Noida-based room air conditioner maker EPack Durables announced its first quarterly earnings after its listing on January 30 where the company reported a net profit of Rs 4.9 crore for the December ended quarter versus net losses in Q3FY23 and Q2FY24. The consolidated revenue was up 1% year-on-year at Rs 279 crore. However, the stock is trading at a 17% discount over the issue price after a lackluster listing. In an exclusive chat with ETMarkets, company’s MD & CEO Ajay Singhania speaks about the Q3 performance, company’s falling debts, IPO proceeds and stock’s performance. Edited excerpts: Congratulations on a strong December quarter earning. The company turned the table from a position of net loss on the YoY and QoQ basis to profits in Q3. What triggered this turnaround?
Ajay Singhania: A couple of things here — One that Q1FY24 was disrupted because of the untimely rains in north India and air conditioner brands postponed their new buying by 35-40 days from the period which traditionally starts from December. This resulted in the 15-20% QoQ degrowth for the air conditioning industry and our own degrowth was almost 10-12%. So the 9-month ended period was flat because in Q3 there was no surge in new manufacturing.

Recovery started in Q2 and in Q3 as brands liquidated what they were holding from Q1 and Q2 and in Q3 the liquidation of inventory was more significant. What looks like a flat revenue in Q3 is actually a recovery where 9 months of sales in the current financial year has matched 12 months of sales in the previous FY.

As for the turnaround, it has mainly come from the backward integration we have done. We invested heavily in the last two years in FY21 and FY22 and those investments have started delivering results in 2023.

Company’s revenues shot up sharply on a QoQ basis amid clearing of the inventory. Will the company be able to replicate the show in Q4 and over the next few quarters?
Ajay Singhania: New buying has picked-up from the second week of January and we are entering the season with the lowest level of inventories. We expect pent-up demand over the coming six months. We are booking more orders and are definitely seeing an uptick in demand which means that Q4 as compared to last quarter will be positive.

However because of this shift in demand by 30 to 45 days, we see that some of it is getting shifted to Q1 of next financial year and probably in April-June, we would see a demand surge.

At the same time, as we all know, certain larger brands have also started doing in-house manufacturing, so there is some shift in the overall mix of customers for us. So, definitely when our large customers in the South have started their own facility, that business has shifted. But we have been able to bridge that gap by adding new customers so that is even a very significant achievement for us.

Moreover, we have increased our capacity to the tune of almost 50% for this coming quarter as compared to the last financial year through our Sri City facility in Andhra Pradesh which means that we should be able to make at least 50% extra revenue on a quarter-on-quarter basis. Though, the capacities currently created are for FY24 and FY25 as a whole and it will be ramped up in a gradual manner. Your debts are coming down consistently. I assume that the company would have used some part of the IPO proceeds towards further retiring of its debts. Can you tell how much of it has been used and where would the debts tentatively stand at the end of Q4?
Ajay Singhania: First thing is the December quarter result and there has been a significant improvement on the debt front without using any of the proceeds. The IPO came in January and the money came to us on January 30. We have been able to reduce our working capital days from 90 to 51 and just to give you some numbers, we have almost generated a free cash flow of Rs 200+ crores in the nine months. We were always aware of the fact that we need to improve and rationalise our working capital. There were certain lapses earlier, may be on inventory front, creditors or debtors. So effort has been in all the three directions.

Now with the IPO money coming in, we already made a commitment that 80 crores will be used to retire the long term debt, which has been used to pare-off some of our debt. We had close to Rs 170 odd crore of long-term debt and out of this Rs 80 crore has been retired. The long-term debt is now close to Rs 85-90 crores.

What kind of room AC demand are you expecting in the upcoming season and how are you preparing for the same?
Ajay Singhania: The industry is destined to grow anywhere 20%+ for the current financial year, helped by a lot of smaller brands which are growing in a faster manner. At this point-in-time, it is difficult to estimate the growth of the industry over a slightly longer term horizon because of the additional capacities being put up by 3-4 major brands. Yeah, so there’s a lot of dust right now.

We are also aligning our strategy whether we should focus more on the CBU (Completely Built-Up Unit) business or also on the component business. We have been able to generate some opportunities on the component side at both the facilities in Dehradun and Bhiwadi and in the new facility in Sri City. So we see good traction if the brands put up their own capacity. At the same time, all the overflow and the pent-up demands will definitely keep flowing to us in terms of the CBU requirement.

In your analyst call you said that the company is eligible for Rs 30 crore PLI. Does that include PLI benefits from your Rajasthan unit once that starts coming-in? Also what kind of sales will the company have to make to avail the entire Rs 30 crore quota?
Ajay Singhania: PLI is an incentive from the central government and as far as the Rajasthan unit is concerned, there is a TLI (turnover linked incentive) scheme which the state government of Rajasthan runs and we have applied for the entitlement certificate and we still have to get it. TLI will be 1.8-2% of the overall turnover done in a particular year.

For PLI, we made a commitment that within 5 years, we will make an investment of Rs 300 crores in plant and machinery. And on incremental investment every year, we are supposed to deliver an incremental revenue. So, for last year, the PLI benefit was Rs 15 crores. For the current financial year, it is supposed to be Rs 30 crores and Rs 45 crores for next year and so on for a five-year window. By investing 300 crores, we will get somewhere between Rs 220-230 crores as an incentive from the central government.

For this year, we are eligible for Rs 30 crores out of which 10 crores has already been accounted for, in our balance sheet for the nine-month ended period. Because quarter four is the heaviest quarter wherein the maximum amount of sales happens, so we have linked it to the incremental sale which we are achieving QoQ and accounting it accordingly.

How do you see commodity prices playing up going ahead?
Ajay Singhania: As of now, no disruption is visible as China is not growing at a very fast rate. Also, the geopolitical situation is not indicating anything untoward at this point-in-time. So things seem to be normal. Over the next three months being election months, we do not see big changes anywhere on the taxation or policy side. And the government will also try to control inflation.

Finally what will you tell your shareholders who invested in the IPO given that the stock is trading at 17% discount over the issue price of Rs 230?
Ajay Singhania: I would like to convey to the shareholders that we are a long-term player and have been in the industry for the past 20 years, manufacturing air conditioners as a complete design product. Our strength is that we are a design-led company and certain disruptions happening in the market in the form of capacity addition or shift in customers happening are short-term. We have faced such disruptions numerous times and we have always come out of it in a positive way.

Secondly, I definitely see that there is some miscommunication in terms of the PE being calculated by certain people. So, a PE ratio is something which is more on an annualised basis. Especially for the AC industry, all quarters are not the same. So, you cannot actually calculate PE on a quarter-on-quarter basis. The Q4 and Q1 quarters being more important from the industry perspective, the outcome for the overall FY changes significantly. Please be patient. We know which levers to turn when and we will definitely deliver.

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