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

Good morning, ladies and gentlemen. Welcome to Shaily Engineering Plastics Limited Q3 and 9M FY'23 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations of the company as on the 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; 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've had a look at our investor presentation that is uploaded on our website as well as the stock exchange. Despite the challenging environment, we have registered sales of INR 446 crores in the 9 months of FY'23. As you're all aware, we are an export-oriented company with customer based primarily in Europe and North America. And given the current economic conditions, high inflation and the customer sentiments in these markets, we have seen substantial reduction in offtake over the last 2 quarters. We also expect the volatility to continue for the next 2 quarters. On the EBITDA front, margin was impacted due to slower offtake, which has impacted in lower utilization levels, leading to lower absorption of fixed costs. As utilization levels improve and raw material prices stabilized, we expect improvement in margins. We are working very closely with our customers to ensure optimal production, increase in offtake in and ensuring optimal inventory levels. We continue to watch the situation very closely. Our focus is purely on having consumers and markets and segments where we are present in order to increase our utilization levels and [ swept ] the asset base that we have invested and created over the last 3 to 4 years. Shaily is known for precision, quality, compliance and our engineering capabilities. We want to focus on business segments, both existing and new, where this is a must have. We see good opportunities in consumer electronics, telecom and other health care segments apart from [indiscernible]. We will use the existing infrastructure to a large extent, and only invest in critical capabilities that these segment needs and work towards building a business model where we are bearing to the customer. I will certainly provide more updates as [indiscernible] evolve and we see traction. At the last note, I would again like to emphasize that we will be very careful and prudent with any future investments and only do so when there is an absolutely. That is all from my side. I shall now hand over the call to Sanjay Shah, Chief Strategy Officer, to give you the operating and financial highlights. Thank you very much.

Thank you, Amit. Good morning, everyone. I shall share with you the height of our operation and financial performance of Q3 and 9-months FY'23, following which we will be happy [indiscernible] During the quarter, we processed 4,131 tonnes of polymer as against 5,321 tonnes in Q3 FY'22. For 9 months, we processed 16,026 tonnes of polymers as against 14,912 tonnes in 9-months FY'22, an increase of 15% year-on-year. Capacity utilization rate was 13% in Q3 FY'23 and 45% for 9-months FY'23. Export during 9-months FY'23 stood at 77% of total revenue compared to 17.7% in 9-months FY'22. Export during Q3 FY'23 stood at 79% of total revenue as compared to 78.7% in Q3 FY'22. I shall now brief you on the stand-alone [indiscernible]. Revenue stood at INR 134.2 crores during Q3 FY'23 as compared to INR 148.3 crores during Q3 FY'22. EBITDA stood at INR 18.2 crores during Q3 FY'23 as compared to 24.34 during Q3 FY'22. EBITDA margin stood at 13.6% for Q3 FY'23. PAT stood at INR 4.5 crores during Q3 FY'23 as compared to INR 9.3 crores during Q3 FY'22. That part stood at 3.3%. PAT [indiscernible] Q3 FY'23 was reported at INR 12.4 crores as compared to INR 16.5 crores during Q3 FY'22. Now coming to 9-month FY'23 highlights. Revenue stood at INR 466.2 crores in 9-months FY'23 as compared to INR 413.2 crores during 9-months FY'22, growth of 13%. EBITDA stood at INR 65 crores in 9-months FY'23 as compared to INR 68.3 crores during 9-months FY'22. EBITDA margin stood at 14%. PAT stood at INR 21.3 crores in 9-months FY'23 as compared to INR 27.8 crores during 9-months FY'22, that part stood at 4.6%. Gross PAT for 9-month FY'23 was reported at INR 44.6 crores as compared to INR 47.4 crores during 9-months FY'22. Our ROC and ROE stood at 12.1% and 7.7%, respectively, as of 31st December 2022. The global business companies achieved the disciplined use of capital. Our debt to equity stands at [indiscernible] permit and our long-term basis. On a consolidated basis, revenue stood at INR 472.6 crores with INR 16.9 crores and PAT at INR 25.2 crores for 9-month FY'23. This is all from our side. And now we can open the floor for Q&A.

[Operator Instructions] The first question is from the line of Mirali from [indiscernible].

As [indiscernible] very clearly mentioned in the last call that we are taking demand issues in Europe and North America. But if you can qualitatively help us understand like how are the three growth segments individually looking at? So Home Furnishings, Pharma and Toys. So is it [indiscernible] we had expected it to or we are facing issues there, too?

Mirali, when you look at Home Furnishings or you look at Toys, both of these are basically certainly focused on North Africa and the European markets, where we have seen demand slow down with our customers, and it is impacting our volumes that we've seen. We see -- based on whatever discussions we have been having with customers, we have seen this continuing for the next 2 quarters and some improvement happening [indiscernible]. If we move forward, we will keep you posted on what's happening. At the same time, what we are doing is we are talking to multiple customers across these segments to see how we can add new customers and new geographies to it. We should have some feedback on that also over the next 2 quarters in terms of the discussions which we have been having for. On the Healthcare, [indiscernible]

On the Healthcare front, we have not seen a slowdown to be honest. We have been more or less in line with new projects. Obviously, there is always a plus or minus 3, 4 months of time period where projects can sometimes get delayed on account of [indiscernible] or the customer, again, to do with development. But otherwise, in terms of supplies, we have not seen any drop in demand for our existing Healthcare portfolio.

Okay, sir. So in FY'22 on the [indiscernible] side, we have [indiscernible] end up about $7 million, $8 million. So what will be that number for FY'23?

So it will probably be around 50% of the number, which you talked about.

Okay, sir. On the pen side, you are guiding that in our own IP thing, we'll be doing a volume of about $3 million in FY'23 and that [indiscernible] to $20 million over the next 3, 4 years. So any update on that? Are you confident of doing $3 million in this year?

Yes, we've done -- we have already, I'd say, done 65% of that, and solid will get -- we'll move on to the next year. But because there is like an alternate sort of this order doesn't change from Shaily.

Okay. That's great to know. We were also hoping to get some plans in this band you had mentioned in the last call about the overall demand or any increase that our customer wants. So did you make any clarity that we are able to see further clarity on that?

So the clarity is that we don't see improvement for the next 2 quarters, unfortunately.

Okay. So we will wait for 2 quarters to give further clarity on the other new segments also that you mentioned?

That's right. [indiscernible] update, I think, on a quarterly basis and in terms of what's happening on the business front, while we are actively pursuing multiple [indiscernible] should have a much better update to you in the quarter 4 and quarter 1.

The next question is from the line of Manish Gupta from Solidarity.

Are you able to share 9-month numbers for Healthcare for FY'22 vis-a-vis FY'23, so one can understand what's the expected impact in the other business then?

Manish, we typically don't share individual numbers, but what we can say is when you look at 9-months FY'22 or 9-months FY'23, Healthcare, you would see a growth on the overall numbers.

Sanjay, I'm just a little bit curious that why do you not share the segmental breakup? Because I just want to understand what the concerns because clearly, the Healthcare part of the business is a far more attractive part of the franchise, right? So even if you just split the numbers of Healthcare and others. From our perspective, it gives a better sense of how the more attractive kind of the franchise is evolving. So I'm just curious to understand why you would not pick that number every quarter or in the half year. Surely, there's no competitive concern, right, because you're not disclosing means of customer or molecules or all that.

So Manish, I think points noted. Let us -- what we will do is we will have to think about this and certainly try to see if we can share this in the public domain from the next quarter. Next 2 quarter or next 3 quarter...

[indiscernible]

Yes.

Okay. Great. Next question is this entire macro theme that everyone is talking about China plus one thing. Amit, can you talk a little bit qualitatively about now that there's been some time evolved and you would have had daily discussions with customers, what part of this theme do you think actively would interest Shaily? My sense is, I could be totally wrong here, but my sense is the Toys part of the business might actually be a lower margin, and I see you guys as a very margin-focused company. So for example, do you really think the Toys opportunity, which is a big opportunity in numbers is something that would interest Shaily strategically?

It's a bit of a tough question. I'm going to try to answer it as it has evolved with Shaily and in terms of my costs. When we got into Toys, we certainly evaluated the margin profile. We certainly looked at how it's fitting with our existing capabilities and there is a good fit. Existing capabilities, compliance in terms of safety, chemical compliance, sustainability, engineering and then the sheer size of the opportunity and how quickly you can scale up the Toys business. But you're absolutely right. I think the Toys business is one where there is a lot of pressure on margin. So the first 3 products that we took on, we took on the higher end of the spectrum of Toys. We do not do very simple products, but we are seeing increasing pressure on cost. And even though China is supposed to be technically more expensive on manufacturing costs. They have a lot of support when it comes to capping raw material prices. They've also set up alternative infrastructure in countries like Vietnam or even in India for that matter. So we are seeing increasing pricing pressure on Toys. We will not be -- we're not -- we will not be making any further investments in Toys until we see a portfolio of products that customer consistently buys from Shaily.

Okay. One is just to add to what Amit said, when you look at the current situation. In a lot of cases, what we are seeing is the raw material prices or the input prices, which China vendors have, is controlled by the government there. It will be an advantage to Chinese suppliers as compared to suppliers in India.

An example, polypropylene is controlled at I think $970 a tonne in China, whereas what we would source it at somewhere between $1,100 and $1,200 a tonne. So there is a significant disadvantage in the input costs.

Right. So now that we've had a chance to study this a little bit more, which aspects of China plus one do you really think are an opportunity for Shaily? And what is just big picture stuff that won't really translate into an opportunity for you?

Broadly speaking, Manish, we see very good opportunity in consumer electronics, telecom, in industrial applications, potentially appliances as well. Again, too soon to talk about anything concrete right now, and we are under confidentiality with any one of these [indiscernible] we'll be having discussions with. But we see very good opportunity and have kind of probably a much better fit in terms of our engineering capabilities.

Okay. Next question is, Amit, there's been a lot of CapEx done in the last 15 to 18 months. And how much of -- how do you think about that CapEx that you've done vis-a-vis the macro environment that we are seeing? And how do you think about CapEx going forward? Are you going to link it to a specific opportunity? Or is this that we've got to build it first and then go and get the business. So -- and the related question is, can you talk a little bit about new logos that you have added in the last few quarters? And what exactly are we doing on business development in some of these areas that you just talked about, consumer electronics, telecom, are we adding to our team to pursue these opportunities? Or is this a business where really our technical competency sales we don't need [indiscernible] we just need these customers to visit our plants. Sorry, 2 or 3 questions rolled into one big question.

Okay. So on investments, I'm very, very clear, going forward, CapEx spent on -- the objective is that we're going to utilize our existing infrastructure. We have very, very good infrastructure to service even the new segment that we're getting into. We might have to do some specific CapEx in terms of very, very specific equipment, but I'm not -- we're not talking about any substantial CapEx in molding -- in injection molding, where for either servicing the existing segments, all the new customers that we are targeting. On business development, we have not added any new logos in the last quarter, to be honest. We are in discussions with several large multinational companies including big box retailers, electronic companies, we are confident that we will be adding new logos in the -- over the next 2 to 3 quarters. very, very confident. And from a -- what was the last question, Manish, again?

What are you -- the last question was that in order to add logos, do you need to add more BD people? Or is it that we have enough credibility in the marketplace. I mean there's no point adding BD people, we just need to show customers our technical competency in the factory. Because I don't see any -- I don't know if you have BD people to go and knock on doors and showcase Shaily. Other than the Swedish labor, I don't know whether you added any big box retailer over the last couple of years. So the question is we put this capacity out. We have technical competency but are we investing enough in a sales team to go and take our message to the world.

We have added to our BD team with a specific focus on also increasing in addition to the big -- other big-box retailers, also increasing business in the domestic market. So there are certain segments in which Shaily can play even in the domestic market, we see a lot of emphasis and investments happening in power infrastructure, especially. So we are -- we have added specific business development folks with a focus on these segments. One of -- no, you're right. A lot of our business development really happens if we can get a customer to [indiscernible] us. 60% to 70% of our BD is done daily basis. So the -- whether they should move forward with the Shaily or -- that is really comes down to whether you can come through a commercial agreement or not. But most of our job is done when there is in us, and that we are actively pursuing.

Okay. Next question from my side is that basis, you are coming [indiscernible] and whatever capital work in process you have and whatever little investments you have to make. What do you think is the peak revenue capacity of the company, this is current investments?

So Manish, if you were to look at March '23 CapEx including the CWIP, the revenue which the company's capital goal will be somewhere between 2.25 to 2.5x of the total growth.

2 to 2.6 -- 2 to 2.5x, March '23 [indiscernible]

Right, Manish. And Manish, just to go back to a few questions. I think we had a -- on the investments. So while I said that we will not -- we will be very careful about where we invest and use the existing infrastructure. The only area where we make investments and look for business in the future is Healthcare respond. That is one area where we will need to gear up in advance. So that's a scale that happens in the future.

Yes. So this is a related question on this, Amit. You see furniture investment. What percentage of the utilization are you on that right now?

[indiscernible] utilizations, but what we're doing is we are in discussions with the Home Furnishings customer and also to...

I think question was specific to pharma.

My apology. [indiscernible] and looking at -- we had the active discussions with the other guys. And [indiscernible] we hope to add 1 or 2 of these names in the next 2 or 3 quarters going forward.

[Operator Instructions] The next question is from the line Pritesh Chheda from Lucky Investment Managers.

So my first question is if Healthcare has grown and we were not supposed to let pricing adjustment if you recall your quarter 3 call. I'm surprised why has the gross margin continues to remain under pressure because Healthcare is supposed to be a fairly high gross margin business, right? And where are we on the pricing increases than with the other portfolio business.

Pritesh, most of our pricing adjustments have happened during middle of the current quarter, the last quarter. So they have been captured in Europe. What we are seeing is basically a higher fixed cost because of the lower utilization level, but price adjustments when we don't have anything. We sell less is what's causing this.

No, I don't see any gross margin expansion, right? So Q-on-Q, it is flat. Y-o-Y, it is down 300 basis points. So I don't understand what [indiscernible] and [indiscernible]. So keep the utilization part aside, so I can understand that...

Pritesh one difference, which you need to look at, when you look at gross margin, we look at the consolidated gross margin because in last year, we were doing development in India on the Healthcare front, we're now doing development in the U.K. So that revenue comes directly to U.K. So when you look at this, you basically need to look at it on a consolidated basis.

So even if I look at consolidated, your R&D sales is 62% in quarter 3 FY'22, R&D sales is 64% in quarter 3 FY'23 and your R&D sales is 64% in quarter 2, '23. So there is no expansion between the 2 quarters. And Y-o-Y, there is a decline despite the time that there is a growth in Healthcare. And you say that you have taken price increases between quarter 2 and quarter 3. So ideally between quarter 2 and quarter 3, there has to be a margin expansion, right, the gross margin?

[indiscernible]

When you look at -- what you need to -- if you were to compare Q1 to Q3, you'd have seen improvements happening on.

[indiscernible] So you say the price increases between Q2 to Q3 that I will see from Q1 to Q2 and then from Q2 to Q3. I cannot see from Q1 to Q3, no, sir?

I see. So there is a business mix exchange also which is happening around.

But sir, Healthcare has grown and everything else is not grown. So [indiscernible]

One thing that I know, Healthcare has grown, it's not that Healthcare has not grown.

So then gross margin should improve.

The gross margin is more or less at the same level in what I see in Q, and that's basically because of a lower utilization level. Because when we are at lower utilization level, you basically just having a little higher prediction or startup [indiscernible].

Okay. I'll see you separately, it's still not comprehend. So now where we see a lot of our traction depends on the progress in pharma. A lot of our traction then also depends on the progress in pharma, right? Where are we now? And is there any changes for our outlook for FY'24 in pharma by any chance?

Can you repeat the question, please?

Is there any changes in outlook for FY'23 -- 24 in pharma?

No, no.

So will we see the margin expansion for sure happening next year? Because this year we had first 3 quarters of higher R&D, which is not specific to you specifically a lot of companies, and you should be getting your price increases to flow into your P&L. There is a straight, I can see about 200 to 300 basis points at least because you were at 60% R&D sale. You were at about 63%, 64%. So there is a 3%, 4% there. It's not there is a pharma movement to happen. Will we see gross margin expansion? Or there will be something else to play in as we need to understand that?

You will see gross margin expansion as we go forward. And revenue increase, you'll also see.

Sir, that I understand. I see -- I understand operating leverage part. Even if you are operating at 50% capacity utilization, I understand the operating leverage part. Where I am unable to still comprehend is the GM part.

So GM part has also needs to be factored in when volumes are down, my logistic cost on my raw materials and everything go up, which is a factor on to my overall raw material cost.

Okay. Okay. We started the year with INR 700 crores revenue. What we think we will end the year now at? And where are the slippages? So quarter 1 was INR 175 crores. I think when we were at quarter 1 we [indiscernible] INR 175 crores [indiscernible] so we were quarter to be on [indiscernible]. So if you could build a bridge between quarter 1 and quarter 3 INR 30 crores, INR 40 crores reduction in business, where are the slippages? And how do we see it ending this year?

So, Pritesh, basically on Home Furnishings, export, Toys, mainly on that account and [indiscernible]. So if you were to look at these are four major [indiscernible], where there have been drops. I would say quarter 4 will be similar to quarter 3. Somewhere in...

But sir, your quarter 2 call also did not tend to say that. Suddenly in quarter 3, you are saying [indiscernible].

I believe I did say on the quarter 2 call that we will come back with an update, but we're not seeing a very good picture on demand. We did not expect a very large drop, but that is what's happened.

Okay. So now -- and how do we see now the FY'24 especially on the pharma side of the business, what kind of growth do you see?

On the pharma side?

Yes.

On the pharma side, we are looking at somewhere between 25% and 35% growth. And with that growth, you will, obviously, see margin expansion.

And where are we on the CapEx now? So the last CapEx that we announced was for pharma. And I'm hoping -- yes, that was for Pharma. So I think about INR 100 crores, right?

Yes.

That's the only CapEx which is ongoing, right?

Yes.

Where are we? How much have we spent? And what is -- when do -- when it commercializes?

So the pharma CapEx would be completed by quarter 1 FY'24.

But how much have you spent so far?

You'll put about INR 60 crores till date.

And because we had enough capacity elsewhere because we are running at 50%, 60% capacity utilization. You won't get into a CapEx unless you add a logo, which means some strategic CapEx.

Yes, Pritesh. We will be looking at setting over -- the pharma CapEx, the specific CapEx, which was regard to be done, because that's a [indiscernible] room and you need that CapEx...

Yes, I understand that.

Pritesh, just to add to what Sanjay said, when we're talking to the other big box retailers, their business models are different than the Home Furnishing major that we work with. A lot of these will buy off-the-shelf kind of product or something that we specifically do. So there will be some investment required, but we were investment in infrastructure.

It will be [indiscernible], which would be done.

Not in machines. Not in physical inflow?

No, right. That's correct.

Okay. So basically for the next 4 quarters -- 4 to 6 quarters because we're at 50% capacity utilization, we might not hear any CapEx announcement from your side?

That is what we foresee right now. The only way we can see if we would even think about it would be there's a substantial sizable opportunity which requires a [indiscernible]. But otherwise, for the next 4 to 6 quarters, we're not looking at any investments.

And what will be your maintenance CapEx?

Pritesh, that will be nominal. I would say around INR 2 crores to INR 3 crores. [indiscernible] so we do not gain maintenance CapEx there. Some of the old CapEx, which we have will not be substantially [indiscernible]

Okay. And lastly, sir, when you said 30% utilization in metal furniture. So has the utilization come down by any chance?

Yes.