Grasim Industries Limited

Ladies and gentlemen, good day and welcome to the Q4 FY20 earnings conference call of Grassem Industries Limited. We have with us today from the management, Mr. Dilip Gaur, Managing Director, Mr. Kalyan Ram, Chief Executive Officer, Global Chemicals and Group Business Head, Fertilizers and Insulators, Mr. Jayant Dua, Chief Executive Officer, Chemical Division, and Mr. Ashish Adukia, Chief Financial Officer. As a reminder, all participants' lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during a conference call, please signal an operator by pressing star and zero on your touchstone phone. Please note this conference is being recorded. I now hand the conference over to Mr. Ashish Adhokia, Chief Financial Officer. Thank you and over to you, sir.

Good morning, everyone. And first of all, I hope that you and your family members are all safe. We have uploaded the presentation on our website as well as I think it has appeared in the BSE and NSE websites as well. So I would request you to please download the presentation as I will be referring to some of the slides from the presentation. So let me start with the room. which is impact of COVID-19 on our performance. The announcement of shutdown on March 21st, 2020 came without any heads up. So our businesses had to forego large part of sales that is typically achieved during month ends. The initial sales made in March could only recover the costs for that month. So while January and February were normalized months for us, month of March impacted the overall quarter performance. In Jan and Feb of 2020, VSF business achieved its highest ever production volume with a run rate of about 1700 TPD. The prices of VSF, which were on the weakening trend till Q3, had stabilized during the start of Q4 with some price improvement in the month of February and March. On the cost front, there was significant benefit on account of softening of input prices like that of bulk, caustic, and also the business had taken up certain cost-focused initiatives, which they called Project Cascade. In the presentation, we have given a number that emerged out of the cascade benefit. In case of chemicals, the EQ continue to be under pressure due to muted global prices and excess supply on account of large capacity additions in India, as well as rise in the imports. Overall, we achieved an EBITDA of Rs. 467 crore in Q4 for standalone business, which if we adjust for one-time expenses of about Rs. 23 crore, it would be very close to our Q3 EBITDA, despite us losing a large part of March. I would now like to walk through a few slides of the presentation to provide you with better perspective on both COVID situation as well as the financial performance. So on slide five, when the lockdown was announced, we had temporarily suspended operations of all our plants, except for fertilizer, which had continued the operations through the lockdown. Chemicals and VSF plants received permissions to start operations over April and May as we produce certain essential items. At the current junction, VSF plants at Nagda, Karach, and Vilayat have assumed partial operations, while Harrier is expected to resume operations shortly. The VSF plants are operating at 30 to 40% utilization, which is growing at a graded way. And all our chemicals plants have resumed operations partially in May. And for June, the capacity utilization stands at 60%. Overall quarter will be lower capacity utilization than the June utilization, obviously. Our business continuity plan is focused on Employee safety, which includes ensuring safety as they resume work. Many of our plants have adjoining staff residential colonies, which help in returning to work expeditiously. Second is cash. We have maintained healthy liquidity and have raised some amount of debt, taking advantage of very competitive rates. Third, focus on an entire value chain. We have optimal level of raw material inventory to run the operations. After some initial hiccups on supply chain and logistics, it seems that we are normalizing now. We've had a clear customer focus. We have to work closely with our customers and help them in their initial restarts. So if you go to slide... Then on consolidated basis for FY20, Grassin reported strong financial performance with revenue of 77,625 crore and EBITDA of 13,846 crore and PAT, which is after extraordinary of about 4,425 crore. And on standalone basis, Grassin reported EBITDA of 2,836 crore and PAT of 1,270 crore. Let's move to slide 13. Yeah. So for the entire year, at the standalone level, while we generated EBITDA of 2,836 crore, we actually generated net cash from operations of 3,159 crore. This has helped us maintain strong net debt to EBITDA ratio of 1x. The standalone gross debt includes Rs. 322 crore of interest-free loan from special banking facility provided by Government of India against the fertilizer subsidy due. In fact, in quarter one, this loan has already been repaid with subsidy release from the government. It should ideally not be counted as debt. It was as though the subsidy had come to us through SBA, the Special Banking Facility. And therefore, the net debt figure should be considered lower at 2,653, which brings net debt to EBITDA at below one, at about 0.94 times. On slide 15, VSS, including VFY, has sales of 102 crore and EBITDA of 261 crore. VSS achieved a strong performance on sequential basis due to reduction in the input prices. The bulk prices on consumption basis reduced by 11% in 53,782 per ton in Q4. The price premium of VAP over gray increased during the quarter as reflected in the strong blended realization in Q4. VFY revenue for Q4 was 415 crore with EBITDA of about 7070 crore. If I go to page 19, There is a consistent decline that you can see out there in EQ, which is primarily due to capacity additions by the industry of almost 610 KT during FY20 in the domestic market. Demand for chlorine value-added products improved with increased usage in health and hygiene products post COVID-19. The WAP sales volume growth stood at 10% YOY, driven by this demand. On page 21, we've covered fertilizer performance briefly. Key highlights are that we've received communication from government along us, fixed cost reimbursement retrospectively. This improves the Q4 EBITDA by around 23 crore. This amount is for the entire year, just clarifications. Second important growth lever in the business performance of fertilizer is that of Purok. Our fertilizer business provides agri-solutions, seeds, crop production products, soil health products to farmers under this brand name Purok. This is basically the non-urea business. These products are sold through our distribution channel, which sells urea as well, and plus there are more tie-ups. PURAC actually contributed almost 28% of the overall fertilizer EBITDA for FY20. There was maintenance shutdown during Q3 as well as in Q4, due to which we lost some production in fertilizer during the year. GRASIM released its maiden sustainability report with ambitious targets to achieve global leadership and sustainability. The BASF and chemicals business and other businesses as well have taken targets on safety, water, emission front. The details are all covered on slide 31. Yeah. Overall, COVID has had a major impact in March 2020, as well as quarter one of FY21. Looking at the future, which we should, we are focused on our strategy to make our business even stronger. And a few points, how we're thinking of making it stronger is to reduce fixed costs further. and look at other cost-optimizing measures like we did in case of Project Cascade for VSS. There is still further scope to reduce fixed cost. Focus on value-added products, which give us better margins, and have a calibrated approach to CapEx, which is currently being kept on hold till we have visibility on the economic outlook. So that's it from my side. I will now hand over to the operator for Q&A.

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 press star and one on your touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask a question, please press star 1. We have a first question from the line of Kunjan Prithyani from J.P. Morgan.

Please go ahead. Hi. Thanks for taking my questions. Just two questions from my side. Firstly, on the Vsf business there is clearly when I look at the slides at the margin I see that prices seem to be reflecting some stabilization so could you talk about what really is happening because from a demand perspective I don't think things would have moved too much given the overall disruption worldwide so is it that you know prices have fallen so low that you know they can't fall anymore or you're seeing some shutdown so if you can throw some color on the Vsf industry And secondly, I missed those comments which you made on the capacity utilization on the VSF and chemicals. So I'm just trying to assess from the supplier side how normalized the things are in both these segments, VSF as well as the chemicals.

So I'll take, let me respond first. I believe you are here. See, Q4 was a little unique in a way because as you recall, China got impacted on the COVID first. So Q4 was the time when Jan said China was suffering from COVID. So there was an issue with the Chinese supply chain, which I briefly mentioned to you earlier. So as a result of that, what happened, all the predatory pricing which China was doing in the market could not happen. And that helped the prices. So... So the Indian prices really started, we could hold the prices because there was a discipline in the market. So Chinese could not intervene and kind of bring down the prices. So there was a gradual improvement in price from Jan, Feb and then March, all month on month. I always told you the Indian demand was always very strong. It was always intact. and so the like in the month of jan said we could sell almost thousand seven hundred tons per day which is never done normally we do thousand four thousand five hundred tons per day the market was really very booming the demand was very good and i think as i told you earlier the there is a definite shift in the favor of discourse with other fibers Even if you look at FY20 as a whole, the global fiber consumption has come down compared to previous years by about a couple of percentage points. But the score still remained at 7%, while others were 2 to 3%. The demand side was very strong. There was a discipline in the market because the Chinese supply was restricted. So that led to a positive stabilization. Now, what's happening today? Problem with China is that all along the COVID thing, they kept running their viscose plants because they couldn't afford to shut the plants because the labor was there, but they could not sell. So by the time the COVID got resolved in China, they had a huge inventory. The viscose inventory in China was almost 125 days March end. And now they are finding that there is a lot of material, but downstream has not picked up. The Chinese textile demand hasn't picked up the way it was expected post-COVID. So the spinning operation rates are there below 50% historically. Now they are inching up beyond 50%. So what is happening is there is a lot of capacity cut and a lot of reduction in operations there. So Chinese OR, what we call the capacity utilization, has come down to around 60%. So market is rebalancing. So as we speak, there's still a surplus because demand hasn't picked up. We have to wait for a couple of more months. I think textile will be the next. In the next year, we will pick up demand. So Chinese demand, I think, has come back. If you look at, they have come back pretty well in terms of other areas. Like the front-facing areas have come out very well. The digital consumption has gone up very high. The consumables have moved up. I think the textile demand picks up in China and is over 60%. We can hope for some kind of stability, but I think it's early days. This is not the time to make any predictions. To my mind, let's wait for a couple of months more.

But do you anticipate more pressure coming from the inventory which is built up there or to some extent demand taking longer to stabilize?

Short term, yes. We all believe that in China, everything has just picked up. Why should that texture in April not pick up? So to my mind, I think the European market has started opening now. So I think so far there was no pull from the global demand. So now I think you start placing orders now. So the whole cycle will get back into design from next month. Now for the autumn-winter launch, they will start buying fabrics now next month. And for spring-summer in July-August. So we believe July is a time when we can see a bit of uptake in the whole thing. So next two months will be challenging, yes, for all of us. Because they have to liquidate the inventory, whether they liquidate here, whether they liquidate wherever it is. But in course of time, but one good thing is they are now getting down to more reasonable OR number. It is no longer 75, 80%. It is 60%, 55%. That number remains stable. And the demand goes down to pre-COVID level. You can expect some stability. Okay.

Philip, would you like to cover the capacity utilization for BSF and then the giant you could cover for chemicals?

As I told us, the capacity utilization was more than 100% because the demand in India was very strong right now.

For Q1, so, Gunjan, the number that I had shared for BSF plants was 30 to 40% capacity utilization as we speak. We'll see how June shapes up. But that's the range at which it is currently at. And chemical, maybe, you know, I would like Jayant to throw some light on capacity utilization currently in June and, you know, April.

This VSF is 30-40% more because demand is yet to normalize. I'm just assessing, is there any supply chain... issue that we could have in the near term, you know, given most industries are facing a supply shock also along with the demand.

No, Gunjan, we have a little difference. When we shut our plants also, we made sure we took some time to shut them down. They are continuous process plants. So we built up enough inventory with us and the customers and when they start, there will be no interruption. We had about 10 days inventory and the lead time to start the plant is 4 to 5 days. So that part is not there and we have enough supply of input like pulp and costly soda. So we don't expect any supply chain issue right now. As you rightly said, the demand, you see, this was a direct demand. So first the apparel have to start selling. Then the fabric will sell and then the fiber will sell. Now what will happen? All the malls will shut. Globally, all the markets have closed down. So what happened? There were a lot of cancellations which happened from the global players. And when the lockdown happened, it was spring, summer, and the peak. So the stuff had gone into the store, but the sale did not start. So next two months, they will liquidate the inventory, which is already lying in their store. And that's why the pull is a little less. So it will take some time. When the buying cycle restarts, the pull will come. But what is important for this course is not the global brand and the malls. It is a local market. It is in tier two, tier three cities and the rural market. There, there's a lot of money and there's a lot of demand. But I think when the wholesale market gets activated, the demand should pick up. So we believe in next two months' time, the wholesale market should get into the action. And then I think demand should pick up faster.

Okay.

Gunjit Jayant is saying, to your question of where are capacity utilization in the chemical is... Particularly in the month of June, I think our current run rate is about 60%. And I think the only challenge that we have in this is with so many products and byproducts that we make, there is a continuous need to balance and rebalance your plant across the various geometries to make sure that you have safe operations. And I would echo Dilip's point that textile is a large segment for us in consumption. And the textile segment is taking time for it to come back to stream. And we expect that probably by the end of the coming quarter, textile will be back to its normal production. So we expect, you know, April we started, we got some permissions in the month of April, basically using the hygiene route. And for us, even if we have to produce hygiene products, by necessity, we have to produce caustic and chlorine products. So our capacity utilization ramped up slowly from mid-20s to about 50, and now we are operating at about 60% capacity utilization.

Okay. Actually, just one question, if I can squeeze in, and then I'll go back in the queue. On the CAPEX, when we had the call some time back, you had mentioned that you would give us more sense on how we are reassessing the CAPEX for F21. Is there any clarity on that front? Because the expansions which have been underway were fairly sizable in terms of commitment. So are we going ahead? I mean, what is the thought process around spend that we can see in F21?

It's a little early for us to assess what about the CapEx plans. There was some disturbance. about our CapEx plan. So I think as we get more visibility, right now we are just in the phase of, you know, increasing our production and looking at the market. I think we'll have better clarity by end of the month. So next quarter, we will possibly finalize our full year plan along with CapEx. So we'll be in better position to share those numbers.

Okay. Thank you so much.

Thank you. We have next question from the line of Rajesh Lachhani from HSBC. Please go ahead.

Thank you for the opportunity. So first question is on this one-off that you said that one-time expense of 23 crore in Q4 led to some drop in EBITDA. However, if I see the presentation, there is in fact a 23 crore one-time gain in the fertilizer. So I just want to understand the what is this 23 crore loss or one-time expense in Q4?

Yeah, sure. So, you know, first of all, the fertilizer number that you mentioned, it's not a one-time gain. It will be a recurring gain that we will have because now the fixed cost reimbursement of an additional amount has been allowed by the government. You know, if you recall, we uh we were accruing some income on that account and then we created a provision last year of 135 crore because uh which was basically 50 of all the income that we had accrued uh we had made a provision because we were not sure whether the government will allow that uh fixed cost additional reimbursement or not but uh this year now they have allowed that uh reimbursement so therefore the fertilizer is actually a recurring gain that you see of 23 crore. It's just that it's accrued in this quarter, but it belongs to the entire year. On chemicals, there is 23 crore of one-time impact. So EBITDA should ideally, should have been 127 crore out there instead of 104 crore. Now that is, there are three, four items in that. Okay. There is certain, you know, electricity duty that we were exemption that we were expecting and we had booked, which we had to reverse because right now the clarity is that we're not going to get that. There is also some physical mismatch in the inventory or assets, which has also been provided for. So, therefore, you know, it is four or five items put together, which constitutes 23 crore, which has been adjusted for in this quarter, which is clearly one time.

So, sir, but this fixed cost reimbursement of 23 crore, it also has the full year reimbursement has been booked in this quarter. So, what would be the... access amount that we have booked from the previous period?

Access amount from previous period? So, see, okay, let me put it differently for you. Maybe it will give a better idea. I think on a regular recurring basis, the EBITDA of fertilizer should ideally go up by about 25 to 30 crore on account of this fixed cost reimbursement. Okay, so quarter one, quarter two, quarter three, we had not booked any of this. Quarter four, we have booked for the entire year. And going forward, you'll get the benefit of about 25, 30 crore annually on account of this fixed cost, additional reimbursement through subsidy that government will give us.

So 25 crore is the annual amount and not a quarterly amount.

Yes, absolutely.

Okay, understood. And if I look at the trend of not only VSF, but also cotton and the PSF, the March exit and compare the March exit with the December exit, I can see that there is a clear continuous fall in the VSF for cotton as well as PSF prices. Also, the bulk prices have actually largely stabilized. In the last two, three months, if I look at the chart that you have provided in the presentation, so clearly the margins could further come under pressure going forward?

I think both of them are at the bottom right now. If you look at the discourse prices also, there is to do arithmetic. Not in India, Indian prices are still better, but I think globally the prices are almost hovering around variable cost. So there is not much scope to go down further. uh pulp also i think it is about it is stable plus minus 10 to 15 dollars kind of a thing the issue is all demand-led issue right now because of the core weight there is no demand for any fiber so this is whole thing is falling as a sentiment so so cotton has fallen because because there is no demand second on top of it what happened because of the code a lot of cotton production also reduced so globally cotton production is less but the demand has fallen faster So the production of cotton from 26 million tons is down to 25 million tons, but the demand is down to 23 million tons. So you are ending the year with a higher year-ending stock of cotton. That will impact the cotton prices. Polyester, the crude price went down to $10. So sympathy, the PSF price came down, but they started picking up again. So to my mind, making any predictions from this trend will be premature. So let's watch for a couple of months, let the world come back to normalcy after post-COVID and then see what happens. But there is not much room to go below this price anyway. If it goes below this, the pulp plant will start stopping. If the scores go below this, the scores plant will start stopping. So I think there will be a new equilibrium that will be achieved.

That makes sense. But if we look at, you know, the Chinese production at the VSF prices in China are currently hovering around 9,000 RMB per ton. And at these prices close to, you know, the producers in China are making 2,000 RMB per ton losses. And yet we are seeing that 60% of the operations are still going on. And this 2,000 RMB per ton is not a current phenomena, they have been making losses to a lesser extent. But still we see, continue to see the plants running in China. So sir, I just want to understand how do Chinese plants, if you can throw some light on why Chinese plants continue to operate despite having losses. So what is the incentive for them?

As I told you, I think it's difficult to understand what is in a Chinese mind. But if you look at the Chinese players out of 24, 25 players, four or five are big players. So they not only make this course, they make other courses. They are far bigger players. So in that case, they take a longer term view. Shutting a plant means you have to get separate delivery. You have to put fixed costs. There is a huge complexity involved in that. But what is happening is the smaller players are kind of shifting out. Otherwise, this could have come down from 75% to 80% capacity to 60%. And that's what they have always been saying. The moment the peripheral players shake out, these core players cannot meet the global demand. Automatically, the prices have to form up. So the issue is what one has to see is how long it takes to shake out this peripheral player. And that is what is happening right now. It has become so unviable that a lot of small players are just not able to manage. Bigger players, you may call them deep pockets, or they've got a strategic commitment to the business. They will take it in their stride. They've been losing money for the last one and a half years. And it is not the first time they have done it. In the hope that they'll be shaken out, the smaller players will fall apart, and the bigger players will continue. And if you see, they've done arithmetic. If the demand goes back to the pre-COVID level, and the OR remains 65%, the market is undervalued.

Understood, understood. Sir, just last, if I may squeeze in one more, can you tell me the exit prices of VSS currently may end compared to March and exit price of chemical caustic soda or chemical segment ECU compared to the March and exit? Which market?

India? Which market are you talking about? India, India. Yeah.

So the March end, we've already shared with you in the presentation, right? On slide 19, you will find the EQ, which is 26,600 for the quarter. We don't give prices of the current quarter as a guidance or something. And in case of Viscose, again, we've given the exit price. And, of course, there is some premium that we enjoy in the domestic market over the international prices.

But just can you share the trend? Is it, you know, upwards or still declining trend compared to the March exit?

No, so I think, see, right now the price, which Dilip has already mentioned, is a little bit theoretical trend. in April because there isn't proper uptick in demand. I think when there is a proper demand, when everyone restarts is when you can really talk about the price, which is more an equilibrium price. So it is, you know, it would be irrelevant to give a price of, say, April or May.

I understand. April, nothing was running? may also boost the textile production centers in the red zone. So, the price is absolutely a number. It doesn't mean anything. So, let's wait for June to happen.

Yeah. Sure, sir. Thanks for responding to my queries. Thanks a lot.

Thank you, sir. We have next question from the line of Gaurav Rateria from Morgan Stanley. Please go ahead.

Hello. Yes, please go ahead. Two, three questions from my side. So, talking on the margins, given that the expectation is that the prices may not fall further for VSF, it's already at the variable cost, and there will be some more input cost benefits which could keep coming on the first side, on costed side. Do you think we have bottomed out on the margins for VSF as well as for chemicals, given that input cost benefit will come for chemicals as well on the power side and some fixed cost reduction side? You want to take this, Ashish?

Yeah, no, no, please go ahead with VSF and then we can follow it up with... No, I think that was a prognosis I shared with you.

But as I again told you, let's wait for a couple of months, then take a call. Because right now, we don't believe there is a further room. But if somebody wants to get into an Arakiri, then there's nothing much you can do about it. So fact of life is, yes, based on the arithmetic, both of them have bottomed out. A good thing which we have not shared in this so far is this goes into applications, textile and non-woven. Now, one thing which has come out of COVID, the non-woven market has boomed. It goes into the facial wipes. It goes into the hygiene applications. So there's a lot of discourse both in China and elsewhere. And India also is getting diverted to the non-worn side of the business. And that also will bring in some balancing. And there you've got a much better premium. But today, every player who used to make an X percentage of non-worn is making 2X percentage. So the whole market is re-equilibrating. So while the textile may go down, the non-worn may go up. Even in India, we have started making non-worn again. So I think it's a bit of a plastic question. Let's wait for things to clarify.

Let me probably cover that differently, Gaurav. I think if you see, you know, pre-COVID, okay, I think there we could have said that it has more or less bottomed out, right? Because we got the advantage of pulp and we had the price which was not fully recovered to you know, what we had earlier in FY19 and quarter one of FY20, et cetera. But we had a reasonable stabilization in the price, right? And in case of chemical also, the EQ had come down quite a bit. And power cost, we will keep changing the mix to improve that. But it's more of a fixed cost than a variable cost. It's not linked to the thing. So if you look at pre-COVID, I think let's forget about this temporary disruption that has happened, you know, because that will only impact your quarter one and maybe quarter two of FY21. But hopefully it will not go beyond that. So if you talk about a normal cycle, then I would assume that it may have bottomed out in quarter three and quarter four.

And also two more questions. One on the government is probably reviewing the ADD from China on goods imported from China and Korea on the chemical side. Any, you know, understanding or any feedback from what it looks like and why the import like really is an issue for chemicals if China is really not active in the market. And secondly, a question specifically for Ashish, current environment when we are reviewing the entire organic cafes what is the headroom for investment in a group company even if on a return ratio those investments may look nominally well what is the headroom left for us to do any investment thank you sure so you know on headroom so ADB you know you

Dilip, would you like to cover? Sorry, so chemicals.

Yeah, so I think the point which Ashish was making that while China does not really import too much into India, but I think the local Indian capacity, which came up by around 610 kT, and if you look at it from a demand perspective, the demand on India is about 4 million a shade lesser And if that kind of capacity comes on stream, it's a significant capacity increase, which has actually impacted the overall prices of caustic. And also from the overall perspective, while China does not impact directly India, but it impacts Southeast Asia and other places. And a very similar story, which Dilip was talking about in BSS, also the status of the story in China. The only difference is that majority of the world, barring India, works on chlorine as the main product and caustic as a byproduct. So the number of dynamics by which the caustic market got impacted globally was significant. Even today, the vinyl demand has really not come back. So there is a, you know, chlorine excess available in the market. And by that matter, you know, plants are getting re-rated or new balances are being found out. And I think this uncertainty globally will continue. People are carrying high stocks of caustic across the system, including India. But as and when demand picks up, which is picking up slowly, I think that balancing will happen. It's very difficult in the current environment of April and May actually to say what is going to be you know, it's looking, improving with every month. And I think the trend will continue there.

On the headroom, Gaurav, if you see that, you know, we've spent this year 2,828 crore towards topics and the remaining from the sanction is about 4,900 crores. which will be spent over a period of time. We have to sit down and recalibrate on how and when we spend the amount and also how much to spend. Is it likely to be $4,900 or is it likely to be lower? So given the current scenario, we may draw out a scenario where we have a lower capex as well. So it's difficult to say what is the headroom for investments otherwise. But if you theoretically calculate, then you will generate, you know, if suppose same EBITDA is this year of 3,000 and you use 3,000 crore towards the capex, you know, and so you won't need to probably raise debt. But over a period of time, maybe if there is some deficit and you have to raise debt, then also there is enough room for AAA rating, we are comfortable to go up to two and a half times or so on a standalone basis. But beyond that also, the rating won't get impacted, but I think we won't like the ratios of NetDev to EBITDA to worsen beyond that level. But that also, according to me, is a little bit theoretical. So I think we are at these levels and there is no proposal at all of any investments in group companies other than we've seen the Navy of our rights announcement. Our share in that is somewhere around 10-11% and their announcement is of on participating in that right when the time comes.

Thank you.

Thank you. So we have next question from the line of Naveen Sahadio from Edelweiss. Please go ahead.

Hello. Yes. Hello.

Can you hear me?

Yes.

Yes. Great. Thank you for the opportunity. Good evening, everybody. A couple of questions. So first question is related to VSF and I just wanted to understand how should we look at the export part of the business? You said China capacity utilization is down to 60%, but they still have huge inventory to be liquidated, which could keep margins under pressure. Now, our exports are about 14 odd percent. But given that they have a pressure to... liquidate that inventory, is there a possibility that our share of export as percentage or in general those volumes can take a hit or is there a way that our share of exports can actually go up because globally people may be a little averse of buying products from China. Any thoughts there? I think that's a good question. In fact, the simple answer is our exports are likely to go up. Why? I'll tell you why. Yeah, because as we all know, you know, this post COVID, it will take time for the demand to come back. It won't happen overnight. One of the ways what we are, we already started doing is we want to fill the entire capacity in the graphene plant. We want to have full capacity. They've got about 1600 tons per day of capacity with us. So what we are doing now, and India is very advantageously placed in some markets. The freight from India is much lower than freight from other countries. those markets so what's here if you remember earlier my demand was so much in india i could not service it so i have to do the export this is that one time fifty percent export seventy domestic the last number we spoke to is fourteen or twelve percent export eighty eight percent domestic i think we are this quarter you will see we have exported more and more in fact i did only 34 times per day of export today i'll do empty much more so i think what we are doing is whatever the demand gap between the capacity and the local demand, we are trying to maximize exports from India. It may not have the same margins as what will happen in domestic markets, but we do make more money than other exporters from South Asia. So the 30 to 40% of the current capacity utilization that we are running in the Viscose, that is including the export benefit. No, no, no. This was domestic. You see, what happened, you must understand. April was full lockdown. Then it got extended to May, while some opening happened on 18th of May, but all the textile centers, you take Ahmedabad, you take Surat, you take Jaipur, you take Girod, you take Devandi, they all remained in red zone. So textile market did not open for entire month of May. It's only after 2nd June or 3rd June is that things started opening up. Like Jayant was saying, we are seeing every week an increase in demand. It's more sentiment than the demand pull, but the sentiment is really positive. So as we speak, the 30% to 40% is the captive demand. And the balance field, I'm not saying entirely we'll go to export, but we are trying to top it up with export. And the idea is, as this buildup will not happen to, we expect about 80%, 85% demand in domestic market only by Q3. So till that time we'll try to maximize exports and again exports will come down and domestic will take over. So in the interim you're saying, so if India can come back only in Q3 to about 80-85%, can exports, does export really have that much potential to take it up to let's say, I don't know, I'm just doing some numbers, 60-70% of overall utilization, can export be that big an opportunity in the interim? Yeah, but it depends on what price you get. So I think we don't export like Chinese, so there's a cut-off price. If there's a viable price, we'll do it. There is enough. Look, the global market is about 6.5 million ton market. I am talking about half a million ton capacity, 600,000 ton capacity. So we don't have a huge volume to sell. They show you at what price you get. Understood. In terms of the margins. Yeah, understood. Thanks. Second question was just about KPEX and I know Ashish sir did say that clarity will come only post Q2 how do you look at KPEX but is it fair to assume that the planned KPEX of 235 KT in BSA that is certainly delayed and will not come then in let's say at least in first half of FY22 is that a fair thing as in because if let's say things were to normalize I'm only trying to understand if Q3 you are expecting India to come back at 80-85% and keeping fingers crossed there in FY22 then turns out to be a much normal year globally. When should we start looking at then the volume benefits from the new plant?

Thanks. So, see, you know, I think these are the questions we are asking ourselves as well when we are sitting down on campus and having a discussion. I think if you were to come back with a scenario that let's kickstart the VSF capacity and increase immediately, then we will lose. We probably lose a quarter, which means that, you know, September, December, what we were talking about can spill over to quarter one of the following year. But again, you know, we have to sit down and discuss these timelines and then come back to you.

Okay. Dilipji, just one follow-up, if I may, please. Has exports from China come down as a percentage? Any colors that you have there that will be helpful? Jan, Feb, March, it did come down because they could not supply. But now they are back in the export market because they also have the same issue. The domestic demand hasn't picked up the way they had thought. So they are back in the export market. Otherwise, China was only exporting 10% of their production. They were all locally focused. Despite all the capacity, the Chinese market could absorb most of the gross production. So I think as we speak, they are in the export market. But I think it depends on how well their domestic demand picks up. Understood. In a normal scenario, China's exports is just 10% of their total volume, correct? Yeah, yeah, yeah. Not even that often. Okay, okay.

Thank you. Thank you very much.

Thank you, sir. We have next question from the line of Pratik Kumar from Antic Stockbroking. Please go ahead.

Yeah, hi. Good evening, sir. So my first question is on the split that you give for VFI and VSS segments revenue and EBITDA. Yes. So VFI I had given for quarter for 415 crore of revenue and EBITDA of 70 crore. Right. So, I mean, for yourself, while your presentation says that there was a 7% decline in Q4 in terms of realization, none of the slides are mentioned, but are radiations dropped only by 2% right in this quarter? On a quarter and quarter basis? Sorry, what are you, which data point are you? In the presentation on slide 16, you mentioned that gray VSS realization is down 7%. I think this is industry you are talking about, or this is for the company? So, industrial. Yeah, yeah. That's an industry. Right. So, our decline is only 2%, right? Yeah, company is less. Right. So, this is due to higher share of value added, or, I mean, we have usually less to import in this quarter, like, because last quarter it was worse versus, like, I think industry.

And our VAT has gone up this quarter.

Yeah, yeah. So there are two reasons, basically. This is stabilization of domestic price. It's not worse from what was there in quarter three. In fact, it had improved towards Feb and March pre-COVID. And plus, there is a share of product mix in terms of product mix, a share of VAT, which there was, in fact, an expansion of premiums of that over the grain. Right. And then we say that we haven't commissioned our Harrier plant where we have commissioned other three. So this is because of some red zone issue or because demand is not there so we have not started the plant?

It is demand-led. What we are doing is there is no point opening more plants and running them at less capacity. We are maximizing the capacity of the same plant. Harrier is now running 100%. So then now we are starting. So we'll fill up and then slowly we are going ahead. So we are in tandem with the demand. We are ramping up the plant capacity and number of plants. So here will come the last.

And there was like some 300,000 customers of some global capacity addition, which was also expected 300 to 500,000 this year in 2020. Is that also delayed?

Yeah, as I told you last time in Jan and March, some capacity came up about 250,000 tons and that's all. Nothing more will come now. Between last year, CY19 and CY20, there will be 250K addition, which has already happened. in Jan and March. I think thereafter, not much. It was only our capacity. If at all it comes up.

Okay. And when we say that in the caustic segment, this 610 kp capacity has come. So is this all because it's supposed to come for domestic players or more like Mi'kmaq capacity was expected or some other players were expected? So all of that have come now on board?

So then, see, it's a graded way you look at it because all the capacity which was supposed to come in the last financial year, they're coming. And, you know, it's the same situation for us now that the current year which we are going through, our capacity which was supposed to come up, and that we will take in a graded manner as we go forward. And then there are capacity inclusions next year which are already work in progress, particularly on GACN. For the last year, all the capacities which were supposed to come in have come in.

So now your then Gujarat LP capacities are pending and everyone else is coming?

As of today's plan and there are plans which have been announced by others but looking at I think everybody is reviewing the situation of demand and what we've been talking about and I think in the next couple of quarters clarity will emerge.

Okay, and just one question on caustic prices in the presentation from the calculation, it seems like if you realize in a falling that 4% for yourself in this quarter. So is the decline worse than industry because competition seems to have like lower decline on a quarter on quarter basis. And that's why the drop is also steeper.

No, I don't think so. That is a fact. As a matter of fact, if we compare our ECU with a couple of our competitors, our gap between their ECU and our ECU is actually maintained or has even gone better. So I think the EBITDA drop could be a function more of the one time rather than from an ECU perspective.

Okay. And also on slide nine, you have given some cost focus numbers uh on with certain chemicals so these are for annual fy21 which we expect like this kind of savings no no no no no so let me just clarify out there those are not the f those are what has been achieved okay now this is combination of the pulp price for example the pulp prices have come down caustic prices have come down. So therefore, there is overall saving of 260 crore overall for the year for us. Plus, there is also, you know, conscious cost-cutting measures, like I said, through Project Cascade that we had done. So, you know, in Project Cascade, for example, the savings that has been achieved is 250 crore. Some bit of that 250 could be sitting in the reduction in the pulp caustic sulfur price also. the cost that is mentioned in the S460. The reason is, for example, one of the measures that we have done in cascade is the consumption norm. So a pulp going into viscose would be a certain number, right? 1.01 ton per ton of viscose. So there we have made some reduction so that the pulp quantity comes down. So Cascade has many such items. It has items like fixed cost reduction. It has common procurement, trying to make common procurement. It has quality measures. It has consumption, some technical initiatives, some market initiatives where we've gone ahead and renegotiated certain contracts. So it has many items like these totaling up to 251. And then on chemical side, power mix change, as well as raw material contract, which has cost like salt, et cetera, which has led to overall 100 crore of saving. So just one, again, I will repeat for sake of clarification, that there could be some overlap between 251 and 460 that you see on that slide. But this is on which historical period? FY20 only or a period of two, three years?

FY20. FY20. FY20 over FY19.

19.

So one more important point is, of course, Project Cascade is a fundamental improvement in the business. So that benefit in whichever areas you've received will continue. Yeah, that's right.

Cascade is recurring. It'll happen year after year. Whereas the input price may happen, may not happen, depending on how the market moves.

Right. Thanks, sir. I'll get back to the case.

Thank you, sir. I just want to ask a question. Please press star one. We have next question from the line of Sumangal Nivatia from Kotak Securities. Please go ahead.

Yeah, good evening, sir. Thanks for the opportunity. Just a couple of clarifications. Sir, in between, you made an interesting comment on the non-woven market doing very well, which is the textile. So, just wanted to understand what is the size of the non-woven market relative in terms of volume mix? See, globally it is 30% non-woven, 70% textile. And non-woven is a global business. India is not a big market. So, while we will make it in vacuum, but we will export it to most of the places. And then post-COVID, it has become a huge market in China. See, the non-one is driven by two things. One is demand by the end industry. Secondly, the fiber is only an input into an intermediary stage where they may cut them into the flat rolls. So the converters are a key thing. But there is no conversion capacity in Europe. Whatever was there, they have already stretched it to 20% more. The rest has all the capacity available in China. So China has become a big non-owned market now. So the export market will be China, Europe, and USA. I understand. And when you say Chinese inventory is currently at around 125 days, what's the normal inventory level they used to keep? 10 days for VSF, 20 days for yarn, about 40 to 50 days. I'm taking a whole, I'm taking from discourse to the yarn level. Okay. And I mean, what is the expectation? How many quarters are we looking for this to normalize? See, look, the whole issue here is, which I think you are reading in the newspapers also, that COVID has destroyed the demand. So it all depends upon the demand revival. If the demand comes back to pre-COVID level, I think this will stabilize very fast. All one is saying is it's a V-shaped recovery, U-shaped recovery, L-shaped recovery. The current predictions look like U-shaped recovery. So it should happen by Q3, Q4, normalcy. So two quarters will be challenging. Third quarter, hopefully things should improve, but we'll have to keep watching it. Now, if there's a recurrence of COVID, then again, the whole thing goes back to square one. So a normal course, if one is able to control it, I think by Diwali, the textile industry should have its normalcy. So the festivals then will be big. All the marriages have been curtailed. No festivals have happened so far. So I think there's a big sense of demand. It should happen. Understand. And just one small clarification on the capex. I mean, if you look at the outstanding capex of around 48, 49 hundred crores, 3000 is towards the expansion and the remaining 1500 towards the modernization and maintenance. So I believe expansion is something which we might just look for one or two quarter delayed depending on our outlook on the demand recovery. I mean, what sort of flexibility we have in the modernization bucket of the CapEx to reconsider whether we want to go ahead or not. I mean, I was just looking at about the delay of whether it is one or two quarters or I mean more than that.

Yeah. Well, see, I think modernization and maintenance CapEx are also as important because a lot of it is environmental and sustainability related other than your modernization related CapEx. So, and, you know, more and more we are noticing that in BFF as well as in chemicals, sustainability is becoming important. And in fact, you get premium for your products. if you are a sustainable company. So, you know, it actually gives us an edge over the Chinese in many aspects. So, therefore, when we look at, we will do a little bit of a zero-based approach as well, where we look at the capex, which one is necessary, which one is not, and what is the timeline, and then only we'll be able to come back to you on this.

All right. Thanks and all the best.

Thank you very much, sir. As there are no further questions from the participants, I would now like to hand the conference over to Mr. Ashish Adhukia, CFO, for closing comments. Sir, over to you.

Thank you. So thanks a lot for joining the call. And I really sincerely hope that all of you all are safe and all the best to um you know as as we all resume work uh so thank you thank you thank you thank you