Century Enka (NSE:CENTENKA) Q2 2027 Earnings Call

0:00 Ladies and gentlemen, good day, and welcome to Century Enka Limited Q2 and H1 FY 'twenty seven Earnings Conference Call. As a reminder, all participant lines will be in the listen only mode. There will be an opportunity for you to ask questions after the presentation concludes. I now hand the conference over to Ms. Purwangi Jain from Valorum Advisors. Thank you, and over to you, ma'am. Thank you. Good evening, everyone, and a very warm welcome to you all. My name is Purvanggi Jain from Valorum Advisors. We represent the Investor Relations of Century Enka Limited. On behalf of the company, I would like to thank you all for participating in the company's earnings call for the second quarter and the first half of the financial year 2027.

0:51 Before we begin, let me mention a quick cautionary statement. Some of the statements made in today's earnings call may be forward looking in nature. Such forward looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's belief as well as assumptions made by and information currently available to the management. Audiences are cautioned not to place any undue reliance on these forward looking statements in making any investment decisions. The purpose of today's earnings conference call is purely to educate and bring awareness about the company's fundamental business and financial performance for the quarter under review. Now let me introduce you to the management participating with us in today's earnings call. We have with us Mr. Suresh Sudhani, Managing Director and CEO and Mr. Yugesh Shah, Chief Financial Officer.

1:41 Without any delay, I request Mr. Sudani to start with his opening remarks. Thank you, and over to you, sir. Thank you, Purwangy. Good evening, everyone, and welcome to our earnings conference call for the second quarter and first half of financial year twenty twenty seven. I would like to thank our host, Valorum Advisors, for hosting this call. Now let me brief you on the operational highlights for the period under review. The automotive sector witnessed healthy momentum during the second quarter with passenger, passenger and commercial vehicles emerging as a key growth drivers supported by festive demand. This provides a constructive demand environment for the tire industry, although the outlook for the coming quarters will depend on deficit monsoon impact, inflation and interest rate movements.

2:29 Within our tire cord fabric segment, underlying demand for NTCF remained healthy, reflecting encouraging demand fundamentals. However, the increase in imports impacted sales volume during the second quarter. We continue to focus on strengthening our market position while navigating competitive pricing pressures and volatility in raw materials and fuel costs. While geopolitical developments, the ongoing war and fluctuations in crude oil prices remain key near term uncertainties, we believe the improving automotive demand environment provides a supportive backdrop for the industry. On the PTCF front, the approval process is progressing in the desired direction, and we expect to commence commercial sales in Q4 FY 'twenty seven. This represents an important milestone in our product diversification journey and is expected to broaden our presence in the Tire Reinforcement segment.

3:25 The nylon filament yarn business recorded an improvement in sales volume during the quarter, driven by stronger demand during the festive season. However, margins remained constrained by continued influx of competitively priced imports from China, particularly in base and low grade yarns, alongside significant fluctuation in raw material costs. To strengthen margin realization, we continue to prioritize value added products and enhance our product mix. During the quarter, we further expanded capacity in this segment to support the growing focus on higher margin offerings. Turning to raw materials and power and fuel costs. The quarter saw a challenging cost environment with significant volatility in raw material prices continuing to weigh on operating margins.

4:14 Additionally, the benefit of lower cost opening inventory, which had supported margins in quarter one, moderated during the quarter, resulting in a normalization of profitability. Further, the energy cost emerged as another area of pressure with higher grid power tariffs at Baruch and elevated LNG prices increasing the overall cost of operations. To address this, we are strengthening our hybrid power capacity, which is expected to start delivering cost benefits from Q4 FY 'twenty seven. Our focus remains on mitigating external cost pressures through greater energy efficiency and operational optimization while working towards a more sustainable cost structure over the coming quarters. I'll now request our CFO, Mr. Yugesh Shah to brief you on financial performance.

5:04 Thank you, Suresh, good evening, everyone. Let me now brief you on the financial performance for the period under review. For the second quarter of financial year twenty twenty seven, revenue from operations grew 37% year on year to INR $5.58 crores. EBITDA stood at INR 33 crores, registering a year on year growth of 4%, with EBITDA margin at 5.88%. Profit after tax stood at INR 19 crore, declining 17% year on year, while PAT margins came in at 3.31%. Moving to our performance for the first half of financial 2027. Revenue from operations grew 37% year on year to $11.13 crores.

5:56 EBITDA increased significantly by 130% year on year to INR 119 crores, with EBITDA margin at 10.66%. Profit after tax stood at INR 80 crores, registering an exceptional year on year growth of INR 113%, while tax margin came in at 7.21%. Now turning to the segmental performance. Total volume for the quarter grew by 13% year on year to 20,162 metric tons. Within this, tire cord fabric sales increased by 37% to INR $2.51 crores, while Plum and Yarn sales reported a growth of 39% to INR $2.93 crores.

6:42 Total volume for the first half grew by 13% year on year to INR 39,361 metric tons. Within these, tyre cord traffic sales increased significantly by 53% to INR $5.57 crores, while Plamanyan sales reported a growth of 30% to INR $5.23 crores. With this, we open the floor for questions and answers. Thank you very much, sir. Ladies and gentlemen, we will now begin with the question and answer session. The first question is from the line of Prahtam Nayak. Please go ahead.

7:46 Hello. Good afternoon, sir. Good afternoon, I have two questions. First of all, the revenue grew by 37% year on year in Q2 FY 'twenty seven. So could you elaborate on the key growth drivers, particularly contributions from higher realizations, pricing as well as the product mix? And how sustainable are the current realization levels? You have two questions. Are you asking second one as well? Yes, sure. So the capital work in progress increased from about INR 13 crores in FY 'twenty six to about INR 38 crores in H1 FY 'twenty seven. So could you also please provide an update on the ongoing CapEx projects, any planned investments And any additional capacity expected from these initiatives?

8:33 Okay. Thanks for your questions. First of all, I'll address on the revenue side. Revenue growth is driven by both the volume growth as well as the realization growth, which is primarily driven by the higher raw material prices. You know our model is basically the main raw material cost comes from the crude based caprolactam or polymerized chips. And those prices have increased significantly quarter on quarter and also in relation to quarter one. So these plus the volume growth that we had on a combined basis for all the products that we sell, these two contributed for the revenue growth. Revenue growth in future will depend on what is the prices of our underlying raw material, while volume will depend on how the market conditions remain.

9:24 As we mentioned in our opening statements, there are too many outside factors, non controllable factors like geopolitical situations, crude oil prices, inflation and as well as the impact of rupee. So all this will have an impact on the demand, and the demand will drive the volumes. As far as the pricing is concerned, that would primarily be dependent on what is the raw material prices. So very difficult to project whether this would remain at these levels or not because volatility both in quarter one as well as in quarter two is significantly high, in fact, much higher in quarter two because of the developments in the Iran war. Coming to the scheduled capital work in progress, the projects which are ongoing are mainly our Madaryan expansion at Pune, our increase in WAPS capacity at Baruch, various energy saving CapExes at both locations as well as improvements in safety and some old asset replacements.

10:34 Okay. Thank you so much, sir. Thank you. Participants with questions may please enter star followed by one. The next question is from the line of Dhruv Shah. Please go ahead. Yes. Hi, sir. Good evening, sir. With the I have two questions, sir. First is with the benefits of increased hybrid power capacity expected from Q4 FY 'twenty seven, what level of power cost saving is anticipated? And what could be the basically the impact on the margins in FY 2028? And second question is about the capacity utilization level against the installed capacity of approximately 92,000 metric tons in Q2 FY 'twenty seven?

11:24 And how much headroom we can anticipate going forward? So the hybrid at Baruch, we already have one hybrid project, which is already giving benefits at Paruch in the power rates. And we the second the additional hybrid would start most likely in quarter four and start delivering benefits. The benefits are actually different between the grid rates and the rates at which we have signed the agreement for the hybrid power. So since the grid rates vary, there could be most likely a better than because the grid rates have been increasing in last few quarters. We expect, I mean, on a very rough calculation basis, annualized benefit of about INR 10 crores per annum.

12:14 On the additional hybrid power, that would come to the company. And this is just a differential between the grid power rates and the power rates that are coming from the hybrid capacity. As far as the capacity utilization, it varies between 80% to 90%. We had about 85% capacity utilization in Q2. And as mentioned in the earlier question, the capacity utilization is a direct function of the demand. And if the demand remains good, we should be closer to 90%. If demand is slightly weaker, we may I mean, either be around this number or maybe slightly lower. So the capacity utilization normally is in that range, and we have sufficient headroom.

13:00 This capacity is obviously based on a normative denier mix. And the denier mix, particularly on the filament yarn side, could also have an impact on the capacity. So all in all, we in case of a short term surge in demand, we have sufficient headroom to meet those demands. Okay, Thank you so much. Thank you. The next question is from the line of Sanjay Patel. Please go ahead. Hello. Hope my voice is audible. Yes. Yes, sir. Yes. Thank you for giving the opportunity. So my question is despite healthy demand from the automotive sector, your NTC sales were impacted by increased imports.

13:47 And how do you view the demand outlook for the tire cord fabric in the second half of the financial twenty seven? And what measures have been taken to address the import led competition? So the imports actually happened in a very uncertain scenario, which were booked in quarter one when the there was uncertainty on availability of raw materials, availability of LNG, availability and so the tire companies more as a risk mitigation exercise booked a larger quantity because there were month on month week on week uncertainty on what will pan out, whether we'll get sufficient gas from Middle East or other sources so that the gas volumes are available for continuing our operation.

14:36 So that was one. Second was the price itself was fluctuating, and these volumes are actually more than the normal imports that happened. So we do expect that this should normalize in the coming quarters, not necessarily that in the current quarter, but because normally, the imports are more towards export of tires because they are brought under advanced license. And we are in touch with all customers, and we expect that this should normalize in coming quarters. But since the volatility continues because of uncertainty in the geopolitical situations, we could have a quarter where the imports could again be higher.

15:24 Second question was on can you please repeat the second part? Sorry? Yes. Actually, I just wanted to know the demand outlook overall for the tire cord fabric in the second half. And also, I wanted to know on the same note, like, what is the current capacity utilization across key manufacturing facilities? Like, is the existing capacity sufficient to support the anticipated demand growth? Or will additional investments be required on that front? Yes. So I mean, we can't we don't give any forward looking statement. But as mentioned in our opening statement, there are some, I mean, monetarables like what is the impact of the deficit monsoon, inflation, the interest rates because demand for our fabric comes from two sides.

16:13 One is the OEM demand and second is the secondary or the after sales demand. Aftersales demand could have an I mean, these factors could have a more impact on that. We'll also see how does the vehicle sales happen, automobile sales happen in this festive season because this is up to Diwali is a major buying period for which some volumes are already in the pipeline. So it is I mean, it's a bit volatile because of too many external factors impacting the demand. But the positive part, which continued post reduction in GST still remains. So that provided a great flip to demand since September last year and which continued till September this year.

17:04 And that still remains as a major driver. We hope that, that would continue to balance some of the negative factors, which came come from the other external factors. And we are yes, we are geared up to I mean, capacities are available. In the short term or near term, we don't need any capacity expansion on the nylon side. Polyester, as we have already mentioned, is under the pool process, and we have capacity to once we start getting approvals from customers from Q4 onwards and from the next FY 'twenty eight, we hope to utilize that capacity as well. Okay, sir. Thank you, sir. Thank you. The next question is from the line of Roshani Shukla. Please go ahead.

17:59 Hi, sir. I just have two questions. First is I want to understand how is the demand evolving across tire OEMs and the replacement market, particularly in the two wheeler, bi star, and the off road segment? And what are the key demand drivers expected in H2 FY twenty twenty The OEM demand, I think, as for public data available has been pretty good because till September, across all categories, the sales have been very good, except some dip in the tractor sales, which also is on a very high growth in the previous year. So on a normalized basis, even that sales have been quite good. So the OEM sales have remained quite robust up to September.

18:48 The secondary market has not been as robust as and this is based on data which is available from Atva and other. We don't have a tracker on how much sales are happening in the secondary market. So based on the external data gain, I mean, sources, the secondary sales have been slightly not as robust as the OEM sales for two reasons. One is the monsoon, normally, the pickup happens either the tire replacements happen either in quarter one or they start more in quarter three and or quarter four. So we will know whether the secondary or the aftersales market actually picks up at the projected levels or what the tire companies are expecting in the coming quarters.

19:38 Okay. Okay. And the second question is that with the PTGF commercial sales expected to commence in Q4 FY 'twenty seven, right? And so what are the initial volume and revenue expectations? And how quickly is the segment expected to ramp up following the commercialization? Since we report on single segment, I will for competitive reasons, I cannot give the breakups of how much will come. But we expect I will see the current the product approval both through multistage approval, especially for the new products. And since it is this PTCF goes in passenger car tires, there is a very high level of technical clearances that is required at multiple levels.

20:24 So the ramp up would be gradual. But the second half of FY 'twenty eight, we expect a very high or almost a good capacity utilization for the capacities that we have established. Okay, okay. Thank you so much. Thank you. The next question is from the line of Sakshi. Please go ahead. Yes. Hi, sir. So first thing that I wanted to ask is, so your EBITDA margin declined by 186 basis points on Y o Y basis to 5.88% in Q2 FY 'twenty seven from 7.73% in Q2 FY 'twenty six and fell by nine fifty eight basis points Q1 from 15.46 in Q1 FY twenty seven. So what would be a sustainable normalized EBITDA margin level over the coming quarters?

21:22 We normally maintain that our EBITDA could fluctuate between or should remain depending on multiple factors between 7% to 10% on a normalized basis. And since the quarter one was a very significantly high margins and quarter two was lower. And one of the underlying factors which impacts the margin is the raw material cost because that increases the base. Margins in this industry do not change as a percentage of raw material because raw material costs are more of a pass through and the margins are a different way of calculation. So when the underlying raw materials are high, the margins would normally tend to be lower.

22:09 Quarter one was exceptional because we benefited from the low cost inventory. And postwar, there was a significant price increase in crude and all the crude derivative raw materials. So that would also be an abnormal, but even Q2 is not our normal range of operating margin. So as mentioned, normally, we I mean, our target would be between 7% to 10%. Okay. And how do you plan to scale the Enka loan and Unile brands, particularly in premium and recycled yarn categories? I mean like what opportunities exist to expand the sustainable yarn portfolio? So basically, Newnile is for the recycled yarns. EnkaLON is based on virgin products.

22:58 And New Nile was basically launched for export markets. And again, due to geopolitical situations, markets are in kind of a flux where the buyers are not sure whether this is the right time to book orders because the war gets settled and the prices come down, the price of all products come down. So New Nile is a promising opportunity that we are looking at, especially in the export market because most of the brands have a target on what percentage of recycled products they are using in their finished products. And that gives us an opportunity to place this product in the premium segment, in particular, with the leading brands.

23:47 And our aim is to work with these, not I mean, through the channels and actually get a larger share of business from them. So Enka Limited anyway demands that it's a premium brand in the domestic market. We don't use it in international market. And we do expect that it will continue to command premium compared to domestic competitors as it has been doing in the last many years. Okay, okay. Thank you, sir. Thank you. The next question is from the line of Gaurav Shah. Please go ahead. Hello, sir. So my question is, Yarn revenue increased from INR $2.11 crores in Q2 FY 'twenty six to INR $2.93 crores in Q2 FY 'twenty seven. Could you elaborate on key drivers of this growth and the respective contributions from volume growth, pricing and product mix?

24:51 This week, we are giving our just a breakup as an additional information. So for competitive reasons, we cannot give the breakup of what is driving that. But as you can see, the volume has grown over corresponding quarter significantly. So that has been definitely a major driver. And second is, obviously, since the raw material prices, again, compared to corresponding quarter was significantly higher. So that has also contributed to for both the products, alcot fabric as well as the filament yarns. Okay, sir. And another one question is what is the current contribution of value added products to total yarn revenue? And what is the target for increasing their share? How could a higher VAT mix support the margin improvement over the medium term? Can you just explain it, please?

25:42 So value added products are basically out of the VIAN portfolio, the nylon filament VIAN portfolio. Our VAPS actually are increasing, I mean, quarter on quarter also year on year. And we expect it to touch maybe about 50% in the near term. And so that could definitely contribute to our margin improvement. And that is the purpose that we are adding more CapEx into the value added products so that we can make products which are directed towards specific customers as well as niche segments. And this is already contributing to our margin improvement in the Yarn segments.

26:31 Okay, Got it. Thank you. Thank you. Our next question is from the line of Rahul Jain. So just wanted to know that what is the current contribution of exports to the total revenue? And also wanted to know what are the key opportunities that and challenges for export growth, let's say, over the medium term? Our exports are, I mean, not large. It's about ranging between 4% to 5% of the turnover. But the opportunities, particularly with FTAs with EU and UK, could open up new opportunities because these are segments where India could enjoy a differential duty compared to China or South Asian countries.

27:28 So we do expect that once it is operationalized, and we can build the right channels to market our product and get the right partners to work with us, that could provide a good opportunity for our products to be marketed there. And that is where our product, New Nile, also comes into. I mean the recycled yarn portfolio could support us. We are also trying to understand the demands requirement, I mean, particularly on the yarn side, what are the specific demands that could emerge from these markets because these have not been our regular markets. And in the next year, maybe financial or the next calendar year, once EU FTA is operationalized, we would make very specific efforts to understand and to target certain customers, certain segments in that these two markets.

28:30 Other markets could also provide an opportunity, but with the current flux of geopolitical issues, there are actually a lot of uncertainties on buying side. And once these things settle, we expect that this that could also become a driver for our export sales. Got it, sir. So my next question would be on the key raw material prices. So basically, how did the key raw material prices, particularly, you know, cathrolactam and other nylon and polyester inputs move during the quarter? And also wanted to know to what extent were these these increase in input costs passed on to the customers? Actually, I mean, it's an increase from between the quarter from June to mid of July or, I mean, early August, actually, there was a fall when the first MOE was signed between U. S. And Iran.

29:28 And then it again increased and the current prices are in the range of USD 2,000 to USD 2,100 for capital item. For the nylon chips, again, ranging from between USD 2,100 to USD 2,200. So the volatility increased significantly, the prices increased significantly, and the underlying reasons are clear, crude, benzene, everything went up significantly. And going forward, I mean, very difficult to predict what kind of rates will remain. But we have been very transparent with our customers. And our I think the margins show that the profit number, even on a normalized last year, corresponding quarter was a normal quarter with no war situations. We have been able to, on an absolute value, be able to better than last year in terms of absolute profit.

30:26 So which is a reflection that we could pass through the price increases. But yes, there could be some timing related gaps. And but we are very transparent with our customers and they also understand the criticality and the challenges that their suppliers face and they have been very accommodative and understanding on these issues. Got it, sir. That was it from my side. Thank you so much and all the best. Thank you. Thank you. Our next question is from the line of Aman Jen. Please go ahead. Hello, am I audible? Yes, Please proceed. You so much for the opportunity. Sir, I just wanted to understand that with inventory increasing to approximately $3.13 crores at the end of H1, what are the key factors behind this increase?

31:18 And how do you expect working capital requirements to evolve over the second half of the year? So inventory increase is one of the reason is the increase in the raw metal prices. So that is the basic reason of increasing our inventory value. And if we see the inventory levels in concrete terms, then it remains almost same or be able to reduce to some extent. In the future, we are expecting that when the raw material prices will change, this inventory level again will go to the normal and we will able to manage our working capital in a better way. Okay, got it. And just one last question.

32:06 So with a strong net cash position and limited borrowings, how are the capital allocation priorities being balanced between capacity expansion, technology upgrades, renewable renewable energy investments? Basically, I mean, since we are not challenged by availability of cash and balance sheet, the priority is more on what is needed for the immediate and near term. So all technological improvements, energy saving initiatives, which follow which cross the minimum threshold are all being implemented. We are getting into more products on the value added products and the Madarya expansion is happening, which will get actually capitalized in the next financial year.

32:56 And we keep evaluating alternates where we a larger deployment can happen. So there is no I mean, it has to go through a process where it makes merit sense to add those CapEx because ultimately it should lead to a sustainable profitable growth in future. And that is the basic criteria. If that meets it, we are well within to and through an approval of Board, we take it forward. Okay, got it. That's it from my side. Thank you and all the best for the future. Thank you. Thank you. As there are no further questions from participants, I hand the conference over to the management for closing comments.

33:51 Thank you all for participating in this earnings conference call. I hope we were able to answer your questions satisfactorily and at the same time offer insight into our business. If you have any further questions or would like to know more about the company, please reach out to our Investor Relations Manager at valorangadvisors. Thank you. Thank you very much. On behalf of Century Enka Limited, that concludes this conference call. Thank you all for joining us and you may now disconnect your lines. Thank you.