Grasim Industries Limited

Ladies and gentlemen, good day and welcome to the Q3 FY20 earnings conference call of Graphim Industries Limited. We have with us today from the management, Mr. Dilip Gaur, Managing Director, Mr. Jayant Dua, CEO of Chemical Business, Mr. Ashish Adukia, CFO, and other senior management team. As a reminder, all participant lines will be in the listen-only mode. and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchstone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Ashish Adukhia. Thank you and over to you, sir. Thank you and good afternoon, everyone. I welcome you all to the Q3 FY20 results call. Let me start the call with a few financial highlights, and then I'll follow it up with the select highlights from the presentation that has already been uploaded. On consolidated basis for the quarter ended December 2019, Gratham reported a revenue of 19,205 crore, an EBITDA of about 2,968 crore. On standalone basis, revenue and EBITDA for the quarter stood at 4,499 crore and 495 crore respectively. The business performance for both viscose and chemicals was impacted by weakness in realization. The global viscose industry was impacted by factors such as large capacity addition of about 1.3 million tons in Asia last year. the ongoing US-China trade war, and RMB depreciation which contributed to the drop in global VSF prices. The current prices are near the variable cost of production for a significant part of the industry, possibly indicating that the prices should be bottoming out. The domestic VSF prices witnessed a continuing decline in line with the global prices. Import of cheaper yarn further impacted the viability of some homegrown spinners. On the cost side, pulp prices fell below $650 per ton. We correspondingly gained with pulp consumption costs coming down from 62,620 rupees per ton in the September quarter to about 60,524 per ton in this quarter. For VFI, the revenue and EBITDA for the quarter stood at 446 crore and 82 crore respectively. The decline primarily is on account of lower sales volume, which was 9% down YOY, primarily due to die-hard slump in automotive sector. The domestic VSF prices may witness some improvement due to improving sentiments post Phase 1 deal. There may be some near-term relief due to current supply constraint from China given the ongoing issues there. The prices of caustic soda declined significantly during the quarter to $3.50 in Asia on back of demand slowdown. In India, the caustic soda prices are getting impacted by new caustic capacity addition and increase in imports. Our caustic soda sales volume of 261 KT has improved sequentially as well as YY. We've been able to maintain a market share of 27% despite capacity additions by industry players. In India, IKU in short term is likely to remain under pressure till new capacities are absorbed by new demand generation. In our value-added products, performance has been reasonably okay given the current economic conditions, but chlorine consumed in WABS has improved to 30% from 27% in Q3 FY19. Value-added product sales growth in volume terms reported an improvement of 18% YY. The EBITDA from epoxy which is part of chemicals business was marginally higher as a weakness in realization was offset by stocking of input costs. Sustainability has been the core focus area for the company. The VSF business recently released its sustainability report. We would like to just highlight few key points covered in this report. We continue to be one of the lowest water consumers globally. Secondly, Canopy's hot-button report has ranked us number one VSF producer. This report ranks the world's top rayon and viscose producers on their progress in eliminating endangered forests from their supply chain. More than 200 leading global brands, retailers, and designers are part of the Canopy style initiatives. Let me briefly cover a few targets that we have taken up in this sustainability report for the VFF business. Reduce sulfur release by 70% by 2022, and this is for all the VFF sites. Reduce water intensity by 50% by 2025, and reduce the lost time injury frequency rate below 90%. Now on the CAPEX fund, I would like to reiterate that our project team is committed for timely execution and commissioning of the project. If you notice on slide seven, the CAPEX earmark to be spent for FI20 as a whole has come down by 500 crore in comparison to the estimate that we had given in quarter one. We have primarily phased out certain payments and we will see some savings as well but it is a little early to state what that amount of savings would be. Our disciplined cash flow approach has yielded results this quarter as well as if I look at the nine-month financials. For the nine-month FY20 standalone operating cash flow, the generation before CapEx has been 3,438 crore. A large part of the cash generation has been on account of production and working capital. So that's it from my side. We are open to questions. So I'll hand over to the operator. Please feel free to reach out to us on any queries that you may have during this call or if they're unresolved, then post the call. Thank you. Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question, may please press star, then 1 on your touchscreen telephone. If you wish to remove yourself from the question queue, you may press star, then 2. Participants are requested to use handsets while asking a question. Anyone who wishes to ask questions, please press star, then 1. The first question is from the line of Amit Murarka from Motila Loswan. Please go ahead. Hi, good afternoon. Just on the margins, so particularly like the prices side, so the prices have slid quite sharply in the past couple of months. What we have been discussing on the call is that like we have reached nearly a bottom, but it seems like the prices have continued to slide. So the Can we now finally say that the margins which we have seen in this quarter is really the bottom now and going ahead, the margins are expected to be better? So, you know, we don't give guidance as such, but I think some of the points that I mentioned about VSS, for example, the price reaching, you know, it's almost reached the variable cost of the global players. So it's highly unlikely that it will go down further. It's expected to, in fact, bounce back because of the whole coronavirus issue. There is no supply coming out from China, so there could be some temporary relief that we may see in the VFF price. Dilip, would you like to add any point? And then we can hand over to Jayant for chemicals. Yeah, I think it is very difficult to predict which way the prices go. As Ashish mentioned, every Chinese player is right now losing up to 2,500 RMB per tonne on the production there and the sales they are making. So I think you can't sustain this for very long. And it is reflecting in the OR, the operating rate of the Chinese plants, which has come down to 75%. Today it has come down to 66% as we speak. So the stress is being felt by the industry, and I think there has to be some bit of discipline coming in. And as to this whole coronavirus thing, it is a short-term issue. Yes, the market will see some kind of upswing, but that long-term ultimately, the demand-supplier balance has to match. Then only the stability will come. Ashok? Very similar on me. The only difference is that India got a fair amount of capacity in slump over the last one quarter, which is getting absorbed by the market, and we expect the absorption to be completed by another three quarters. The imports have gone up, particularly from Northeast Asia and also from the Middle East part, both sanctioned and non-sanctioned countries. We started seeing a slight reduction in the intensity of the drop, but the drop of prices continues to be a challenge now. Generally, there is a two-month lag, right, between the bulk prices shifting into the P&L? Our system is we take the previous quarter price. And then the inventory also, there's about a three to six month gap it becomes. So depending upon, so pricing is last quarter, but the consumption happens. So the whole lag story, this quarter also had a huge amount of lag, about 120 crores of lag impact. Yeah. So, but I think going forward now, we have to see the end of it. So because the prices are now flattening out of bulk, so hopefully before we should see the end of the price lag. And also just one more question on the CAPEX. So you have a fairly large CAPEX program and given that the industry profitability is so weak, is there any thought around delaying some of the CAPEX and wait for a recovery in the industry? I don't think it makes sense to delay the CAPEX at this point in time because I think the demand is there. And by the time our first line goes on stream by third quarter and third and fourth quarter, I think By the time this plant stabilizes, the market should see an uptake, hopefully. And even if it doesn't, this plant we are putting up is far more efficient than the existing plant, so I'll have a lower cost of production advantage and more flexibility, so we can do more value-added products. So I think we don't want to delay the project right now. We should be there in time when the market looks up, we should have the capacity ready Just to add to that point, these capex are quite strategic. So if you look at VSF, for example, there is a large commitment that has already happened and we see a demand of growth to serve that market from our capacity as well. And if you look at chloralkali, the major capex that has come is on account of, say, Balbadrapuram, Okay, which is again in the region, eastern region, which is a deficit market today, that market actually imports caustic. So it's a ready market for us to serve. So therefore, both these big capex are strategic in nature. And then there are other capex which are, you know, in value added product side in chemicals which are strategic. And then you should go back. the history when we had put up our last one in 2014-15 it was exactly the same cycle was there and the and the commodity cycle the down cycle lasts about 18 to 24 months so hopefully i think the timing should be fine okay understood thank you thank you the next question is from the line of pratik kumar from hunting stock broking please go ahead Hello. My first question is on your domestic VASF segment. So what would be the industry growth in this quarter because it seems that our growth is flat during this quarter in the VASF segment. The industry growth should come back again. I don't know whether you picked up the point. What happened in last quarter, because of the VASF prices became very low globally and VASF because we are defending our market for the fiber and a lot of cheap yarn started coming into India. So if you see between June to August and September, the yarn import became 259 tons per day. Almost 20% of the market was grabbed by the yarn imports. And so the demand actually, so if you are asking for VSF fabric, the demand did not go down. But part of the demand was met up by the imported cheap yarn. And that is the reason why we had to drop our VSF prices to make sure that our spinners, I always have been telling in this call, it's about policy to provide our product to help the value chain, to keep them healthy and because Indian value chain came under a lot of pressure because of the cheap imports and we dropped the VSF prices to do that and as we see the imports have virtually stopped. So I think that the demand should go back, come back. So there is no shrinkage of demand in Indian market, enough demand. I think if that yarn import had not happened, we would have gone by about double digits only. am i making myself clear yeah yeah it's good so actually i joined the call later it was discussed earlier in the call uh so on on regarding this impact of coronavirus so uh in chemical segment caustic or value-added specialty segment uh does any of these segments get benefits from the prices i mean um i mean i understand we understand that there's It is temporary, but like the speciality segment, does it benefit significantly from the ban on, I mean, the closure of capacity in China? Currently, no such indicator is available which gives us any confidence to say that that could happen. But the flip side of the situation can be there are a lot of pigment and dye stuff manufacturers who are dependent on a lot of imported stuff from China. Now, normally they carry an inventory of anything between 30 to 40 by 60 days, depending upon the leak times. If this thing doesn't settle down, you could actually have some of the value-added products going up because of shortage of raw material for their entire feedstock. But it's too early to comment on that. We need to wait and watch and see what happens. On the caustic side, we don't see any impact at all. So caustic is not related, only the speciality segment, as you mentioned, might benefit. Okay, basically, yeah, and regarding our net debt position and standalone business has gone up sequentially by around 700 crores. Is it related to that investment we added in like AB, Aarti Birla Capital, you know? Yeah, so you have to look at it from overall company's point of view of cash inflow and outflow during the quarter. So, yes, that is the investment that was made of 770 crore into Aditya Birla capital that led to increased cash outflow. And that's one of the reasons for the debt to go up. However, like I mentioned, there is a good amount of cash that has got generated as well due to release of working capital in this quarter as well as for nine months, which was used to obviously meet the requirement of the business. Okay. And just one question on capex. So a nine-month capex is around 2000 crores. Channel of business, we are in this adding 1200 crore in fourth quarter. That's the right figure I'm looking at. Yes. So the total comes to about 3,200 for the entire FI20. And what we had given initially was somewhere close to 3,700, 800 as an estimate. So it's lower by 500 crore. But that just spills over to, I mean, in fact, some of this might also get spilled over to next year. And total CAPEX numbers remains the same. Yeah, so right now, so like I said in the beginning of the call, as of now, we're not changing the estimate of the total CAPEX that will be spent over the next two to three years. So that estimate is not changing. but we have seen signs of some savings that can be made in some of these capex, like Dilip was also mentioning. It's a little early for us to give any kind of an amount for what that saving could be, but there may be some savings that we will see in these capex. Okay, and on ECU realizations in the standard pressure, so How the chlorine realizations continue to remain negative third quarter straight? The chlorine realization, the intensity of negative has gone down. So it went as high as about 1500 negative in the earlier part of the year. It's down to now just about 100 degrees negative as of now. It's also because the chlorine demand, particularly in Gujarat area, which is a fairly large consumption area for chemicals, has been fairly stable. We expect chlorine to remain at the last quarter in similar ranges. So is this something also we import, chlorine, which could also benefit? Chlorine does not travel at all. Chlorine being hazardous the way it is, does not travel at all. tend to do either by pipeline or very limited movements through tunnels in a small lead district. Okay. Thanks a lot. I'll get back to you for more questions. Thank you. The next question is from the line of Gunjan Pratyani from J.P. Morgan. Please go ahead.

Yeah, hi. Thanks for taking my questions. On the VSF, I just needed a clarification. For the last many quarters, we have been able to kind of keep our realizations more steady given, you know, the various initiatives we were taking on branding side or also improving the mix. It somehow seems that in this quarter, the decline that you guys have had is much steeper than what, you know, global VSF prices would have seen. So, what really changed in this quarter for the the realization to see such an acute pressure in a quarter that the catch up happens.

See, as I mentioned to you, this was a strategic intervention we did to make sure that our spinners continue to remain viable. Because their viability, so they were bleeding at the, because they had to match the imported price of viscose yarn. Viscose yarn which was coming at 148 took me the kg. At that price, Indian spinners were losing money. So we had to kind of support them and that is why the prices came down disproportionately. But even now also, we still were at a premium to the landed prices of this course in India. But as we speak, by the end of the quarter, the global price came down to $1.2 per kg.