Grasim Industries Limited

Ladies and gentlemen, good day and welcome to the Q1 FY21 Earnings Conference Call of Crossing Industries Limited. We have with us today from the management, Mr. Dilip Kaur, Managing Director, Mr. Kalyan Ram, CEO, Global Chemicals and Group Business Head, Fertilizers and Insulators, Mr. Jain Dua, Chief Executive Officer, Chemical Division, Mr. Ashish Adukia, CFO. As a reminder, our partisan 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 Aditya, CFO. Thank you, and over to you, sir.

Good afternoon to all the participants. So as the virus spreads across the country and has now started reaching hinterlands, the health and safety of our employees have gained even more priority, and especially at the plants. At our plants, social distancing, rigorous screening, and health checks have become preset norms. In fact, we've initiated automatic detection system in one of our plants, which would enable detection of face mask, body temperature, social distancing norms remotely anywhere in the plant. So now coming to the quarter, quarter one FY21, we have followed four key themes for the management in this quarter. These are all mentioned on page five of the presentation, which you must have all got. The first theme is demand creation. The second theme is cost rationalization. Third theme, innovation and agility. And the fourth theme, cash flow focus. So in our first theme, we have actually reoriented our portfolio for the quarter, depending on the demand. The concerns around health and hygiene have assumed primacy in light of the current pandemic, which uplifted the demand for chlorine WAP value-added products. We witnessed WAP realization improving and chlorine turning positive in this quarter due to increased demand. The lockdown severely impacted our operational and financial performance in the month of April, The operational performance improved in June as majority of our plan resumed their operations leading to better capacity utilization for the month of June and for the quarter. As highlighted on page six, the capacity utilization of VSF business improved from a load single digit of 6% to 48% in June. And now in July, it is actually running at 79%. The capacity utilization of a caustic soda plant improved from sub-25% level in April to 70% utilization level in June 20, and 78% now in July. We're not providing any guidance for August and September, but the fact is that we're gradually reverting to normalcy. On page seven, our share of value-added products have improved across our businesses. The share of WAP in the overall VSF sales volume increased by 25% quarter-on-quarter to about 30% of the overall volume. Similarly, for fertilizer business, the product, which is the non-urea sales revenue, have registered a double-digit sequential increase. In our second theme, we have been at the forefront of innovation. Rassim's Leva brand has launched anti-microbial fiber. The fabric produced using this special fiber inherently possesses anti-microbial properties, which inhibits the growth of microbes on apparel and home textiles. We also saw emerging opportunity in the non-woven segment, and therefore we were nimble in tapping this opportunity by commencing non-woven production on our existing lines. In our third theme, our approach has been to reduce costs. Across our businesses, we have reduced fixed costs by 35%, which amounts to savings of 256 crore compared to FY20 quarterly average. Please note that not all of it is a permanent saving. However, we are targeting more actions on cost savings, which will be more permanent in nature. So, of course, this fixed cost has, for example, repairs and maintenance, which has come down because of the lockdown as well. Lastly, as a fourth theme, we continue to maintain cash flow focused approach and we continue to maintain a healthy liquidity level. We have calibrated our CapEx plan based on demand outlook and cash flows. Our interest cost has been most competitive in the market, the benefits of which is visible in this quarter with low interest costs and higher treasury income because of MTM gains. Part of interest costs is capitalized to the VSF Reliance Project. On page eight, standalone revenue and EBITDA witnessed a month-on-month improvement driven by underlying business performance of VSF chemicals and fertilizers. The month of June contributed almost 45% of quarterly revenue up from about 23% in May. Our EBITDA number turned positive in month of May and June after reporting a negative number in the month of April. And if you see, in June, we have 51 crore of EBITDA and that has COVID-related expense sitting out there of about 25 crore. So a June number would have been higher by 25 crore on a monthly basis. Given exceptional circumstances, we've shared month-on-month breakup of financials and key performance indicators for better understanding. These details will not be shared from the subsequent quarters. But moving on to the next phase, the consolidated revenue and EBITDA for the quarters to that 13,621 crore and 2,613 crore for the quarter. On a standalone basis, the reported EBITDA was negative 46 crore. However, there's one time cost of COVID related CSR expense of about 40 crore sitting out there, adjusting for which the EBITDA would have been negative six crores. Moving on to page 11, The board has approved the capex of rupees 1,615 crore for FY21. And our capex spent for the quarter stood at 131 crore. As of now, we have decided to continue the Reliance VSS project and Brownfield project with revised timelines. We keep reviewing the balance amount of the capex on quarter-on-quarter basis based on business outlook. The other capex, so Willi projects is about 818 crore plus 46 crore this year. And the balance amount is mainly towards the upkeep of plant and environment-related capex as well as some of the commitments that were already made of payments, et cetera, that are being made now. Moving on to business performance, page 13, VSCO segment financial performance was impacted by lower sales volume and weak pricing environment. The weak operational performance of VFI weighed on the overall segmental performance. The capacity utilization of VFI has been low given the big demand condition in domestic as well as overseas markets. VFI sales was about 56 crore and EBITDA loss was about 81 crore out of the 113 crore negative that you see on the slide. The domestic VSF realization, which is in the next page, were impacted by global VSF prices, which were at historic lows. The domestic demand for VSF remained low due to extension of local lockdowns in key manufacturing hubs, non-availability of workforce, and with malls and shopping centers being non-operational. Our cost focus gained traction during the quarter, our fixed costs reduced by 186 crore in comparison to average FY20 cost. Moving on to the next page on VSF on page 15, the VSF business switched their focus from domestic market to export markets and dedicated few production lines to cater to the export demand of specialty products. This actually led to 26% rise in share of exports to 38% in June 2020. and improve the capacity utilization for overall BSF business as well. I'll move now to the chemical business performance, which is next page onwards. The operational and financial performance of chemical was better than some of the other businesses. The capacity utilization ramped up to 70% in June. closer to March utilization level. And please, if you recall, March utilization level was lower because we lost the last one week of March. The chemical business reported EBITDA of 41, positive 41 crore in the quarter, despite challenging market conditions. The caustic soda demand remained weak on account of lower demand from user-based industries. Chlorine value-added products demand remains strong and touched pre-COVID levels during the month of June 20. The chlorine realization turned positive in the quarter, driven by demand from disinfectants and hygiene-related products. On page 17, you will see that the global caustic prices were at almost a four-year low, and weakened to sub $300 level during the quarter. The equal prices were influenced by weakness in caustic soda prices, but were partly compensated by positive touring prices. The domestic caustic prices continue to be impacted by excess supply situation and continuous inflow of imports. On page 19, Fertilizer business was one of the bright spots in the company's performance. The demand for urea remained strong on back of normal monsoon and advanced crop sowing. The YOY improvement in EBITDA was driven by lower fixed costs of about 3.6 crore, one-time gain pertaining to freight subsidy arrears of about 12 crore, and improved product sales by about 4.6 crore. Product which is essentially non-urea products sold through our distribution channel contributed almost 24% of the overall fertilizer EBITDA for the quarter. If I take you to page 27 on sustainability, Our VSS business has collaborated with other global viscose players in formulating the Zero Discharge of Hazardous Chemicals, ZDHC, guidelines for manmade cellulite fiber players, covering responsible production as well as wastewater and air emission standards. We are committed to implementing ZDHC standards at all the fiber manufacturing units. In terms of outlook for the business, with the easing of lockdown conditions and gradual resumption of economic activities, demand for the company's products is expected to increase in the coming quarters. We have initiated measures to optimize operations across plants, reduce fixed costs, and conserve cash. We continue to maintain a very comfortable level of liquidity to navigate any uncertain business environment. Our inherent financial strength, our operational excellence, and diverse product portfolio with cement, financial services, viscose, chemicals, et cetera, makes us prepared to withstand temporary disruptions and sustain the leadership across these businesses. So that's it from my side. I will now hand over back to the operator for Q&A.

Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone 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. Anyone who would like to ask a question, please press star and one at this time. Ladies and gentlemen, we will wait for a moment while question queue assembles. The first question is from the line of Gunjan Kishyani from JP Morgan. Please go ahead.

Hi, thanks for taking my questions. Just two questions from my side. Firstly, on the VSF side, if you can just share the broader market position, where is it globally, how you're seeing things normalizing. I mean, I don't want to read too much into this quarter, but what is happening really in terms of both realization and the normalization, particularly the domestic normalization for grassroots. And secondly, this CAPEX, which has been approved, I mean, given that we're still not sure of how things normalize, Why are we going ahead with 1600 odd crores CAPEX in this year? Is there a rationale to push it out right now and maybe look at it later because cash flows clearly may be an issue this year, given the overall market dynamics?

I'll try to respond to both your queries and then maybe Ashish can chip in. the global discourse prices continue to remain under pressure. What I told you last quarter continues because still because of the COVID, the demand side of the textile hasn't picked up as well. So China still continues to have a very low operation rate for the yarn manufacturing as also for the VSF manufacturing. So the VSF OR was about 64-65%. Yarn is even less than that 50%. So So the textile recovery has not been as good in China as for the other sectors, but it is slowly ramping up. So the viscose prices touched the historic low during the quarter, largely not because of anything else, but because they have inventory and there is no demand. This quarter, I think the industry, with the opening up of the European market, opening of the U.S. market, I think the recovery in the global market has been significantly better than we expected. So even in India also, what has picked up is the export from India to the rest of the world, not only in textile, in fiber, but in textiles also, in downstream, in apples everywhere. So I think the U.S. and European economy and the consumption of textile, etc., is picking up. significantly better than what the domestic has picked up so that is one part of it good thing is because of the low OR operation rate in the VSF plant the inventory has started coming down they are still high but they are trending low and we are seeing some signs of at least there is effort being made to increase the prices by the Chinese players early days but there is an effort on the part of Chinese players to take up the prices so There could be perhaps a bottom or near bottoming out of the prices. So that is one part of the global prices. India demand, I think the good thing about the India demand is 80 to 90% of the fiber demand in India is from unorganized sector. It is not from the branded retail. While the branded retail hasn't started the way it should have started, but I think because of good rural incomes, the tier 2, tier 3 towns economy doing better. The demand in that segment is picking up better. And that is the reason why we found after June a good uptake in the demand part of it. In fact, as we speak, all my plants are managing 80% capacity. The shortfall also only because of one segment. And that segment is the dope dye. The dope dye segment goes into the suiting industry. Suiting and formal shirts and trousers. Now the only segment of the market which has not done, picked up is this segment of the offices are closed. People are still working from home. The marriages are not taking place. So we believe this part of the segment will start looking up once the festive season comes to start. So maybe in a month or month or two, when the festive season is around the corner, we believe this demand also should pick up. So as we speak, the trend on the Indian demand is healthy. We are running our plants full blast, barring the dope guy part of it. Perhaps the detailer could be the COVID spreading into hinterland, COVID getting into the rural part of India, which was not affected. So why the demand became so good is because smaller towns are not impacted by COVID. While the larger, the metro cities are impacted where there is not much demand in terms of our product. Second, During this lockdown, what is doing well is what they call street-to-street clothing. So this casual clothing, the pyjamas kind of this thing. And where a lot of viscose goes, so low-cost clothing. So I think that the demand outlook for viscose looks to be good for two reasons. One is the kind of clothing which is involved. Secondly, if you see the global prices of cotton and viscose, the gap has come to almost 3,500 RMB, the Chinese currency. It is widening. These are the times when the shift starts happening. At these kind of high deltas, technically, the downstream value should start moving from quarter to discourse. Now, how and when, I think we'll have to watch for it, but directionally, I believe, the substitution should start going forward. So, that is the the viscose supply-demand balance in the pricing scenario, what we can still get, and just give you the leading indicator what you can, and then you can make a conclusion based on that. On the project per se, see, one is the current crisis, the current impact, what is happening. Second is the long-term drivers for the business. I think viscose, whatever you may say, will remain the possible going fiber. because for various reasons we have been telling you so the the implicit demand for this course has to be there and in india if we are the dominant player the demand must come to us so we believe as for our projection by q4 uh the textile demand in the country will come to normalcy or 90 95 of normal levels so f by 22 by middle of f by 22 uh yeah of course if i 20 right so middle of fy 22 the the demand will start growing significantly. And we anticipate there will be a shortage of grey fibre compared to what capacity we have and what demand will be available. And this project, when I had shared with you earlier, has three advantages. It has got the largest capacity lines, so it gives a very low cost of production. So I have a consistent advantage on variable cost from this plant. Second, this plant is sharing its site with the existing plant. So it will become the largest single location plant. The fixed cost will be very less. Thirdly, the quality of product from this, the machines are the latest generation machine, will be world-class. This is outstanding, very good quality, both for the domestic and international market. So we believe this project is the right thing for the business to do to grow its competitiveness. And based on the projections, yes, we believe there will be enough demand. And even if there is an issue on demand, There are other operations with a high cost which we need to scale down rather than letting this suffer. So to our mind, this is a good investment which is a very strong case for early commissioning. In fact, by mid-August, by the time this comes up next year, I think demand will be running, we'll have pressure on the supply-demand situation. That's the rest of our side. And Ashish will share with you, there won't be an impact on our balance sheet because of this as much. Yeah, absolutely. I think out of 1,615 crore of capex that I mentioned for the year, almost the take up by the life project itself is about 860, 865, somewhere around that. So a substantial part of it is that Now, you would appreciate that at Grattan and Standoll level, we are running almost 15 plus units. Now, you know, to keep the upkeep of all these units, et cetera, there are certain capex and there is also increased environment-related capex that we are incurring. So just to make sure that the upkeep and environment-related capex are spent. that itself overall adds up to the balance. And plus, in the projects, other projects that we have completely put on hold in chemical side, some of those projects, there are commitments that we have to fulfill. which may relate to MSME, et cetera, as well. So, therefore, some part of CAPEX is also towards that. So, really speaking, other than for Velayat, which is a strategic CAPEX, the rest, all of them are bare minimum CAPEX. And, of course, you know, what Dilip had said, the balance sheet of RASM is strong enough that even if there is inflation, We don't know yet where we're going to land up at the end of the year because we don't have visibility on EBITDA. But nevertheless, we're strong if we have to take more debt to take care of this capital.

Okay. Thank you so much.

Thank you. The next question is from the line of Gaurav Kateria for Morgan Stanley. Please go ahead.

Thank you for taking my questions. Firstly, any color on what the current trend rate for export market is there in July? And how are you able to compete with the Chinese players in the export market? And is profitability very different from what it is in domestic market? Yeah, Ashish, I'll then you can add later on. See, as you always know, the profitability in export market is not as good as domestic. And that's why our effort has always been to maximize the domestic sale and the export become an overflow kind of. Because in the domestic, you have the logistics cost advantage. And you provide extra services to people which are rewarded to you from the branding point of view. But the good thing is our cost of production in the Indian plants from where we export, the Kharat in Vilayat, are one of the lowest in the world. They are sub $1. So even in a very competitive export prices, we do make positive money in this. So to that extent, it's adding value to the portfolio. We are not doing export just to fill up capacity. And there are two types of export. One is export of grey fibre, other is export of value added products. So things like modal which we are exporting. We have got a very good realisation. In fact, when In this market where the gray prices are very low, the delta between specialty, the modal price and gray has been highest ever. It's more than $1.20. So we make far more money in exporting a value-added product from graphene than we'll do even in selling in local markets. So what we are doing in export is the CPAS to export, which is modal, which is a very high value-added product, non-woven. Again, as we told you last time in our call, because of the hygiene impact, there is a lot of demand for the non-woven fiber. And non-woven fiber has about 15 to 20 cents more premium over the textile fiber. So bulk of the export we are doing and remaining overflow is on the textile. And that also, there are geographies which are better paying within the same world. We focus on high-paying geographies from India. So that's the kind of a thing. So I think while it is not as profitable as the local market, but if you look at it, my overall realization, blended realization, is much higher than my India grey prices. And sir, what is the current run rate at which you are doing exports? It was 40% of my portfolio was export in June, but now it is coming down and we are doing more of this. It's about 230-240 tons per day kind of a thing. But I think, you know, we should not assume exports. I think we should go assume the levels to be back to FY20 levels. By Q4, yeah. Yeah, by Q3, Q4. This is transient to make sure because, you see, when you use assets fully, you reduce the cost of production, operating efficiencies go up. So this helps you in two ways. including operating efficiencies and getting you some positive EBITDA. Sure, sure. So second question is for Rashi specifically. I know it's difficult, but what is the peak net debt you have in mind beyond which you would like to flex your CAPEX plan so that you don't kind of go beyond that level? I know net debt to EBITDA comfortable level is 2.5 times which you had shared in the past, but NEP net debt number you have in mind for FY21. Thank you. Yeah. So, see, I think the net debt to EBITDA is not the right metric to look at for this year. Okay. I think, you know, if I look at last 12-month EBITDA and try to calculate the net debt at this stage, it comes to somewhere around 1.65 to 1.7 times. But really speaking, you know, one quarter out of that is actually less than zero of EBITDA. So you're really calculating that on three quarters. So I would ideally look at more annualizing the subsequent quarters that keep coming with an improvement, etc., to look at net debt to EBITDA. So, ideally, when we reach quarter four, whatever is the, which we believe is probably going to be normalized quarter, the EBITDA in that quarter should be annualized to calculate net debt to EBITDA. And, you know, I think we'll be below, you know, our threshold, et cetera, based on that number. Sure. Thank you.

Thank you. The next question is from the line of Rashi Chopra from CDQ. Please go ahead.

Thank you. Just some bookkeeping questions. The global VSF realizations are down about 6% sequentially, but the last quarter, the domestic realizations got a benefit, right, because of China closure. So for you, what has been the realization decline sequentially, one? And second is, where are those realizations now versus the April to June quarter. That's one question. And second, just wanted to check how much you have put in the rice issue for Aditya Birla fashion so far.

I couldn't understand the question. You are saying the 6% QOQ reduction, that's over the last quarter? No, no.

The 6% is a global decline or is it your decline as well? That was my question.

No, now it's a letter. Ours is, I think, 3%, if I'm not wrong. Yeah, ours is 3%. Okay, and the spot realizations versus the... They are broadly in line, I think. It's only an issue of the mix now. Otherwise, broadly, they are in line with the waterfall. Got it.

And just on the rice issue?

So we have put only the calls. So first of all, we put only our share of amount. So our commitment to them is somewhere around 100 crore out of 1,000 crore rights that they did. And the first call is about, I think, 54 crore or something. So we've put only that much amount. And as the calls come is when we will be paying the balance amount.

Got it. And at least in the imminent future, there is no proposal to invest any further in the group companies, right?

Yeah, absolutely. No proposal, zero proposal to put other than the calls that will come from the developer fashion.

Got it. Thank you.

Thank you. The next question is from the line of Vivek Ramakrishna from DSP Mutual Fund. Please go ahead.

More or less the questions have been asked, but just to clarify, you have two purposes which you do. The way I see it is that the cash flows from the business will be enough to take care of the CapEx, fingers crossed that the EBITDA kind of at least keeps the June numbers. And then you have the holding company kind of role also which you do. How do you see the depth in relation to both these things? Because, for example, financial services business, you can't anticipate how much capital it will need and so on. So how do you see that panning on through the years? That's the only question that I have.

Sure. So, you know, I think in investments in subsidiaries or group companies, okay, the way we look at it is that the standalone businesses of Gratham, which is chemicals, DSF, fertilizer, et cetera, always takes precedence over companies the investments in the subsidiaries or group companies. So first we look at, when we're looking at cash flow and cash flow allocation, first priority is given to that. And then if there is a requirement in the subsidiary business, the strategic subsidiary business, then we look at those on the basis of, you know, whether it's what the return, et cetera, is going to be. So it's always a second priority to CapEx.

Okay, so thank you. So we can broadly expect that it will be around current level of debt only, right? Because you earlier answered that there's not media investment in group companies and CapEx seems to be more or less within your cash flow numbers, assuming that things normalize a little at least.

Yeah, so I think it's tough for us to say that to... Where we land up on EBITDA and whether it will be able to cover the capex or not is tough to say today for the entire year. We know our capex, but EBITDA is unknown. So to that extent, if the EBITDA takes care of it, then we should be okay. We should be landing up at the same levels of net debt to EBITDA. And I, you know, as a sake of repetition, there is no further investment to plan on the group company side. Thank you, sir. We'll keep our fingers crossed for all of us and good luck. Thank you.

Thank you. The next question is from the line of Robin Chatter from Inam Holding. Please go ahead.

Yeah, good evening, sir. Sir, two questions. First on the fixed cost, you have done an excellent job in reducing and you gave in the opening comments also. But as you said, not all is recurring in nature. So what number should we assume could be recurring in nature considering difficult times when you would have reduced it? Because as you said, the repairs would come in the upcoming quarters. So that wouldn't be permanent in nature. So out of this 256, how much portion can we assume on a quarterly run rate basis for this fiscal, which would be lower?

It's difficult to determine the most sustainable number. I think this quarter was tumultuous and this quarter it was, you know, we've taken measures, but some of those cost-cutting measures, etc., you know, we will know the amount, what benefits we will get when the operations normalize, whether some bit may come back and some bit may sustain. So, therefore, it's difficult to determine that number. But what we are doing is we're looking at each and every cost item. Each business is doing so to figure out what is the scope of reduction in all those items, which can be in the manpower. We are looking at manpower at all levels to see where the reductions can be made. So in manpower especially, there will be some permanent reductions. When I say permanent, it means that at least you'll see that in this year as well as in the next year. In repair, some of it can reverse. In others category, which is advertising and admin, etc., we'll see some reduction. But generally, we are looking at across all levels to see where permanent changes can be made.

Okay. And regarding the CAPEX slide, basically the completion timeline, so This VSF thing, which was earlier to get over before the end of this fiscal, so what would be your completion or what I can say a commencement date of this incremental capacity of VSF? Because as you said, obviously you're completing the CAPEX this year only, but these are two lines of 300 tons. So are you phasing it one by one line? How does that start up? you want me to respond ashish ashish i was i lost my connection for a bit i can please this is regarding the vsf expansion so you are doing two lines of 300 tons per each which was but the original schedule was going to get completed in the second half of FY21. So what's the revised date of either completion or starting this line?

Yeah, sure. So like Dilip had said, middle of August next year is when we expect at least one of the lines to start. And second line will be possibly a quarter after that. uh they left the yeah yeah because you see what happened we had we had stopped work on this line during the last four months and now the monsoon time is there so once so you're saying august 20 and uh december 20 right that's right 21 21.

August 21 and December 21. Okay. So basically next year quarter two and quarter three. So full impact could come maybe more in quarter four. Okay. And if I add the capacity to this, so 566 and 2,19,000 gets added. So where is that? Your presentation says 801. So where is that 16,000 additional coming from?

D bottlenecking must be there.

Sorry, is it the Karach line? Karach is included in 566, right?

Yeah, Karach is included. Everything is included.

I had a number of 566 to 788. So I think your presentation shows 801.

Yes. So there is a small D bottlenecking that we keep doing, which is... In Kharag as well as in Hariyar if I'm not mistaken. Yeah, that's right. So those two will take it to 801. So debottling. That should happen this year or that also next year? That will be this year. See, debottling also requires approvals etc. So it won't entail much of capex but it just means you need to get approval for the enhanced capacity and then you can that's what happened this year yes right yeah right and uh regarding the chemical thing here if we can uh guide on the similar uh dates when the project would get uh completed to 1.45 you know so chemical like i said they're on hold we are not entering anything other than the committed payment that we have to make in that fund. So we will continuously review these projects based on the performance of EBITDA and then decide when to take up these projects.

So chemical also, if I'm not mistaken, it was broken into two parts. First, that was 400 tons per day, which was getting expanded, which would have taken your capacity to close to 12,93,000. And the second stage, it would have been taken to 1.45 billion. So both are on hold or?

Yeah, both are on hold. There are totally, you know, in caustic side, there are two projects. There is one in Rahela and there is Balbhadra Puram that we had acquired. Balbhadra Puram was also in two phases. So that's on the chloralkali side. Then there was also certain VAP projects that we were undertaking while you are at product. There was also a power plant. So it contains multiple projects in strategic aspects.

Okay. Just a continuation on this. Since actually the chemical business recovery looks to be faster seeing the chlorine side of the business and even caustic soda is not big negative and you have always been operating at full utilization level so will you not be short on capacity if actually the demand return or is it just to match cash flow with the capex you are postponing it on the chemical part or is it the approval process which has been taking time

Yes, so let me add here. I think we have a structure in terms of looking at all our CAPEX into three or four levels. One is we focus on first DHS and sustainability and sustenance CAPEX. And the second one is around, as Ashish mentioned, the commitments that we already made for these projects. Majority of these projects were to be completed this year.

Third, we started to look at what is the demand situation in the market and which ones can be postponed for a while, where we manage the balance between the demand and supply. Fourth group is those which will make us competitive, whether it is power plants, whether it is labs investment.

We've taken all of them. I think we're going in phases. First quarter, after the first quarter, VSS has taken some, made some choices. In chemicals, what we intend to do is to also see the second quarter, how it pans out. And we want to then activate some CAPEX activities, if it makes sense.

So this is actually a developing story.

So every quarter, we might actually come up with some developments. In the case of chemicals, we want to take another one or two months to actually see symptomatically because chemicals is not affected by international markets.

So we are closely monitoring international markets. If you know, caustic prices are significantly lower across Asia. And China is quite strong and then dominating much of Asia. So we are closely monitoring that too. So we need to balance that. We'll come back to you. I think it's exactly how you said. We are closely monitoring, and then we don't want to be, again, fought. But as of now, we have enough capacity. Even if it goes up to 90, 95% of normalcy by Q4, we will have enough capacity.

Thank you, sir.

Thank you. The next question is from the line of Pratik Kumar from Antic Stock Broking. Please go ahead.

Thanks for the opportunity.

First question is, so in BSF segment, so like have we attempted taking price hike in domestic market? Like we mentioned some of the international Chinese players are attempting in their market.

So is there any price hike which is taken by us in domestic market? See, the prices follow the international prices. So if it happens here, it happens here also automatically. So right now, they are trying it. It has not happened. There are no deals happening. There is an announcement. So let's see how it goes. So there has not been any price hike by us till now. So this, because what happened right now, we are coming out of a shutdown. So right now, we are sustaining the same price as what happened pre-shutdown. Let the normalcy come and then we'll see where the demand-supply balance is. and what the international price is, because the international price reflects the domestic price straight away. Okay. Anton, regarding this additional duties on imports of yarn or VSS, it has been very slow. Has there been any update on that from the government side? It is still a work in progress. We have no date right now. There is an investigation going on right now. Investigation related to the Chinese dumping players. Yeah, yeah, yeah, anti-dumping investigation. On the yarn side, yeah. Right. And pricing in the caustic segment, we don't see that recovering in the next six months. Are there any signs it's there also in pickup? Caustic recovery segment, clearly you see there is an overcapacity at this time. Jayant, your voice is a little bit faint. Is it better now? Yeah, yeah, yeah. So in the caustic recovery, you know, in prices, clearly there is a demand supply which is impacting at the moment, plus the imports because of the caustation as Kalyan forgets, there is a fair amount of capacity there. So as the demand picks up, like clearly we're seeing textile demand coming up, which is a large consumption center for cosplay. I think over the next couple of quarters, if the demand supply starts coming up, then maybe we could see some changes, but it's too early to say anything on the price. Uh, and, uh, in, uh, in terms of the best, uh, reported in the presentation, So there is an increase in gross debt as well as cash position.

Do you have a specific reason for that?

Yeah, sure. I think I can take that question. See, in case of when we started the quarter, there were a lot of uncertainties and we had gone into lockdown. So we wanted to maintain strong liquidity. So we had... uh borrowed money both from the capital market as well as from the bank market just to maintain liquidity uh you know but but if you look at it more positively so that's why there's an elevated debt as well as elevated treasury but if you look at it more positively uh you know there is no negative arbitrage out here in fact the treasury has done extremely well because of the yield compression The capital gains on the bond side has been very good in this quarter. And the cost of debt also for us is very competitive because we get the best rates both in the capital market as well as in the back market. But over the next, you know, this quarter and subsequent quarter, whenever there are debt rollovers coming, we may use, we're not too sure yet, we will keep continuing the situation, but we may use combination of treasury as well as new debt to repay the old debt. Okay, and this last question, while we mentioned about debottlenecking income for increasing capacity, what are the financial chart in the last couple of pages? It already is showing higher capacity, like 578 kTPA from 566 kTPA for BSF segment and likewise for BSY also. So this debauchery is already partly done. Yeah. So, you know, we will reconcile the capacity numbers with you offline. But, you know, some of these people in bottlenecking would have got done and some must be pending. Like Haraj was done, Velayat was done, career has been done. These are ongoing process. I mean, it keeps on happening. The word bottleneck means when you remove one, the other one comes. So we keep on improving this. So this is really a perpetual exercise.

Sure. I'll get back to you. Thank you.

Thank you. The next question is from the line of Amit Murarka from Motilal Oswal. Please go ahead.

Hi. Good evening. So my question is around margins. So the chlorine has turned positive in one, but is it sustaining is what I was trying to understand.

Currently, Amit, it is clearly sustaining because of the entire focus on the health and hygiene aspect. And clearly, these segments of water for our wraps, which take both chlorine and the value-added products, are doing very well.

Okay. And also in the price chart that you showed on BFF and the pulp price, so like doesn't look like there is an uptick in either. So even though volumes are recovering, is it fair to say that the margins will be quite subdued at least in the near term?

So difficult to give any guidance out here. I think Dilip has shared some bit of a price trend and we, you know, bottoming off the VSF price and how the cotton premium over VSF has increased and therefore there might be some recovery in the price of VSF. So there is possibility of some recovery in that. Pulp, you know, we are continuing to get the lag benefit to, you know, of pulp purchase and pulp prices continuing to be under pressure. So we may get benefit to continue to get the benefit of that. So it's difficult to give that whether the margin that you're talking about will continue to grow or decline. Certainly not decline. It is more likely to grow.

Sure. And in one of the earlier calls, you had mentioned that imports had started coming in from China because of the oversupply over there. So what is the situation on that front?

Import of BSF you're talking about? Yes. Or you're talking about The import of yarns were coming in, I think. The import of Chinese yarn was coming in.

Yeah, sorry.

Yeah, yeah. And then it stopped because China itself had a COVID. Then India got into a lockdown. But I believe now again the pressure on the import of yarn is happening again from this month onwards. So after the tensions on the border have eased out, there is a threat of import from China is happening. So it may start. But that we'll have to face as it comes.

Okay, sure.

Thank you. The next question is from the line of Rajesh Rathani from HSBC. Please go ahead.

Yeah, thanks for the opportunity. Actually, most of my questions have been answered. Just one on capital allocation. I just want to understand what is the hurdle rate that you have internally when you decide for the projects, both for VSF and chemicals? And do you think the IRR that you have calculated earlier have now reduced due to this consistently low demand and pricing environment? Sure. so see we whenever we approve a project we always do a full thorough exercise of looking at the ir and whether it meets our hurdle rate or not and hurdle rate is you know something that we calculate based at that time based on the industry you know, classic WAC model, right? And we look at the beta in the textile industry, et cetera, and then arrive at the hurdle rate. And then you compare your IRR with the hurdle rate that you have got it. And at that time when we did, for example, the last project, it was much ahead of the hurdle rate. And we look at the payback, et cetera, as well. So, you know, today it's difficult to say whether, you know, you lay it in the current scenario. Obviously, if you lay the numbers in the same model of the S&P price, then the IRR may not be, you know, as attractive as it was at that time. But generally, when these are commodity, which is, you know, volatile and, you know, open to risks. There in the model itself, we take through the cycle realization, et cetera. Some bit of thing would have already been factored in, some compression in the price would have already been factored into the model at that time. Today, while the VSF prices have come down, but Pulse prices that may have been assumed in the model has also come down. So difficult to say the IRR levels of the project today, but at the time of approval, we had very good gap between the IRR and the WAC. Yeah. Is it possible to quantify some of those ranges of hurdle rate and IRR? And also, since we are prioritizing the VSF CapEx project, ahead of the chemical. Is it fair to assume that the IRR for the VSF project is much better than the caustic soda? And that has been one of the factors for you prioritizing the VSF capex. No, so it's difficult to answer that question, frankly. I think there is a lot of factors that goes into deciding whether to do the capex or not. IRR is, of course, one of them. There is also market outlook. See, in Caustic, as you have seen, that there is an increase to supply from the domestic phase, which has impacted the eco, etc. And if you increase further supply in the market, it just not disrupts your business, but it also disrupts the entire market, which means that it may disrupt your current capacity as well. Many such factors go into prioritizing one project over the other. We have leadership position and we see the demand pickup that has come up once the market stabilizes and the lockdown or COVID situation is over. So that was one of the few reasons on the basis of which we decided to go ahead. Understood. And my question on quantification of the IRR and hurdle rate, if you can give us some numbers, that would be great. So, you know, like I said, you know, I think today the risk-free, et cetera, so if you compare the hurdle rate of today versus the hurdle rate of when we approved the project, okay, those are two different rates because the risk-free has come down The equity risk premium may have gone up slightly, but not a lot. So, you know, it's any other way how any analyst calculates the VAT is how we will look at it. And we look at more normalized VAT without the benefit of a group. So, or Grassen cost of debt. So, we take a normal cost of debt. So, we would take a cost of debt at about 9% or so. We would take the risk-free return, what is prevailing in the market. The beta could be, you know, whatever, 1 to 1.2 range. And the market risk premium could be somewhere in the range of 5% to 6%. And that's how we would arrive at. The cost of equity could come to somewhere around 12%, 13% roughly. And cost of debt, like I said, would be 9%. And then you take about – typical funding structure of either 50-50 rates of debt and equity, or 40-60 sometimes we take, which is 40% debt and 60% equity. The reason for that is that, you know, upfront the debt might be higher in a typical project, but over a period of time it normalizes. Understood. Thanks a lot.

Thank you. The next question is from the line of Sunangal Nivathia from Kotak Securities. Please go ahead.

Good evening and thanks for the opportunity. My question is with respect to operating margins of both the business. You answered in bits and parts in the previous question, but just to summarize together, if we look at historically, we used to maintain good, comfortable 20-odd percent EBITDA margins operating margin in both the business. And in the second half of last financial year, it reduced to around record lows of 10%.

Now, even if we exclude the first half of this year as enough, how do we see returning first to the last, the second half of last year levels of around 10% in both the businesses? And then how, I mean,

When do we see both the businesses returning to the historical mid-cycle range of 20-odd percent EBITDA or operating margin levels and how many quarters? Difficult to say when we will reach those because, see, I think if you do it mathematically, okay, the realization plays a big factor in the margin, right? And it's kind of... flows through as well. So any, you know, the improvement in realization has a big bearing on improvement in margin. So difficult to say when will we go back to those levels. But yeah, we hope that through the cycle, like you said, we would award back to the margins that we were enjoying in the first half of previous year.

But Ashish, is there any, even any visibility on the 10 odd percent EBITDA margin which you used to maintain in the second half of last year?

Any confidence that we will be returning back in the second half this year to those levels? No, no, I don't think we should say that it's too tough. I think there are a few levers that we need to keep in mind, right? Which is under our control. Certain things are not under our control and certain things are under our control. What is under our control is the conscious initiatives that we can take to reduce the costs that are under our control. So raw material costs, which we are buying from the market, you know, you cannot, you may not have too much control over those. You can change the sourcing, et cetera, but you can't do much about it. You can change consumption norm, which can help you. So you can reduce costs, Fixed cost is another number that you can focus on. So that's one side of the story. The second side of the story is how you improve your realization. So if you talk about just gray, I think gray, there is little leverage that you have in increasing realization given a certain market. But what you can always work on is a product mix. So you can look at specialty. You can look at value-added products. et cetera, which are less volatile and they give you a little bit more resilience in the price, which we have seen in this difficult quarter as well, where both specialty side of both VSF as well as the chlorine derivatives have actually given us a good realization. Dilip Salyan, please feel free to jump in if you want to add anything at this point. Yeah. So from chemicals point of view, I think maybe there were a couple of questions before also.

I think what I can say is we have a portfolio of caustic, which is extreme commodity, which has a cyclical aspect to it. And then we have chlorine, which

He's now more and more looking like, not typically like India, but the rest of the world. And then we have chlorine derivatives.

And then we have epoxy resins.

So if you see our overchemical part in over the last 10 years, across 10 years, we had the highs of 20 plus.

We came somewhere in between the decay to 15, went back to 25 plus EBITDA percentage. And we do expect this year and next year will not be 20-plus bad, but we will still be strong enough. But what has happened in the last three, four years when it was going to 20-plus, 25-plus EBITDA, there are more players in the market, there are smaller players in the market, and there is more availability, there are more investment amounts and such. I think we would, in a typical commodity cycle, see announcements when markets are good and reserve not pushing ahead when the markets are not good.

From where we have looked at over the next five to 10 years strategy that we have just completed, we actually use the COVID time to actually review that. And we are very clear, we will have one or two disruptions like this over the next 10 years of strategy. We will have the highs and lows and we We believe the next three, four years, we will need to continue our investment momentum exactly same as before. And we do think we would like to maintain the leadership position. Only thing we would like to handle is pacing it so that we will catch at least the few months of growth in demand. But structurally, these investments are over 30, 40 years. So if we can catch exactly that moment of demand going up, it will be great.

And that's what we try and then pay. Otherwise, structurally, we are very clear. The returns are there. The CAGR that we expect are there.

The demand and application expectations are very clear to us too. So we're quite confident. I think it's about being prudent about when do you start these plans, How do you make sure your volumes come out and then ensure you catch when the demand is going up rather than when it is down? I think that's the pacing activity we are doing. I think even choices that we are making internally, I think it's very clear we have a strategic approach to where we want to be in each of these products.

And you can't compare apples to pears. These are different businesses. Each place we want to have a leadership position and we are taking a very pragmatic view on who should be doing when for catching the right kind of demand momentum.

Yeah, Dilip. All I would like to add from the ESS side is if you talk of second half of last year and where we are today, the prices haven't changed much. So I think that part As I was telling you earlier, it is rightly bottoming out. What we are talking about is the demand. If by Q4 we do get back to the demand what was earlier there, then you are there. Then what we are missing out is the business has built up huge resilience in this two quarters, the last quarter and now. The cost benefit which we have built in now will come in and add on to what was historically there. We never saved the kind of fixed cost we have saved in this quarter. So even if we say carry forward 50, 60% of this to next quarter, you know, for the same volume and same pricing, your margins could be better. So that's how we make the businesses more resistant to cyclical fluctuations. And that's what we are doing from our side of it. That's all the market will decide. But we believe that the business is getting more and more resilient as we go along. Through product mix and through cost. I understand. I understand. With respect to the chemical business, you can share some intelligence as to where are we in terms of cost curve versus other players. And since we are making low single digit margin, can we assume the other smaller players must be bleeding? And similar to our expansion plan, the overall industry will have a pause on the expansion and maybe naturally the demand-supply dynamics will improve over the next one, two years. Is that a fair assumption? I think that's a fair assumption that you have. On the cost curve, we are in the top quartile of the cost curve. Again, our scale is substantially different from the scale of... In terms of further announcements coming as Kalyan alluded to, I think you've already seen a pause. There are quite a few projects which were announced but which are not taking off. But I think it's too early to take that call. I think we're just coming out of Q1 of the first quarter which was impacted. I think as another one or two quarters goes through, the real situation will actually pan out then. And if the industry is back to its earlier levels, you might see again the announcements coming back because then there is that demand which is there to be caught up with. I can just squeeze in one last question with respect to VSS. Could you share what the capacity utilization, how the sequential movement is happening in China at the inventory level? And I'm sorry if I missed this information earlier. As I told you, China capacity utilization is about 64%. It is about 50 to 20% lower than what the historical was. That's a good sign. And we have stayed there for quite some time now. So a lot of this so-called low cost and less efficient players are either shaken out or have shut their operations. The inventory had gone to LIS 46-44 days, is now still high, about 34-35 days, but coming down. So I think you never can predict what is happening in China, but I think, I believe a new normal emerging in GSM. And now the demand side will decide what happens. If If this war continues and if this inventory level is there and now the textile demand picks up, then you will see the uptick. So now I think we have to watch how the China-U.S. relationship pan out, what happens to the demand for Chinese textiles, the footfalls in the China-Texas, which is improving, I think, by July. And August is better than what was July. So I think let's hope so. So we all are watching the demand part of it now. If the Chinese demand picks up, things should look up. Got it. Thanks for all the answers and all the best.

Thank you. The next question is from the line of Nitin Shakthar from Green Capital Single Family Office. Please go ahead.

Hi. Good afternoon. My question pertains to the for viscose-stable fiber. I think there is a fair amount of CapEx which you've outlined for the next nine months, but the CapEx per quarter one has been very low. How do you anticipate to do approximately 300 crores of CapEx over the next three quarters on an average-based basis? If you could just highlight a bit of the CapEx strategy. For the Viscose project? Yes.

See, Viscose project, what happened, we were all really, if COVID had not struck us, By now, my first line would have got commissioned. So everything is there. Equipments are there. Building has been made. Civil foundation has been done. We just have to put people to erect them. We are in that final stage of the project where things go much faster than what has taken us so far. Because we paused the project because of the COVID crisis, I think we now have to regroup. And once the regrouping is done, I think August 21 is a very doable target. Should not be a problem at all. But there's nothing we're waiting outside. The equipment's already done. All the civil work has been over. Structures have been raised. Now the issue is installation. And that also, the bulk of the equipment has been installed on one line. Now it's only the off-site and utilities and those kinds of things. And getting back the labor, which we had, there was a time when 8,000 guys were working on my site. So we need to get those people back. So I think it's not a problem because it is not an issue of spending now.

It's the issue of electing and commissioning. Okay. And my second question pertains to the sales volume mix. Do you anticipate the export sales to go higher or lower? Conversely, do you anticipate the domestic sales to go higher or lower over the next few quarters? Our guess is, as I told you, the export is not our priority volume. So I think as the quarters improve, as the demand in India improves, the export will come down.

and domestic volumes will go up.

But in the past, what are your exports?

What are your exports?

May I have your pardon? In Guatemala, export sales for some reason was higher, or you increased the percentage of export sales.

Yeah, because there was no demand in the domestic market, but we are matching capacity with demand. So I have an X capacity which is fixed. If the Indian demand is matching the capacity, the X is equal to the local sales. Because the Indian demand went down because of lockdown and COVID, the global demand was still there. So there was no lockdown in Turkey. There was no lockdown in Indonesia. There was no lockdown. And Pakistan didn't have a lockdown. So to make sure that my capacity gets utilized, we started exporting. So it was a more tactical export than my long-term strategy. My long-term strategy is to serve the Indian requirement. This grapheme has been set up to serve India's demand. And that's my first priority. And if the India demand is not there, then only I think of exporting it. So right now we are doing more export because Indian demand, as we shared with you, the textile markets are still opening up. It was only 35%, 36% end of the quarter one. As we speak, it's about 60%. So, when India demand comes to 90-95% of the world level, we will go back to the historical export level. Historically, we used to export about 14 to 15 to 20% from graphene and 80% was domestic. So, we may go back to that ratio.

Okay, sir. Thank you. That's all from my end. Thank you. All the best. Thank you.

Thank you. Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to Mr. Ashish Adukia for closing comments.

Thanks a lot. There were many questions, so thanks for asking those questions. I think it has been a difficult quarter, but we do all together, the entire management feel that we've come out stronger from this quarter. We do hope that some of the cost measures, et cetera, that we are taking will make the company overall resilient and better shaped to grab the opportunity that comes both on the volume as well as the realization side in later quarters. So thanks and wish you all all the safety, etc. Thank you. Thank you. Have a good day.

Thank you.

Have a good day. Thank you. Bye.

Thank you. On behalf of Gratham Industries Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your line.