Carborundum Universal Q2 2013 Earnings Call 1 Nov’12 Call/113375_20121101.pdf · Carborundum Universal Q2 2013 Earnings Call 1 Nov’12 Operator Ladies and gentlemen good day and

Carborundum Universal Q2 2013 Earnings Call 1 Nov’12

Operator Ladies and gentlemen good day and welcome to the Carborundum Universal Limited's Q2 FY13 Earnings Conference Call, hosted by Kotak Securities Limited. As a reminder for the duration of the conference, all participants lines will be in a 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 the conference to Mr. Jasdeep Walia from Kotak Securities. Thank you and over to you sir.

Jasdeep Walia Good afternoon everybody. On behalf of Kotak Mutual Equity, I welcome you all to the second quarter FY13 earnings call of Carborundum Universal. From the company's management we have with us the MD, Mr.K. Srinivasan; CFO Mr. Sridharan Rangrajan; Mr. Raja Mukherjee who is DGM Internal Audit & Strategy. I hand over the call to Mr. Srinivasan for opening comments. Over to you sir.

K Srinivasan, Managing Director Yeah, thank you, Jasdeep. Good afternoon to all of you. We start this conference with the good news that the cyclones that visit yesterday sort of less little bit uncased all our factory managers talked to all them and all the plants are operating well and so it was not as bad as we expected it because yesterday the term was practically shut up but I think its sort of left it down the plant case and we all come out of it pretty quickly. We had a very difficult quarter I must say, couple of quick things is in terms of the speed at which we expected to come back in all our verticals did not happen as expected. Q2 was only marginally better then Q1 which in term was very marginally better the Q4 of last year.

In the sense that it was not as sharp recovery from the truck that we had hit in Q4 as we expected so that is a concern for us. But having said that we'll also say that we are better than Q1, we expected to come back very quickly but didn't but we are better than Q1 and I am going to explain how it is in terms of the business itself and what is it that we are looking ahead and then later Sridhar will take you through the numbers.

On a simple basis, we crossed the 500 crore mark on a consolidation once again. It was a 4% growth quarter‐on‐quarter basis. All numbers unfortunately will suffer from four comparison because you must understand Q2 last year was an extraordinary quarter, it was the best quarter ever in the history of Carborundum.

To that extent, I have to take comparisons to that quarters who always one difficult. But if you look at the Q4 they look much but anyway 4% growth on top line, 522 crores. From a standalone 2% growth quarter‐on‐quarter basis to 283 crores. At a consolidated level on a sequential basis, the sales grew by about 5% and on a standalone basis it grew by about 4.5%.

So there was top line growth in standalone as well as consolidated on a sequential basis which was, which like I said was important for to know that the business is moving upward. Overall, we delivered a profit before exceptional item of about 55 crore

This is significant lower than the previous year amount of 99 crore. But in the last two quarters this is the best quarter. clearly like I said on a sequential basis we are moving up. I'll take you to ra. Consolidated level the Q2 sales were 210 crore versus 205 crore marginal growth 2.5% on a sequential basis we are about 4% better.

In abrasives I must the domestic market continue to be on a pressure. All the factors construction, fabrications, steel, engineering everyone of this business is suffered in India. So consequently the off‐take was weak. We are also very, very cautious in terms of seeing that we don't oversell and have the channel loaded because that is a very dangerous in the downturn. So we'll continue to be very prudent in terms of pushing sales.

We collected the money and that's important. So we couldn't grow as fast as we expected to. Russia also grew again marginally about 3% to 4% there again manufacturing is low. They have been have significant growth but Sterling which sells primarily to

the abrasives for the agricultural products they recorded a good growth.

They had a 21% growth not so much because of the same products selling more, they are introduced new products particularly for the right finishing and polishing and this took off very well so they grew by 21% the other small piece in the abrasive business which adds on is the Wendt consolidation and Wendt India also did not do well. They also had a very weak sales during the quarter. So broadly in terms of abrasives I would say it was a neutral quarter, marginally better than Q1. And as we look at going forward we expect things to get better and I'll explain why we expect it to get better not in Q3 as much but definitely in Q4. Q3 traditionally abrasives always a weak quarter because it's practically a two and a half months quarter with both Dushera and Diwali coming in so we don't expect a very significant improvement in Q3 but Q4 definitely expect improvement.

On the electromineral business this is a business where we expected the recovery to come in quickly and fast. This you will know that last Q2 of last year we delivered an extraordinary margin of about 28% on EBIT. This was this is going to suffer in comparison and also it suffers as a fact that this industry across the globe is today underneath stress.

We did the sales of 152 crore net on consolidated level versus a 190 crores was a not a major drop on the top line. Sequential basis also there is a margin growth of 0.9%. But the big issue that we continue to have here is just a lot of the sales are a bit lower margins and I'll explain this going forward.

Foscor did sell much more in Q1 but they were all at very, very low margin because we were still selling products produced with high cost inventory and to a market which was not willing to give increase in price. In mostly, we've maintained and grew the volume but we were under pressure and margin primarily coming out of a big jump in the energy process.

The electricity prices in the quarter went up almost 16% so margins were under pressure. The domestic and the electromineral business of India sequentially grew by 6% but however there was a drop of 14% compared to the corresponding quarter last year. Last year that quarter had issued sale of microgrits for the photovoltaic and as you know the photovoltaic business has gone through a significant change with a major portion distance moving out of Europe and America into China and Asia consequently our addressable market is dropped significantly.

So that is an issue continues and we are trying to find a way to address this market in a more profitable manner going forward. We did have a sale of microgrits out of plant in Q2, but Q3 we are going to see how this can be maintained ultimately try and see whether we can push up our sales of alumina and bauxite.

On the electromineral business, the margins remained under pressure. We do not expect it to come back even in Q3 because the situation is continued to be under stress in all our key markets and hopefully when Q4 you can see something improving, primarily because there is still inventories available in the pipeline and they would ought to disappear.

New capacities are not coming up. Several people have stopped fusions so consequently it's a question of holding out still if the pipeline dries up so that we can get things back to some shape in this. Ceramic business continue to do well. We were stressed out because we did have limited number of customer for the metallised still in the business. We are trying to change it with the addressing more number of customers even though the business per customer is not growing, a bit larger number of customers we seem to be getting better.

The sales were at 133 crores versus 117 crores that's a 14% growth. On a sequential basis we grew by 13%. CUMI Australia grew again though the margins were under pressure because their sale improved, China primarily for coal washing business is under pressure in terms of margin.

But overall I would say the ceramic business is doing well and will continue to do well. The refractory business to an extent is impacted because of the project closures in India, and not project closures in India not happening so shipments are not happening. But again we expect to see things get a little better from Q4.

We don't expect it to be better in Q3, but Q4 hopefully we should get things better. The margins on the ceramic business overall continues to be strong. On a consolidated basis we are about 18.5% so the margins remained strong. Though there is a small erosion we'll explain that but overall this business continues to grow and continues to remain strong.

On the CapEx we said we will do about 200 crores yielding, downturn to try and see how we can and what we call this discover factories within factories how many jets efficiencies improved, how do we do small automation to see whether new capacities can be unlocked. We're just paying a lot of dividend. We're being careful in terms of the CapEx commitment but we expect that still we will go ahead with major plant CapExs. And we are likely to be ending up between 160 to 170 crore CapEx spend overall.

Key things that we would likely to sort of look at is to see whether we can differ these furnaces in Russia by at least six months to eight months primarily because silicon carbide prices are muted. And the energy price in Russia did go up last quarter so we would like to sort of signal to the administration and another that we need to be comparative to add capacity for we won't able to add capacities unless these competitiveness is ensured. So but we overall are committed to that. But we would like to whether we have to bring the capacity in earlier. So to that extent we'll probably delay this barely six months.

That's broadly the outlook. Yes, it was a difficult quarter, a lot of very good work is happening. The team is being doing an excellent job in terms of using this downturn not to put the shoulders down but to actually see what is that we can do to become more comparative as we come out of this downturn. So like I said, one of the key things is happening across locations is what we call is discover factory is within factories. Which would mean the CapEx intensity of business going forward must come down and we should be more competitive as we come out of this downturn. So there are several things happening in many geographies I'll touch it later. But overall, yes results are not inline with what we wanted or what they expected.

But it is not a scary in the sense that they actually sit in the business and talk about it. There is 25% fall in profits as we look at it. It's not as far from what we could have done, given the things that have happened and compared particularly with outstanding Q2 of last year.

Sridhar will explain a little more on the numbers which will give you a perspective then we will come back and take your questions. Thank you. Sridhar?

Sridharan Rangarajan, Chief Financial Officer Thank you, sir. Good afternoon to all of you. First of all my apologies that I believe that the consolidated numbers somehow was not posted in the site, in the profit and there was a mix up due to this cyclone powers went down so many issues, network issues. We try to send you yesterday night but I didn't include it. But I think today in morning we sent all of you whenever we can do at the first opportunity.

I think if you look at the numbers what we have, as Q2 profit from operations before other income in '12 is exceptional. We have grown at 5% compared to Q1, which is around 60.2 crores we delivered 57.4 crores what we delivered in Q1. So fundamentally I think what Mr. Srini said is that operationally we are getting better compared to Q4 to Q1 and Q1 to Q2 we are getting better at it.

At the same time, we all have question in mind is that we see that a 67 crores drop in profit compared to the first half what we delivered versus the first half what we delivered today. But I think I would say broadly I would like to summarize why it happened and then we'll go into the details.

So first of all, the 67 crores drop over in impact alone amounted to 70.7 crores which consisted of power increase in Tamil Nadu, Kerala and Russia put together. And we had the first half of large scales with the exceptionally good microgrits business.

The microgrit's business going away are doing lower than what we did. That cost at about 12 crores. And we have Foscor where we talk about cost push is higher than what we can get a surprise that is about almost 12 crores. And we acquired a new business in Thukela which is a refractory and minerals business. Which had an operation of two months and which had a loss of about 6.6 crores.

So if you look at that all these are externalized and beyond our normal control that's what we had. And I will definitely explain what happened in Thukela later I know when it comes appropriate time. And besides this coupled with volume drop in abrasives and refractories that's about 13 crores and a cost push that we couldn't pass on compared to whatever we had in terms of the foreign exchange factor et cetera in neutral raw material that is about 6 crores.

That is kind of broad outline if you can get in terms of why we are below 567 crores as far this. This first half is...

Now let me get into the details. I will say that first half, at consolidated level we registered a sales growth of 20 crores which is a 4% growth compared to the corresponding quarter last year. The 4% came from translation gains and export exchange rates converted into the current exchange rates.

Incremental sales of 20 crores resulted in a drop of operating PBT of 44 crores. Out of this 20 crores and a decrease of 44 crores of operating PBT, standalone configure to 5 crores of sales and decrease of about 18 crores of operating PBT and subsidiaries and JVs put together contributed 15 crores in increase of sales and a decrease of 76 crores of operating PBT.

CUMI standalone operating PBT percentage drops on 18.7% in Q2 versus to 11.8% of the current Q2. This drop came by way of rising input cost in a challenging market making it difficult for us to take the liquid price increase. On a sequential basis the margin fell by about 4.6 crores, 230 basis points. On a quarter‐on‐quarter basis, margin dropped at about 18% crores and talking about the standalone. This happened due to the following reasons one, is adverse product mix mainly coming from the sales that is about 7 crores. Lower volume mainly coming out of the abrasives that's about 4 crores, higher power cost and fuel cost mainly coming out increases that is about 6 crores, abrasives cost versus the price increase that is about 1 crores.

On a sequential basis the profits dropped by Rs.4.6 crores or 230 basis points, mainly due to power and fuel again about 1 crores. Exchange loss about 2.6 crores, salary increases another parts increases normally even salary gets revised in this quarter that is about 2 crores.

Lower non‐operating income largely out of the dividends we had Q1 dividends about 7.5 crores. These are normally timing issues and it has been happened every quarter so it's spring of about 7.5 crores. This was offset by a higher volume as well as the price increase that we could get in that quarter of about 9 crores. So by and large I would say definitely on a Q2 wholesale business we had higher volume, higher price that gave us about 9 crores of course we had this 7.5 crores of extraordinary dividend that we had last quarter which would internally this one.

But for that we would have delivered far higher numbers compared to Q1. On a half yearly basis again on standalone the profits dropped by about 32 crores, are 650 basis points largely due to lower volume plus cost push versus price increase mainly abrasives about 10 crores.

Adverse impact on product mix again coming largely from SIC sales about 12 crores on the higher power and fuel cost are about 10.7 crores. Now moving to consolidated numbers as far as the PBT margin is concerned on a quarter‐on‐quarter basis it's typically mirrored what we had in standalone.

There is a drop of 44 crores or 920 basis points happened due to the following one is we just saw what happened in standalone that is about 18 crores had an impact which is about 8 crores of adverse exchange movement basically the gain what they had versus the in a small loss what they had and you should appreciate that the robust started appreciating the dollar at least about close to 10% in the first half.

And about 6 crores of power cost increase. These are the two reasons for the wars impact. Foscor have significantly impacted by lower margin on account of uncertain market condition we couldn't pass on the price increase and the result of unwinding of the inventory carried at a higher cost of about 5 crores. And loss of Thukela is about 6.6 crores out of this 6.6 crores of our 4 crores was one‐time in nature raising out of the inventory revaluation.

I would like to say that the company that we acquired was a captive company of RHI. So the method of valuation of inventory is different was, we have to value the inventory in the cost of market value vis‐à‐vis less while they were valuing it pretty much on standard cost basis and because of that we need to bring back to write down of 4 crores.

I would also like to say that we have acquired this company at significant discounts and the book value what we had versus we what per say really low and we had created the significant reserves out of this. So we expected that we ‐ at the time of purchase itself. So we expect that it will take about six months before we can, ‐ operations are ‐. On a sequential basis there was a drop of 2 crores, which is 90 basis points which happened due to the loss of Thukela which we just saw 6.6 crores. And standalone gain of 2.3 crores offset by ‐ lower loss compared to the Q1 so which is about 3.6 crores.

On a half yearly basis basically the first half versus the first half at a console level we had a 67 crore drop I just started summarizing at the beginning of my decision one was the standalone impact of 34 crores, ‐ impact was about 14 crores coming out of 4 crores of adverse exchange moment 7 crores of power pass 3 crores due to volume drop. ‐ where again between the cost increase what we had versus progress that we could passed on that is about 11.5 crores.

Thukela reflects ‐ about 6.6 crores and lower profit in ‐ is about 2.2 crores. Now moving to the segments abrasives PBAT margin and abrasives moved from 14.8% in quarter two of '11‐'12 to 10.8% in quarter two of '12‐13. Is largely coming out of the CUMI standalone which consisted of more than 75% of consolidated sales. CUMI standalone upgrades to margins dropped from 18.2% to 13% basically the drop of 7.5 crores owing to lower volume and fast push on raw material, elaborating to pass in through in the tough market situation that's about 6.5 crores. Higher power and fuel cost increased about 1 crores. At a consolidated levels the margins are up 7.6 crores. There is a drop of 7.6 crores for the quarter mainly due to CUMI ‐ standalone. On the sequential basis the margins dropped by 1 crore, primarily due to the cost push of raw material and the foreign exchange adverse impact the ‐ what we had for abrasives.

Moving to electrominerals PBAT margins are ‐ moved from 28.9% which is the best ever quarter in '11‐'12 10.5% in '12‐'13 compared to Q1 margins Q2 margins they were I would say it's probably flat to 40%, 40 basis points drop. As Mr. Srinivasan mentioned in the Q2 of the last year was a best performing quarter in the ‐ in the last quarter we mentioned that the normalized margins for this ‐ would be 14% to 15% till it's time we bring that external challenges under control.

We have mentioned there was one‐offs in Q4 '11‐'12, Q1 '12‐'13 in the form of inventory evaluation ‐ revisions whole restatement in ‐ which adds let the margin to fall to 11% level. In this quarter the major impact into Thukela factories 6.3 crores. If you gross this up it would be a margin up ‐ between the range of 14.5%.

As mentioned in the last earnings call we continue to face challenges on the following fronts, photovoltic markets, global cooling of SiC cooling of, was selling to metallurgical grids in Russia, volume reduction in SiC micro grids. All these are seem to be there is some amount of risk due to expected inventory devaluation out of micro grids inventory that we carry are I know an unwinding of zircon that we carry because of the high input cost of zircon sand bed that we had. As far as the ceramics closed PBAT margin of ceramics moved from 32.9% in '11‐'12 to 18.5% in '12‐'13. On a sequential basis there is drop of 240 basis points. Our sale is witnessing a

pricing pressure due to Chinese competition coupled with ForEx losses the margins were marginally lower, domestic market in refractory seeing some challenges since projects are getting postponed. As sales of refractory business were lower both on quarter‐over‐quarter basis and sequential basis and margins were under pressure going to volume drop.

And as far as the CapEx, the total CapEx spend so far is about 94 crores this consisted of 37 crores on standalone basis and about 67 crores on as rest of the subsidiaries, mainly coming out of the Foscor expansion. All our programs are intact except the possible postponement of SIC capacity which is inline with the existing SiC supply demand.

We will give you the CapEx plan inline with the business, business in the view as we go about. As far as debt‐to‐equity ratio on a standalone basis the debt‐to‐equity ratio decreased from 0.25 as of June 2012 to 0.30 as of September 2012.

The debt on standalone basis increased from 164 crores to 207 crores. Largely to fund the working capital. On a consolidated basis the debt‐to‐equity ratio decreased from 0.46 as of June 2012 to 0.49 as of September 2012. The debts on consolidated basis increased from 448 crores to 489 crores largely coming from the standalone increase. So, with that I would say broadly if you look at it as the challenges that we have or can be but into buckets like structural issues, operational challenges and market related challenges that we have I would say as far as operational issues goes typical cost management, typically which is about input cost rights both in terms of due to the import of raw material plus power and fuel cost in the managing that.

As far as the market related typically volumes down and project delays that traced in various segments that we have. As far as the structural issue goes SiC micro capacity which Srinivasan touched about is the challenge that we will have to address them in the coming quarters it will take kind of minimum about a year‐to‐year and half problem that we would like to address them, but we have quite confident we would find a solution to that and will come out of that.

So with that I think we'll open up for question‐and‐answer session.

Questions And Answers

Operator Thank you very much. Ladies and gentlemen we will now begin the question‐and‐answer session. [Operator Instructions]. We have a first question from Laxminarayanan of Catamaran Ventures. Please go ahead.

Laxminarayan Good evening sir. My question is on your Russia capacity of electrominerals. What percentage of the capacity has been utilized and what is the internal sales versus external sales of Russia? And second in Russia you mentioned there is the power increase that has taken place. Do you see this is one of the things or this is going to be some kind of sustain power increase?

K Srinivasan, Managing Director In terms of capacity utilization we produced approximately about 6,200 tonnes a month and we continuing to produce flat. you change product mix but till H1 we have run at flat. we are probably going to slowdown a little bit in Q3 which is really the last quarter for them. We will go a little slow may be in this quarter but otherwise so far we are running 100% plus in terms of capacity.

The reason we want to slowdown also is little bit to send a message out that this power price it is not viable to or at least it doesn't make that much of a sense to produce flat out if we have a power price increase. We had a 16% power increase at rate come up. We are far far more than anybody expected. There has been industry representation, there has been particularly from the high energy consuming industry also complaint et cetera has gone up the government is looking into it. We do not think it is a sustainable base that this power increase is today but we must plan that we may not have a full benefit coming back in Q3. But we hope that this price increase is at least partially rolled back. That is why also we are trying to send out a massage that we will delay the big furnace and have a re‐look at it with this kind of price increase.

Analyst Sir, just on electromineral front, can you just help me understand the capacity of electrominerals in India, in South Africa and in Russia? And also what percentage of that electrominerals which you actually produced, last quarter you actually so consumed internally and did you export it or sent out of your plant?

K Srinivasan, Managing Director Okay. I will touch this. Quickly in terms of capacity, in India we roughly do about 3,000 tonnes of silicon carbide, 3,000 to 3,500 tonnes of silicon carbide. We roughly do about 15,000 tonnes of luminous, and about 2,000 tonnes of specialties, so that is a capacity of those as well as electrominerals is concerned.

In South Africa we have two fusion capacities now, in Foskor we do roughly about 4,000 tonnes of which is what we call as Calcia Stabilised Zirconia. Of course it's been stepped up with the new plant coming up and a plant which will be we have a capacity of 20,000 tonnes per year of various alumina's. Still a broad in capacities. On your question in terms of what is internally sold and what is...

Laxminarayan In Russia also sir.

K Srinivasan, Managing Director In Russia roughly about 75,000 tonnes of silicon carbide.

Laxminarayan Okay, so within this what is consumed internally and what is sent outside...

K Srinivasan, Managing Director At the moment in the last two quarters out of Russia, we are consuming roughly about 15% internally, internally means it includes what we consume in Russia itself and what we consume with the Carborundum system. And as far as India is concerned, very roughly we consumed about 10,000 tons internally.

Laxminarayan Okay. And in Forkor?

K Srinivasan, Managing Director And in South Africa both the units we sent everything outside.

Laxminarayan And who were the consumers of this, someone like Saint Gobain is a consumer or?

K Srinivasan, Managing Director Saint Gobain is also a competitor, also a consumer. We sell to all the abrasives, refractories, ceramic companies in the world. And we also sell to this steel producers for the metallurgical grits.

Laxminarayan So will come back in queue for any other questions.

K Srinivasan, Managing Director Thank you, Laxminarayan.

Operator Thank you very much. [Operator Instructions]. Our next question is from Mr. Jasdeep Walia of Kotak Securities. Please go ahead.

Jasdeep Walia In the light of the 16% increase in power cost, lets say the government doesn't reduce power prices, so what would be your perspective then on capacity expansion and viability of Russian operations.

K Srinivasan, Managing Director Jasdeep there are two answers in this. First is, clearly we don't like this increase that's for sure. Second is this increase is not being done by the government firstly, it is done by a combined process of two things.

One is there is power generating organization, and then there is a power distribution companies. In some reorganization army intended consequence was merging this two mint that they together put up the price by 16%.

I think there is a huge amount of outcry and representation that has gone out. It will be too early country like Russia to immediately take a view that this is how it is going to be. Lets give it a quarter's time, nobody expect such increase. And we don't believe this is sustainable, if it is hurting out the other which produce aluminum and other things Russia is the one of the world's largest aluminum producers. I don't think this kind of thing is sustainable or good for industry as a whole. So at the moment the message we are sending out this is a reality there increase. We have send out a message based on that, we will defer our expansion. But even with that increase we are profitable that I can assure you, we are profitable, you see a numbers, Sridhar will show you the numbers but we don't like this increase because it means we have become that less profitable, that less comparative in terms of expanding capacity.

Jasdeep Walia Sir, your power cost would be close to around lets say 35% of net sale at Russia or more?

K Srinivasan, Managing Director Just one minute I have to check in terms of percentage. It is let us say we are now getting RUB 1.74 per unit of power. RUB 1.74 per unit of power even today is let say Rs.303.50. It is still significantly lower than what I pay at the lowest in any Indian state ‐ sorry less than Rs.3 at this moment.

Jasdeep Walia This is after the increase.

K Srinivasan, Managing Director After the increase.

Jasdeep Walia Okay.

K Srinivasan, Managing Director So in terms of location at distillery base location and it is the comparative locations.But a 15% increase over night means that your new capital etc. everything is going to take that much longer to pay back and particularly when downturn on a year‐over‐year basis there is roughly 15% erosion in average selling price primarily coming out of the product exchange.

Jasdeep Walia

Got it.

K Srinivasan, Managing Director So combination of all this is working out like that.

Jasdeep Walia Sir what proportion of your sales, there is the power cost lets say for last year.

K Srinivasan, Managing Director One sec. Jasdeep are you there?

Jasdeep Walia Yeah.

K Srinivasan, Managing Director It is roughly about less than 13% of the carbides.

Jasdeep Walia Of the SIC sales.

K Srinivasan, Managing Director Yeah, yeah. So in a way it would take 16% of 18% roughly we are talking about 4%.

Jasdeep Walia 4% margin impact.

K Srinivasan, Managing Director Exactly. 4.5% for an opposite.

Corporate Participant I just would like to only tell that this is as sooner I say it, there is a lot of representation which is not final. We need to look at it now with what the reaction is on the government is.

Jasdeep Walia Got it. Sir, is there any movement in SIC prices quarter‐on‐quarter like‐to‐like comparison?

K Srinivasan, Managing Director It has been flat. I mean on an average realization basis, it is flat.

Jasdeep Walia

Got it.

K Srinivasan, Managing Director But I have this fundamental issue like I mentioned, we are selling more metallurgical consequently the product mix is unfavorable.

Jasdeep Walia That is okay. And...

K Srinivasan, Managing Director And as last quarter no change.

Jasdeep Walia Got it. Sir, also you talked about the price increase been taken in the abrasive segment in the standalone business. And you sounded confident in the last quarter of possible lets say 200 basis points improvement quarter‐on‐quarter, purely on price increases which has not happened.

K Srinivasan, Managing Director Actually here I must clarify, we have not seeing you will not see it yet, because I think we saw the increase impacting best in our September margin of the business. The September margin is actually 200 odd basis point higher than the average of Q2.

Jasdeep Walia Okay.

K Srinivasan, Managing Director Because we still have to unwind the higher value inventory that we already acquired and so the price impact would only start kicking in from Q3 in full.

Jasdeep Walia Got it

K Srinivasan, Managing Director September already I have seen the basis point increase you will see it in Q3.

Jasdeep Walia Got it.

Corporate Participant I think as of, as a whole of the year I would say you will not be able to see as your full year number at 14% etc. because you have to see that whatever happened until now and it will span out for at least one or two months and then we will start getting it. So overall we will not be at that level of about appraisals close to about 1% plus.

Jasdeep Walia

Got it. That's all from my side sir. Thank you.

K Srinivasan, Managing Director Thank you.

Operator Thank you very much. Our next question is from Bhoomika Nair of IDFC Securities. Please go ahead.

Bhoomika Nair Yeah, good afternoon sir.

K Srinivasan, Managing Director Good afternoon Bhoomika.

Bhoomika Nair Yes sir. Sir you mentioned on across a few division first is abrasives. You're seeing quite a bit of demand pressures, so how are you seeing in terms of growth coming back and when can we see growth coming back in that segment?

K Srinivasan, Managing Director This is a very, very difficult question because really we're talking of the overall economy here because abrasives like goes to all industry segments. And practically all industry segments are lagging, none of them are actually booming. So to that extent we are not able to see anything dramatically becoming different.

The only thing we hope is that we will continue to take market share, what is happening is at these price level, these operating difficulties the smaller players and the traders are even more intense pressure consequently they are vacating. And this means even in a declining market we would be still able to keep those 4%, 5% growth taking market share.

Bhoomika Nair Okay.

Corporate Participant AsAnd Bhoomika as a sequential quarter we have volume key.

Bhoomika Nair Okay.

Corporate Participant That's the positive note. So we may see some again in terms of volume happening.

Bhoomika Nair Okay, okay. In terms of the electrominerals division like you mentioned at the end about the power cost issue that VW. So we are obviously looking at some delays in terms of the capacities. So does that mean that there will be some revision to our guidance in

terms of top‐line growth for both this year and next year?

K Srinivasan, Managing Director See, I thought we touched the top‐line, I will do it now. As far as this year's topline is concerned we broadly think that we will do about 10% better than last year.

Bhoomika Nair Okay.

K Srinivasan, Managing Director That we are not changing. We still think it is doable, we'll try and get there. See again I must be careful because we are seeing extraordinary things happenings in the last couple of quarters which we have never seen in 20 odd years of many‐many things going right or wrong at this same time but with all that we still think there is line to get this 10% growth on topline. The pressure really on the margins, so far up to H1 our margins have fallen they are almost at about 25% plus to last year.

Bhoomika Nair Correct.

K Srinivasan, Managing Director Now, we expect to close year we said last time and that is one area where if you go to a last year, last quarter when we had earnings call we said that we are likely at best to be down between 5% to 8% last year. Now that we are revising downwards further saying that we are likely to be down by between 15% to 20%.

Bhoomika Nair In terms of the operating profit.

K Srinivasan, Managing Director In terms of the profit, yes.

Bhoomika Nair Okay.

K Srinivasan, Managing Director So that is the only change that has happened because the sharpness at which we went down in Q4 from a high of Q2, we thought would be the same sharpness with which we will comeback from Q4 in this Q2. It did not happen.

Bhoomika Nair Okay.

K Srinivasan, Managing Director It has been a very very flattish recovery. And consequently we think this quick recovery does not happen and so we're likely to still hurt on the bottom line even at the end of the year.

Bhoomika Nair Okay. Sir, my other question is in terms of the acquisition. As you mentioned there has been one time impact of the 4 crores on inventory which may not recur as such. But when do we see that turning profitable because if I remove that and as you know Mr. Shridhar mentioned that it has...

K Srinivasan, Managing Director I know we will come back to 14.5 if you remove that and look at it, and Sridhar and me we were sitting, and almost I was saying every quarter we come back and say one exertion we don't want anymore exertions to talk about but the fact of the matter it is that an exception that came in. Anyway what we think is this 4.5 was something which we knew even it was not a surprise it was a part of process. Sridhar explained the reason how the devalued and how we would value when we bring it in. And we will try and make it exactly in conformance what we do across all our businesses.

Bhoomika Nair Okay.

K Srinivasan, Managing Director What it at a significant discount to book value, you would see in terms of a balance sheet number when you have it. We almost had a book value of roughly about 50 plus crore and we bought this dismiss at a less than one‐fourth at price. So one‐fourth of book value or one‐fifth of the book value is what we brought because we have to add this back in our calculation.

We know that it take us two quarters to turn it around we will be negative even in Q3, in this business and hopefully by the end of the year you will start seeing it becoming profitable. And being a little more cautious now compared to what it would have been six months back because the sharpness at which we come back from downturn is not visible now. Because we will comeback quickly but the market conditions are not exactly favorable for that in spite of that by end of year we should be okay.

Bhoomika Nair Okay. Sir, why there the losses, is it a product mix issue, is it again a cost mix issue out here which like we saw in where it was a cost issue and we are moving.

K Srinivasan, Managing Director There is a lot of cost issue simply because they are selling their entire production into RHA, they don't have one customer without RHA, it was a capital plant. Now for a plant for a product and look at new customers, and looking at new customers at a time when market doesn't even think from existing customers. So they are giving that much longer to take product, get it approved etc. It is not a profitability issue, we have just signed those new customers.

Bhoomika Nair Okay. Yes sir, I will come back in the question queue.

K Srinivasan, Managing Director Right, thank you.

Operator Thank you very much. Our next question is from Bhalchandra Shinde of B&K Securities. Please go ahead.

Bhalchandra Shinde Sir wanted to know regarding the electromineral business as you say that last time crystalline and metalized cylinder. That's like since photovoltaic sector, photovoltaic solar sector is going through major slowdown. Then you said that our other kind of a material is getting fold more. So how exactly the mix is changing on the electromineral side right now? And will the margins will remain at these levels, or it is expected to improve?

K Srinivasan, Managing Director Bhalchandra, there is couple of things. One is, we are talking in the silicon carbide of a product mix between metallurgical grade and crystalline grade.

Bhalchandra Shinde Yeah, yeah.

K Srinivasan, Managing Director See basically our business is up primarily tuned towards making more of crystalline because it's more value added. This crystalline grains are used in many applications. It's used in making abrasive products and refractory products and some ceramics. One of the things which we have created in the last five to eight years and grown significantly is to convert it into micro powders for cutting, fluid cream, engross to wafers.

This business by itself was booming primarily in the U.S. and Europe in the last five, seven years and we were participating and what appears at times we had established our ourselves as one of the leading players in terms of quality for the premium manufacturers.

Unfortunately this part of the business is completely shifted out to China, which plays the same game with significantly inferior quality of products at much lower price. So the industry remains active, but the locations have moved and have been moved slowly, moved in almost six months and six months is entire industry as declared just move off to China.

So this is a story there. And consequently we have to readjust our business model to see whether we supply crystalline to other products, convert it into other applications, or try and go to a lower end product to address the Chinese market. So we are working on this with several options, some of it are already happening, many of these are yet to happen. And that's a structural change that Sridhar mentioned. And it will play it out in the next three quarters to a year at least, it will have to play out and then come back.

In the meanwhile, a significant part of the fusion we are trying to shift towards metallurgical. This is a low margin, it's still profitable, but a lower margin business, but the market is local. If I produce it in Russia I can supply to CIS countries and nobody can come and compete with me there. As it is a reasonable product and that is what we are trying to do, that is why we are running our plants flat and that is why we are running plant flat and supplying to this industry.

Overall it gives me the profitability. But it is not as well as we would like it to be. Does that answer to your question?

Bhalchandra Shinde Yeah. But then how much growth we see for this metallurgical silicon carbide?

K Srinivasan, Managing Director We don't push metallurgical beyond the point simply because it is like as I said a local business. We have to to try and see that we supply the the industries around our business. It will not be able to carry another $140 of freight per ton to ship it let us say to Europe or to U.S.

Bhalchandra Shinde Okay.

K Srinivasan, Managing Director So it was constrained by the availability of market in the nearby countries.


K Srinivasan, Managing Director That is the reason why we are going slow with the expansion as well.


Sridharan Rangarajan, Chief Financial Officer It is just a product mix, but where capacity we are fully replacing and the impact would be on our realization average mix. But if we can find some alternative. We know that start changing.

Bhalchandra Shinde Okay. And sir regarding two wheeler refractories, I guess into refractories we can sale the product to the local business also for the export, or it doesn't becomes that much viable. So how much potential we see for that two wheeler refractories on the local side?

K Srinivasan, Managing Director See two wheeler refractories which we run at flat out we will cross 200 million a year.


Sridharan Rangarajan, Chief Financial Officer This is when we ran the refractories and put together broader composition, but it will detail I think minimum about 2, 2.5 years. By the time you reach that kind of volume. This is capacity that we can get out of that. Plus also an opportunity for us to use the same technology bring it into India in terms of the steel refractories where we can cross limit that earnings et cetera.

Bhalchandra Shinde And sir in the domestic side for the high‐end abrasives, are we facing kind of competition from the competitors like Saint Gobain or means like I had a word with some of your competitors, they said that high‐end competitors are increasing and we might face kind of a margin pressure on the high‐end abrasives?

K Srinivasan, Managing Director See everybody who sells anywhere in the world are available in India and we also compete with them in other markets of the world. So unlike other industries there is no protectionism, we have been in this competition now for a long long time. We competed all the names you have mentioned and we competed very successfully with all these names. I don't think we are loosing market share with any them, we probably gaining market share because imports are becoming that much more expensive with all these depreciation that happened in the last one year.

Having said that I also acknowledge that behind the pressure they are all going through in Europe and U.S. there is that much more anxiety about all those big players to come and compete in the Asian markets, India, China and they are doing it aggressively. If they come and drop prices in some specific areas to that extend the margins remain under pressure which is happening in some pockets. But that's not something very unusual it has been their for a long time now.

Analyst Okay, and last question. On the quarter side how much upside we have means how much contributed for the sales.

K Srinivasan, Managing Director 15 crores

Analyst 50 crores?

K Srinivasan, Managing Director 15.

Analyst 15 crore okay, thank you very much.

Operator Thank you our next question is from Naysar Shah of Birla Sun Life Asset Management. Please go ahead.

Naysar Shah Hi good afternoon

K Srinivasan, Managing Director Good afternoon

Naysar Shah Just wanted to understand when did this power tariff hike happened in Russia?

K Srinivasan, Managing Director July, it happened in July.

Naysar Shah Okay, and sir also just wanted to understand while obviously you are not like the tariff hike but assuming it doesn't it continues for some time, then what happens? Is it Q4 margin economy that your talking about building the reversal of this and what happens to the industry dynamic assuming this does is not reversed then?

K Srinivasan, Managing Director Worst case scenario. Assuming it stays at RUB 1.74 and we're assuming we continue to do the same product mix. As long as I can

still sell my 6,300 tons a month I'm quite okay. I will still make margins which are in line with what we want.

Corporate Participant Also this is not. Well, the price of size is ample of power is growing. We have the benefit of going down. So they will lend some amount of compensation we get and we have some benefits as we get in sand prices. So it's a mix of this, power is going up or at the same time we also get some benefit out of...

K Srinivasan, Managing Director We are hoping to sand benefit kick in out of other things. So we are planning this, worst scenario you may have to handle this.

Naysar Shah Okay. And sir what happens to the industry, you said you'll still be able to make money, what percent of the capacity same maybe will not be profitable at current power cost in Russia?

K Srinivasan, Managing Director In Russia is this power cost our capacity will be able to fully produce until we will be profitable.

Sridharan Rangarajan, Chief Financial Officer Absolutely.

K Srinivasan, Managing Director There is no issue of I explain to you, let's assume it will be still a unit Rs. 2.89 a unit. So we are still very competitive.

Naysar Shah I'm saying what happens to the other competitors say what percent of the capacity in Russia say will go out of the business if power tariff remains...

K Srinivasan, Managing Director You are talking about silicon carbide production, nobody else in Russia will produce silicon carbide.

Naysar Shah Okay.

K Srinivasan, Managing Director So we are talking of let say the major power consuming industries lets say you are talking of an ammonia tracker, you're talking about aluminum smelter etc. All of the aluminum as today is LME is $2,500 a ton, everybody is. So those are the bigger boys who have even more deeply impacted by the power increase. It's not anything to do with our industry so general industrial usage.

Naysar Shah Okay. Okay, thank you very much sir.

K Srinivasan, Managing Director

Thank you.

Operator Thank you. Our next question is from Abhijith Vara of Equirus Securities. Please go ahead.

Abhijith Vara Yeah. Good afternoon, sir. My first question is the CapEx which you mentioned 160 crores to 170 crores. Could you please give me a break up of approximately how much will go into what facility and when you expect the commissioning to happen?

Corporate Participant See, Abhijeet, we can talk about that broadly later. But standalone would be in the range of 70 crores and rest of is on the consolidated which is basically typically on the phosphor expansion.

K Srinivasan, Managing Director Yeah. Roughly about 40 crores going in to phosphor about 25 crores going into for implement of processing capability etc. So that's not even numbers you are looking at and if you are looking at in terms of capacities, we have already explained to you Foster potentially brings a matter of 5,000 tonnes of monoclinic and distilined capacities which is one of the most modern efficient each corners of its time anywhere in the world.

We are hoping to see some benefit kicking in even in a very soft market. As far is concerned it prepares us to address a changing product dynamics and also makes us more efficient in terms of processing our dreams.

The other two capacities we have been mentioned earlier, is one is technical project to make a bubble in the ENB business it doesn't had anything in terms of immediate tonnage to our business, but brings in a new range of products for the refractory industry, in terms of roughly 3,000 tonnes of luminous, that we are producing in electrominerals hopefully some December, January.

And which again gives us a completely new value added product and also make us a own aggressive industries more competitive. These are broadly the major CapExs in addition to this we mentioned that we will invest in two generators which will put in our subsidiary unit for generating gas based. As for Tamil Nadu we have suffered like nobody else.

We still have facts of the state result to see as a power a day. And that means if you have your power supply we struggle and generate power or diesel hopefully this would help us in that.

Abhijith Vara Okay. So most of the facilities you mentioned will come up in fourth quarter of this year.

K Srinivasan, Managing Director All I mentioned will be up and running in this quarter.

Abhijith Vara Okay,and second sir in the last quarter's con call you had mentioned that going potentially the supply demands situation might improve with the most of the competing facilities and becoming and non‐viable. What is your take now as in by when do you think it should be in your favor the supply demand situation.

K Srinivasan, Managing Director Yeah, I was hoping that it will happen faster than what is playing outs. But because its really coming out of the supply not picking up fast enough and also because of the unknown commodity of what really setting available in China. I still believe Q4 will be up to a very least number level of utilization across our company.

Corporate Participant What was made is in relation to the photovoltaic industry as a generic one. And hence, some of them will become un‐viable hence as SIC manufacturers could become could be made use of that, that's a context in which meet.

Abhijith Vara Okay. So it's not in general about the silica carbide is it only for the photovoltaic supply?

K Srinivasan, Managing Director Yeah.

Abhijith Vara Okay. And Foskor in China subsidiaries, are they profit making or how is the performance in this quarter?

K Srinivasan, Managing Director China doing better than what we did ever before but it still lose it's money. We have a new CEO that's come in, a Chinese gentlemen we have a new Chinese Director hopefully joining in from this quarter. We have a strong game plan for China and we hope that we would get it into better shape by end of this year. It still loses money but marginally.

Abhijith Vara And Foskor?

K Srinivasan, Managing Director We will be breakeven almost. We are not at all losing money.

Corporate Participant Foskor was a profitable company until last year. They are making in lots at the end of the year they will be having a little loss to close.

Abhijith Vara Okay. Fine sir those were my questions. Thanks.


Operator Thank you very much. Our next question is from the Vinay Rohit of ICICI Prudential Life. Please go ahead.

Vinay Rohit Sir, could you just elaborate on you said that margin in abrasive may improve 3Q but you don't expect too many improvement in Q3 and creamic is any way? So what do you think the margin will improve in Q3 and why not in ?


Could you repeat the question, is it relating to abrasive or industrial ceramics?

Vinay Rohit Related to abrasive that the margin will not improve in Q3, margin will improve in Q3 and why it will not improve in division?

K Srinivasan, Managing Director Okay. What was said is that we are seeing a margin improvement in the month of September and we started seeing that. The price announcements were made in some time in August, mid of August. So the realization starts kicking in September. So as you see that as these margins starts kicking in we say that as the full year we will not be reaching to the level of 14%, 14.5%. So full year would be in the range of about 10% to 11% and we are saying that this will start kicking in coming, Q3 and Q4 you will start seeing that margins but on a full year basis you won't see that number.

Vinay Rohit Okay. And EMD where do you think the year will end?

K Srinivasan, Managing Director EMD we seeing the year somewhere in the range of about 10.5%.

Vinay Rohit Okay, on full year basis?

K Srinivasan, Managing Director On a full year basis.

Vinay Rohit Thank you.

Sridharan Rangarajan, Chief Financial Officer Maybe it's good to see you say broadly expected margin across this whole portfolio.

Sridharan Rangarajan, Chief Financial Officer So on a full year basis we expect EMD will be about 10.5%, ceramics would be in the range of about say around 19%, and abrasive would be in the range of about 11% to 12%. That's how we are looking at it. Overall margin we expect to be in the range of about 13% to 13.5%.

Vinay Rohit Okay. Sir just a question, we have seen margin from 20% to 10% EMD. So do you think the 20% is pretty much gone and the new normal would stayed close or less between 10% and 14% for next few years?

Sridharan Rangarajan, Chief Financial Officer No I think...


What we should assume normal of 14.5% in the last two quarters. And we think, we are every time telling you why this is where we are, but for the exceptional. I think we msut look at new normal achievable again only around the 14%, 14.5% for some more time till we have a better product mix.

Sridharan Rangarajan, Chief Financial Officer Until we address this structure this year of micro capacity.

Vinay Rohit Okay. Thank you, sir.

Operator Thank you very much. Our next question is from Manish Goel from Enam Holdings. Please go ahead.

Manish Goel Yes. Just a clarification on the initial drop in operating profit seems that 67 crores drop out 17.7 crores from power cost. And how much was the impact on microgrit lower?

K Srinivasan, Managing Director 12 crores. Again we have got movement between H1 of last year to H1 of this year. So it's really a movement that we are talking off. To that extend it is not a quarter‐on‐quarter thing.

Sridharan Rangarajan, Chief Financial Officer A swing between first half of last year versus this year.

K Srinivasan, Managing Director Correct. And also exchange movement, it's actually the movement we are talking about.

Manish Goel And what were the other three items, sir?

Sridharan Rangarajan, Chief Financial Officer I'll just quickly recall them. Power and fuel impact is about 17.7 crores. Out of that about close to about 8 crores is from Russia and the balance is from India. Foscor cost push versus price increase is about 12 crores. SAP microgrit seal impact was about 12 crores. Then the new business acquisition loss is about 6.6 crores. Volume drop in abrasive factories versus the cost push et cetera is about 19 crores all put together.

Manish Goel Okay. And sir just to broadly infer from the guidance you are giving for the operating profit, a drop off between 10% to 20%. What it infers is that in second half we are broadly looking at 10% to 15% growth over first half number. So just wanted to know that is it going to be driven by cost saving, or is it going to driven by your improvement in your sales realization or the margin? Number one.

And number two, in Q4 when we are expecting improvement what will, which segment will drive the improvement? There two groups.

Sridharan Rangarajan, Chief Financial Officer I think the volume growth would bring the increase in our margin, kind of margin that we are looking at. One is the volume growth compared to H1 versus H2. Again, there is some other cost actions that we have started working on that. And third is that there is the exchange rate as what we are looking at versus in some import can we use the domestic mid‐year, those solutions would also drive the margin to be on this. The way the segment I would say abrasives would pick up slightly and so that makes to maintain and electrons also will maintain.

Manish Goel Okay, thanks. Thank you very much.

Operator Thank you. Our next question is from Peeyush Mittal of Franklin Templeton. Please go ahead.

Peeyush Mittal Thanks for taking my question. One basic question I had was abrasives business. I was wondering if it would be possible to give some understanding of what form it was used for bonded and quoted separately?

Corporate Participant I think Peeyush we use the various aluminum, we use silicon carbides, we use zerconia, all things are used in good bonded and quoted. Along with the grains we also have in the cases of quoted baking material which includes paper, fabric, cloth, glass fabric et cetera. So these are broadly the raw material.

Peeyush Mittal Okay. Second question was in terms of channels of sales like maybe through distribution channel or directly to the OEMs. I mean broad break up that you guys have.

K Srinivasan, Managing Director Actually 1/3,2/3 is what has been saying.It send about 1/3 to daily customers and 2/3 trough the channel.

Analyst Okay. And there has been some talk at least in the previous conference call about this diesel, catalyst convertor related business with the company in Japan. I was just wondering if you can provide some update on what's going on.

K Srinivasan, Managing Director Yes, we're still working with them.We have qualified and couple of preliminary testing they have gone in to extensive testing like any auto component, I think they have a qualifying process which takes anywhere between two to three years. We are fairly advanced state and the reason we didn't talk too much about it is we still have to get the contract.

Till we get a contract we are abtou it and see where it is. We are in testing and we've passed a reasonable number of tests which will have some mines.

Analyst Are they other companies or Carborundum is the only company?


There are two other companies already supplying to this industries we are in the third one.

Analyst Okay. Now just one question on post the announcement on reform, I was just wondering if you guys have seen any uptick volume in the month of September and October, I mean October is already behind you, has any uptick in volume happened or its just been...

K Srinivasan, Managing Director None.

Analyst None at all?

K Srinivasan, Managing Director No. There is no impact on volume.

Corporate Participant I think we should wait for the festive season to get over and see what kind of reaction it brings.

Analyst Okay. I mean discussion you had with customers, any feedback that you gotten from them that makes you...

K Srinivasan, Managing Director No projects have been closed, nothing has happened no significance. Whatever has been happening in the standard halting manner it continues. There has been no fundamental excitement or change or something dramatic happening of yet.

Analyst Okay. Alright. That's all the question I have. Thank you.

Operator Thank you. Our next question is from the Vinay Rohit of ICICI Prudential Life. Please go ahead.

Vinay Rohit Sir, just a question, last year we had a full year tax of 28%, this year about has been close to 32%. So what is the number to look for in on a full year basis.

K Srinivasan, Managing Director To taxes yes?

Vinay Rohit Yes.


I think it should be around 29‐30 because you see the of it is going. So to that extent you will see that 28 will definitely move up towards 30.

Vinay Rohit Okay. Thank you, sir.

Operator Thank you very much. Ladies and gentlemen, due to time constraints that was the last question. I would now like to hand the conference back to Mr. Jasdeep Walia of Kotak Securities for closing comments.

Jasdeep Walia On behalf of Kotak Institutional Equities I thank the management of CUMI and all the participants for attending the call. Thanks a lot.


Corporate Participant Thank you.

Operator Thank you very much. On behalf of Kotak Securities Limited, that concludes this conference call. Thank you for joining us and you may now disconnect your lines.

Carborundum Universal Q2 2013 Earnings Call 1 Nov’12 Call/113375_20121101.pdf · Carborundum Universal Q2 2013 Earnings Call 1 Nov’12 Operator Ladies and gentlemen good day and

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