Nuvoco Vistas Corporation Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Costs peaked, relief promised from Q3: Power and fuel cost hit a record ₹1,370/tonne, up 55% YoY, but management called the top, citing lower contracted fuel prices that flow through from October.
• Revenue up 20% YoY, but QoQ volume dropped 15%: Top-line growth was price-led and demand-driven in East and North, though the seasonal monsoon quarter and inflationary pressure softened volumes sequentially.
• Freight disruption masked an otherwise tight ship: A severe railway rake shortage forced clinker onto roads, spiking distribution cost 10% QoQ; the issue resolved from July 1, and the underlying SPRINT cost-save program remains on track.
• Growth ambition overrides rapid deleveraging: Management is comfortable running with ₹3,500–₹4,000 crore of debt and will direct surplus cash to expansion, targeting technical debt-free status only by 2026.
• What to watch next quarter: Whether the promised substantial fuel cost decline materializes in Q3, the pace of demand recovery post-monsoon, and any firm commitment on the next greenfield expansion.

Cost Structure: The Fuel Peak and the Freight Shock

• Power and fuel hit an all-time high: Blended cost rose to ₹1,370/tonne in Q1 FY23 from ₹885 in Q1 FY22, driven by expensive imported pet coke at $250–$260/tonne and a forced shift in the fuel mix after linkage coal availability halved.
• Linkage coal shortfall forced a dirty mix: Linkage share fell from 26% to 16% YoY, pushing pet coke consumption from 20% to 53% of the fuel mix; imported coal dropped from 25% to just 2%.
• Freight cost spiked on a railway bottleneck: Indian Railways diverted wagons to coal transport for power plants, cutting Nuvoco’s clinker rack availability from 3.5–4 racks/day to roughly 2 racks/day, forcing a shift to road transport that raised distribution cost 10% QoQ.
• The rake issue is already behind them: From July 1, rack availability normalized and no clinker has moved by road since; semi-finished clinker freight rates returned to the normative ₹250–₹260/tonne.
• SPRINT savings are the internal offset: The cost-save program delivered ₹150/tonne in FY22 and targets an additional ₹100/tonne in FY23, with levers in waste heat recovery, linkage coal use from Q3, composite cement, and premium products.

J. Krishnaswamy: “We are at the peak of coal fuel prices right now. So, we have reached almost the tip of the iceberg.”

Fuel Cost Trajectory: The Q3 Relief Bet

• Q2 will stay painful, then costs should fall: High-cost inventory held until end-September means Q2 FY23 power and fuel cost will likely remain at peak levels; management expects a substantial decline from Q3 (October) onwards as lower contracted prices feed through.
• New fuel contracts are materially cheaper: The company is now contracting pet coke at $170–$180/tonne and coal at roughly $220/tonne, well below the prices embedded in current inventory.
• Linkage coal supply should normalize post-monsoon: Formal linkages are now secured for all captive power plants in the East (Risda, Sonadih, Arasmeta, Jojobera), and the quota is expected to flow when the company enters October.
• Management declined to quantify the Q2 cost step-up: When asked for a specific percentage increase in power cost for Q2 FY23, management called it “giving a guidance” and said it would update as the quarter progresses.

J. Krishnaswamy: “We are at a peak level of fuel prices for our Company... We are contracting coal at a much lower price... So, I guess from Q3 October onwards, the fuel prices will come down substantially from the current trending fuel price.”

Demand and Pricing: Growth with Softening Edges

• Demand grew double-digit in core markets: Eastern region (80% of footprint) saw double-digit YoY growth, and the North grew roughly 15–16%, supported by infrastructure projects, PMAY, and real estate.
• Prices rolled back after an April hike: Price increases taken in late Q4 FY22 and April held early in the quarter, but partial rollbacks in May and June, and a further ₹5/bag drop in July exit prices in both East and North, left net realizations insufficient to offset energy costs.
• Near-term outlook is seasonally soft: Demand is expected to dampen in the monsoon quarter before regaining momentum post-monsoon; prices in both regions softened in July and are expected to remain under pressure.
• Full-year demand view stays positive: Eastern region cement demand is expected to grow double-digit for the full year, with Q3 set for exponential YoY growth because Q3 FY22 was badly impacted.
• Premium product share inched up: Premium products reached 34% of trade volume, up 1.6% points YoY but flat QoQ; trade share stood at 72%.

Balance Sheet and Capital Allocation: Growth First, Debt Later

• Net debt rose on working capital: Net debt increased to ₹5,347 crore, driven by higher working capital requirements amid the steep rise in fuel prices and the seasonal nature of the business.
• Debt repayment path is laid out: Of the ₹600 crore net repayment planned for FY23, ₹130 crore was repaid in Q1; the balance will be repaid over the remaining part of the year, with roughly ₹1,100 crore net repayment targeted for FY24.
• Technical debt-free by 2026, but not debt-averse: Management aims to be technically debt-free by 2026 under the current business model, yet is comfortable operating with ₹3,500–₹4,000 crore of debt and will invest surplus cash in growth.
• No asset monetization on the table: Management explicitly ruled out plans for asset divestitures or land monetization, stating confidence in the business model despite industry cost pressures.
• Covenant risk is dismissed: The company is well within current covenants and sees no apprehension or risk in meeting any covenants going forward.

J. Krishnaswamy: “Retiring debt is not the ambition for the Company, growth is ambition for the Company and hence I mentioned we would be okay to run this Company with a 3500 to 4000 crore debt and the rest of the cash which we generate would like to invest on growth for the Company.”

Capacity Expansion: Brownfield Now, Greenfield Later

• Near-term capex is fully brownfield: Short-term projects, including 1,000 TPD clinker debottlenecking at Nimbol and Risda, a 0.12 crore tonnes grinding unit at Bhiwani, and railway sidings, are all expected to be commissioned by September next year.
• North capacity is scaling without major capex: The Bhiwani grinding unit and Nimbol debottlenecking will lift North capacity to roughly 0.5–0.6 crore tonnes in 12–15 months, with an additional ~0.2 crore tonnes of cement available for sale in the North over 2–2.5 years without further major investment.
• Greenfield expansion is pushed out: Management confirmed that no greenfield site, including Gulbarga (Karnataka), will break ground within the next 12 months; a decision on whether to prioritize North or West expansion will be made in coming quarters based on government approvals.
• Eastern region utilization should stay high: Even with roughly 1 crore tonnes of clinker capacity being added by the industry in the coming two to three years, management expects clinker utilization to remain at 85–90% because demand growth of ~0.8 crore tonnes/year will absorb the new supply.
• FY23 capex is modest: Total capex planned at ₹500–₹600 crore, of which roughly ₹150 crore is maintenance.

J. Krishnaswamy: “In the next 12 months we will not be able to start Gulbarga or any Greenfield site.”

Operational Levers: Mix, Efficiency, and Alternate Fuels

• Composite cement and slag are margin tools: Raw material cost per tonne was flat YoY and declined 14% QoQ despite inflationary pressure, helped by higher slag consumption as composite cement volumes ramped up; slag prices are benign at ₹1,200–₹1,300/tonne versus ₹1,700–₹1,800 a year ago.
• Waste heat recovery hit a record: The company benefited from its highest ever power generation through WHR systems during the quarter.
• Alternate fuel usage is climbing slowly: Alternate fuel share in the overall fuel mix improved to 6% in Q1 FY23 from 3% a year ago; investments in handling facilities at Risda and Nimbol are progressing.
• North now has a two-brand strategy: The Double Bull brand was launched in the North, joining Duraguard to give the company two brands in that market.
• Value-added mix is steady: Value-added products and Ready Mix as a percentage of total sales improved to 28%.

Guidance & Commitments

Key Metrics