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

Ladies and gentlemen, good day, and welcome to the Shaily Engineering Plastics Limited Q2 and H1 FY '21 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinion and expectation of the company as on 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 would now like to hand the conference over to Mr. Amit Sanghvi, MD. Thank you, and over to you, sir.

Thank you. Good morning, and a warm welcome to all the participants to the post earnings call of Shaily Engineering Plastics. I hope you're all keeping safe and healthy. I have with me Mr. Sanjay Shah, Chief Strategy Officer; Mr. Anil Kalra, our CEO; and SGA, our Investor Relations advisers. I hope you've had a look at our Investor Presentation that is uploaded on our website as well as stock exchange. Before I start discussing business updates, I'd like to announce one key strategic move the company has taken. We've established a new wholly owned subsidiary, Shaily UK Ltd. in the U.K. with the sole purpose of creating speeding technologies across business segments that can be licensed to our customers either directly or through product manufacturing supply. Shaily is known for its long-standing relationships with this home furnishings major, with whom we have also diversified our business segments. And I'm happy to say that today, we've taken a big step towards diversifying both our products as well as customer portfolio. Therefore, mitigating risk by making our foray into toys. We are slowly and steadily gaining hold over the toy segment by adding new customers and new products. The toy segment has very large potential for growth. Purpose of choice are no longer limited to just play. Baby toys are becoming smarter and designed specifically for learning purposes. Moreover, the pandemic has created a new demand wave given that toys have formed a very significant part of our entire wellbeing. Shaily had entered this segment about a year. And today, we are in -- we have the momentum to achieve more. Adding to that, the China plus 1 strategy is further giving growth opportunities to Indian manufacturers like Shaily. Many brands are increasingly looking to create a second line of outsourced manufacturers -- manufacturing base, which will deepen the manufacturing capability of Indian manufacturers. The health care journey for us has been one that has been full of new learnings and addition of new capabilities. Apart from the IP that we have both created and acquired, we've also added significant testing capabilities as for ISO 11608, which is the de facto standard on needle-based injection systems. We are slowly and steadily making good progress towards commercializing our devices and filing with the U.S. FDA, starting in Q3 of FY '21 to Q1 of FY '22. We we have also recently signed on a large U.S. biotech company for development the supply of the drug delivery system for a molecule that I will not be able to disclose. If everything goes as per plan, our consolidated Healthcare business should be able to achieve faster breakeven and higher efficiencies, filing revenue to 2 to 3x in the next 3 to 5 years. We continue to build a strong order book during the quarter. We've added following to our [indiscernible]. On the FMCG segment, we've -- there's been consolidation of businesses with increase in volumes and addition of new moulds from our existing customers. In toys, we've added 2 new projects across 2 customers with a total value of USD 3.85 million per year. On the Healthcare side, we we've signed a contract and agreement for development and supply of 2 rectal applicators for for engineering pharma. In automotive and engineering, we've added 2 new insulator rod projects which are currently under development for Garett erstwhile Honeywell. I shall now hand over the call to Mr. Kalra, our newly appointed CEO, to give you his thoughts on the business. Mr. Kalra, over to you.

Yes. Good morning, everyone. It has been a while that I have been in the organization. It is a dream that I joined them and as I get more and more familiar to the business and a bit more into the operations of the company, I am absolutely confident that this company is uniquely positioned to build a strong order book in the various verticals that we have, and from existing customers are new set of expanding market. Since the very beginning, my endeavor has been to work on improving the efficiencies of all the plants and also improve the utilization of the plant and machinery. This will be effectively taken off quite well in the quarter 2. And I would just like to really assure all of you will see the strong order book of the plants are fully geared up to deliver smoothly and on time to all our customers, existing and new ones. And the effort is to streamline the operations by driving and purchasing efficiencies, managing the manpower, adding the right set of skilled people at all levels who will strengthen the organization, develop more of the engineering skills in design and engineering. And all these efforts, put together, safeguard the timely project execution that is a key goal for the company at this point of time. We have been successfully started trial production of our new plant, the carbon steel plant, in quarter 2. And 2 SKUs have already been tried very well, and we are expecting more to be added by March. With that, I finish my brief. I'll now request thankfully, Mr. Sanjay Shah, to take over.

Thank you, Anil. Good morning, everyone. I shall share with you the highlights of our operation and financial performance for Q2 FY '21. Following which, we shall be happy to respond to your queries. Shaily Engineering Plastics reported higher level quarterly sales, and it looks like we will achieve a landmark number of 3-digit revenue very soon. During the quarter, we processed 3,986 tons per polymer as against 3,378 tons of polymer in Q4 FY '20, which marks 18% growth year-on-year basis. Machine utilization rates were at 69% in Q2 FY '21 as compared to 66% in Q2 FY '20. With ease in lockdown restrictions, manufacturing operations have picked up pace with fixed safety and hygiene protocols, worker safety paramount, and we are taking it as most cared of it by keeping our workplace safe for our employees. Exports during the quarter stood at 70% of total revenue as compared to 69% in the same period last year. For Q2 FY '21, our revenue stood at INR 98.7 crores as compared to INR 87.6 crores for the same period last year, growth of 13%. On half yearly basis, we reported INR 145 crores of revenue as compared to INR 168 crores of revenue in H1 '20. This takes into account that quarter 1 was severely impacted by COVID-19. EBITDA for Q2 FY '21 is at INR 17.7 crores as compared to INR 15 crores in Q2 FY '20. EBITDA margin stood at 17.9% in Q2 FY '21, 60 basis point improvement over previous year for the same quarter. Net profit stood at INR 7.3 crores for Q2 FY '21, a growth of 13% year-on-year. Cash PAT for Q2 FY '21 was reported at INR 11.9 crores as compared to INR 10.2 crores for the same period last year. On the credit front during the quarter, our credit rating agency care reaffirmed our rating on long-term facilities and short-term facility. The long-term facilities were given a care rating of care A-, with stable outlook. With healthy order book, we are confident to improve our revenue with stable margin profile. We expect recovery in H2 FY '21 on back of commercialization of new projects that we have added over a period of time, and we continue to build strong order book with our clients. That 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.

Congratulations for a good set of numbers. Sir, I wanted to kind of get some more color on Amit's opening comments where you said that the Healthcare segment can grow quite significantly over the next 3 to 4 years. Sir, if you can just throw some more color on that, where do we see significant traction coming over the next 2 to 3 years? And if you can just also highlight some of the recent developments that are happening in that segment? And what gives us this confidence about the sharp increase?

Yes. So the reason for us expecting this fairly significant uptick in revenue is that all the projects that have -- that are in various stages, for example, all the pen injectors that we have developed, some are in the registration batches with the customer. Some are in the final stage where the customer will take the registration batches there. After they do the registration batch and after they file with the FDA, we're looking at most launches starting end of '22 to '25. So we have 3 molecules currently for which we have made supplies to various customers and all of -- our 4 molecules. For all, we will be starting supplies in '22 and scaling it up to '25 and then, of course, onwards. So we see -- we see all development that we have done over the last 24 months coming into commercial production, which is why we see the uptick in revenue.

Okay. If I can just ask about the slightly thought out of future from this point until December '22, when you said significant supplies can begin. How do we see the runup or the runway from today for the next, let's say, 1 calendar year or 2 calendar years?

For health care, particularly or for general -- in general, the business?

No. For Healthcare, in particular?

So we have ongoing contract manufacturing business that we've been doing, where we've also been adding products, several products. That is already commercialized. So that business keeps on increasing a bit at a certain pace year-on-year. Now with the same customers as we keep adding more devices, we get an increase in revenue. Where in the short term also [indiscernible] as per [indiscernible] our development contracts also get spread over a 2-year period, where we also see very significant revenue coming in. The other thing is that we why we have taken a wait-and-watch approach, we have been successful with some of our CRC trials at some of the customers. But we will provide an update on that in the next quarter once we actually get into commercial production.

Sure. Okay. Sir, on the toy segment, it appears we have had quite a positive start. We've added -- so this additional USD 3.85 million, is it in addition to the USD 6 million that we already had, right?

Yes. Yes, that's right.

All right. So how do we see the traction in that segment? I mean we started on a fairly strong note. And we've added close to USD 4 million in the last few months. So just, I mean kind of to map the trajectory, where do we see this segment over the next maybe 1 year or 2 years?

It's...

The toy segment.

At the moment, it looks very optimistic, but it's hard for us to tell you -- give you a number. The reason is that except 1 product, nothing is actually -- so we commercialized 1 product. We've not commercialize anything else yet. They all go into production starting January to April of the coming calendar year. I think we'll be in a better position to give you an update on toys, probably during our quarter 1 presentation of FY '22.

Sure. And sir, one final question on your significant client, the home furnishings major. We have started carbon steel. So how do we see the traction in that segment going forward? And for instance, is it likely that the coming months, December till March? And then in the next year, we can see significant rollout?

So the customer definitely needs the product, and there is high demand. We have struggled a lot with installing, insulation and validation, qualification of the products. Given that we don't have competency and because of COVID, we couldn't get our suppliers to come in and of course do this for us. So we had to undertake the entire installation of plant and machinery ourselves with very limited resources, which we have achieved successfully now. We've made trial production and kept practice for the customer successfully. And we are looking at ramping up fairly significantly starting in December and into the next quarter. We essentially should be at somewhere between 60% and 70% utilization next year,

Next financial.

Next financial year.

Right. Right. Sir, sorry, if I can just squeeze in one more question about this new subsidiary in the U.K. If you can just throw some more color on what is really the rationale or the thinking behind this new subsidiary? And where do we kind of want to take it?

I'll briefly answer that, maybe getting into too much detail would be a little premature at the moment. But as I mentioned in the speech, the sole purpose of creating a subsidiary in the U.K. is to really work on creating IP, creating world-class technologically leading products across segments. And now, of course, the focus will be on healthcare, but we do intend to -- do intend to create technologies for other segments as well.

[Operator Instructions] The next question is from the line of Saurabh Jain from Astute Investment.

I just had a few questions. Just taking off from what the last participant asked on the subsidiary in U.K., just wanted to get your thought process that as a company, would we ever look at manufacturing outside India for us and maybe even an acquisition and to get access to customers even faster and get approvals? Or would we just focus on India for manufacturing?

Somehow , I'd say the answer is, yes, we would certainly look at manufacturing outside of India. But that doesn't mean that now is the right time for us to do that. And we have already quite a few projects in the pipeline that needs to be executed, and they need to be executed well. So we focus -- we continue to focus on that. And yes. In the near future, we would be looking at opportunities.

Sure. Makes sense. And the next question is on the toys business, with this $3.85 million contract and the $6 million, which we've had from before, so about $10 million. Is this on a per annum run rate or are these onetime? Or how should we look at the tenure of these?

These are based on volumes indicated by the customers, and these are annual volumes.

Right. So if all goes well, I mean $10 million annually would be recurring and it can even increase going forward?

Yes. So the P tools would be to on adding more projects -- adding products. More products and projects to toys, but yes that's way forward, which we would look at.

Perfect. And would you be able to give us the value of these 2 rectal devices that we've gotten the order for?

A bit difficult right now.

Sure. The next question is, Garrett is a customer where we've got orders, but we read that the company had gone into bankruptcy and then Honeywell had tried to save it. So any thoughts on that?

That was more of a restructuring which we were doing it. So we are aware of that. And we are keeping close track on that, but there -- this is not going to impact our business with them in any way. It's more of a restructuring, which we are doing internally, nothing else.

Sure. Sure. And just the last question is, how do you see October shaping up so far, considering that September was a good month for us?

Well...

The way you mean good?

Better than September?

I don't want to get number. [indiscernible] we see quarter 2 and quarter 3, the traction which we achieved in quarter 2 continuing in quarter 3.

[Operator Instructions] The next question is from the line of Nitin Bhasin from Ambit Capital.

I don't track your company regularly, but just visit the numbers often, but very I'm pretty surprised by this new forays that you've made using the engineering plastics. So just had a few questions for the senior management. The first one is, I see that you are now getting into toys, which, as an analyst, to me, it appears as if the toys are less value-added to the pharma or the healthcare work that you do. At the same time, you're getting into furniture through this carbon steel. So how are you deciding what products and what new businesses that you want to get into? Because it appears from an outside view is that a 20% ROC, pharma, great engineering skills. But you're just getting into too many businesses and if toys was an opportunity, why not earlier? So just to get a sense from you on how do you decide with businesses to get into? How will you allocate capital tomorrow or talent, capital, technology and then connect this to R&D because I have seen some polymer companies do very well in India in healthcare because of R&D focus like Poly Medicure earlier. Can you help us with this thinking of yours? I appreciate that. And then I'll go through second question.

Sure. Okay. So -- you're right, we are into several segments. There is merit in doing business in all of these segments. Now if you look at our strategy and communication going back 2, 3, 4 years, you will see that our focus has always been on our home furnishings, healthcare as well as niche on some of our smaller businesses. We continue to have niches like the ones in automotive, where we do the metal to plastic conversions, et cetera. Now adding -- going into steel furniture with our home furnishing customer was a very strategic initiative. Now what was the thought process behind that? Is that basically we get into -- by doing this, we can -- we possibly get into multi-material products. With multi-material products, you have a very high amount of value-add and therefore, margin expansion. Second is that it was just -- we have a very good strategic fit with the customer. And both of ourselves very comfortable with each other getting into a segment where we don't have competency. So it works kind of both ways that they have put this trust in us. And over the years, we've showcased that we can perform. And IKEA's -- I mean our home furnishing furniture also held up their end of the bargain when it comes to volume and qualities that they buy from. The toys initiative was started essentially 3 -- 2, 3 years ago. We've been wanting to -- while we have excellent relation and performance with our home furnishings major, I think a lot of investors as well as us internally look -- did see the customer concentration risk. And one of the only ways to derisk was to get into a segment where we can scale up very quickly. It also does add -- it also does enhance our margin profile from the current levels. So strategically, there is also a lot of compliance fees in the toy business, which fits in well with our current portfolio of products and our infrastructure and set up. I know there's a lot of different types of toys, but our -- what we are manufacturing is primarily for exports to where the compliance needs are very, very high. And food contact, child safety, chemical compliance all play a very significant portion to making good quality products. So for us, these were the basic principles behind getting into a business that we have to enhance capability, we have to enhance margin profile, we have to improve ROC, and we have to derisk the existing customer concentration.

And just to add to what Amit said, there are 2 other things also, if you were to look at it. So the home furnishing business basically is a business where we can scale up much faster. We see a similar thing on the toys business also. While if you look at the pharma business, you need to make up-front investment and see that revenues come in -- will take to 24 months to 36 months. So this basically sets for both ways. One is kind of cash and begin with make investments to grow the other part of the business also.

Okay. Okay. So Amit, from here on, if you move forward, auto or pharma because now you've got a senior person coming in with a lot of background and experience of auto. How do you see incremental research and development? Will it be auto? Will it be pharma? Or will it be the relationship of the home furnishing major globally to export multiple products?

It will be a mix. But having said that, on the research development side, we will certainly be focused on pharma. Look, automotive is not a large business for us neither it is significant focus for us. Now we only focus on engine, turbocharger, breaking and CV systems, where ever there is needs, where need for higher amount of engineering and engineering polymers. We don't want to get into interior, dashboard, bumpers et cetera. So we will not be focusing on the larger part of the automotive business. We will get into niche businesses, where our capabilities are both appreciated and pays well.

Okay. And the last question is from the hindsight, how do you look at your pharma healthcare initiative success or the lack thereof in the last 2, 3 years? Where it has disappointed you as a capital allocator as you went into this business? What has surprised you negatively in the last 2 years?

So the big disappointment has obviously been when we set up this plant end of '14, commercializing in beginning of '15 calendar year. Now the plant was set up with the sole purpose of manufacturing primary packages, trial resistant closures and focus in the pharma industry. So obviously, the biggest disappointment has been that we've been unsuccessful in getting those sales out. We are operating at 12% and 15% and 25% capacity from what we had projected. Now what has happened because of this initiative is that the infrastructure we created and the quality systems we put in are -- have to be the best in the country and one of the best in the world. So what has happened is because of that, we saw a lot of opportunity come to us on the device side where we had the inherent expertise from the very beginning. So our capacity in general is utilized. But instead of for packaging, it is being utilized for devices. This client has given us the opportunity to develop the entire product portfolio that we have now over the last 24, 36, 30 months. So I would say that the learning is that yes, probably a bad judgment call on the product selection that we set up the business, but a great initiative to set up the business, which is what has given us this opportunity in. And we've seen revenue grow very, very significantly over the last 2 years.

[Operator Instructions] The next question is from the line of Ravi Naredi from Naredi Investment.

Sir, how much top line we expect from carbon steel plant in current year and full financial year or financial year '22? And what margin?

Ravi, we won't be able to get into individual numbers. We are just getting into -- we just started trial production and we'll get into commercial production. Broadly and currently we're looking at wrapping up production, as Amit mentioned, in Q4. And Amit also mentioned we're looking at about 60% to 70% utilization levels for FY '22. So that's what we will be able to say.

Okay. Can you tell whatever the CapEx plan, how much times turnover we can expect?

So we've talked about this in the past that we've invested a total of about INR 55 crores in the carbon steel factory. And the total revenue which we expect is going to be somewhere in the region of about INR 125 crores to INR 130 crores, that's depending on the current product.