Everest Kanto Cylinder Limited (EKC) Q3 FY23 Earnings Concall Transcript

Everest Kanto Cylinder Limited (NSE:EKC) Q3 FY23 Earnings Concall dated Feb. 15, 2023.

 

Corporate Participants:

Puneet Khurana — Managing Director

Sanjiv Kapur — Chief Financial Officer

Analysts:

Aisha Shah — CDR India Private Limited — Analyst

Harshvardhan Kumar — Trustline Securities Ltd — Analyst

Sandeep Agarwal — Naredi Investment Private Limited — Analyst

Vishal Shrivastava — Swan Global Investments — Analyst

Harsh Saraswat — Investor — Analyst

Nishith Shah — Aequitas Investments — Analyst

Presentation:

 

Operator

Ladies and gentlemen, good day and welcome to the Everest Kanto Cylinder Limited Earnings Conference Call. [Operator Instructions] I now hand the conference over to Ms. Aisha Shah from CDR India. Thank you, and over to you ma’am.

Aisha Shah — CDR India Private Limited — Analyst

Good afternoon, everyone, and thank you for joining us on Everest Kanto Cylinder Q3 and Nine Months FY ’23 earnings conference call.

We have with us today Mr. Puneet Khurana, Managing Director and Mr. Sanjiv Kapur, Chief Financial Officer of the company. We will initiate the call with the opening remarks from the management, following which we’ll have the forum open for question-and-answer session.

Before we begin, I would like to state that some statement made in today’s call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation shared with you on earlier.

I will now request Mr. Puneet Khurana to make his opening remarks. Thank you and over to you, sir.

Puneet Khurana — Managing Director

Yes, thank you. Good evening, everyone, and thank you for joining us for the earnings conference call. I will initiate the call by talking you through the operational and financial performance, after which we will open the forum to have a Q&A session.

During the quarter, our performance remained subdued on Q-to-Q-o-Q basis. This was primarily due to the decrease in demand in CNG industry, which continues to affect our business. Additionally, the negative impact on our performance was intensified by decline in Commercial Vehicle CNG segment. However, a steady contribution from Industrial segment partially offset the decline and supported our performance.

On a consolidated basis, the revenue came in at INR256 crores in Q3 FY ’23, EBITDA stood at INR14.53 crores with a margin of 5.7% and on a standalone basis, revenue from operations stood at INR143.2 in Q3 FY ’23 EBITDA stood at INR12 crores with the margin at 8.4%. PAT stood at around INR10.5 crores. On consolidated, performance was impacted owing to the one-off exception cost at INR19.94 crores. This was on account of a penalty levied on CP Industries Holdings, a step-down subsidiary of the company by its customers on account of non-fulfillment of agreed contract. We are contesting with the customer, but in the interest of the long-term business engagement with a large customer, we decided to settle the matter.

The CNG segment saw a decline of 61% year-on year to 45% of revenue at a consolidated level. Additionally, our subsidiary in Dubai, UAE contributed positive to our consolidated results. We believe the potential of CNG in India remains strong with the government focused on increasing the use of natural gas in the energy mix as most of you will be aware that have taken several measures to promote the use of CNG vehicles. Unfortunately, the reduced prices difference between CNG and other fuels have primarily led to the fall in the usage of CNG vehicle in the fiscal year. We believe this change at the price difference between the CNG and other fuel increase going-forward.

To conclude, we have witnessed some demand uptake in the CNG segment in Q4. We hope that trend will continue in Q-o-Q and the demand environment will improve starting from Q1 of the fiscal year. We do however need to monitor the price difference between the CNG and other fuels as our key commercial vehicle sales will remain subdued. The customer in this segment is highly sensible on price differentiation and are certainly determining their buying decisions. As and when the demand environment improves, we believe we will be positioned to capitalize given our leadership position, strong balance sheet and expanded production capability.

Thank you.

Operator

Sir, would you like to start the question-and-answer session? Puneet sir?

Puneet Khurana — Managing Director

Yes.

Questions and Answers:

 

Operator

Thank you. [Operator Instructions] The first question is from the line of Harshvardhan Kumar from Trustline. Kindly proceed.

Harshvardhan Kumar — Trustline Securities Ltd — Analyst

Hi, thank you for this opportunity. I would like to know in India business, we dropped another 27% quarter-on-quarter in terms of our revenue, but I think we were expecting flat sales numbers. So, what is the reason for the drop in the domestic sales and how much is the volume and realization decline for Q3?

Puneet Khurana — Managing Director

Yes, Sanjiv, can you take that?

Sanjiv Kapur — Chief Financial Officer

Yeah. So, look at our figures, there has been a drop in the CNG segment, which on quarter-to-quarter also because of the slowdown in the CNG segment, even the Cascade business dropped a little and that affected us. Though we can see pickup in the auto sector happening, but still, it did not match to what we foresee as a good push. So, going-forward, we believe that this would obviously come back, and we’d expect the CNG prices also to cool down and obviously the uptake would obviously pick up thereafter.

Harshvardhan Kumar — Trustline Securities Ltd — Analyst

Okay. But could you please give me any numbers for the volumes and the utilization please?

Sanjiv Kapur — Chief Financial Officer

No, realization, I think we are having normal realizations only, only the numbers have dropped.

Harshvardhan Kumar — Trustline Securities Ltd — Analyst

Only the volumes have dropped.

Sanjiv Kapur — Chief Financial Officer

Yeah, volumes have dropped.

Harshvardhan Kumar — Trustline Securities Ltd — Analyst

Allright. And my next…

Sanjiv Kapur — Chief Financial Officer

There is a slight pick-up in the auto sector, and these, but it got offsetted by drop in the Cascade segment. Auto sector comprised of CNG.

Harshvardhan Kumar — Trustline Securities Ltd — Analyst

All right, okay. And then my next question is, what is the current domestic capacity utilization? In Q2, I believe it was 60%.

Sanjiv Kapur — Chief Financial Officer

Yeah, we are continuing at 60% in this quarter too.

Harshvardhan Kumar — Trustline Securities Ltd — Analyst

Okay. All right.

Sanjiv Kapur — Chief Financial Officer

So, though we sold lower quantum cylinder, but the manufacturing then somehow is equivalent, so the volume is at 60%.

Harshvardhan Kumar — Trustline Securities Ltd — Analyst

Okay. All right. And also, in terms of the mix of Industrial and CNG in revenues right now on a standalone basis, could you give me also the split between the CV and EV in the CNG segment after you give me the Industrial and CNG split?

Sanjiv Kapur — Chief Financial Officer

Yeah, so our Industrial and CNG are in — just a second. So, CNG was 50% and this one also 50%, both are at 50% now. In the current quarter volume and pricing, the total value-wise it is 50%.

Harshvardhan Kumar — Trustline Securities Ltd — Analyst

Okay, okay. All right. And between the CV and PV in the CNG, do you have anything on that?

Sanjiv Kapur — Chief Financial Officer

So, PV we are still to capture that, because PV was not the area which we had concentrated on, and accordingly, PV we are pushing with that the other OEM, and we believe that going forward be able to push for the PV segment also.

Harshvardhan Kumar — Trustline Securities Ltd — Analyst

Okay. And also, on in the past like promoters have bought from the open market right at around the current prices, so is there any intention of the promoters to bite on the open market now? I anticipate that this would send a very strong signal to the market.

Sanjiv Kapur — Chief Financial Officer

That and the promoters are deciding that but nothing as yet.

Harshvardhan Kumar — Trustline Securities Ltd — Analyst

Okay. All right. Okay. Thank you.

Sanjiv Kapur — Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from the line of Sandeep Agarwal from Naredi Investment. Kindly proceed.

Sandeep Agarwal — Naredi Investment Private Limited — Analyst

Thank you for the opportunity. So, my question is what could be negligent from your part of the company regarding this penalty of INR3.9 crores and more penalty will occur in future, or this is one-time?

Puneet Khurana — Managing Director

This is a one-time penalty only which had come, and it’s still got to be finalized absolutely, we are still negotiating them, yes, and since it is in the pipeline, we have made a provision for it.

Sandeep Agarwal — Naredi Investment Private Limited — Analyst

Okay. And sir, what is the capacity utilization guideline for the financial year, next financial year? Any view regarding this?

Puneet Khurana — Managing Director

You know, as the business grows, I mean, we have enough capacity to grow, so we’re well aware of the capacity expansion also.

Sandeep Agarwal — Naredi Investment Private Limited — Analyst

Okay. Now sir, what is the purpose of — we have land acquired during the 6 months and now you had a land investment approximately INR23.67 crores in your books. So, what is the purpose?

Puneet Khurana — Managing Director

Well, land acquire, we had acquired land to setup a project.

Sandeep Agarwal — Naredi Investment Private Limited — Analyst

So why it’s showing as an investment.

Puneet Khurana — Managing Director

No, no, it’s not an investment. It’s for a project. We have announced a project where we are going to — we were going to expand capacity. Currently, since our market scenario is a little subdued, we are going slowly with that project.

Sandeep Agarwal — Naredi Investment Private Limited — Analyst

And sir, is there a bifurcation of other assets of INR111 crores as on 30th of September?

Puneet Khurana — Managing Director

I don’t have the figures at present, but you could catch-up later and I would provide you.

Sandeep Agarwal — Naredi Investment Private Limited — Analyst

Okay. Thank you.

Puneet Khurana — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Vishal Shrivastava from Swan Investment. Kindly proceed.

Vishal Shrivastava — Swan Global Investments — Analyst

Thank you for taking my questions. Sir, I have one question regarding our U.S. business. In the last quarter you have seen a good growth in the U.S. business, and you set that the trajectory of revenue will improve from hereon. But this quarter there has been a sharp drop, has it because of some — we have launched some recurring business because of the penalty, which has been imposed or can you throw some light on that regards please?

Puneet Khurana — Managing Director

No, the penalty is not there to reduce our business because that’s the way we have settled the last customer, so that we are continuing with the business. So, I believe that the business would continue the way it is. Yes, obviously, in one of the quarters they had done some old outstanding orders which got executed, and since it’s a project-based environment, the orders being completed on an appropriate date only can be invoiced. So obviously, you know, there is a little variation in the way it works.

Vishal Shrivastava — Swan Global Investments — Analyst

Okay. So, what kind of trajectory you are seeing for the U.S. business in the near-term?

Puneet Khurana — Managing Director

They are doing well and there would obviously be at least bring up what we’ve done in the last quarter.

Vishal Shrivastava — Swan Global Investments — Analyst

Okay. And are we seeing some kind of decent growth from that business, or it will be around a flattish trajectory?

Puneet Khurana — Managing Director

It will be flattish.

Vishal Shrivastava — Swan Global Investments — Analyst

Okay. Sir, my second question is regarding the margins in both U.S. and UAE business has been too much volatile. So, this quarter we have seen some improvement in the UAE business and U.S. business has, there is a drop, so can you give some guidance in terms of what is the margin we would like to have in both the businesses, will it be similar to the lines of the India business than U.S. and if yes, by when do you see margins would be in that trajectory?

Puneet Khurana — Managing Director

The margins would always come back once sales improve. So, I mean, going by that the comparison between the U.S. and Dubai entities vis a vis India entity. I mean, India, the past also and present also has been doing better than the others, but obviously, yes, they are good also try and catch-up with that in terms of EBITDA.

Vishal Shrivastava — Swan Global Investments — Analyst

Okay. Any timelines you are targeting that you know some restructuring program you’re doing internally, so that in next while we have also, we would be somewhere near to the Indian business margin levels?

Puneet Khurana — Managing Director

The market where we sell are usually different, so, I mean, we can’t really say that they would to be able to have similar margins than us, but obviously their margin would be a little lower than us.

Vishal Shrivastava — Swan Global Investments — Analyst

Okay. Sir, my next question is a little bit of bookkeeping side, and I want to know what is the total debt on books by December 2023, and bifurcated into short-term and long-term debt?

Puneet Khurana — Managing Director

Okay. Okay, can I just give it in the next…

Vishal Shrivastava — Swan Global Investments — Analyst

Sure sir. And sir, my last question is regarding what kind of — are you seeing some improvement in the CNG off late, has the prices have more or they add on the elevated levels, but they have more or less stabilized. So, is that some improvement you are seeing of late in this segment specifically?

Puneet Khurana — Managing Director

On the debt part I’ll just answer. So, on the debt that part it’s INR114 crores and all in short-term overall on short-term basis.

Vishal Shrivastava — Swan Global Investments — Analyst

Okay.

Puneet Khurana — Managing Director

And what was the last question you had?

Vishal Shrivastava — Swan Global Investments — Analyst

Are you seeing some improvement in the autos mainly as the CNG prices, although they are on an elevated level but more or less have stabilized, so is there an improvement you’re seeing and in the segment you’re seeing that improvement?

Puneet Khurana — Managing Director

Yes, we are seeing improvement.

Vishal Shrivastava — Swan Global Investments — Analyst

Okay. Thank you so much sir. Thank you and all the best.

Puneet Khurana — Managing Director

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Harsh Saraswat from Investor. Kindly proceed.

Harsh Saraswat — Investor — Analyst

Hi, good afternoon. I have few questions. Can you little bit to reiterate on the natural gas prices, which have fallen, as a trend what you see happening going-forward? Can we see the CNG prices going back to where they were one year-ago?

Puneet Khurana — Managing Director

So, the government has issued a new recommendation from the committee to keep the gas prices in the range of $4 to $6 from the old fees, if that happens, definitely there will be a correction in the price, but internationally. you know, the situation of gas prices, they have been increasing, so they are definitely looking like there will be some kind of correction happening in probably you will see in March or April, there will be some projection on the downward point to the gas prices.

Harsh Saraswat — Investor — Analyst

Okay. So, can we — by that can we go with the fact that Q3 would be our worst quarter and from next quarter we should see something improvements revenue and margins there?

Puneet Khurana — Managing Director

Gas prices, correct, there would be an immediate response from the customer on the on the gas off-take, I mean, sorry, for the offtake of CNG from all over. So, definitely there will be an impact.

Harsh Saraswat — Investor — Analyst

Got it. And on the government, has the government aggression reduced in the CGP as a segment due to value in the prices?

Puneet Khurana — Managing Director

No, no. At the moment the CG sector investments still continue, even though the gas prices are high, there is still a huge population, which is growing every time, should a PV vehicle population may not be growing at that level, but it is definitely growing every month. So, there is a huge vehicle population coming to the market still of CNG and so there is a drive and all the gas companies continue to invest because the vehicle population keep coming in. So, it’s of course, the plan is not moving as fast as they would desire it, but it’s moving. So, because now the CNG infrastructure has been put, that industry has been set, so definitely now, before in the past there was not so convenient to get gas, now with almost 4,000 CNG stations in India, the availability of gas infrastructure nationwide spread is very convenient.

So, there is an industry which is now there is a momentum that is set, so even at these prices you are seeing that the industry still continues. It is not something that is just not preferred anymore. There is there is a market for this, because the product is still, you know quite well priced, the CNG vehicle is quite well-priced, only thing is for a commercial vehicle because commercials are mainly dependent on diesel prices and diesel is a one that is very close to CNG, so that is really not becoming a motivator. But as for petrol is concerned, gasoline vehicles, they still have some preference and some customers are still, and of course, like if you have auto rickshaws, there the regulatory framework is consistent considering. So, there only CNG auto rickshaws are applying, so there is a continuous flow of vehicle, but, so you will see that as the prices get corrected, the difference between the diesel and CNG becomes even at 10%, 20% 15%, so immediately we will see a rush of people interested for CNG vehicles.

Harsh Saraswat — Investor — Analyst

Got it. And on the raw materials side I wanted to understand how are things panning out, how do you see it going-forward? Will margins come back?

Puneet Khurana — Managing Director

Sorry, raw material front, I’m not able to understand, what do you mean?

Harsh Saraswat — Investor — Analyst

So, on the raw materials side, we have seen our material costs have gone up considerably in this quarter, margins have come down, how do we see going it forward?

Puneet Khurana — Managing Director

So, I think it’s mainly due to gross margin, basically. Sanjiv, can you put any light on this?

Sanjiv Kapur — Chief Financial Officer

Yeah, so actually, we have we some inventories, which would get consumed and maybe going forward we will have it average out with the current pricing, it will even out. So, it will have better margins going-forward.

Harsh Saraswat — Investor — Analyst

Okay. So, the lower-cost inventory will be coming in next quarter?

Sanjiv Kapur — Chief Financial Officer

Yes.

Harsh Saraswat — Investor — Analyst

Okay, got it. Thank you.

Sanjiv Kapur — Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from the line of Harshvardhan from Trustline PMS. Kindly proceed.

Harshvardhan Kumar — Trustline Securities Ltd — Analyst

Yeah. So, because CNG is coming back, what kind of topline can you expect for full utilization of a domestic capacity and with your current realization?

Sanjiv Kapur — Chief Financial Officer

We don’t want to give a prediction here, I mean, the way the business has moved, but yeah, obviously, if we have an improved quarter it will add to the top-line.

Harshvardhan Kumar — Trustline Securities Ltd — Analyst

Okay.

Puneet Khurana — Managing Director

And also, you know now what’s happened is that with all our greenfield projects completed, you can estimate that definitely there is a — there’s definitely going to be a better situation than we’ve seen in the past also.

Harshvardhan Kumar — Trustline Securities Ltd — Analyst

Okay. And just to confirm, what was the CNG contribution for Q3 FY ’23?

Sanjiv Kapur — Chief Financial Officer

Yeah, 50-50.

Harshvardhan Kumar — Trustline Securities Ltd — Analyst

But is that the same for the consolidated entity as well?

Sanjiv Kapur — Chief Financial Officer

For consol, we really can’t count because the consol as a project business. So, if I add the volume, it will dilute the understanding.

Harshvardhan Kumar — Trustline Securities Ltd — Analyst

Okay. All right. Thank you.

Sanjiv Kapur — Chief Financial Officer

Yeah.

Operator

Thank you. The next question is from the line of Nishith Shah from Aequitas Investments. Kindly proceed.

Nishith Shah — Aequitas Investments — Analyst

Good afternoon, sir, and thank you for this opportunity. Sir, I would like to understand how do we see the Cascade market going-forward, since essentially what we are seeing is production in spot natural gas prices?

Sanjiv Kapur — Chief Financial Officer

Puneet sir, can you take the question?

Puneet Khurana — Managing Director

Yeah, this is regarding the natural gas prices, right?

Nishith Shah — Aequitas Investments — Analyst

Right sir.

Puneet Khurana — Managing Director

Yes, so you know again, natural gas prices are depending a lot on government policy. So, government has announced some incentives for CGD sector to cap the prices between $4 to $6 from gas to be available from the old fields. But, of course, there are the major thing is that the global scenario seems to be that the gas prices are cooling off so we’d see some kind of correction will definitely happen in the coming months, we’ll definitely see that.

Nishith Shah — Aequitas Investments — Analyst

Sir, I wanted to understand, so how is the Cascade demand right now and are we see increase in demand for Cascades?

Puneet Khurana — Managing Director

No, no, the Cascade, see what has happened is that there is a demand, but it is not like, the projects have of course slowed down, but there is demand, there is a continuity of the business, but only thing is, there is a slowdown, because again the gas companies are also expanding, but not at that pace that they were expanding previously. Yes.

Nishith Shah — Aequitas Investments — Analyst

So, there is no change on that front as of now, right?

Sanjiv Kapur — Chief Financial Officer

Yes, we look forward to improvement obviously.

Puneet Khurana — Managing Director

Yeah, yeah, of course, they will definitely — as soon as some announcement on the pricing, gas prices comes, then the gas company know that this is at least a long-term, certainly they have a vision that in the next one year, there’ll be no change in the price and the there is a gap between the diesel and CNG so their investments become a little bit more — they are motivated to make those investments. They are making investments, but definitely they are a little bit pulling back because they don’t want to make too much investments today because of the situation. Like I said, that the ball is rolling, the CNG business is for real, there is a vehicle population that has been rolled-out every month, so they have to, they cannot stop putting infrastructure because the existing vehicles on CNG and the new vehicles are being rolled-out. So, there is a continuous need, even at a little bit higher price, the gas companies cannot stop laying down infrastructure.

Nishith Shah — Aequitas Investments — Analyst

Okay. Got it. Thank you.

Operator

Thank you. [Operator Instructions] As there are no further questions, I would now like to hand the conference over to the management for closing comments.

Sanjiv Kapur — Chief Financial Officer

Puneet sir, can you go through the closing comments?

Puneet Khurana — Managing Director

Yeah, sure, sure. Thank you. Thank you once again for your interest and support. Should you need any further clarification, or would you like to know more about the company, please feel free to contact our Investment Relation team. Thank you.

Sanjiv Kapur — Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]