Hello Sir,

Hope you are doing well.

You might be aware of Granite countertops, but not sure if you are aware of Quartz surfaces. Well, Quartz surfaces are an engineered product and can be made to have any kind of design, including Natural Granite designs.


Recently, we were looking at Pokarna as the stock is down more than 40% from its peak price of 800 in Jan'22. While the stock may/may not have bottomed out, we are intensifying our research so as to make the most of the market correction opportunity and create wealth in the next up cycle.

Pokarna deals in both Granite and Quartz surfaces; however Quartz is now the major driver of sales and profits of the company. The company is the largest exporter of Quartz from India.

Below, we have shared our notes (unedited) from the Q4 FY 22 concall transcript of the company to understand management's views on demand, inflation, expansion, growth potential, etc.


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Pokarna - Q4 FY 22 concall notes

What's driving demand for Quartz - Quartz as a product is definitely one of the best available alternate to many other surfaces, which are used on kitchen countertops. It is also taking away lot of share from solid surface laminates, granite and other natural stones. So quartz being a better product, market being stable, and I think all other economic factors being okay, that seems to be driving the demand.

How is the Granite business looking - I don't foresee any large expansion or growth in the granite business. Presently, if you see, it is basically because the block sales have come down and the reason is that the Chinese buyers are not allowed to come to India. Also because the business has become very competitive, and we have no interest to do business without profits.

Why did margins contract in Q4 FY 22 - Inflation in commodities is happening across all the industries and not specifically to quartz. Polyester resin prices have increased substantially. We’ve seen year on year over 100% increase in the polyester resin prices. Freight has also increased and prices of other raw materials have also increased between 30-100%.

Secondly, also the product mix is also an important factor in the margin determination. So predominantly, I would attribute the product mix and the inflation as primary reasons for the contraction of the margins.

How is the shipping cost impacting the margins - One is on the input, we buy a lot of raw materials from Belgium, Norway and other parts of the world. So what I was buying at EUR 500, the container is now EUR 4,000 a container. So to some extent the raw materials also get impacted because of that shipping cost, which is actually borne by us.

Point number two is that in the past, the way we price it we consider certain shipping costs and give the complete proposal to the customer that okay this is going to be the landed price. Now the shipping prices have gone up substantially, while the selling prices have remained same.

How is the demand from US - We don’t currently see any demand related challenges in the US market. While the stimulus has been rolled back and also the mortgage rates have gone up. We believe that our product positioning and the customer profile is little different and we typically cater to middle to higher income related housing.

US is the largest consuming market in the world. So I don't see any one particular or few particular markets making up for what US wouldn't be able to take. While we engage in different markets, but I'd be honest to say that our eggs are in the US market and we are positive about that market. So I don't have any alternate market ready to absorb what US market wouldn't be absorbing.

US investigation Malaysian Quartz - In case the department views that there has been a circumvention, and Chinese have been trying to sell quartz made in China into US via Malaysia route, then there is a high probability that the US Department of Commerce may determine a circumvention case and applicable duties would come into force. But I think that will take time is what is our assessment at the moment.

Quartz Plant 1 capacity utilization - Old plant is running at optimum utilization. Optimum utilization is a factor which is predominantly influenced by the designs what you make. So considering all those factors, the first plant is already into optimum utilization for a long, long time now.

Old plant typically has medium to higher end products compared to the new plant which largely has basic products.

What's optimum product mix - Typically, if we are able to get 30% to 40% medium and upper grade and 60% even if it is at the lower part of medium to the basic grades, I think that's reasonable optimization.

Quartz Plant 2 capacity utilization - The utilization levels are now around 70% and now we are looking at going beyond that. We have started the process of getting certain medium to high end designs and then eventually we'll have an optimum product mix.

So that is where our focus currently is that focus on capacity utilization to the maximum possible and then start getting into the new products where the realizations are better than what we currently see.

Debt - Our decision is that now we have to keep reducing the debt. Our unit one is already debt free. So debt what you see is basically the new debt of the unit two and some promoters debt, which is still not paid. So, we for sure will be bringing down debt that is our first target now, before we embark on a major expansion.

Expansion - The next expansion need not necessarily be of the magnitude what we did, because we already have certain land, building and other infrastructure in place.

Why is the working capital so stretched - It is stretched because the sales cycle this time, because of the shipping challenge is relatively longer than what it would have been in the normal circumstances.

The payments are due when the bill of lading comes in, or when the material is onboard. When we ship out of certain ports, what happens is like we've seen containers reaching the ICD, but not reaching the port first 60 or 80 days within India itself, because of the blank sailings or non-availability of space. So unless the containers reaches the port, or onboards the ship, we don't get the bill of lading.


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Disclaimer: This is not a recommendation to buy/sell Pokarna. These notes are as announced by the companies on exchanges and only for the purpose of information and education.


Best Regards,

Ekansh Mittal
Research Analyst
Web: https://www.katalystwealth.com/


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