Shaily Engineering Plastics Limited (501423) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. And welcome to the Q3 and 9 months FY'20 Earnings Conference Call of Shaily Engineering Plastics Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Sanghvi, Managing Director of Shaily Engineering Plastics Limited. Thank you, and over to you, sir.

Thank you very much. Good afternoon, and a warm welcome to all the participants to the post results earnings call of Shaily Engineering Plastics. I have with me Sanjay Shah, our Chief Strategy Officer; and SGA, our Investor Relations Advisers. I hope you've had a look at our investor presentation that has been uploaded both on our website as well as the stock exchange. Q3 FY '20 has been a steady quarter for us despite the labor-related issues, which impacted our sales in the early part of October. As it was disclosed during the previous earnings call, slowdown in the automotive sector has also impacted our performance to some extent. Our margins have seen an uptick on account of better product mix, economies of scale on account of raw materials and our efforts towards improvement of operational efficiencies. We therefore, remain confident of maintaining our margins going forward. A brief update on the status of our steel furnishings plant. Our steel furnishing plant in Halol for the European home furnishings major has -- will be commissioned in Q4 of FY '20. We have started installing machinery and are expecting to complete full complete installation by the -- by middle of March, with potential first supplies happening before end of March 2020. In the recent quarter, we have commercialized our medical devices and are on track to commercialize some more during Q1 of FY '21. We've also started supplies of toys to our customers. The Toys segment provides us a huge business opportunity going ahead. We believe that this -- that the Toys segment has potential to be as big as our current number one customer in years to come. We have a strong product pipeline in the pharma segment, addition of new clients and product segments have also enabled us to build a strong base. We're working closely with our customers on their product initiatives, pipelines and commercialization of products. With this, I would also like to announce that Shaily is moving forward with the development of 2 unique novel auto injectors, both which are syringe based as well as a cartridge-based auto injectors. These are used in various therapies from human growth hormones to migraines to rheumatoid arthritis, multiple sclerosis, diabetes and weight management. The business update for the quarters are as follows: we've submitted trial batches of 4 different things to our customers during Q3 of FY '20. In the Toys segment, we made our initial shipments to Spin Master and we expect this to ramp up in Q1 of FY '21. On the steel furnishings project, as I mentioned, the plant is being commissioned, and first supplies will be made before the end of Q4 FY '20.

Sorry, to interrupt you, sir. May I request you to come a little closer to the phone and maybe speak a bit louder because the audio is sounding a bit low.

Sure, sure. Sorry about that. So with this, I shall now hand over the call to Mr. Sanjay Shah, our Chief Strategy Officer, to give you the financial highlights for the quarter. Thank you very much.

Good morning, everyone, and thank you, Amit. I shall share with you all the highlights of our operational and financial performance during Q3 and 9 months FY '20, following which, we will be happy to respond to your queries. During the quarter, we processed 3,599 tons of polymers as against 3,318 tons in the same quarter last year. For 9 months, we processed 10,026 tons of polymers as against 10,296 tons in the same period last year. Machine utilization rates stood at 67% during Q3 FY '20 while for 9-month FY '20, the same was around 64%. Exports during Q3 FY '20 and 9-month FY '20 stood at 69% of total revenues. For Q3 FY '20 revenue stood at INR 88 crores, showing a year-on-year growth of 3.2% from INR 86 crores in the same quarter last year. For 9-month FY '20 revenue stood at INR 256 crores as against INR 261 crores in 9-month FY '19. EBITDA for Q3 FY '20 is at INR 16 crores versus INR 13 crores in Q3 FY '19, growing by 18.2% year-on-year. EBITDA margin stood at 17.6% in Q3 FY '20 versus 15.3% in Q3 FY '19. Our 9-month EBITDA stood at INR 44 crores, a growth of 3.6% on a year-on-year basis, with a margin of 17.2% as against 16.3% in 9-month FY '19. Net profit for Q3 FY '20 is at INR 6 crores, growing by 46.7% year-on-year with a margin of 7.1%. PAT margins expanded by 200 basis points year-on-year. During 9-month FY '20, profit stood at INR 17 crores, posting a growth of 5.6% on a year-on-year basis margins expanding by 50 basis points at 6.5% on a year-on-year basis. Cash PAT for FY '20 -- Q3 FY '20 stood at INR 11 crores, as against INR 8 crores in Q3 FY '19. While for 9-month FY '20, we have witnessed a growth of 11.8% in cash PAT from INR 27 crores to INR 20 crores in 9-month of FY '20. Our CapEx spend for 9-month FY '20 was INR 60 crores, which includes CWIP, or capital work in progress. This was primarily towards the carbon steel project, some of the medical device development, which we have done and some expansion in our [indiscernible] facility. This is all from our side. Now we can open the floor for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Kaushal Shah from Dhanki Securities.

I have a few questions. Sir, if you can just share with us the key drivers for the margin improvement in this quarter? The second question was on our large Swedish client, and we've read in the news recently that they have shut down virtually all their stores in China because of the virus issue. So are we anticipating any issue from our side in terms of our supplies to that client? And the third was a directional question. So where do you see the coming year -- financial year 2021 in terms of volumes, the overall tonnage number that we would be looking at? This year was, of course, challenging for us due to various reasons. So how do you see the next year for us?

Kaushal, can you just repeat your first question?

So the first question was the reason for the margin, basically the key margin drivers that we had -- margin expansion?

Okay. On -- I'll probably answer the margin expansion and then let Amit answer on the IKEA, China thing. Margin expansion, if you look at the mix, the mix has changed. So the mix, which you were -- would look at is 69% is export and 31% domestic where we have added more business on the pharma front. And that led to an improvement in margin. Second is some of the products which we have done, we have moved up the value chain. So these are reasons for that -- the same. On IKEA, China, Amit, do you want to answer that?

Yes. Sure. So we are currently assessing the impact of store closures in China. We do anticipate some impact. However, the amount of shipments that go into China are very minuscule. They're single-digit percentage. So the overall impact on revenue will be fairly minimal, but we will only know at the end of March, earlier April.

Right. And so the third question was on the direction in terms of where do you see -- given the current progress in various segments, where do you see the next year panning out?

So I think we remain consistent with what we have said in the previous earnings call, that we have good visibility up to INR 500 crores to INR 550 crores in the next financial year. So we still remain with that figure. There are external factors. We are a B2B business. Therefore, there are factors at our customer side, which can impact that number. But apart from that, our visibility is quite strong. I'd just like to also add something to the China question. There could also be a potential opportunity to increase sales because Chinese suppliers are also shut.

Right. So there is a chance that we may have some role to play there?

Again, I know it's going to be -- it's only going to be temporary, but we don't know what -- where -- the positive impact or negative impact is not known at the moment. So this will become a little clear towards the end of March.

The next question is from the line of Manish Gupta from Solidarity Advisors.

Amit, could you talk a little bit about how the business has evolved strategically over the last few years on 2 dimensions, one is the logos that you've added? And are there some logos where people used to work with us and they have stopped working with us?

So on your second question, no. We don't have anyone that used to work with us and has stopped working with us. Over 32 years of Shaily's history, we have lost customers on account of 2 reasons; one, either Shaily has exited out of that customer for lack of growth opportunity, for lack of margin; or two, we didn't see a strategic fit on the business. On the first question, when I look at how the business has evolved over the last 3 years, anyone that has been following our conversations would realize that we have been heavily reliant on our single largest customer. So over the 3 years, with all the initiatives we have taken, whether on the pharma side, whether in toys, whether in other areas have been with the primary objective of creating another 1 or 2 customers or segments, which can equal the revenue of what we are doing with our largest customer today. The key names that we have added to our portfolio in these 3 years are German -- large German retailer -- grocery retailer called Lidl. We've added Spin Master, as we mentioned, we just -- we started shipments in Q3 of FY '20. We've added various customers and devices on the pharma side. We're very unique in that sense that from being just a OE manufacturer of medical devices, we now offer platforms and off-the-shelf devices to our customers. We have initiated development of 2 auto injectors, based on IP that we have created. So this is potentially a very large market with very few players in it at the moment. So all these verticals have been created with the primary objective of, one, growing, obviously, the bottom line; and two, derisking ourselves from our largest customer. Now I understand that one could use the argument that you're going into steel furnishings business for the same customer, but that was a natural expansion of material area within the same portfolio, but within the same customer, gives us an edge with others as well. So I think -- I hope that answers your question.

Yes. My second question is that the part of the portfolio, as to the Swedish major or the toys business is perhaps quite prone to recession in the western world. How are you thinking about how you will protect yourself in case there's a recession in the western world and demand for these products falls?

Okay. So I think -- let's start with the first part of that question. I'd like to split the Home Furnishing business from the Toys business. Several recessions since 2001 that we have seen, especially with the Swedish Home Furnishings major is that they have not -- their sales have never been impacted. In fact, even last year, their sales was only impacted on account of inventory. There was a little bit of slowdown, I'd say, but there hasn't -- 2008, their sales were as good as they have been in 2007 or higher. 2014, is also -- so traditionally their sales have never been impacted on account of recession in the western world because they target a market which or a segment or a class of people where, even in recession, you would have maybe a slightly higher income class buying from the Swedish Home Furnishings major. On the toys side, from all our -- we're fairly new in the business, but from all our conversations with customers, we understand that demand for toys are growing in emerging markets significantly. And they haven't -- they have been more or less been flat in the western world. So big areas where growth is coming from for toys is countries like China, Brazil, Russia is doing well in Toys, but there are lots of emerging markets, which are doing a lot better in toy sales than the western world, even at present. Therefore, recession should not drive that business down significantly.

Okay. And if I -- there's time for one more. We've been having on and off labor issues for a while now, Amit. How do we know whether that's conclusively behind us?

Manish, we don't.

So can you talk a little bit about that? What exactly the issue? And what is the company doing about it?

We -- being a supplier to all these multinationals, one is our policies and the way we are -- the way we pay our laborers and everything, we're far beyond fair than any other industry that exists on our belt. Now in spite of all of this, we still see issues from time to time. And a lot of these issues have been on account of an outside union wanting to come in, instigate something. Multiple times we've had problems with labor, especially, since we've started doing well, we've tried -- we've had more problems. So having said that, a very significant part of our labor force is not in favor of even this time when the strike had happened, are permanent. We did not officially have a strike, but even this time when we had labor issues, our permanent workers were fully supportive of us. So they gave us that comfort, they brought in as many people as they could from the contract force. And we ran the plants maybe to 30% capacity, but we ran the plants. Now going forward, how are we planning to mitigate it? We're adding more slightly skilled people. We have these ITIs in India -- all over India. So we're adding people from ITI in our workforce. We have recruited 171 ITIs and put them on fixed-term staff at Shaily, and we're going to see how this experiment works out. If it works out well, we will continue to increase that over the next year.

The next question is from the line of Hitesh Taunk from ICICI Securities.

Sir, my first question is pertaining to the volume growth. Since we have plugged 8% volume growth on a Y-o-Y basis and 6.5% on a Q-on-Q basis. And we have a very -- I mean, in the end side of this quarter. I mean, it's already to 1 month is over. How has been the traction in terms of volume growth in the last month, if you could throw some light on that? That is the first question. The second question is, you have spoken about the opportunity in the toy business. And just if -- it will be very helpful if you can quantify a bit in terms of what could be the opportunity size in that segment? That is my second question. And my third question is pertain to -- in the last con call, you mentioned like one Japanese major you're talking with possibly for your caps -- caps and bottle business. How far have you succeeded in that? These are my 3 questions.

Okay. So let me answer each of these questions separately, Hitesh. On the volume of polymers processed, if you were to look at it between Q3 FY '20 and Q3 FY '19, you have seen growth. And you've also seen growth between Q3 -- Q2 FY '20 and Q3 of FY '20. A lot of it depends on the product mix. And if you were to look at 9 months FY '19 compared to 9 months FY '20, it's been more or less the same with a marginal de-growth of about 1% or so, but it's more or less the same. A lot of it depends on the product mix. So I would suggest when you look at Shaily, probably looking at just volume of processed -- polymers processed would not be the right parameter to look at it. Second is on toys. If you were to look at it in terms of an opportunity, it's a huge opportunity because a lot of these companies who are global giants, whether it's Spin Master, Hasbro and the various other gentlemen or the other people who have been -- they've been sourcing big time from China. And with what's happening on China and it's hitting really Hasbro's sourcing.

So all of these guys are looking at derisking themselves from China and moving part of the sourcing out of China. So we see a huge opportunity. As we had said last time, we have started with 1 customer. We hope to add the second customer in this quarter. So we started shipments with Spin Master for 1 product last quarter, and the second product, which we will start shipments this quarter, and we expect ramp up to happen in Q1 FY '20. We are working with both Spin Master and our other customers in terms of adding more products and everything. And we hope to add a lot more products going forward. So I think from an opportunity standpoint, we see a very good opportunity here. We will probably talk about it in each quarter as and when we add more business to it. And on the Japanese cap and bottle, which we talked about, we had just submitted samples -- the first samples to the customer and they are under evaluation.

Okay. Sir, in addition to that, a bit clarification, I requiring that. Like -- you talked about the toy business opportunity. So you mentioned -- Mr. Amit had mentioned in his opening remarks that FY '21 and the revenue -- looking at there's -- we are looking at a revenue of something about INR 500 crores and INR 550 crores. So have you building toy revenue in that or toy revenue will be above that -- in that?

We have built in some toy revenue based on the visibility and the discussions, which we have had. So if you were to look at the last earnings call, which we had, we had talked about a INR 7 crore business, which we have confirmed from one of our toymaker, which is Spin Master. So that revenue has been taken into account. There are some other projects which we are working on, and we expect a closure on that. So that's also what we have taken into account in that number.

And the gross margin of those business are more or less similar to the company level? Is it right assumption?

I wouldn't want to get into individual margin discussions, please.

The next question is from the line of [ Ritesh Kolaria ] from [ Gir Capital ]

Sir, one off like information, customer had [indiscernible] product recall in the plastic that we made in India. Is the company impacted by this? And in general what is the liability of the company in case of product recalls?

You want to...

You're talking about the product recall?

Yes.

Can you just repeat your question? What specifically about the product recall would you [indiscernible].

So there was a news report that IKEA had done some product recall of made in India plastic products. Is the company involved in that? And in general, is there any liability on the product recall for the company?

At the moment, we don't have any liability on the product recall. Product recall, in general for the purpose that it happened is not something I can explain to you over this call. But I'll put it in a very simple form. Is there a problem? Yes, there is a problem, for which product recall was initiated. Is the problem related because of Shaily's manufacturing? No. So is there likely going to be liability on account of this? Probably not.

Okay. The second question is, sometime back there was a search inquiry by the GST authorities. If you can give us some updates around that, what is the current status and any impact on the company?

We had -- so as we have said earlier also, there was a GST search where molds were received and the seizure was lifted based on the detailed representation made by the company. Post that we have not heard anything back from the GST authorities, so that's where it is. We have, yes...

[Operator Instructions] The next question is from the line of Ritesh Shah from Investec.

My first question is, at the start of this year, you had given a target of around INR 400 crores of top line. I think we are a bit far from INR 400 crores. So just wanted to understand how far we are? And secondly, how do we look at the building blocks for this INR 400 crores, and next year, target of say INR 530 crores to INR 550 crores, which you had given at the start of the year?

Yes, Okay. And so we had an internal target of INR 400 crores for this financial year that we had mentioned to you during our first call of the year. Let's see what is -- where have we lost revenue so far. We lost INR 14.5 crores in this -- in the current quarter on account of labor and the GST's seizure of molds, right, which was completely unnecessary and uncalled for. We lost an additional INR 12 crores of revenue in the last -- in the first half of this year on account of labor issues. So we -- all in all, just so far lost INR 26.5 crores of revenue in the current year. We had budgeted about INR 10 crores to INR 12 crores of sales for steel furnishings, which was to go on stream and start supplying in the month of January, which has been delayed on various accounts, some related to customers, some related to us and some related to the coronavirus in China right now. So our installation is getting delayed till middle of March. So all in all, we lost about INR 37 crores, INR 38 crores of sales just on these 3 heads. We certainly had all intentions and the order pipeline to back up that INR 400 crores. For next year, if I look at earnings, we need to find a solution or an alternative to the labor issues we're having. I think year-on-year, last 3, 4 years in a row we've been losing significant revenue on account of labor problems. We've tried various -- taken various initiatives, tried various things. We haven't fully been successful. So we solve an issue, another crops up. For next year, we see, again, that our order pipeline is quite strong. It backs up the numbers that we have given you, but we need to execute those orders.

So is it fair to assume that we are still looking at INR 530 crores to INR 550 crores for FY '21?

Yes.

Okay. Is it possible if you could break it up, if you can't give a exact detailing what I'm more keen on is how has the pharma business actually played out, specifically, the incident pens wherein there were a few launches, which were expected? And so frankly, all the CRP caps has also played out. So this 2 specific questions for the pharma side, if you could help us understand this a bit better?

Sure. Just give me a second. So we have not indicated segment-wise sales. And I don't want to start doing that now. But FY '19 to FY '20, we've grown our pharma sales by about 65%. All of these have primarily come in from our device business. On the CRP, because the base itself was so low. Yes, there is growth, there's 40%, 50% growth, but the baseline is so low that even now, the number is quite insignificant.

Okay. I think -- sir, the start of the year, you had indicated about 100,000 pens. That is something which was the target, which was given. How far have we reached on that? And secondly, on CRC, what's the utilization levels? Like has it added above 50%? Where do we stand on that?

Yes. I don't know, 100,000 -- I don't know the figure of 100,000 pens because we manufacture over -- we manufacture at the moment also over a couple of million pens a year. So I don't know, it's 100,000 specific to...

Must be specific to customer...

To a project or...

It might be for a project. I'm just looking at our transcript data in May 20. So it's fine. You can take the number 100,000 out. I'm just interested to know the potential of this business, both the pens and CRC and how far we are. So I'm just trying to understand the margin profile going forward from this.

Ritesh, just to add to what Amit said to your question. We have about 12 pens under development, out of which 4 we have submitted samples to customers. And for the balance, we will basically be submitting samples to the customers during this quarter, quarter 1, quarter 2, quarter 3. So different quarters have different timelines for submissions. So we expect a majority of these things to get commercialized before the end of the year, which is FY '21. In terms of margins, as we have said earlier, giving individual margins or segment point margins would be difficult. But pharma and device business does have a better margin, that's what we can say. I hope that answers your question.

Yes, sir, specific question on pens. When we say this 12 pens are under development, and we have submitted a few to the customers. Does this customer -- does it include any of the local pharma companies?

It includes, it includes. All the 12 pens which we're talking about, out of those 12, 10 are Shaily devices, where IT is owned by Shaily. And in some of these cases, yes, it's 2 domestic pharma companies, core global market risk.

Okay. And on CRC, how far we have reached, if you can indicate broad utilization levels or the potential development there?