Sigachi Industries Limited (SIGACHI) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Sigachi Industries Limited Q3 FY '24 Earnings Conference Call, hosted by Nuvama Wealth Management. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ranvir Singh from Nuvama Wealth Management. Thank you, and over to you, Mr. Ranvir.

Thank you, Chorus team. So this call is being hosted by Nuvama Wealth and co-hosted by Go India Advisors. I'm Ranvir Singh from Nuvama Wealth Research team. I welcome you all. So we have with us the senior management team of Sigachi Industry; Mr. Amit Raj Sinha, Managing Director and CEO; Mr. O. Subbarami Reddy, CFO; and Ms. Shreya Mitra, the Company Secretary. I now hand over the call to the management team for opening remarks and before the Q&A session starts. Over to you, sir.

Thank you, Mr. Ranvir Singh. Good afternoon, ladies and gentlemen. We are pleased to welcome you all to our Q3 and 9 months FY '24 earnings con call. In the interest of some of our people who are new to this company, let me first start by giving a brief overview of the company, followed by strategic updates and performance highlights. Our investor presentation would be shortly uploaded. I understand that there is some technical glitch. We are in the process of uploading. And I believe in the next couple of minutes, we should have that done. Sigachi Industries stands as a global leader in the production of microcrystalline cellulose. This refined wood pulp is chemically inert substance with widespread application in food, pharma, cosmetics and polymer composite industries. MCC being a diluent with self-binding properties is highly favored as a directly compressible binder due to its dry binding characteristics. Its unique chemical and physical properties, such as apart from other excipients and its compatibility with most APIs, active pharmaceutical ingredients, is a significant advantage. With excellent absorption capacities, a broad particle size profile, superior compressibility leading to faster disintegration, MCC has earned its position as the most widely used excipient in the pharma industry globally. Sigachi manufactures around 60 different grades of MCC ranging from 15 micron to 50 micron, having varied applications in all the pharma, food, nutra and the cosmetic industry. Sigachi is a significant player in this promising market, presently serving over 52 countries with a global presence. In line with our diversification strategy and a focus on expanding our global footprint, we have incorporated Sigachi Arabia, a joint venture with Saudi National Projects Investment Limited. This strategic move includes a plan for manufacturing facility at Riyadh within the next 3 years, initially catering to the local and the GCC markets. The company has been experiencing strong growth with a top line CAGR of 25% over the last 5 years. As part of our strategic plan to scale up operations, we are currently in the process of expanding our MCC capacity by more than 50%, increasing from approximately 14,000 metric tonne per annum to more than 21,000 metric tonne per annum. This expansion is expected to be effective from Feb 2024. In the last quarter, we also acquired 80% stake in Trimax Bio Sciences, a leading API manufacturing company based out of Raichur. This, in addition to our existing operations and capabilities, gives us the complete ecosystem of the pharma industry. Additionally, we have initiated establishment of our new CCS manufacturing facility at Dahej SEZ, a significant step in strengthening our manufacturing infrastructure and augmentation of our production capacities. As a testament of our effective management, we have been appointed by Gujarat Alkalies and Chemicals Limited, Grasim Industries, ONGC Petro Additions, Lords Chloro Alkali, thereby significantly expanding our operations and management's business segment. Witnessing steady growth, we have achieved a top line of INR 25.96 crores in 9 months FY '24, and we anticipate this positive trend to continue with an expected revenue of approximately INR 35 crores in FY '24. On the operational front, in the 9 months FY '24, our overall revenue experienced a robust year-on-year growth of 27.5%, expanding from INR 235 crores to INR 299 crores. Sale of the products increased by 27% in the 9 months FY '24 to INR 269 crores versus INR 212 crores last fiscal. The quantity of MCC demonstrated a notable increase over the year-on-year growth of 12.04%, increasing from 9,850 metric tonne to 11,036 metric tonne. As part of our commitment to continuous improvement, the company is dedicated to enhancing its R&D capabilities and implementing cost-effective manufacturing processes, reinforcing our position as a manufacturer of choice with the highest quality standards. Our strategic focus on high-margin-yielding product mix and efficient manufacturing processes, coupled with effective inventory management gives us a competitive edge and is instrumental in sustaining our leadership position in the country. I now request our CFO, Mr. O. S. Reddy to give you a brief on the financial performance. Over to you, Mr. Reddy.

Thank you, sir. Good afternoon, everyone. I am delighted to share the Q3 FY '24 marked a robust performance for us. In Q3 FY '24, our operating income showed a substantial year-on-year increase of 61%, reaching INR 111 crores. EBITDA witnessed a 61.4% year-on-year growth, totaling INR 22.6 crores with a margin of 20.3%. Net profit saw a 65.3% year-on-year rise, amounting to INR 16 crores and a PAT margin of 14.6%. Coming to 9 months FY '24, operating revenue for the period increased by 28.4% year-on-year reaching INR 295 crores. EBITDA showed a 29.7% year-on-year growth, totaling INR 60.3 crores with a margin of 20.45%. Net profit amounted INR 42 crores with a PAT margin of 14.24%. We'd like to draw attention to the fact that our written on capital employed has seen a declining trend. This is primarily due to our ongoing capacity expansion plans and the increased capital work in progress. The capital work in progress as on FY '23 was INR 35 crores, and for 9 months FY '24, CWIP is INR 79.13 crores. However, we are optimistic that the favorable impact of these initiatives will materialize in the upcoming years. As we progress with our strategic expansion initiatives, we are confident that unlocking economies of scale and enhancing operational efficiencies will be key aspects of our future successes. These efforts align with our commitment to sustainable growth and delivering long-term value to our stakeholders. Thank you. Now we can open the floor for question and answers, please.

[Operator Instructions] The first question is from the line of Dhruv Mukesh Bajaj from Smart Sync Investment Advisory.

So my first question that I have is, in terms of growth drivers, specifically in terms of business segment areas, can you provide insights into key factors contributing to the expected growth?

Yes. Mr. Bajaj. One of the prime growth drivers is our focus on the industry overall in the pharmaceutical space and in the excipient industry catering to our core product of microcrystalline cellulose. As the pharma industry grows, so does the solid oral dosage forms grow. Solid oral dosage form is primarily the tablet and the capsules. And just about all the formulations of solid oral dosage forms that is tablets and capsules need MCC for their formulations. And this is what is propelling our growth in the MCC and the pharma space.

Okay. The next question that I have is how will Sigachi's entry into the market as a CCS manufacturer impact the existing players?

I'm sorry, I didn't get your question. Could you just repeat it again?

How will Sigachi's entry into market as a CCS manufacturer impact the existing players?

Impact the existing players.

Yes.

You mean the customers or the competition?

The competition, sir.

Okay. Fine. So what happens, CCS becomes very complementary to our current product, core product of MCC because MCC is a binder and it binds the whole tablet together. Whereas CCS becomes a disintegrant where it breaks up the tablet at the right point within the body to release the drug. So every tablet, which is taken in also needs to have in CCS. So it becomes very complementary. And technically, we are giving a basket, a range of all the ingredients, which go into making a tablet to our customers. And that's a very big value add which goes in. And not everybody who makes MCC or is a cellulose player also makes CCS because that's a completely different chemistry.

Okay, sir. So 5 years down the line, what's the target revenue mix from our current revenue lines and our API segment, considering we did a major investment in Trimax of INR 100 crores for 80% stake?

5 years down the line, I think -- we believe we will continue to be primarily a pharmaceutical company. We believe 70% or more of our revenues would continue to come in from the excipient and the API space, the balance 30% would be from the food and nutrition and operations and management.

Okay, sir. Sir, I have 2 more questions. Sir, your -- sir, next question that I have is your company was expected to commission MCC plant expansion in Q3. So have you achieved that expansion? And if yes, what is the revenue potential?

Yes. The capacity expansion is already underway. We are having commissioning trials running, the wet and the dry trials. After that, we will have the material trials commenced. In terms of potential, I would just like to indicate that from a 14,000 tonnes capacity, we would be increasing it to 21,000 tonnes capacity. So you can gauge the revenue potential, which comes in just by having basic math in place.

Okay. My last question is what's your views on equity dilution considering you have raised a round of funding within 2 to 3 years of IPO?

Views in terms of equity dilution, I'm not sure what is it that you would want to hear, but my focus is the growth of the company. So whichever way it comes in, it's important that there is a growth coming in and all the stakeholders, whether it's the shareholders or the people, I mean, the customers or the employees, everybody kind of gains and has potential to grow within the company and outside the company. So -- I mean, that's the prime focus at this moment.

[Operator Instructions] We have our next question from the line of Abhay Jain from Hem Securities.

My question is, are we sticking to the guidance of achieving 25% of the utilization of additional CapEx in Q4 FY '24?

So in my last con call, I had indicated that 25% in the first quarter would be a very tough target and had indicated it would be 10%, subsequently it will be 25%. So I believe in the Q4, we should be having an additional capacity of 10%, I mean additional capacity from the new CapEx, which is put in. And in the Q1 of the next financial year, we should be comfortably touching at 25%. You see because one part of the month is already lost in terms of commissioning and equipment trials. It is partly commissioned, but we are not really in a position to deliver the sellable goods. So I believe 10% would be a fair mix to take in.

Okay, sir. Just a humble request, and sir, can you also provide us the percentage utilization of additional CapEx in the upcoming quarters, say, suppose, for the Q1 FY '25 and Q2 FY '25, if you have the numbers with you?

So in terms of additional CapEx, we have the CCS project where we were looking to have the environmental clearance by December. I see that there is a delay, and the committee has not yet cleared the file. We are expecting that the file gets cleared by mid-Feb. So in case that happens, by March, we should be able to deploy our CapEx into the CCS project. So in -- over the next 18 months, we should be able to completely commission and kickstart the commercials from that particular CCS project. So I believe over the next 4 to 5 quarters, we should be able to deploy all this CapEx of CCS.

[Operator Instructions] We have our next question from the line of Vilina Jain from Perpetuity Ventures.

Yes. So I have 3 questions. First is beyond India which specific export markets are you targeting for CCS sales? What strategies do you have in place to secure the competitive pricing and market share in your chosen export markets? And lastly, how will you balance meeting domestic demand with your export focus?

If you can just repeat the last one, domestic demand?

Sir, with your focus on export markets, how will you manage meeting the domestic demand?

Okay. So in terms of meeting the global demand and the domestic demand, it's a very fine balance in terms of catering to our old customers and seeing that we are able to cater to their needed demands and also catering to our high potential -- high realization sales across the globe in the regulated market. I'm sure all of us are aware that in India in the domestic market the realizations are not as good as what we get in the regulated markets. So historically, we have been having 2/3 of our revenue coming in from the export and 1/3 from the domestic. We believe, even with the advent of CCS as a product coming in, we would continue to have this kind of sales in terms of domestic and export. In terms of pricing strategy, it's -- I would say it's a very good question. Pricing strategy, when you're launching a new product is always competition-driven. So when you launch a product, you have to beat the competition and you have to price it so that the customer has a reason to buy in and you have a leg in the door. And once you are kind of there, you can show in your strength in terms of quality, in terms of service and gradually have a better share of the wallet from the customer. I believe this is the overall CCS sales strategy as well because our network of distribution and end customers across the 55 to 60 different countries is already established, and in many regions and countries, we have cemented relations with our customers. So giving them an additional product from our portfolio would only kind of complement and add more strength to our relation. I hope I answered your 3 questions, Ms. Jain.

Yes. I have 1 more question. So with your acquisition of Trimax, is this the first step towards forward integration?

No, I wouldn't call it a forward integration, ma'am, because the Trimax is an API manufacturing facility. We are [Audio Gap] both our customer profiles are the same. I mean, Trimax earlier also was selling to formulators, the guys who make the tablets and the capsules and any other liquid syrups or other cosmetics. And we were also selling our excipients or, so to say, the inactive ingredients to the formulators. So our customer profile continues to be the same. So it's not really a forward integration.

[Operator Instructions] We have our next question from the line of Muthukumar from Fidelity Ventures.

Yes. I have 1 question here. What is the CapEx you have spent for financial year '23 and CapEx plan for financial year '24 and '25 financial year?

Yes. Thank you, Mr. Muthukumar. This CapEx for '24 almost we have spent around -- for '24, it will be around INR 100 crores. And FY '25 also, it is around INR 100 crores would be there.

Okay. And financial year '23?

'23, it is -- in CWIP, INR 35 crores is there, sum capitalized are some INR 15 -- INR 20 crores are there, around INR 50 crores, INR 55 crores.

[Operator Instructions] We have our next question from the line of Devansh Shah from I-Wealth Management.

So just wanted to know the realization for the MCC, sir?

Yes. MCC -- thank you, Mr. Devansh. MCC realizations, FY '23, it was around INR 208 per kg. And FY '24, also, it is not -- there is -- almost it remains the same, but quantity, there is an improvement there. Quantity, there is a good improvement is there. And price wise...

Right now, we are at a capacity utilization of?

Utilization of almost 95%.

Okay. And sir, just wanted to know the growth drivers behind the sales growth of 61%, sir.

Yes. That is because this quantity increase is there, one thing. And also, there is a contribution from our -- API little contributed for this growth. And also, our subsidiaries, Sigachi U.S., also contributed. And O&M also, it is -- there is a good growth rate is there in O&M. If you remember, FY '22, our O&M revenue is INR 13.29 crores, and FY '23, it was INR 26.59 crores. This year, we'll be reaching around INR 35 crores. And -- yes, that is a good growth is there from the other segments. And this MCC also after expansion, our -- good revenues we are expecting. Even margins also, we're...

Got it. So what kind of growth can we expect?

The growth, almost not less than, we hope it is, 33%, around 30%.

Got it, sir. Sir, just 1 last question. Sir, how much -- if you could just tell me the quantity -- production quantity for this quarter for MCC?

MCC, this quarter as -- for 9 months, it is around 11,036 metric tonnes, whereas in corresponding previous year 9 months, it was 9,851 metric tonnes. One small announcement, sir, the results have been uploaded.

[Operator Instructions] We will have our next question from the line of [ Shreeman Narayana ], an investor.

Yes. I would like to ask 2, 3 questions. Now first question is what is your market share in the Indian industry? And globally, what is your position? And the second thing, you have CapEx of about INR 200-and-odd crores, but what is the funding plan for these things?

Sir, you were not completely audible, market share in?

Market share, now your market share within India. And what is your...

In which segment or product are we talking of, sir?

Your base product, that CCS.

CCS is the product which we are yet to commence our production. MCC is our core product, sir.

Yes. Yes. What is your market share within India?

So market share in India, I would say that at this moment, market share percentage, I think, is a very tough call to take because there are a reasonable level of imports coming in and for the regulated market from where it gets exported to the -- finished product gets exported. However, in terms of installed capacity in India, I would say, we are the #1 player in terms of installed capacity. Our current volume, what we sell is the highest by any player within India. And once we have the additional capacity coming in, touching nearly 2,000 tonnes per month, that would cement our position as the #1 player in India, sir. Market share percentages is we don't really have a data which one can call authentic to be able to tell it on an earnings call. Second question, sir?

Who are your competitors?

Competitors, we have a player by the name of JRS Pharma and Gujarat Microwax Private Limited, based out of Gujarat.

Okay. Okay. Regarding now this 200-and-odd crores of CapEx, now this is happening now in current financial year and the next financial year, what are the sources of funds for that?

Yes, sir. Thank you, Mr. [ Shreeman Narayana ]. This CapEx, already, we have issued, share warrants were allotted for the tune of INR 286.45 crores. And that is already -- the objects for that is INR 160 crores towards acquisition and expansion of API facility, that is the Trimax Bio Sciences at Raichur, and INR 50 crores, that is Dahej and Jhagadia expansion part of -- for the expansion we'll use. And augmentation of Hyderabad unit, INR 22 crores, we'll use it. And there is a working capital and general corporate purpose is there. Mostly the funds are earmarked from this share warrants and also the CCS already certain -- around INR 33 crores, it is available. And further, we'll -- we have the plans of maybe through retained earnings or some further capital or debt we will raise that will take...

Yes, sir, to whom these share warrants were issued?

Share warrants, it is issued to the group of investors, even promoters also contributed, promoters and...

What are the conversion terms? What is the share premium?

That is -- share warrants, that is, standard terms are there, 18 months from the date of issue, but all the investors. As for the requirement of the company, they will infuse into the company.

No. But is there any agreed conversion terms for that? Or...

There is no agreed. But as for the requirement of the company, the investors, they infuse into the company as for the capital needs.

Okay. But now what is your present capital as on 31st December then?

In 31st December, INR 30.7 crores is the capital -- INR 31.7 crores.

Okay. Now, suppose now these warrants are converted. Now what would be the likely capital -- equity capital on...

Yes. On a fully diluted basis, that would be around INR 41.7 crores. Yes, INR 30.7 crores plus -- yes, INR 41.7 crores.

INR 41.7 crores means the rest of the things will go as a share premium or how?

Yes, yes, share premium only. This is equity share -- the number of equity shares. And we have issued at INR 261, that was before conversion, means after conversion, that would be INR 26.1.

But now -- I think now it is -- how it compares with the present market price now, such as the premium now what you are going to collect...

Yes. At the time of issuance of share warrant itself, the premium also, as per the SEBI guidelines, it was calculated and issued.

What was the -- what is the per share premium now that you will be getting?

Premium, we'll get that -- INR 251 was the share premium.

INR 251, compared to the -- that is very high now that compared to the present market price of, say, around INR 75. Is it correct now? That -- are you sure now that you are getting INR 251 per share?

Yes, yes. Already, it was issued some time back. And as for the SEBI calculation, the -- that is the way any company issue the share warrants.