Significantly better than Q1 of last year at a consolidated level, operating profits declined by 17% sequentially; lower quantum of profits at Sterling, CAPL, VAW, and FZL have had an impact; however, margins continue to hold up in standalone abrasives despite the lower volumes caused by the lockdowns.
The month of May was terrible especially for abrasives with very few dispatches happening to various parts of the country, which have all been severely impacted by lockdowns. Overall, standalone abrasive margins softening by about 100 bps from 17% to 16% sequentially. In the standalone ceramics segment, the volume impact and cost impact led to a 200-bps softening of margins and this cost impact was not so much from input prices but from mitigating the chronic labor shortages at the Hosur complexes where they have bonded abrasives, coated abrasives, and super abrasives facilities with the temporary labor returning home for the lockdown period and also the unbudgeted COVID expenses.
Standalone EMD (Electro Minerals Division) has been the silver lining of the last quarter with margins increasing by almost 500 bps. Done record volumes in some of the products lines and also managed to pass on some of the input price increases. In addition to a combination of product mix, which is favorable profitably they had a great run at Maniyar due to good rainfall.
On an operational side, there were some disruptions in the Hosur plant due to the imposition of the lockdowns and also the acute shortage of labor. They utilized this opportunity to revamp some of the critical assets. In March, they regained a significant portion of the lost sales in the month of June as the lesser incidences across the country and the opening of the lockdowns.
The ahmedabad-based subsidiary, Sterling Abrasives performed well on account of good demand from the agriculture sector. After several quarters of lower volumes at the Russian subsidiary, VAW - due to the ailing home and European auto market, there is some revival in demand.
In the Ceramics segment, the consolidated ceramics recorded Rs.173 Crores marking a 100 bps decline in topline sequentially. The disruptions in operations at the Hosur plant had impacted production and on-time deliveries. Consequently, sales to the Australian subsidiary CUMI Australia and other exports were also impacted due to the non-availability of containers for exports. The orders from repairs and maintenance segments in the domestic market have been particularly an encouraging story.
In minerals, the demand scenario looked good both at standalone and global operations. This is also due to the fact while the end-user industries are seeing an uptake there is also hesitancy or rather a preference from many of the customers to have an alternative source of raw materials from China and that is also helping both the Russian and Indian operations.
An increase in input costs was offset by a price increase to some extent. The good rainfall in the captive power generation facility at Maniyar has helped shore up the bottom line. This resulted in a 500-bps improvement in margin Sequentially. At the consolidated level, it declined by 70 bps. At the Russian operations, good volumes were seen in the Silicon Carbide segment. Few days of operations were lost on account of electricity supply disruptions and COVID-related no working days in the region. Expect the seasonal demand over Q2 to be better abrasives and expect the good volume and realizations streak to continue in minerals.
In ceramics, the company has a good order bank at CUMI Australia and expects the new mining projects in Australia to bode well for them in the near and medium-term. There has also been a rise in cost in raw materials and fuel and they expect this to continue for a while and this may have an impact on the margins.
On a consolidated basis, the debt-equity ratio was 0.02 and the total debt on the consolidated basis was Rs.45 Crore. The cash and cash equivalents including deposits with tenure exceeding 3 months net of borrowings were at Rs.662 Cr.
In Abrasive, some from the thin wheel segments and also on coated and precision abrasives have gained the market share. The reason being that many of the customers in the precision abrasives business (which is the auto and auto component segments) buy both from domestic players and import. Having someone local like CUMI to support them very quickly has helped.
Revenues, on a consolidated basis, can hit a double-digit growth and on the margin side, double-digit growth on the top line. On the bottom line, many of the commodities prices have been shooting up significantly. Some of these costs will be passed onto the customers.
Margin improvements in all three segments.
In abrasives, margins are over the last few quarters. Diligent work on the cost front, improving efficiencies, improving yields, reducing energy cost, and energy consumption, very scientific work, which has helped both in the coated abrasives and in the bonded abrasives segments. Also, they have chosen raw materials which will give lower losses
The bulk of the ceramics in the standalone and also in the case of Russia goes into the exports market and these are technical ceramics and despite the lockdowns even last year the end-use markets, which is the fuel cell market or the alternative energy markets, the power transmission and distribution markets, they have been doing very well and these are custom-built products and of better margin profile and that is where they have been focusing on building the volumes so that has definitely helped in the ceramics.
In the minerals business while silicon carbide produced in Russia is always had a better competitive advantage due to its position in Russia, with access to competitive raw materials and energy, the work which the minerals team in India has done in terms of generating more volumes from the existing assets so they have been able to sweat those assets to create more volumes and also significantly change their product profile to ones which consume less energy, which has helped them both by specific energy consumption thus lowering the cost of energy itself and also churning out volumes, which help in a better-fixed cost coverage.
This quarter has been exceptional, so they had locked up inventories in two counts largely one on the raw material side and on the finished good side. On the raw material side, the abrasives division and also the ceramics segment, import, bulk of the raw materials from overseas and in the abrasive segment they do significant imports of the grains from China and beginning of Q4 in February when the Chinese New Year starts and the Chinese go on for a 15-day holiday and hence, normally tend to schedule more in just before the holiday starts. But materials were delayed, some were stuck in the port, some were yet to receive in the plants, so this ended up in piling up of raw material inventory or good inventory and this inventory will be diluted over the next couple of quarters.
The abrasives segment broadly is into precision and in the mass market. In the mass market, they have both bonded abrasives and coated abrasives which deal with housing infrastructure or the engineering segments. In the mass market segments, coated abrasives have seen an uptake with possibly more and more home innovations, building innovations happening and many companies or many commercial buildings also which has been closed down after the pandemic reopening now.
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