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

Ladies and gentlemen, good afternoon, and a warm welcome to the Q2 FY '26 Earnings Call of 20 Microns Limited hosted by Wisdomsmith Advisors. I am Muthukumar from Wisdomsmith Advisors, and it's my pleasure to facilitate today's discussion. From the management team, we are joined by Mr. Atil Parikh, Chief Executive Officer and Managing Director; Mr. Nihad Baluch, Group Chief Finance Officer; Mr. Pranit Shah, Finance Controller. As a reminder, today's call is being recorded. The audio-video version of the call will be uploaded on the company's website soon after the session concludes. And the call transcript will also be available shortly thereafter. [Operator Instructions] After the presentation, we will open the floor for Q&A session. Before we begin, let me briefly read the forward-looking statement disclaimer. Certain statements may be forward-looking and subject to risks. Actual outcome may differ, and the company is not required to update these statements. With that, may I now request Mr. Nihad Baluch to take over the proceedings of the call. Over to you, Mr. Nihad.

Thank you for joining us today and for your continued interest in 20 Microns' performance and strategic direction. I take this opportunity to walk you through the financials of quarter 2 for the financial year '26, referring to the Slides 4, 5, 6 and 7 of the presentation and sharing some context on the operating environment, margin trajectory and how we see the second half shaping up. Let me begin with Slide #5, our quarter 2 consolidated performance. Revenue from the operations stood at INR 2,307.8 million. There was a drop by 3.9% Y-o-Y and 6.6% subsequently. The softness in the top line is directly linked to the macro factors affecting the paint industry, extended monsoons, delayed festive impulses and pricing pressure among the paint manufacturers. Despite these external challenges, our EBITDA grew to INR 318 million, showing a 3.4% improvement year-on-year. More importantly, EBITDA margins expanded to 13.8%, a strong 100 basis point improvement over the same quarter last year and nearly the same over quarter 1. The margin improvement is a direct outcome of continued cost initiatives, operating discipline and more efficient sourcing. Our PAT grew to INR 173.5 million, up by 5.5% year-on-year, and our PAT margins improved by 7.5%. Our EPS increased from INR 4.65 last year to INR 4.92 this quarter, demonstrating a consistent value creation. Now moving to the Slide #6, our P&L summary, which will showcase the cost discipline and marginal resilience. Even in the revenue constrained environment, operating expenses were tightly controlled, declining 7.7% subsequently and 5% year-on-year. This demonstrates how our efforts on cost efficiencies, alternative sourcing and manufacturing discipline are translating into measurable financial gains. Our EBITDA improved despite revenue pressures, which is the key message in today's environment. Even in tough market condition, our structural margin focus is working. We also continue to maintain a healthy financial profile with a stable financial costs and disciplined working capital. Depreciation increased due to the capacity enhancement and modernization initiatives, investment that will support growth as demand revives in the second half. Now moving to the Slide #7. I'll just brief you on the business outcomes and the performance. The paint industry had gone through a temporary slowdown driven by external rains, subdued customer movement and competitive pricing actions. But within this environment, 20 Microns strengthening its market share, especially as paint manufacturers increasingly prefer reliable suppliers and diversified offerings and consistent service level. We remain a strong alternative to the traditional suppliers and our diversified customer mix helped cushion the downturn. Paint contributed 48% of our revenue, followed by Plastic at 25% and Rubber by 9%. While Paint remains the largest segment, our strategic direction is clear, growth through innovation, new product introduction and deeper penetration in the Plastic and Rubber segment, where our margins are structurally higher. This shift will help us further rebalance our portfolio in coming years. I'll just brief you our second half outlook how optimistic we are in terms of business strategy. Looking ahead, we expect a more constructive environment in the second half of financial year '26. Festive and wedding season typically drive consumption cycles and early indicators of October and early November suggest improving activity level. International inquiries have also picked up from the recent industry exhibition we entered. While we stay concise on [macro] uncertainties, we do believe that the worst of the demand softness is behind us. With stabilizing raw material prices, improved utilization level and continuous focus on operational efficiencies, we are confident of maintaining margin improvements in the coming quarters. To summarize the Q2 performance, though we faced a challenging demand environment, but protected and expanded our margins. Cost discipline remained core and Q2 results validate the strength of this approach and our long-term vision. Our diversified portfolio and efficiency-driven culture give us resilience in down cycles. And finally, we see early signs of recovery in H2, supported by seasonal demand and ongoing initiatives. As always, we remain committed to delivering long-term value through disciplined execution, innovation and strengthening our market presence. Thank you. With that, I would like to now hand over the discussion to our CEO and MD, Atil Parikh.

Thank you, Nihad. It's both a privilege and a responsibility to present the performance of 20 Microns Limited for the second quarter and the first half of fiscal 2025, '26 and to share our vision for the quarters ahead. Despite being a challenging macroeconomic environment and the sector-specific headwinds, 20 Microns continues to demonstrate resilience and operational discipline, a testament to the strength and agility of our business model. The paint industry, as all of you know, remains the largest contributor in 20 Microns at approximately 48% of our revenue. While Q2 faced headwinds due to extended monsoons, subdued customer demand and a delayed festive season, we expect the demand to recover in H2 with an onset of improved customer demand through upcoming festivals and weddings. Our deep integration with leading paint manufacturers positions us to capitalize [indiscernible] on a cyclical uptick. The Polymers and Rubber division showed a significant growth in the industrial application, though at a measured pace due to the global raw material volatility. Product innovation and value-added formulations are helping us capture higher-value market segments, which is evident in our Q2 performance. The Paper and Ceramics continue to remain stable where we have certain high-end offerings for these segments. Strategic R&D and customer tie-ups are yielding positive results, particularly in the premium segments based on our offerings. Our B2C portfolio in the construction chemicals and mineral fertilizer space is also gaining traction, particularly in the underserved Tier 2 and Tier 3 markets. The distribution network continues to expand, offering potential for incremental growth, albeit from a smaller base. Our export footprint spans more than 80 countries and our recent expansions into Poland, LatAm, Middle East and South Africa are beginning to yield results, offsetting some plateauing in saturated Western European markets. Our derisking strategy is helping us win new clients seeking alternatives to traditional supply chains and export revenue is exported to climb in the coming quarters. Looking ahead, we anticipate a recovery in the demand, though slowly, particularly in the Paint and Construction segments, fueled by festive and wedding season consumption and the infrastructure upgradation activities. Our focus in the next half would be on accelerating growth in value-added segments and specialty chemicals to enhance our margins and reduce the cyclicality, deepening of the customer engagement to foster stronger partnerships, especially in core B2B sectors, expanding our product portfolio, our R&D pipeline envisages further innovation anticipated to underpin long-term competitiveness, driving market penetration for our emerging B2C businesses, leveraging both new and existing distribution networks, enhancing our export presence with target markets, responding to evolving global supply chain landscapes. And our planned CapEx fueling growth in capacities has been slightly deferred, but will smoothly be executed from Q4 onwards. Despite geopolitical tensions, uncertainties and inflationary headwinds, we have maintained stable margins, underscoring operational rigor. We remain committed to our ESG practices, responsible mining practices and innovation-led growth, an approach that will secure our long-term relevance and value creation for the stakeholders. While near-term revenue headwinds pose challenges, our unwavering focus on margin improvement, product diversification and market expansion gives us the confidence in delivering sustained value. Our vision to create differentiation remains undeterred, anchored by disciplined execution and a forward-looking strategy. Thank you all for your continued trust in 20 Microns Limited. We can now start taking questions.

[Operator Instructions] So there is one question that is -- we'll take some of the questions that has come through e-mail for us. The first question, Mr. Atil, if you could answer is regarding the revenues. The query is that the second half revenues typically tend to be slightly lower than the first half for 20 Microns. Do we expect a difference this year?

Well, usually, the second quarter is sometimes at its peak. But this time, due to the lower demand, which has been there, we are expecting that the third quarter and the fourth quarter should be decent compared to the last half of the year.

Okay. So the second question is on -- is a question about the -- particularly the revenue growth guidance. So are we on track to achieve the 13% revenue growth for the full year given that what we have seen in Q2 sales -- dip in the Q2 sales this time?

Well, yes, the target would continue to remain the same that we had anticipated at the beginning of the year. There's always a shuffle in terms of the quarters, looking at the demands which shifts based upon the customer sentiments. But we are hopeful that with the encouraging demand coming up in the next few months, we should hopefully achieve the targeted growth rate of 13% and above.

Okay. So in the same context, there is a question that is put up on regard to the EBITDA margin. So what is the outlook for the EBITDA margin? How sustainable is the level seen in Q2?

Well, we have seen a good growth in terms of our EBITDA margins in the first half, if you see. And we have reached our anticipated targets in between 13% and 15%, which was -- we were quite hopeful about. And even in the second half, we are expecting that this should continue to sustain if that go back to the levels where we were at 12.5% and we would hopefully be in the 13% to 14% range at the end of the year.

Okay. So there is a question that has been put up on the chat box from [Adarsh Jain]. His queries that since Malaysian mine is operational now, how much margins we could improve from that?

Yes. The Malaysian mines have recently been operational and to go full-fledged, it will take another few more months until we reach the optimal level where we will then be able to get a proper guidance about how much savings that we can do in terms of the margins because currently, we are working on all different grades that is coming out of the mines from the various different grades that we work with. And once we segregate those grades in the near term for our own production, based on that, we will be able to have a fair picture about the cost inclinations and the improvement in the margins that we can see in the forthcoming quarters. But we will be able to get a better idea about it only at the beginning of the next financial year.

[Operator Instructions] So there's one question that has come up. Can you share updates on new product introductions in H1 or those that are planned for in the second half of the year -- financial year? And which of the products are actually performing well in the last 12 months?

Well, we have a whole range of different products that we have introduced in the last quarters of the last financial year. And in this first half, we have been trying to promote those products, be it from organic thickeners to opacifiers to flame retardants and activators to partial replacement of zinc oxide. So these products have been slowly being accepted by the markets in the domestic front as well as in the international markets. And we are very hopeful that in the upcoming quarters also, we will see a significant growth in these products. And we are seeing quite encouraging results currently. And hopefully, there are a few more products also in the pipeline, which is too early to comment on right now, but they will be introduced in the fourth quarter when we will be showcasing those products in our upcoming exhibitions for plastics, rubber and paints in February, March and April of 2026. So that is the time when we will be launching those products as well.

Okay. So there's a follow-up question from Mr. [Adarsh Jain] on the chat box. He's asking, are we exploring anything on rare earth minerals?

Rare earth is something very, I think, quite in trending right now in the Indian markets because of the China dominance. And the media has been quite showing a lot of spotlight on this particular area, but there's not much clarity from the government about the rare earth minerals that are available in India and the processes and the availability of these rare earth minerals in different parts of the country. So we are working closely and trying to explore to see if there is any potential that we can establish in terms of rare earth minerals in the future. But it's too early to comment right now because it's just a very new area to be looking into. And there's a lot of different processing techniques and its trace elements that are available in the mines in India. So it's complex processes that need to be worked upon in this particular area. So it's very different from what 20 Microns currently does. But yes, if the opportunity arises and if we have good initiatives and information available from the government, then definitely we would be looking more into it in the future.

Okay. So there is one question that has come up is how did the Nano business perform during the first half of the financial year? Are we on track to scale up the Nano division to INR 250 crores to INR 300 crores business? What hurdles are you facing?

The Nano has been in the H1. If we consider of this year versus last year, we have not seen a significant growth. We are at the same levels that we were in H1 of last year. But yes, we have significantly decreased our raw material cost in Nano in this financial year. And also that has led to increased PAT margins and PAT of 20 Microns Nano. So that has been a good sign, which we were anticipating for quite a long time. In terms of the overall revenue growth, as the demand is currently sluggish, we are hopeful that the demand will improve in both the Exports and the Paint segments in the upcoming quarters. But in Polymers and in Rubber segments, we are on track, and we have seen a good growth in these 2 areas in the first half of this financial year.

Okay. So there is one question regarding the mines and the capacities. I think it has come up together. One is that how many mines are operational currently? And what progress has been made on restarting mines?

So currently, our Malaysian mines has recently started, as I mentioned in my comments. And our Bhuj mine is completely operational. But apart from that, all the other mines that we have, we have already started to do core drilling to establish the quality of the materials, which is available in the mines at a certain depth. So once we get more data on the core drilling operations, we will be able to establish a plan about the mining in the coming quarters. And we will be doing it one by one, opening the mines one after the other and not all at once because we will have to look at the cost structure also, which is a significant part of the mining. And so we will have a better idea once we get more data on the drilling operations, which are under process right now.

Okay. There's a question on the collaborations and the question is, how are the collaborations with Dorfner and Sievert progressing?

Yes, we have seen a very good increase in the revenues compared to last financial year in Silcol, which is our Dorfner joint venture for colored quartz, where we have almost doubled our turnover in the first half when we compare it to last year. And we have recently started the production of our tile adhesives with Sievert 20 Microns Private Limited. And there, we have just introduced the product into the markets recently. We participated in one of our recent exhibitions, which was quite successful in Mumbai for construction chemicals, where there was a lot of traction for the new brand and the new products that we are launching in the market. So slowly and steadily, we see a lot of growth that we are expecting in this particular company as well, but it's too early right now since we have just started production. So maybe in the next quarter, we might have some figures to share.

That's good. Okay. So I think there are some questions on the CapEx and the strategic initiatives. What is the status of the INR 100 crore CapEx plan? And how much remains to be executed over the next 2 to 3 years? And related is, could you provide an update on the renewal and the sustainability investment initiatives?

Yes. The CapEx currently, as I mentioned in my opening remarks is that it has been slightly deferred because of the current lowering of the demand. And our Malaysian CapEx plan is on track. So we have already finalized plans of infusing funds into our Malaysian subsidiary for the expansion of our calcium carbonate operations there after the acquisition. So that is already on track. And for the rest of the CapEx, it is -- as I mentioned, it's slightly deferred in terms of the outflows, but we are revising our CapEx plans in that aspect. And our CFO, Mr. Nihad, will in the coming months, come out with hopefully a press release with the new CapEx plan that we will be having based upon the INR 100 crore plan that we have announced. And when it comes to sustainability initiatives, yes, we are on track for that. We are taking sustainability very seriously. We have an in-house department. We have regular audits in our all operations. We are EcoVadis Gold certified company now, which is a proud certification that has been given to us. We also regularly conduct TfS audits at our all operations, and we have regular customer audits also for sustainability in 20 Microns and in 20 Microns Nano for any new products or the existing products that we produce. So yes, it's a very important initiative that we take internally, and it's an ongoing process, which is taken very seriously in the organization.

Okay. There is one question from [Adarsh Jain]. What is the impact of U.S. tariff on us?

Well, there is no direct impact on the U.S. tariffs because our exposure to the U.S. market is very limited. It is not significant at all. So we don't export much there. But there's an indirect effect in terms of whenever there is like changes in tariff situations, there is the supply chain, which kind of gets disturbed globally and that kind of impacts indirectly to the operations, but not in a very significant way. So I think we are kind of aloof from that whole mess which is there right now.

One call, I think you addressed it partially when you spoke about margins, but on the chat box, there is a query from [indiscernible]. She has mentioned that what sort of margins do we see for FY '26 on a consolidated basis? And going ahead, what are the steady-state EBITDA margins?

So I think currently, we are at 13.7%, where we moved ahead from 12.7%. So it's been like almost 100 basis points up if you look at it currently. But when the demand goes up, the margins might get compromised a little bit. But I think to be fair, I think 13% to 13.5% is something that we expect to close at the end of this financial year. And as I have always mentioned in my earlier discussions also on the public forums is that the steady-state EBITDA margins will always remain in the 13% to 15% range, depending on how the progress is because it all depends on the product mix and the demand. So as the product mix changes, the margins change, and we are hopeful that we continue to remain in that bracket of margin space in the coming years as well.

There's one financial question related to the expenses, like material and other expenses were lower. What factors drove this reduction? What is the current freight cost scenario? I'll just repeat, material and other expenses were lower. What factors drove this reduction? What is the current freight cost scenario?

Mr. Nihad can probably answer that question.

Yes. So coming to the point on the drivers that have helped us in terms of product mix to maintain our raw material cost and sourcing points that help us to marginalize our operational cost in terms of sourcing. Well, in terms of the stability that we have drawn in terms of freight pressures also, that keeps us moderate in terms of maintaining the operational margins.

Okay. Yes, there's one follow-up. I think related question, I think which partially you addressed while -- during the presentation is relating to despite price pressure from paint manufacturers, margins improved. What explains this resilience?

See we have already started working in Q1 about the cost effectiveness in our operation. However, you see that our raw material cost and our distribution cost have been decreased. So there is the advantage that we had in terms of -- despite the lower sales from the paint customer. But there was, again, export sales that has been a slight added advantage in terms of getting that distribution cost...

Okay. So one -- besides the paint industry, there is one question that talks about how are the other key sectors, construction, chemicals, ceramics, plastics, paper performing? And what is the demand outlook?

I think I already mentioned that in my opening comments, if you recall, so I had spoken much about the polymers and the plastics and the rubber division and how they are expected to be stable in the -- they are quite stable right now, and they're expected to grow in the coming quarters also. And we have some good products which are lined up for these segments also, and they are doing very well currently, and we hope that they will continue to grow also in the coming quarters.

So we are close to the end of the session. So I'm just repeating again. [Operator Instructions] So since there are no questions, Mr. Atil, would you like to address -- end the talk by giving a speech on that?

Yes. So thank, everyone, for joining in, and I hope you continue to build upon the trust in 20 Microns Limited, and we hope to improve our operations, margins and our revenues in the upcoming quarters and offer you good results at the end of this financial year. Thank you very much for joining in.

Sorry, just one question. I think it was put up in the chat box after we spoke from [Adarsh] again. So since competition is increasing in paint industry, doesn't it allow us to improve our margins having greater market share? Just repeating what is mentioned. Since competition is increasing in paint industry, doesn't it allow us to improve our margin having greater market share?

Well, the competition is increasing in the paint industry, and they are working on reduction of the raw material cost due to that stiff competition between the paint manufacturers. And due to that, they are trying to squeeze our margins for the raw materials. And so we work on a very selective approach when it comes to paint industries in terms of our product offerings to sustain our EBITDA margins currently. But in the future, if the competition gets eased out a little bit and there's room for growth in terms of the product portfolios, then definitely, that will allow us to improve our margins.

Thank you so much, Mr. Atil. With this, we conclude -- we come to the end of the session for the Q2 FY '26 earnings call of 20 Microns. If you have any queries, please write to us. and have a very good evening. Thank you.

Thank you. Thank you, everyone.