Hi-Tech Pipes Ltd

NSE:HITECH

Earnings Call Transcript 2023-Q1

[Operator]

Good day, and welcome to the Q1 FY '23 Earnings Conference Call of Hi-Tech Pipes, hosted by PhillipCapital India Private Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Vikash Singh from PhillipCapital India Private Limited. Thank you, and over to you, sir.

[Vikash Singh, analyst]

Good evening, everyone. On behalf of PhillipCapital, I welcome you all on Hi-Tech Pipes Q1 FY '23 Earnings Call. Today, we have with us from the management side, Mr. Anish Bansal, Whole-time Director; and Mr. Narain Maloo, Chief Financial Officer. Operator, without any taking any much time, I would hand over the call to Mr. Anish Bansal for his opening remarks, and then we will follow-up with any Q&A. Over to you, sir.

[Anish Bansal, executive]

Good evening, and welcome, everyone, for our Q1 FY '23 Earnings Conference Call. I'm joined on the call by Mr. Narain Maloo, Group CFO of the company. I hope everyone has had a chance to go through our results and updated Investor Presentation uploaded on the exchange.

During this quarter, the company is able to register a 35% year-on-year growth in the sales and 40% volume growth. This is mainly due to better capacity utilization and higher sales utilization. However, the profitability of the quarter impacted due to high price differentials between pipes manufactured from primary coils and secondary coils. Also, one of the main reasons, the reduction in steel prices due to the imposition of export duty on quarter on May -- on 22 May, 2022, by the Government of India as well as the downtrend in international prices of HR coil resulted into channel destocking and consequently also impacted our margins.

We found the impact of steel price correction as short term and confirmed that this will definitely help in increasing our volumes in medium to long term. Now I would like to take you through the ongoing projects and other developments. The pipe mill upgradation project at the Sikandrabad for production of solar torque, which is completely -- which is completed recently and it's working well.

These tubes are well accepted in the market, and we are scaling up the production. Secondly, setting up of color-coated sheet facility of 50,000 tonnes per annum is at final stages of commissioning at our Sikandrabad plant. This is a good integration towards existing cold rolling and Continuous Galvanizing Line facility. This shall also increase the overall capacity utilization of existing facilities and increasing the share of value-added products.

The color-coated sheets are used for roofing, wall cladding, whiteboard, domestic and industrial sheds infrastructure, bus bodies, metros, railway station, door and window frames, et cetera. Thirdly, the commissioning of large diameter pipe project of 60,000 tonnes per annum at Sanand Gujarat facility is mainly catered -- to cater demand arising from water, city gas, all distribution and construction sectors. The commissioning of the project is on full swing and tile production is expected in Q3 FY '23. We are also committed and focused to actively improve our capacity utilization of our existing facilities and also increase the proportion of value-added products. The recent decrease in [indiscernible] prices and a narrow gap of primary steel versus secondary steel has resulted in increasing the volumes. The channel partners and dealers and distributors were earlier destocking the tubes and pipes, which are again now buying material to build up their inventories.

We are continuously getting orders from the Jal Jivan Mission and other infrastructure projects like high-speed railways, metros, telecom, et cetera. Government CapEx and energy, housing, infrastructure, railways, airports, agriculture, telecom and irrigation in the next 4 to 5 years would surely be the big demand drivers for steel, tubes and pipes. Moreover, on private CapEx side, sectors like automotive, capital goods, consumer durables and envisaging big CapEx in coming years, which would further drive demand for our steel products.

So to sum it up, we at Hi-tech remained very positive on India's structural growth going ahead. These developments are setting our stage for robust second half performance. I will now hand over the call to Mr. Narain Maloo, our Executive Director and Group CFO, to take you through the unaudited financial results of Q1 FY '23. Over to you.

[Roop Maloo, executive]

Good evening, everyone. I will take you through the financial results of Quarter 1 FY '23. Our revenue from operators for the quarter grew by 35% year-on-year basis to INR 517 crores as against INR 383 crores in Q1 FY '22. The revenue growth was primarily driven by significant increase in our sales volume with higher realizations. The revenue growth was primarily driven by significant increase in our sales volume. Our total sales volume stood at 0.70 metric tonnes, which is higher by 14% year-on-year basis.

Sales realization improved by 18% to INR 73,000 [indiscernible] per metric tonne in Q1 FY '22. Our EBITDA for the quarter declined by 14% year-on-year basis to INR 18.4 crores as against INR 21.4 crores in Q1 FY '22.

The EBITDA per tonne for the quarter stands at INR 2,545 per metric tonnes as against INR 3,467 per metric tonne in last quarter. The profitability is impacted mainly because of decrease in raw material prices as cited by Anish. Our sales declined by 50% to INR 4.48 crores as against INR 8.89 crores in Q1 FY '22. The decline in margin is due to higher price differential from pipe produced from secondary steel and power production, leading to general disposing. With this, we would like to open the floor for questions. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Vikash Singh from PhillipCapital.

[Vikash Singh, analyst]

Sir, I just want to give some guidelines on the kind of the volume target we want to achieve and reason why we are running at a so low capacity utilization, if you can.

[Anish Bansal, executive]

So Vikash, yes, our capacity utilization in Q4 was around 65% to 66%, which has fallen to 50% in Q1. This was mainly due to the destocking by the dealers and distributors. This was witnessed all across the industry as we have seen the, as the export duty was implemented on 22nd of May, that led to a strong new jerk reaction. And coupled with the declining steel prices, especially from the Russian steel producers, they were dumping steel for first 2 to 3 months because of the foreign exchange prices. So these 2 wins, they led to extreme specialism in the market, which led to destocking. And -- but now we are very confident that the prices have come to a quite reasonable and affordable level. The gap between the secondary producer and primary producers, that has narrowed down significantly which will help the company to increase the utilization in Q2 and Q3, Q4 onwards.

And along with this, I would also like to point out that historically, the H2 consists of almost 60% of our volumes and H1 is 40% due to several factors and monsoon. So H2 should be significantly quite good because our color-coated facility that will also come into commercial production, which will eventually lead to the better capacity utilization of our cold rolling complex at Sikandrabad. So all in all, despite Q1 -- despite the challenges of Q1, we are hopeful of maintaining 15% to 20% volume growth for this financial year release. [Technical Difficulty] Hello?

[Operator]

Sir, just given me a minute. Mr. Singh got disconnected. I am just reconnecting him.

[Vikash Singh, analyst]

Sorry, sir, I got disconnected. So I heard drilled out the Patra gap between the Patra and the primary, which was narrowed down.

[Anish Bansal, executive]

Yes. So this was narrowed down and the prices have come to be reasonable and affordable level. And all the projects which are earlier stuck-up, the government projects and -- which was stuck-up because of the high steel prices. The -- that demand is coming back to the market. And historically also, like our H2 consists of 50% of the total volume -- total annual volumes. And H1 is relatively lesser. So having said that, we are still confident of maintaining our 15% to 20% volume growth for this financial year.

[Vikash Singh, analyst]

Understood, sir. And sir, what kind of volume loss we have suffered because of this destocking, Otherwise, what kind of additional volumes...

[Anish Bansal, executive]

For this quarter, 15,000 tonnes.

[Vikash Singh, analyst]

So otherwise, it would have been 85,000, 86,000 tonnes kind of volume.

[Anish Bansal, executive]

Yes, yes, yes.

[Vikash Singh, analyst]

And sir, my second question, pertains to our value addition, like one of your competitor APL Apollo they have a lot of value addition things, which is going on, which also allows them to increase their blended margins. So just wanted to understand where are the in terms of our overall value addition perspective. And what -- where do we see ourselves in next 2 to 3 years?

[Anish Bansal, executive]

So Vikash, right now, our -- in our product basket, the total mix of value added is 25% at this moment. And with the implementation of our large diameter pipes, the colour-coated facility, and we are also enhancing some damaging capacity at Sikandrabad. So all in all, we'll be going to a 30% share this financial year, which will eventually go to 50% in the next 2 financial years.

[Vikash Singh, analyst]

And so in terms of our major competition, how confident we are in -- because you and APL Apollo, both are basically operators in a same kind of the business as well as in the same geographies. So in terms of growth price, how confident we are taking over this standard the growth. Are this growth is coming from the market side improving? Or we are also taking share from the smaller players which are unorganized?

[Anish Bansal, executive]

So Vikash, it's a mix of all these things. But like with the growth also, we are also constantly facing like challenges from the external factors like the reduction of international steel prices. And in some quarters, we have faced like lockdown challenges. So all in all, like the situation is quite challenging, but even then we are hopeful of maintaining a good volume growth.

[Vikash Singh, analyst]

Understood, sir. And sir, just lastly, our margins are nearly half of that of the nearest competitors. So what are the steps you have taken in order to improve this margin? What are -- how do you see that would be our speed kind of the margins going forward?

[Anish Bansal, executive]

Right now, back in last 4 years, we have set up like the base capacities and all the plants. Now the step is towards value addition. So we are progressing in that direction, and we are adding the coating facilities, the [ SKUs ], which has person getting higher EBITDA per tonne. So a lot of work is going on in all these areas, and we are focused in increasing our EBITDA per tonne. So this Q1 was extraordinary quarter like we saw a price correction to the tune of almost INR 12,000 to INR 13,000 steel per tonne, which is historic and just making a span of 1.5 months, such a deep fall is historic. So now the markets have stabilized, and we feel there's been much correction has already taken place. I think another 3 to 4 agreements all that is left in terms of steel price correction. After this, once the prices get settled here, the demand will come back and then full in some fashion.

[Vikash Singh, analyst]

So any EBITDA per tonne balance you would like to give?

[Anish Bansal, executive]

We would like to maintain our -- the previous year's EBITDA per tonne. That's our target. Despite the Q1 challenge.

[Vikash Singh, analyst]

And then any work on our CapEx plan, though I know that our capacities are much higher. So this year, what kind of CapEx we are doing? And to what capacity once we get to utilize, let's say, 60%, 70%, or 80% when our next phase of CapEx cycle would start?

[Anish Jobalia, analyst]

So our major CapEx has already been done for color coating and diameter pipes and Sanand. And it is only about utilizing the same. So both the production are expected in Q3. So once these get streamlined, then surely the -- it will definitely improve the top line and bottom line of the company.

[Vikash Singh, analyst]

Understood, sir. Operator, are there any questions from the participants side?

[Operator]

As of now, no questions. [Operator Instructions] The next question is from the line of Ronald Siyoni from Sharekhan.

[Ronald Siyoni, analyst]

Just a few questions. So first was on the compressed operational profitability. So now post Q1, how have you seen in terms of operational profitability. Does it improve the to a larger extent? Or still operational profitability, we make under pressure until the post Q1?

[Anish Bansal, executive]

Yes, Mr. Ronald. As we had said that mainly the compressed profitability is the result of decline in the pipeline and the higher price difference from the price manufactured, you know from the recycled [indiscernible] that would be patra pipes. So these 2 factors has affected our profitability Otherwise, from operational front, whether it is basepower or it is the power or it is the other manufacturing expenses, we have been very, very cautious and we have become competitively efficient in that part.

I think I answered your question.

[Ronald Siyoni, analyst]

Yes, sir. Post Q1, it has improved. Moving to somewhere in July and August till date, there has been some improvement...

[Anish Bansal, executive]

We have witnessed a higher demand for about 10%, 15% in the month of July and August as compared to the last quarter. There are a lot of inquiries in the market. In fact, the lifting under the government schemes where we probably supply the push to EPC contractors, there also serious witness [indiscernible] lifted. And if we see that the complete pipelines are weaker at this moment. Once the market is confident about that there is not going to be further price reduction. And we hope that the stability will come in 10, 15 days. So lifting will improve. All these pipelines have to be filled up.

[Ronald Siyoni, analyst]

Okay. So in terms of destocking, at the end of Q1, how was the channel inventory like in terms of days or month if you can share that. Before at the end of Q4, how was it at the end of Q1 how was the channel inventory in terms of [indiscernible]?

[Anish Bansal, executive]

Inventory of the retailer partners, it is not like auto industry. It is not monitored by us. But the rough estimate is that maybe if someone might maintain 1,000 metric tonnes, they are riding to the level of -- their minimum level of 500 to 600 metric tonnes. Those sort of reduction in the fund. So we can say some 30%, 40% reduction is referent inventory of the channel partners.

[Ronald Siyoni, analyst]

Okay. And if you can also take us in terms of gross debt numbers and how do you plan to reduce that? And also on the working capital side...

[Anish Bansal, executive]

Our growth rate is more or less at the same level, which were there in the last financial year. So it's around INR 380 crores.

[Ronald Siyoni, analyst]

And in terms of working capital, have you seen any stretch in that our inventories are payable to. How is the working capital cycle at the end of Q1?

[Anish Bansal, executive]

Yes. Very good part on the level that we are further able to reduce 3 days working capital, and that is basically on account of debtors. On a combined basis, 3 days reduction is there.

[Operator]

[Operator Instructions] Next question is from the line of [ Vaibhav Kapoor ], an individual investor.

[Unknown Shareholder]

I just wanted to know that at what capacity utilization do you and recharge the next line of CapEx to begin? Do you have some kind of a capacity utilization number in mind? Or would you look at it as and when...

[Anish Bansal, executive]

As a policy matter and in the earlier calls also as well as in the industry, once we retail a capacity utilization of about 70%, we start thinking of expanding our capacity. Here the benefit with [indiscernible] that this LTV pipe project, we have taken land more than 2x. This is higher than our actual requirement. So first of all, any CapEx, we are thinking once we reach the -- to a level of 70%. And second thing is that whatever CapEx will be happening it will be a marginal cost for us. Only cost of building and plant the machinery. Infrastructure is already existing at all the cost.

[Unknown Shareholder]

The other thing is I just wanted to -- if you could give some color in terms of the numbers of how this -- the secondary, the Patra market, what was it previously and -- what is the current situation now in terms of the price differential. If you give some color on that?

[Anish Bansal, executive]

Yes. Anish Bansal. So [ Vaibhav ] anything in the month of March and April, the spread between the Patra pipe and our organized sector fee price was in excess of INR 15,000 per tonne. And right now, in the current month, it is around INR 2,000, to INR 3,000 per tonne, which historically has been prevailing for many, many years. So the excess differential, that has all gone a bit, which has given a major boost to our industry.

[Operator]

[Operator Instructions] The next question is from the line of Hetal Gada from ITI Mutual Funds.

[Hetal Gada, analyst]

I just wanted to understand, like you mentioned the there is gap between Patra prices and primary [indiscernible] prices. So at what gap or how much is it narrowed out, then people will start considering again the [indiscernible] prices or robust [indiscernible] for manufacturing. Hello, can you hear me? Can you hear me?

[Anish Bansal, executive]

Yes, yes. I would like to ask you that first of all, that there is quality different, which is the secondary steel and primary steel that the quality is different, but what happens that in EPC projects or in some rural areas if these goods are used. [indiscernible] different in the range of INR 4,000, INR 5,000 -- INR 4,000 around, okay, from market side. Started to understand the quality difference. And the quality of the pipe which we manufacture is not less than 25, 30 years, whereas in that case, it is about 15 to 20 years. Second thing is that it consumes more color, more paint. So INR 4,000 price is around a reasonable difference. And now we have reached to that level, it will definitely be increasing our volume.

[Hetal Gada, analyst]

So at least at these levels, you will see that volumes will go back to primary side...

[Anish Bansal, executive]

branded price manufacturers growth had been 15% to 20% in industry, whenever the price difference has been reasonable from Patra pipes. So that time is coming when time has in fact come and we will see that sort of a growth.

[Hetal Gada, analyst]

Okay. And that you can see already in our orders and volume ramp up also.

[Anish Bansal, executive]

Yes.

[Hetal Gada, analyst]

Okay. Sir, secondly, I also wanted to understand [indiscernible]. So what capacity has been expanding and your volumes have been ramping up. APL Apollo, your competitor fees mentioned. Because of this year, time that they have, they usually get discounts or exit in the [indiscernible] subserving their raw material. So are you getting any benefit of that time from your suppliers?

[Roop Maloo, executive]

So regarding the procurement and the pricing of raw materials, we are confident that our raw material pricing is quite competitive and one of the lowest in the industry, considering the volume and the relationships that we are having with all people for last many, many decades.

[Hetal Gada, analyst]

So I mean to what extent, I mean, can you just quantify is it possible.

[Anish Bansal, executive]

I can't quantify this because like I wouldn't have there. But in the market as per the market and what we have from other suppliers, the pricing is quite -- like for our competitors and for us, it is quite reasonable.

[Hetal Gada, analyst]

Okay. Okay. And sir, regarding your plan that you have commissioned at Mumbai, what is your -- how much has it ramped up? And what are your plans for that? And in future, what kind of [indiscernible] expansion in India, will there be more of council expansions? Or are you planning to look for a greenfield at the end?

[Anish Bansal, executive]

So Mumbai operations from Q2 onwards, we are targeting 65% to 70% utilization from that plant for the remaining 3 quarters? And regarding expansion, like we are first focused towards achieving our 70% utilization across all the plants. So once this happens, then we have enough room to expand on a brownfield level.

[Hetal Gada, analyst]

Okay. So whatever expansion will come will be more towards the brownfield side rather than the greenfield side. Can I assume that?

[Roop Maloo, executive]

Yes. Absolutely.

[Hetal Gada, analyst]

Okay. Okay. And my next year, can we say that Mumbai would be running at a full capacity utilization given that it is a very big market in itself?

[Roop Maloo, executive]

Yes Hetal. So 70% is peak utilization in our industry. So we are hoping to achieve that from H2 onwards.

[Hetal Gada, analyst]

Okay. Okay. Fair enough. Sir, just last one question regarding your guidance on your debt front, how are you planning to -- for deleveraging? And what are there -- any guidance on it.

[Anish Bansal, executive]

We are very seriously working on reduction of working capital and we [indiscernible] EBITDA burden. Whatever CapEx were required, we were in the growth phase of last year. And I can say that up to this quarter, we are in the growth phase. And now onward there are no major CapEx.

So whatever be the profitability as well as whatever the surplus coming from reduction in current assets will be used for reduction of the debt.

[Hetal Gada, analyst]

So we can say at least still so but till when are you planning because any guidance? Can you give like what are your plans? What is your target?

[Roop Maloo, executive]

We are not giving any guidelines for this [indiscernible] using the capacity utilization. And -- but one guideline is very clear that our debt is not going to increase including [indiscernible] the growth plan in the way that [indiscernible]. We will see a reduction in debt after a year like that.

[Operator]

[Operator Instructions] The next question is from the line of Vikash Singh from PhillipCapital.

[Vikash Singh, analyst]

Sir, just a continuation to the former participant. So what kind of land bank is available with us and to what level of capacity we can go to brownfield.

[Anish Bansal, executive]

So Vikash, we have enough land available across all our plants, all our locations. And we can comfortably go up to 1 million tonnes within the existing land bank.

[Vikash Singh, analyst]

And greenfield versus brownfield expansion, what's the difference in the ROI basically, if I may ask?

[Roop Maloo, executive]

So the CapEx in greenfield is almost 2x that of brownfield. So ROI for the enhanced and for the incremental capacity should be somewhere around 25% to 30%.

[Operator]

[Operator Instructions] The next question is from the line of Ronald Siyoni from Sharekhan.

[Ronald Siyoni, analyst]

Just one question regarding value-added products now with Q1, the prices had gone down. So in terms of operational profitability, how this value-added products stands? You see a downward revision in EBITDA per tonne for these value-added products also?

[Anish Bansal, executive]

Ronald, the thing is basically, there is no reduction in EBITDA per tonne. EBITDA per tonne is appearing lower because of the inventory loss that we have offered in Q1. So across all our products, whether it is like normal products or valued products, the EBITDA per tonne on the conversion rates remain the same.

[Ronald Siyoni, analyst]

So [indiscernible].

[Anish Bansal, executive]

Decline in steel prices in the month of May, month of June, month of July, month of August. So in last 4 months, we have seen constant reduction in steel prices, which is not which is not the pairing in the profitability.

[Ronald Siyoni, analyst]

Okay. Sir, in terms on operational conversion profitability in [indiscernible] so how much the inventory losses, can you quantify during Q1, your [indiscernible].

[Roop Maloo, executive]

In fact, mix actually, it's a mix of the thing. We can't really, really quantify in some of the products we are selling in advance. Some of the products are sold from the stock. But the rough estimate in the range of about INR 600 crores to INR 800 per metric tonne, the impact of reduction in the price.

[Ronald Siyoni, analyst]

Okay. So when this prices stabilize and say, if possibly they trade higher a little bit then are this -- would that reverse -- inventory losses will get reversed [indiscernible].

[Roop Maloo, executive]

And when it happens, if there is a sudden reduction in the prices. So if you see in the month of May and June, there is a reduction of price is about INR 12,000 to INR 30,000 per metric tonne, otherwise it will be INR 2,000, INR 3,000 a month like that, then we do not affect generally our profit.

[Operator]

[Operator Instructions] As there are no further questions, I now hand the conference over to Mr. Vikash Singh for closing comments. Over to you.

[Vikash Singh, analyst]

On behalf of PhillipCapital, I would like to thank Mr. Anish Bansal and Mr. Narain Maloo to give us this opportunity to host their concall. And over to you, Anish, sir, for any closing comments.

[Anish Bansal, executive]

Thank you so much, everyone, for sparing time to attend our earnings conference call. To sum it up, I would like to say that Q1 was a significant quarter and challenging one for the industry. We have seen a sharp decline in steel prices, which led to lower profitability. But having said that, the reduction in steel prices is a welcome step. This will contribute significantly towards higher volumes because of the reduction in prices of -- reduction in the gap of secondary steel sites. And the affordability quotient has also gone up very high. The projects which were earlier stuck, they are also coming back. So with all these things, it is quite positive for the company for -- in H2 and also in the coming years. The company is well poised to cater any kind of demand but that comes from any geography or any sector. So that is all from me. Thanks, once again.

[Operator]

Thank you. Ladies and gentlemen, on behalf of PhillipCapital India Private Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.