Sealmatic India Limited (543782) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Sealmatic India Limited FY '25 Half Yearly Earnings Conference Call for the period 1st April 2024 to 30th September 2024. [Operator Instructions] Please note that this conference is being recorded. A statutory notice. All content on this earnings call is for informational purpose of a general nature only and does not address any circumstances of any particular individual or entity, do not construe any such information or material as legal, tax, investment, financial, professional or any other advice. Content on this earnings call does not represent or constitute any solicitation, investment, recommendation, endorsement or offer by Sealmatic. Any information, materials, statements and/or data set out herein is subject to change any time without notice, and as such, no reliance must be placed on fairness, accuracy, completeness or correctness of any information and materials contained on this earnings call. I now hand the conference over to Mr. Umar Balwa, Managing Director of Sealmatic India Limited. Thank you, and over to you, sir.

Thank you, Ryan, for this introduction. Good evening and a very warm welcome, ladies and gentlemen, to this fourth earnings call of today. Before I begin with the formal address, I take this opportunity to express my heartfelt appreciation to all of you for taking the time out of your busy schedules and accepting our invite and to be part of this call. I would also like to express our gratitude towards our shareholders and the keen interest expressed by investors and the analyst community in our company, Sealmatic. As I have already briefed over the previous 3 earnings calls about the company and our journey in the business of mechanical seals, and hence, there's a lot of data available on the BSE site and also on our social media handles such as YouTube, LinkedIn, Facebook, Instagram, et cetera. Hence, I will not get into specifics and make this introduction as brief as possible, which should allow us to take as many questions as possible. Just a brief introduction about the 6 months that went by. Sealmatic succeeded in increasing its turnover by 19% on a half yearly basis as compared to FY '24. Our half year turnover period ending September 2024 stood at INR 448 million. This shows the demand for Sealmatic products is very strong and is being driven by the markets in India, Europe, North America, Middle East and other regions globally. A quick look on the outlook for financial year 2025. So for the financial year 2025 half yearly, Sealmatic has achieved a year-on-year organic order intake growth of almost 25%, which shall lead to seamless operations and will enhance profitability and similar increase in the top line. Our continuous investment into research and development drives our commitment to keep evolving our capabilities as a leading sealing technology company globally. In the Middle East, Europe, Russia and U.S.A., we are currently expanding our footsteps to support various OEMs and end users. Our recent joint venture in UAE, Abu Dhabi, in the name of SealTech LLC will provide world-class support and services for mechanical seals, addressing the needs of major customers like ADNOC, OEMs like KSB, Sulzer, Sundyne, Ebara, and host of other EPCs such as PEG, Saipem, Maire Tecnimont, Worley, Wood Group and many other important customers, thus targeting a significant portion of the USD 60 million mechanical seals market in the UAE. Similar activities are in an exploratory stage and are being conducted in Oman, Kuwait and Qatar for the Middle East region. We are also exploring and are conducting a feasibility study for establishing a service center in Houston, Texas, U.S.A. Russia has been a good opportunity and a lucrative market for us. We are putting a major thrust over there. We have participated on a continuous basis in exhibitions. Until now, in the period of last 18 months, we have participated in 3 exhibitions with great success and are slated for the next exhibition in April 2025. Thus, our focus in Russia is in a strategic manner. Other important exhibitions that we are participating in the near future are at SABIC in Saudi Arabia, which is slated in January 2025; Egypt in Cairo, February 2025; Oil and Gas India in Mumbai, March 2025; Defense Expo in Chennai in September 2025; Pump Symposia in U.S.A. in September 2025. Our drive towards penetration in various markets is relentless and we are committed to establishing Sealmatic as a global player, or rather I would say that we are globally recognized. Our new manufacturing unit in Kaman got fully integrated with our Mira Road unit. The new facility spanning an impressive 25,000 square feet signifies a remarkable expansion. Thus, this will enhance 65% of our production capacity to the existing capacity at Mira Road. Other important developments were such as we have signed an agency agreement in Saudi with the STG Group, thus marking a significant step in the company's expansion in the Kingdom of Saudi Arabia. The mechanical seal market in Saudi Arabia is currently valued at an impressive USD 150 million, thus giving us opportunity to a potential of a huge market over there. Our global market, which is exports to more than 57 countries, has demonstrated a longevity along with year-on-year growth and will remain essential even as new markets will emerge in the near future. We will continue to invest for particularly demanding API 682, oil and gas, nuclear, marine and other high critical applications. In this manner, we will create long-lasting value for our shareholders and employees, as a result of which we are one of the chosen companies in the field of mechanical seals for critical applications in nuclear, marine, power plants, oil and gas, et cetera. We have undertaken various CSR initiatives for development of society, including education, health care, destitute care, women empowerment, et cetera. I would also like to extend great appreciation and thanks to our shareholders for all their support and to our employees, customers and partners, without whom none of our achievements would be possible. I will now hand it over to Ratan, who is our CFO, to share vital details about the half year that went by.

Good evening, ladies and gentlemen. We are very pleased to present our results of half year FY '25, which showcased significant performance. During this period, we have achieved revenue of INR 44.83 crores, which is an increase by 19% as compared to first half of FY '24. We have achieved the profit before tax of INR 8.77 crores during first half of FY '25, which is a 20% total of revenue. These profit are in line with profit percentage earned in March '24. In this first half of FY '25, we have achieved the EBITDA of INR 10.36 crores, which is 23.1% of our total revenue earned in first [ half of ] of FY '25.

We are ready to take questions.

[Operator Instructions] The first question is from the line of Pavnish from Hridya Cars Pvt Ltd.

Sir, my question was over a potential issue cancel [Foreign Language]. What could the effect on liquidity of the company?

The withdrawal of preferential issue will have no bearing on the cash flow or the liquidity of our company. We are well and sufficiently financed. So to that extent, it doesn't affect our functioning or operations in any manner. Yes, the market conditions are turbulent at the moment and the investor would have thought otherwise, and they decided to postpone it for a while until the markets are in a more stable condition. So that was the only reason for a withdrawal from the preferential investor.

And sir, my follow-up question on this would be like what kind of revenues do we project in coming financial year, like financial year '26-'27? If you could give some guidance on this, please?

I can give you guidance for FY '25. So if you compare us with the previous year, FY '24, our incremental growth on the top line would be by 25%.

Okay. And sir, one more question. Like is there any route through which retail investors could also participate in the preferential issues that would be there in the coming future?

Yes, we would very welcome retail investors to participate in the preferential issue as and when we come out with the sale. But as you know, there would be a minimum ticket size to that. So that could be discussed and we could design a particular preferential issue in that manner. I mean, we would be very happy to have as many investors possible rather than going with 1, 2 or 3, I would be happy to have more than 25 investors.

Yes, I'm asking the question because there was a notification on the BSE that you would be having a preferential issue. And then there was a notification that it will be canceled. I mean, how do I approach the company to participate?

In fact, if you recall, if you would have seen -- if you have followed the BSE side, so at the time of the Board meeting, it was announced that we are coming out with preferential issue and everybody had a chance to come and approach the company and we would have welcomed them.

Okay. So next time whenever there is a chance, I can approach the company and I can participate, provided I meet a minimum investment criteria?

Absolutely. You are very welcome, Pavnish.

And just one last question, sir, how do I approach the company for this?

You have e-mail ID listed on the BSE site. You can write to compliance at Sealmatic and you will be very promptly answered to your e-mail.

The next question comes from the line of Devender Wadhwa from Value Prolific Investments Advisory.

My first question is, what is [Technical Difficulty] basis? And what is the revenue visibility we are looking for?

I'm sorry, Mr. Wadhwa, I didn't get your question.

My question is what is our order book currently? And what is the revenue visibility?

I have answered this question to Pavnish, but I'll still answer it once more. We're looking at an incremental growth of 25% of the top line for FY '25, and the order book is robust and healthy to give us another incremental growth for FY '26.

Sir, could you give me a ballpark figure of the order book, if possible?

Order book as on date would be INR 500 million.

INR 500 million. Okay. And my next question, sir, we are doing lots of collaboration with other companies in different countries. How does it translate to revenue of the company?

The only joint venture that we have is in Abu Dhabi, and whereas in all other countries, we have authorized sales and service representatives. So we sell them and further they sell it to their customers in the region over there.

Recently, you also did a collaboration with a Russian company. So how does it impact our revenue? How much percentage, if possible you can share?

Russia has been very good opportunity for us because of the ongoing Ukraine situation, as we all know. The market that we see in Russia is going to be very, very robust and healthy for us. This year, in FY '25, we expect a revenue of almost INR 8 crores from Russia alone, which is profitable and which is a growing business for us in Russia.

The next question comes from the line of Hardik Gandhi from HPMG Shares and Securities Private Limited.

Sir, just wanted to know on the bottom line. So we had a good growth on the top line, but the bottom line was quite -- comparatively lower than last year's same period. So what was the major reason for that?

A lot of investment has gone into sales and marketing, mainly exhibitions. And if you look at that expenditure, that has been enormous because you need to invest money into new markets. And we also established 5 sales and service centers in India, which are manned by Sealmatic employees. So that's the major expenditure. But all said and done, we'll have a good bottom line for FY '25. As you see in the half year, it is 23.5% at the moment, and we are very confident of increasing it to almost 25.5% on the bottom line. That is the EBITDA I'm talking about. So if you compare us with the previous years, we would be lying on the bottom line as well.

Understood, sir. But just on that front, given that we have done this CapEx, and for now the money which was coming from preference is not there -- has been stropped, right? So how will it affect us? I know you previously mentioned this, but -- so you say that we have good liquidity as well as there is no issues for the plan going forward. But there was a reason why we raised this money. And if this money is not coming to us right now, so that will affect us in some negative way. So I just wanted to know what's the plan on that front?

Mr. Gandhi, it wouldn't affect us in any manner operationally or the cash flow. The money that we are seeking via preferential issue was our expansion into Middle East and into U.S.A., which still can be furthered or postponed by, say, about 4 or 6 months when the markets will become more stable. Currently, it has got no bearing on the withdrawal of the preferential issue.

Understood, sir. And are we still planning to capture the 15% of the market share? Or have we increased from that 15% going forward?

Yes. I think I have clarified this in the previous earnings call as well. The 15% of the market share that we are trying to attain is of the new requirements.

Correct, correct.

Yes. We are very much on line.

Understood, sir. And sir, just one last thing. What is the capacity utilization for the existing plant? And how fast do you think that the new plant will ramp up?

The current existing capacity utilization, I would say, on a ballpark figure would be 80%. And the new plant in Kaman, which is 20 kilometers from the existing plant, is already integrated and would be ramped up in the next 2 or 3 months' period maximum.

Understood. And that new plant has a 65% additional capacity?

Yes, yes.

And how much of a -- like let's just say that plant also wants to reach 80% utilization. So in how many years' time do you think that's a practical...

I would say, it would be fair to say, in the next 18 months' time, the plant 2 also would be having 80% capacity utilization.

Okay. And previously, you had mentioned multiple times that in the next years, we will have a golden era where there will be a repeat demand on that front. So do you think that is still intact and we can see a good growth on the repeat orders from the OEMs and everything?

Yes, I've always mentioned that our Chandragupta Maurya period would start from FY '27. And that's the whole purpose of investing into OEMs and projects and subsidizing our sales. So from FY '27, we see a great growth in profitable business for the next 25 years.

Understood. And just one last. I know I might be taking...

No problem.

Yes. So on the Dubai front where -- sorry, not Dubai, the Saudi front, where you mentioned that we were going to use that INR 25 crore preferential to do a capacity expansion. So if we are going to postpone it, firstly, how long do you think we are going to postpone? And second thing is, if and when you do start a plant there, how much time would it take for the whole plant to be completed?

I'll just correct, maybe there's a misunderstanding. It is not for Saudi Arabia. It was for Oman, Qatar, [Audio Gap], Saudi Arabia and U.S.A. Investment of INR 25 crores is not for a new manufacturing plant in Saudi Arabia, or for that matter any new manufacturing plant out of India is not possible economically, because the whole purpose of economies of scale and cost of production gets defeated when you go and produce the same products outside of India. So the investment is needed to do sales and all these and repair some mechanical seals in those regions.

Understood. So indirectly, you're saying that the joint venture which we did earlier, which we did there, right, so the mechanical seals will come from there, you'll repair it here and then send it back?

In Abu Dhabi, we have a joint venture where we are putting up a service center. Two of our employees are being transferred, as we speak, to Abu Dhabi, whereby we'll be solely focusing on customers like ADNOC, and not only repair our mechanical seals, also repair mechanical seals of any competition, which is a lucrative business, profitable business.

Right. So the repairing facility will be there itself, or will we get it here repaired and send it back?

I'm sorry, I didn't get a few of the words.

Yes. So will we repair the seals there itself? Or will we import those seals and then send it back to the service center?

No, no. The seals will be repaired in Abu Dhabi. It will be a full-fledged service center of qualified technicians. The parts to repair those seals will go from India.

Understood, sir. Understood. And how big of a service business are we looking there?

Service business, the current market in the UAE, in Abu Dhabi alone is $60 million. That's the market size over there, which is totally [ in line with the ] business and it's a profitable business.

Understood. Sir, just from what I've understood that usually when there is a seal issue or something, they just replace it rather than repairing it. That's from what I have known and spoken.

Yes. Many times they replace the entire seal. Even replacement, when we talk about repairing of the seals, is 75% of the cost of a new seal.

Correct.

When we repair a seal, we replace the vital components. And those vital components constitutes 75% of the cost of the seal, so that's a profitable lucrative business. So when we say repair, it does not only mean that we are repairing or servicing, it means we're replacing the seals with new parts.

Understood. Okay. And any pressure from the import of the raw material side, because I think the raw material is imported, right? Are you seeing any price pressure or anything from that front?

No, not to an extent that we have felt a pinch or a kind of a push. The [indiscernible] system is seamless. And in fact, certain of the components have reduced to the price of the previous year, because the volume also increased over here at Sealmatic.

Correct. And are we going to plan to -- I think people were planning to open domestic operations for the raw material which you use. So are there plans to curb the import and just purchase domestically?

When we talk about critical components such as silicon carbide, so this is not being currently manufactured in our country.

Correct.

So they have to be imported. Then there are certain [indiscernible] quality of rubber, which goes into refineries and petrochemicals, those are imported. So these are very critical parts, whereas when we talk about the body of a mechanical seal, which is stainless steel, that is indigenous.

The next question comes from the line of Rajesh Jain from NB Investments.

I just had 2 questions. One is about the joint ventures that we are tying up with in different parts of the world. You have also given us the potential in those regions. Just want to know, down the line, 2 to 3 years from the formation of these JVs or the tie-ups, how much of that potential we will be able to capture?

See, I'll give you an example, Jain sir, that when we are talking about, say, Abu Dhabi joint venture, okay? So that is predominantly going to cater to the market in Abu Dhabi and the adjacent areas in the UAE. So let us focus on Abu Dhabi. So what we are doing currently over here is that many projects are being undertaken by ADNOC. So all the pumps are being manufactured in India and are being supplied to ADNOC in the UAE. So all the seals that will go fitted in those pumps will be from India. Of course, we need to be approved by ADNOC, which is a good news that we are approved by ADNOC. So our target is to install 100 seals in the next 8 months in ADNOC; then in the year that will follow on, another 100 seals; and so on and so forth. So in 3 years' time, our target is to have minimum 300 seals to be installed in Abu Dhabi. Now this itself, when we talk about lucrative business, in 3 years' time, we expect a business of USD 1.5 million, which is totally an end user business, profitable business, and a proprietary business, because the original seals are Sealmatic seals. So as we speak of our target for 100 seals for this year, we have achieved 70 seals so far, 30 more to go, which will happen in the next 4 or 5 months' time. So that's the kind of margins, that's the kind of business we are talking about. And if we further expand it to say in Kuwait or in Oman, or in Qatar or Saudi Arabia, it's a similar market size. Of course, Saudi Arabia is a much bigger market and, of course, a difficult market, as we all know, because of the stringent conditions from the end users. So that's the kind of bandwidth that we foresee for Sealmatic.

Okay. That is quite helpful. Sir, just a follow-up on this. So the 100 seals what you are saying, it is basically in the pumps which were sent from India, earlier, Sealmatic seals were only there?

No, no. These are new projects. So any refinery or petrochemical unit, there's always capacity augmentation, expansion, modernization. So when such activities are being undertaken by the end users such as ADNOC, they will buy new pumps. So new pumps with mechanical seals.

Okay. So you're saying it is for the project business only again?

Yes, exactly.

Okay. Sir, my second question is, as on year ending FY '24, how much was the project business? How much was the value of the project business, as well as if you can give that number for the H1 FY '25 also?

It would be difficult to give an exact scientific value on that. But I can tell you, in FY '24, we had done almost 175 mechanical seals, which went for projects. And this year, we are planning more than 250 seals for projects.

So what should we take as the average cost of these seals?

For the future business or for the current business?

No, no, no. Whatever these seals you are saying, 150 we have done till FY '24 and another 250 you are doing now in this current financial year.

Yes. I think I mentioned this in my previous 3 earnings calls, and I'll still further take the opportunity of giving more insight for this project business. It is like the razor and the blade or the Kodak film and the camera. So during projects, you are subsidizing your seal. So that is actually, in terms of financial value, it is not visible. But in terms of future business, it is going to be enormous. And that is why we say, from FY '27, that's going to be a golden period, because all the hard work that we did in FY '24, '25, '26, and we'll still continue doing it, will all come as end user business beginning FY '27. So when we talk about project business, it is done at a loss.

Sir, I understand that. I have gone through all the last 3 con calls. See, what I'm trying to ask you is -- okay, I'll rephrase my question. So you're saying your golden period will start from FY '27. So based on whatever you have planned for what you have done in '24 and you are doing now in '25 and then in '26, how much will be the projects business -- the annual sales will come from '27? How much it would be?

Only in India, FY '27, when we talk about, and assuming that the current business as we are conducting and it grows in a similar fashion, we will be able to add INR 15 crores of pure end user business, which is highly profitable.

1-5 -- INR 15 crores?

Yes. Again, when we go on FY '28, so this INR 15 crores gets repeated, plus additional INR 10 crores or INR 15 crores will further get added. So it will be incremental growth as we move forward.

Understood. Sir, another last small clarification. I think someone had asked about the drop in the margin or the profitability. I think you had mentioned that this year, we will end FY '25 with 35% EBITDA margin is what you said?

25%.

Last year was how much, sir?