Ion Exchange (India) Limited (500214) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Ion Exchange (India) Limited Q2 FY '23 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Anuj Sonpal from Valorem Advisors. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone. And a very warm welcome to you all. My name is Anuj Sonpal from Valorem Advisors. We represent the Investor Relations of Ion Exchange India Limited. On behalf of the company, I'd like to thank you all for participating in the company's earnings call for the second quarter and first half of financial year 2023. Before we begin, let me mention a short cautionary statement. Some of the statements made in today's earnings call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. The focus of today's earnings call is solely to educate and bring awareness about the company's fundamental business and financial quarterly review. Now let me introduce you to the management participating with us in today's earnings call and hand it over to them for opening remarks. We have with us Mr. Aankur Patni, Executive Director; Mr. N.M. Ranadive, Group Chief Financial Officer; Mr. Vasant Naik, Executive Vice President of Finance; and Mr. Milind Puranik, Company Secretary. Without any further delay, I request Mr. Vasant Naik to start with his opening remarks. Thank you, and over to you, sir.

Thank you, Anuj. Good afternoon, everybody. It is a pleasure to welcome you to the earnings conference call for the second quarter and first half of the financial year 2023. Let me first take you through the financial performance of Q2 FY '23 of our company on a consolidated basis. The operating income for the quarter was INR 4,476 million, an increase of around 18% year-on-year and 17% quarter-on-quarter. EBITDA reported was INR 533 million, an increase of around 34% year-on-year and 62% quarter-on-quarter. EBITDA margin stood at 11%. Net profit after tax reported was INR 387 million, an increase of around 42% year-on-year and 41% quarter-on-quarter, while the PAT margin percentage was 8.65%. For the first half of the FY 2023, the operating income stood at INR 8,300 million, an increase of around 20% year-on-year. EBITDA stood at INR 862 million, an increase of around 14% year-on-year. EBITDA margins were reported at 10.39% and PAT stood at INR 661 million, an increase of 31% year-on-year. PAT margins improved to 7.96%. Let me now take you through the quarterly segmental performance of our consolidated business. In the Engineering division, the revenue for the quarter was INR 2,577 million, an increase of around 17% year-on-year. EBIT for this segment was INR 182 million, an increase of 39% year-on-year. The company witnessed steady order of growth both in domestic and international markets. Regarding Sri Lanka order, the execution remained affected due to the ongoing uncertainties in the Sri Lanka. On the other hand, the execution of the UP Jal Nigam Project is progressing satisfactorily and revenue has been recognized based on the work completion. The order book as of 30th September, 2022 stood at approximately INR 1,458 crores excluding Sri Lanka and UP Jal Nigam. If we add this 2 to the order book, our total order book would be approximately INR 2,795 crores. And also we have a bid pipeline of INR 8,025 crores. With this, we have a strong [indiscernible] for the next 2 to 3 years from the engineering segment. And we are all well-set to undertake significantly increased state of execution in the engineering [indiscernible]. Moving to the Chemical segment, the revenue for the quarter recorded was INR 1.95 million, which increased around 18% year-on-year. EBIT was INR 377 million, which was an increase of 33% year-on-year. The sales in the domestic segment continued to record steady growth and export volumes remained same. This segment improved margins in spite of the impact of rising U.S. dollar rates on input prices. Lastly, in the consumer division segment revenue for the quarter was INR 455 million, an increase of around 29% year-on-year. The loss for the quarter was around INR 5 million. Investment, infrastructure and energy products are giving encouraging results. And we expect the segment to sustain its growth momentum. With this, we can now open the floor to the questions and answer session.

[Operator Instructions] The first question is from the line of Pratik Kothari from Unique Portfolio Managers.

So my first question is on the engineering piece. I mean if we compare ourselves 3 years back which is pre-COVID, our order book is substantially higher, 2x. But when we look at the execution, it's very similar to the run rate that we used to have then. So can you just talk about our execution capabilities, what are we building to kind of shift to a higher trajectory in terms of the execution that we do on the engineering piece.

Good afternoon, Pratik. We are going to witness substantially increased level of execution in the coming quarters. And we have strengthened [indiscernible] including manpower, engineering, whatever is required to handle the execution. You will see the benefits of that in the coming quarter.

So the investment or preparedness has already been done. Does it - it is yet to reflect in on-ground exhibition?

That's right.

That's good to you. And sir, for the last few quarters, you have been mentioning that you're almost on the verge of signing of a large order maybe in the international market or domestic market. But that has not born fruit. So, I mean, usually, what are the reasons that this gets delayed or had some because of the recessionary, et cetera, the narrative which is out there? Has something shifted that decision-making is getting delayed? If you can just highlight something on those, please.

So these are generally infrastructure and government contracts that we talk about. There is extended decision-making mechanism, various government approvals and multiple departments verifying [indiscernible] information and as you can understand in a typical government contract, a lot of diligence takes place. Further, there is a lot of effort which we put in to ensure that our risks are mitigated to the maximum extent possible, and the contract structure in itself takes some time. It is not generally possible to predict an exact time line when the orders would eventually fructify, but we have certainly at it. And hopefully, we will be able to [indiscernible] soon. But till that happens, we will not want to come out and announce anything specific.

But there's no delay in terms of their interest or decision-making, et cetera. I mean that intend doesn't change.

Intent does not change. However, the decision-making process itself is expected to be long. And in government departments, which -- whether it's a district level or it is a state level or it is at a central level, they take their own time and they evaluate various aspects. So expected that the decision making will…

The next question is from the line of Chetan Vora from Abakkus Asset Manager.

Sir, wanted to understand on the engineering side, the growth has been like 5%, 10% and at the start of the year we were guiding out for like overall growth of 30%, and chemical also has reported a revenue growth of 16% in the first half. So where do we stand in that scheme of things?

Chetan your voice was very unclear, little bit muffled. Can you be a little bit…

Yes. Is it clear now, sir.

Still not clear. If you can be a little bit louder and more clearer.

Is it fine now, sir?

This is better.

Yes. Yes, what I was asking, at this part of the year we had given a -- we are looking out for the revenue growth of nearly about 25% to 30%. But in the first half our engineering growth has been like 11% and the chemical has grown by like 16%. So where do we stand in that scheme of things, sir?

We should substantially increase pace of execution in the coming quarters. We retained our expectation of the year-end revenues from engineering segment and overall numbers.

Which is 20%, 30%, right?

Yes. We should be looking at a growth of around 30% to 35%, yes.

Okay. And this is for the -- sorry, for the engineering or the overall?

We're talking overall.

Okay, fine, great. And so basically it will be the back-ended thing. And on the margin front, also, sir, for the first half also the -- and engineering, we saw a pressure on the raw material because of which the margins has been like 5%, while the chemicals margin has improved. So how do we see situation going ahead?

We should be -- conservatively we should maintain the full year margin percentage similar to what we have achieved in the past year.

Okay, fine. And how do we see the -- you know, the -- as the earlier question was also being asked that the bid pipeline which stands right at nearly about INR 8,000-odd crores. And how much of that will be in the advanced stage of talking, and that was the first thing. And the second thing was of the UP dream, the UP order has started getting executed, is under execution. So how much of that would have got executed in this quarter?

The total invoicing which has happened on the UP during the 6 months is INR 76 crores. And in terms of the bid pipeline which you asked for, roughly around 20% to 30% would be at a relatively advanced stage.

Okay. And then the last question would be, what's the object on the Sri Lankan order whether it is status quo or any work is going on?

Sri Lanka order you asked?

Yes.

The pace of execution has come down to almost a standstill. We are -- we still remain hopeful that very shortly, the conditions for execution of the contract will improve. And then we will go ahead with execution in consultation with the funding agencies and Sri Lankan government. Only when we feel that the recoverability is not going to be a challenge and execution [indiscernible] desired pace, we will start again in earnest.

All right. And how much is your receivable from them as of now?

Sorry, can you repeat that question.

How much we are supposed to receive from Sri Lankan business?

Specific, I think we've not really given out contract-specific data. But in general, the -- we've been saying is that we do not expect to have any credit risk in the job. We are not getting paid directly from the Sri Lankan government, and this project is funded by Exim Bank. So to that extent credit risk is not something which is on top of the mind.

All right. And sir, last one, what's the update on the greenfield expansion, do you know if it was delayed because of the approval? So what's update on that?

We have heard some positive developments in the very recent past. And our expectation is that we will get the environment clearance that we were waiting for within this market. And we expect to start commercial production in FY '24-'25.

[Operator Instructions] The next question is from the line of [ Yog Rajani ] from KamayaKya Wealth Management.

My first question is, what is the maximal revenue potential of the consumer product division facility and chemical division facility and the membrane facilities?

You are asking the maximum revenue potential.

Yes, from the current capacity that we have in the 3 divisions.

Consumer product division, we don't really have a significant capacity constraint. We can go to a figure of 2x or 3x of where we stand without much of a strain. And likewise, our ability to [indiscernible] revenues from our chemical division is pretty strong as we are able to add modularity to the extent required and which is product-line specific. In case of resins, as we have been announced, we are looking at our greenfield expansion there which will increase capacity to double of where we are, our current capacities. So there again, with that expansion, we will face, we should be able to increase ours by more than two-fold. In terms of engineering, again, there is -- the capacity constraints are not all that significant because a lot of the execution takes place at site. And it's not all mirrored in the plant. There's a lot of manufacturing which happens at site. So capacity constraints do not work as they would in a typical manufactured product.

I had another question. What is the total addressable market of the consumer product division and what would the market share be in it? And out of the total market, what percentage of the total addressable market would be institutions?

What percentage of the addressable which?

Of the total market would be institutions for a consumer product division.

Institutions?

Yes.

What do you mean by institutions?

By large corporate payers.

Okay. So for consumer products, if you look at the home water equipments that we typically installed in residences, that market itself is close to INR 10,000 crores-plus kind of a number. There are other equipments which go into residences which is things like softners, the new product which we have introduced recently which is alkaline water, these would add to that market number. As you would notice from the overall revenues, which we have been declaring, our market share is small in percentage teams and the opportunities remain quite big.

Okay. And what EBITDA margins can we expect from this division over the next few years?

Segment is capable of generating extremely high levels of EBITDA margins. However, it's the question of scale. There is a substantial amount of fixed costs, which we incur in the segment. And when we go past the threshold scale, the EBITDA margin additions will be substantial.

The next question is from the line of Pranay Roop Chatterjee from Burman Capital.

So my first question is pertaining to the engineering segment. And it's more from a medium-term perspective. So if I look at your business mixes, right, let's say, 5 years from now and more from a tender perspective, which you define as your bid pipeline, what sort of mix do you expect, let's say, between private and public entities, like do you see public entities giving you more business in the next 5 years. If you could also break up on the private side, which are the sectors where you expect to show stronger performance versus the others. And similarly, on the public side as well, which government programs would drive this incremental orders? Continuing on the mix side, also on the domestic versus international front, like do you expect international to increase in share or domestic to have a stronger mix going forward? So just trying to understand how your business would look from a mix perspective, 3 to 5 years from now?

See, as of now, the UP contract, which is one of the larger contract itself is a government contract. Similarly, Sri Lankan contract, we would classify under the government contract itself. Typically, one large contract from the government side would tend to create a significant bias towards that segment. It's difficult to give you very exact or accurate predictions of how these things would pan out in the future. But based on reasonable assumptions, I would expect that in a time frame of 3 to 5 years, the government -- the direct government contracts should be in the region of around 20% to 35%, somewhere in that bracket.

And if you could also elaborate on the domestic versus international front?

See, if you get a very large contract in the international market, something like Sri Lanka, which we have been talking about, that would tilt or skew the numbers slightly. But again, based on reasonable assumptions, I would expect domestic to be somewhere in the 60% to 65%.

Got it all clear. And my second question is on competition side, also on the engineering segment. If you could -- it's okay, if you don't give an exact number, but a broad range as to what has been your bid win rate in the past. And continuing on that, given your bid pipeline and the type of projects you bid for, how does the competitive environment in India look like, specifically India? For example, do you see the number of international players increasing due to the recent uptick in tenders being given out? And also, how many firms are really there who are capable and eligible…

Hello? Pranay? Sir, we are not -- sir, you may please continue with your question.

Yes. Sorry, I think it got cut off. So my question was on competition. If you could just help me with the bid win rate in the past. And also talk about the competitive environment, like if there are increasing number of international players instantly coming in and bidding. And number two, how many players are at all there who are eligible and capable to bid for the same contracts?

As a thumb room, we assume that our bid win rate would be somewhere in the vicinity of 20%. International players in the market, they have been there for decades as of now. There are new players which come in and there are players who exit almost every year. There is no significant uptick in terms of the competitive intensity.

Got it. And if you could just -- this is the last thing. How many players would there be ballpark, would it be 20, 30, 40 who are eligible and capable to bid for similar contracts? Just to get a sense on how crowded the market is.

It is a very distributed market in terms of the type of competition and type -- capabilities of various players. And it's quite specific to sectors, segments of industry, it would be specific to geographies. So, as such, there is quite a large number of players who operate in this market.

The next question is from the line of Romil Jain from Electrum PMS.

Congrats on a good set of numbers. Sir, just want to understand, at the ROC level, whether our exports business would be doing better or our domestic business will be doing better overall?

As a thumb rule, we would expect it to be almost the same, maybe with a slight bias towards the international sector.

Okay. Okay. And presently, of the order book, how much is the export order book? And how much is the export bid pipeline?

Roughly 20% is exports. Okay. And the bid pipeline in total is around INR 8,000-odd crores, of which exports is roughly 30%.

Okay. And sir, in terms of Sri Lankan order, the project, while I agree that we don't run a major credit risk there because of the [indiscernible]. Can you just let us know how much -- obviously, only small part of the execution is now left. So what kind of money have you already received on the project?

So that's, unfortunately, not a number which we have been declaring in the public.

Okay. Okay. Sir, chemical related business, I just want to understand who are the competitors in India for the chemical business?

To name the 2 or 3 of the major players, Nalco, which is now Ecolab; and [indiscernible] is another one. These are the largest of the multinational players.

Okay. Mostly international players are the competition in this segment?

No, there are domestic also. Thermax, for example, is also one of the players in the chemical segment.

Okay. But I think the scale is different for you and [indiscernible]

The next question is from the line of Saket Kapoor from Kapoor & Company.

In your presentation under this engineering order book and pipeline, it is mentioned that engineering project is INR 1,458 crores, whereas outstanding for Sri Lanka is INR 256 crores. So this is the worth of contract pending to be executed for Sri Lanka?

That's right. INR 1,458 crore is excluding Sri Lanka and UP.

Yes, yes. Separate figures are mentioned, so…

INR 256 crore is the outstanding portion of Sri Lankan contract.

Okay. And sir, as you have -- correct me, you mentioned that for the greenfield project, we are in the process of receiving the environment clearance within this month. And we are expecting it for this month?

Yes, we are expecting to receive it this month.

Okay. Sir, could you give some more color on the size of the investment we are going through and what would be -- what are the controls of this greenfield projected, sir?

As I've been saying, we will be doubling the capacity of our resin manufacturing in Phase 1. And there, I think another in Phase II we'll be adding a similar capacity. The total cost, the CapEx on this, we are expecting to be upward of INR 200 crores, INR 250 crores. The numbers, we would be giving out at a later date, but it will certainly be in excess of INR 200 crores to INR 250 crores.

INR 200 crores to INR 250 crores. And the completion date would be FY '24?

Yes, FY '24, '25, we expect to start commercial production.

Okay. And what should be the turnover at optimum levels that would be expected from this plant at Phase 1?

As I said, we will be doubling our current resin capacities. So at the bare minimum, it will be more than 2x.

Sir, what is the current resin sales for us for last year or for the first half?

Approximately 60% of our chemical segment revenue is from resins.