Chaman Lal Setia Exports Ltd. (530307) Earnings Call Transcript & Summary

Good evening, and warm welcome to Chaman Lal Setia Exports Limited Q3 and 9M FY '23 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. The results, press release and investor presentation are available on stock exchanges and the company website. I would like to introduce the management team today on call with us. Mr. Rajeev Setia, Joint Managing Director and CFO; and Mr. Sankesh Setia, Executive Director. A cautionary note before we begin. Some statements made on the call today could be forward-looking in nature, and actual results could vary from these statements. A detailed information in this regard is available in the investor presentation, which is available on the stock exchanges and company websites. I will now hand over the call to Mr. Sankesh Setia for the highlights. Over to you, sir.

Welcome, and thank you, everyone, for joining us on Q3 FY '23 and 9M FY '23 earnings call. I'm delighted to announce that we have recorded a robust performance in the quarter and 9 months ended December 2022. This season, the planted area for the paddy has increased by almost 10% to 15% compared to last season, despite the paddy prices up by approximately INR 10 per kg this year. The export demand scenario has been favorable in key markets. Our strength lies in strong customer relations as of today, which is further strengthened through consistent and timely supply of quality rice as per the presence and end consumer. We continue to focus on operational efficiency, expanding our distribution reach and penetrating into new geographies, which we will continue to drive our growth journey going forward. While growth remains a key factor for us, we always believe in the sustainable performance while maintaining our profitability. Coming to the key highlights of Q3 FY '23. For Q3 FY '23, our operating revenue was up by 62% year-on-year to INR 353.9 crores from INR 218.9 crores last year. The growth in the revenue is due to the market share expansion in the current geographies because we have entered a lot of new countries recently and strengthening our distribution network through exhibitions and many other traveling based marketing. For the quarter, our exports improved by 44% year-on-year, and export sales by value grew by 66% year-on-year at INR 312.4 crores. Gross profit for the quarter was at INR 91.1 crores, up to 35% year-on-year. The gross margin increased by 505 bps from 30.8% in Q3 FY '22 to 25.8% in Q3 FY 2023. Due to the increase in output costs, however, the strong revenue growth, along with our constant focus on operational efficiencies and moderate in freight expenses have resulted since the freight prices also went low this year, which is good for the -- all the industries. Along with the focus on operational efficiencies, the EBITDA was up by 130% year-on-year at INR 51.4 crore, INR 22.4 crores in Q3 FY 2022. The EBITDA margin improved by 430 bps year-on-year from 10.2% in Q3 FY '22 to 14.5% in Q3 FY '23. Profit after tax was at INR 37.5 crores in Q3 FY 2023, a growth of 134% year-on-year compared to INR 16 crore in Q3 FY 2022. EPS for the quarter stood at INR 7.2. Now taking you through the key highlights of 9 months FY 2023. So now we'll be talking about the 9 months before it was about the quarter. So for 9 and FY '23, the company registered a record high revenue and profitability. Our operating revenue stood at INR 1,030.2 crores in 9 month FY 2023, up by 65% year-on-year from INR 622.9 crore in 9-month FY 2022. So from INR 622.9 crore to INR 1030.2 crore. In the same period, our export sales volume grew by 58% year-on-year and export sales value grew by 67% year-on-year, at INR 904.1 crores. The company is growing in the export market and has made a remarkable progress in the countries like Yemen, Israel, Egypt in 9 months FY 2023. The company has also entered new countries in Central Asia, like Turkmenistan, Kazakhstan and so on. The gross profit for the year 9M FY 2023 increased by 43% year-on-year to INR 264.6 crores. Gross margin was at 25.7% EBITDA for 9M FY 2023, increased by 81% year-on-year to INR 110.4 crores, and EBITDA margin increased by 94 bps year-on-year from 9.8% in 9M FY 2022 to 10.7% in 9M FY 2023. In the same period, PAT grew by -- profit after tax -- grew by 88% year-on-year to INR 79.9 crores. PAT margin increased by 94 bps to 7.8% in 9M FY 2023 compared to 6.8% in 9M FY 2022. The earnings per share was at INR 15.5 per share, and the total inventory as of 31st December 2022 was at INR 439 crores. Thank you so much for allowing me to speak. And thank you so much for hearing me out. With this, I would like to open the floor for questions and answers, and thank you very much. Have a good day. Thank you very much.

[Operator Instructions] The first question is from CAO Capital.

Congratulations for great set of numbers. I'm Augustus from CAO Capital. Sir, I had a few questions. One was, can you tell us, going forward, given that we are adding so many new markets, how will the quarterly seasonality play out? [Foreign Language] But given the organic growth and given the new markets, how will that play out? So that's the first question. Also the seasonality and the variations that we'll see in the ASP going forward, because as you said, area under cultivation is very high this time and yet prices have gone up. So [Foreign Language] That's the first question, sir.

Yes. Rajeev Setia. First of all, I feel regret on my part that I -- after 1 or 2 phone calls, after a long gap I have resumed calling, and it will be more frequent in the future. This is what I assure. Now coming back to your question. Admittedly, rice is -- basmati is 1crop in a year, which various variant they start coming from September onwards and till October and the complete harvesting takes place. And yes, the farmer brings the paddy to the mandis, and we all start our production process. But we, as a company, precise rely to you question is we don't buy the entire material at the beginning of season. We keep on buying frequently. Simultaneous, our sales process is going on because we buy paddy and we buy rice also, which is a complete rice, but we still have to put into the process of air cleaning, stone cleaning or any kind of foreign material. We have to clean it up. We have to make it as per the international standards, SORTEX, metal detection and after that we pack. This in itself is -- that sophisticated and the latest machinery, it goes through. It is most essential for export. So that is also our kind of capacity, and there are so many supporting manufacturer will keep on buying whole year it is available. Rice is available whole year. Paddy, that finishes almost by March every year. But then there are -- there is limited availability. Largely, it is sold out by the farmers. Farmers or some traders also keep paddy. But yes, of course, it is a seasonal product. A period at the end of year, a period comes when there is short of supplies, but it's enough. Hopefully your answer is given.

And sir, about ASP [Foreign Language] So are you seeing this INR 80 plus number sustaining for the next, let's say, 4 quarters? Or will you see some correction?

Repeat your question.

Sir, average realization, do you see INR 80 plus sustaining throughout the year? Or will you see some correction?

This is a very subjective question for us. It's very simple. We buy on one side and sell on the other side like any business. So if we get -- I think whatever is the cost of procurement accordingly, the market prices open, and accordingly we sell. The advantage of the company is a very wide distribution around the world, very wide distribution. That is the catch of the business. We built up in so many years our market, our sustained relationship with the customers and meeting them in the exhibition, the travel, which Sankesh told. So this is how it happens. If the prices come down, for example, if the -- it matters, sometimes the prices are very high in the season, after 2 months they come down. In the commodities, prices go up and down, and we buy with some sales coverage. There is nothing blind in the business. We sell on one side, procure on other side and keep this balance maintained throughout the year.

Branded sales [Foreign Language] as a percentage of total sales?

The branded sale is 6% to 7%. Sankesh, you will answer or should I continue with answer?

You continue with the answer.

Okay. It's 6%, 7% as regard export is concerned. In Indian market, it is mainly our own brand, but international market is 6% to 7%. And the beauty of this business, though it is very small, but we are in 40 countries, 39 to 40 countries. Sankesh, I am right?

Yes, you are correct. We are in about 40 --

Yes, because you handle this part. We are in 39 to 40 countries. And you see whenever for any business, you find a good distributor, distributor prefers a product, which is famous in the market. For the new product, it's hard working for them. Most of the very big distributors don't catch on your product. We always try to sell to someone, maybe smaller person or bigger person., our presence should be in the country. And I have seen it, realized it that in few countries, in one of the African countries, our supply was just 4, 5 container a year. But the brand separate, there was limited competition, the brand separate, and now selling more than 100 container in that particular country I will name publicly. Today if something is selling in one country in limited area, gradually it will become famous. If my distributor works hard and enhances my sale, I'm very happy. If he's unable to do, at least my presence in the country, I have ease in finding the next distributor and place, this is the idea.

Right, right. Sir, one final thing, and then I'll go back in the queue, sir. I have other questions, but I'll come back later. Sir, one request, again, because of the Adani problem, corporate governance issues have come out in the open, and you have seen the way market has reacted. And I have always found your company to be trading at a substantial discount to what the fair value should be. And given the -- especially the cash on the books, generally [Foreign Language], but you are a cash rich company. Sir, my request to you is, you partially touched upon it that you will continue with the con call's regularly now. Sir I really appreciate it, sir. Also, sir, any of the corporate actions that you take, any of the end use of the cash that you make, sir please be very, very careful. Market is getting very finicky about these things. So I really hope that now that we are making such good progress on the branded side and on adding new markets and our growth is also coming, organic growth is coming, this is probably the best kind of growth that the company can make. You're doing so many things operationally. I just hope, sir, that we continue with our disclosures, and we maintain the highest corporate governance standards so that the value of the firm goes up so that everyone will win, sir. That is my only request, sir. This Adani thing, again, sir, please keep that in mind, sir, because markets are very, very finicky now, very, very finicky about bad corporate governance. It's a humble request. I have no complaints against you, but I just wanted to point it out.

Your suggestion is excellent, and I have taken very serious and good note of what you said. Historically, we have very conservatively and carefully run the company. That is, say, in our industry if you search, a lot of people have gone in bad shape. And they are in both periods also. And yes, on the corporate governance also we are implementing everything. And wherever we need, we are approaching professionals for that, that nothing goes wrong. Thank you so very much.

The next question is from [ Sanjeev Damani ].

Sir, for the last about 2, 3 years, I have noted you are a very conservative businessman and a very prudent businessman. And I really congratulate for the results that we have seen in this quarter. It is all because of your continuous perseverance and good strategies of the business that we are here today. So that is -- firstly, I want to really congratulate you and your entirety team. That is one. Now secondly, sir, just now I noted before I move to my other questions. I just now noted that you have an inventory of INR 439 crores as of 31st December. I am glad that this has been disclosed, so we have come to know about it. And another question is that can you also disclose the outstanding that we have on either export front or the domestic market? Can we get a figure of our net debtors as on 31st December, if at all we can?

Truly speaking, I have right now no figure, but I am aware it is always around INR 100 crore, INR 110 crores, INR 95 crores internally. And let me add one thing. My entire export turnover is insured with the ECGC under multiple buyer exposure policy. Any buyer, a new buyer, I get, if he is -- I online check. If the company is on adverse list of ECGC, I don't ship. If the party is available with the cover of risk, I export. So -- and I very rarely sell on DA, I mean, on a credit basis, which we have called in the common language. That is with very old buyers, well known for 20, 30 years. We are still continuing with that. But new buyer, it is against payment delivery. Despite that, it is insured. If the buyer doesn't take the cargo in any country, if I call back the entire to and fro expense is also insured with ECGC.

Very nice. Very happy to know this.

I mean, it is not blind risk. Because once in a while somebody will definitely default in every business.

Right. So now I come to my next question is regarding, sir, domestic modern trade that you are now targeting through Amazon and all others. So what are the prospects there and how we can push it more if it has not reached a reasonable level of your satisfaction? And one more question is regarding the fact that when we export, we always sell it in 1 kg, 5 kg, 10 kg packages or it is in bulk that it goes from here? This is I want to understand for my understanding, say, a 25 kg pack or a 50 kg pack, is that the way it is exported or we export it in our preprinted flexible packaging, 1 kg, 5 kg, that way in export market?

Yes. Most of the export is in small pack, 5 kg, 10 kg and 20 kg. Most of the export -- and 1 kg to -- this is how it is. Beyond 50 kg, we are not permitted because ILA, International Labor Organization, the maximum size has to be 50 kg packing. Beyond that, you cannot. And it is all branded pouch packing, BOPP packaging, non-woven packing, all kind of packing they do. Box in the jar, every fancy packing, they are very beautifully packed.

Now regarding modern trade, sir. Last question is regarding modern trade in India.

Yes. That truly speaking, we are very limited in that business so far. It's gradually growing.

And regarding online -- through our own website, if somebody clicks and gives you order, then do we deliver that?

Yes, yes. That is also available apart from that we have with Amazon, Flipkart, JioMart. And yesterday, the Reliance people were -- 2 days back, they were in my office, and they also plan to buy in a big way.

Very nice. Congratulations. I'm satisfied, sir. Of course, my pending requirement is dividend from your company, sir, I mean, our company.

I've taken due note of your suggestion.

The next question is from [ Somnath Paul ].

I just wanted to ask you, sir, from our analysis, we understand probably maybe around 15-odd companies or more based out of Delhi NCR and Punjab region are involved in rice export similar to yours. So I just wanted to understand, and I'm sure international standards are at certain levels. So what is that that makes your company score over other companies in terms of all the parameters, especially when we have 15-odd companies competing for a similar product in similar markets? That's the first question.

Admittedly, there are other competitors because that has to be in every industry. We are not out of that. You see, we are one of the oldest rice exporters. Since '82, we started exporting, and this business my dad started in 1974 as sole proprietorship first year. And after that, it was a partnership with me and my brother, family concerned. So we have seen all up and down and turbulences. It's a huge experience. Then it's a very spread market. It's very hard. It is very easy to say we put up a mill and we start competing others. Admittedly, some competition forms, but it's the strength, financial strength. If I buy the rice, I deduct 2% CD immediately. And on the third day, I make the payment. It's not even a week. When you make payment timely, your vendor sleeps comfortably after selling you, he sells cheaper also. Who gets this kind of advantage? I have cash. We are cash-rich company. We use that advantage, one, for our pricing. And we can better compete than others. And there are big company, equal company, they competed, very good rates. So it's part of business, nothing to be scared of.

Sir, secondly, I think you mentioned that the previous speakers that you have seen the highs and the lows of the business, and you have also seen a lot of companies going through a bad phase or probably getting bankrupt. So probably you being a cash-rich company, so have you come across situations or have you ever wanted to acquire companies in your business who have gone through bad shape either by their choice or by industry headwinds?

Absolutely not. I will never acquire any company from my own industry. I can expand on my own. I know how to -- how to put up the machinery. My brother, Vijay Setia is --

I would also like to answer this question partially. Sankesh Setia this side from Chaman Lal Setia Exports Limited, Whole-Time Director. I would like to inform one more thing, like when there is a bankruptcy, so most of it goes in our favor. So let's say, there's a company and they're doing a turnover of INR 500 crores and they go bankrupt overnight or in 1 year or 1.5 years, the business starts going down. So out of INR 500 crores of their exports, there are buyers who are buying -- somebody is buying worth INR 5 crores, somebody is buying worth INR 10 crores of rice from them annually. Somebody is buying worth INR 25 crores of rice from them annually. So automatically, we being a very strong player and we being head-to-head and we being complete knowledge, information about their supplier, their buyers. And we always have a target that, yes, this company is getting weak, their performance is getting low, their deliveries are getting late. So we automatically penetrate those buyers and all that sale, I won't say the whole INR 500 crores sale comes to me, but a huge chunk of that always comes to us because even a supply -- even a buyer is looking for a stable supplier so that who can supply them rice on time, who can pack their private label on time. There are a lot of supermarkets around the world who get their private label packed in India under their brand names, the Basmati brands. So they are looking for stable suppliers, good suppliers who can supply them good quality, timely quality, good pricing. So all these things matter a lot. And when a supplier gets weak, of course, a buyer also looks for a new supplier, and we're always there for them. So anybody gets bankrupt, automatically a huge chunk of business comes to us. So this is -- it goes in our favor. So there's no -- it makes no sense for us to acquire them. Automatically, the business is anyhow coming to us. And we are very choosy at that time because a lot of times because our total -- out of our total sale, only 2% to 3% of our business is on a credit basis, means udhaar, open graded without LCs or without any bank guarantees. So out of -- on our business, only 2%, 3% of the business is like that. So sometimes, let's say, there's an exporter who was exporting INR 500 crores of rice annually. And out of which INR 200 crores of supplies were on a credit basis. So I will not touch that business. I don't -- I'm not looking for the buyers who buy on credit. I would always say that the industry people, okay, you can take this business. I don't want this business. I'm more happy to leave this business apart. So they can go and grab that business. So I grab the cash business, good buyers who give good margin, who give good cash, whose payments are good. So it goes in our favor only when somebody gets bankrupt.

Yes. Don't wish anybody goes bankrupt.

And honestly, yes, yes, we don't -- we never wish that. I'm just replying.

Everybody should flourish.

Sir, the idea was more to do with sometimes acquiring assets, maybe, of course, the sales, as you said, comes to your books or under your kitty, but it was about assets as well. Okay. Sir, I think I'll put a final question, and I'll come back in the queue if I have anything more. So for the same basmati rice, what would be your margin profile say supposed to a developed country, maybe like Sweden or Australia versus an emerging smaller country? That is one. And secondly, as you mentioned, 6 to 7 of your exports are branded sales. So likewise, branded in exports and non-branded, how would be the margin profile different?

Yes. This question has been many times I have answered. Our large business is private label of the customer. So that is more important for you to first understand, you see what happens. For example, somebody from New Zealand or Australia or Canada, Indian people of Indian origin or Iran, Iraq, oriental part of the world, original, they set up the store there or warehouse there. They have to have multiple products from their own country or if they are from India, Indian and other products also. And they take rice. They fortunately or unfortunately, in our industry, private label business is huge from most many people. We have to do private label if you were to sell in our brand, buyer says, "I want my private label." Okay, fine. Now what happens when he starts the private label in pouch of 1 kg, 2 kg, 5 kg or 10 pound, 20 pound, it his brand, he wants the good quality, we give the good quality, we give the reasonable price. And when he starts the business, 1 consignment, 2 consignment, 4 -- after 1 year, 6 months, when he's happy, I'm getting good rice, my brand is flourishing in the market, that brand becomes his baby. He loves his baby the most. And we get the price. He doesn't want to change. It's a very big risk for anyone who is running a brand to change the supplier. As a distributor, he will have to -- somebody doing our brand, he will have to come to us. Private label can definitely go to the other person, but it is a very big risk for him. And he -- many customers say me, Rajeev, give me the good price, don't care for the price. Charge your price, but I want the best quality, best than anyone. This -- so our profitability as regard our private label business is concerning very good. And as regard to our own level is concerned, maybe in the beginning, sometimes we sell at breakeven also to enter into a country, but gradually, we start getting.

No, sir, if you could just quantify probably some rough range for --

Profitability, you see it cannot -- it's very subjective and it cannot be correctly determined because it's a commodity item. We get huge margins from the private label also and our own label also.

And sir, I was asking also about suppose basmati selling in Australia and New Zealand and Canada, which is a small country, which is growing. So do you have a margin profile difference there as well, similar items being sold in 2 different countries?

First thing from the well part of the world, Europe, we get better prices. It's premium market. Canada is premium market, U.S. is premium market because it's an FDA approved, you have to give SMB. Or unit is certified by plant quarantine department for export to U.S. It's mandatory for exporting to U.S.A. And these are granted FDA clearance rights. So we have a very huge business in U.S. and with a good margin. Yes, you are absolutely right, the country like Iran absolutely don't do business. It is simply a turnover business, no margin. Sometimes we lose money also. Yes, this Middle East market, some people pay good. And this -- though it's a very big market, we do business in this area also, large business, but we don't choose the top plus buyer. First category who buys, say, 100,000 tonne rice, we search for 20,000, 10,000, 5,000 tonne smaller customers who can pay better. Because if there is no profitability, I leave my business.

The next question is from Himanshu Upadhyay.

I had 2 questions. The first was, what percentage of business would be through private labels? And means, let's say, brands or private label which have been with us for more than 5 years, established brands, something like that can you give?

Yes. I have already explained in the last speaker, we have largely private label business, 8% to 9% around our own Maharani Basmati rice or branded rice. The customers in the private label, they are as long as 30 years old, '90s, '95, prior to that, very old customers. I have so many customers which I can count. They are 25 year old, 20 year old. The sustainability is long.

Can we see that more than 50% of revenue would be from private labels for us?

No. When my export is 7%, 8% in my own label, obviously my entire business, around 90% or a little more is from private label.

And when we do a private level, is there -- I mean supplier also generally given that we are the manufacturers and sellers on the, let's say, the private label bag what he is taking, is it generally given? So let's say, 0.5 kg bag, somebody takes a package or a brand or private label, okay?

No, we can do 0.5 kg also. We have infrastructure for packing 0.5 kg also, but we avoid, unless it is a very large good order, then we go. Otherwise, 1 kg, 2 kg, 5 kg is the main supply. So we make excellent bags for in packet, box it and packing in the container with entire care. It's done in Karnal factory only, not by local transportation and sending that destroys. So everything is done there.

One last thing. How are we looking at inventory management, okay? See, we have seen prices of paddy and basmati rice, both have increased in last 1 year. And some of them are at all-time highs, okay? The amount of inventory what we have, is it a presold inventory only that we are keeping or we are keeping some excess inventory? And is there any risk of price fall on that inventory at any point of time? Just some thoughts on that.

This is the best question so far amongst all because this is something which we always think, and it's something we have to be very, very conscious of that when I buy it. We go with the satellite data of production when paddy comes. We carry out our own surveys for the size of production. We check how much is the last year crop is available in the market and prices. And of course, demand. Now it's the question of demand and supply. Yes, we have to buy some material, unfold also in the beginning -- and thereafter, the sale starts, customer also now for the last 15 days, people are waiting for the Gulfood, because the company is participating in Gulfood from 20th to 24, 5 days in Dubai. It's one of the biggest there. Many of my existing and prospective customers will come. People wait, we'll see the price there also. So on one side we sell and on one side we buy. We can match our prices. And because as I told, we have established sales around the world in 90 countries we are selling now, and we can -- likely to increase also. So it's a hedged product. We have sales. It is already hedged, this much this buyer will buy even if he buys 20% less this. We make all data's. We prepare everything before buying. For example, my 3 months quarter sales is INR 350 crores, INR 360 crores -- INR 353 crores, 3 months. my stock built up as of December is INR 439 crore. So I can comfortably sell in coming 3 months. If I compare with my preceding quarter, so this is how it is balanced. We sell and buy and we buy and sell. This is a continued process.