Borosil Renewables Says Capacity Running ‘Flat Out’, Margins Will Improve

Borosil Renewables Ltd. is the only solar glassmaker in India. Add to that some successful fundraising in order to double capacity for the second time in five years, and protection from an anti-dumping duty on its only competition — imports — and that may explain why the share price has risen 320% this year. In fact, the stock has risen around 500% from its 52-week low in March.

BloombergQuint’s Menaka Doshi talks to Pradeep Kheruka, executive chairman and promoter on the lack of competition, pricing power and growth outlook.

Here are some of the key highlights of the conversation:

• The government has emphasised the importance of obtaining solar panels in India in the last two-three years. All schemes require ‘Made in India’ solar panels.
• While it isn’t required for solar glass to be made in India, it still gives impetus to locally manufactured glass and allows Borosil Renewables to service India’s solar sector.
• Taxing and tiresome nature of solar glass manufacturing discourages competition.
• “We’ve been in this over the last 11 years and we’ve whittled down our costs to so much that even though the competition from China is heavily subsidised, we are still able to compete with them.”
• Achieved 28.5% Ebitda in the second quarter of this financial year; it’s likely to grow.
• Last 11 years have been very challenging. The company only turned profitable in 2016.
• “Before that we were just filling in the hole we had dug for ourselves which had all come from dumping by China or Chinese-owned companies.”
• Call for anti-dumping duty on Malaysia was because those companies are owned by Chinese parents who were selling raw material way below global price to enter Indian market.
• Anti-dumping duty allows the competitive landscape in India to sharpen.
• There is a case for others to come in but the technology is not simple, it’s quite specialised.
• “The R&D is done on the fly. When we need something done, we go out and do it.”
• Probably have the lowest cost of melting glass, highest rate of production from a single line.
• Borosil Renewables is not the price setter in the market despite having monopoly, due to competition from imports. “The imported glass is the price setter in the market. The capacity abroad is 40 times our capacity.”
• Anti-dumping duty only evens the playing field a bit.
• “We’re now producing flat out. It’s now a question of getting the glass out there.”

Edited transcript of the interview.

Given the impetus and the emphasis on solar power for almost five, six years now - how is it that you're the only player in this business?

It's now for the last two or three years, that the government has laid a lot of incentive and a lot of emphasis on obtaining solar panels in India. So, there are a couple of schemes there. One is the SECI Scheme and the other is Kusum Scheme - where all the panels that are to be used in these schemes (projects under them) have to be procured from India, so, they have to be made in India and the solar cells have to be made in India. Now this has given a lot of impetus to us because even though solar glass is not a part of the scheme, in the sense that it is not compulsory to use Indian solar glass, the fact is that if the panel is being made in India, it gives us a very strong chance to attend to the requirements of those panel producers and supply them the glass. Glass is indeed a very critical component of a solar panel. Without the solar glass the panel cannot come into existence. The wafers themselves are very fragile. So therefore, glass is important and we’re happy that we've been able to supply the needs of the Indian solar producers which has been cropping up rapidly in the last three or four years.

This is not a very new story. Last year you close to doubled capacity - from 180 tons per day previously to 450 tons per day. Now you intend to double that further. Clearly others would have spotted this opportunity as well. I'm just surprised that there is no other player in this space.

It's a very taxing and demanding production process, which brings solar glass into the hands of the user. Though there are all the giants in the country that means: Saint Gobain, Guardian, Asahi—everybody's present in the country. They have not yet thought about doing this, I think because it's just very tiresome and it's very demanding in a manner of speaking. A lot of technology goes into this plus we've been in this now for the last 11 years and we have whittled down our costs to so much that even though the competition from China is heavily subsidised, we are still able to compete with them and in the second quarter of this financial year we were able to achieve 28.5% Ebitda, which is quite decent.

The current actual requirement in the country is roughly about 650 tons per day and that you are approximately 40% of that capacity and the rest of it is sourced via imports which is 60% - at least that was the ratio this year. Just under half of those imports come from Malaysia; a small fraction this year came from China, because we have reduced our trade with China. Even though you were the only player and a monopoly in this market, with the exception of imports, you sought an anti-dumping duty on Malaysian imports. So, when you say you are already price competitive, is it enough to be able to compete with imports?

So, your question is fundamentally why is it that nobody else has come in and the answer to that has been that it has been a very challenging journey for us these last 11 years. We've been able to start turning a profit only after 2016 or thereabouts. So, before that we were just filling in the hole that we had dug for ourselves in the ground which had all come because of dumping from China or Chinese owned companies. With Malaysia, for example, the unit is a Chinese unit, it's a lot of related party transactions between China and Malaysia between the Chinese parent and the Malaysian subsidiaries where all the plant and machinery, raw materials and everything comes from China. So, there is no knowing what the actual cost of that is. So, when we go for an anti-dumping duty, we find that they're able to show that they have bought it cheap—the raw materials, so there's no dumping. Now, actually the price at which they have bought is far below the world market. So, this is just a way to enter the Indian market without getting anti-dumping slapped on them.

The reason we sought this countervailing duty on imports from Malaysia is because that's permitted under the WTO. If they're getting an unfair subsidy, then it's only right that we should be able to find a countervailing duty to offset those subsidies. Therefore, that allows the competitive landscape in India to improve and to sharpen. Now with this other players might feel like coming in. For instance, India belongs to nobody so, it is not a private domain that that we own it or that we can do it. Yes, we are good and we are expanding. So, I guess somebody who comes in will factor in everything before he comes in.

You did say this was a difficult product to manufacture. You said it requires a lot of technology and I was listening into your post-earnings call and someone asked you about your R&D budget, and the response was, “A lot of R&D is done on the fly which means while we're manufacturing the glass. we take certain steps to change certain things and do certain things so that it usually goes into cost of production only.” So, there isn't anything unique about the technology that you deploy that other people might not be able to do?

It actually is not simple. It's quite specialised. It's like a Formula1 car. You may have a Formula1 car in front of you, but can you drive it? The question is, can you drive it. So the plant that we run, we run it flat out.

Formula1 car - and yet you don't have an R&D budget?

The R&D is, as I said, it's done on the fly. When we realise that something needs to be done, we go out and we do it. So, we have perhaps the lowest cost of melting in the world -- I would say perhaps because everybody's numbers are a secret but we hear industry whispers. I don't think anybody has as low a cost of melting as we do. We have the highest production from a single line, so that's capital. When you lay out a production line, how much can you squeeze out of it? We squeeze a lot out of it. I think we have the highest production rate of glass anywhere in the world.

Likewise, with regard to the melting, for instance, the cost of labour in India is much cheaper than that in China. So, we're constantly automating to make sure that the labour costs is as little as possible. We have a highly automated plant and the difficulty here is, first you must melt the glass, after you've melted the glass you must make sure that the sheet does not have bubbles or blisters. Once that is done, you have to grind the four sides of the glass. The grinding has to be perfect. It has to be washed perfectly then there's an anti-reflective coating that is applied on that and finally it is tempered. Now, something can go wrong in any one of these cases and if it goes wrong, that glass has to be rejected.

The only competition you have is imports. Now, you have an anti-dumping duty on Malaysian imports as well. So, you're pretty much a monopoly player and you can set your own pricing?

No. We had been selling in about 22% of the market until March 2020 and because of what we make we are exporting 45% approximately to buyers in West Europe, so that means in Germany, Italy, France, Holland and the United States and Canada. We have our customers in some of the most developed countries in the world, where they are very demanding in terms of quality. So, we do export about 25% of our production over there.

What is happening is, first of all there's absolutely no incentive on manufacturing of solar glass whatsoever; neither in the manufacturing nor selling nor consumption there's no subsidy. So, anybody who comes into this game has to face that. As recently as April to June this year 2020, the prices were at an all-time low. So, we take a long-term view and we come into the market. We enter the market with a decision to sell and it is a bet we take. We take the bet based on our capability of being able to be a low-cost producer. As I already told you, with the cost of melting, we are lower than anybody else. The cost of tempering in every place, we are very cost conscious too.

Will you be a price setter in this market now because you're literally the only supply of solar glass given that there is now I think a 9 ½ % countervailing duty on imports from Malaysia as well (42% of the market).

Not anytime soon because with the demand that has ramped up very significantly, there is as much as 12 gigawatts of module making capacity which has been announced. Even if six were to come up, we are only 2 ½ gigawatts today with both furnaces functioning. With the expansion, we would still be at 5 gigawatts. If we are going to be producing 12 gigawatts of modules in this country which seems more and more likely, then we (Borosil) still are going to be less than 50% (of that capacity).

I would clearly say that we are not the price setter under any circumstances. The imported glass and the price of the imported glass is the price setter. The capacity abroad is 40 times our capacity. It's 40 times of what we produce here. So, there's an ocean of glass out there compared to what we do. Everybody knows everybody, I mean all the module makers know all the glass manufacturers internationally and all of them—all the large module makers are getting at least 50% of the glass on an ongoing basis from there (imports). The only thing that countervailing duty does is that, it gives us some capability of going ahead with more manufacturing programs in this country, because then we are on somewhat on a slightly more even keel.

Even with 9.71% (duty) we are not on an even keel at all. The assistance they get we have been able to prove is much more than this but the fact is that this is what the government in its wisdom decided to recommend. So, even 9.71% is some relief to us but it doesn’t fully cover the incentives that are being given to the producers there.

At the end of Q2, you said you were running at about 91% capacity utilization. You already explained to us how the demand for solar glass far exceeds your own current capacity. What has been your utilisation for the better part of Q3?

I wouldn’t know what the exact number is and it's not right for me to give it to you before I give it to the board and then to the shareholders and BSE, NSE and all that. Let me say we are running flat out and it's now a question of being able to get the glass out. I mean one day we might have a power shortage or a power outage because a peacock decided to sit on a high transmission tower and short two phases. The poor peacock of course was electrocuted instantly, but for 24 hours, there was no power. So, for that time we cannot have production, things like that. I mean these hiccups come in once in a while but we’re running flat out.

The anti-dumping duty becomes effective when? Because I understand it's been announced but it hasn't been notified. Also, what kind of price advantage or how does it change your margins or your financial profile - the average pricing you spoke of in Q2 was roughly about Rs 98 per square meter. Now have a little bit of cushion, thanks to the import duty?

I want to tell you that the landscape of pricing which we have not yet discussed; the pricing landscape is as follows.

There has been a shortage of glass in China in the year 2020, which started from about August this year. What has happened is that the government of China has announced its own program of installation of solar power, it is about 40 gigawatts. That's immense and 30% of that has to come from modules which have glass on both sides of the module. Typically, a module has glass on one side and it has a plastic backing sheet on the other side. So, when you have a glass-glass module, you're using twice the quantum of glass for the same module. The reason you do that of course is you have a longer life of the module. So, instead of 25 years, you go up to 40 years. You can use bifacial cells so you're now recovering solar energy from the other side of the module as well, which might give you anything between 20-30% more power from the same module. So, it's more efficient that way for the cost of a piece of glass. It's a lot of advantage to do that and the next year might be 60% glass-glass modules in China. So that is one reason why glass got consumed.

The second is, they have been going very aggressively on anti-pollution in China. So, there are certain glass producers who are within a couple of 100 kilometres of a major city. They have been asked to shut down, no discussion.

What happened was that there was a shortage and prices have gone up significantly. I would say they've gone up by nearly 70%-80% this year, but this is short term, I think another two months, we are having more capacity coming in back into production. Then we would see price prices coming back down.

You said the average price in India was about 98 rupees per square meter. Are you saying that there has been another 70-80% increase on this? What will be the resultant price equation once this anti-dumping duty actually does kick in as well so that we understand what your margins will look like.

This was before the price boost and now what we will be seeing is after the price boost.

So, it’s about 160-170 rupees per square meter now?

Yes, you're right, it's about that. The price is going to continue until the price from China comes down because as I said we follow Chinese prices, we are not the price setters. Even now we are a little bit less than the Chinese prices.

How much lower are you versus the imported price?

I would not have that information on the back of my hand.

Are you 10-15% lower than imports? Are you at par with imports? Are you now pricing higher than imports?

We would be somewhere there.

10% lower than imports?

That's right.

When the duty kicks in, we shall have to see what happens when the duty kicks in. We may be on par with them or it's very difficult to predict this because this is a very dynamic situation.

It's a 9.71% duty so what will be the actual import price?

It all depends upon whether the exporter absorbs the 9.71% duty or not because first of all the duty has not yet been announced. Announced meaning, what has been announced is a recommendation but the actual duty has not been announced. So, the duty is going to be announced whenever the Minister of Finance decides to do so which is typically within two to three months of the request going out.

I want to say that there is definitely going to be a lot of production coming in from China and when that happens, then the prices are going to stabilise. I don't think the prices we are seeing today are in any way or shape or form, long term prices.

You did about a 28% margin in Q2, and you did mention at the end of that quarter that you thought it was sustainable. If you do get the final implementation of this anti-dumping duty you think you might be able to boost that further to 30% or so?

To boost that and in order to be able to go in for that, aggressive industrialisation is what the country requires in terms of solar glass. The world's largest producer of solar glass is currently running at 50% Ebitda. It is that kind of Ebitda which they are drawing, which is enabling them to plow back that money back into the business. It's very important that I tell you that the second furnace that we set up we did not do any borrowings from the market.

That was when you went from 180 to 450 tpd?

That's right, that expansion came in purely from our own generation and we had borrowed some funds from the banks, which today are all there with us in liquid funds. I mean, whatever outstandings we have from the bank are covered with deposits. So, on a company basis we don't have any borrowings today.

So you expect somewhere in the region of about 150 to 160 rupees per square meter kind of pricing to persist through the course of the next couple of months at least. And your 28% margin can only rise from here on because the benchmark player has a 50% Ebitda margin.

There's no harm in benchmarking anything. That is what can be achieved in the industry because even the number two player in China which is flat glass operation has a very high Ebitda margin. With this kind of a margin; if we want to do the expansion, it is what the country requires.

You run on a one-and-a-half-month order book. Isn't that a very short cycle for a business that's actually a project business with the solar power plants are planned well in advance and bid out.

We have customers who are regular customers and those people are people who are using the same size again and again.

Why wouldn't they put much larger orders? Because solar power plants get built out in size, the bidding is done well in advance. So why would the orders have to be just as short as one and a half months?

My customers manufacture modules; modules are a very voluminous product and sometimes they are not able to ship them out. When they can't ship it out, they have no place to store the modules that they have manufactured. We have a very good understanding with our customers. All our customers, whether they are in India or abroad, they look upon us as very dependable suppliers. So, when we are there and available and ready to deliver whatever we have promised, they don't have to feel the need to order it.

You don't see the one-and-a-half-month order book cycle, changing at all, even as you expand capacity?

This is how we’ve always functioned and it's very comfortable for us.

Receivables were up roughly Rs 10 crores in H1 (Q2 Revenue: Rs 114 crore, Net profit Rs 14 crore). Are you seeing any stress in your buyer community at all?

The situation is perfect. We have no problems at all. In fact, we very often exceeding our collection targets each month. So, if the receivables have gone up, that's only in the normal course of business but the turnover has gone up, the total tonnage has gone up and the number of pieces which are being shipped out has gone up. We are very comfortable with our receivables.

You just finished raising about Rs 200 crore and you've inducted some new institutional shareholders through this QIP. 200 crore to fund a 500-crore expansion plan. The rest will come from debt for the first time for your company or are you looking for more equity fundraising?

We are not going into any more equity funding. We'll be going for debt and we shall be having our own funds that are getting generated.

About 120 crore is accrual and 180 crore as debt.

You more than doubled capacity last year to 450 tpd. You're servicing roughly 2.5 gigawatts - 20-30% of the total solar project capacity. When you double that to 950 tpd you will be servicing about 5 gigawatts. And you’ve said the market is a more than 10-gigawatt market, And there are no local competitors. Why not plan a bigger expansion?

We always like to be cautious in our expansion. We have lived all our lives; I mean I'm 69 now and I've spent all my life in the glass industry. I've always had competition, so I'm not scared of competition. The thing is that I don't want to shoot myself in the foot. I'd like to bite what I can chew and no more than that because I've seen what has happened. A lot of people have bitten off more than what they could chew and they've all ended on their nose and I have no desire to do that. I'm very cautious with my investors, I am cautious with the company, my employees and with everybody. I would just like to take measured steps to go in for whatever growth plans we have.

If government support to the solar industry were to be taken away, would a business like yours still be competitive?

Yes, we’d be competitive because we are already competitive in Europe and in the United States where there is no support of any kind and we have no incentive per se, when we are exporting to them, from the Government of India. We get a drawback for the duties and taxes which we have incurred while manufacturing the glass, which the government gives us back when we are exporting but that's it. That there's very little, it's not very much and we are still competitive, when we export there. So, we do have the export market.

And the other thing which is very important as you see, the fact of the matter remains that solar power is simply the cheapest power in the world. There is always going to be solar panels being made in this country and there are probably about 200 module makers and we are selling to each one of them. So, we're going to continue to sell to them and I do not believe that these 200 module makers that we have are running purely because of the government support. What gives us the impetus to expand rapidly and there is more surety with what we're doing but even if the government support was not there, I don't think the solar industry would collapse at all.

Any local competition on the horizon?

There are a couple of people. There is one producer of glass who is looking at it, he is a domestic producer and he is looking at it. One of the large module manufacturers has been asking around for pricing and things like that. They haven't come to the point where they've taken a decision. Now see, there is every possibility that somebody will come. If somebody comes, good luck to them and we’ll co-exist. That's my take on it.

You’ve watched your stock price go up some 300% this year. Any reaction to that?

I'm pleased that I’m vindicated. I never play in my own stock at all. I am completely neutral from the stock market, number one.

Number two, before I end this interview, I must say something, manufacturing solar glass is a very tough act. Anybody who thinks about getting in has to be very sure about what he's doing because it is a tough act to follow. It's not easy. It’s 50 years of glassmaking experience that we have and specialty glass and we have squeezed out every bit of that in doing this.