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

Ladies and gentlemen, good day and welcome to Shaily Engineering Plastics Limited Q1 FY '23 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] And there will be an opportunity for you to ask questions after the presentation concludes. [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, sir.

Thank you very much. Good morning, and a very warm welcome to all the participants to the post results earnings call of Shaily Engineering Plastics. I have with me Mr. Sanjay Shah, our Chief Strategy Officer; and SGA, our Investor Relations advisers. I hope you had a chance to look at our investor presentation that is uploaded both on our website as well as the stock exchange. I am very happy to share that while we have registered our highest quarterly revenue in quarter 1 of FY '23 at INR 172 crores. However, I'm sure everyone has this question on their mind, so I'd like to address it upfront that we've also registered lower than normalized margin. We had some rate of significant challenges in quarter 1 of FY '23, particularly with respect to rising material prices, as well as rising or weakening rupee against the dollar, which have both resulted in margins taking a hit. We anticipate these margins to normalize by quarter 3 of this financial year. We have witnessed significant improvement -- improved traction across various verticals, and we have very strong visibility that gives us immense confidence that we will be able to scale up further and grow including margins. We are deepening our foray into the intellectual property that we're developing in the U.K. for Healthcare. Healthcare is now our second largest revenue contributing segment. During the quarter, we finalized contracts for 2 additional pen injectors with leading pharmaceutical companies. We've built a scalable model, which will help us achieve higher revenue growth in the coming years. We've also embarked on a journey to create a new drug delivery technology that will be groundbreaking and leading -- world-leading for oncology, where currently the therapies are administered by health care practitioners in hospitals. We intend to change this by taking the drug delivery at home. We're also deepening our foray in Contract Manufacturing and Medical Devices, where I'm happy to announce that we've just signed an agreement with the customer to manufacture powder inhalers for them. Under our automotive and engineering, we have started commercializing orders that we received and expect ramp up in the current year as we had mentioned in earlier calls. Last year, we raised funds and have started utilizing it to expand our core business of home furnishing toys, as well as towards Healthcare. We are planning a CapEx spend of approximately INR 200 crores over the next 2 years, out of which more than half of the spending will be towards the pharma part of our business. This will be towards scaling up the existing devices that we have spent years developing and putting on clinical batches for customers as well as for new IP-led devices that we're currently in the process of developing them and handing over to customers. That is all from my side. I shall now hand over the call to Sanjay Shah, our Chief Strategy Officer, to give you the operating and financial highlights. Thank you very much.

Thank you, Amit. Good morning, everyone. I should share with you the highlights of our operation and financial performance of Q1 FY '23. Following this, we will be happy to respond to your queries. During the quarter, we processed 6,544 tons of polymers as against 4,098 tons in Q1 FY '22, an increase of 60% year-on-year. In Q1 FY '23, we've already achieved 34% of the volumes of FY '22 in the current quarter. Machine utilization rate stood at around 50% in Q1 FY '23. Exports during FY '23 stood at 80.4% of total revenue as compared to 76.1% in FY '22. I should now brief you on the standalone result highlights. Revenue stood at INR 172 crores during FY '23 as compared to INR 120.1 crores during Q1 FY '22, a growth of 43%. This is our highest quarter [ reach ] as mentioned by Amit. EBITDA stood at INR 21.7 crores during Q1 FY '23 as compared to INR 20.2 crores during Q1 FY '22, a growth of 8%. EBITDA margin stood at 12.6% for Q1 FY '23. As mentioned by Amit, margins have been the pressure for a couple of quarters due to increase in raw material prices. These costs would be passed on as we go in the future. PAT stood at INR 7.4 crores during Q1 FY '23 as compared to INR 8 crores during Q1 FY '22. PAT margin stood at 4.3%. Cash PAT for Q1 FY '23 was reported at INR 15.2 crores as compared to INR 13.9 crores during Q1 FY '22, a growth of 9%. On a consolidated basis, revenue stood at INR 175 crores, EBITDA at INR 24.3 crores and PAT at INR 9.5 crores for Q1 FY '23. We don't have a comparable for Q1 FY '22. So we're not having any comparative numbers there. We would like to highlight that on the basis of recent adjustments including operation and financial performance of the company, CARE ratings have agreed to our long term rating to -- from A1- with a stable outlook for our long-term bank facilities of INR 270.17 crores, and the short-term bank facilities have been upgraded from CARE A2 to CARE A1. This is all from our side. We can now open the floor for Q&A.

We now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Manish Gupta from Solidarity Advisors.

My question is that my understanding is, and please correct me if I'm wrong, that your business model is primarily a complete raw material pass-through model. And with your largest customer, that's the European -- can you hear me?

Okay. [indiscernible] We couldn't hear you.

I'm going to repeat. So I said my understanding is that our business model is...

Your voice is breaking. I'm sorry.

I Sanjay, I think it's your network. I can hear Manish very well.

How much should I wait for Sanjay to get back?

No, I will try to answer it, Manish, why don't you go ahead.

Okay. So my question is, Amit, that as my understanding is, that your business model is primarily a complete raw material pass-through model. And with our largest customer, our billing is in rupee. So we are also hedged for currency. So my question is that how does one interpret the quarter-on-quarter gross margin decline? I'm saying practically, from a medium-term perspective, this metric -- does it mean anything? Because if your revenue is on a formula basis linked to raw material prices, even if raw material prices were to crash or move up, over the medium term, your absolute cash gross margin remains the same. Is that understanding correct?

Yes and no. See, there is a material margin that is charged and there is also a manufacturing margin, which is charged. So what happens in a scenario when you have rising material prices quarter-on-quarter, is that we get the effect of the rise in the last quarter during this quarter and the rise during -- of this quarter in the next quarter. Then the other thing that plays out is the product mix for each quarter and the volumes for -- the volumes that we manufacture and sell. So for example, if we've done the best quarter we have in the current quarter and sales go up and we get the price increase, we benefit out of it or we at least negate the margin erosion of the previous quarters. But if volume comes down, even though you get the material revision, you benefit less. You will have some losses that you make because you've not done the same volumes. So product mix volume also plays a little bit of a role. Throughout in a given year, it balances out. But unfortunately, we are in some unusual times at the moment. So we are seeing product mix changes. We are seeing certain products going up in volume, certain products coming down in volume. And it has a little to do with the customer strategy as well because there's limited capacity in terms of logistics available. So prioritizing products, which are the best sellers is always going to be key for them to sustain their business. Did that make sense for you?

Yes. So I have a follow-up on this. So what I hear you say is that under the assumption, for example, that these are only selling one SKU. And let's say it was 100 units, and that remains flat. Then no matter what happens to commodity prices or the rupee, your cash flow remains preserved over time. Is that understanding right?

Yes. As a percentage of it goes up or down, but the value part probably remains the same over a period of time.

Okay. So what I didn't understand is that now I understand product mix, but if volumes go up, right? So let's say that you're growing pretty rapidly. Your volumes were up 50% Q-on-Q, give or take. So if commodity prices have gone up, are you saying that you will lose out because you know you not get -- you will get a lower raw material adjustment based on the higher volume. Is that what you're saying?

No. So think about it. Our raw material buying cycles on average are -- we will keep -- we will have stock of no more than 20 days in raw material, for example, whereas the price revision with the customer is quarterly. So you have one price revision every 3 months. So whatever I have supplied in Q1 FY '23, I've also bought substantial, barring 3 weeks, I have bought the most substantial amount in Q1 FY '23. So the prices I've paid in [ rupee ] in Q1 FY '23 are substantially higher than Q4 of FY '22.

Okay. My second question is...

We've seen risk revision in Q2. We will get this adjustment in Q2.

And if the prices completely collapse, it's not as if the customer will not give you the adjustment. The Will give you the adjustment for the higher price than...

No, the same formula applies. So prices collapse -- prices collapse, so our margins go up because, for example, we've paid the highest -- I mean, material have been at the highest in Q1 FY '22. And if prices start to come down, then we will benefit from prices going down.

Okay. My second question and final question on it, is that we are seeing across the board opportunity in China in [ Sichuan ]. I guess in some of the segments that you are in, their opportunity is quite strong, toys, furnishings. So can you just talk a little bit, and you have mentioned in some of the similar prior calls. But what are we doing for talent retention as we scale up? Because this is manufacturing. So I guess you need a lot of talent on the design and manufacturing side. So can you talk a little bit about what you're doing for that?

Sure, sure. So again, I'm glad that you asked this question. We've brought down our attrition from 14%, 15% down through -- very close to 10% over the last 2 quarters. We have great camaraderie within the teams. What we have done is we've introduced the performance linked incentives, where a portion of the -- portion of our employee salary up to level of senior management, too, is all based on PLI. So based on performance, quarterly performance of the company, as well as quarterly performance of the team and then the individual. So we've seen that this has been a great motivation for people to, a, to perform higher, to do better continuously. And we see the results of that, especially when it comes to manufacturing. Unfortunately, our utilization is low because the order book, while we've done INR 175 crores, the order book is not what we anticipated it to be. So that's playing a bit of a downer. But overall, our retention has gone up, employee retention has gone up substantially, and we are introducing a long-term -- long-term wealth creation for a certain -- up to a certain level of employees so that we improve that further.

Okay. And perhaps if I can slip in the last one on the PAT. Given what you're seeing, how the world is evolving, I guess, there are some recessionary headwinds, but there are also tailwinds of global supply chain, diversifying. On a rolling 5-year basis, would you venture a number of what you'd be disappointed by if Shaily does not reach in 5 years from now?

Put me on the spot, right?

Amit, I think we would retain from [indiscernible].

Actually, yes. I think if Shaily does not achieve an average CAGR of 17% to 20% year-on-year, I would be very disappointed. Given year, it could be bad. But overall, I think you should still get there.

The next question is from the line of Ritesh Shah from Investec.

A couple of questions. First, continuing with the prior question. What percentage of our volumes will have a cost of arrangement you explained on the price revisioning that was useful. But just wanted to get a number on percentage of volumes, which will have a cost for a pass-through arrangement?

As for pass-through arrangement, some pass through on a quarterly basis, some pass through on a 6 monthly basis, some pass through on a yearly basis.

But most of our volumes, right? Did I hear okay?

I would say that 80% of our business passes through on a quarterly basis or more.

That's perfect. Okay. My second question is, Amit, in your initial remarks, you did mention about Healthcare. You did mention about inhaler device and a new mechanism to get the delivery at home. Possibly, if you could provide some more color over here?

Two separate projects. One is we've developed a new technology. I hope -- I will explain about it more in upcoming quarterly calls. Too soon to talk about it. But basically, it's for oncology therapies where the patients are required to take very large volume drips currently at hospitals. So we're trying to develop something, which -- where they can do their same activity at home. The second is that we have gotten into a contract with someone to manufacture dry powder inhaler.

This dry powder inhaler, any quantum -- any time lines over here or the size of the market that you are looking to cater?

No, it's a contract manufacturing -- because it's a contract manufacturing job, it purely depends on how the customer does. So here, I will not be able to give you any further information at this point. Once product is fully Industrial, we will be able to give you some indications. So that's going to be 12 months out.

Sure. And lastly, in our prior conference calls, you have indicated about the ramp up [ 33% ] that we are looking at on insulin pens. We have also indicated that we have a number of innovative products which are there. Any color over here?

That business is growing well. We're making a lot of headwind in now also different geographies of the world. So we have currently targeted Middle East where we see great volume opportunity scale up in '24 and '25, and so the earlier indication stands through even today.

Would it be possible to indicate the number of pens produced? I think the earlier number was, I think, 7 million pens per year. And we were looking to a ramp up of nearly 20 million over the next 2 years. Any updates over here? And if you can split it between contract manufacturing versus IT, that would be useful.

All right. So currently, contract manufacturing would account for 60% of the pens. I would say 60%, maybe 65% or 55% or 65%, let's say, somewhere around there. Its changes. It's quite dynamic and the rest would be our own IP. We see the IP growing significantly. So when we gave the indication of 20 million over 3 years, most of that will come from our own pens. [indiscernible] will come from our own pens.

That's quite encouraging. And where are we right now, what is the 20 million pens number? Are we around about 7 or have we moved up?

Yes, somewhere around 6 million, 6.5 million pens.

Sure. And just last question. I think in the prior question, you did indicate that the order book is not to what we expected, can you provide some color segment-wise in any particular reason? I presume it would be on back of logistics or the global macro. If you will provide some color about that.

It's purely the global slowdown in logistics and price -- price rise. But from a segment perspective, we've not provided it in the past. And unfortunately, I will not be able to provide that right now.

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

Congratulations for a fairly good traction in revenues. Just for 2 questions, one on the gross margin side. So we were about 40%, now we are about 33%. So there's about 5% to 7% loss in gross margin. When do you see this getting recouped? And when do you see the incremental contributions or the incremental business from the Pharma side start kicking in, which would then influence the next leg of gross margin expansion? So this is my first question. And my second question is usually at the beginning of the year, you have some broader revenue target for FY -- for the fiscal ongoing year. It would be nice if you could share what should be now the expected revenue for FY '23 if it is possible to share?

Thanks, Pritesh. I think let me answer your second question first. We're very hopeful we maintain similar momentum as we come in quarter 1. Quarter 1 has been exceptional. I will not lie, quarter 2 is at best going to be as good as quarter 1. But we anticipate ramp-up in quarter 3 and quarter 4. On the margin side as well, with the pharma kicking in, you will see margin expansion. You will first see normalizing of margins in quarter 3. And then an expansion of those margins. I don't know how much, but some expansion of those margins in quarter 4 because we do have significant deliveries planned in quarter 4 for the Pharma business.

Okay. When you mentioned that you will be hopeful to maintain the quarter 1 traction -- is it INR 175 crores in Q4? Is that how we should look at your business with quarter 4 seeing further expansion of the revenue? Because Pharma will start kicking, that's how I should read your answer or a different answer should read?

It's very difficult for me to tell how demand will pan out this year. What we see is quarter 4, we have additional Pharma revenue from the INR 175 crores that we've done. So we should grow in revenue in quarter 3 and quarter 4. But quarter 2, I'm telling you right now because we're already in August. So I know for the fact that we're -- at best, we're going to do INR 175 crores or somewhere a little less than that, yes.

Okay. And lastly, sir, what is the progress now at the Furniture factory, which you are trying to stabilize and ramp up over the past 1, 1.5 years. So where are you on that journey?

On the Steel? [indiscernible] sorry ? Did you say something?

Yes, no, no. because [indiscernible].

Yes. So again, Steel Furniture factory, we -- our manufacturing capability has improved. Our learning -- we have come over the learning curve when it comes to fabrication of sheet metal. We have some challenges in power coatings, but we have improved significantly. Again, what we're seeing, Pritesh, unfortunately, is that we've seen demand drop in quarter 2. So whatever manufacturing gains we have in terms of efficiency, in terms of quality, in terms of rejection, unfortunately, will not really give great numbers in quarter 2.

But have you stabilized the [ sheeting ] problems in the factory?

I would say 80% of our problems -- 85% of our problems have been resolved. We had some for which we have seeked external expertise -- external consultants as experts, and we will be resolving them.

And what is the utilization at Furniture factory?

Usually, we don't see about [indiscernible] that.

No problem, sir. Okay. Lastly, sir, if you could share the CapEx number now for '23 and '24?

Because your CapEx numbers will stand same as what we talked about last time. We're looking at investing about somewhere between INR 100 crores and INR 120 crores this year. A majority of that will go into our expansion across Pharma facilities. That's what's going to be the CapEx number this year.

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

First, on the gross margin and EBITDA margin side. So if you see our gross margin has fallen by 7%, 8%. But the fall in EBITDA margin has been less at around 4%. So whenever in Q3 or Q4, we expect the gross margin to go back and maybe then Pharma will kick in, can our EBITDA margin be much -- if not much, but higher than the average 16%, 17%, which we used to do historically?

Yes, that's what we expect going forward. I don't know in terms of timeline, what it would be. But yes, if we were to look at between this year and next year, we do expect margin improvement happening over that period.

Next question is to Amit sir, on the pen side, you have talked about you see most of the traction for this year in Q4. So are we on track to our target of around 9 million pens this year and around 12 million pens as you have talked about for next year?

No, no, it's 6 million, 6.5 million pens, going to 20 million in 2 to 3 years. That is what we have said. So we are on target for that. And we've done a decent Pharma sales in quarter 1, we manufactured and are selling more in quarter 2 for Pharma as well. So you see good Pharma traction before the end of this year.

And so that 10 million number is [ halfway ]. Do we expect to drop next year, the [indiscernible] jump up will happen next year?

So I'm filing the launch of the 2-year cycle typically. So next year, yes, I think we should get somewhere close to 10 million at least. I don't know how much, maybe 9 million, maybe 8.5 million.

So it's totally back ended? Because from 6 million to 20 million, we are not very sure of this year or next year ramp-up happening, but then 2.5 years will happen [indiscernible].

Yes, because it's always going to be -- that's the cycle, that's the approval cycle. It's not, Aman, it's not that we're not sure. Global volumes are there, it's just about how it's going to happen. And there's a great plan with the customer in terms of it. As Amit mentioned, there will be [indiscernible] that is given. There will be budget given for trials and everything. So for those trials, you know what quantities we are supposed to give. And post that, we move with the ramp-up, which is going to -- so that's the cycle which happens for the business.

Sure, sir. Next question on the Toys division. We have talked about this year to be a little soft. Any change on this part? Any new customer addition we are trying? Any new campaigns we are trying because a lot of -- we see a lot of emphasis on the toys manufacturing in India. Given we haven't lead, we have done quite well up to now. But to reach to the next level, are we putting more effort? Are we trying to talk to more customers -- more orders from same customer, if you can talk a little bit about the steps we are taking to ramp up Toys division.

So Aman, what we're doing is we are in discussions with existing customers to add more products. And at the same time, we are in discussions with new customers also. Again, here, what's happened there -- because of the global slowdown and unwinding, which has happened. Global demand for toys has come down as compared to last year. So while we are in discussions, we should be able to give you some better clarity as we move forward.

Sure, sir. Final question on the employee addition which we are targeting for this year, if you can talk about it.

Sorry, I didn't understand that question.

We have 1,800 to 2,000 employees. Any number you have in mind for the addition for this year?

We're not signing any additions, anything major is for additions or employee [indiscernible].

Yes. We're adding people in key positions as required. Amit, we want to talk about this year, which you're looking at, give some just...

We've said before, we will close the CEO mandate before the end of this calendar year, and we will have someone on board with us. And that remains -- we're on the right track in terms of timing to achieve that.

The next question is from the line of Nikhil Jain from Galaxy International.

Just a couple of questions. So looking at your commentary in the -- initial commentary, it seems for, at least to my mind, it was that we are shifting towards more on the Healthcare side as an organization. So 3-year timeline, 3 to 5 years timeline, where do you see sale? So the Healthcare contribution right now in second largest. Will it become the largest contributor to the business in maybe 3 to 5 years?

It will remain second largest even in 3 to 5 years.