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

Good day, and welcome to the Shaily Engineering Plastics Limited Q2 and H1 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 may 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 and Promoter. Thank you, and over to you, sir.

Thank you very much. Good afternoon, 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've had a look at our investor presentation that is uploaded on our website and the stock exchange. Despite a very challenging environment, we have registered half yearly sales of INR 332 crores in FY '23. The iron export-oriented company [ with products and customers based on the overseas matter ]. And given the geopolitical situation across the globe, we expect softness in demand in the coming half. We are working closely with our customers to ensure optimal production and inventory levels. We continue to watch the situation closely and will provide timing updates. Now let me give you some highlights on the business performance of the previous quarter. As I've mentioned on several calls in the past, we are very focused and deepening our foray in IP-related products for Healthcare. We have created a scalable model which will aid growth in revenue in the coming years. Healthcare is now the second largest revenue contributor to Shaily's business. Through Shaily U.K., we now cater to the other markets and create innovative products, not just for generics but also for global innovator -- innovative pharma. The most recent example is our wearable auto injector meant for delivering large volume injectables for oncology. I'm happy to announce that we showcased our first fully working prototypes at CPHI worldwide in Frankfurt and have received some very encouraging feedback from global innovator pharma companies. During the first half of the year, we did INR 4 crores of sales to Shaily U.K., and we are EBITDA-impact positive right from the onset. Under our automotive and engineering, we have started commercializing the orders received and expect ramp-up in the current year. In FY '22, the company raised funds, and we have started utilizing the same to expand the core business. We are planning capex spend of approximately INR 200 crores over the next couple of years, out of which more than half of the spend will be towards auto part of the business. So growing the device -- growing device part of the business, which is led by our own IP proprietary products. That is all from my side. I shall now hand over the call to Mr. Sanjay Shah, our Chief Strategy Officer, to give you the operating and financial highlights. Thank you very much.

Thank you, Amit. Good evening, everyone. I shall share with you the highlights of our operational and financial performance of Q2 and H1 FY '23, following which we will be happy to respond to your queries. During the quarter, we processed 5,145 tons of polymers as against 4,498 tons in Q2 FY '22, an increase of 14% year-on-year. For the half year, we processed 11,689 tons of polymers as against 8,591 tons in H1 FY '22, an increase of 36% year-on-year. In this year, we have already achieved around 60% of the volumes of FY '22. Machine utilization stood at 45% in Q2 FY '22 and 47% in H1 FY '23. Exports during H1 FY '22 stood at 77.8% of total revenue as compared to 78.7% in H1 FY '22. Now I shall brief you on the stand-alone results. Revenue stood at INR 160 crores during Q2 FY '23 as compared to INR 145 crores during Q2 FY '22, a growth of 10%. EBITDA stood at INR 21.5 -- 25.1 crores, sorry -- during Q2 FY '23 as compared to INR 23.8 crores during Q2 FY '22, a growth of 5%. EBITDA margins stood at 15.7% for Q2 FY '23. Tax (sic) [ profit after tax ] stood at INR 9.4 crores during Q2 FY '23 as compared to INR 10.5 crores during Q2 FY '22. PAT margin stood at 5.9%. Cash PAT for Q2 FY '23 was reported at INR 17.1 crores as compared to INR 16.9 crores for Q2 FY '22. Now coming to the H1 FY '23 highlights. Revenue stood at INR 332 crores as compared to INR 265 crores during H1 FY '22, a growth of 25%. EBITDA stood at INR 46.8 crores as compared to INR 44 crores during H1 FY '22, growth of 6%. EBITDA margin stood at 14.1%. PAT stood at INR 16.8 crores as compared to INR 18.5 crores during H1 FY '22. PAT margin stood at 5.1%. Cash PAT for H1 FY '23 is reported at INR 32.2 crores as compared to INR 30.8 crores during H1 FY '22. for RoCE and ROE stood at 13.6% and 9.1%, respectively, as on 30 September '22. Total debt:Equity stands at 0.6x and our long-term debt to equity stands at 0.2x. On a consolidated basis, revenue stood at INR 339 crores, EBITDA at INR 50.2 crores and PAT at INR 19.5 crores for H1 FY '23. This is all from our side. Now we can open the floor to question and answers. Thank you.

[Operator Instructions] We have the first question from the line of Bhavin Rupani from Investec.

Sir, my first question is on gross margins. Given the second quarter, we reported gross margins of around 35%.

Mr. Rupani, your line has been unmuted. Please go ahead with your question.

Hello?

Yes.

Yes. Sir, first question is on gross margins. Sir, during the second quarter, we reported gross margins of around 35%. However, earlier, we used to report somewhere around 40%. So sir, how should one understand about this 5% lower margins? And do you think 40% margins are achievable in the near future? And what would be the factors, which will lead to increase in margins?

So Bhavin, so one of the [ factor ] when you look at FY '22 and FY '23 is that our development or part of the power revenue comes from U.K. So when you look at gross margin, we need to look at our combined U.K. and the balance [ even ] together, which would basically give you an indication on the gross margin. Second is, as we have talked about in the past calls also, we have seen inflationary pressures and the raw material part too happens with the land. So that's the reason for some drop in the gross margin, which would get back to improvement as we speak. Even if you were to look at Q2 FY '23 as compared to Q1 of FY '23, you would have seen improvement in gross margin, and that's because some of the raw material pass [ through didn't ] happen.

That's helpful, sir. Sir, any factors that will lead into the margins going there?

Bhavin, I'm sorry, I couldn't hear you properly. Could you repeat?

Hello?

Yes. Can you repeat the question?

Yes. Yes. Sir, any margin guidance for second half or for FY '23?

We don't give a margin guidance, Bhavin. I'm sorry about that.

Okay. Okay. And sir, how should I understand the incremental margins going at? Currently, we are reporting around 13% EBITDA margins. What would be the major drivers for margins [ growing ahead ].

So a major driver for margin growth will basically be increase in volume. And second, as we increase the Healthcare part of the business and the [ pharma part ] of the business, the [ certain increase ] margin [ within ].

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

My first question is on the pharma business. If you can update on the CapEx as well as what kind of orders are we expecting in FY '23 in terms of our own IP sense?

I'll let Amit answer the second part of the question, and I'll just take the first part of the question later on.

Sure. Am I audible?

Yes. Yes, Amit.

Yes, okay. So we have a fairly strong pipeline. These are all products that have been filed [ in our cibility ] by various customers. In FY '23, we definitely see scale up likely bids for the same product. We did some scale up in FY '22. We see further scale up in FY '23, especially for our [ P60 pen ], which is the insulin variant of our Protean Pen. We also see scale up on our [ teriparatite ] pen, which is the fixed dose pen injector. And then we're seeing a very large opportunity with our -- one of our new devices, which was -- which had been on showcase for the last 4 to 6 months. But we are just completing the program, and we've seen a very significant opportunity at the exhibition this year as well. So we anticipate significant revenue coming from the new pen in FY '23 as well.

Sir, on the CapEx part, Sanjay, sir, on the pharma side.

Sanjay, you want to take the CapEx?

So with the total CapEx which we are doing currently, will be about INR 125 crores, out of which -- part of it has been spent, and the balance will be spent during the current year and some of it during the course of next year.

In H1, how much we have expensed of this pharma CapEx?

Aman, I don't have the exact number right now in front of me. But actually, we would have spent about INR 40 crores, INR 45 crores [ et cetera ]...

Last number is okay. And are we expecting to spend similar number in second half?

It will be -- that number will be a little higher in second half.

It's work in progress, right? Is it right?

Yes.

Yes. Sure, sir. The next question is on the toy business and the carbon steel business. If you can give the update any further breakthrough in terms of newer orders or newer clients? As well as utilization level in the carbon steel business currently?

So on toys, we are working with our existing customers to basically increase our business and everything. One of the challenges which we are facing is, as Amit mentioned in the early part of his speech, that we do see [ with winter coming ] we are seeing demand slowing down in Europe and the U.S. for most of our customers. So getting new business in this scenario does take a little longer time. So we are working with customers for that. Similarly, we continue to explore opportunities with some other customers also. But given the overall scenario, it does take a little longer time. Same is the situation on the carbon steel part of the business. What we are also doing is we are in discussions with our existing customers to basically see how volumes can be built up there. And that's something which we are constantly discussing with the customer.

So just to add to what Sanjay just said on toys, there's a global drop in demand of 25% in toys that we are hearing from our customer, 25% to 30%. Combined with this, the issue is also that increasingly more, Chinese factories have become -- I think the right word is more competitive. They're just providing [ stronger ] prices, prices that are not sustainable for long term. And we have stayed away from such practices.

Yes.

On the price part, sir, at the start of the year, we were thinking of maintaining this business [ which we did ] last year. But given the slowdown, are we expecting like maybe 20% kind of fall compared to last year in the toy business?

There will be some impact. We're really not sure in terms of the overall impact, which will be there. But yes, there will be some impact.

Sure, sir. And what would be the utilization part you left for the carbon steel business?

Again, Aman, we don't report individual utilization levels. What we do is we report the utilization level at an overall company level.

But did it increase versus last quarter? Or is it at the same level [ quarter 2 ]?

As compared to quarter 2 -- quarter 1, utilization levels have gone down in quarter 2.

The same demand scenario, unfortunately, it impacts all of our consumer businesses.

Okay. So that means one of the major clients also is facing some kind of demand issues both in plastic and carbon steel?

Yes, yes.

That's right.

Sure, sure. My final question is on the machine utilization. So what was the machine addition this quarter?

As well as for the H1, we ended up at around 47% utilization.

So for H2, do you expect similar number or much higher, or what is your expectation?

So we have not added any machines in Q2. So what you're seeing is on the same basis Q1 or Q2. Utilization levels, I think overall for H2 will probably be more or less in line with whatever we have seen in H1, but I think still an evolving situation whatever the questions we have been having with customers.

We have the next question from the line of Manish Gupta from Solidarity.

My first question is, Amit, with the benefit of hindsight, do you think the foray into steel furniture was still the right decision for the company?

Hindsight's always like that, Manish. I think given the impact you've seen the steel furniture is having on our business, I'd say probably not, but really hindsight has to do more with all the events that occurred post finalization of the business, coated having the biggest impact on commercializing that business, when the opportunity was there. Unfortunately, we just weren't be able to do it because of various technical issues, operating ratios that we realize that we put the plant onstream ourselves while [ were ] any of the suppliers coming and installing the new equipment. So this has had a huge impact on how quickly we are able to start the plant and then how we were able to benefit out of it. Unfortunately, the scenario is different right now. So in hindsight probably a bad idea.

No. Well, my question is 2 parts to that, Amit. One is obviously the ramp-up, which is due to factors beyond your control, COVID and now the recession. But technically, do you think we have mastered the steel furniture business as well as we have on the plastic side? So do you think technically we are there right now or technically still there's something missing?

Mastering any manufacturing process comes with the scale of the manufacturing process and how much experience and exposure you get to it, which is the unfortunate part with carbon steel, that the minute we try to up the utilization levels, we even got to a point where we felt comfortable in taking on more orders from the customer. We saw this kind of recession in the West. I think our fabrication capabilities are very strong today. I'm very confident that if we are given more business, we'll be able to execute. We had some challenges in surface coating, which is primarily part of COVID, but we have overcome most of those issues. So given a chance today where we can have increased volumes, I think we'll be able to perform fairly well.

Yes. But is the customer exuding confidence in our competencies or because as Sanjay had mentioned that [ capacity ] is currently lower than Q1?

Yes. Yes.

So do you think we'll be able to get up to full capacity, let's just say, INR 120 crore in this plant by, say, FY '25?

Oh, yes. Yes. Very confident of that.

Okay. My next question, Amit, is just wanted to understand some dynamics. So far for our business, see, in the IP industry, people have this concept of farmers and hunters, where people are opening new accounts. And then there are people like [ arents ], who will deepen the relationship. Now we've obviously got 1 large client whom we're working with for a long period of time. And now we've got a bunch of relationships that are forming on the health care side. So just wanted to understand how this thing works for Shaily. Is it that people hear about our reputation and approach us? Or have we hired a bunch of people who are going around opening relationships for us? How does the model work in our business?

It's slightly different. I think, maybe on the IP side, you can kickstart a project fairly quickly because there isn't much in terms of development upfront that probably takes place. I could be wrong about this, but it's just my knowledge. When it comes to Shaily, it really is -- it really comes down to us having been able to showcase to a potential customer what our capability is and what can we provide. When you try to do that with too many accounts at the same time, you end up with too many small projects that pick up all of your resources without adding any substantial revenue. Because whether we execute a project worth 50 crores or 5 crores, the amount of resources that go into executing the project are more or less the same. So for us, it's very important to try to find customers that can give us scale. And then it also depends on the segment of the business. For example, on the consumer side, we did not want to take on 5, 6, 7 customers. We probably want to focus on adding 1 or 2 accounts in a given 12-month period. And we have been doing that. So we have been actively pursuing some new business with companies similar to the home furnishings major. A lot of these companies, apart from the home furnishings major that we work with, have a model where they buy off the shelf, which means that you already have a portfolio of products that you manufacture and you can offer something off the shelf, which is your own design. And you already created the capacities, invested the necessary capital to provide them the product. We have been a contract manufacturer. Unfortunately or fortunately, we've not really had an opportunity to create our own portfolio today. So we struggled in terms of working with others like the home furnishings major we work with, but we do pursue these opportunities actively. On the pharma side, we're very much hunters. So we very much go out and hunt for new business.

Okay. So just a follow-up, Amit, in our...

This is the operator, Mr. Gupta. We are unable to hear you clearly.

Okay. Is this better?

Sure. Thank you.

So we are on...

Manish, we lost you again.

[ How is this? ]

Manish, can't hear anything.

Mr. Gupta, I'm sorry to interrupt. Once again, your audio is not clear, sir.

Maybe I'll get back in the queue, yes?

Okay. Thank you, sir. We have the next question from the line of Nikhil Jain from Galaxy International.

Just a couple of questions. Number one, when do we expect that we would be able to pass on the impact of raw material price hikes to the customers in all our businesses? So will it be like a couple of months more, quarters? Any feedback on that? So that is one. And second, specifically on the health care side, I just wanted to understand that on one of the big products that we are expecting to launch probably in 2023, '24, have any of our customer got a tentative approval?

Amit, do you want to take the first [ two ] questions?

I can likely take the second question first. On both products that we mentioned, on one of those products, we expect an approval as early as January. We've -- we know the process of how the approval would potentially come and the questions that were raised and the subsequent answers that were given to it, we are hoping for approval in January. For the other product, it is for the Middle East market, where the demand is already there. And the customer also already has a product on the market. So they will be now using our [ trend ] to put the same product on the market. So really, for the second part, it really depends on how quickly we can work with the customer to provide them a full solution on their assembly, help them with creating their testing protocol, their release protocols and then take it forward from there.

Just to follow up on that. Is that a tentative approval that we are talking about? Or is it like a final approval from the U.S. FDA for your device part?

One is the U.S. FDA, one is for the U.S. market, second is for the Middle East, where their [ drop ] product is already on the market. So we now need to combine it with our combination product, and we do the relevant testing to provide the data for filing and it will be -- it should essentially be immediate approval within a few months essentially. So we're working as fast as we can on that program.

Have we already been inspected by the U.S. FDA? Or you expect that post this application, we will get inspected?

We don't know whether we'll get inspected or not. The fact is that we are certified to [ MDSAP ] with the U.S. FDA scope, which means our MDSAP approval essentially gets signed off by the U.S. FDA before us being certified. So we don't actually know whether we will actually get inspected or not. Might happen at some point in the future. Happy to take on the inspection. I think we're geared up from a quality perspective.

Okay. Okay, yes. Okay, fine. So that was on the second question. On the first question, any feedback, any thoughts?

On the first part of your question, the raw material part, some of it will happen in Q2, and the balance of it should happen in Q3.

So our margins, sir, then, let's say, in Q4 should revert back to our normal natural margins, let's say, historical margins, sir?

As long as we don't see any inflation or anything again [ all of the ] prices going through some change or something.

Yes. Correct. Okay, fine.

[Operator Instructions] We have the next question from the line of [ Akshay Jain from Jain Capital ].

A couple of questions from my side. Firstly, sir, you announced last year that you had raised funds, where are you utilizing them? And how much have you utilized till date? And what is the plan going forward?

Sir, could you repeat your question? I'm sorry, [ you were hard to hear ]...

No problem. I'll just repeat it. So last year, you had announced that you have raised funds. And so I just wanted to understand where is the allocation of those funds? And how much have you spent it till now? And what is the plan going forward?

So we [ did fund ] INR [ 150 ] crores of preferential offer, out of which, as of 30 of September, if you were to look at it, we have spent INR [ 60 ] crores and balance INR 90 crores are [ now in oshel ]. This INR [ 50 ] crores is being spent [ 40 then ].

Okay. Understood. Sir, secondly, -- so Europe is under pressure as we see it currently. So how do you see demand over there? And how much of it will impact our sales and profitability for the year?

Amit, do you want to take that?

Thank you. And could you please repeat that.

Yes. So the question is, Europe is under pressure currently. So how do you see demand over there? And how much of that will impact our sales and profitability for this rest of the financial year?

I mean it's not good news by any means. Europe is under substantial pressure, and so is North America to be honest, it's not just Europe. All of our major consumer business is significantly impacted by this. So we are working with the customer to see how additional markets can be assigned to us. But I mean, reality is that until we see some normalization in Europe and the U.S., we're not going to have any great impact. We are hoping that if part of the Europe business cycle throughout the year, we see increasing demand for the same customers starting in Feb every year. So there's always a slowdown period that starts in November and lasts till February. February, you see increasing demand again. We're hoping that the same will continue. But to what level will you see further additional increase, it's currently unknown.

We have the next question from the line of Manish Gupta from Solidarity.

Yes. Is my line better now?

Yes, sir.

Yes.

Yes. Sorry. So Amit was just continuing on the previous question that I was asking. So what you had mentioned was that you don't want to take on too many small projects, and therefore, you are not actively going out on the plastic side on -- but we are going far more aggressively on the pharma side, the Healthcare side. So would it be fair to say that most of your growth over the next couple of years is actually going to come from customers with whom you already have a relationship?

Most of our growth next couple of years, let's give it a little bit larger horizon, if you don't mind. In addition to what we are doing on the pharma side, Manish, we're also working very hard on creating additional verticals of the business. So today, largely, if you see the business, we have consumer, we have healthcare, we have automotive and engineering and personal care, right? Now automotive and engineering, we already know what we are focusing on in terms of product, the type of products. So we're not going to see any very substantial INR 200 crore revenue coming from there. Similarly with personal care. So really, the only growth areas we've had so far are from consumer plastic and from Healthcare. So Healthcare, we continue to build as we are, probably more aggressively. We had added strength to the Healthcare business development team. And in addition to that, we are now -- we are very actively pursuing other verticals to grow business. It's too premature for me to tell you what those other verticals are at the moment. But at the right time, we will inform pretty much the community.

[Operator Instructions] we have the next question from the line of [ Utkarsh from FinTree ].

I just wanted to understand our relationship with some of the entities. I think in the annual report, I could find Panax Appliances. And it seems we made some investments, and we also have some [ distributeds ] outstanding. So can you elaborate on the entity and the relationship?

So Panax was an associate company. It's not doing any business for the last 5 to 7 years. There is some investments which have been made, and there is some money that Panax has given us. So if you were to look at it on a net basis, it's nullified.

Right. But there is still some receivable outstanding or...

That's already been provided for. So it's a very small [ amount to us ].

Understood. And how about Shaily, IDC and India Private Limited and Shaily Medical Plastics?

Look, it's similar. So all these 3 companies which you talk about are reported companies, but they have not been doing any businesses in the past 5 years. So there has been no income and [ there have been no legal ] transactions in any of these companies.

But these are not only on subsidiaries, right?

No, these are not fully on subsidiaries.

Okay. So the other owners of those entities were from the promoter group itself?

Yes.

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

First question is on the -- any update on the CEO?

The update on?

The CEO, which you were looking for professional CEO?

It's on CEO, Amit.

Yes, yes. The search is very much ongoing. We had -- we did have the finalization of a candidate about 1.5 months ago. Unfortunately, for whatever reason, it didn't work out at the end. So the search is still ongoing, and we are actively pursuing candidates.

Sure, sir. Next question is you are talking about one of the opportunities is a very large opportunity in terms of spend. So is it like a million-plus kind of spend opportunity? How do you quantify this, a very large opportunity?

We wanted to do this particular product for. Earliest we can go into -- we'd see, we have multiple programs. I mean we have -- sorry, we have multiple customers on the same program, which means that we will be making supplies up to probably supplies up to 200, 250,000 tons every year. It's a very high value product. So the revenue will be quite good. But the real opportunity will only come starting 2026, '27 when we -- when our customers will be able to do the launch in U.S. and European markets. Then the opportunity is upwards of 1 million. So it's at a million tons.

Sure, Amit. So this year, you've talked about these 2 products, 1 in Middle East and 1 in the U.S. Any such big product in pipeline for FY '24 launch?

We will see further scale up on both these platforms in FY '24 and FY '25 as well. We will see substantial volumes.

Okay. But for next 2 to 3 years, these 2 will be the only growth drivers in pharma. There are no other products [ remaining ] you have talked about in FY '26 and '27?

Yes. So you enjoy the onetime fees and the income that you generate out of [ exhibit ] batches, because the value of those is fairly high. Given that it is low volume, your pricing points are different than commercial production. So you will enjoy that until FY '25. And then we will see commercial production at the same time in '26 and '27. '26, '27 again is the earliest it can happen, so we've -- we'll also -- but these are both big molecules. One of them is an $8 billion molecule and one of them is a $2 billion molecule. So we're anticipating good volumes in generics [ will come from ].

Yes. And in terms of trends, do you have some numbers, that $8 billion molecule, then convert it to pens opportunity, how big it can be in terms of number of pens?

I can tell you. So one is about 10 million to 12 million pens, 1 molecule, and the other one is 2 million pens. So combined, let's say 15 million. So the more number of [ filers ] that jump out of the [ shell ] product, the higher the chance that we have of taking substantial volume of that.

Are we are thinking in terms of, say, maybe 20%, 30% market share in the 15 million pens or even higher?

I'd say at least 20%, 30%.

Sure. Final question from my side is what we have seen in, say, other allied sectors like also that once a customer becomes big, say OEM, ask for a price reduction every year. So is it a similar kind of arrangement do we see for our key clients?

In what area -- in what segment particularly?

So for example, say, in auto because of efficiency, they ask for 1% to 2% price reduction every year for -- because they are compensating with increased volume. So for, say, home furnishing, do we have to do similar kind of -- do the customers expect some kind of price reduction every year because of our improving efficiency and more volume?

Well, the answer -- the short answer is yes, but it's not so much -- it's not structured the way automotive is. I know in automotive, you basically [ drag in up front ]. On the other businesses you have, especially the consumers, we work with the customer on specific improvement programs. Improvement programs could be reducing weight of the product, could be changing material going from a more expensive material to a low-cost material or in a lot of cases, trying to become more sustainable going for a recycled material. So we do various projects during the year, which we then, depending on the results, the outcome of the project, we share the benefit between Shaily and the customer. There are also time when we go for increases. So it's very useful understanding there are factors which are in our control, there are factors which are beyond under control. Nothing is ever fully guaranteed. But we work on these projects very actively with the customer's involvement, and then try to do what we can in terms of the final outcome.

Sure, Amit. So to summarize this part, is it -- we tried to assume that in auto [ ancillary ], the customers, the OEMs squeeze their clients a lot. But here, it won't be the case. It will be based on.

That's right. That's right. Yes.

We have the next question from the line of Faisal Hawa from H.G. Hawa and Company. Mr. Faisal Hawa, please proceed with your question. If you have muted the line from your end, please unmute and speak. Mr. Hawa, please proceed with your question. Your line has been unmuted. We will move to the next question since there's no response from this participant. The next question is from the line of [ Nikhil from PIA ].

Amit and team. Could you explain how you monetize these intangible assets on development mode? It seems like in the last 6 [ months it spend same ] crores on it. I think we just mentioned that you had a onetime fee. And then how does it go? Could you just enlighten me on this?

So basically, the effect which you see are basically the IPs which we are developing. So typically, the total cost and the development would basically be part of that IP development costs, which we will be spending, which is what we capitalize it. And over the -- the IP business will be depreciated over 10 years.

Okay. And how do you quantify the onetime fee with your clients? I mean, is there a mathematical equation? Or how do you [ see the price ].

It will be difficult to get into it. It will depend on molecule to molecule, customer to customer. There will be different contracts [ in sure ].

Okay. But for each client that you empanel for the same platform, do all of them pay you the onetime fee? Or is it just for the particular time?

No, no, all of -- because we try to basically look at it this way, that on each molecule or platform we will end up with, the best position is that we'll end up with 5 or 6 customers. So then each of them will be charged an equal amount.

Okay. So let's assume a case where you are working on 5 platforms and -- or 5 devices. What's the hit ratio in general?

Well, we can talk about the fact -- we can talk about the hit ratio on our existing platforms. So on our [ fixed close ] pen platform, we have 4 accounts. On our Protean platform, we have 3 accounts. So on our Harmony platform, we have 3 accounts. On our [ neo ] platform, we have 4 accounts at the moment. And on [ Tobi ], which we basically did the whole development in less than 12 months, we currently have 1 account.

Okay. Okay. Understood. And another question is, why do we keep on expanding our capacity when our utilization stands at less than 50%? I'm recalling has been happening consistently for the last few quarters. I mean how confident are we? Okay. And let me put another question to this. This is, what is the maximum capacity utilization that we can do in our business?

We're expanding a very specific capacity at the moment. [ Because ] if you think about our Healthcare unit, all we really have is about 14 machines out of 180 in Shaily. Now we cannot use the other capacity, which are not in a [ treatment ] to manufacture Healthcare-specific products, because our quality management system is different than the other facilities and to -- it's basically not possible to -- we also use all-electric machines in our Healthcare business versus using servo or hybrid machines in the other businesses. So right now, at the moment, we're doing a very specific expansion, which is for the [ podo side ]. Any expansion we've done so far has been -- I know we're looking at a situation area to be where its utilization is low because of what's happening in the world. But it's been project-specific. It's been kind of -- where we've been awarded the business and then we've done the expansion. We've not done the expansion prior to being awarded the business. So the big expansion that we did in 2020 and '21, the business is fully awarded, and then we did the expansion.

Okay, this is the first time where we are focusing on expanding in Healthcare where you get the business after you do the expansion?

Well, we have visibility on a significant portion of what we're -- where we're expanding capacity. But yes, there will always be 30%, 40% that we have to go and seek both expansion [ areas. You can't -- some expansion ]unfortunately, you cannot be at peace with it because you then end up with a lot of disruption in the existing manufacturing setup. So while we will be adding capacity, we're not adding the full capacity in one shot. We will be adding it over 3 years. We've done expansion for 36 machines, but we are only adding 12 in year 1. But the [ building and the necessary ] other utilities and all will be complete [ from year 1 ].

Okay. Understood. And one last question is when you think about the expansion, what is the general return ratio that you look at in terms of RoCE? And what is the long-term RoCE that the business can deliver?

Typically, again, different businesses will have different returns, but the payback which we would look at would be somewhere in the region of about [ 14% ] [indiscernible] [ to 15% ].

Okay. So on that, so 15% to 18% return that you are looking at under the circumstances?

[ Higher than that. ]

Okay. Okay. No problem. One -- sorry, just putting in my last question is how does the demand scenario look for the next 12 months or whatever time line you guys have with you?

I think I've already given an indication of that, is we are seeing some demand slowdown from our key customers across Europe and the U.S. We are in discussion with these customers, and we'll have a better clarity as we move forward.

Ladies and gentlemen, that was the last question, and we will now close the question queue. I would like to hand the conference back to the management for closing comments. Please go ahead.

Thank you very much. Thank you, everyone, for joining the call. We hope that we've been able to answer your questions adequately. For any further information, I request you to get in touch with SGA, our Investor Relations advisers. Thank you again, and have a nice evening.

Thank you, members of the management. Ladies and gentlemen, on behalf of Shaily Engineering Plastics Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.

Thank you.