Everest Industries Q3FY17 Concall Summary

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 Demonetization Impact

  • AC roofing industry sales were impacted by 11% for Everest (Overall 13%) and majorly in December as rural market had no cash to buy anything. Majorly hit regions were North and South India while the Eastern and Western India experienced minor hits.
  • Training of Dealers (30+) for digital transactions and about imminent GST.
  • No credit given to dealers in retail markets after demonetization
  • Initiated activities to expand dealer network within various districts in the next 18 months
  • Exports of boards and panels are less compared to last year.
  • Additionally, demonetization resulted in postponing the steel projects by a few days. Nevertheless, the demand for these kinds of projects surged.
  • The company also saved a lot of cash due to this and carried out steps like inventory reduction, loan retirement. Therefore, the company is in healthier cash position now than it would have been, even though the overhead expense increased while bringing down the plant spare inventory.

 Roofing Business:

  •  Rural economy and abundance of crops will increase the demand for AC roofing products which was progressing until 9 days later Demonetization came in.
  • Liquidity situation will start improving once the impact of demonetization starts becoming mild.
  • Testing of new variants of AC roofing products has been done in Q3FY17 which will be rolled gradually over a span of 6 months.
  • An improvement in demand is expected from housing, infrastructure, educational, and government driven sanitation, smart city, and affordable housing for all projects which will also help the boards and panels business. Moreover, governments allocation of funds for rural housing will indirectly benefit the company.
  • Roofing business can be helped in the following 3 ways:
    • Upgradation of thatch roof or simple mud tiles to AC roof
    • Extension of house
    • Storing grain and parking of tractors under the roof.
  • In addition to the competition in this market, the company faces competition in RCC as well as metal.
  • RCC is the most desired roof for Indian customers but the cost of it is roughly 10 times that of the company’s AC roofing which is at the rate of Rs. 400 to Rs. 500 per square meter. AC roofing does not have an unorganized share, while tiles and RCC have.
  • For metals, price is not the differentiator because a plethora of sizes and shapes are available right from 0.15 mm thick roof to 0.5 mm thick roof.
  • Advantages of AC roof over metal roof:
    •  AC roof lasts forever while metal roof doesn’t
    • Transmission of heat and sound is significantly lesser than metal. Hence the tagline of “baharmajbutiandaraaram”. 

Everest Super Color:

  •  Everest Super Color, a new product after market research. Advantages:
    • Roof looks new even after 10 years of usage due to anti-algae coating
    • Available in different colors which soothes the eye.
  • Though this product is still in the testing phase but the company is ecstatic over the positive    response of people. 

Financial Analysis:

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  •  Revenues increased marginally and the profitability took a hit owing to demonetization and increase in steel prices.
  • Steel prices soared between October and December.
  • Volumes for steel products was 14,000 metric tonnes as opposed to 15,000 metric tonnes in the same quarter last year.
  • Volume for building segment fell to 127,000 metric tonnes from 140,000 metric tonnes (last year) with impact on gross margins as well. January witnessed a small increase with subsequent months expected to do well.
  • Wherever the profitability was low, the company cut down the inventory and the interest cost went up due to the FOREX loss of Rs. 4.2 crores.
  • The FOREX loss of Rs. 4.2 crores were unallocable cost and Rs. 1.8 crores were finance cost.
  • Sales of Everest Industries Ltd:
    • North and East – 50%
    • South and West – 50%
  • CAPEX has not been significant Q3FY17, but the company has made all the necessary changes needed for it to improve.
  • Repairs and maintenance costs were 10% less as compared to last year.
  • 90% of the CAPEX and revenues of the company are focused on India.
  • The company expects a gross margin of about 18%-20% on building products and about 9% on PEB.
  • If the selling price of PEB is Rs. 80,000, the gross margin is 25% while for Rs. 1,00,000, It is 20%. These numbers are obtained using the following equation:

           Gross contribution = Revenue – tax – freight – erection – raw material cost

  • Expected ROCE (Return on Capital Employed) is 25% for all the project segments. This number should not go below 22%.
  • Depreciation rate is about 2.5% for the segments.
  • Price of steel hiked from Rs. 37,000 per tonne in August to Rs. 46,000 per tonne in December of this quarter. This means a 22% hike in steel prices.
  • Any increase in raw material prices is immediately passed onto the trade with a small lag. 
  • The company got a major discount in the chrysotile fiber, because of which the margins have been improved. It is expected to reach a positive number in Q4.
  • Domestic sales for boards are two times as compared to exports of the same during the nine months of 2017. Exports should be around 30%.
  • Domestic sale for panels is 50% into institutional trade and rest 50% into retail trade.
  • Expenditure of Rs. 25 crores for Quality and Volume improvement in boards business at Nashik and Roorkee plants which will be completed by the end of the current fiscal. Marginal focus on increasing the quantity. Total capacity in boards will rise to 165,000 tonnes for the year. It is demand constraint rather than supply constraint because of lower exports.
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 PEB:

  •  The current order in the PEB is around 34,000 metric tonne.
  • For PEB segments, prices of steel do not change much over the five months period required from order to final handover. But, if they do change, it affects the results to a large extent. Possible alternatives are:
    • To keep very high inventory, but it adds to inventory holding cost
    • Completing the project faster (approx. to 2 months to completing the metal in the plant)
  • The company is trying to tackle the situation of rising steel prices.
  • In PEB building, primary constraint is not the demand but company’s ability to manufacture the metal.
  • Major benefit of PEB is there is no change to the fixed price contracting across the industry unless the project is a very long duration project.
  • Expected volumes for PEB to be marginally better in Q4 because of capacity increment.
  • Steps involved in the PEB segment:
    • Design stage: Detailed design for a customized building takes about a month to complete.
    • Manufacturing stage: This stage should get completed within 3-4 weeks.
    • Erection stage: This stage requires 8 weeks to get completed.
  • 16 weeks is the ideal time for PEB building but, it may be different depending upon the size of the building and the site conditions.

 Project Parivartan:

  •  Unallocable expenditure on Project Parivartan (aimed at increasing the profitability of roofing business) and ECB retirement for the nine months period was Rs. 3.5 crores.
  • The pay-out for this project is Rs. 7 crores.
  • The company has repaid $4 million in ECB.
  • FOREX hit is about Rs 1.6 Cr for this quarter and Rs 4.8 Cr for the whole nine months period.

 Middle East Business 

  •  The company has an experience of 4 ECBs and only 1 out of it has been hedged since it was assumed that the rupee will depreciate 5% to 6% per year. This decision was taken carefully after looking at the time-period, loan outdoors, how much money will come.
  •  This loan was taken with the intent of setting up a project in the Middle East.
  • The company exports 50% of boards and panels to the Middle East and hence the decision to expand there was taken with the motive of reducing the logistics cost. But this project is on hold. The money spent there has been put up in work-in-progress section of the balance sheet
  • Oil prices in the Middle East will take some time to come back to original level. But the market of UAE, Qatar are doing very well. Saudi Arabia is lacking on these terms.

 Customized Building Products

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  •  The company makes customized building productd. Therefore, the raw materials used in each is different from other.
  • The company is taking major efforts at plant level to deliver clean manufacturing, in terms of implementation of PQM, Toyota Production System to cut down the time taken, the error so that the throughput can improve and the site can become better.Hence, the focus is on Operations currently.
  • The company is focussed on maximizing profitability along with sustainability.

Demand In Building Segment  

  • Demand of building segment will be same for January compared to last year January.
  • Recovery of demand in building segment expected by the month of March or April.

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