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Ladies and gentlemen, good day, and welcome to IFGL Refractories Limited Q3 FY '21 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kamal Sarda, CEO and CFO, IFGL Refractories Limited. Thank you, and over to you, sir.
Thank you. Good evening, friends. So thank you for joining us on the Q3 FY '21 earnings call. I hope you have -- you and everyone are safe and in good health. So we have SGA, our Investor Relation adviser, in this call as well. We uploaded our results presentation on the stock exchange, and I hope you have had a chance to go through the table. I'll give you a brief on the economy and the other business highlights.So economy witnessed a strong recovery during FY -- sorry, quarter 3 FY '21 as lockdown restrictions are eased and business operations across all the industries ramped up swiftly. No one had ever imagined that the recovery would be so sharp and quick. Our manufacturing capacities were also run at almost near optimum or utilized levels during this quarter 3.Talking about the steel industry, the demand for steel also witnessed one of the sharpest recoveries in the back of the strong pickup in all the industries. Two of the most important steel consuming sectors, real estate and auto, also gained significant traction. Relating to the enhanced demand of steel, capacity utilizing of domestic steel companies also ramped up quickly. Domestic and export market both continued to benefit the steel companies here and in turn has led to continuous order inflow for us. All these factors, together with the exports, led us to report our highest ever quarterly revenue, quarterly EBITDA and quarterly PAT in this quarter 3, better than even in all the other previous quarters. Budget '21 has clearly prioritized growth and development for economic use of doing business, increased CapEx, accelerated privatization, ensuring minimum government and maximum government and promoting self-reliant economy through [indiscernible] product initiatives. It is evident that the government is clearly focused on growth and overall well-being of the economy.Increased capital expenditure, new CapEx plan by the private sector on the back of renewed demand will lead to sustained demand of steel industry in the long run. All these factors together will enable new and incremental demand for refractories. Our focus will continue to be on developing specialized products, which enable us to earn a higher margin and provide value to our customers. Moving on to the financial performance of quarter 3. On the stand-alone side, we recorded the highest ever revenue -- sorry, highest EBITDA and highest PAT in our stand-alone business on the back of strong demand, increased realization, cost efficiency initiatives and operating leverages playing out.Total income for quarter 3 stood at INR 181.6 crores as compared to INR 123 crores in the quarter 3 of FY '20. This is up by 47% year-on-year. EBITDA for quarter 3 was INR 43.2 crores as compared to INR 22.6 crore in quarter 3 of the corresponding period. It's almost more than doubled.EBITDA margins expanded by 710 basis points to 23.8% compared to 16.7%. PAT for quarter 3 FY '21 was INR 24.7 crore as compared to INR 7.3 crore, more than tripled. PAT margins up by 70 basis points to 13.6% compared to 5.9% in the corresponding quarter. On the consolidated financial highlights, our consol financial highlights also include our international subsidiaries in the U.S. and Europe. International markets are showing a considerable kind of improvement in terms of demand, which also led us to report best ever quarterly revenue. EBITDA and PAT at consol level as well. Total consol income stood at INR 299.7 crore as compared to INR 219.4 crores in the corresponding quarter, up by 37%. Consol EBITDA for this quarter was INR 59.6 crores as compared to INR 23.1 crores, up by 158%. Consol EBITDA margins expanded by 930 basis points to 19.9% as against 10.5%. Consolidated PAT is INR 37.3 crores as against INR 7.3 crores. The margin in percentage terms of 12.4% as compared to 3.3%. On the individual international business, EI Ceramics, our U.S. subsidiary, total income stood at 5.49%, up by 13% year-on-year. EBITDA margins were 1.52%, up by 140% year-on-year. PAT stood at $1.3 million, almost 3x than quarter 3 of last year. Monocon, our U.K. subsidiary, the total income was GBP 6.32 million, up by 9%. EBITDA was GPB 0.42 million. PAT was GBP 0.33 million. Both EBITDA and PAT were lost in the last corresponding quarter. Hofmann Ceramic, the total income stood at EUR 1.42 million, down by 11%. However, at EBITDA level, we are marginally positive as compared to negative in the last corresponding quarter. PAT was almost at a breakeven level. With respect to the liquidity position, as in the last quarter, we remain net debt-free with a strong balance sheet, strong cash balance in our books. Our ongoing CapEx, both at Kandla and Visakhapatnam, remains on track. With this tremendous recovery the country has witnessed with specialized product and strong balance sheet, we are more confident than ever to continue growing in the times to come. So I look forward to the -- any specific questions you all have. Thank you.
[Operator Instructions] The first question is from the line of Atul Kothari from Progwell Securities.
Sir, just 2 questions. Sir, I would like to know actually what are the key factors that led to record operating margins?
So as mentioned in my speech also that there's a volume growth, which has happened both in India as well as overseas, more in the overseas business. Then the other factor was the foreign exchange, which helped us in better realization in export front. Various cost rationalization measures, both in the input costs as well as other expenses. Plus in the last -- almost last 1 year, we hardly had any travel. So for us, the travel cost is very high. So that also led us -- led to significant savings. And lastly, we have a strong cash balance. So that also generated income for us. That is also increasing every month or so.
Okay. And sir, are these EBITDA or are these operating margins sustainable going forward?
See, we would like to remain at that level. But as I mentioned in my last quarter's speech also that the input costs are going up, going up quite significantly in the last 3, 4 months or so. The freight rates are moving very, very sharply. In fact, somewhere it is like going up by 6x. So there will be impact on -- of these factors in the current quarter as well and the coming quarters, but I cannot tell you what margins would be in terms of margins.
Okay. Sir, secondly, did improved realization also played a key role in higher revenue? Or was it only because of increased volume?
Both, I mentioned, both. Increased realization also I mentioned.
Okay, sir. And sir, what is your outlook on the domestic steel demand and the order?
It seems to be very good.
Okay.
It seems to be very good, yes, because there's a lot of infra push given by the government of India. So it seems like it would be very good.
Okay. And lastly, sir, our U.S. and Europe subsidiaries performance has also improved significantly. So sir, can you just throw some light in terms of the outlook for these markets?
Yes. All these markets have improved in the last quarter. They improved quite well. The U.S. market improved quite well. In the EI Ceramics and the Mono Ceramics, we have gone to a good level. But not at the peak levels, but we've gone to a good level there. Our market is also improving. But then you know that in the last few months, the COVID situation was not very good. So hopefully, the next coming quarter, with the vaccine being given to many people, should be changed from there.
[Operator Instructions] The next question is from the line of Pritesh Chheda from Lucky Investment Managers.
Sir, is there any significant shift in the product mix in this year versus the product mix what we see in the past quarters? Because the gross margin swing is quite significant of about 600, 700 basis points. That's the first question. Second is, if you look at the world steel production growth rate and the top line growth rate for us, there -- also there is a big gap. So we want to highlight the reason for a fairly substantial growth rate in the stand-alone sales that we see? My gross margin question was also on the stand-alone side of the business.
Yes, on the gross margin side, I think I have answered in my previous question. So I think I will refrain from repeating the same. Okay. And on the product mix, there has been no change.
Okay. And was there any favorable RM gain if the product mix has not changed, which you had for the first 3 quarters?
Pardon, sorry?
Was there any favorable raw material, which was prevalent in the first 2, 3 quarters for the gross margin?
No, no, no.
So it's purely pricing.
Yes, yes, purely pricing. And our cost rationalization are -- we did a lot of work on our input costs. That's what we did.
Cost rationalization. Okay.
Yes, yes.
And what is the increase in the raw material costs now that you are seeing as a basket?
Really, it is not that we are not buying one raw material. There are hundreds of raw materials. Some are priced, some are increasing.
As a basket, right?
But the trend is favorably increasing size.
Okay. And...
Yes. We are importing our major raw materials from China. So RMB has also appreciated. That is also an impact on the price. Sea freight has gone up. So that is also getting an impact from the price. There may be an impact in the coming quarters.
Okay. And our growth rate and the steel production growth rate are different. So what explains the fairly strong revenue growth rate for us or the strong volume growth rate?
I really don't know, whether there is very, very many -- very, very direct increases. There is a direct increase. All the customers have been doing quite well.
Is there any addition of any customers which pulls up your growth rate number higher?
We had a couple of customers in the last 1 year or so, yes. That also has had -- but nothing very, very significant. Yes, so all those factors added up.
Okay. And last question, initial commentary, you mentioned that quarter 3, you're operating at optimum type of utilization. So what is the incremental scope available at the current asset in the stand-alone for taking the revenue higher? Is there any further incremental scope by capacities?
Yes. Yes. Yes, we have capacities. We have capacities. That's not a big issue. And adding capacities in refractory is not very -- it's not a very big cost or a long lead time or so.
So that I know. But existing assets, any...
There are capacities available.
Okay. To what extent, sir? So then how does -- so I'm a bit confused. On one side, you're saying as you optimally utilize. Then on the other side, you're saying that it would be...
Optimum, could be -- optimum could be -- this doesn't mean that we are utilizing at 100% level.
So what level are you utilizing?
Optimum could be in some places, we are utilizing at 80%, 85%. We still have -- we could do some minor debottlenecking. [ Heritage ] capacity is not a constraint at all. We can do some debottlenecking and then do it. So there are scope available -- enough scope available, whatever be there, enough scope available with us.
The next question is from the line of Vineet Maloo from Aditya Birla Sun Life Asset Management.
Congratulations on a very good set of numbers. Sir, my -- for my first question is about if you can talk a little bit about what kind of business inquiries you are seeing because we are seeing steel production recover in the Asian region, right? And now the West is also recovering. So if you could talk about what kind of inquiries you're receiving now? And would that transfer into something a good traction over the next 6 months to 12 months?
See, inquiries, we have good order book. There's no problem in the order book. Okay. So the inquiries are, and I would say they're quite good. So we continue to have a good sales in the coming quarters as well.
So directionally, we can assume Q3 run rate sustaining for some time?
We were trying to -- Q3 had one external factor because this accounting standard is 116 of the revenue recognition, 116 or 115, I don't remember that. So for the export sales, there was a revenue reversal in Q2. And in Q3, there was a positive take. So that added about, I think, 13-odd crores sales in that. So that's where we don't know in quarter 4 what will be there. Whether a positive or a negative, we don't know. So that will depend on the 31st of March what will happen. But as I said, the order book looks -- the inquiries or whatever you call it looks good.
So sir, excluding that 13 crores, the underlying run rate seems to be more sustainable, right? That's a fair assumption, right?
Looks -- as of today, looks similar.
Right. Then my second question is about Hofmann. And sir, we've seen some cycles now, right, more than 2, if I'm not wrong. And sir, this is a unit which doesn't seem to be turning around very quickly. What are your thoughts regarding this? I mean what kind of investment does it require? I mean what exactly is reading it?
It is going into a different market cycle. Product cycle is different for them. So -- and then that European market, especially the German market, is not -- their auto sector is not going too good. Their engineering sector is not doing too good, plus the competition in that product range has also increased. So they had introduced a different kind of product, which has got a good response, but then entry level into that product into the market is taking a longer time than expected. It may take some more time before we get into a comfortable situation in that company. We can say that we -- as I said, that company is very small compared to the total turnover. So it's not going to affect anything. They are managing on their own. So that also is not affecting us to a large extent. It will take time.
So on a cash basis, I mean are we not investing anything at all there? They're able to take care of that?
No, not yet. Nothing as of yet.
Okay. Okay. And is it -- is, sir, off-shoring some of that production that they do, is that one of the options that could be considered? I mean, surely, if we run our own units in [ ADAS ]...
We're taking all steps to see that things improve there.
Right, right. Because, sir, the only concern is that while our initial investment was not much in terms of losses we've incurred, that gives an amount on that actually was increasing our invested capital in a way. That's a limited point that we want to drive...
We're taking all steps to make sure that things get back to normal faster than -- so I think it will go faster.
Just one last question regarding this off-line. Okay. Just wanted to get the lay of the land. How -- I mean are there -- is it too competitive landscape out there for its products? I mean are there too many players? Are there specific issues regarding our cost of production, right? I mean -- or is it given specifically that the customer base is going down?
I don't have all those details than whatever I told you. As I said, it's very small in terms of total business of ours. So there is an enough management time given to that company to ensure that we improve there. But all those cost data, competition data, I don't have that.
Okay. Okay. Or I guess we can probably engage off-line some time on this.
Yes, yes, yes. Thank you.
The next question is from the line of Sanjay Nandi from Ratnabali Investments.
Yes. Sir, can you please share the capacity utilization for this particular quarter?
I think most -- we would be somewhere around 70% levels.
70% levels. And the next question is like and you are coming up with different CapEx programs in the Kandla and Visakhapatnam. So can you please elaborate on those things? What kind of incremental sales that is going to come? What is the time line for these projects?
It's there in my presentation, not the capacities. But if you can discuss with [ Semik ] of SGA, he will have all the data. Or we can -- maybe we can speak off-line sometimes. I can give you more details.
Sure, sir. Sure, sir. Sir, one thing I wanted to know like in the monolithic space, we are just investing in via Visak. So what is the outlook for that particular segment, sir, going forward? Sir, how will you look in monolithic industry as a whole, sir? Because Orient is also coming up with this monolithic steel here, building some capacities with all these things. So...
Yes, we are not differentiating between monolithic and shaped refractory. The refractory market seems to be very good. So I would -- yes, that market seems to be very good. And on the monolithic product also, the market will remain good. Though it's a no value per tonne product. Maybe the margin in some products would be lower. But then, yes, the product is -- the market is good in that.
And sir, a lot of restructuring things are happening in this overall restructuring, this refractory space, like the [ RHA ] is just consolidating its arms into India. And so as a competitive scenario, like where we are heading to like in next 5 years down the line?
We're looking at growth. We have been growing and will continue to grow.
Okay, sir. Sir, do you -- can you comment anything on the pricing competitive? Like, do we have the power of pricing competitiveness or something like that?
So there's nothing which is called pricing. If somebody can give a -- take a higher price and take higher share, it's a competitive pricing.
No. I mean to say, like if you can shift onto some premium products like the flow control products or moving up a bit more way to all those products.
It has to be a basket of products. We cannot only sell high-value products. You have to sell all the products. So the customer is looking at the total solution. You cannot go to the customer that's now on low value up if you want [ offer ] high value [indiscernible] for that. [indiscernible]
And sir, do we have any foray into the total refractory management in TRM?
Yes, we do that.
In that segment?
Yes.
So what is the scenario as of now in the TRM segment, sir? Like what kind of margins do we generate from those segments?
Margins are good. So I cannot share you what kind of margins we do in that. That's something that I think is pretty internal. But then, yes, there is a good margin in all those management contracts also.
[Operator Instructions] The next question is from the line of Rajesh Majumdar from B&K Securities.
Sir, I had a couple of general questions. One is on the consumption of refractories in the various steelmaking processes. There is primarily BF versus EF. What is the ratio of consumption of refractories in the BF route versus EF route?
We should get into the entry expert.
Sir, I don't think they'll be materially different because the last -- I mean the last year, the BF route of production, which is primarily China was relatively affected. And this year, the global steel production will come back. It will be primarily through the EF producers. So do we expect an incremental high growth rate globally for refractories? Or will it be in single digits or low single digits? What is your thought processing?
If you look at the world steel data, there, I think, see, EF route has got a significant advantage. They can quickly ramp up the capacity utilization and quickly bring it down if the market is not good. So any incremental sales or the market demand, the EF will be the first to get benefited or impacted. The BF will continue to run at a reasonable level always. Shutting down a BF would be -- blast furnace would be difficult.
So that's why I was asking you on the specific consumption of refractory. Because as I understand, the requirement of refractories in the EF process is far, far lower than the BF.
No, no, no. I don't think so. I don't think so there is major -- very significant distinction to it.
Okay. So roughly, you have the 30%, 40% lower? Or...
As I said, I don't have the data.
Okay. Okay.
But in our main refractories which we supply, our range of refractory, there'll be no difference.
Okay. Got it. Got it. And sir, my second question, is that the overall refractory industry-specific consumption is decline in per tonne of steel? So the industry has to rely on pricing to basically grow. So in a competitive scenario on a larger picture, since technology is of essence and R&D, global R&D, we are competing with all the large global names in India as well as abroad, have a head start in this. Will it be difficult to sustain a longer-term growth rate because of the fact that specific consumption of refractories is going down? What is your thought process in this? How does the company assess this scenario?
This situation is there for the last 13 years. Okay. And despite all those issues, we have been growing, and I think we'll continue to grow. It's not going to impact us at all.
So you think the specific consumption is not plateaued? Or it will go down further in terms of kg per tonne?
It has a scope of further improvements.
Okay. So technological innovation and products will be the key distinguishing factors going forward?
Yes, yes, it will always be.
[Operator Instructions] The next question is from the line of [ Isha Savla ] from [ Mata Securities ].
I have only one question. I wanted to know that as the company is having strong cash on balance. So what do you plan to do with the excess cash?
We don't have anything as of today. So other than whatever expansion we are doing in Kandla, Visak, as well as the CapEx in our Orissa plant is being funded through this internal cash, which we have. We have not borrowed any loan. As of today, there is no specific thing which we can share with you.
[Operator Instructions] As there are no further questions, I will now hand the conference over to Mr. Kamal Sarda for closing comments.
Thank you, everyone, for participating in this earnings call. I hope I have been able to answer most of your queries. In case there are other queries, you can contact SGA, our Investor Relation adviser. And we look forward to the next call in the next quarter. Thank you, everyone, and remain safe. Thank you.
Thank you very much. On behalf of IFGL Refractories Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.