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

Ladies and gentlemen, good day, and welcome to the Q3 and 9-month FY '21 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 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, MD, Shaily Engineering Plastics Limited. Thank you, and over to you.

Thank you. Good morning, and a warm welcome to all the participants to the post results earnings call of Shaily Engineering Plastics. I hope you're all keeping safe and healthy. I have with me Sanjay Shah, our Chief Strategy Officer; 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 and the stock exchange. Quarter 3 of FY '21 was truly a remarkable quarter in Shaily's history. It was the highest revenue that we have ever recorded for a particular quarter. We're confident to further build on this trajectory, given a strong order pipeline and the addition of new orders. Shaily is currently present across 7 verticals and holds a strong command over its products, coupled with long-term relationships with customers. Growing with our Home Furnishings major, we've also scaled up from 18 SKUs in 2017 to 48 SKUs currently and further strengthened this relationship with addition of new capacities and products. Our Toys business, which was started nearly 1.5 years ago with Spin Master possessed a huge potential for growth. Today, we're one of the preferred partners from India for global toy manufacturers. We are increasing our footprint in this segment and getting validation from the brands which showcases our ability and efficiency in this very significant market. Shaily-manufactured children's products comply with the highest international standards of quality, and we expect to further ramp up this business in the coming quarters. We are future-ready to meet this demand. In the last few years, we have spent considerable time in developing our own intellectual property for drug-delivery devices, which is now reflecting in our performance. Healthcare business brings better margins for us and should be able to grow at a faster pace. Let me briefly throw some light on the business update for this quarter. On the Home Furnishings side, we received confirmation for additional business of INR 120 crore. On the Toys side, we've added another product from our customer valued at $1.5 million per year. We are therefore expanding our Rania facility to meet new and existing projects for toys. This facility will be operational by the end of the current fiscal year. In the Healthcare segment, we've developed our intellectual property for an additional pen injector, and we'll have that commercialized by the end of FY '22. We have announced expansions of capacity. We have started construction of the new plastic plant on our new campus in Halol. This plant will be operational in the first half of FY '22 and will help us service the new orders, especially for the Home Furnishings space. This is all from my side. I shall now hand over the call to Mr. Kalra, our Chief Executive Officer, to give you his thoughts on the business.

Thank you. Good morning, everyone. Hope you're all doing well. Please allow me to throw some light on the operations at Shaily Engineering. In terms of the top line, we have seen significant growth of the business. And hopefully, that should be maintained during the coming quarters. Despite all the odds in terms of logistics that the world is facing throughout, the costs are being closely monitored in all the units at Rania and Halol. And that is giving good results, we have seen significant savings in terms of our operational cost, in terms of employees to turnover and other cost parameters. Now there's a team that is closely monitoring the pricing in terms of what we get from the customers and what we spend. And that kind of closely monitoring is really very helpful, and I'm sure we'll be able to retain more benefits in the coming quarters. Our technical team has been strengthened quite well to meet the new challenges of the new projects that are on the anvil. And starting from the design to the commercialization of the products, we have people with us, and we are seeing to -- in a timely manner to meet the targets on the time lines. Now the challenge lies with the Carbon Steel Plant. It is to inform you that there is a positive news on that account. Carbon Steel Plant, which was commissioned in December '20, has been producing articles, and we have had already 3, 4 clients or third-party section of the customers and the products have been dispatched. This month would see some growth in terms of the top line, [indiscernible] what we have seen so far in the previous months. And hopefully, by this year-end, we would have commercialized 3 major articles out of 5, and that should take up the top line well. And also, that should be a significant -- there should be significant improvement in EBITDA due to Carbon Steel Plant. As Amit just mentioned that we have new projects that have been offered to us by our existing customers in also the Toy business. So the operational scene is hopefully geared up on commercializing the Toys business. The sales should start towards the last -- end of this financial year and pick up in the first quarter of the next year. And also, at the Halol plant, which should be commissioned and support the plastic business of our major customers. With this, I am handing over to Mr. Sanjay Shah, our Chief Strategy Officer. Thank you.

Thank you, Mr. Kalra. Good morning, everyone. I should share with you the highlights of our operational and financial performance for Q3 FY '21. Following which, we will be happy to respond to your queries. During the quarter, we processed 4,400 tons of polymer against 3,599 tons in Q3 FY '20, which marks an increase of 23% year-on-year basis. We are gradually increasing returns by efficiently utilizing our operational facilities. Machine utilization rate was 70% in Q3 FY '21 as compared to 66.5% in Q3 FY '20. Exports during the quarter stood at 75% of total revenue as compared to 69% in the same period last year. For Q3 FY '21, our revenue stood at INR 105.5 crore as compared to INR 88 crore for the same period last year, growth of 19.6%. On a year-to-date basis, we reported INR 250.8 crore of revenue as compared to INR 256.4 crore in 9 months ended FY '20. EBITDA for Q3 FY '21 is INR 18.9 crore as compared to INR 15.5 crore in Q3 FY '20. EBITDA margin stood at 17.9% in Q3 FY '21, 30 basis point improvement over previous year same quarter. It is important to note that EBITDA margin in the current quarter was lower on account of MEIS benefits, lower MEIS benefits post the recent capping of MEIS benefits by the government of India. Net profit stood at INR 8 crore for Q3 FY '21, a growth of 27% year-on-year. Cash PAT for Q3 FY '21 was reported at INR 12.8 crore as compared to INR 10.8 crore for the same period last year. For the period, we incurred the CapEx of INR 15.53 crore, and we expect for FY '21 CapEx to be in the region of about INR 20 crore. CapEx spend for Halol and the new Rania facility portfolios will be INR 70 crore, and last quarter -- it will be spent in Q4 FY '21 and Q1 of FY '22, allowing us to be ready for commercial supplies by the end of H1 FY '22. With this, I would like to summarize on our operational highlights and let you know that we are all working actively towards diversifying our business model, and you'll see better trajectory in quarters to come and we want to start commercializing. That is all from our side, and now we can open the floor for Q&A.

[Operator Instructions] First question is from the line of Hitesh Taunk from ICICIdirect.

Congratulations on a very good set of numbers. As far as top line is concerned, we have recovered on a 9-month basis. Sir, I have some questions on the recovery front. Like we have seen a good top line growth during this period. And -- but I'm -- nearly 60% to 70%, what I can understand from our previous calls also, that 60% to 70% revenue comes from the overseas market. Sir, I just wanted to know, our business has not had any impact of second wave of -- or lockdown in the overseas market, what we have been continuously seeing from the media report that the second COVID impact -- second COVID lockdowns were there and -- but we have not seen any kind of impact on our top line. So any specific reason, sir?

The second wave impact has been there. And we wouldn't say that it hasn't been there. But it will be -- so we've had lots of challenges on the logistics front. We've had lots of challenges on availability of materials and some challenges on even fluctuating forecast from various customers for various regions. Overall, the business, however, has done exceptionally well, especially in a lot of the markets where the lockdown or the second COVID wave hasn't really impacted the market badly. There are some markets where we are seeing volume drop, but it is being covered up by another region and also being covered up by the addition of products that we added and the new business that we have developed over the last year.

So if we compare on a like-to-like basis without adding our new product category, so was it good recovery there in that if we compare like-to-like? Is it a good -- is my understanding is correct that the existing product category would have a kind of growth only and not dipping?

Yes, Hitesh. The products are also seeing growth. So compared to last year -- also as compared to quarter 2.

Okay. Great. Great. Sir, my second question pertains to our gross margin. Although there has been a bit supply concern and all, sir, I just wanted to understand our gross margin was kind of under pressure during this quarter despite having such a good volume term, and the changing mix also for the Healthcare category, which is a kind of a higher-margin business, what we understand. So is this a onetime event? Or we can see kind of improving gross margin going forward, given the fact that our new capacity is in the start signal and giving a good utilization level going forward?

So, Hitesh, there are 2 things there. When we look at gross margin, I mentioned in my speech that MEIS has been capped based on the INR 2 crore limits which the government of India has set which has impacted our gross margin. We commercialized carbon steel in quarter 3, December, to be precise. So from a gross margin level, the contribution from carbon steel was lower. So these were two reasons why you have seen a little minor drop in gross margins. We expect that gross margins to go back to normalized levels as we move forward in the quarters to come and probably improve so fast.

Okay. Great, sir. Sir, my last question pertains to our annual revenue opportunity, what you have been guiding since Q1 FY '21 during the challenging period also. So the new business opportunity in the Toy segment, and the additional, you can say, orders from the existing Home Furnishings major. So is it safe to assume, sir, I mean, around INR 200-odd crore of revenue opportunity what is lying to execute in FY '22? Additional, I'm talking.

We have given the numbers in terms of what additional businesses, which we've added in Q1, Q2, Q3. And if I were to look at that, the number adds up to higher than what you are seeing. So that's the type of opportunity which we are looking at here.

But sir, opening remarks, we had -- in opening remarks, we have been mentioned like our carbon steel project is -- will be fully operational from our current year and that too from I think December or November or second half of the year, right? So if I include that much of revenue, then it would be around INR 200 crore or it will be more than INR 200 crore? That was just confirmation.

This number was excluding carbon steel.

Hitesh, the INR 200 crore or the number which you're talking about is on an annualized basis. None of these projects are getting commercialized Q1 and Q2 of FY '22. So that's something which we need to take into account, and then there will be a ramp up which will be done.

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

I would like to know, in next 1 year, from this sector, are we seeing good revenue in companies, carbon steel or other old verticals?

So Ravi, I think we're looking at growth across different segments, whether it's Home Furnishing, whether it's steel furniture, whether it's Toys or Healthcare. We're looking at growth in each of these verticals in the coming year.

In FY '22.

Okay. And sir, what is our debt at present and how much new CapEx we are going to do so? And what will be debt after 1 year?

So the total CapEx which we are going to do, additional CapEx, I just mentioned in my speech that for the Toys and the new plant, which we're setting up and Halol, will be in the region of about INR 70 crore. We already have funds which have been tighter.

But we will raise the debt or equity?

So it will basically be funded by a mix of debt, which has already been raised. And if you look at the -- we are not looking at raising any equity.

The next question is from the line of Vikas Khemani from Carnelian Capital.

Congratulations of good set of numbers. A couple of questions. In the scenario of the hedging in raw material prices, how does sort of ...

Your voice is breaking a little bit.

Sure. Is it better now, sir.

Yes, a little bit.

Yes.

So my question is in the situation of rising raw material prices, how do we sort of handle? Is it mostly pass-through where it happens with a lag? And how does it work, that would be good to know? And secondly, I think we hear that lots of restrictions are there right now -- lots of constraints are there right now because of the container unavailability. So when you do you think the situation should normalize? And do you see an impact on that going forward? And the third question would be, can you give some sense on what if tomorrow the rupee starts appreciating? I mean do we have any sort of -- so I would love to give us a sense of rising mechanism.

Yes. So on higher pricing, Vikas, it's the pass-through with a lag of 3 months.

Okay.

Right. So it is always -- with most of our customers, it is previous 3-month average pricing, which gets applied the following quarter. On logistics, we have seen improvements between December and January on the logistics front. We are seeing some improvement right now. I wouldn't say significant, but we hope that it normalizes by Q1 or end of Q1 FY '22. Really isn't away when what we do really gauge when it will normalize. Typically, we see shortages of containers during Chinese New Year because whatever's been -- whatever hasn't gotten out from there doesn't get out until 18th or 19th of February. But so far, we've been managing logistics very well. I'd say even though there are shortages, we should not get into a position where we are not able to ship product.

And what kind of cost rise you would have taken in the last consequent quarters in terms of our logistics cost? I mean I'm sure there would be high cost, right?.

There are 2 things there. In most of our cases, in terms of exports, our pricing is exports. So the cost gets borne by the customer. We would have seen marginal cost increases on our raw material because of logistics. So -- but then there's...

Then also is again same principles apply, landed price is a pass-through.

Third question is on rupee appreciation. So if rupee appreciates, Vikas, a lot of our revenue, especially to the Home Furnishings major is actually in rupees.

Okay. Okay. And a question I had on the CapEx side, how much -- I mean, so first of all, I mean this current current year, FY '22, how much of the CapEx we are operationalizing? And same thing for '23, how much CapEx we'll operationalize?

So we just capitalized our steel furniture facility, which was a total CapEx of about INR 55 crore, INR 57 crore, which is what was commercialized in December of 2020. We will be commercializing further CapEx of about INR 20 crore to INR 25 crore in Q4 of FY '21.

Okay.

When we look at it on carbon steel, a lot of it was spent during last year, which is getting commercialized now. So that's something which we [indiscernible].

And the next year, sir, in FY '23 -- or FY '22, sorry. '22, sorry.

We would be spending about INR 70 crore on the new Toy facility and the new plastic facility, which we are creating. Yes, so Toys will be done in the current year. The new facility, Halol, will be done in the next year.

And is that the normal CapEx we should assume even let us say [indiscernible] 3 quarters because given the size of opportunity is very large, do you think it will accelerate, it will stay here? Or what's going to be broader strategy?

This is based on the current business, which we have taken up. We now look at commercializing all of that business with the CapEx which we have got. And then review what CapEx we will do for FY '23, '24 onwards.

Okay. Whatever CapEx you're putting will be fully -- are you expecting it to get fully utilized in '23, sir?

Yes. So we -- we set up the CapEx we have businesses which have been tied up. So all the CapEx which we are currently doing is based on business which has been tied up. That would be commercialized based on the time lines which we have in terms of product commercialization.

Okay. And sir, our general -- do you think any improvement in the working capital will happen or this the level that will continue to be?

So working capital, we have seen some improvement between say Q1 to Q3, the Q1, we had a higher level of working capital, which was abnormal. As we move forward, we will see some more improvement. And as the steel increases, we will see further improvement next year.

What is the -- like our internal target level of working capital we would like to keep?

We internally look at the net working capital somewhere between the 75 and 90 days.

You always had, in that sense, cash conversion of roughly about 70 days, right?

Right. That's what we would look at.

Okay. That will -- that's a lot of range to us.

Yes.

[Operator Instructions] The next question is from the line of Amit Shah from Ace Equity.

Sir, I have two questions. First would be any progress on our U.K. subsidiary?

We set it up, which is in the process of sorting out the logistics for the subsidiary. But until travel resumes, there will not be much activity at the moment.

Okay. Okay. And sir, in auto side, there hasn't been any new orders except Honeywell from last few quarters. So can you discuss a little bit about that segment?

We don't actively participate in automotive, neither go -- actively pursue business. We're doing just mix business on particularly where there is metal-to-plastic conversion or high requirements of engineering. But apart from that, we don't really actively pursue that business.

The next question is from the line of Atul Kothari from Progress Securities.

Sir, I have two questions related to the Toys business vertical of us. So, sir, I wanted to know as to the new order which you have received for the Toys business, is it from the Spin Master or from some other client?

It's from another client.

Okay. So which client is this?

We will name the client once we start the play.

Okay.

We cannot -- I'm sorry, but we will not be able to name the client.

Okay. And sir, we are getting business from renowned toy players as a result of this strategy of shift of business from China, okay, from some of our clients. So we'll be supplying existing products? Or this should be new category of toys, which we'll be supplying to them?

Some are existing products that are already available on the market. Some will be new launches.

Okay, sir. So sir, what would be the percentage of -- can we just give you a mix -- product mix in terms of new and existing? Would it be 50-50 or it will be more in favor of new toys?

So I think this business is still evolving. If we look at...

Currently, it's split between 50-50.

Yes, probably even more on the new side. It's split between 50-50.

Okay. Okay. And sir, what type of toys are you manufacturing? Can you through some light on that?

These are complex games, puzzles, electronics.

[Operator Instructions] The next question is from the line of Vandna Soni from SBI Capital.

Just wanted to understand, is their any declining domestic sales this quarter? I believe domestic business is primarily FMCG and CRC caps. Are you seeing any slowdown in these businesses?

No. In fact, our FMCG business is doing exceptionally well. In whatever products and markets that we can participate, we have an increased order book.

So, Vandna, even if you were to look at domestic business, it's not only FMCG and CRC caps. Part of our device business is also domestic because we supply to some companies in Indian games on export account. So for us, it's domestic business. Some of our auto business is also domestic. So we have business -- domestic business across different segments.

So what made this decline in this market?

It is not declined, Vandna.

Okay. Then second question is on MEIS benefit. I just wanted to understand, it seems to be around 4% earlier. What it is now? And how much impact it will be on your revenue overall?

So MEIS, government came up with regulations in August, dripping MEIS for September to December at INR 2 crore. So our revenue -- or MEIS income, which we have recognized in our book has been capped at that level. And we've opened the balance MEIS benefit. And that impact is about what percent of the revenue for -- let me rephrase it. We do not foresee any MEIS benefit, but we don't intend report if there is a way -- yes, if the government allows it, we will take it in [indiscernible], yes. So -- but at the moment, we have not taken it on our P&L.

Okay. Understood. So if I ask one more question. I just wanted to understand what is the raw materials and also where they are sourced?

Sorry, I didn't understand the question.

So what is the breakup of exports -- imports? Or how much percentage you are sourcing from India?

So 50% of our raw materials is imported, 50% is domestically sourced.

Okay. Understood. So if you can give us how much inflation you are -- I understand you have partners [indiscernible] new customers. So how much is -- how much inflation is there to raw material?

Vandna, your -- price increases on raw material. I think that's the question.

Yes.

Increases from materials, I mean in some cases, we're talking about maybe 8%, 10%, 12%. There are materials where it has gone as high as 100%, 105%, 120% also.

Okay. I just wanted to understand, sir, how much this quarter, you have seen -- when there was gross margin impact due to raw material prices? So next quarter, will we -- gross margin will be benefited with this, right? Only 3 months gap plan.

That depends on material pricing and [indiscernible] material price movements and volume that we sell every quarter. Some times we get a little bit more. Some times we get a little bit less. It balances out at the end of the year.

The next question is from the line of Pritesh Chheda from Lucky Investment Managers.

I have one question. Based on the supply commitments that we have for different projects in the next years, I just wanted to understand if you could help us or tell a broader revenue number, which is possible on these supply commitments, one ex of the steel project, steel furniture and one including the steel furniture, if you are willing to share a certain range portfolio.

All right. I think without the steel furniture, we would be looking at somewhere between INR 500 crore and INR 550 crore, and with the steel furniture somewhere between INR 560 crore and -- INR 550 crore and INR 600 crore or INR 620 crore.

Okay, so without steel furniture, it's INR 500 crore to INR 550 crore. And with steel furniture, it is INR 550 crore...

INR 550 crore to INR 620 crore.

INR 550 core to INR 620 crore. Okay. And I missed one question -- answer on one of the question which was asked by a participant about the gross margin and the EBITDA margin not expanding to extent which you have thought otherwise in the quarter. I couldn't understand the response with Mr. Shah, actually.

Pritesh, If you were to look at quarter 3, there were 2 impacts which happened in quarter 3. One is the capping of MEIS, typically led to a 1% drop in EBITDA. And the commercialized carbon steel for carbon steel at the net level in quarter 3 was negative on EBITDA. So these were 2 reasons why you are seeing EBITDA which actually could have been higher was a lower percentage.

Okay. Okay. And has the full depreciation on the carbon steel project started flowing in, in this quarter? Or it was partly operational in the quarter?

So, it's partly operational. So you will see the full impact of it in the quarter 4.

In quarter 4. And what is the depreciation run rate on invested amounts? I think we invested about INR 50 crore as CapEx in steel furniture, right?

Yes, about INR 55 crore.