Apar Industries Limited analyst Q&A

Thank you. We will now begin the question-and-answer session. The first question comes from the line of Nitin Arora with Axis Mutual Fund.

Hi. Thanks for taking my questions.

I’m sorry to interrupt, Nitin. You are not quite audible.

Am I audible?

Yes, now it's much better. Please go ahead.

All right. Thank you for taking my question, sir. Just on your outlook on U.S. market. I remember a few calls back, you also talked about the data center opportunity which you were seeing. You mentioned Microsoft and everyone as well. How big is these opportunities are becoming for you? Because given such tariff challenging yield , you're still able to deliver such high profitability on the conductor side despite U.S. being down for us. So going in FY27-FY28, how this U.S. opportunity looks like to you because you're increasing again the capex, which looks like a very high visibility you are seeing? So just your take first on a little detailed way on the U.S. capex.

So Nitin, the U.S. market, we are seeing actually a very st rong traction in the U.S. market. It is being clearly led by the data center opportunity there. All the major public companies, data is already available from the numbers that they have given, from the Q1 earnings call that the Metas and the Amazons, Googl es of the world have already had. So we have already taken positive steps in this direction. We've supplied to 3 major data center projects so far in the U.S. The total of cables that have gone in there is in the range of about $15 million. And with this, we are now slowly getting more and more access and RFQs which we are being asked to bid upon. So we see the cable side on the data center growing and being a larger opportunity for APAR as time passes by. We have also made certain capex provisions for adding specific capacity to produce the data center cables which are required in the U.S. that are of a significantly higher specification than the data center tables that are going into India. On the conductor side, we have had extensive discussions with various utilities there, both public utilities and the IOUs. And from whatever we see of the amount of capital that they are allocating to improve their transmission line capacities and moderniz ation of the grid, we see that this business will only continue to increase year-on-year. So we are seeing fairly strong signal and visibility across the board in the U.S. What has helped is that it is a tariff situation. Even though there are tariffs, it has settled down. And this is also helpful in terms of customers having to take decisions. Last year was a very difficult period, and in spite of that, we grew because the end customer, the moment they have had an import ed product from India, they were not clear what the landed cost will be, which really affects their decision-making. And as a consequence, that had an effect in terms of where we stood. That, I think, is today something that is much more settled. And so you will see in FY27, a larger APAR presence in terms of sales in the U.S.

Okay. And when you announced this capex, is it something that these hyperscalers are trying to block…?

You're still not audible. Could you please use your phone on the handset mode?

Am I audible now?

No, not really.

Yes, we can hear. Yes. Go ahead, Nitin.

No, I think, Nitin, the line is totally garbled right now. Hello?

Yes. Am I audible?

Yes, yes, now. Please go ahead.

Yes. So I'm asking on this capex, which we have announced and upsized again. Is it like coming more from the U.S. data center hyperscaler side, where they are trying to block your capacity the way they are doing for all the vendors around the world? Or is it a mix of both India capex and U.S. capex altogether?

So it's looking at all the opportunities. If you will see that even as I mentioned earlier that even in India, the data center expansion is there. There is also an expansion happening on solar and wind in India. There is a significant increase in solar capacity that we are seeing getting lined up in the U.S. as well. So the U.S. is being led by data centers. But unlike in the case of fiber and some of the other things that are going directly and blocking capacit ies here, these are largely projects which are awarded to EPC players. And then EPC players in turn go into the market and start picking up or ordering the business. The capex increase we are seeing is fundamentally overall demand growing with the U.S. being one market where we see significant growth besides India. So these are the two markets which APAR is really focusing on.

Just last question, sir, on the profitability. Even if U.S. increases next year in exposure and you're already able to do 44,000 in conductor for the whole year, how one should think about profitability of the conductor business next year?

So Nitin, we typically give guidance for medium to long -term perspective as we have always been doing consistently in the past. And based on the historical EBITDA margin that we have made, we expect that from a medium to long-term perspective, our conductor margins could be in the range of INR35,000 to INR36,000 per metric ton. And this has been resulting because of the impact of high premium products, the reconducting opportunity as well as the copper mix that is going up. So in line with that, we expect this margin to be high. Also to note is that with the increase in the metal prices, you will see higher interest costs also coming in because the metal price is going up. So as we are looking at EBITDA, which is earnings before interest, so to that extent, our interest cost, the EBITDA will also grow. And of course, these are, of course, excluding the tailwinds. We always talk about EBITDA plus tailwind. So it's in the range of INR35,000 to INR36,000 per metric ton plus the tailwinds coming our way.

See, one thing, Nitin, I'll add to this is that there is still -- whether it's the U.S. or whether it's India, there is a short-term slowdown in ordering because especially with aluminum, aluminum moves along with the cost of energy. And because of this wh ole war -related problem, as I mentioned in my opening remarks, there is very sharp increase in the price of aluminum. There is a premium increase. So if you look at the MJP, which is a mean premium of Japan, that also has increased. And the freight costs have increased everywhere. In the U.S., they are at all -time high, prices of diesel, gasoline and everything. So there is a small -- meaning I expect a short -term slowdown. But the kind of budgets which are being allocated, and these are being allocated right from the big data center companies, the budgets which are getting approved in the Board meetings of these big utilities is showing a very strong picture going forward. You may not be able to place things like what you are asking in the exact buckets, Nitin, because of the uncertainty in the current environment. But the makings of an allocation, very serious allocations from all these different players, that will drive the market in the future. And that's one of the reasons why we have committed to a larger capex because given that the current scenario, the capex cycle also is significantly longer than what it was 2 to 3 years ago. From the time you order equipment from a top equipment suppliers at the time, you get the equipment coming in and the installation takes place. That cycle has got dragged out. So I hope that answers your question. Hello?

So the participant has dropped so we'll move to the next participant. That would be Umesh Raut with Nomura Holdings. Please go ahead.

Hi, sir. Good evening. And congrats for a strong set of numbers in cable and conductor division. My first question is pertaining to our current capacity utilization in these 3 divisions and, at the same time, if you can give us a further detailed breakup of INR1,500 crores of capex that you are planning for FY27.

Yes. So on the conductor division, our capacity utilization currently will be about 90% to 95%. And similarly, for cables, it could be close to about 85% to 90%. Oil division, as the operation are not so capital intensive, we would have enough capacity because it would be in the range of 65% to 70% capacity.

Lubricants is higher at the moment. Lubricant capacity is running at almost 85% to 90% for the small can and the bucket filling because as you've seen, there's been a substantial growth in the last year. And the company is making some further investments a s part of this capex to debottleneck that.

Anything else you wanted, Umesh?

Yes. A breakup of INR1,500 crores of capex that you are planning for FY27.

Around INR400 crores would be coming from conductor division, around INR200-odd crores on oil division, and cable would be in the range of INR850 crores.

Okay. Got it. My second question is pertaining to domestic market. Now that a lot of these large HVDC projects are entering into execution mode, so just wanted to know whether the material awarding for these projects are already being done or it is expecte d to come up in FY27. And second, any kind of delay in tender finalization that you've seen in domestic market for transmission lines?

So the answer to the first question is no. These HVDC projects have just been awarded. So both conductor and the oil will come significantly later. Fortunately, the 2 main players in this -- or rather, the 3 main players in this are Hitachi Energy, your GE and Siemens. And APAR is the principal and only supplier to all of these 3 companies so far in terms of the HVDC transformer oil. So none of these orders have started getting awarded. I think the business will run through FY27, FY28 also in terms of the awards taking place. Second question you had, Umesh?

Regarding current tendering pipeline in terms of finalization, how it is happening, whether you are seeing any delays because of inflationary pressures, where earlier probable estimates for transmission lines could be different now given that copper and al uminum have both seen significant inflation. Any kind of revision to that as it will take approval times. So any kind of delays that you can anticipate in first half FY27 in domestic market?

So we've seen effect of both. In some cases where we already have the orders and where the customer needs to actually block the metal, they have been delaying the delivery of those supplies. Also, there is some amount of postponement that is happening because the factor is not just metal. Manpower is a big problem in India at the moment, especially with Bihar -- with the West Bengal elections and the elections in the Northeast. A lot of the workforce at project sites come from those areas and those jurisdictions. So there has been a little bit of a slowdown that's coming from these things. But our sense is that the time should pass and you will have a pickup. If you see last year, the second half of the year had a tremendous execution intensity compared to the first half. So maybe a similar sort of phenomenon may come up in this year. But short term, as I mentioned, they definitely are all these moving parts which have resulted in higher costs, and people are postponing decisions and deliveries wherever they can, even on all the fiber optic OPGW, all that because the fiber costs have go ne up 3x and 4x what they were compared to about a year ago.

Understood. My last question is pertaining to data center. Now three parts to this question. One, any rough idea about how much of value of cable supply that you can give to 1 megawatt or 1 gigawatt of data infrastructure, suppose, in the U.S.? Second, do you see pricing in data center user industry to be relatively far better than the other user industries? And third, any color on potential long -term contracts that you can get on the lines of similarly what we have seen on the fiber side in domestic market from U.S. customers? So any kind of long-term contracts or tying up of capacity that you are now discussing with the large players in U.S. data center market?

So the last question, I can tell you that as far as our wires and cables are concerned, there is no blocking of capacity that we are seeing with not only as per any of the major players around the world. Because the way it runs is that is then placed on an EPC contractor. EPC contractor then places it on to an electrical contractor who then does the contracting. First question, the data center is very, very dramatically. So if you see the kind of spec that runs in India is totally different than what runs in the U.S. Also, the spec that runs in a data center, which is a general data center versus an AI data center, is also vastly different. And the third thing is that we are seeing that the bill of materials is also evolving as NVIDIA's new chips are being utilized and things like that, the electrical requirements are also starting to change. But to give you an idea, a medium-sized data center that you would supply in the U.S. would be taking about $10 million to $12 million worth of cables -- of just the medium voltage cable. And you would probably have something equivalent in terms of the other low voltage cables in this. About $25 million, $30 million for a medium-sized data center in the U.S. Over here in India, you are looking at about INR2 crores worth of cables for a 50-megawatt kind of facility. Yes, 50 megawatts. Correct. So if it's 100 megawatts, it would be about INR5 crores to INR6 crores, like that.

Okay. Got it. Sir, last question. I mean, I know that you are guiding for INR35,000 to INR36,000 of EBITDA per ton on its conductor side. But if I look at our pending order backlog where export mix is relatively higher at about 39%, while we did about 21% export sales in conductor in last year, and probably I think there is also a higher room t o supply to U.S. because this especially in last year was weak. So considering all these things, it looks like you can report probably improvement on last year's EBITDA per ton number, put it at about INR43,000. So any color over here?

So that's what we always indicate, INR35,000 to INR36,000 plus tailwinds. And as you can see, the order book is not representing the entire requirement for the year. Also, there will be some order books -- part of some order book that could spill over to the next financial year. And as we indicated earlier, these are like our medium to long -term guidance. We don't give the guidance for next year. So we have been increasing our guidance historically. It used to be about INR8,000 to INR10,000. And from there, gradually that has gone up now to INR35,000 to INR36,000, which even the earlier quarter was about INR30,000. So as and when we see more visibility, we would take the call on that. But for now, we feel that on a medium to long -term basis, our margins could be in the range of INR35,000 to INR36,000 plus tailwinds.

Okay, sir. Thank you so much and all the very best.

The next question comes from the line of Mohit Kumar with ICICI Securities. Please go ahead.

Good afternoon and thanks for the opportunity. So my first question is can you just help us with your dependence on the Middle East for Specialty Oils business in terms of sourcing and sales?

Okay. So in terms of sourcing, the refinery that we source a reasonable amount of quantity and have a long-term contract with is Saudi Aramco base oil refinery in Yanbu. So that refinery at the moment is still running. It hasn't shut down at all through the entire period. And they have been shipping product out of there. It's one of the refineries that has actually met every quarter's requirement including in the month of April and now in the month of May. So from a sourcing standpoint, there is not a major impact from the refinery in the Middle East. On the contrary, what has happened is that Saudi Aramco other subsidiary, S -Oil, which is our largest supplier, and Formosa, which is out of Taiwan and many of the other refineries, they had a major shock in the month of April, where the raw materials which are on the way to the refinery got stranded. So that's the reason why in the month of April, all these issues have taken place. By the time, we came into the month of May. Alternate arrangements have been made as well as Saudi have started lowering large amount of quantities from Yanbu. So out of the 9 million to 10 million barrels that they were loading previously from Ras Tanura, that has been substituted with about 7 million barrels from Yanbu itself. So there has been a bit of a substitution that has come in. On the sales side, our transformer oil, we have a very strong supply going into Saudi Arabia and Kuwait, and both of those had been affected. There were no shipments that went to these geographies in March. Nothing went in the month of April. However, in May, we have made shipments after getting the increased freight costs, etcetera, from these refineries. So I would still see -- and these are suppliers that have gone into projects which are at very advanced stage, where commissioning of the tr ansformers and all that was coming up. So I see that the Middle East business will continue to remain a little bit subdued until this war gets completed. There's also an impact in the Conductor division where we have certain contracts with Iraq and some of these places, where the deliveries wil l get pushed out until there's a resolution over here.

Understood.

Does that answer your question?

Yes, it did. My second question, can you help us the growth outlook in premium conductors in domestic markets and compare the inquiry pipeline with the last year. I'm specifically talking about AL59, HTLS, overhead, CTC conductors and copper plates. Yes.

Generally, we see a good growth prospect in this year. There was a little bit of holding back of tenders last year. This year, we expect more tenders to be finalized. And accordingly, the supplies will be more forthcoming. And with regard to CTC also, there has been good growth in the transformer segment. While there has been overall more supply also because of the expansions which have come through for us as well as competitors, but overall market is growing. So we see that as a positive.

So Mohit, as you see, as I mentioned in my opening remarks, 45.8% is the mix that we had of premium products. And if you look at that as a percentage of the current order book, it's a little over 50%. So you will see continuing growth happening in these ar eas, I mean, as Chaitanya mentioned.

Understood. Sir, last question. Is it possible to sell the CTC conductor export markets? And where are we in terms of getting those approvals?

So there is absolutely a possibility of exporting it. So far, we had really not exported products because there was a major deficit in the domestic market. And to tell you honestly, given the deep relationship that APAR has had on the transformer oil side with all the major power transformer manufacturers across the country who are the main users of the CTC, so obviously, there was a lot of pressure to supply them as well. Now having gone through 5 phases of expansion within APAR, we are now in a position to start exporting the product. Initially, we have got approvals from Middle East manufacturers and has started exporting to them. We are now working towards getting approvals in Europe and the United States as well. So as you see, as we look at FY27 and FY28, we will want to broad base ourselves and look at exports. Europe is definitely something which is an attractive market. In the case of the U.S., there is a tariff that the India CTC faces compared to a product that's manufactured locally in the U.S. But we are in the process of exploring this because I don't think there's sufficient CTC manufactured in the U.S. by itself.

We'll see that as a higher percentage going forward.

Thank you, sir. Thank you.

Okay.

Thank you. The next question comes from the line of Amit Anwani with PL Capital. Please go ahead.

Hi, sir. Thank you for the opportunity. Sir, first question on the Cables capex, which you said probably about INR850 crores capex, which we have envisaged for this year also. With earlier capexes, we were probably trying for roughly about INR10,000 crores revenue. So any change in terms of the volumes we want to achieve after this round of capex? As you said, you're frontloading the capex for the future years. So what's the kind of long-term outlook?

Capex is working towards getting to that INR10,000 crores. We have already spent about INR400 crores in FY26. And if you look at all the carry -forward projects which we have into FY27, that's about INR850 crores. So the total spending has actually increased by almost about INR400 crores compared to what we had planned earlier. And most of this is going into -- there's a certain set going into expansion of medium -voltage cables, both XLP as well as rubber-based, that go into data centers going into general expansions for utilities, industries, all of that. There is a capacity increase for what we produce for the wind sector. There's a capacity increase of what we produce for solar. There's also a capacity increase for what we produce for the railways and defence. So it's quite a broad-based. And we are seeing -- this is a capex towards that INR10,000 crores. We're pulling it forward a little bit. We would have staged it out -- instead of spending INR1,200 crores in 2 years, we would have otherwise spent INR800 crores in 2 years and then INR400 crores in the third year, were trying to actually pull it forward.

Right, right. Sir, is the capacity kind of fungible? Since it's a data center, there would be different specs in India and also in exports and your building capabilities there. So is the current capacity fungible there? And second, like what kind of expectations we have in terms of data center kind of contribution going forward since you're building this capacity for that also? And second, on margin, we have about 10.2%. How these margins can move? Because you also talked about some competition in the domestic market and players are actually setting up their own setups for this. So on these two aspects, yes, that's the question.

Okay. In terms of fungibility, the machineries are capable of producing a different specification of products. So the U.S. has a combination of XLP, but largely rubber-based for the data center. So that's one of the reasons why we have added a capacity expansion to produce a much larger quantity of these medium voltage EPR or polymer -based cables. So as expansion happens, the fungibility is going to remain reasonably high. Second thing is you're talking about the competition coming in. Yes, there is a competition coming in. You heard some very big names. After Ultra Tech disrupted the paints market, now they are investing and wanting to launch basically wires. We see our strength really in cables and especially in the specialty cables for all the segments that I mentioned to you. I don't think either the current plan or the immediate launch that UltraTech is going to do -- the Aditya Birla Group is going to do is going to affect these high-value products. I think their focus is much more on the building wire s and the building segment. Similarly, the Adani Group also seems to be focused more on the wires and the LDC or the light-duty cables, which go through the distribution network. But we feel there is a very large access that's available in the market both in India as well as overseas, and we are continuing to look at growing irrespective of what happens with respect to some of these players. There could be increased competition. To some extent, you may lose a percentage or so in EBITDA here or there. But the overall size of the pie will continue to grow.

Right. And sir, on Conductors, how the premium product volumes would have grown this year? And what's the outlook for next year in terms of the overall volume growth in Conductor and especially the premium product volumes growth in Conductors?

Overall figures, we are continuing to look at a 10% growth year-on-year on our Conductor side by volume. We are looking -- continuing to look at growing by 25% a year in our cable side of the business as well. So all these expansions are all in line with that. We needed a 25% CAGR to be able to get INR10,000 crores in that 5-year time frame when we launched the program. So we are very much on track, in fact, maybe slightly ahead.

Right. So premium conductor, how would have been the volume growth?

So premium conductors, as I mentioned, as a percentage...

45% is for the year.

45.8%, so almost 46% for the year.

Right. Lastly, on the U.S. sales . How was the U.S. sales for this year? And then what are the expectations you're building in for FY27 in terms of U.S. sales?

So last year was, obviously, year-end was very badly affected because of that 20% premium that India had to pay or a penalty because of the Russian oil purchase angle. Currently, the duty structures have got rationalized. The total duty that you pay on Indian product is 25% for both copper as well as aluminum cables because it falls under the Section 232. So the pricing is at that level. We feel that our business will go up in FY27. It will further go up in FY28 because we are spending a lot of time in getting approvals there and started getting from a much wider range of customers initial orders. So you'll see significant growth over the previous year in the U.S. market on the cable side. Similarly, we see that the conductor side also will be higher than what we have seen in last year's numbers. The short -term factors are not looking good because of higher freight costs and the product cost itself being high. As I mentioned a couple of times on the call so far, everybody in the world is pushing out decisions to the extent that they can because the moment the war gets over and energy costs come down, you will automatically see an impact happening, especially on aluminum.

Understood, sir. Thank you, sir. Thank you so much.

Thank you. The next question comes from the line of Amitoj Singh with 360 ONE Capital. Please go ahead.

Yes. Thank you so much sir for taking the question. My first question was on the U.S. tariff scenario. Recently, the US has changed their Section 232 tariffs. There is a flat tariff for 50% of conductors and 25% on cables. So how do we see the pipeline evolving due to these tariffs? Is it beneficial for APAR? And how has the customer reaction been? That's first question.

So what actually it has done under 232 is with whatever rationalization has been done. It seems like that now this is here to stay for a while. So the uncertainty which was really the big problem that existed in the last financial year, that problem is now -- at least visibility is there. You can do a proper computation in terms of what the landed cost will be. So in that sense, it is positive. I guess India is still continuing to have discussions with the U.S. government, and I don't know whether there could be reduced tariffs coming in. But otherwise, in the meantime, whatever plans and whatever I'm discussing is considering the current tariffs under Section 232. And we see that with tariffs, we will grow significantly in FY27 over FY26 as far as the U.S. market is concerned.

Yes. Please bear in mind, even an American producer will incur the duty on the aluminum.

Exactly, of 50%. And the U.S. imports close to 90% of its aluminum, whereas it imports less than 5% of its copper. So the impact on exporting products to the U.S., which are aluminum - based products is not as high as a barrier which exists when you export copper-based products.

Makes sense. And we export largely aluminum to the U.S. That is fair. Okay.

Yes.

Makes sense. Yes. And sir, second question was on the competitive intensity in the domestic market. There is -- I think there's private player who has -- who is almost coming up with their carbon score technology for conductors and is, I think, close to getting a PGCIL approval. So any comments on that or any R&D that we are doing apart from our HTLS segment that would negate that effect? Just your comments on that, sir.

See, even earlier on, actually, but in all these tenders with power grid and others, there is a requirement to have past performance successfully. So if the parties who are coming up new,