Avro India Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Recycling ramp-up missed, hitting profits: The new post-consumer recycling plant produced only 228 metric tons against a 300-ton capacity due to machine breakdowns and process instability, so the expected cost benefit did not materialize and profit declined QoQ.
• Demand was muted, forcing discounting: Consumer spending was weak across the country, with peak-season off-take at 70% of expectations, compelling the company to offer deep discounts to cover fixed costs and move inventory.
• A 20%+ raw material cost saving is promised, but not yet delivered: Management expects the recycling operation to deliver more than a 20% saving on raw material costs, with benefits starting from Q2 FY24 once optimization is complete.
• A new trading activity boosted other income: The company began buying and selling recycled plastic in the market this quarter, earning a mark-up that drove other income to ₹1.5 crores, up from ₹3–5 lakhs previously.
• What to watch next quarter: Whether the recycling plant achieves stability and delivers the promised cost savings, and whether peak-season demand recovers enough to reduce reliance on discounting.

Recycling Plant: The Quarter’s Core Disappointment

• Ramp-up fell short: The post-consumer plastic reprocessing unit, which started commercial production in late December, failed to achieve stability through the March quarter. Production reached only 228 metric tons against a 300-ton declared capacity.
• Cost benefit inverted: Because the production process could not be built up sufficiently, the actual cost of recycled material was higher than purchased virgin material, negating the plant's entire rationale for the quarter.
• Root causes were operational: Machine breakdowns, labor issues, and challenges specific to processing post-consumer plastic (washing and drying systems) all contributed to the shortfall.
• Pre-operating expenses added to the drag: Repair and maintenance costs related to the ramp-up were capitalized, further weighing on the bottom line.
• Optimization is promised this quarter: Management believes the process issues will be fixed before the end of Q1 FY24 (by June), with the 20%+ raw material cost saving materializing from Q2 FY24 onwards.

Sushil Kumar Aggarwal: "It is like saying we have boarded the bullet train and is catching acceleration and when it will catch speed then we don't even have to even tell it will starts automatically so sometimes what happens is man proposes God disposes."

Demand Environment & Pricing Pressure

• Muted consumer spending: GDP growth was only 5.1% for the quarter, and peak-season (April–June) off-take was running at 70% when it should be 150%, indicating a subdued market.
• Discounting to survive: The company had to roll out deep discounts, incentives, and benefits to distributors and dealers to move goods, because fixed costs like salaries and interest had to be covered.
• Operational loss excluding other income: The gap between revenue and expenses stood at approximately ₹31 lakhs, driven by the discounting push and expenses from setting up the recycling operation, as noted by an analyst.
• Geographic expansion as a countermeasure: The company added a couple more states in Eastern and Southern India to its distribution basket, aiming to deploy production capacity that exceeds demand in existing markets.

The Recycling Strategy & Capacity Ambition

• Why post-consumer plastic: The shift was driven by extreme volatility in virgin polymer prices (ranging from ₹80 to ₹150, now in the ₹90–96 range), which was draining profits. Post-consumer plastic carries no such supply-chain volatility.
• Capacity scale-up plan: Management intends to raise recycling capacity every quarter, targeting 1,000 metric tons per month by FY24 and approximately 2,500 metric tons per month over the next two years.
• Self-consumption first: For at least the next 6–8 months, 100% of recycled output will be consumed internally, with no material available for outside sale. Furniture capacity will also expand from 8,000 to 12,000 metric tons, with 70% of recycled output self-consumed.
• Multi-location replication: The company has identified 4–5 locations across South, West, East, and Central India for future recycling plants, but will proceed only once the current plant demonstrates its ability to sell and showcase output.
• EPR credit opportunity: Management is in discussion with large corporates to monetize Extended Producer Responsibility credits, an opportunity that could add ₹4 crores per annum at scale, though it has not yet been monetized.

Sushil Kumar Aggarwal: "I will become predatory in my pricing when it comes to the final product because I will be cheaper."

New Income Stream: Polymer Trading

• A surprise contributor: The company started buying and selling recycled plastic in the market this quarter, generating other income of ₹1.5 crores, compared to just ₹3–5 lakhs in previous quarters.
• Opportunistic by nature: The activity depends on mark-up opportunities arising from import price volatility and the company's stocking ability, and management indicated it is likely to continue on a need basis over time.

Competitive Positioning & Product Strategy

• Integrated process claim: Management stated the company is the only one in the Indian furniture industry with an integrated process system spanning post-consumer plastic to final product, serving both B2B and B2C channels.
• 3-year guarantee as a moat: The company offers a 3-year guarantee on products for breakage and color distortion at no additional cost, a differentiator management emphasized heavily.
• SKU expansion underway: More than 15–20 new product SKUs will be added in the next two months, part of a continuous process of adding and removing obsolete products.
• Omnichannel presence: The company operates on online platforms (Flipkart, Amazon, Jio, Meesho) and in hypermarkets (Metro, SPAR, LOTS), though management could not provide a bifurcation of online versus offline sales when asked.

Sushil Kumar Aggarwal: "If today I give you bad product then suddenly we will vanish from the market overnight. So, Vishnuji this is a balancing act like on the pole…."

Financial Position & Funding

• Low leverage provides headroom: Long-term debt stands at less than ₹2 crores, with a machine loan of ₹1.75 crores, giving the company room to leverage for CAPEX if needed. Internal accruals and potential investor capital are also options.
• Facility expansion in progress: An additional 30,000 square feet is being added to the recycling facility, doubling its initial footprint of 30,000 square feet.

Sushil Kumar Aggarwal: "Sometimes it feels so weird that how much money has been deployed, have invested crores of rupees and still return is not coming, results are not coming, then the person thinks why such frustration is happening, why the hell it is happening, but actually it is a part of the life."

Guidance & Commitments

Key Metrics