CHEMPLASTSNSEQ2 FY2023November 15, 2022

Chemplast Sanmar Limited

8,686words
94turns
11analyst exchanges
1executives
Management on call
Ramkumar Shankar
Managing Director. Thank
Key numbers — 40 extracted
11%
. We closed the first half of the fiscal with a flat top-line and a double digit EBITDA margin of 11%, at a consolidated level. While the top-line is flat, what is encouraging is that sale volumes ha
19%
ificant impact on the EBITDA margins, which have dropped to around 11% in H1 FY23 compared to the 19% in the corresponding period last year. The margins are under pressure also due to increase in ene
30%
st year. Based on current trends, the custom manufacturing business is expected to grow at around 30% on the top-line in FY23. Recently, we have signed a Letter of Intent with a global innovator to s
61%
ness comprising Caustic Soda, Chloromethanes, Hydrogen Peroxide, and Refrigerant Gas, delivered a 61% surge in the revenues led by growth in volumes of all products and a sharp increase in Caustic pr
10%
upply of Hydrogen Peroxide in the region. On the Suspension PVC front, our revenues were lower by 10% during the first half, largely due to the price drops. Sales volumes were 5% higher in the half y
5%
enues were lower by 10% during the first half, largely due to the price drops. Sales volumes were 5% higher in the half year on a year-on-year basis. What is encouraging is that the industry demand
18%
t is encouraging is that the industry demand for Suspension PVC in H1 was quite strong. It was up 18% on a year-on-year basis. We expect that in 22-23, the industry demand for Suspension PVC resin in
3.3 million
, the industry demand for Suspension PVC resin in India would revert to the pre-pandemic level of 3.3 million metric tones, which would be a 16% increase over FY22. Moving on to an update on our expansion
16%
sin in India would revert to the pre-pandemic level of 3.3 million metric tones, which would be a 16% increase over FY22. Moving on to an update on our expansion projects; work is well under way for
Rs. 1194 crore
the same period in the previous financial year. The revenue from operations for Q2 FY23 stood at Rs. 1194 crores, registering a drop of 29% on year-on-year basis. This was largely on account of
29%
ial year. The revenue from operations for Q2 FY23 stood at Rs. 1194 crores, registering a drop of 29% on year-on-year basis. This was largely on account of the combination of lower re
27%
cost and other expenses. However, on a year-on-year basis, other expenses have gone up by almost 27%, primarily on account of higher power and fuel cost. EBITDA for the quarter stood at Rs. 98 crore
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Guidance — 20 items
Ramkumar Shankar
opening
“We believe that both Paste PVC and Suspension PVC prices are nearing the bottom and with stability expected towards the end of Q3, we expect to see an upturn from Q4 onwards.”
Ramkumar Shankar
opening
“To cater to the additional volumes of the custom manufacturing business, we plan to increase the capacity in Phase 1 itself and fast track the expansion.”
Ramkumar Shankar
opening
“We expect to achieve significant growth in this segment in the coming years.”
Ramkumar Shankar
opening
“However, we expect the prices to recover and stabilize once the market absorbs the additional quantities.”
Ramkumar Shankar
opening
“We expect that in 22-23, the industry demand for Suspension PVC resin in India would revert to the pre-pandemic level of 3.3 million metric tones, which would be a 16% increase over FY22.”
Ramkumar Shankar
opening
“Moving on to an update on our expansion projects; work is well under way for the additional 41000 tonnes per annum Paste PVC expansion project at Cuddalore.”
Ramkumar Shankar
opening
“Construction is also progressing well and we expect to commission this as per the schedule in the second half of FY24.”
Ramkumar Shankar
opening
“We intend to complete the civil work for the entire project in this phase.”
Ramkumar Shankar
opening
“With a greater visibility on new products, especially with the order win in this half year, we plan to increase the capacity in Phase 1 itself to provide for incremental volumes.”
N. Muralidharan
opening
“115 crores for the purchase of property, plant and equipment during H1 FY23, with project capex accounting for significant part of it.”
Risks & concerns — 10 flagged
Slowdown in PVC consuming sectors in China, due to their zero-COVID policies, led to PVC inventory build-up in China and continuous dumping into India.
— Ramkumar Shankar
While the conditions have been extremely challenging, the strength of our balance sheet and the portfolio of products that we manufacture, have helped us to fare reasonably well in this very difficult situation.
— Ramkumar Shankar
The margins are under pressure also due to increase in energy costs which continue to remain high, with coal and natural gas prices on an upward trend.
— Ramkumar Shankar
Unfortunately for us this also coincided with the monsoon season which is typically a weak season for demand for Suspension PVC in India.
— Ramkumar Shankar
So this was a combination of both that weak seasonal demand and also the fact that pricing sentiments were so negativend that kind of fed on each other.
— Ramkumar Shankar
In this kind of a situation where prices keep falling, unless people are absolutely sure that the price drop has stopped, the buying sentiment is also weak and people buy only for their immediate need and not for inventory.
— Ramkumar Shankar
So, Q3 will continue to be a difficult quarter as far as margins and prices are concerned on PVC.
— Ramkumar Shankar
It would be difficult for us to build-up stock and it may not be so prudent to do that as well, because especially in the immediate short-term with the prices falling, any additional stock that we have will hurt us in terms of inventory losses.
— Ramkumar Shankar
Do you believe that there could be any pricing pressure going ahead given that now India would also be reaching almost at our capacity as far as making at least near term demand is concerned with these capacities coming in.
— Nitin Tiwari
So of course I understand that they will be come up in phases but as these capacities keep coming they will be like closing the demand supply gap that exist so do you think that it has the potential to put pressure on pricing in anyway?
— Nitin Tiwari
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Q&A — 11 exchanges
Q
Good afternoon. Thanks Ram and Murali for the opening remarks. I have a few questions sorry I may stretch a little bit here. First on the Custom Manufacturing, at the start of the year we gave a guidance of 15% now we have inched that up to 30% and the 15% was more on the premise that we were running short on the capacity. What is driving this incremental growth because I do not think we have added any more material capacity? So that is number one, number two this new opportunity that we have just disclosed where we have won a long-term contract for advanced intermediate. Can you help us under
N. Muralidharan
This is also adding to our thought process in terms of increasing the capacity in Phase 1 itself as this AI itself will occupy significant part of the Phase 1 capacity expansion that we are doing. So this we believe is a significant win for us. I think this will occupy significant part of Phase 1 of capacity and will add materially to the revenue of the Custom Manufacturing business in the coming years. Krishna K. Rangachari: Your third question was on more upside, should we be doing anything differently. The pipeline that we have is fairly strong as well as quite broad in terms of the number
Q
Thank you for the opportunity. I like to probe more on this topic of Custom Manufacturing as Sanjesh was discussing. So earlier I think we had Rs. 350 crores or Rs. 340 crores capex plan combined both in Phase 1 and Phase 2. Now that we are doing 300 Crores in the Phase 1, what are our thoughts on the Phase 2 of capex, how should we look at it and what are the timelines for the same?
N. Muralidharan
You are right. We are fast tracking the capex and incurring significant part of it in Phase 1 itself. Obviously the Phase 2 is not going to get restricted to the balance 40 Crores or 30 Crores. It will definitely be larger than that and we are evaluating the pipeline and the options and looking at fast tracking Phase 2 as well. We would sort of announce it once we firm up our view on that. Just to understand the Letter of Intent which we have signed. Does this product will form significant portion of the capacity which we are building? How should we look at it, what sort of diversification we
Q
Sir just follow-up with the previous participant’s question. I wanted to understand what is the outlook in terms of the pricing and how is the global dynamics playing out the China factor and what we hear from other players that US prices, demand is weakened and that is having a negative impact on Indian prices in the resin prices. Could you share your thought please?
Ramkumar Shankar
Sure. Let me address the demand part first. The demand for PVC in India is actually strong. This first half has seen a 17% year-on-year increase and like I said in the opening remarks, we expect the full-year demand to be back to the pre-pandemic level of 3.3 million tonnes, which is 15% to 17% year-on-year over FY22. Therefore the demand in India is quite strong. It is a fact that demand in, for instance, the US has come-off a bit largely due to higher mortgage rates. But there again, if you see the earnings call of some of the large PVC producers in the US, they are pretty confident that thi
Q
The first question is on the Chinese imports for PVC - if you can quantify what would be the monthly run rate for Chinese imports in Q2 versus that in October?
Ramkumar Shankar
Actually, October numbers have not yet been received because we depend on officially released data. But if you look at last few months of imports from China, in April we received something like 67,000 tonnes from China, in May India received 90,000 tonnes, in June it was 98,000 tonnes, in July it was 76,000 and then in August and September they have fallen-off to 32000 and 20000. This is largely to do with commencement of safeguard measures investigation by the government based on representation by the industry, that is an ongoing process. So, there is some drop off in the imports from China.
Q
Sir with this volatility in the PVC prices, how will this impact your decision making process for the next round of capex? Because we have been interacting since past one year now, the scenario and the commentary by the management was much different and we were expecting a global demand supply mismatch to sustain for a long time and there was lot of positivity around the PVC demand supply. And now we are at this juncture, so how will this impact the next expansion in the PVC?
Ramkumar Shankar
As I said just a little while back, we continue to be bullish on the medium to long term prospects of PVC. The demand-supply structure of the industry has not changed at all. What has happened over the last few months is really the one-off event revolving around COVID and if suddenly you find a country which accounts for around 40% of the global capacity, their demand drops-off suddenly and then they start exporting to the rest of the world. Obviously that will have an impact on prices around the world. It is not just in India, prices have been affected around the world. But this is not someth
Q
Hi Sir thanks for the opportunity. Couple of questions. First is on PVC I presume there has been some safeguard duty which has been proposed. Can you please highlight at what stage of process the government is in and if there has been industry representation on the quantum of duties, if you could please highlight? That is the first question.
Ramkumar Shankar
So we are not really looking at a safeguard duty as such. As an industry, what we have asked for are safeguard measures. It could be quantitative measures or quantitative restrictions and this is largely to do with the quality of the product that is coming into India. As a country, since we need PVC to be imported, it is not that we are saying there should be no import, we are only saying that low quality product should not be imported into India. This is being taken cognizance of and the government has started its investigation and its due process. It is too early for us to talk about where i
Q
Thanks for the opportunity. Sir first question is on the Custom Manufacturing - so till last quarter we had indicated that Phase 1 will be commissioned in Q1 FY24 and now we saying Q2. So this is purely because there has been a revision in terms of the capex or are there any other delays because of which it has been postponed by a quarter or so?
N. Muralidharan
Rohit, we had indicated it will be commissioned by H1 of FY24 and it still holds. Even with the increased volumes that we are looking at we will still commission it by H1 of FY24, there is no change in the plan. So on the Custom Manufacturing front, in terms of product pipeline, the product commercialization scheduled over the next 2 to 3 years and generally how much time does it take from enquiry to commercialization? Krishna K. Rangachari: So typically, it takes anywhere from 20-24 months from enquiry to commercialization and as we have indicated in the past, we have a number of products at
Q
Good afternoon Ramkumar. You just mentioned few things in terms of overall long-term demand situation and also China opening-up. Considering medium to long term outlook and the cash that you have, would it be prudent to kind of stock up on the materials and probably build that stock which can be used up going forward when the demand recovers sharply in the market. What would be your policy on such thoughts?
Ramkumar Shankar
Thanks KK for the question. It would be difficult for us to build-up stock and it may not be so prudent to do that as well, because especially in the immediate short-term with the prices falling, any additional stock that we have will hurt us in terms of inventory losses. But even otherwise, the policy that we have built up over many years of experience is that we operate with wafer thin stocks on finished products. We normally have only around 4 or 5 days of production as inventory and in terms of feedstock as well we buy it with a very tightly controlled supply chain and the tankages determi
Q
Hi Sir thanks for the opportunity. Most of my questions are answered, you mentioned during your presentation and afterwards that in the longer run still see that fundamentals for PVC market are intact in terms of demand and supply. So how do you see this evolving in terms of the capacity expansion that have been announced by your competitors and some of them are pretty large ones. So correct me if I am wrong we have currently 1.5 million tonne of production capacity in India whereas the announced production capacity over next 2 years is almost 3 million tonnes. So we would practically be reach
Ramkumar Shankar
The current demand for Suspension PVC in India is around 3.3 million tonnes, that is what we expect it to be by the end of this financial year and the current capacity is around 1.5 million tonnes. In 4 years’ time, this demand is expected to go to anywhere between 4.5 to 5 million tonnes. And the expansions that have been announced, they will come in phases, they will not all come together, and they may take 3 to 4 years. We need to see how many of these projects - which one will come when. So even assuming that all of them come together by say 2026 or 2027 is when all the capacities, all the
Q
Hi Sir, thanks for this opportunity. Sir I have two questions - firstly from the balance sheet front so we have net cash at the same time we also have a sizeable debt on the balance sheet and I believe that the cash and the large portion of the debt is sitting in the CCVL. So just wanted to understand the thoughts behind carrying these debt on the balance sheet. Do we intend to pay this off, what is the thought process? And also about the cash that is lying what is the policy of deployment - we do it in the debt or the mutual funds? That is the first part. Thank you.
N Murlidharan
As far as the debt that we carry in the balance sheet, we do believe that debt is an integral part of capital structure. So, we would like to retain the debt and pay it over a period of time as it matures. As far as the cash in the balance sheet is concerned, like I explained earlier as well, we have Rs. 1400 crores of cash out of which Rs. 550 crores is in the holding company and Rs. 850 crores is in the subsidiary and we do not deploy in mutual funds; we will deploy only in bank deposits. What is the repayment schedule of that particular debt on the balance sheet? It has three components; th
Q
Thank you everyone for joining us today on this earnings call. We appreciate your interest in our company and if you have any further queries, please do not hesitate to contact SGA, our Investor Relations advisor. Thank you very much and have a pleasant evening.
Management
Speaking time
Ramkumar Shankar
21
Moderator
13
N. Muralidharan
11
Sanjesh Jain
8
Yogesh Tiwari
6
Ritesh Shah
6
Ahmed Madha
5
Rajesh Kumar Ravi
5
Rohit Nagraj
4
Ranjit
4
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Opening remarks
Ramkumar Shankar
Thank you very much. Good afternoon. On behalf of Chemplast Sanmar Limited, I extend a very warm welcome to everyone joining us on the call today. On this call we are joined by our CFO, Mr. N. Muralidharan, Dr. Krishna Kumar Rangachari, Deputy Managing Director - Custom Manufactured Chemicals Division and SGA, our Investor Relations advisor. I hope you all had an opportunity to go through the financial results and investor presentation, which have been uploaded on the stock exchange website as also on our company’s website. The unique challenges facing the PVC industry continued through this quarter. Our business continued to face headwinds in Q2 FY23 as well due to the zero-COVID policies in China, rising energy costs due to the Russia-Ukraine war and overall inflationary pressures. Slowdown in PVC consuming sectors in China, due to their zero-COVID policies, led to PVC inventory build-up in China and continuous dumping into India. However, with the commencement of proceedings on poss
N. Muralidharan
Thank you Ramkumar, and a very good afternoon to all the participants on the call. Chemplast Sanmar on a consolidated basis, registered a drop in its revenue and operating profits for Q2 FY23, as compared to the same period in the previous financial year. The revenue from operations for Q2 FY23 stood at Rs. 1194 crores, registering a drop of 29% on year-on-year basis. This was largely on account of the combination of lower realizations per tonne and drop in volumes for our PVC products. Sequentially, we did not see any major variations in employee cost and other expenses. However, on a year-on-year basis, other expenses have gone up by almost 27%, primarily on account of higher power and fuel cost. EBITDA for the quarter stood at Rs. 98 crores compared to Rs. 346 crores in the corresponding quarter last year, on account of the reasons I just explained. EBITDA margin for the quarter as a result stood at 8.2%. Finance cost for the quarter has come down to Rs. 40 crores compared to Rs. 14
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