20 Microns Limited (20MICRONS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the 20 Microns Limited Q2 and H1 FY '24 Earnings Conference Call hosted by Ventura Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand over the call to Tushar from Ventura Securities Limited. Thank you, and over to you, Tushar.

Thank you. Good day, ladies and gentlemen. On behalf of Ventura Securities Limited, I welcome you all to 20 Microns Limited Q2 and H1 FY '24 Earnings Conference Call. The company today represented by Mr. Atil Parikh, Chief Executive Officer and Managing Director. I would now like to hand over the call to Mr. Parikh for his opening remarks, post which we can start the question-and-answer session. Thank you, and over to you, sir.

Good afternoon, ladies and gentlemen. A very warm welcome to the Q2 and H1 FY '24 Earnings Conference Call of 20 Microns Limited. I would like to begin by offering a brief overview of our company. 20 Microns Limited is a pioneering and a leading industrial mineral company with a rich experience spanning across 3 decades. We are the front runner in revolutionizing the micronization of various industrial minerals with a systematic approach in India. Our product range includes an array of nonmetallic industrial minerals, such as calcium carbonate, talc, kaolin, mica, quartz, dolomite, natural red oxide and various specialty chemicals and functional additives like mineral-based fertilizer, construction chemicals and many more. With 9 state-of-the-art manufacturing facilities and warehouses across India, including Gujarat, Rajasthan, Tamil Nadu and Andhra Pradesh, we have a collective manufacturing capacity of [ 4,15,000 ] metric tons per annum. Additionally, we operate 5 different mines in India, collectively holding a total mining reserve of approximately 169 lakh million tonnes. Our products are used as building blocks in various different industries, like paints and coatings, rubber, plastics, paper, tires, ceramics, agrochemicals, printing inks and many more. Currently, we serve a wide-ranging customer base across the world, including 65-plus international countries. We proudly cater to more than 200-plus clients, representing a wide array of industries, which also includes well-established companies like Berger Paints, Asian Paints, Kajaria, Pidilite, L&T, Kansai Nerolac, Finolex, ONGC, JK Tyres, AkzoNobel and many others. Now moving on to the financials. Our revenue from operations increased by 6.35% and stood at INR 199 crores in Q3 FY '24, compared to INR 187.78 crores in Q2 FY '23 on account of a surge in demand for our products in the underlying industries like paint, rubber, plastics and others, led by extended festive demand and increase in propensity to consume. Further, our EBITDA increased by 28.25% from INR 233.5 million in Q2 FY '23 to INR 299.4 million in Q2 FY '24, and margins improved from 12.43% to 14.99% during the same period. This impressive performance can be attributed towards sustained commitment to cost efficiencies, resulting in reduced foreign fuel expenses and improved negotiation for freight charges during the period. The PAT increased by 34.24% and stood at INR 160.54 million in Q2 FY '24, compared to INR 119.6 million in Q2 FY '23. The margins improved to 8.04% from 6.37% during the same period. During H1 FY '24, our exports contributed about 16% of our total sales. Now coming on to our revenue split. The paint industry contributed about 50% of the total revenue, followed by 23% by the plastics and rest by rubber, paper, ceramics and many other allied industries. Further, our subsidiary, 20 Microns Nano, which is engaged in the manufacturing of specialty chemicals and functional additives, has contributed 12% of the total revenue. One of the key drivers of our future success is our unwavering commitment to research and development. We invest heavily in fostering a culture of innovation, constantly pushing the boundaries of what is possible. Our dedicated team of 45 to 50 people continue to be focused on innovation by developing a wide range of products in our in-house R&D facility in Vadodara, Gujarat. 20 Microns remains unwavering in its commitment to delivering high-quality products and innovative solutions. Through the ongoing research and development initiatives and close collaboration with both the domestic and international customers, we continue to enhance our product portfolio between two diverse markets. As one of India's leading producers of ultrafine industrial minerals and specialty chemicals, we are expanding our global footprint and diversifying our product mix. We added 61 products in our offering during the financial year FY '23. Further, I would also like to highlight some of our recent developments in terms of technology upgrade, where we have introduced automation across various different functions -- business functions in our company, including the tracking materials logistics, creation of purchase orders, [ wage ] recording in [ ERP ] systems, vendor notification for short receipts and material rejection, automated payment advices given to our vendors. Additionally, we have also integrated ERP, CRM and HRMS systems to efficiently gather data from key specific modules, the sales, production finance, quality control, material management, sales tracking, executive performance and employee activities, among other critical areas. In terms of expansion, we have recently expanded into new regions, including the Middle East, which includes Jordan, Egypt, Saudi Arabia, Iraq and [indiscernible] and Southeast Asia, which includes Thailand, Indonesia, Japan, South Korea and Philippines through various distribution agreements. Additionally, we have also restructured our distributor relationships in other international markets with the focus on capitalizing on their strength and mitigating their weaknesses, all while optimizing the product portfolios to achieve maximum efficiency. Moving ahead, we are steadfast in our dedication to executing our strategy with precision, and we hold a strong belief in achieving greater profitability and enhanced cash flow for the fiscal year 2024. To realize this goal, we will persist in our efforts to improve the efficiency, including periodic upgrades to our machinery and technology. We also accelerate the adoption of digital capabilities and maximize the utilization of data using the expanding growth opportunities within our core markets. Furthermore, we're confident that our strategic focus and operational excellence will be instrumental in significantly elevating the company's growth, profitability, sustainability and cash generation in the near to medium term. I thank you all for your time, and I'm happy to answer any questions that you may have. Thank you.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from [ Divya Daga ] from Global Securities Private Limited.

Congratulations for a good set of numbers and for margin improvement. I have a couple of questions. My first question is as more than 50% of the revenue of the company comes from paint and coating segment and upcoming plans of Grasim and JSW will be helpful for us. So can you provide that if we are in talk or have -- do we have any contracts with them?

Yes. So with Grasim and JSW, with JSW, we are already an approved vendor and we are already doing some system supplies to the company. In terms of Grasim, we have already initiated the trial orders as an approved vendor for them. And with the announcement of their different plants across the country, as they open up we will be starting to supply to them as well.

Okay. My next question is in H1 FY '22, revenue was INR 374 crores. Then in this H1, we have a revenue of INR 391 crores. That is 4% growth, 4.5% something. So you have given a guidance of 15% to 18% revenue growth for the year. Will we be able to cover this by the next 6 months?

Yes, we will be able to do that. And yes, we shall.

Okay, sir. My last question is there is fall in other expenses from INR 54 crores to INR 48 crores in Q2 and from INR 105 crores to INR 94 crores in H1. So is there any major fall in particular head? Can you state?

Yes. There are 2 heads I would like to define here. One is the power and fuel cost, where the fuel cost has gone down, where we are using furnace oil to manufacture our kaolin in Bhuj plant. So that has decreased. I think it's an external thing we are dependent on. So because of that, we have a reduction in the fuel cost. And secondly, our export logistic cost has gone down substantially. So if you look at the COVID times, the rates had drastically increased to abnormal levels and now they have got back to the normal levels. And because of that, earlier times, we used to have very high export logistic cost. And we have now in this financial year, we have a substantial reduction as well. So these are the 2 factors.

Next question comes from Darshit Shah from Nirvana Capital.

Congratulations on a good set of numbers. Yes. I basically wanted to know a little bit about the JV that we intend to do or we did with the German company Sievert for manufacturing, construction, chemicals and building products. So any color on what kind of CapEx that we intend to do for this and whether it's going to be a completely new plant or in an existing plant, we can make those products?

So this -- it's too early for us to comment anything on this JV because we're still in the negotiation phase and preparing of the terms and conditions for the JV agreement. So we are still working on the conditions and the kind of investments that would go into the formation of this JV and the manufacturing that we will be doing. So in maybe another 6 to 8 weeks, we will have a clarity on the same and we will be announcing the same in the exchanges.

Got it, sir. No worries. So this company is a very old kind of 100-plus year old organization mostly the construction chemicals and building products and probably the revenues are in millions of euros. So just to get an understanding on if you can give a little bit idea what kind of products do we intend to make or probably, are these going to be the first of its kind of products to be made in India? Or probably is there an export opportunity, if you don’'t want to name the product? Just to get a rough idea, what are you looking in this JV.

Basically, if you look at today's scenario, many of these European companies are willing to enter into India. So definitely, this company has been in business for many years, as you mentioned. And it's a very old known company in Germany. So they decided, since we had a relationship with this company before, we were in discussions of manufacturing certain construction chemicals here in India. So it's a mix of different chemicals that we will be doing. We are still working on the final aspect of the products that we will be manufacturing here in India, but most of them will be the new age technology products, which I think some of them are doing, some of them are not doing here in India. So once we have a list ready of the different products that we intend to make here, we will definitely be announcing that as well.

Sure. Sure sir, that will be really helpful. Sir, secondly on the margin front. As you alluded that there was a reduction in power and fuel and the freight costs, a little bit increase in the gross margin, which has led to this 15% kind of operating margins from around 12.5%, 13% that we did last year. So any rough ballpark guidance on the margin trajectory probably for this year and for the next couple of years, where do we see them heading?

I think this is an optimal figure that we usually work in our organization and in the ecosystem that we work in terms of the industrial mineral segment. So 15% is an ideal margin space we usually look into. So to maintain these kind of margins will be the task that we will be taking up in the next few quarters and to sustain them, and then we will be working on improving them as well.

Sure. And sir, lastly, on the -- when we met, I think you alluded some product that was kind of used in the EV battery space. Can you share a little bit more highlights on what that product? Whether are there any potential kind of planned tie-ups or something of that sort that we can do in India or export?

So right now, we are working on that product. So we have not yet completely finished working on the product. So once we have some clarity on that, we will be targeting more of the export markets and the Indian market. But the Indian markets currently is still in the very nascent stage of the EV and the semiconductor and the battery space. So a lot of projects have been announced. Once we have some clarity from the production happening in India, we will be trying and designing the product [ within that ].

[Operator Instructions] Next question comes from Mayur Liman from Profitmart Securities.

Sir, my first question is what are the major reasons for the revenue increase apart from the festive season?

The increase in the revenue?

Yes, sir. Yes, sir.

Yes, the demand has been very good, I think, in the term. So we were -- usually, the demand is usually there until the pre-Diwali season. So we have seen a good growth in the demand from various different sectors in the export markets as well as the domestic markets pick up. And so that is the reason that we have been able to increase the revenue in the quarter 2.

Okay. My second question is what are your expectation from the next quarter, sir?

So quarter 3 and quarter 4 usually are at par with the current trends that we are following. So there might be -- the demands are quite erratic in terms of this financial year, but we try and maintain our revenue growth and our bottom line growth, keeping in consideration the various different market segments that we are a part of. So we try and balance our portfolios accordingly in terms of the product range that we have to offer in the market within the domestic and the export market. So I think it should look fair enough in the same way that we have seen Q1 and Q2 shape up.

Yes, sir. Sir, my last question is could you please give the revenue breakup of the product wise? And do you have any plan for the adding new products in the future?

Yes. So we keep continuously innovating and adding more products in our portfolio. Our 20 Microns product revenue mix typically is in the range of 50% for calcium carbonate, about 22% of kaolin, about 10% of talc and remaining is all other minerals like quartz, mica, feldspar and other products. And in 20 Microns Nano, we are doing various kinds of opacifiers, wax additives, processing aids, matting agents, rheology modifiers. So as mentioned, they contribute about 12% of the total revenue of 20 Microns. So that's how our product mix is basically bifurcated. Typically, our product mix usually does not change much. It remains in the same percentage year-on-year with an increase in the growth levels that you usually see.

Next question comes from Divyansh Gupta from Latent Advisors.

I have about 5, 6 questions, so I'll take 1 by 1. Given that plastics is the second highest contributor to our revenues and given this whole ESG and recyclable trend that is going, do you see any headwinds in the plastics sector demand for 20 Microns?

No, that directly doesn't impact us in a way. So -- but yes, so we don't see like a significant increase in the demand happening for us.

So what kind of, let's say, plastics are being -- rather what the end-user client nature with respect to the plastic segment?

So basically, we are into PVC cables. We are into master batch producers. So -- and into polypropylene, polyethylene and PVC is the major plastic segment we cater to.

Understood, understood. Coming to the second question, what is our, let's say, pricing policy or dynamics with the customers? Is it contractual for a 6-month? Is it market plus kind of thing? And what is the reset frequency, if any?

So there is no specific contracts that we usually do with most of our end customers. Yes, for export customers, we are bound with certain contracts for a yearly deal or a 6-month deal, but not for all. It depends on which a distributor or which customers we are engaged with. In the domestic market, usually, it is more on the typical cycle of the revenues that we usually -- the quantities that we are usually doing with them. So we just try and meet those demands, which keep coming. The demands are not consistent. The demands keep changing. So that is the reason that we have to continuously work with our customers on a regular basis, on a monthly basis to understand the demand that they might have depending on their end demand that they would be having. So that is the reason that in the past, I think 1.5 years, we have been working very closely with the customers due to these rapid demands that keep coming. So there's no fixed contractual system that we have in terms of that. In terms of pricing, we work on some major heads. If they keep changing, then definitely, we work with our pricing strategies based on that. But it differs again from application to application, it differs from the product group to product group. So it doesn't form one whole systematic approach that we do for the company.

Got it. Understood. And coming to the paint sector as such, let's say, general [ customers ] for you. What is the -- how much of their -- in their P&L, how much is your cost as in if a paint is INR 100, then 20 Microns product is INR 5.05 or what's the overall average with respect to the...

In terms of volume, if you consider in terms of volume, it is anywhere in the range of 20% to 40%, depending on what kind of a paint they are manufacturing. Every paint has a different formulation. So depending on what paint they are manufacturing, a low-grade paint being a distemper to a high end premium emulsion paint that they are making to any other powder coating to industrial paints that they are making, the formulations are very different. So it is not easy for us to tell you. So every customer, every formulation is very, very different. So there's no fixed base price or a base volume that would go into a certain formulation. They also keep changing the formulations based upon the market demand. So that is how it works, yes.

And I'm assuming the premium paints will have a higher share of Micron -- Micron will have a higher share in them?

Well, again, the -- if you go -- if you make a premium paint, the volume which goes into making the premium paint is lower because they use more finer materials, but the price of that particular product will be much higher. So that's how it works.

Got it. And what would be -- any idea on the market share that we have with respect to paint sector?

Again, it's different. Again, it's very different because we only do a certain segment of products when we deal with the paint industry. We don't do all the different products which are there because -- so it's -- we don't have like a perfect market size that we can define in terms of where we stand. Because for every customer, we have a different ratio, where -- against our competition where we stand.

Any ballpark number you can?

[indiscernible] unfortunately. We are trying to work on it to define an addressable market space. So based on that, if we have a number ready with us, we'll definitely share with you in the future calls.

Got it. Next question is that I've been reading your annual report from FY '15. And every year, there is a long list of new products that have been developed and the company mentioned. So let's say in the last 3 years, whatever new products that we have launched, what is their sales contribution in our overall sales?

So it will not be a very significant contribution. They will be anywhere in the range of between 5% to 6%. Because most of these products which are developed, they would either be developed for 1 or 2 customers or for a particular market segment, a smaller market segment or a specific industry segment. So again, it will take time for these products to grow into the mainstream markets. So we first do these products with the customers who have demanded these products. Once they work for them, then we share it with the main markets to go forward with. So usually, in the first few years, it is usually in the range of 5% to 6%, and then it kind of grows in the next 2 to 3 years to a bigger size.

And the bigger would be around?

Like that would go up to 10%.

Got it. Understood. And just last couple of questions. So are there any...

I'm sorry to interrupt you, sir. So could you please turn back the queue again for more questions. Next question comes from Darshit Vora from RoboCapital.

So congratulations on the good results. I just wanted, not specifically a guidance, but just a view on revenue going forward in the next 2 to 3 years, say, by FY '26. I mean, you've given some guidance on like 15% to 18% for FY '24. Has that changed? And also for the future?

So that will continue to remain the same. So our goal internally is that with the kind of markets that we are in, in terms of even the turbulent times where we've seen in the past, we continue to be steady at a 15% to 18% growth levels year-on-year, and that is what our internal goals are. Definitely, with the addition of capacities in the future that we might have, once we put them into use, then we will have a clear picture on where we will further our growth compared to the traditional 15% to 18%. But we expect that at least for the next 2 years, 15% to 18% growth level is the ideal one for us.

[Operator Instructions] Next question comes from [ Sandeep Damani ] from [ SDK ] Consulting.

[Foreign Language] I am the person who visited you in the last AGM, and congratulations for excellent numbers. And we know that you are very much investor friendly and very transparent with all the investors. So thank you very much for being so good. Sir, we wish your company to be a market leader and main supplier to all the paint industries. Now my -- I would like to understand only one thing that who are our nearest competitor as far as raw materials meant for paint industries are concerned? That is my first question, sir.

There are no listed players. There are no listed players in the competition. We have a few international players. And again, when we look at competition, they will be different for each product group. So for calcium carbonate, we have different competition base. For kaolin, we'll have a different competition base. For talc, we will have a different one. So we'll not have a general competitor across the board like 20 Microns product range that we are offering. So again, each segment will be different. So there, we have many new competitors in calcium carbonate. We have few competitors in talc and kaolin. So it again, it differs. So this is not right for me to name them, but I think we can take it on a different level than required.

Okay, sir. Now emerging from the discussion that took place in this meeting only, I just want to understand that we have a share in all kinds of paints being manufactured in India. I mean, can you kindly confirm that we have some material to supply for all kinds of paints, whether it is [indiscernible] or whether it is oil based.

Yes, we can [indiscernible] to marine paint, we supply to automotive coatings, we supply to powder coatings, we supply to industrial paints, we supply to decorative paints. So all paint segments are part of our core group.

Next question comes from Utkarsh Patel from Motilal Oswal.

Yes. So I just wanted a broad view about your vision for the company, right? Let's say, today, we are at a particular size, right? So as a company, how do you see this company evolving over a period of next 3 to 5 years?

In what terms are you looking at?

I'm talking in terms of revenue, profits, do we have any internal targets for next 5 years, let's say we want to reach here in 2027 or '28?

Yes. So we have our own target. So as I mentioned to you that we have a target of 15%, 18% year-on-year growth. Now we are working on -- the company started to evaluate potential projects for expansion internally in India and abroad. We are also exploring the potential to add more mines into our additional reserve. We are also looking at potential strategic initiatives and opportunities through various JV collaborations for the growth factor. We are -- so there are some high investment projects, which we are supposed to be looking at now. But with the turbulent conditions in the markets globally, we are taking a cautious approach with that, with the changing market dynamics, and so we are keeping looking on this major outlook. And so we'll have some clarity of thoughts regarding our potential CapEx plan, which will be put into use and which will be contributing to the total revenue growth for the coming 5 years. But that is currently being worked upon right now. So we are just currently going with our regular CapEx plans. But with the recent JV, which we will be forming and various other projects which are in the pipeline, discussions are currently ongoing with various people across in India and globally. So as and when these things start shaping up and the disclosures can be made, we will be announcing these things in the coming months.

Okay. Okay. Just to follow-on to that, let's say, in terms of our existing infrastructure, what level of capacity utilization will we be working at?

So currently, we are our own manufacturing. We are operating at around 85% of our capacities. But we have a model of our own manufacturing, toll manufacturing and contract manufacturing. So these 3 models, if we look at it, then we have enough room available for future growth because what we do is that the regular end of the run of the mill products, which are there, we do it in toll and contract manufacturing and all the more advanced technology products, more finer products, which are there, there we do more of our in-house manufacturing. So that distribution keeps happening every quarter. So that's how we keep on growing and with minimal CapEx that we intend to do.

Okay. Okay. And your own manufacturing will be the major piece, right? Toll manufacturing and contract manufacturing will be a smaller part, right?

Yes. Yes, that's right. That's right.

Okay. Just wanted to understand 1 more thing. Let's say, last year, we had H2, which was slower compared to H1, right? So we were at INR 180 crores, INR 190 crores in H1. But H2 was significantly slower, I think 10%, 15% over the H1 last year. So do we see any particular trend like that this year as well? And if there is any seasonality aspect to the business, maybe if you can clarify around that?

Post COVID, we have lost the seasonality aspect, so we don't fall under that category anymore. It's kind of even cycle across the year. But yes, as I mentioned before in one of the questions that the market dynamics keep changing. So earlier, we used to have a clarity on a 6-month vision as to how the market is going to behave. But now that 6-month horizon has come down to 2 months, 3 months, so the market keeps changing every month. So it's hard to predict. But yes, we have our internal statistical department, which kind of maps it in a way that we kind of balance our portfolio and try to maintain the H1 as well. So we try to remain stable and try to grow, if possible, in H2 as well.

Understood. Understood. Just 1 final question. We have a debt of close to INR 100 crores as of now, right? Do we have any plans to repay it? Or do we see this going up in the future?

When you look at the debt, total debt components, there are multiple components as a part of that. So if you look at our long-term debt, it is just in the range of INR 8 crores to INR 10 crores so that we will be repaying within the next few months. And apart from that, we have our fixed deposits, which is also part of the overall debt, if you look at it. And we have only discounting that we do with many of the big customers, that is also a significant component as a part of that whole debt cycle. So they will continue to remain in the way it is. But yes, the long-term debt we will be getting mostly in the next couple of months or in the next few quarters.

Okay. Because I was looking at your interest expense. You have an annual interest expense of closer to INR 17 crores to INR 18 crores versus your debt, which is closer to INR 107 crores, INR 108 crores. So I'm assuming here in the interest cost you are incorporating the discounting charges, et cetera, as well. That's why this number is higher, right?

Yes, exactly. Yes, yes, that's right.

Next question comes from Dhiral Shah from PhillipCapital.

What is the contribution of the export revenue in our business?

So we usually are in the range of 15% to 16% of our overall revenue is export business.

So are you looking to eye more on the export side?