Mitsu Chem Plast Limited (540078) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q3 FY '24 Results Conference Call of Mitsu Chem Plast Limited, hosted by Kirin Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Chandni Chande from Kirin Advisors. Thank you, and over to you, ma'am.

Thank you. On the behalf of Kirin Advisors, I welcome you all to the conference call of Mitsu Chem Plast Limited. From management side, we have Mr. Manish Dedhia, Joint Managing Director and CFO; Ms. Kashmira Dedhia, Vice President, Finance and Accounts. Now I hand over the call to Mr. Manish Dedhia. Over to you, sir.

Thank you, Ms. Chandni. Good evening, everyone. I extend a warm welcome to each of you as we convene here for our quarterly conference call to delve into the performance and future prospects of Mitsu Chem Plast Limited. It's a pleasure to have you join us today. Reflecting on the recently concluded Q3 FY '24, we are proud to share that despite encountering cost pressure, our total income stood at an impressive INR 73.74 crore. Among these challenges, we reported a resilient EBITDA of INR 7.70 crores and our net profit reached to INR 3.18 crores. This achievement is a testament to our commitment to cost optimization and profitability improvement. In our pursuit of sustainability, we remain dedicated to energy conservation and green initiatives. Our innovative measures have not only reduced wastage, but also optimized consumption, resulting in substantial cost savings by embracing advanced technologies and installing efficient machinery, we are contributing to a more sustainable future. Strategic investment in product innovation and value-added offerings have been a cornerstone for our efforts to meet the escalating demand for packaging products. Our unwavering focus on becoming a preferred partner for the supply of packaging material has led us to strengthen our product portfolio continuously. Product innovation and value engineering continues to be our focus to enhance product portfolio and product quality. I take pride in announcing our latest innovation in sustainable packaging solution, MiEcoPET, by using 30% to 50% less raw material than traditional HDPE container and incorporating 30% to 60% recycled PET material. MiEcoPET reduce waste, conserve resources and cut costs without compromising strength or durability. MiEcoPET appears to be a game-changer in the packaging industry, offering a compelling combination of sustainability, efficiency and functionality. It is a testament to our commitment to innovation and responsible business practices. Mitsu Chem Plast has played a favorable role in advancing health care innovation globally. Our engagement in collaborative ideation has generated solution with universal applicability, reinforcing our standing in the industry. The company took part in the MEDICA Dusseldorf Exhibition in Germany, hosted by Messe from November 13 to 16, 2023, and also took part in Arab Health 2024 at Dubai UAE from 29 Jan to 1st February 2024, showcasing innovative health care solution. The impact of our presence has led to inquiries from diverse countries, underscoring the global signification -- significance of our contributions. To grow, we need to invest to stay ahead of industry trends and leverage increasing demand. We are raising funds via the right issue. The right issue is offered in the ratio of 1:8. That is 1 right issue share is offered for every 8 equity share held by our investors. We are offering the right issue at a price of INR 144 including premium of INR 134 per share. The fundraise will be utilized for various purpose like repaying debt, funding working capital requirements and expanding business. This investment are crucial for staying competitive in the industry and maintaining our leadership position. Now, Ms. Kashmira Dedhia will take you through our financial performance during Q3 FY 2024.

Thank you, Mr. Manish Dedhia. Our total income surged to INR 73.74 crores with a 2.91% growth compared to the previous period. The effective implementation of cost control measures significantly bolstered our EBITDA reaching to INR 70.70 crores and achieving EBITDA margin of 10.48%. Our strategic cost control efforts led to an impressive 300-plus basis points rise in EBITDA margin. This led to remarkable 46.60% increase in EBITDA and even more noteworthy 75.95% rise in net profit, reaching to INR 3.18 crores with a net profit margin of 4.33%. Our operations showcase efficiency and profitability. We remain focused on sustaining this positive momentum and driving continued growth in the upcoming quarters. Revenue during quarter 3 FY '24 was driven by the demand for our products across various business verticals. Notably, molded industrial plastic packaging products contributed to the larger share accounting for approx 86% of the revenue. The hospital furniture parts also made substantial contribution of approximate 12%, and others, including infrastructure and furniture contributed approx 2%. Maintaining a commandable level of capacity utilization at around 70% on an installed capacity of more than 25,000 metric tons per annum, Mitsu Chem Plast Limited continues to position itself as a reliable industry player. I exchange my heartfelt gratitude to our stakeholders for their unwavering support, which has totaled our journey forward despite various challenges, rest assure. Mitsu Chem Plast Limited is on a growth trajectory, and we are committed to sustaining this momentum to secure a leading market share in the plastic packaging industry. With this overview, I'm now open to taking questions from all of you. Thank you.

[Operator Instructions] The first question is from the line of [Yashwanti ] from Kojin Finvest.

So just wanted to understand what are your strategies on operating margin, though we have improved to 10% less, but what is the headroom for further improvement? And what would be the driver for the same?

Ma'am, if you can just repeat your question, sorry, I could not understand it very well.

Okay. Sir, you have reported operating margin of 10% plus, 10.23%, which is, of course, an improvement over the past few years what we've seen. But what I'm asking is what are our future growth strategy to take it forward from the current level? And what will be the growth driver for this?

Okay. So yes, great question. I think we -- as I told in the last call also, so our internal target is again 12%. But yes, yet to achieve the full year goal by 12%. So 12% is our goal. And there are many growth drivers. So not different, different. We are -- also have launched this new product with also high EBITDA margin EcoPET. MiEcoPET is also a new product. So we are definitely very confident to achieve a higher EBITDA margin.

Okay. Sir, we can see somewhere in FY '25, we are close to 12%? What is your outlook on it?

Very much positively, I can say, yes, because I think I'm looking at a very positive market for next financial year. And yes, you can see there is growth -- already I had in my last call also, I said third and fourth quarter will be much better quarter. But definitely, the whole year will be much, much better than what we are -- what we have seen in third and fourth quarter.

Okay. That is really great, sir. And sir, you just talked about the new innovation that MiEcoPET containers. So which user industry will be benefiting from it? And have you approached any clients in the specific industry for these products?

Yes. So this is particularly for lube oil, edible oil and FMCG industry. We have already approached some edible oil containers -- edible oil companies and lube oil. They have shown interest. The product is under trial at their factory.

Okay. Sir, the customers -- yes.

[indiscernible] product -- first time in India we are bringing this, so everybody are little curious and they also wanted to have a lot of checking before giving the orders. So which is fair enough for us.

Okay. Okay. Okay. And are these customers are from our existing client portfolio or the new customers?

Both.

Sorry, sir, I didn't get you.

Both. Both. So new customer as well as our existing customer also.

Okay. Sir, and we should supply to our -- few of our OEMs who then supplies in the export market. So whom we call it as deemed export. So we are seeing that business has been shaken during the political issues in the -- and the global scenario as well as the corona lockdown. So how is your volume status over there? Have we resumed our sales to those customers?

Most probably we are giving it to India, okay? And my customers are exporting. So definitely somewhere while U.S. crisis and other crisis have been done, so they have affected for sure. But I see my products are going into both domestic and for export related. So domestic market is too good -- doing -- at least from last 1 quarter is doing very good. So third and fourth quarter is doing very good. So definitely -- I mean like for both, local and export is doing very well.

And we do not directly sell anything in the export market, right, sir?

Sorry, sorry, sorry.

We do not sell anything in the export market?

Not yet.

Not yet. Are we planning anything?

Yes, yes. As I said in my con call, today's con call also, the hospital furniture is very much marketable for -- I mean export-related products. And we have many, many inquiries, many, many firm inquiries. So any moment, we will announce that once we receive the export orders.

Okay. And so currently, how much the hospital furniture contribute to our revenue? Rather, if you can just give you a use-wise, segment-wise product contribution to the revenue?

So packaging is 86%, 12% is hospital furniture and 2% is infrastructure furniture and others.

[Operator Instructions] The next question is from the line of [Khushboo Kaur ] from [ TP Capital ].

Yes. So could you elaborate more on our new product or PET container?

Okay. See, this -- I mean, what do you want to know exactly? Technically, you want to understand -- you want to understand what exactly?

Sir, I want to know when it will be reflected in our financials. Also, how much of the margin we are spending -- like how much margin we can expect from this particular new segment umbrella?

Okay. So I think this will reflect maybe as we have started a little late. Maybe I say, we will start the commercial production. Already, we have started something, but the effect will come from the next -- first quarter only of '25.

Okay, sir. And are there any marketing initiatives planned to enhance brand reputation?

Any marketing, sorry?

Marketing initiatives.

For?

To enhance brand reputation and publication.

Yes, yes, I mean we have already done that. And I think you will see more marketing efforts in few times -- in a few days' time. Maybe you can see our LinkedIn, Instagram, Facebook, all doing there. And definitely, to our prospective clients also, we are giving them demo.

So a few more questions. We will sustain the same margins for FY '24? Or will it be increasing?

For '24 or '25?

'24 -- the next coming quarters.

Yes. So it looks like we might try to at least match the last year, the thing. But '25 will be much better. So as I said, like quarter-to-quarter, if you ask me, I always say that Q1 and Q2 was not too good for Mitsu. But yes, Q3 and Q4, I look very positive.

About your participation in MEDICA event hosted by Messe held in Germany. Any progress, sir? Any inquiries by global packaging partners...

Many inquiries have come, but it takes some time to develop that product to design because everybody wants something new. And yes, it is a very, very positive sign. Very, very good. This was our third year, and I think this was a very, very important year for us.

The next question is from the line of [ Shivam Sharma ] from [ PCR Capital ].

Congratulations for a good set of numbers. So my question was what is the capacity and capacity utilization post retail expansion?

So, sir, our capacity per annum was 25,000 metric tonne plus and the capacity expansion is around 835 metric tonnes, approximately.

Okay. And what is your fund deployment plan, the proposed right issue? What is the fund deployment plan, which are proposed right issue?

So we have the 3 objectives: one is loan repayment. Second is we have the small working capital debt and the balance fund we will use for general corporate purposes. This will be then can be used for capital expansion.

Okay. And so what is your current working capital cycle?

Net working capital cycle around 80 days for quarter 3 as on 31st December.

So generally, it is at 60 days. Due to some raw materials came a little early, so our cycle time has increased. But generally, average, over cycle days is 60 days.

Okay, sir. And sir, how are raw material costing with oil price volatility?

How are the...

How are our raw materials costing with oil price volatility?

I think it's very much directly effective for sure. But with this, definitely, demand and supply also works together. So crude oil price, demand supply, this is all impact our pricing.

[Operator Instructions] The next question is from the line of [ Ankit Kumar ], who's an individual investor.

I have questions like what is our capital? [Foreign Language] Are there any CapEx on our card?

CapEx on our?

Sorry, Mr. -- if you can just repeat your question, please.

Sir, is there any plan for capital expenditure?

Okay. So not now. Definitely, we have many things for expansion as we are coming up with the right issue. So we are keeping some money for research. But once we will have that money and then we will decide and maybe we will announce for that.

Okay, sir. So the funds raised from the issue, how much are we going to invest in research and development?

So research and development, we are already investing a lot in last 2, 3 years. So that is our separate fund, and I think we are investing regularly because our new product development team is a very, very strong team. And we have many, many research and many new developments are going on there.

Okay, sir. Sir, do we have backward integration for plastic recycling?

So, yes, not yet. We are thinking about this. So right now, we are buying from outside. But one, that is looking like substantial quantities, then maybe we can think about this, but not right now. Well, I think very valid questions.

The next question is from the line of Akhil Parekh from B&K Securities.

Could you please clarify on what is the current debt we are having right now?

It is INR 97.54 crores, including current and noncurrent, both.

Okay. And how much will be long term of the INR 97 crores?

INR 36.8 crores is long term and INR 60.74 crores is short therm.

That's the working capital.

Okay. Okay. So with this rights issue right, and this up to INR 45 crores, how much will be used to kind of repay the debt?

Sir, I will just correct your -- this thing. We are coming a bit at INR 21.73 crore issue. And out of that, yes, we will repay our INR 15 crore debt and the rest amount will be for reserves and some will go into our working capital.

Okay. Great. So how would the quarterly interest cost would look like, right? Because right now, we are paying almost upwards of INR 30 crore of annual uses, the finance cost. So for next year, what kind of finance costs you should expect on annual basis?

Good question, but it's a tricky question as well. So definitely, see, we -- I think, I see finance cost also going down because most of the -- after this issue -- right issue, there will be only a bank finance. And I see bank finance will drastically down from the first quarter of 2025. We'll start reducing a little bit. So you can consider and definitely after paying off some debt, the cost will be a little less on Mitsu. So finance costs will be approximately INR 2 crore -- INR 2.5 crores will be lesser as of today's figure.

On an annual basis, you're saying or quarterly basis?

Annual basis, for sure.

Okay. Perfect. And second, in your recent media article, we have read that Mitsu is planning to have a INR 1,000 crores of top line in the next few years. But we have not seen any significant capacity addition at least for the last 1 year, if I look at it, right, when we added around 1,500 tonnes for pail manufacturing and another 800 tonnes for a new product right now. To reach from current INR 300 crores kind of a top line to INR 1,000 crores, we need significant capacity addition, right? So if you can highlight like if there is any ballpark or rough estimation of capacity expansion for next 2 to 3 years, if you can highlight?

So it looks like my next call, I can tell you some of the things -- it looks like because we are not ready with many things about this right now.

Okay. And sir, the current capacity of 25,000 tonne, sir, how much is the potential for the total?

INR 500 crores, approximately INR 500 crores.

So the current capacity can be 100% utilized, or is it up to 85%, 90%?

85% to 87%.

Okay. And 95,000 you are saying, we can reach INR 500 crores of a topline.

Right, right. INR 475 crores to INR 500 crores, we can achieve.

The next question is from the line of [Deepika Chadha ] from Kojin Finvest.

I have 2 to 3 questions...

Sorry to interrupt. Deepika, may we request, you use the handset mode, in case if you're using your speaker mode.

Okay. Am I audible now?

Yes, ma'am.

Sir, I wanted to know what is the current contribution from our Hospital Furniture segment?

12%.

Okay. And any new clients added in the last 6 months?

New?

New clients added?

Yes. So we have added around 25 clients in last quarter.

Okay. Great, great. And what is the contribution from our top 10 clients?

So, ma'am, around 50% to 60% from -- of the business comes from the top 10 clients.

[Operator Instructions] The next question is from the line of Jayesh Shah from Arihant Corporation.

I would like to ask some -- few questions. So first question is, what are our future growth strategies for the growth expansion?

Okay. So see, first, I think we have just launched this EcoPET, MiEcoPET. So this is the first of the initiative. And it goes very well, so maybe we can expand in the same business. Further, as I said, like by next con call, we will be able to announce something good if possible.

Okay, great. So any new product launches in the pipeline?

In the?

Pipeline process.

I'm sorry...

In the pipeline.

No, not yet. Not yet. So I think whatever it was there, we have already announced. This MiEcoPET was a new product. We have already announced.

So last question is that what is our current debt on average cost of borrowing?

So current -- short-term debt is INR 60.7 crores.

Okay. Average cost of borrowing?

What?

Average cost of borrowing?

10%. 9.75% to 10% approximately.

The next question is from the line of [ Sai Kiran ], who's an individual investor.

Am I audible?

Yes.

Sir, just a quick question. In the presentation, you see that approximately 1,100 points are there for you. And if I look at in terms of the top line and even the top-end customers, the per customer revenues above -- even from the top line beyond that is also extremely small. Just trying to understand, sir, what will be the typical scale up per customer for you in terms of the top line? And also beyond top 10, how scalable are these customers in the long phases?

So typically -- I understand your question. If I -- correct me if I'm wrong. So if you wanted to know about how much we are -- I mean, one customer is giving us their business, right?

Yes, sir. Yes.

So, sir, I'll tell you one thing is about 70 to 80 customers, top 70 to 80 customers are giving us 80% business. So our risk is very well diverted. So we are not depending too much on our clientele. And like typically, if you ask me, one client in the year...

It varies very much.

It varies too much with the client to client because we have like 80 to 90 clients which are completely different and they give 80% business.

Sir, if you start picking your top 70, 80 customers, can that be possible that our clients you can go up to INR 15 crores or INR 20 crores per customer. Is it a possible scenario as such?

I'm sorry, I didn't get you. The question...

What I mean to say sir, even existing customers, per customer, is it possible for Mitsu Chem Plast to generate INR 10 crore revenues or INR 15 crore revenues per customer? Is it possible? Or it is not possible?

And you are talking about per year?

Yes, sir. Per year, sir, yes.

Sir, typically, you can say customer to customer difference. But like -- see, we do not intend to give more than 5% generally to one customer. That's our basic policy. So if you consider our INR 310 crores, so the total is INR 15.5 crores for 5%. So that's our maximum amount. We can also give it to one of the customer. Yes. But I think INR 10 crores to INR 12 crores is one of the biggest customer we are having the business.

So I assume that there is no restriction for you to get to 5% or 10%. Assume that you are a INR 1,000 company, right, so how -- so you think customers can be scalable? That's my question.

It is scalable. So all my clientele are most of the MNC companies or a limited company. So definitely, yes, it is possible to grow business with them.

Understood. So in other words, can I say this sir that you don't need to look for new customers to grow the business. You can still look inward, the existing customers and will grow the sales from the existing customers, we were trying to sustain, sir?

I'll defer your question a little bit. I mean like it is not like that, that we are always in search for new customers because this is a very, very competitive market. And there are many new companies that are coming up daily. So we always search for a new customer also. And definitely for existing customers also. So like whoever gives us the best bottom line, we will stick to them. That's the reality.

Got it, sir. Got it. So if you have to take a step back and then look at your business, it's an extremely low EBITDA margin business as we speak. And the asset turns were extremely high. Just me being the financial analyst, the fourth assessment what I can take is, that look, there is not many entry barriers for this business. And probably there is not significant mode also there. How does this like reading the financials, but would like to hear from your perspective, how do you look at this business? And what kind of asset terms are possible? And why a customer deals with Mitsu, but not with others? If you can just explain that, that will be really helpful, these are only 2 questions from my side.

Right. So very good question, I think, and a very relevant question for Mitsu. Yes, I think before COVID, yes, you are right, there were a lot of things, were entry barrier and everything. Nowadays, customer wants everything. So my customer, as I said, most of the customers are MNC or most of the customers are a large corporate. Now they want all the systems in-house. They want -- and like sustainability, EPR, they want a PCR, they want EcoVadis. So all the licenses, all the system, GST compliance and many other things. I'm not talking about ISO, it's a very, very small thing, but we want the top ISO. We want to -- we want that their suppliers to adopt each and every rules and regulation of Indian government, which is around 55, 60 rules and regulations. And we need to fill up that and things. So which is -- sometimes it is as seen. See there are 2 types of suppliers like us: one, they -- either they believe in all the systems, one. And the second one, they do not believe all the system, they just manufacture and they supply. They will also find a client. But I think this way, what we are doing as a Mitsu and very few other suppliers like us are doing the same system. So it's a really, really differentiate and beneficial to organize player like us.

Understood, sir. Understood. That means some shift from unorganized to organized is happening, that is also driving some portion of the growth is what you're saying, sir?

Yes, yes.

Okay. And second, sir, the asset terms, how do you look at this, sir? Say, for example, if you have a INR 10 crores kind of fixed assets. As of now, I think you are somewhere around 4 to 5 at asset terms is what is happening in terms of the sales. Is it sustainable, sir? Because some of the competitors who are like operating at a much higher EBITDA margin, but very low asset terms, just trying to understand, sir.

So right now, our fixed assets turnover ratio is around 4, and we are saying that we will improve it in a short-term period of time.

But the average in our type of typical company is around 5%.

Company is in the expansion mode right now. So that's why you see the improvement in fixed assets turnover ratio in near future.

Understood. Understood. So essentially, you have any thresholds in your mind when we do a CapEx in terms of ROEs and [indiscernible]?

Not exactly. But -- it's different for the different products. So like we are also right now on that mind that who gives us a better margin. So I think that's what our main agenda is right now.

[Operator Instructions] The next follow-up question is from the line of [Khushboo Kaur ] from [ TP Capital ].

Sir, could you please elaborate on our sustainability initiatives and any progress you make towards achieving our environmental goals?

Okay. So -- okay. So first thing is like the product what we have launched, this MiEcoPET is very much sustainable product. As I said, like 40% to 50% less plastic will go and 30% to 40% we can use recycled material. So I think this is a very big initiative what Mitsu has taken place. About existing products, we are doing many, many things, like we are doing PCR and wherever we can use and we can suggest our customers. As our customers are a very large corporate and MNC, so it takes a lot of time to explain them and a lot of time to get the approval. But yes, we are on that verge of doing many things sustainability, as we are compatible enough to give them recycled material product as they require.

Okay. And sir, is there any regulatory challenges and compliance issue that we are facing?

No. We do not -- facing any issue. We are compliant with all the rules and regulation as per government norms.

Okay. With regards to the competitive landscape, has there been any shift or new entrants impacting our new market position?

I'm sorry, ma'am, you have to speak a little louder. I did not understand.

Yes. With regards to the competitive landscape, has there been any shift or new entrants impacting our new market position?

Not exactly. I mean like you are talking about other new initiatives?

Yes.

Not really, not really. Because I think we are also walking with the new market trends, whatever it is in the market.

Okay. Sir we supply to the customers who export material for using our packaging, which calls as a demand export -- deemed export. Last 3 years with potential instability with corona lockdown and all, our sales to these customers were affected badly. So what is the current state of our supplies to them?

No. I think for some of the time they have affected -- and export has been affected, like shipping costs was exorbitant high. And again, I think second and third quarter, again the Red Sea issue happened. And I think again, the shipping cost has gone higher. So we always -- I mean like those our clients do not export, then maybe we have to switch over to our clientele who procures for local material. And that's how we have a flexibility as we have many clients. So we have that flexibility for sure.

[Operator Instructions] As there are no further questions from the participants, I would now like to hand the conference over to Ms. Chandni Chande for closing comments.

Thank you, everyone, for joining the conference call of Mitsu Chem Plast Limited. If you have any queries, you can write to us at [email protected]. Once again, thank you for joining the conference.

Yes. Thank you. Thank you very much.

Thank you. On behalf of Kirin Advisors, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.