Alok Industries Q Earnings Call 14 Aug 12

Transcription

1 Alok Industries Q Earnings Call 14 Aug 12 Presentation Ladies and gentlemen, good day, and welcome to the Q1 FY13 Earnings Conference Call of Alok Industries Limited, hosted by Crystal Equity Research. As a reminder, all participants line will be in the listen only mode. and there will be an opportunity for you to ask questions at the end of today's presentation. Please note that this conference is being recorded. I would now like to hand over the conference to Mr., Associate Director, Equity Research at CRISIL Research. Thank you, and over to you, Mr. Vishal. Thanks Shama. Good afternoon everyone. On behalf of CRISIL Equity Research, I welcome you to the Q1 FY13 results conference call of Alok Industries. It's a pleasure to have with us today, Mr. Sunil Khandelwal, CFO of Alok Industries. During the course of this call, they will discuss the main factors that drove the operational and financial performance of the quarter, and provide insights on the overall business scenario, which will be followed by the Q&A session. I would now like to handover the call to Mr. Sunil Khandelwal. Over to you sir. Thank you Vishal. Good afternoon, everybody. Thanks for joining our Q1 concall organized by CRISIL. This quarter was really good for us. Our sales grew by almost 48% to 2004, 23 crores and, exports also grew by about 34% to 837 crores. Operating EBITDA was really good at 759 crore, and the PAT after considering the exceptional items of 172 crore mark to market was crores. These are the main highlights of our this Q1 results. With this I would like to keep the floor open for the Q&A session. Questions And Answers Thank you very much. We will now begin the question and answer session. [ Instructions]. We have the first question from the line of Paras Bothra from Ashika Stock Broking. Please go ahead. Paras Bothra Good afternoon, everybody. My question was with regards to the debt position of the company. Can I know the debt position of the company at present? And secondly, what all things that management is doing to bring down the debt? And recently there was a talk that the real estate division is going to be sold out. So are there any possibilities with regard to the real estate as well? So these all are the things which I wanted to know. Yeah, sure. You had nailed at the right place, in fact this is our top priority to reduce the debt. Our debt as on June is about 12,900 crores, as on 30th June, And of course, we are working on it. We feel that from the operations the free cash flow will start repaying this loan from 2014 onwards. And for this year, we are working on to sell our non core assets, that is primarily our real estate which we expect to give us around 2,500 crore close to that kind of a realization over a period of two years. Of which we are targeting about 1,500 crore in this financial year to.

2 And we have made a good progress in that. Close to 600 crore worth of transaction has been interacted till date. And we have received good number of advance against that. So we are on tracks, we are, debt reduction is our top priority. Paras Bothra Second question was, hello? Paras Bothra Second question was with regard to the ForEx, there was a mark to market of 172 crore, right I suppose? Absolutely right. Paras Bothra So can you please explain what exactly led to that mark to market of 172 crores? In fact this is related to foreign currency transactions, and majorly on account of forwards. B, restatement of foreign currency loan which are for working capital into the current rates. And C, we have done some coupon only swaps where we have about 1.5 years back, we have done some coupon only swap where we were the converted part of the loan, rupee loan notionally into foreign currency loan where we are paying the interest in notional in dollar and getting fixed rupee to say about 1.5% interest cost. So largely it's on account of that. If I have to break up in forwards, it's about I mean it's equally divided into forwards, and so the 173, you can actually divide into forwards, coupon only sway and restatement of loans. Paras Bothra Thank you so much. Thank you. [ Instructions]. We have the next question from the line of Sudhir Virabh from Consultancy. Please go ahead. Hi, Sunil, I'm Sudhir here. Hi sir. Your margin has grown up very fantastically for this quarter.

3 Right. And the share of polyester has come down, I think from 39% last year to 34%. So going forward, if polyester sales is going to increase say 38% to 40% of the total sales, then this kind of margin can be maintained or margin will be little bit lower in the rest of the year? So the thing is our polyester sales has not gone down, yeah, in the first quarter, yes, it is looking 36% of overall sales, but last year if you look at for the whole of March 2012, it was 34%. So the 34% has moved to 36%. What has happened, the margin improvement is on account of couple of things. A, rupee depreciation has helped us. So the volume increase and the value increase in exports in fact about 20 more than the increase in export is about 34%, of which more than 20% is due to value increase. So that has of course helped us in increasing our sales and the margins. Second, the input cost, the raw material costs have gone down compared to what you're seeing in the last year. So that has also helped us. So depend upon where the rupee moves, where the raw material cost moves, and how much the polyester division contribute to the overall sales, the margin would vary from time to time. Of course I would not say that, yes, this kind of a margin can be maintained, no, but yes. This year order book is very good. Prices we see, selling prices are also we are getting good. So let's see it should be good. Margin should be good. Thanks. Thank you. We have the next question from the line of Mohammad Reza Aydin from Money. Please go ahead. Hello. Good afternoon, sir. Congratulation on a good set of number, sir. Thank you. Thank you very much. Sir, my question was polyester contributing around 36% of the revenues and as you've mentioned just now that we have seen some tailwind due to recur reduction in raw material prices and currency. So since this has increased our margins now going forward, the only thing the clients will be asking for is the discounts on rate because your costs have ultimately come down and polyester being more of a commodity kind of play, this such high margins might not be sustainable always. You are very true. In fact definitely on the new orders that we take, we have to consider the present spot rates. And of course we keep some cushion because the spot today is not, is quite it's fluctuating a lot. So we keep some margins, so and go to the buyer. As far as polyester is concerned, polyester, we have to look at from the two angle. One is domestic market, one is export market. Export market as on date is looking extremely good for polyester in terms of margins. And that is why we are focusing ourselves to see more and more polyester products we export where to get the addition margin especially in case of texturising. So depending upon which product basket giving us what margin, definitely we would push our capacities towards that. So it's a very interesting product mix we have and interesting market mix that we have. So polyester also would endeavor would to have margin expansion to the extent with this flexibilities that we have.

4 Sir, as far as my bit of reading goes, we are on the break of having over capacities in polyester because lots of capacities had come up in India, is about to come in India as well along with China already has a huge polyester capacity. And see in cotton kind of textile business, India is one of the largest producer of cotton. So we have kind of a up hand and because traditionally lot of labor is required, and the Indian labor being cheap but polyester thing being a very commoditized. Don't you think first of all, can you brief me about the capacity across the world, because I've been reading that there were over capacity in polyester. So will it hamper the margins going forward? See just to give you an overall consumption pattern of the fiber consumption of the world. The average fiber consumption of the world per person is about 11 kg. per person. India is below that. India is at 8 kg. per person. Right. The world average of that 11 kg. per person is 30% cotton, and balance 70% non cotton. In that non cotton, almost 90% we can safely say is polyester. So that's the ballpark. In India, the fiber consumption is as on date is about 50:50. So we are below the world average in terms of consumption of polyester. And if you look at China who's per kg. consumption of fiber per person is about 18 kg. They are already had 75 polyester, 25 cotton, a little more than that. So what has happened India traditionally was a cotton success country. And that is our strength and 70% of what we export is also cotton. So what has happened if you look at over a period the gap between cotton prices and the polyester prices have widened. For example, cotton yarn today for discount is available for Rs. 230 a kg. Whereas polyester yarn is available for Rs.100 a kg. So gap is more than 100% now. What we see today in next two, three years down the line is that India's export is continue to go up and it will be more of cotton products where we have a strength at the same time internal domestic consumption is also growing by 8%, 9% per annum. So the moment industry which is $80 billion today about 30 billion actually it is 85 billion, 30 billion exports and 55 close to domestic market. Moving towards 100 billion, 105 billion the cotton supply situation of India would start deteriorating and in fact we would become

5 neutral in terms of cotton supply situation. So that tends a gap between cotton and the polyester prices would further widen. And we would see the masses in India would also move towards blended fabric. Then you will see huge demand coming up in the domestic market out of polyester fabric. So it's a story which is going to unfold over a period of next three to four years but it is surely going to happen the way we are talking about. Yes surely looking to this trend there are lot of capacities coming up in India but as I said there would be enough room for all I don't see a over capacity, may be temporarily in a year or so there could be a scenario where we are having a over capacity. That is why it's very prudent to have a basket of both export and domestic. Right, right. So even if temporarily domestic is over capacity, we can divert over capacities over the export market which is really good looking good for our products. Our costing is as per international prices. And if we can produce those qualities that there are looking at, definitely we have a market. So Alok strategy is that only to have 50%, 55% of export as of now because that is we are seeing good margins over there and also have some meaningful prisons in the domestic market. Okay So I think long term if you ask me polyester capacity and the consumption would grow up in India. Correct sir. And sir last comment on what is our operating since you are earning such a high levels of operating profits, why are cash flow from operations is negative? It means significant amount get stuck in the working capital as well. Yeah absolutely right that's the area of our focus also. And we believe from working capital, lot of capital can be is possible to bring back. We are working on it and you will see improvement going forward. Any significant specific steps you are taking? Obviously we have now out of our major expansion drive of course there would be CapEx happening but the major CapEx that we have been trying so now we are focus on operations. And in our fabric we have identified that we are producing more than 300 qualities as of now.

6 And so because of which naturally we have to keep for entire chain for all qualities, we are rationalizing those qualities and see that how we can reduce it to 100 major qualities based on the contribution that give to the company. So on that direction so like that there are lot many ways we can improve and definitely there is a good room to improve. And we will be doing that. Thanks a lot sir. Thanks for taking my questions. Most welcome. Thank you. [ Instructions]. We have the next question from the line of Neerav Shah from Andriod. Please go ahead. Good afternoon sir. Neerav calling from Ahmadabad. Good afternoon Neerav bhai. In spite of that everybody says we are positive and we have good margin, why the stock is not performing sir? Sir that's a question that's difficult for me to answer but I will just tell you sir,we are three issues that we are I have been referring to. A, of course there are three legacies that we are fighting. One is country legacy, if you are overseas investors. B, industry legacy, there is a general mindset that this industry is not doing well, it's not a profitable industry, it's not giving returns. So, industry legacy which is true but that's again matter of history. In this you will soon see that the organized players in this industry, see this industry has 85% smaller fragmented 15%, 20% of the organized players. As the organized player proportion increases, you will see that the outlook of the industry will also change in the mind of the

7 people. Thirdly of course company legacy also. The traditionally Alok has been into CapEx mode for long time, last nine years, eight years we've been in a CapEx of about 11,000 crores. Secondly, during the same period, so there was no free cash Sir, last year recently sir last quarter? Neerav ji, that we've done, we've been trying to sell the real estate, I think market is waiting for the actual action to happen. We are working on it. So it's a real estate portfolio which is quite large. It's going to take time. So once we start, once the market start, clearly start seeing those signals on the company, that yes, they are now focus on their core operations, they had started generating free cash flow. The company is focus on ROCE, let me tell you, we are working on focus on ROCE and in next four years, consciously we would double our asset turnover and we will try to double our ROCE. That's our strategy that if we are able to succeed in that, you will see a different company altogether, we are working on it. So what price it is quoting today is because of certain reasons. That's we have let down may be, you might have let down the people in terms of our strategies, in terms of our certain steps. Maybe that our leverage is one of the major concerns. We do not know, free cash flow maybe the second reason. Maybe the poor ROCE and asset turnover could be other concerns. So all this concerns, one by one we are now trying to address, and looking at the size of the company, and the balance sheet size, it would take time to show those kind of a results. I would clearly need two to three years modestly and/or maybe in a long term about what we want to implement may take even five, six years also. But once that we have chosen that path and we are moving towards that, maybe at some point of time market would start seeing that and probably will give us value. But yes, what we are today is may be the market is, we have not met their expectation that market was looking at. And we'll try and see changes legacy. One more thing I want to know, sir. [Non English]. Last week, I suddenly know that the promoter has pledges their share everyday, what is the reason behind that sir? See promoters, they have come from a background where there are not, we don't have a surplus income or cash flow to, so whenever they would required to... That's what I want to know sir... Whenever they required to pump money in the company to increase their stake, they are doing it through outside borrowing and that they are pledging their share to raise that borrowing in their personal books. So, that is the reason the pledge has gone up. Thank you Sunil Bhai.

8 Most welcome sir. Thank you. The next question is from the line of from ICICI Direct. Please go ahead. Good afternoon, sir, and thank you for the opportunity. I had a couple of questions. Firstly, if I look at the capacity expansion details that you have given in the investor update. We see that the POY segment is going to have some decline in the capacity, is this because you are looking at internally utilizing that capacity and producing a higher value added product or I mean is there a gap in my understanding on that front? You got it absolutely right, Dhavni. We, Alok as a strategy is looking at polyester division on a finished product side. So, we would be more onto DTY, more of FDY, more of BSF, and other than into chips or POY. So that is why increasingly we'll be creating more finished product capacities and reducing the POY and chips consumption, I mean production. Production. Absolutely right. Okay, sir. Sir I wanted an update on the H&A front in terms of how is the performance how the stores are performing domestically and what is our plans on that front? See H&A is our domestic retail venture and they are doing I would say monthly sale of about 5 crore and annually about 60 crore, 65 crore top line they achieved. In terms of profitability we're still not profitable, we're losing about 2 crores, 3 crores per month in terms of outgo there. And we've internally met decided that in the first step we're closing about 45 non profitable store that will happen by September and then see the performance of the division. If it continues to be profitable, and within their own means, like if they manage out of their own cash flows, we would continue that business else it will gradually we'll start unfolding it. Sir what is the current count of stores and approximately what base of recovery?

9 As of now we have about 190 EBOs that is Exclusive Brand Outlets and we have got equal numbers of shop in shops. What we've realized that shop in business is quite it's breaking even, it's profitable also because we just share some portion of our shares. Right? But in EBOs because of rentals and other issues it's not panning out to be profitable. So averagely you wanted to know this space this space that we occupy? Yes sir. Averagely you can take 800 square feet on say I would say 290 stores. And 800 square feets. So it's about 2,30,000 square feet roughly we are operating. Okay sir. So I mean the plan is that even after is rationalization et cetera if you still think that it not viable to probably to actually look at exiting this business, right? Absolutely right. The thing is the focus is now on the ROC so any asset which is not generating the return we would not like to continue that business. Okay sir. Also what is the quantum of foreign tax out of the total debt that we have on books? On a standalone level I think term loan would be about 1,000 crore. And working capital would be another 1,000 crore. So 2,000 crore of loan.

10 And sir cash as on June if you can talk? You are saying the you want to know the cash levels as on June? Yeah, it's about 270 crores. Fair enough. Thank you sir. Thank you. We have the next question from the line of from Enam Holdings. Please, go ahead. Yeah, good afternoon sir. Good afternoon Bhavinji. Sir, what is the current quarter inventory? Current quarter inventory may be close to about four months. Four months. And how has been the trend in Shankar 6 prices roughly, if are they going up, steady, down? I think you have given the chart where it shows June prices were around 32,500. Right, right. What should it be in August?

11 Now, of course it has moved. It's now close to 38,000 levels to 40,000 levels in fact. So, it has gone up to some extent now. And the other thing, the debt number you gave is a standalone right 12,900? Absolutely right sir. Okay and it includes all short term working capital, home debtor all...? All, all. And the ForEx figure sir just a confusion what you explained 173 crores breakup and... Going forward will there any be ForEx MTMs or this is through? Sir, I will tell you at at 56 level now it is provided for. Right. Now it depends where the rupee goes down from here. Suppose it further depreciates to 57, 58 level it will accordingly be the MTM would move inline with that. And what's the gross quantum on which it is provided? It is on different, different products say like about 1,700 crore worth of rupee loan we have done a coupon only swaps than on some

12 forwards we have sold. So, it's the different different this thing, it's primarily of three transactions. One is rupee loan, reinstatement of rupee loan, A. B, it is on the forward that we have sold, And C, it is on the swaps, coupon only swaps. Now to tell you, what, so in case of forwards, majorly it is because of the forwards and the swaps sir, more on forward. In terms of our net exposure, we are dollar positive right? Obviously, obviously because our exports are much larger. Right. So actually we should be gaining on it. This is just a forwards sold what we have done which has resulted in foreign exchange... Absolutely right, sir, absolutely right. And it's a forward sold is also not I think that effect will also go gradually. And let's see. Other thing on the real estate portfolio of sold real estate worth 600 crores right? Right sir. And till date, advances received have been? Yeah,yeah. We have received about 150 crores worth of advances. 150 crores worth of advances.

13 And now we are closing the transactions, so we're completing the agreements. So I think we expect to receive major chunk very shortly. Thanks a lot. Thank you Bhavin Ji. Thank you. Thank you. Before we take the next question, the management would like to make a small announcement now. I would in fact I would like all the participants that Alok is well understood by looking at it's plants. So it is our open invitation to all that whosoever would like to come to our plant, we would organize the visit. They can inform And also a better understanding of the industry and the company. So it's a request for all of you to make it, you can just need a morning, evening, in a day we can complete the whole visit both Silvassa and Vapi. So that was the invitation that we wanted to give, that was the. You can go ahead with the concall. Thank you. We have the next question from the line of Prashant Kutty from Emkay. Please go ahead. Prashant Kutty Thank you sir, for taking my question. I just have one question, whichw as the margin Excuse me, Mr. Prashant. You are sounding very distant, can you come a bit closer? Prashant Kutty Am I audible now? It's okay now. Thank you. Prashant Kutty Thank you. So, as far as the margins are concerned, we said a large part of it is basically led by rupee depreciation.

14 Prashant Kutty Could you probably know what is the steady state margins for the business because we've seen the polyester business as you just said that it's increased to 34% for FY12 to 36%. And if I assume the polyester business assumes have lesser EBITDA margins as compared to the cotton segment. So, if you could probably say, what would probably be the steady state of EBITDA margins going forward? See, as I said, it is the mix of both. It's a mix of cotton and the polyester. So it depend upon the mix that it would go. See as of now we are getting our margins on the cotton integrated about 38% to 40% integrated model. And on the polyester side, we are getting anywhere between 15% to 17%. So that is the range that we are working on. Now depend upon lot many things where the margins will move within the segment, and then the blended margin of both the. So I can't tell you what is the steady margin going forward but yes, these are margins, and I think for the current year, I don't see substantial up or down, may be 1% or 2% here and there, it's okay. But I don't see much traction to this. Prashant Kutty And sir, just one more question, what rate is our forward covered? We are neutral at 52. Prashant Kutty Fine, thank you. Thank you very much. Thank you. [ Instructions]. We'll take the next question comes from the line of Mr. Vishal. Hello? Yeah hi sir this is Vishal from CRISIL. Yeah Vishalji. Sir I have two questions one is regarding the ForEx loss.

15 Second is about the retail chain in UK. So sir out of these 173 crores how much is realized and how much is notional? These are all notional sir, nothing is whatever is realized is already provided in the P&L. These exceptional items are one which are only provided which is this is non cash item sir. So sir by what period if let's say rupee stays at 56 level for next two quarters then the complete loss will be realized? No, no. There's certain swap that is coupon only swap is a period of four year. And also the forward that we've done is again for a longer period of about four years. The realized if rupee stays at 56 you can simply divide it by four. So about 70 odd crore can be our realized losses per annum, 70 crores to 80 crores Per annum.

16 Per annum. Okay, sir the four year is from 2012 or it was from year back? No, no. From now also it's four years. It's done the last year, so the last one year has gone now. It will be 3.5 or so but yeah it's from now. And sir regarding the Store Twenty One retail chain in UK, sir how is the performance for the six month? No, they have gained follow March ending and of course this quarter was not good for them. Again they had a loss at the EBITDA level, about they made a loss about 4 million at the EBITDA level. And there again we are taking a formulative strategy to come out of that. So, may be next within a years time or so, our endeavor is to come out as early as possible. So, we are working on that strategy. And sir last question is related to the polyester business. Sir another industry players are facing problems in sourcing PTA because there was a shut down and all the three plants in India Reliance, Mitsubishi and IOCL. So sir how is the Alok Industries scoping with the PTA supply and what is the situation of the PTA currently?

17 Yeah of course that has been the challenge from July onwards that has started. So that challenge which is there for the industries for us also. We are trying to work our of course we have everybody has reduced the throughput and we are working on the options of imports and all. So far so good we have been to able to manage it. And fortunately or whatever you say because of that margins in this period has really gone up substantially. So on that side is a good news. And sir the additional 1 lakh tonne of polyester by when it is expected? Sir it's a long way at least not in the near future not till 2014, we will not even start looking at that. Okay so what is the current capacity, it is 4 lakh tonne? Half a million tonne? It is 0.5? Okay, okay. Fine sir. That's all from side. Thank you. Thank you. We have next follow up question from the line of Sudhir Bida from Right Time Consultancy. Please go ahead. Hi Sunil, Sudhir here.

18 CapEx were not going for polyester from 5 to 10 but then what kind of CapEx you are envisaging for this year and may be next 12 months? Yeah, what sir is happening we will be all focusing on a balancing CapEx now. For example, in niche we have a machine production hall ready so will expand our knitting capacity from 25 tonnes to say 50 tonnes a day a day. Similarly, in our spinning, our spinning is getting about 60% of our weaving internal requirement. So, gradually the volume of that 40% is very large. So, we have to source it from many mills, more than 20 mills we are sourcing that. So, again the quality of the yarn in terms of the because we are paying from different mills, so it varies. So, we are gradually increasing our spinning to match our, bring it down to close to 90%, 95% of our internal consumption. So, we will be looking at that. Similarly on the wider width side, we are not getting grade from the markets, so we are trying to put up 200 wire with loops to match our processing capacity. Amount wise. what kind of CapEx you're looking for this year and next year? And what will be the result of this? How much percentage turnover will go next year? Sir, it's difficult to give you how much turnover and all will go, but our idea is to have our asset turnover of at least 2 now. For CapEx, how much you are looking? So whatever CapEx will do, it will have asset turnover of at least 2, that's what we are internally keeping a target. As far as amount is concern of CapEx, it is anywhere between 800 crores to 900 crores, which is equivalent to our depreciation charge. We would try and limit our CapEx within that limit. Okay sir. Thanks. Thank you for attending the conference call. On behalf of CRISIL Equity Research, I thank the management of Alok Industries for the concall. Also I had mentioned earlier, the management of Alok Industries welcome you for the plant visit at Silvassa at the time convenient to you. In case you are interested, you can get in touch either with us or with Mr. Tirupati in Alok Industries. And even equity published independent equity of Alok Industries and the report is available in CRISIL website. Thanks once again for all of you, and have a good day. Thank you very much.

19 On behalf of CRISIL Equity Research, that concludes this conference call. Thank you for joining us. You may now disconnect your lines. Thank you.