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

Ladies and gentlemen, good day, and welcome to Shaily Engineering Plastics Limited Q1 FY '22 Earnings Conference Call. 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, Managing Director. Thank you, and over to you, sir.

Thank you very much. Good morning, and a warm welcome to all the participants. The post results investor and analyst meet of Shaily Engineering Plastics. I hope you all are keeping safe and healthy. I have with me Sanjay Shah, our Chief Strategy Officer; and SGA, our Investor Relations Advisers. I hope you've had a chance to look at our investor presentation that is uploaded on our website as well as the stock exchange. Before I begin commenting on our business, I'd like to thank -- sincerely thank the Shaily management team and all the employees of Shaily Engineering Plastics for their persistent support in these challenging times to keep our operations running smoothly. We are taking utmost care, [indiscernible] including vaccination drives. [Technical Difficulty]

Sir, we are losing your audio slightly.

Is this better?

Yes.

Okay. Now coming to business. Quarter 1 FY '22 was challenging in terms of managing operations given the second wave of the pandemic. Since majority of our business is exports, we had to face significant hurdles in terms of managing the supply of our products given the availability of containers was one of the biggest issues we faced during the pandemic, coupled with interrupted operations and limited workforce. However, I'm very happy to share that we've managed our operations well and serviced our global customers. Despite disruptions of 2020, we managed to put our Carbon Steel operations up and running since December 2020. It has allowed us to strengthen our relationship with our marquee clients in Home Furnishings. And today, we're supplying 4 global products to them. We're looking forward to supplying more products in the same stream as the year goes on. Coming to our bread and butter Plastics business with the Home Furnishings major. We're in the process of expanding expansion of our facility at the new Halol complex, and I'm excited to share that without any interruptions due to COVID second wave, we are on the verge of commencing manufacturing at our second facility with operations starting up before the end of this month. In the Toys segment, we are building a strong and credible supplier image and have become one of the preferred suppliers to major toy giants of the world. We're expanding our order book with Spin Master and now have entered into a relationship with the world's second largest toy manufacturer. This marks -- that marks the quality of our products and trust by these companies in us. However, due to shipping crisis, it has been a little bit difficult to manage supply chain. Container shortages are causing shipping delays and increased cost to our operations. Barring this temporary phenomenon, these toy companies have indicated their plan of transition to third-party manufacturing facilities in both India and Vietnam from a complete China-based supply chain as it is today. We are glad that we are being part of their objective and able to contribute with our specialized skills. Some highlights on our Healthcare segment. I've been highlighting on this point for quite some time now that the opportunity with the pen business -- the pen market is massive. We're trying to grab our pie out of it very slowly and steadily. We have successfully signed 2 new pen development contracts, and we have many more in pipeline. We have -- we will be starting supplies to -- we will be starting supplies for insulin in the Iran market in the coming months. To sum up, let me give you a business update for the quarter. On the Toys business, we have successfully started supply to the second largest toy brand in the world. In the Healthcare segment, we have 2 new pen development contracts signed and in progress. Our new facility at the Halol complex for the Home Furnishings major, we've started trial production, and we will go into commercial production before the end of August 2021. Let me conclude now by saying that the Board of Directors have approved a preferential allotment of shares amounting to roughly INR 150 crores. We have been successful in getting marquee investors such as Lighthouse Funds and White Oak participate in this fund raise. Let me tell you that this is Lighthouse Fund's second primary infusion into Shaily, after their first infusion in 2008, 2009. After their exit in 2014, '15, this is now their second investment into Shaily, showcasing their trust and confidence in the long-term story of our company. We intend to use these funds towards growth of the business. We foresee utilizing these funds over the next 12 to 18 months towards expansion of our business in pharma, toys and home furnishings. This investment will allow us to leapfrog into the next phase of growth and strengthen our relationship as a strong supplier to global brands. That is all from my side. I shall now hand over the call to Sanjay Shah, our Chief Strategy Officer, to give you an update on the operating and financial highlights of quarter 1 FY '22. Thank you and over to you, Sanjay.

Thank you, Amit. Good morning, everyone. I should share with you the highlights of our operation and financial performance for Q1 FY '22. Following with, we will be happy to respond to your queries. During the quarter, we procured 4,093 tons of polymer against 1,815 since Q1 FY '21. In Q4 FY '21, we processed 4,356 tons of polymer. Machine utilization rate of 56% in Q1 FY '22 is the same as Q4 FY '22 (sic) [FY '21].Please note that you could [indiscernible] utilization rate looks lower. In Q1 FY '21, utilization was 34% due to the nationwide lockdown due to COVID. Exports during the quarter stood at 81% of total revenue as compared to 15% in the same period last year. But for Q4 FY '21, exports stood at 97%. Revenue stood at INR 120.1 crores during Q1 FY '22 as compared to INR 46.6 crores for the same period last year. Margin of growth of [indiscernible], although it is not comparable due to lockdown in Q1 FY '22. In Q4 FY '21 group revenue of INR 109.8 crores. EBITDA of Q1 FY '22 stood at INR 20.2 crores as compared to INR 3.5 crores in Q1 FY '21 and INR 22 crores in Q4 FY '20. EBITDA margin stood at 16.8% in Q1 FY '22 compared to 7.4% in Q1 FY '21, and 20.1% in Q4 FY '21. Net profit stood at INR 8 crores for Q1 FY '22 versus loss of INR 3 crores in Q1 FY '21. Cash PAT for Q1 FY '22 was reported at INR 13.9 crores as compared to INR 1.5 crores for the same period last year. For Q4 FY '21, cash PAT was at INR 15.3 crores. For the quarter, we incurred CapEx of INR 22 crores. We expect FY '22 CapEx to be in the region around INR 80 crores to INR 85 crores. With this, I would like to summarize on our operational highlights front. And that you all know that we are working actively towards diversifying our business model and you will see better chances in quarters to come as the orders start commercializing. 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 Pritesh Chheda from Lucky Investment Managers.

Sir, I have 2 questions. One, if you look at our asset utilization, it's at about 56% of what we reported in the presentation. And then we have a new asset, which is lined up in the second half. And we have raised INR 150 crores also for some kind of investment. So if you could give some color on these investments that you have done so far, what kind of revenue potential do these investments have? And what is the usage of this INR 150 crores of the equity institutions which has been planned by the company?

So let me answer that question in 2 parts, Pritesh. When you look at the current utilization level, what you need to look at is we have been adding our machine in quarter 1 as well in quarter 4. These are for specific businesses which we are commercializing as we move forward. So we have started [indiscernible] improve utilization levels as we move forward. So new plant, which is being set up is basically for a business which has been committed and for which we're getting more [indiscernible] so an additional business, which we have got, we have talked about that business in the past in terms of a total revenue potential of about INR 180 crores on a yearly basis from the Home Furnishings customers. So that's specifically for that business. The [indiscernible] digitally for -- as Amit mentioned, for 3 reasons. As we move forward, we are seeing a lot of growth opportunity on the pharma front as well as our existing business of Home Furnishing and what we mentioned into [indiscernible]. At the same time, if we have been able to take advantage of those opportunities, we would be able to [indiscernible] on that business opportunities as we come forward. So we're seeing enough opportunity in each of these 3 segments where we would basically be making investments to grow that business. So that's where we would be spending the money in. I hope that is the answer to your question.

Yes. So I still have 1 confusion here. With new business will new plant, then what will drive the utilization of the existing asset, which is about 56%?

So utilization levels will improve. What we have talked about is you will see ramp-up on costs. So you will see utilization levels improving in the current quarter. [indiscernible] new opportunity which we are setting up, we also see a ramp up there, you'll see utilization levels improve.

What is the revenue for -- yes, sorry can I...

Go ahead, Pritesh, yes.

So what is the revenue potential of the current investment that we have done so far?

Pritesh, we've again talked about it in the past. Total CapEx, which we have done [til date] if you were to look at it, you probably look at somewhere between 2.25% to 2.5% of revenue potential.

Okay. And I have one more question. Since past few presentations, we are seeing movements happening on the spend side of the business. So some projects are doing commercial while some new additions are happening. Could you tell us over the next 2 years, that is '22 and '23, what revenue do you think you will be able to close either in the overall pharma business or in the pen business? Whatever you are comfortable with Shaily? And based on the current platform and current knowledge that we have, what is the eventual revenue potential of this business?

Amit, do you want to take that question?

Yes. So one of the first molecules for which we will be leading suppliers to will be teriparatide. We will start -- we are looking at starting supplies for teriparatide in calendar '22. So somewhere between end of FY '22 and beginning FY '23. The second big molecule will come into play in FY '24. And then in FY '26. All in all, we are looking at ramping up the pen business substantially. Existing platforms where we manufacture somewhere close to, all in all, about 6 million pens a year. We'll be looking at doubling that over the next 2 years. And then looking at potentially somewhere between 15 million and 20 million pens in 4 years.

Okay. So 6 going to 12 going to 20?

Yes.

Okay, okay. And realization for pen, if you could?

Pritesh, getting into individual numbers that will be [difficult].

Very difficult. It also has a different realization, very difficult to predict that or to give you an indication today.

No problem.

What we have said is we see the device or the pharma part of the business going to 2x to 3x years in the next 3 to 5 years. We still stand by that.

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

Congratulations for a good set of numbers. Sir, continuing from this question about capacity utilization. So currently, we are at about 56%. And we have in the past done much higher utilization. The asset turn has been upwards of 2.5 also in the past. So over the next, let's say, 2 years or so, now that the Halol CapEx is also coming into play, we've also had the Carbon Steel now available. So this 56% can go to what number, let's say, in a year or 2 years' time from now?

So the 56% I wanted to clarify this on the last question itself. The 56% is not truly indicative. I tell you that. What we have... [Technical Difficulty]

Sir, your audio is breaking.

When we add capacity, it's in anticipation of new business that will come on stream. So 56% includes equipment, machinery added for the Toys business, which we commercialize post quarter. So that capacity has already gone into manufacturing and is currently being utilized. So when you see the next set of numbers for the next quarter, you will see this 56% being reflected as a much higher number.

Sure. Okay, so potentially speaking...

Kaushal, so basically would be at a higher level. So cost of like typically, today, we're going to look within our plant. We have utilization levels, which are exceeding 80%, 85% in some of our plants. So I think overall, if you were to look at it, utilization level can be somewhere between 80% to 85% of total [indiscernible].

Sure. Sir, a follow-up to the -- what you mentioned from the potential -- revenue potential from our furnishings major plant and the number that you shared was around INR 180 crores, from the incremental CapEx. Do we anticipate to do this number in maybe 2 years' time from now?

Yes it will be faster than that.

Okay, sure. And just 2 more questions. What Amit has shared regarding the pharma and the pens business. So there also, this potential doubling of volumes in 2 years' time. So let's say, from August again, 2 years, so should we look at FY '24 as a potential first target, so to say?

Yes.

Can you repeat your question? Okay, sorry. Go ahead, Amit.

Yes, yes. The answer -- the short answer is yes.

Okay. And one final question on the CapEx. So we've already spent INR 22 crores. If you can just help us understand the balance part, I tend to believe that Halol, I think bulk of the CapEx would be done. So the balance CapEx of whatever INR 50 crores, INR 60 crores, that would be towards the pharma segment?

Out of the balance, INR 50 crores, INR 60 crores of -- over 50% would basically be in the new plant, which is being set up at Halol. So some of the [indiscernible] will come in quarter 2 and capitalization will happen in quarter 2. So that will basically happen in quarter 2. And the balance will basically be split between pharma and other businesses, including pens.

Sure. And sir, one final question, if I can squeeze in. Any clarity on the MEIS? We had, I think, a substantial number blocked over there. So any further update on that?

As of date, the portal has still not opened up. The [indiscernible] rates have been announced yesterday. We are still evaluating whether we will be eligible for that or not. So there is some clarity to be had from the government. But we're still getting that. I expect government would probably open up when we have a portal, and we should be able to make applications and get them [indiscernible]. So that's something which we are looking forward to.

And have we received a pending, I think it was more than INR 15 crores, INR 17 crores, if I remember correctly.

It was not INR 15 crores. It was a much lesser number [indiscernible] which are spending to receive [indiscernible].

Okay. So was it in MEIS and GST or something like that?

Yes, we do the GST [indiscernible] which are on an ongoing basis. So we typically now have a much lesser capital blockage on GST [indiscernible] under normal phase where we basically get refund on a monthly base.

[Operator Instructions] The next question is from the line of Manish Gupta from Solidarity.

The first question was that your Hasbro. Would you know how much product volume they are sourcing from India at present?

Manish, probably being about 80 million in orders right now out of India.

And how much of this $80 million is in products where you would say is overlaps in Shaily's business definition?

I'll say most of it. Today, based on whatever we know, limited information, which we know, I think most of it would basically be similar to what we would be able to.

So Sanjay, Hasbro might be sourcing products in a lot of different areas. And some of these areas might not overlap with what Shaily does today. For example, we recently went into steel furniture. So are we still defining a definition more with highly engineered plastics or will we also go into other areas of toys?

I think Manish, we define ourselves as engineering company [indiscernible] products.

Amit, I can't hear you very well, sorry. Your voice has not been very clear today.

I apologize, I'm in a different part of the world. No, I think we're defining ourselves as an engineering company capable of manufacturing complex products that require multiple processes.

Okay. So essentially, if we have to go beyond plastics, that's something that we will consider?

Yes. Well, it depends. It has to be close to -- I mean there has to be a certain part of plastics involved.

Okay. My next question is, I think Sanjay said INR 85 crores of CapEx for this year. Based on what you know at present, based on the opportunities you see, you've just done an equity raise. So I guess, can you share, based on what you know right now, what your 3-year CapEx road map or 5-year CapEx road map might be? I fully appreciate this might change. But based on what you know at present, how much CapEx do you think you will do over the next 3 to 5 years?

So based on the current quarter, [indiscernible] fund raise which we have done. What we're looking at is post the current CapEx, which we are currently going up INR 80 crores, INR 85 crores, we would basically be looking at further CapEx of about INR 200 crores. INR 200 crores is broken up into about INR 100 crores to INR 120 crores on the pharma part of the business for growing the device part of the business, which overall IP-led business. And around INR 80 crores to INR 100 crores on home furnishings and toys. As Amit mentioned earlier in his speech, we would still be looking at putting up all of the CapEx in the next 12 to 18 months. And we're seeing enough opportunities on them. So with multiple customers in these segments.

So just to get my time line right, Sanjay, you said INR 85 crores in fiscal year '22, right? And these numbers that you've mentioned, which is INR 100 crores to INR 120 crores for pharma, let's just work with INR 100 crores for a minute and INR 80 crores to INR 100 crores for furnishings. So let's just work with INR 80 crores. So when you're saying INR 85 crores for fiscal year '22, the other INR 180 crores that you just spelled out, this is for '23 and fiscal year '24?

You're right, Manish. We basically spilled over between '23 and some of it will get spilt over to '24.

Okay. Great. So just so that -- I'm sorry to belabor this point. But between fiscal year '22, fiscal year '23 and fiscal year '24, we are looking at approximately INR 260 crores to INR 280 crores kind of CapEx?

Yes, you're right, Manish.

Okay. My next question is that our gross block as of fiscal year '21 is approximately INR 300 crores, give or take, right? Am I right in understanding that our peak revenue from this gross block will be anything in the range of INR 650 crores to INR 700 crores?

Right, Manish.

Yes.

Okay. And 2 other questions. The first one is, Amit, we are seeing a war for talent in the Indian IT industry. I don't think it will take long before it spills over to the engineering industry. Can you share what the company has done or what plans you have for talent addition and retention to help you manage this scorching pace of growth and opportunity that you see in front of you?

Sure. So I think we've -- Shaily as a company, I won't say the entire engineering industry in general, but Shaily as a company has been facing this challenge on some of our businesses for a few years now. You see, there are a lot of businesses where we're one of a kind in the country. And it's not so much talent retention, which is an issue. It is talent acquisition, which is a problem. Because there are companies in the country where we can recruit from, where we get adequate talent to begin with. So one of the initiatives we've taken this year is we've gotten -- so to speak, we've got a world-class molding expert on board who would be with us for a period of 12 months at a minimum. He's a Swedish fellow, he will be with us for a period of 12 months where we intend to train a lot of fresh engineers in the ways in scientific injection molding. So we're trying to create new capability to make sure that our processes are extremely robust and stable, and there's a method behind achieving that. So we've hired a lot of new engineers, engineers fresh out of college, engineers with 2 or 3 years of experience that we intend to train over the next 6 months. Hands-on training, classroom training, all of it put together, where we intend to at least retain even if we retain 30% to 40% of the staff we hired, we will be able to service our upcoming needs for the next 24 months.

Okay. And the last question, Amit, is that for your recent QIP, INR 150 crores, did you use a bank facility? Which banker did you use?

Sanjay? No. So Manish, we did it on our own, so on that property.

It was done by the company, the company's internal team. That's pretty awesome. Congratulations. Thank you for all the hard work.

Yes. So Manish, I didn't point to Sanjay to answer the question. I pointed him as if he was the banker.

So Sanjay was the banker? Is that what you're saying?

Yes. Sanjay did the QIP.

That's not a QIP.

Sorry.

[Operator Instructions] The next question is from the line of Aman Vij from Astute Investment Management.

My first question is on the storage business. So could you talk about how many SKUs do we have as of today? And as for the order book, we have around $10 million to $12 million per year. So when -- by which quarter do you think we can reach the utilization level of, say, $1 million sales per a month kind of run rate?

Aman, so we are already at that number, which you are talking about that, we want look at on quarter 2. So we currently have about 4 [ retainers ], which we are currently doing. And we're looking at commercializing other SKUs as we move forward.

And in terms of capacity, sir, because this will be important in toys, when do you think the next capacity will be coming? Or what is the peak utilization sales we can achieve from the toys current capacity?

Sorry, could you just repeat your question?

Yes. I was saying if we are already clocking that number. So in terms of capacity in Toys segment specifically, where are we? What is the peak sales we can achieve from the current capacity in toys?

We don't [indiscernible] capacity in toys specifically. It's part of the overall capacity, which we have. And as we move forward, we will basically add the furnishings and [indiscernible] business because we are seeing a lot of potential for growth here. And as we move forward, we will be in at capacity. Typically, you talk of the utilization level, yes, you can go to about 80% and order, which is what we talked about on each of our businesses, which we are looking at.

Sir, my question was, we won't face any capacity constraint if we want to, say, increase the toys part much faster given we have already achieved that kind of run rate?

So one reason why we deferred GDP rate or the [indiscernible] was basically to expand [indiscernible], which will climb if you look at putting up a new plant sometimes next year for toys which will basically take care of the opportunities which we are seeing as we move forward.

Sure, sir, that helps. Next question is on the expense side. Sir, maybe if you can talk about the utilization level, which you think we can achieve this year as well as next year? And is my understanding is correct, auto injector are maybe only even higher value addition part compared to say normal time. So when do we see the commercialization of the auto-injector pen?

Some of them have -- so most of them have been supplied for clinical batches, clinical or registration batches. And once our customers reach for approval, they will become fully commercial. We expect commercialization starting in calendar '22 between the end of FY '22 and beginning of FY '23 with molecules coming on stream in FY '24 and FY '26.

And Amit, what kind of utilization are we expecting for this year in pens and next year?

Aman, we don't report individual -- I'm sorry, but we don't report individual utilization levels. What we report is utilization levels at the company level.

Your question before that we do 6 million pens today, 6 million to 7 million pens.

Yes, sir, that was the question. So we have that capacity. So do you think in 2 years, we will be able to utilize it fully?

No, that's what we're supplying today.

Okay. That number, we are already doing?

Yes, yes.

Okay. Okay. Sure. The final set of questions is on the Carbon Steel business scaling. So maybe if you can talk about that. And have we reached the peak utilization level with...

No, we're not -- no, we've not reached the peak utilization level. As I mentioned in my speech, we do about 4 SKUs at the moment. We will be adding another 3 in the current year before the year is up. And end of quarter 3, beginning of quarter 4, we will go to as close to full utilization as possible.

[Operator Instructions] The next question is from the line of Mr. V.P. Rajesh from Banyan Capital.

Just trying to [indiscernible] a high level. Can [indiscernible] we have talked about this [indiscernible] [Technical Difficulty]

Sorry to interrupt, your voice is breaking.

Yes, is it better now?

Yes, it's a little bit better, yes.