Sigachi Industries Limited (SIGACHI) Earnings Call Transcript & Summary

[Operator Instructions] Ladies and gentlemen, good day, and welcome to Sigachi Industries Limited Q4 FY '24 Conference Call hosted by Nuvama Wealth and coordinated by Go India Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ranvir Singh from research team of Nuvama Wealth Management. Thank you, and over to you, Mr. Singh.

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

Thank you, Mr. Ranvir Singh. Good afternoon, ladies and gentlemen. Welcome to Sigachi Industries Limited Q4 and FY '24 Earnings Conference Call. I hope you had an opportunity to review the financial results and the investor presentations available on the exchange. FY '24 marked significant progress for Sigachi as we expanded our product offerings and presence across regions. We have strategically expanded our MCC production by 7,200 metric tons per annum at Dahej and Jhagadia plants, bringing our total capacity to 21,000 metric tons per annum. MCC with its unique properties is vital across various industries from pharma to cosmetics. We prioritize maintaining quality standards and specializing tailored MCC solutions to meet diverse clients' needs. Let me begin by providing an overview of the business segments in which we operate. Sigachi primarily operates across 3 segments: the Excipients and that's specifically MCC, the Operation and Management and the API, leveraging 5 state-of-the-art manufacturing facilities in India. As highlighted, MCC stands as our core operating segment with a combined capacity of 21,000 MTPA. The volume of MCC witnessed notable year-on-year surge increasing by 16.47% from 12,655 metric tons to 14,740 metric tons in FY '24. Substantial growth was also observed in revenue from the MCC division, increasing by 15.83% to INR 301.5 crores from the earlier figure of INR 260.3 crores in FY '23. Looking forward, we expect a gradual rise in the utilization of the recently added capacities. We anticipate that we will reach 50% by Q4 of FY '25, further rising to 80% by FY '26. With this capacity utilization enhancement, we expect further addition to the top line from the MCC or the Excipient segment. The demand for MCC as an excipient remains substantial with its quality and pricing are being highly sought after in the pharmaceutical, the food and the nutrition industries. The total addressable market opportunity as on date is in the range of $1.4 billion, which is estimated to be around $2 billion by 2031, and we are confident in our gradual scaling up to meet this demand. In FY '25, we have allocated a CapEx of INR 15 crores for our MCC division plant located at Hyderabad. Furthermore, to broaden our product range, last year, we have acquired 80% in Trimax Bio Sciences, incorporating API in our offerings. This strategic move provides us to capture a larger share of the pharmaceutical value chain. The synergies between our excipients and API offering holds significant potential for expanding our market share. While awaiting regulatory approval for Trimax products, Sigachi will serve nonregulated and semi-regulated markets before moving towards exporting to the regulated markets. We anticipate the API segment to achieve approximately a 25% margin EBITDA as we transition to catering to the regulated markets. To facilitate our growth plans, we have earmarked INR 60 crores for CapEx to expand the Trimax capacity by 150%, adding up nearly 150 KL at the end of which the total capacity would be 250 KL. Additionally, our plans of establishing the CCS project at the Dahej facility is there to -- which would enhance our product portfolio in the Excipient section. The customer base for MCC and CCS are all complementary and overlap, including the potential overlap from the API customers. These products complement each other and which is such a diverse portfolio, we anticipate capturing a larger portion of our customers' wallet. In the O&M segment, we have established partnerships with renowned entities such as Gujarat Alkalis, Aditya Birla Group, ONGC, Lords Chloro Alkali. The growth trajectory of this segment aligns with our objectives. We have recently added Adani Solar Power at Mundra to our client roster. We're confident in our abilities to maintain excellence in this segment. Moving forward, we see significant room for growth. Geographically, our expansion has been remarkable, extending our approach to encompass the Middle East through our strategic joint ventures. Our wholly owned subsidiary, Sigachi MENA FZCO has established partnership in the UAE with revenue potential to reach $54 million by FY '29. Additionally, Sigachi Arabia, another subsidiary, has collaborated with Saudi National Projects Investment Limited with anticipated revenue of approximately $180 million in FY '25. We will be exploring opportunities in the segments in which Sigachi operates, that is Excipients, API, O&M and certain opportunistic trading. We are committed to continuous improvement, focusing on enhancing our R&D capabilities and implementing cost-effective manufacturing processes. This is to maintain our position as a preferred manufacturer with the highest quality standards. I now invite Mr. O.S. Reddy to give you a brief on the financial performance. Over to you, Mr. Reddy.

Mr. Reddy, please go ahead with you.

Thank you, sir. Good afternoon, everyone. I am pleased to report a strong performance in Q4 FY '24. Our operating income in Q4 FY '24 surged by 43.78% year-on-year, reaching INR 104.1 crores. EBITDA experienced a robust growth, rising by 33.6% year-on-year to INR 16.3 crores with a margin of 15.65%. Net profit also saw a significant growth, increasing by 108.22% year-on-year to INR 15.1 crores with a PAT margin of 14.6%. In FY '24, our financial performance remained robust. Overall, revenue saw a significant year-on-year growth of 32.08%, rising from INR 302 crores to INR 398.9 crores in FY '24. Revenue from O&M grew 32.45% to INR 35.1 crores from INR 26.5 crores in FY '23. EBITDA grew by 30.49% year-on-year to INR 76.6 crores with a margin of 19.2%. Net profit amounted to INR 57.2 crores, increasing by 31.19% year-on-year. PAT margin stood at 14.34%. We'd like to highlight a declining trend in our return on capital employed, primarily due to ongoing capacity expansion plans and increased capital work in progress. As of FY '24, this capital work in process stood at INR 96.6 crores, and we expect that as we bag more O&M projects and once the expansion capacity comes out, gradually increase -- ROCE gradually will increase in future. We remain optimistic about the favorable impact of our growth initiatives in the coming years. As we continue with our strategic expansion initiatives, we are confident that unlocking economies of scale and enhancing operational efficiencies will be pivotal for our future success. These efforts underscore our committed to sustainable growth and delivering long-term value to our stakeholders. That concludes my updates. And now we can open the forum for question and answers.

[Operator Instructions] The first question comes from the line of Harmanpreet Singh, an individual investor.

Sir, actually, I joined the meeting a bit late. So could you please tell me the status of our expansion plans at what stage we are like MCC expansion?

So Mr. Harmanpreet Singh, the expansion is all on track. The erection and commissioning is over. The product validation is at close. We are already at 10% capacity utilization as we move in this current month.

Next question comes from the line of Munjal Shah, an individual investor.

Congratulations to the management for good numbers. Sir, my first question is regarding the gross margin. Sir, when we are comparing year-on-year, there has been a drastic decline of close to 7%, 7.5% on the gross margin basis. So that is my first question. Secondly, sir, there has also been a huge surge in the debtors. So if you can just throw some light on that particular thing. And sir, when are we expecting the CCS facility to start ? There is no progress on the CCS facility? So these are my 3 questions right now.

Yes. Thank you, Munjal Shah. This gross margin, not much basically declining. That's because of increased material pricing, there is a little -- maybe around 5% variation when we compare to last year and this year. And gross margin and that is because of gross margin is mainly on account of increased raw material prices. And debtors. In certain countries, there are -- receivables are getting delayed like Egypt and also the turnover in the last few months that is in last -- end of the month, it is end of the year, that is higher sales are taking place. That is one of the reasons. These things will regularize in maybe in another 3, 4 months or in next 6 months' time. We are finding -- the customers are also finding some of the alternate measures to release the amount at the earliest. And the third one is CCS. CCS project anyway, now we have -- we are yet to obtain the regulatory licenses and maybe we'll complete it by 1.5 years' time, we can -- the CCS project will come into operation.

Munjal Shah, I'll just add in to what the CFO speaks. The environmental clearance for the CCS project is still not obtained. We have a situation where for the last 3 months, the authorities have not really sat on the table to have a meeting because of the impending elections. So everything is on a standstill in terms of decision-making at the state level. So we are just helpless. We are waiting that the first week of June comes in. And hopefully, we will have the committee meetings coming in and the state-level decision-making body taking decisions and giving us the EC for commencing the project.

Okay, sir. Sir, just coming back to the gross margin, sir, what can be the sustainable gross margin percentage considering the product mix we have?

So Mr. Munjal, I'll just add in one of the other reasons for a slight dip in the gross margin is on account of the API vertical building up some revenues. Because API vertical, we are just getting started and it's baby steps, naturally, the gross margins are not as healthy as what is there in the matured Excipient vertical. So what we believe is, like I indicated in my opening message that as we kind of reach out to the developed markets, the regulated markets, we should be maturing ourselves at around 25% EBITDA for our API vertical in the developed markets.

Okay. Okay. So sir, can we expect maybe the EBITDA margin and the gross margin to regularize in coming 2 quarters with capacity utilization expected to improve in the MCC division?

So capacity utilization of MCC will definitely improve. However, like you know, the value of APIs are much more than the value of Excipient. And if the value of APIs are going to take -- make up a significant portion of our sales, there is going to be a slight hit in terms of coming back to what we were 2 quarters back. But we are working to see how we can regularize this in the next 3 to 4 quarters.

Okay. Okay. Sir, and basically, what has been the volume in terms of API? So if there's any ballpark figure you can share because in the presentation, it has been only MCC and O&M. But if you're talking about scaling up API in the coming years, if you can just share certain information related to the API segment, it would be really, really helpful.

Sure. Sure, Mr. Munjal, not an issue. Our current capacities of the API are by virtue of the reactor capacities and the current reactor capacities, what has been acquired is 100 KL. There has been -- in the shareholder agreement, we have had a declaration and an agreement where we will together put in additional 150 KL of reactor capacity, adding up to a total 250 KL. Now by basic thumb rule, what it does imply is that this 250 KL should give us an added revenue of nearly INR 200 crores to INR 250 crores on an annual basis at 100% capacity utilization. We are in the process of kind of building up our capacity utilization for the installed 100 KL. And once we reach a certain figure, we will be kind of commencing the activities and the civil works and erection commissioning for the balance 150 KL of the reactor capacity.

Okay. Sir, what would be the current API capacity utilization for 100 KL roughly, if you can just...

It's around 35%, 40%, sir.

Okay. Okay. And sir, what can be the optimum -- so I know it cannot be 100%, but what can be the optimum utilization level for this 100 KL?

So I would say 80% to 85% is a very fair optimum utilization of the capacity, considering that there are regulations to be met and the product changes do take time, 80%, 85%, I think, is a healthy mark for capacity utilization.

And sir, what do you -- and what can be the reasonable time for us to reach that 80% to 85%?

So it's a give and take wherein we -- our focus should be, are we interested in increased capacity utilization? Or are we interested in an increased capacity utilization by additional focus on developed markets? So our focus right now is to have a healthy mix of capacity utilization, combined with a healthy mix of regulatory filings into the EU region and the U.S. region. So this combination is only going to give us good yields. That is what is going to improve our gross margins in the APIs.

Okay. So then, sir, I think we must have a pipeline of DMF filings for the developed markets, so...

Yes, DMF and the CEP filing, certificate of suitability to the EDQM for the European Union.

Okay. So sir, if you can just put in a number of like what is the pipeline currently, like what products have we applied for the DMF approval?

Sir, at this moment, we have already filed 3 filings to the CEP. There are additional 4 to 5 filings which are slated for this current financial year to the CEP.

Okay. And sir, if you can just help like in future, if you can just help with what is the pipeline? So basically, when we are building a pipeline of DMF, what is the approximate market size of the products for which we are applying? So it could be -- at least we can have a ballpark figure in mind how we are progressing ahead in the API segment as well?

So Mr. Munjal, it's a complicated question to answer because the market size might not really be relevant. I might be looking at a niche segment where there are limited players or where I have a better competence than my competitors. So that might not really be the actual relevance in terms of selecting as to which product to go into. It's a combination of a lot of things, which includes competence, the nicheness, the newness of the product and of course, the markets.

Next question comes from the line of Nihal Shah with Prudent Broking.

Sir, am I audible?

Yes, Mr. Nihal.

Yes. So I had a question like we have added about 2 new contracts in the O&M segment as well. So what would be the margin profile in that? And can we see employee costs going higher like when we had the new ONGC contract as well that went higher. So do we expect that to be the case with this as well?

So Mr. Nihal, I believe the employee cost is going to be high because in the Middle East, the employee costs are substantially higher. That's number one. However, we believe that part of it will be offset by the increased revenue we have for our O&M.

Okay. So the margins would be lower than the current O&M contracts that we have or it will be in line?

I believe it will be in line with what we are going because getting a business or getting into a business with lower margins is no big feat. You don't really need to plan for it. Our objective is that we kind of qualify and penetrate into businesses, which give us a better profile margin.

Okay. And on the API front, so how is the competition scenario with China for like MCC and for the APIs as well that we have?

So in competition from China isn't there in the cellulose field, in the MCC field at this moment. We have our competitors primarily from the developed markets that is U.S. and Europe. China is not really there in the play among the top 7 to 10 customer -- manufacturers. In terms of API, it's a complicated mix of N minus 1, N minus 2 stage, and the product where you are selling. So China cannot be ruled out in terms of the value chain, but one has to probably strategize to see which way the sourcing and the manufacturing capabilities align with the cost proposition of what the customer wants.

Okay. So what is our main competitive edge like we have competition from the developed countries. We have competition from China. So where is it that we stand out in the crowd?

I mean competitive edge for us in excipients is in terms of volume and scale. Competitive edge -- I mean, all this is there in the presentation, but nonetheless, competitive edge is in terms of assurity of supply because we have 5 facilities across in India. Even in the COVID, there was continued supply to our customers across the globe. Competitive edges in terms of sourcing the raw material from the FSC certified organizations, which are sustainable.

Next question comes from the line of Khush Shah with Niveshaay Investments.

Hello, sir, am I audible?

Yes, sir.

So I had a couple of questions. First, for the JV announced this fiscal year, which business segment of Sigachi will serve this region through the JV?

So our subsidiary, Sigachi MENA is going to be the front end for serving all the needs of the JV partners in the GCC and Saudi Arabia.

Okay. The second question would be regarding the projection of $180 million in revenue by FY '25. With the Sigachi Arabia JV and SNP, do we have the capacity to meet the demand? Could you please elaborate?

So we, of course, have the capacity to meet the demand. It is just that we have to see what are the kind of products the joint venture partner has envisaged in the breakup of the $180 million. Now they are seeing this as an opportunity. We have to work out to see how much of it can be facilitated from our in-house facilities and what are the other products which will classify itself as opportunistic trading, sourcing and trading. So for this, we will have to work out and see what is it that can be catered from in-house and what is it that can be catered from our channel partners who are across the globe.

Sir, last question would be, when will your API capacity ramp up and contribute to the revenue?

So in the last financial year, the gone by financial year or rather, I would say, the first financial year of the acquisition, we have already had a sales turnover adding up to around INR 45 crores for the part of the year. So it has already added up to a reasonable level of capacity and capacity utilization of the 100 KL. So it's already coming in, sir.

Our next question comes from the line of Harmanpreet Singh, an individual investor.

Sir, actually, I want to ask you, actually I was looking at the profit and loss. And I have seen that our profit and loss -- net profit decreased vis-a-vis last year FY '23. So could you explain what are the reasons for this and what we are doing to increase in FY '25?

Yes. Thank you, Mr. Singh. Yes, this is in absolute terms, there is a profit is INR 57.27 crores is the net profit for the financial year ending 2024. And previous year, it was INR 43.53 crores. And in terms of the percentage, as you said, there is a slight decline is there, wherein absolute terms, there is around INR 13.73 crores increase is there. In percentage terms...

Actually, in the -- like I was looking at the -- you have uploaded in the exchange that it's saying that the total income for the period in FY '24 is INR 4,112 lakhs and previously, it was INR 4,146 lakhs. So actually, it has decreased. And it could be seen in the equity per share. Previously, it was INR 1.35 and now it is INR 1.30.

Yes. This is mainly there is an increase in material cost slightly because of that there is a change.

No, no. I think there is some confusion. Mr. Harmanpreet Singh, could you just repeat what you said? I didn't get it. I think I missed something.

Actually, I was looking at the profit and loss figure for total income for the period for FY '24 is INR 4,112 lakhs. And it was INR 4,346 lakhs in FY '23. So I was asking that what are the reasons for decrease in income and what we are doing in FY '25 to increase our net income?

Sorry, Mr. Harmanpreet. What was the figure for FY '23?

Sir, FY '23 it is INR 4,146 lakhs, and earning per share was INR 1.35 and now it is earning per share is INR 1.30.

No, something is wrong. [indiscernible].

Yes, something is wrong. Harmanpreet Singh, just you can see the financials. In FY '23, you are talking about revenue or only EPS?

Sir, actually, I am talking about total income for the period. In profit and loss, total income for the period is INR 4,146 lakhs, sir actually, revenue in FY '24 is INR 31,749 lakhs. other income is INR 1,157 lakhs. So actually, at the end of the P&L, it's saying that our total income for the period is INR 4,112 lakhs, which is a bit less than the last year, which was INR 4,146 lakhs. And earnings per share is INR 1.30. Last time, it was INR 1.35.

No, no. You are talking about stand-alone or consolidated figures? because nothing is matching...

Actually, I'm talking about stand-alone.

Yes. Stand-alone, the income is -- total revenue is INR 317.49 crores is the revenue from operations and other income is INR 11.57 crores, and total income INR 329.07 crores. This is FY '24. And the FY '23, total income is INR 296.99 crores.

Yes, sir. Sir, but I am talking about the total income for the period at the end of P&L, total income for the period is INR 4,112 lakhs, which was INR 4,146 lakhs last year.

Okay. Yes, that is profit, net profit, okay.

Net profit, yes, sir.

Yes. What is your question, please?

Sir, actually, I'm asking what are the reasons for decrease in profit and what we are doing in FY '25 to increase it? What are our plans?

Yes. That decrease is a very small amount. That is because of around INR 33 lakhs -- INR 33.75 lakhs only. And this is on account of increased material prices. And yes, you have any question on EPS? EPS also you're asking.

Actually, I want to understand that what we are doing in FY '25 so that our income increases on a stand-alone basis?

FY '25. Definitely, it will increase. Stand-alone and consolidated, both.

Sir, what are the -- if you can explain, what are the steps, you are forcing material cost to coming down or what? Actually I want to understand what are we [Technical Difficulty] capacities...

Yes, yes. The increased capacity comes into operational. And for the increased capacities, there will not be much increase in overheads. Fixed overheads remains constant and the capacities will increase and profit also will increase in the FY '25.

Our next question comes from the line of Manav Vijay with MV Investments.

So first, my question is regarding the MCC. So in FY '24 against our capacity of 14,000 tonnes, we did around 14,700 tonnes. Now what -- now since this additional 7000 (sic) [ 700 ] tonnes has become operational, so what you mentioned in the opening remarks is that we should expect a 50% utilization for the year. Correct, sir?

Yes.

Yes. With the increased capacity, we'll reach 50% by Q4.

So 50% by Q4. So what will be the average for the full year?

See, it is very difficult to actually mathematically break it up. There are cycles of the product, and I think it would be inappropriate to have an average for the year because the graph is not really straightforward. It's exponential. So it will be incorrect for us to have an average. What we believe is, currently, we are at 10% capacity utilization. Next month, we should be better than this. By Q2, we should be better. And finally, by the time I touch Q4, we should be at averaging at 50% on a quarterly basis.

Okay. So sir, so the next question in this case would be regarding the average realization that we would be having on MCC. So I believe that for the year, our average was around INR 2,00,000 for actually per tonne. Now compared to FY '23, I believe this number has come down. Is it possible for you to help us understand what -- so let's say, what kind of let's say, number you expect for next year in terms of average realization?

Yes. Next year, it will go up because last year, we pushed our quantities because 14,740 is the total quantities we sold. Because of that, we have compromised a little on pricing. But this year, it will -- definitely, it will increase further. At least 5% increase would be there because keeping in view of our coming expansion capacities, we wanted to grab the market and in that process, we have pushed our products.

Okay, fair enough. Next question is regarding the O&M. So with around INR 36 crores of sales in FY '24. What do we expect for FY '25?

'25, yes, that is we are -- we expect around -- I don't know, it's a futuristic statement but of course, we'll around some INR 50 crores, INR 55 crores, between INR 50 crores to INR 60 crores would be there.

Okay. So maybe around 40% kind of an increase? INR 50 crores to INR 55 crores is what you are saying?

Yes, yes.

Okay. Sir, next is regarding the Trimax. So INR 45 crores is what you have done this year with around, I believe, 35% kind of utilization. Again, for FY '25, what do you expect that company to do, the API to do?

This year around...