your voice is breaking. We cannot hear you.

[Sridharan Rangarajan, executive]

There is an echo in your voice.

[Operator]

Yes. And your voice is breaking.

[Mihir Manohar;Carnelian Asset Advisors;Equity Research Analyst, analyst]

Is it audible now?

[P. Padmanabhan, executive]

It is. It would help if you can just slow down a bit, please?

[Mihir Manohar;Carnelian Asset Advisors;Equity Research Analyst, analyst]

Sure. [Technical Difficulty] comment about logistics [Technical Difficulty] and supply side challenges [Technical Difficulty].

[Operator]

Sorry, Manohar, may I request you to rejoin the queue? I'll take you immediately after the next participant. Please rejoin the queue. We cannot hear you.

The next question is from the line of Dikshit Mittal from LIC Mutual Fund.

[Dikshit Mittal, analyst]

Sir, my question is on Russian operations. Since you mentioned now you have resumed your exports to Europe. So do you think you can get more market share or maybe higher margins in Europe since European players may be suffering from higher gas or power costs?

[Sridharan Rangarajan, executive]

Yes. So we have not resumed. We continue to do what we are doing. I mean, like there was no impact. I think we communicated this in Q1 also. So I think what -- I would say that the silicon carbide is a very important material. And it is needed by all the industry. Hence, they will have to start using this material. And we are following whatever is the guideline respective government provides as far as the logistics is concerned, we are doing the same. So I would say, the logistics issues are getting better day by day. The Indian government is also doing quite a lot as far as logistics routes to India.

To your question, will it create more opportunities for Europe, I would think definitely, yes. But like as I said, we are operating to the brim. I mean, we -- operationally, we are doing the best at this point in time, except that the exchange issues are beyond our control. I mean, that's the challenge we face.

[Dikshit Mittal, analyst]

Yes. Sir, I assume that your competitors in Europe will be facing challenges, right, in terms of power cost. So will that give you opportunity to increase margins for your sale to Europe?

[Sridharan Rangarajan, executive]

Sorry, could you repeat the question?

[Dikshit Mittal, analyst]

Sir, because your operations are in Russia, so I presume that you'll be better placed, right, as compared to your European competitors. So in terms of cost structure. So will that help you increase margins maybe in the medium term?

[Sridharan Rangarajan, executive]

Yes. No. So I think as far as our position is concerned, yes, we are better positioned than probably an European counterpart, particularly in terms of the energy availability and the cost. But I think we want to do the right things for the customer, and we'll go by the market price. We are not looking for a -- like, for example, using this opportunity to have a windfall gain, but it depends on the demand, supply and the price at that point in time.

[Dikshit Mittal, analyst]

Okay. Sir, but I assume that the prices will ultimately rise, right, if the -- basically, power costs are rising. So in a way, that should help...

[Sridharan Rangarajan, executive]

That's right. I think I told in my remarks is the combination of what we got is the price and volume and price is playing a big role there.

[Operator]

The next question is from the line of Aditya Mongia from Kotak Securities.

[Aditya Mongia, analyst]

My first question relates to the 3 segments and all put in one. From what I recall a few quarters back when I asked this question, it seems as if EMD, amongst all the 3 segments, was best placed as per you in terms of growth visibility and ability to pass on cost inflation to the customer. It seems to be the case right now also as per your commentary. We do understand that EMD is a commodity-like business. Do you expect the strength of EMD is related to the other 2 segments sustaining for a longer period of time?

[P. Padmanabhan, executive]

Yes. So the EMD business, as I said, it is in 2 parts. One is in Russia and other was in India. And it was always the Indian part of the business that we were concerned about in terms of its sustained profitability. The last couple of years have seen EMD grow in volumes and also improve its, when I say product mix, it has picked up products and changed them completely to -- as in the case of the synthetic brown, which gives them a very good cost position. So what is happening is that, combined with volumes and also a good cost position, now EMD has set itself up for, I believe, a sustained profitable growth. So while some parts of -- or the bulk of the EMD business is in, what you would call, a commoditized product, but there is also a large growing portfolio of specialized products, which would overall improve the margin profile of EMD.

[Aditya Mongia, analyst]

Understood. My second question is more a clarification. Somewhere in your opening remarks, you suggested that beyond the subsidiaries creating a loss-making situation for you. There was also a gas price issue that impacted. Is there a separate loss number that you would want to kind of quantify for the quarter?

[Sridharan Rangarajan, executive]

SEDCO. Sir, you are talking about the gas?

[Aditya Mongia, analyst]

Yes. Exactly, the SEDCO part, yes.

[Sridharan Rangarajan, executive]

Yes, yes. So SEDCO, see, the price is set by ONGC every quarter based on the global basket of the price of their source, what they source to us. I mean, not -- it's an Indian-based one. So if you really see $2.9 per MMBtu, that has gone to $6.1 per MMBtu. So that has created a high cost of gas to SEDCO. And SEDCO in turn cannot pass on it to its customer. So it's captive units. It serves the group. So -- and we always price the group companies at what power generation company can charge to its customers, which is basically either a TANGEDCO or KSEB, how they charge, the same rate they charge. So in some quarters, they get a better profit because of your gas input cost is coming down, in some quarters, it has got a loss, and that's how it -- whole thing plays. So what you have to see is that, had they passed on this, it could have come in the other side of it. That's how it goes through.

[Aditya Mongia, analyst]

Understood. And then just one more clarification, not a question. When you say that receivables have been kind of treated and there has been an FX impact, where exactly -- does it get booked inside the segmental EMD number or somewhere else?

[Sridharan Rangarajan, executive]

Yes, it gets booked in segmental EMD, correct.

[Operator]

The next question is from the line of Manoj Bahety from Carnelian Asset Management.

[Manoj Bahety, analyst]

So I have a couple of questions. First one is...

[Operator]

Mr. Bahety, there is a disturbance from your line also. I would request to use your handset to ask a question.

[Manoj Bahety, analyst]

Hello? Is it better now?

[Sridharan Rangarajan, executive]

Better, yes.

[Manoj Bahety, analyst]

Yes. So my first question is, since you mentioned that a portion of impact on margins is due to conversion of exports back to ruble. So just wanted to understand like once we have done the exports and don't we have a hedging mechanism like where we lock our export realization. Or this time, we have decided not to have looking at like expectation that ruble will keep on under pressure?

[Sridharan Rangarajan, executive]

Good. I wish such mechanisms are available in Russia, given what they are undergoing. Yes.

[Manoj Bahety, analyst]

Okay. So you are saying that the hedging mechanism itself was not available. I understand that, sir. I missed that. It is like -- it must have been like --. And the second part of my question is, sir, if you can touch a bit update on our next-generation business vertical, especially on the battery side, silicon carbide, if you can touch upon some update on that, that will be helpful.

[N. Ananthaseshan, executive]

Yes. As mentioned on the last call, these 2 projects are still on a pilot stage. And while we have made progress in terms of the high-purity silicon carbide, both as a raw material and also as potentially a [ decibel clusters ], it would take time to get that into some commercial levels. So it's -- as of now, it's on a pilot and progressing as per our plan.

[Operator]

The next question is from the line of Alok Ranjan from IIFL AMC.

[Alok Ranjan;IIFL Asset Management;Analyst, analyst]

Sir, my first question is broadly on the macro -- the way we are listing on the macro side of the things that the demand, global demand may likely to continue to see headwinds. Are you getting any initial signs in any of your segments, specifically on the Electro Minerals and Abrasives? Any early indication in terms of demand coming down or something?

[P. Padmanabhan, executive]

See, in the Abrasives segment, what we have seen over the last quarter, the precision abrasives has stayed strong. That's possibly the revival of the auto industry is helping. And also the imports of the abrasives due to the -- I mean, it's leading to -- the ForEx is also leading to higher cost of imports and also supply difficulties from overseas suppliers is also helping. So the precision abrasives is seeing a stronger demand. In the case of the mass market abrasives, there has been some amount of pressure from the construction industry side. But I believe that going forward, this should ease a bit. While in the case of Minerals and the Ceramics, the demand continues to be very positive.

[Alok Ranjan;IIFL Asset Management;Analyst, analyst]

And sir, just to add on this one, given that China was impacted because of the COVID and there were lockdowns, although it was kind of localized. But the way you mentioned that the mass market segment is the one which is [ obviously ] goes into the housing and the construction. With this opening of the Chinese manufacturing, how do you see ex-China for companies like us, how the volume market share get impacted or also in terms of the pricing? Do you see with the opening of the China manufacturing, it will be impacting this negatively? Or it will be neutral or positive? Can you just comment on this, please?

[P. Padmanabhan, executive]

It is not surprising that China has got back or will get back. I mean, it's a large production base for materials like ours. Having said that, their cost position is also going to be -- has been impacted because their energy costs have gone up, their people costs have gone up, and also the raw material cost for them also have gone up. So I'm saying that while they would come back, the prices at which the imports from China would come in is not going to be cheap. And on top of that, we have the rupee also weakening. So that is also going to put up the overall cost of the products. So yes, it's not going to be a very lopsided competition as before.

[Alok Ranjan;IIFL Asset Management;Analyst, analyst]

Got it. Just one clarification, sir. Given that we are witnessing commodity costs coming down, except oil, most of the commodities have seen a sharp correction. Do you see Electro Minerals also witnessing price correction or the dynamics are very different there?

[P. Padmanabhan, executive]

There will be pressure on price corrections because when the commodity prices went up -- I mean, commodities like alumina went up, obviously, we had to put up prices. And it would be the reverse going down. But at the same time, having said that, there's also the raw materials, what we source can also be at the lower prices. So hopefully, the margins may sustain.

[Operator]

The next question is from the line of Bhoomika Nair from DAM Capital.

[Bhoomika Nair, analyst]

Yes. Sir, just been a continuation to the previous question. In terms of the EMD, while realizations will go down and also the raw material prices will go down, will that actually mean an expansion in the margins per se because of the mathematically, I mean, as such the margin numbers should go up because absolute profit will remain same?

[P. Padmanabhan, executive]

Mathematically, yes. But then we're still not -- while there are demands or there will be demand from customers to bring down the prices, we also have to see the next -- because there are already raw materials which we buy, which we all bought at higher prices. So to that extent, we will have the margins being impacted. So when the prices go down and the future consignments at lower prices, then you still have a better margin. So overall, I would think that, net-net, would stay with similar margins.

[Bhoomika Nair, analyst]

Okay. Sir, the next question is on RHODIUS. We are projecting something like EUR 170-odd million kind of a revenue, which is -- sorry, EUR 70 million kind of revenue versus what they used to early do about EUR 60-odd million. Now with Europe entering into a slowdown or a recession, et cetera, is it a risk to this number, which would mean that what you're projecting breakeven for the current year could be at risk? And if you can just throw some light into -- we are looking at sustainable margins at about 12% plus by FY '26. How do we -- how are you looking at the journey from breakeven to that 12% or from that 7% historic margins to the 12%?

[Sridharan Rangarajan, executive]

So Bhoomika, first of all, the export to multi-geographies, it's just not focused on one geography. So -- and also there is a mix of own brand versus the private label brand. So coupled with the construction boom that is happening every place and also the visibility that the private label players give. The team is confident of delivering this number. There could be some softness, but I think by and large, they are very much looking at that. I mean, like, for example, this quarter, they delivered better than the last year. So it is in line with that.

The second question is about what's your path from 7.5% to 12%. The path is coming largely from 3 broad areas, the volume going up, certain new investments in terms of improving the productivity, also introducing a few new products, what they have started introducing are work in progress in the final stages, and the mix change, particularly the -- some of the raw materials that they have been using. So these are the 3 broad reasons which will lead us then to pick up this. I'm looking at not just the drop -- right now, what you are witnessing is not a right comparison because it is a lag between price increase that you would put up versus the cost push that you are suffering. So that you need to eliminate. And if you put this back, they are still in a very healthy [ widget ] of 7.5% to 8%. So from there, they will pick up about 400 to 450 basis points to these measures. And that was kind of originally planned, not because of our acquisition that the plan that they have in their own projection.

Now there is an offset that's on top of that, that we talked about synergy areas in the last call that needs to play out, which will be on a larger basis of both India and Europe put together. So for that, we have not considered any benefit that would come from that. We need to work on that. We have now identified one leader who would campaign this project. Obviously, he will be given team to support delivering these synergies that we are looking at.

[Bhoomika Nair, analyst]

Sure. So it would be fair to say while this year, there is a challenge because of all these aspects in the first year and as expected to be breakeven in the current year. But would it be fair to say that next year onwards, we should bounce back to that 7% to 7.5% level, given that recently commodity prices are kind of easing off?

[Sridharan Rangarajan, executive]

Yes, absolutely.

[Bhoomika Nair, analyst]

Okay. And the next question is on Ceramics. We've clearly seen a very strong performance, both on stand-alone and consolidated basis. Given that there is a lot of moving parts out there, if you can just kind of elaborate what has happened and how sustainable it is? The outlook in terms of the segmental margins out here?

[P. Padmanabhan, executive]

Yes. The Ceramics business, as you know, is largely divided between wear ceramics and what we call engineered ceramics and both of them have a significant export component. On the wear ceramics, we do see both through CUMI Australia and CUMI America. Demand for the line equipment, as we call it. We also have projects which was delivered in Q1, which was a spillover from Q4. So that also helped. On the technical ceramics, which is the metz cylinders and the ceramics for alternative energy, the demand continues to be strong, and that's where we would continue to grow.

[Bhoomika Nair, analyst]

So these margins that we've seen in this quarter now would be a more sustainable level as we move ahead on an overall both stand-alone and consolidated basis?

[Sridharan Rangarajan, executive]

So let's look at in 2 compartments. We feel stand-alone is sustainable, and consolidation that comes from our Australian business and also from America. So there are some orders pile up, which kind of they could ship out this quarter. So there is a higher margin, but it is not going to fall off big time. So I would say, they would be better than the last year's EBIT margin on a consolidated basis.

[Bhoomika Nair, analyst]

Sure. All the best.

[Operator]

Ladies and gentlemen, due to time constraint, that was the last question for today. I would now like to hand the conference over to Mr. Ravi Swaminathan for closing comments.

[Ravi Swaminathan, analyst]

Sir, thanks a lot, and thanks, everyone, for being on the call. I would like to thank the management also. Thank you, everyone. Yes. Thanks.

[Operator]

Thank you.

[N. Ananthaseshan, executive]

Thank you.

[Operator]

On behalf of Spark Capital Advisors (India) Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.

[P. Padmanabhan, executive]

Thank you.

[Sridharan Rangarajan, executive]

Thank you so much.