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Ladies and gentlemen, good day, and welcome to Balkrishna Industries Limited Q3 FY '23 Post Results Conference Call hosted by Batlivala & Karani Securities India Private Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jayaraj from Batlivala & Karani Securities India Private Limited. Thank you, and over to you, sir.
Thanks, Seema. Good morning, everyone. On behalf of B&K Securities, welcome to 3Q FY '23 Post Results Conference Call of Balkrishna Industries Limited. I also take this opportunity to welcome the senior management team of Balkrishna Industries Limited. We have with us today, Mr. Rajiv Poddar, Joint Managing Director; and other senior members of management team. I would now invite Mr. Rajiv Poddar for their opening remarks to be followed by question-and-answer session. Over to you, sir.
Thank you, Mr. Jayaraj. Good morning, everyone, and thank you for joining us today. With me, I have Mr. Bajaj, Senior President, Commercial and CFO; and also SGA, our Investor Relations Advisers.
Let me begin with performance updates. As indicated, during our previous interaction, we are experiencing channel inventory clearance in our market. The distribution channel across the globe has excess inventory not only in Off-Highway Tire segment, but also other tire segments as well. So with this, the slow lowering of raw material prices and improvement in delivery time lines owing to better availability of containers has led to a lower reordering cycle via this channel. The end demand is still holding up. But the channel issues...
Sorry to interrupt management. I'm sorry to interrupt. Sir, your voice is breaking up. I would just ...
Is it better now?
Allow me one minute, sir. Ladies and gentlemen, thank you for holding. We have the management line reconnected. Please go ahead, sir.
I'll restart the speech just for clarity purposes. Apologies for that.
So good morning, everyone, and thank you for joining us today. Along with me, I have Mr. Bajaj, Senior President, Commercial and CFO; and also SGA, our Investor Relations Adviser.
Let me begin with performance updates. As indicated during our previous interaction, we are experiencing channel inventory clearances in our end markets. The distribution channel across global markets has excess inventory not only in Off-Highway Tire segment, but also other segments of tires as well. Along with this, the slow lowering of raw material prices and improvement in delivery time lines, owing to better availability of containers has led to a slower reordering cycle by the channel. The end demand is still holding up, but the channel issues of reordering continues to impact the volumes. Therefore, as expected, our Q3 volumes were at 66,480 metric tons. We continue to face challenges of destocking in Q4. However, the intensity of the situation is residing on a month-to-month basis.
The situation has been relatively better in North America. However, recession fears can continue to impact demand. India continues to be stable, supported by a better economic environment. Our EBITDA margin had 2 elements that broadly negated each other. The freight cost corrections that we have been witnessing in the last few months has led to improvement in our margins, which is reflected in our freight costs which now stand at approximately 9% of sales in Q3 versus approximately 14% in the previous quarter. We expect further benefit on the account of freight to reflect in Q4 and fully in Q1 of FY '24. Please also note, we have lowered the surcharge to end customers on account of freight, and the same is reflected in our average selling price, which has moved down by 6% on a Q-on-Q basis.
The aspect, which impacted our margins negatively and almost negated the benefit of freight costs were raw material costs. Please note that while raw material prices have corrected, we could not fully enjoy the benefits due to high cost of raw material in our inventory. Further, Lower volumes clocked in Q3 led to a lower absorption of fixed cost as against the expectations of a higher volumes built in at the start of the financial year. We expect some improvement in Q4 and a meaningful recovery in margins in FY '24. Lower raw materials and freight costs, better hedge rates, better end market situation gives us ample hope of margin recovery in financial year '24.
Let me now update you on the CapEx. The CapEx of Carbon Black project along with the Power Plant has been completed. With the commissioning of 55,000 metric tons per annum, power achievable capacity stands at 170,000 metric tons per annum. The advanced Carbon Black project of 30,000 metric tons per annum is on track, and we expect to commission the same by the end of the current quarter or early part of next quarter. The CapEx for Brownfield capacity, an issue of 35,000 at Waluj has commenced. We expect the same to be completed in the first half of next financial year. Post completion of this Brownfield project, Waluj will have a total capacity of 55,000 tons at a single location. At a company level, our achievable capacity will increase back to 360,000 metric tons per annum by end of first half of financial year '24.
With this, I now move on to operational highlights. Our sales volume for the quarter was at 66,480 metric tons, a degrowth of 5% year-on-year. For 9 months, sales volume stood at 228,505 metric tons, a growth of 8% year-on-year. Our stand-alone revenue for the quarter stood at INR 2,215 crores, which includes realized gain on foreign exchange pertaining to sales of INR 73 crores. For 9 months, revenue stood at INR 7,748 crores, which includes realized gain on foreign exchange pertaining to sales of INR 255 crores. For financial -- for the 9 months of financial year '23, 49% of the sales came from Europe, 21% from India, 19% from America and the balance of Rest of the World. In terms of channel contribution, 70% was contributed from replacement segment while OEM contributed to 28% with the balance coming from offtake. In terms of category, Agricultural segment contributed to 63%, while OTR, industrial and construction contributed 34% and the balance came from other segments. And the stand-alone EBITDA for the quarter was at INR 423 crores with a margin of 19.1%. While for 9 months, it was recorded at INR 1,534 crores, translating to a margin of 19.8%. Other income for the quarter stood at INR 43 crores, while unrealized loss stood at INR 166 crores. The sharp rise in euro rates in Q3 to the tune of 10% impacted our ForEx borrowing, leading to M2M loss. Other income for 9 months stood at INR 86 crores, while unrealized loss stood at INR 91 crore.
Coming to net ForEx item. For the quarter [indiscernible] ForEx loss of INR 80 crores, which includes realized gain of INR 78 crores and unrealized loss of INR 166 crores. For 9 months financial year '23, we had a net ForEx gain of INR 198 crores, which includes realized gain of INR 289 crores and an unrealized loss of INR 91 crores. Profit after tax stood for the quarter was recorded at INR 100 crores versus -- for 9-month financial year, it stood at INR 823 crores. Our gross debt stood at INR 3,464 crores at the end of 31st December '22, of which about 75% is relating to the working capital debt. Our cash and cash equivalents were INR 2,082 crores. All the CapEx programs bearing Carbon Black are over. We have minor amounts and retention monies to be spent.
For Q3 financial year '23, the euro hedge was at INR 85. Forward hedge rate currently stands at INR 86 for the financial year '23 due to the sharp uptick in Europe -- euro rate. For financial year '24, we were able to achieve INR 87 for financial year '24. The Board of Directors have declared a third interim dividend of INR 4 per share. This is in addition to an earlier interim dividend of INR 8 per share.
With this, I conclude my opening remarks and leave the floor open for question and answers.
[Operator Instructions] We take the first question from the line of Binay Singh from Morgan Stanley.
The first question is on the volume side and second on margins. So on the volume side, could you update us on the inventory levels that you have now? You had added that it's around 3 months in the September conference call. Where is inventory now? What is the ideal level of inventory would like to go at? And linked to that, when we look at the volume breakdown by region, we see that the biggest drop sequentially is in the U.S. market, in the North America market. So if you could comment a little bit on that also. That's the first question.
So on the -- when you asked about the inventory, I'm assuming that is for raw materials, we would ideally like to be around 45 days. We are currently between 60 and 65 days.
Sir, I meant inventory at the dealer level of the stock of the tire stock because earlier, we had talked about that we are destocking inventory. So we were at 3 months in September, we were planning to bring it down to 2 months.
So it has come down to about 2.5 months.
Okay. So that process will continue into the coming quarter?
Yes.
And sir, within the breakdown of volumes, we see that the biggest sequential drop is in the North America market. So could you talk a little bit about that. On a Y-o-Y basis, it has grown well, but sequentially, we see a sharp drop. Is it due to seasonality or something?
Yes. That is the seasonality, but we are, overall, not very concerned about that. America is going well for us.
Okay. And sir, secondly, on the margin side, if I look at your other expenses, excluding freight cost, they have also sequentially gone up. So any comments on that? What was the driver there?
So basically, some minor promotional activities, which have been done, which have come into account -- been accounted in that quarter.
Okay. So to an extent, this should sort of normalize back in the coming quarters?
Yes.
We take the next question from the line of Mr. Ashutosh Tiwari from Equirus Securities.
Yes. Sir, firstly, on this -- your gross debt numbers, what is the interest costs we now have on the working capital and long-term debt because I think the LIBOR is -- everything has gone up over the last 1 year?
Between 3.5% and 4%.
Okay. 3.5% to 4%. And this is true for both your working capital as well as long-term debt?
Yes. I've given you the average for both. Long-term is lower, but if you include the working capital and everything, that gives you the average.
Okay, okay. And in terms of demand, I mean, you said that retail is still holding up and inventory correction integration has now moderated. So can we go to say 75,000 tons, 80,000 tons kind of run rate from Q4 or Q1, is that visibility coming through because we are already impaired right now?
It's too early to comment on that.
Okay. And lastly, on the demand side, is it like across the gold, the volumes are contracted across construction and mining or agri or maybe mining is still holding up? And what's the current sense on that?
Yes. So agri is more effective. Industrial construction is -- yes, they're holding up.
The next question is from the line of Mr. Arvind Sharma from Citi.
Two from my side. First on the realization. This decline, is it entirely attributable to the lower surcharge? Or is there a mix impact as well? I'm talking about ASPs.
So it is only due to the lower surcharge.
So apart from that, there is no change quarter-on-quarter?
Yes.
Sir, secondly and more of an accounting question. In the reported format, not the presentation, but the reported format, where are your unrealized FX losses that INR 177 crores, where is it located in the reported format?
It is included in the other expenditure in the reported format.
Okay. So that could be one of the reasons why it would have gone up, right, that INR 175 crores is the incremental this quarter because -- and the FX gains, I believe, were reported as a part of other income?
Yes, yes.
We'll take the next question from the line of Sonal Gupta from HSBC Mutual Funds.
Just continuing with this ASP decline versus the fleet surcharge. So essentially, this should not be negative for your numbers, right? Like I mean, what's going out of the top line is going out of cost as well, I mean, in absolute EBITDA per ton basis?
Yes, I mean, basically, the freight rates have contracted, and that is why the ASPs have come down.
Right. I mean ...
When we say that, even the earlier quarters, they were never passed on to that burden as yet -- they were not fully passed on. So that is why the impact is yet coming. It is getting negated.
Right. No. So if I see like on a per ton basis, your freight cost would be down like say, like $250 per ton and your ASP is down more than that. So just trying to understand what is the factor here? And is that like -- because like you mentioned that your freight cost was only -- some amount of freight cost decline was not passed -- freight cost increase was not passed on to customers. So ideally, your ASP decline should be lower than the decline in freight cost, right?
So we were not able to pass through in the earlier quarters, we were not able to pass through the full amount. Thereby, it was impacting on our -- it was stemming on our ASP. But now with that being withdrawn, even this has come down.
So -- but I'm just trying to understand, sir, are there any other factors that is driving the ASP down other than the freight cost?
No, no.
No other factor. And I mean -- and this decline should not really be negative for margins, right?
So there is no change of the product mix or there is no change in the overall working of principal of the company. So that has no other impact on ASP apart from the freight.
And just coming back to the question on other expenses other than freight. I mean, we've seen like a INR 50 crore quarter-on-quarter increase. So is that -- you're saying mainly marketing spend? Or are there other factors which have driven like because the level of activity has gone down, right? Like your volumes are down 16% Q-o-Q but your other expenses ex rate is up 10%.
So mainly, it is the benefit of a marketing expense, which has gone up or it is also some foreign exchange gain, which is loss which is coming [indiscernible] FX loss.
So typically, when you have a net ForEx loss, it sits in the other expenses, which is why on a quarter-on-quarter basis, the other expenses look higher. If you negate the loss situation, the quarters may look slightly more comparable. In quarters where there is a net ForEx gain, it sits in other income.
So could you quantify that? How much is the loss?
The loss for Q3 this quarter on a net basis is about INR 88 crores. That is what is sitting additionally in the other expenses, which, if you negate, looks more comparable from a Q-o-Q basis.
Got it. Sir, this is on current liabilities and current assets -- not related to that, right?
That's right.
The next question is from the line of Mr. Siddhartha Bera from Nomura Capital.
Sir, again, on this realization drop, will it be fair to say that the competition would have taken similar cuts as well? And our discount versus the Tier 1 players of about 10% to 15%, which we have maintained, that remains largely relative?
So the difference between us and the Tier 1 yet continues to be the same. Their costs have also gone up being in the western world, the power [ force ] and also there have also been -- the dividend is currently being maintained.
Okay. So I think they also must have taken similar cuts in the surcharge which they are charging to customers.
They may not pass it on in form of surcharge, but in other ways, I am not sure. But the difference in the end product remains the same.
Okay. And on the freight costs, obviously, they have come down, but I mean, we expect more reduction in the coming quarters, so that should again lead to a conventional drop in ASPs. As in it passes on those surcharges as well?
Yes. Yes.
Okay. And sir, on the RM side, we had a higher cost inventory in the Q3. But looking at current levels, how much commodity cost, benefit cost can we expect in the coming quarters from Q3 levels?
We can't give you exact quantification of this, but it will definitely come down.
I mean in high single digits can be the right assumption or -- in terms of part time decline?
No, we can't quantify that.
Okay. And the last question is on the CapEx side, if you can highlight the 9 months, how much has been done? And any thoughts you have for the next year as well?
Around INR 1,300 crores has been done in the 9 months.
INR 1,300 crores?
Yes.
Okay. So that is largely for the whole year? Or do you expect something more in Q4?
There will be some minor amounts which are left over because all our projects are over apart from the Carbon Black and the Brownfield project at Aurangabad [indiscernible].
Okay. Understood, sir. Okay. And any number for next year, if you can share?
Around INR 300 crores, INR 300 crores to INR 400 crores.
We'll take the next question from the line of Priya Ranjan from HDFC AMC.
So my question is related to the volume. I mean, the -- whatever we have in terms of whatever we used to do around 78,000, 80,000 in a couple of quarters. And then we have again come back to roughly 66,000, 70,000. So is it ideal to assume like, say, 70,000, 75,000 number is the right number because in previous quarter, there has been overstocking in this channel and the demand is actually of around 70,000, 75,000. Is this the right way to look at?
Sir, it is too early to give a view on the volumes for next year, but trends are slowly improving.
Okay. Okay. And what is the net debt number right now, I mean at the third quarter?
Around INR 1,350 crores.
INR 1,350 crores, okay. And just coming back to the cost element. So on the raw material side, so gradually, I mean, are you seeing any kind of -- I mean, inventory still left of the previous high-cost inventory? Or do you think now the normalized level of inventory will -- I mean, the pricing of the inventory will be there in the system?
Inventories is still higher, but reduction, you will see next [indiscernible]. In the coming quarter, there will be reduction. And from April onwards, we can expect the normal price.
Understood. And just on the pricing front, so because there has been some inventory destocking, et cetera. So do you see the industry level, there has been some price connection as well apart from whatever you have done in terms of surcharge, et cetera. Is there some pressure in terms of pricing as well in the industry?
No, not at the moment.
Not at the moment. But it can come back because ...
It's difficult to say today, but we are not seeing any of this because the surcharges, which have some have already had a positive impact in [indiscernible] so it's difficult to say.
Okay, okay. And how much extra surcharge is still left? I mean -- so I guess it was around 5% to 6% earlier the cost of freight cost used to be. It has to got up to a 14%. So 6% you have already corrected. So is it fair to assume that 3%, 4% is -- can additionally be cut -- went about formally the entire trade cost normalizes?
No. So basically, our surcharge from 1st January has come to 0 for most of the regions. So whatever you -- as you rightly said, whatever freight benefit you will see, it will have an impact on the positive side of the margin.
Understood. Understood. But surcharge you will not -- I mean it's almost 0 now?
Almost [indiscernible].
We take the next question from the line of Mumuksh Mandlesha from Emkay Global.
Sir, the Off-Highway Tire segment continue to remain on positive trajectory. Can you guide what kind of growth expected going ahead, sir?
you know, single digit.
And sir, on the rest of world region, sir, which has witnessed a decline on a year-on-year basis, despite the better availability of capacity, sir. So what drove the contraction in this those markets, sir?
Sir, could you repeat your question, the voice was muffled.
Yes. So the rest of the world regions have witnessed a decline on a year-on-year basis in terms of volume-wise spend having better availability of capacity, sir. So what drove the correction in those markets, sir?
It's just an economic cycle seasonal factor.
Right, sir. Sir, can you guide a path to improve the margin to the target range of 20% to 30% over the coming quarters. So what will lead to those target ranges, sir?
Meaningful recovery EBITDA is due to raw material and freight cost, we'll give at least 300 basis points in that financial '24.
So 300 bps improvement due to RM and freight in FY '24, you expect?
Yes, yes, yes. At least it is the minimum, at least.
We'll take the next question from the line of Mr. Jinesh Gandhi from Motilal Oswal.
Couple of clarifications. One is with respect to the power hedge rate, you indicated 86 against euro would be for fourth quarter FY '23.
So that is for the full year -- that is for the full year for the January, February, March, we have 50% freight at the rate of 89.
Okay. Okay. Right. And for FY '24, we indicated 87, so is that for our entire exposure or ...
Average we have taken, but currently, we have covered up to 50%, which is also at 89.
Okay. 50% exposure is at 89. Okay. Got it. And second clarification was with respect to the RM cost benefit. So did you indicate that we expect the benefit of lower RM cost to reflect from April '23 onwards by then our high cost inventory will be totally absorbed?
You will see some correction in the January to March also, but full recovery from the April onwards.
Okay, okay. Got it. And third question was pertaining to the freight cost side. So are we also passing on the freight cost benefit for contracts which are on CIS basis or only for contracts where -- which are on FOB basis?
FOB basis, question does not arise. But on CIS basis, yes, whatever surcharge, we have added that we have withdrawn from 1st of January.
Got it. Got it. And lastly, with respect to the U.S. market, we have seen Y-o-Y decline of 9% in volumes. So is that a reflection of inventory correction? Or this is end market, which is the ...
General market conditions.
Okay. Not the inventory correction related impact?
No.
The next question is from the line of Nishit Jalan from Axis Capital.
I have 2 questions from my side, mostly on the volume side. You have talked about that dealer inventory levels have come down to 2.5 months. I'm assuming you are giving an average number for Europe and U.S. Typically, what is the normalized inventory level, sir, that we should be looking at given our regional mix. And second point you talked about was that end market demand is holding up well. What we understand is that in Europe, especially in the agri segment, there is a double-digit volume decline. Is that not the case? Or what exactly do you mean when you say demand is holding up well, there's a decline, there's a growth, it's flattish? How should we look at the demand side, especially in that agri segment that I'm talking about?
So what we understand from our dealers, they are able to sell what they were selling. So that is why we are telling end-to-end market demand is intact. However, due to the raw material price decrease they were expecting, and they were not having the space to unload the further tires which they were keeping higher inventory during the COVID times. So they are the liquidating that inventory. Once that correction is over, to full cycle should start. Already started reducing.
Normalized inventory levels, how should we look at from 2.5 months, how much more room is there to -- for the inventory level?
45 to 60 days normally, minimum they will be.
Okay. And just one follow-up on the -- typically, when RM prices come down so sharply that we have seen, there is some price correction also that happens in the market. And probably that is another reason why dealers are not -- or looking to lower the inventory levels. Are you seeing any signs or any price cuts happening on gradual pass-on of happening of lower RM costs by any players or by yourself and in Europe other than U.S. market?
So far, we have not come across. Only the shipping surcharge which we were charging that we have passed from the 1st of January.
And none of your peers have taken any prices? Or do you see any price that's happening because the RM costs have come down very sharply.
Not -- we have not come across so far.
We have not heard from our dealer.
Okay. And just one last thing on accounting thing. This unrealized losses that you have. These will be largely for the working capital because your debt levels are fairly low, right? So the currency fluctuation happening in your receivables and payables. And that is the main reason why you are seeing these kind of unrealized losses coming? Or are these also [ percent ] to the future hedges of revenues that you have done and you are doing value on getting some mark-to-market losses on that.
Nishit, this is largely due to the borrowings that are there in the system.
Only borrowing. It's not the working capital, is it?
No. Working capital debt and the long-term debt, they are not the mix.
The next question is from the line of from Pramod Amthe from Incred Capital.
This is with regard to the ASP where you were talking about freight costs. Can you help us understand in the bigger market like Europe, what is the extent of imports from Asia? And what is the extent of locally produced ones -- overall as the industry?
We don't do -- for raw material?
No, no. For the finished goods, for whatever Europe agri tire consumption happens, what is the extent of imports from Asia because only the Asia imports might be the ones which might have been reducing the freight cost, right, not the locally manufactured ones?
Difficult for us to estimate from where they are importing.
We don't have those numbers.
So are they 15%, 20% or the 50% of the industry?
No idea, no idea.
The reason why I was asking is if this is the case and the other guys are holding on your cutting [ rigs ]. So you might be competitively priced more now versus the -- might be 6 months back when the freight price was going up?
Difficult to put a number. It's very difficult to answer.
And second one is with regard to the overall industry itself again Europe, looking at your volume decline versus the -- again, industry decline, there seems to be almost on par, like 15%, 16% Q-o-Q decline. So then why do you say that you have cut the inventory versus the industry is also falling in a similar manner? One. Second, would you be -- since now this is the issue for last 1 or 2 quarters, would you be able to disclose on a regular basis, what are your retail [ volumes ] for these wholesale volumes, so we can get some more color in terms of what's the underlying demand?
No. We don't have that data. We don't get that big.
Difficult to get data off the retail volume, it would be very difficult to provide that number on a quarter-on-quarter basis.
Since you said the dealers [indiscernible] has reduced by 15 days, so you may be having a retail versus wholesale, right?
What we understand from our dealers that we have only informed.
Okay. And the last one is with regard to costs. Since the margins have been under pressure for the last couple of quarters, and now you're almost running -- nearing your completion on CapEx. Would you be focusing now on cost reduction so that you can come back to the your normalcy of corporate margins much sooner? At least that is the case where you want to focus on the cost side?
So we are always conscious about the cost part. But once the volume increases, it will definitely come down.
So you will wait for operating leverage to play out?
Yes.
The next question is from the line of Mr. Abhishek from Dolat Capital.
Sir, you have recently done full automation and modernization of Bhuj plant and also invited dealers and clients for plant digit. So how is the customer feedback and how much benefit you will get in terms of the operational efficiencies? And what is your plan to reduce power costs?
So customer feedback is, I mean, good because they're getting a more -- just the product is much more consistent. So that is what we are getting from them. Regarding power reduction or any other efficiency improvement, it is a continuous journey that we do at BKT. There is no destination. Every time we reach a new bench -- milestone, that becomes a benchmark, and we continue to improve from there.
Okay. Sir, in the past, you have done a lot of the land acquisitions near Bhuj. So what is your long-term plan for capacity additions in both tires and the Carbon Black, sir?
We are evaluating. We have not made up any firm decision yet. As and when we do, we will let everybody know after the Board approval.
Okay, sir. So right now, the current capacity is 365,000 tons. Can we assume that in the next 2 years, you can use to the 500,000 tons kind of the numbers?
We can't give you a number on that or comment on that because as of now, we have not drawn up anything neither have we gone to the board. So it's just fair to put a number and we can get there or we can't get there. At the moment, what we are saying is by end of financial year of first half of next year, our number will go to 360,000 tons, our capacity.
And my last question is related with your expansion on networks. So what have you done to expand in your global network in the last couple of quarters? And how do you see opportunities in the South American market?
So we have now local [ debt ] potential in this. And of course, that is done because we see an opportunity for us to grow. That is our view.
So what is the contribution of the South American market in overall volume right now?
We don't break it up into South and North America. We can give you for Americas. The total Americas is -- currently contributed to about 90% from Americas.
For 9 months.
For 9 months.
We'll take your next question from the line of Mr. Ankit Kanodia from Smart Sync Services.
So sir, after the results, as in Q1 FY '23 result, we made a commentary regarding the cautionary or the recessionary situation in Europe. But when we look at the volumes in Q2 and Q3, it looks like the Europe volumes have been pretty resilient. Can you throw some light on this as to what is happening in the industry and how are we positioned there?
So as we mentioned that, yes, Europe is under recessionary. So we are also seeing that and there is destocking at the dealer network. So we are continuing to see that. The retail is holding up the demand, and that is why we are confident of getting some numbers back in the coming quarters. The trends increase positive [indiscernible].
And how are we doing in terms of market share there? I'm not looking at any numbers, but how are we doing -- is our market share increase during the period of -- remain largely the same ...
Stable, our market share is stable. we have not lost cross market share.
Okay. My next question is on the CapEx thing. So largely, most of our CapEx has been done in as per your presentation, the Carbon Black project and also the Waluj Brownfield CapEx, I think both will be done by -- maximum by Q1 FY '24.
Yes.
Is it fair to assume that next year FY '24, we'll get double benefit, one from the operating leverage if the volumes go up? And also from the point of view of -- incrementally, we'll see our interest and depreciation not arise and currently going down. And in depreciation can't go down, but incrementally, it will not rise. Is it fair to assume?
Yes.
The next question is from the line of Priya Ranjan from HDFC.
Just one thing on the -- how do we plan to ramp up the carbon black? I think the specialty Carbon Black will be mostly sold outside? And do we -- what kind of contribution we are seeing the normal Carbon Black sales from the overall top line?
Around -- Carbon Black be about 5% of top line and specialty will be sold outside [indiscernible]?
And additional 55,000 ton, which is the normal Carbon Black that will all mostly consume in-house or that will also have some ...
So that will have some sales outside. But overall, our sales turnover, about 5% will be -- Carbon Black will be sold outside.
And specialty, I mean, do we have identified the market? And how should we look at the ramp-up of that specialty?
Yes, we have identified markets. We are going to do testing, so we can ramp up in about a year's time.
The next question is from the line of Mr. Aniket Mhatre from HDFC Securities.
Just a quick clarification, sir. When you said low single-digit growth, you meant this for near-term or for FY '24?
At this moment, we are only commenting on near-term, so we are commenting on the near-term, that will be low single digit.
So that's -- one should expect for Q4, basically?
Yes.
And when you said the benefit from raw material and freight of about 300 basis points, that would be after -- I mean the entire benefit would flow in from Q1 FY '24, right?
Yes.
So by when should one expect our margins to bounce back to 28% to 30%, could you guide -- could you provide any guidance?
So on the quarter, when you asked about the volumes, I'm just reiterating to clarify, you -- quarter-on-quarter, it will be better, a little better, so sequentially.
Sequentially, it would be a bit better. Okay. And on margins, when can we go back to the -- our guidance of 20% to 30%?
We are working towards that. I mean we would -- we've always mentioned that in the long-term, we would like to be at that. So basically, there is no principal change in the way we operate over here. These are minor cyclic effects, which are coming in, but we expect it to -- we would like to go back to there. But in the next coming quarters, we will have a meaningful recovery in EBITDA due to raw material and freight costs going down. We expect it to be to around 300 basis points from current level at least.
Sure. So from current levels of 19%, you expect 300 basis points improvement at least by Q1? And any ForEx benefit would be over and above that.
Yes.
We'll take the next question from the line of Mr. Lokesh from Vallum Capital.
Couple of questions from my end. One is on the ForEx on the unrealized loss of INR 166 crores attributed to borrowings. If you can share the average duration for these borrowings? Ballpark number would be fine.
So average duration is 3 years for long-term and 6 months for short-term.
Okay. So is it right to assume then -- if, let's say, in the next 6 months, the euro is at 88 and it does not come down. This provision would not be written back. Is it fair to assume that?
Yes, yes.
Great. Second is on the ASP front. So we're seeing raw material prices coming down. Going forward, how would you like to play this? Would you pass it on to your dealers? Or would you want to play this with volume which is coming up with your capacity?
At the moment, we'll wait and watch because what is happening in the industry, how everybody is moving, what is happening. So it's too early to comment. We have not made up our mind, but we are waiting [indiscernible] ...
As for what the market demand is and how the situation is.
The next question is from the line of Mr. Tanik from Asian Market Securities.
This is Mayur. Just wanted to understand, so now that we've been hearing that China is kind of reopened and would normalize production. Have you seen any trend of the Chinese tires coming back into the European replacement market yet? Or all of that yet needs to be factored in?
No, it's not -- we've not seen any spend.
Okay. And is it fair to assume that you would have significantly gained because tires from Russia and China, both were possibly not there. And since the European counterparts would have seen some significant increase in their operating cost as well due to higher energy cost. We would have gained -- is it fair to assume that we will be able to retain most of this gain or you could see some loss of share once all of these factors also kind of normalize?
So we would -- we can retain the [indiscernible].
We take the next question from the line of Prolin Nandu from Goldfish Capital.
A couple of questions from my side. First would be over the medium-term, right? I mean what kind of market share gains should we assume? Because in the past, you have mentioned that you are somewhere at 5% to 6% market in the relevant markets that you are presenting. And I mean 2, 3 years back, I think this number was 3% to 4%. So could you help us understand as we enter new markets as the local dynamics in some of the markets where we are present changes, is it fair to assume that the market share gains will accelerate year-on-year over the medium-term?
So currently, we are -- as we mentioned, 5% to 6%, our aspect in is to go to 10%. We are trying to accelerate this growth to reach our goal. But how much will it accelerate in the mid-term is difficult to say. We will be prepared for it, and we are ready to reach those numbers.
But is there anything happening in the market, which gives you confidence that this 10% number would be achievable sooner rather than what we had previously assumed. Is this anything happening in the market that gives you that confidence or not yet?
So I think we are working from whatever we can do, we are working. We are creating the distribution. We are creating the product. And of course, we are -- over the last 3 to 4 years, we are putting in a lot of money in marketing. So the brand recognition will go up, brand proportion is being done. So those things will always have an impact.
Sure, sure. And sir, my second question is on your treasury book, right? I mean if I'm not on cash and cash equivalent at the end of this quarter, is also somewhere close to INR 2,000-odd crores, right, in some [indiscernible] and we have carried on that as well. And there have been questions in the past and you mentioned that you want to play that real advantage that we have. And if I look at your annual report for FY '22, I see lots of different types of investment in direct equities in some of the IIFs, in some of the venture capital funds as well. So could you help us understand as to what kind of an objective does the Board or the senior management provide to treasury? And what kind of constraints does the treasury team work with? And what are the expertise of the treasury team to make some of these investments into BC funds and some of the IIFs as well, if you can help us understand that?
So as we had earlier mentioned that, that was run for short-term [indiscernible]. So we have already done that. We have already guided that we will be slowly moving that money towards repayment and also towards future capital -- CapEx expansion.
Sure. But are there any constraints? Are there any yield targets that you give your treasury team? Or are there any no-go areas which our treasury team work with while I understand that before short-term and now is that in the CapEx mode. Can you give some constraints with which they work with, it would be great for us.
The no-go zones are basically taken out to anything that is firstly risky. We don't know -- I mean, it's a short-term paper, safe papers, government papers mainly which gives us good protection on the financial as well as gives us a good yield. So that is the objective.
We take the next question from the line of Joseph George from IIFL.
I have 2 or 3 questions. One is, you mentioned that starting Jan 1, the freight surcharge has gone to 0. So how much further speed decline should we think of when we think of 4Q compared to 3Q?
Very much, very much.
Okay. The second thing is -- I mean, the second question that I had was in relation to how the pricing of BKT tires is in, say, Europe compared to the peers? So in the past, you have mentioned that you'd like to keep the price discount versus the larger peers at about 12% to 15%. Now with the level of freight surcharge, had that discount narrowed? Or was it still at 12% to 15%. Now with the removal of the surcharge, it will increase further. How should we think about the pricing there versus the peers compared to the 12% to 15% discount range that you have given us earlier?
We have always indicated that we would be 12% to 15%. We try to be as close, but yes, of course, during the last couple of quarters, it had gone down to maybe between 11% to 13%, which are now we will take it back to 12% to 15%. But again, I reiterate that our principal policies of operating the business are not changing. We would like to maintain all the same principles that we have been running the business with. So that will continue.
Understood. And sir, the last question that I had was in relation to end demand. So I think this question has been asked by previous callers in this call. But -- so what I'm trying to figure out is, when you mentioned that currently, volumes are impacted by destocking, it automatically implies that in the preceding quarters, there was overstocking. So what I'm trying to figure out is when I look at the average volume, say, in the March quarter and the June quarter, September quarter, which was about 80,000 tons per quarter, how much of it was inflated by overstocking by dealers? And in those quarters, what was the -- what is the volume implied by the genuine underlying end retails?
So there was about 5% to 10% overstocking at their level as well.
So we're saying that those 80,000 numbers, I mean, when I look at the quarterly numbers, March quarter was 77,000, June was 83,000, September, 79,000. So I think out of this, about 5,000 to 10,000 was over inflation because of overstocking by dealers. Is that the right...
Yes.
The next question is from the line of Saif Gujar from ICICI Prudential AMC.
Sir, just regarding the Indian operations. So this quarter, we had around 15,972 tons out of the 66, 480 tons this quarter from India. So is there any focus on increasing the market share from Indian operations? Or it is just like a hedge from the European operations?
No, no, we are working actively to increase the margin in India. We have always mentioned that there is an area of opportunity for us to grow. And you can see that in the -- if you look at the last 2 or 3 years, we have -- of the bigger pie also, increased our market share in India. So that will continue to be there. It's sort of hedge against Europe. It's a targeted approach that we have made to grow in it.
So how is the strategy here? And there would not be any significant low-cost advantage as we enjoy in overseas operations, right? So ...
We are competitive in the marketplace. At the end of the day, we are selling ourselves and we are -- our quality is being accepted. Our brand is now being recognized, and all those things are placing us as a premium product, and we are competing with them and selling.
And it would be more towards the agri side or the Off-Highway side, particularly in India?
Both. Agri is also Off-Highway side, but agri and mining both industrial, all segments of ours, we are pushing in India.
Thank you very much. Ladies and gentlemen, that was the last question for the day. I would now like to hand the conference over to the management for closing comments.
Thank you, everyone, for taking your time to join us. See you next time, stay safe.
Thank you.
Thank you. On behalf of Batlivala & Karani Securities Private Limited, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.