Styrenix Performance Materials Limited (506222) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Styrenix Performance Materials Limited Conference Call. We have with us today from the management of Styrenix Performance Materials Limited, Mr. Rakesh Agrawal, Chairman and Whole-Time Director; Mr. Rahul Agrawal, Managing Director; Mr. Sanjeev Madan, Chief Financial Officer; and Mr. Abhijaat Sinha, Company Secretary. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjeev Madan. Thank you, and over to you, sir.

Thank you. Dear shareholders, investors and analysts fraternity, we welcome you to this earning call. Your company, Styrenix Performance Materials Limited, has declared its results for 9 months ended December 31, 2022, on 13th November (sic) [ February ] 2023. We will brief you about the major highlights of the performance. Regarding quarterly performance, revenue net of GST from operations in current quarter is INR 557.2 crores as compared to INR 550 crores in July to September 2022, and INR 511.9 crores in October to December 2021. Profit before tax in current quarter stands at INR 40.4 crores as compared to INR 32.4 crores in July to September 2022, and INR 73.4 crores in October to December 2021. Now regarding year-to-date performance, revenue net of GST from operations stands at INR 1,757 crores in 9 months ended December 2022, as compared to INR 1,555.1 crores in 9 months ended December 2021. Profit before tax for 9 months ended December 2022 stands at INR 188.7 crores as compared to INR 312.5 crores for 9 months ended December 2021. Now regarding quarterly segment performance. First, specialties. Profit before interest, tax and other unallocable expenditure stands at INR 30 crores in current quarter as compared to INR 34.3 crores in July to September 2022 and INR 56.5 crores in October to December 2021. And profit for 9 months ended December 2022 stands at INR 134.4 crores as compared to INR 232.5 crores for 9 months ended December 2021. Polystyrene. Profit before interest, tax and other unallocable expenditure stands at INR 11.5 crores in current quarter as compared to INR 1.73 crores in July to September 2022, and INR 18.4 crore in October to December 2021. And profit for 9 months ended December 2022 stands at INR 63.9 crores as compared to INR 81.6 crores for 9 months ended December 2021. So this is all about the clarification and details about our financials. Now we can go forward for the queries or any clarifications required or which are needed. Thank you.

[Operator Instructions] We have our first question from the line of Rushabh Shah from RBSA Investment Manager.

Sir, you have recently acquired this company. So if you can just briefly share, what is your game plan for the next 3, 5 years, and say, why did you acquire this company, sir. It would be very helpful for us to understand your perspective.

Hi, Rushabh, this is Rahul Agrawal. Thank you for your question. So as you might have read about the history of this company, it was founded by my father, Mr. Rakesh Agrawal, who is the Chairman, and he's also actively involved in the business right now. There is a lot of knowledge and understanding of this business for the last 40 years that we have. When the opportunity came to acquire this business, we believed that we can add considerable value to this business going forward. And we also believe that in terms of both the product segments or both the areas where this business is operating in, that there is an extremely bright future in terms of potential. So keeping that in mind, we have acquired this company.

And sir, in the presentation that has been shared, it is mentioned that we are looking at developing new products also. So if you can just share what new products are we looking at? What is the market size? And what kind of return ratios you target, sir?

So just to give a brief idea about the market. So currently, if you look at the specialties business, we are operating in the automotive sector, we are supplying to consumer durables, electronics, electrical sectors. All these sectors are experiencing significant growth. As you know, there is a huge growth in the EV segment, where a lot of our materials are used, and also some additional products would be used in those segments. Even in consumer durables, there is a significant push by the government with the PLI schemes, and there is also a lot of capacity building, which is happening currently, which is going to add to significant further demand, not only for the existing products where we are operating, but also for additional products, which are related to our product line. We are still in the process of identifying and commercializing these products, so it will be premature to speak about that. But we do believe that with our current participation and market position with our existing customer base as well as new customers in these product segments, that we are well-positioned to take full advantage of the growth that we foresee.

Okay. Sir, just one clarification. Sir, what your products that is in this company and say, what new products you plan to add into going forward. Is there any concept of interest in other Asia group companies, because I believe there are a lot of group companies also under Shiva Group. So I just want to please understand, clarify this fact.

There is no overlap in the product profile between the products of this company and other group companies.

And in terms of, say, raw materials on this, do we get any raw materials from the companies or are you going to sell to any of our group companies, from that angle also?

So in terms of raw material, there could be some -- so most of the raw materials which are purchased by Styrenix are commodities, least the bulk raw materials, and of course, there are specialties and additives and auxiliary chemicals that we buy. But from the commodities that we buy, and also in some specialties, there could be similar products that we are purchasing in other group companies. So to that extent, that would exist. But in terms of any kind of relationships with regards to buying and selling of products, there is no significant products which would overlap in the buying and selling between group companies.

Okay, sir. And sir, if you could clarify, how much is the capacity utilization as on December for all -- across product lines?

So I think in the investor presentation, it has been mentioned that the capacity of the specialties business is about 100,000 tonnes. And for the polystyrene, it's about 78,000 tonnes. The capacity utilization, we have to see a full year of performance, frankly, to understand where we stand. And only after we run it, we'll know, because it's been only essentially 45 days since we have taken over the business. So we will be able to answer that question in time to you. But currently, the capacity utilization is around 70%, roughly.

Okay. And just one last question from my side. So you also mentioned in the presentation that there are various cost reduction initiatives. So I understand it's very short time. But so far whatever you have seen, is there a significant scope to improve margins on the cost front, sir?

So we do believe there is a lot of opportunity. As I already mentioned, in terms of capacity utilization, there could be potential opportunities for us if we're operating right now, say, around 70%. And that in itself would improve the efficiencies of the business and reduce or dilute some costs. Furthermore, we are studying and evaluating, and prima facie we do believe there are several areas where there could be potential significant cost savings.

[Operator Instructions] We have our next question from the line of Vaibhav Badjatya from Honesty and Integrity Investment.

So I just wanted to understand that you have obviously taken over this company, but on the other side, what was the motivation that the seller was looking to sell and why they exited the business. What kind of issues they were seeing in this? Or what was their strategic consideration that they wanted to sell this business?

Vaibhav, thank you for your question. But I'm not in a position to answer exactly why a seller does what they do. I can give you motivations that we have to buy the business, which I've explained in my previous answer, but it is almost impossible because it will be speculative in nature for us to assume the reasons for which a certain seller does sell the business.

Okay. Got it. Understood. And from a longer-term perspective, I don't know as of how have you gone through the very detailed strategic review. But apart from ABS and SAN, do you want to enter into any new areas of business? Or would we like to continue with this over next, say, 3 to 5 years?

So we believe, Vaibhav, that there is a present opportunity, which is going to remain in the foreseeable future, to obviously have a larger participation in the overall markets of the products that we are present in. So those are opportunities which would be first addressed. With time, like I mentioned, the segments that we are servicing and the customers that we are providing products to, have requirements for other products and other areas, for which also we have started evaluation. So I think in a phase-wise manner, we would look at, first, being able to have a larger presence in the products we are already present. And then furthermore, add to that portfolio to have a larger basket of products for our customers.

Right, right. And this is a much more long-term structural thing I want to understand. We've seen a lot of fluctuation in the product prices, ABS and SAN. There's competition from China, there are some other players, all of those things are going on. This improvement in margin that happened for the business that happened just after COVID hit and there were a lot of supply chain disruptions. Before that, the margins were not really good. So what is it with some of the Chinese players which makes them really competitive in this market? And how it is going to change in future is what I wanted to understand.

It's difficult to predict what will happen in the future, because in terms of the demand/supply scenario in India, it's, of course, unique in its own way because of the nature of products and nature of grades which are sold in India. It does not necessarily fully replicate how the same type of products, ABS or SAN or any other products are sold in other parts of the world. However, we are not isolated from the world, and what happens in terms of a demand/supply scenario in the rest of the world will have some impact in India as well, which we will see from time to time. However, our fundamental premise is that the underlying demand in India is strong. We also believe that the demand in India will grow because of the segments which I already mentioned in the first question that I answered. And we believe that we are well-placed with the brand equity of our products and our positioning in the products in terms of quality and recognition to take full opportunity of that growth. So I think in terms of going forward, at least, we do believe that [indiscernible] to do better than the competition.

[Operator Instructions] We have a question from the line of Ashwin Reddy from Samatva Investments.

Sir, I have a few questions. So firstly, could you expand further on the comment that you just made about the unique market structure in India and the different grades that are sold. I'm just curious how is the market in India different from the market elsewhere.

Hi, Ashwin, this is Rahul again. Thank you for your question. If you look at the Indian market. Indian market, the applications, like I said, large applications, therefore the ABS market, again, that I'm answering, is for automotive, for consumer durables, electronics. A lot of these products use ABS, again, in the Indian market condition like say in 2-wheelers or even 4-wheelers or whatever. And Indian weather conditions and Indian use conditions are always unique. So in terms of what the requirements are in terms of customization of the product will always be pertaining to how and where that product is used or that component is used. So in fact -- and those are the segments where, for customization, even Styrenix for that matter, or in its previous avatars have always been the preferred product choice. Because in terms of customization that they've been able to provide, it is unique to their specific applications that they need. If you look at other parts of the world, that level of customization may differ or may not be necessary, again, depending on which country you speak to. There are many countries which have their own individual sets of requirements. So it's hard to speak on each of those. But India, obviously, will have its own unique requirements and hence, require customization for those applications.

Got it, got it. That's interesting. So usually, how long is your sales cycle? And how long is the usual contract that goes on for? How is it structured, because of this scenario?

So in most of the cases, in terms of sales cycle, it depends again on the specific customer, specific product grade, specific application, sensitivity of the component which is being produced from that particular grade. So it could be, again, 6 months to 2 years, or even longer. So we don't know. It depends on how much of testing is required at their end -- at the customer end as well as at our end kind of grade wise and phase wise testing to ensure that the product is the most suited. So that is one thing. I'm sorry, what was your second question?

So how long is the usual contract period for -- so how long is the customer coordination?

So typically, contracting -- again, there are different types of contracts. Now a lot of those contracts, there is confidentiality around those contracts. So I can't share a lot of details about those contracts that we have with customers, but...

I just wanted to understand, is it like short term, long term, how does it work, that's it.

Generally, these are fixed annually with customers, at least around some kind of a volume or supply -- surety of supply, reliability that they can derive from us. And basically, it's a percentage of our overall revenue breakup that we will do.

Got it. Got it. So then how would the price hikes be structured, because your raw materials are going to depend upon crude, right? So given the volatility there, how do you structure the price hikes or the price changes based on the raw material changes?

So a lot of the contracts, majority part of the contracts would have a formula inbuilt, and the formula would account for pricing of raw materials which are transparently available by way of publications. And our own pricing for buying of those raw materials would also be dependent on the similar publications. So essentially, it would be a pass-through, if you will, from what we buy the raw materials and then in terms of what we would charge to the end customer.

Okay. Got it. Got it. And if I may go on for couple more questions, if it's okay?

Yes, sure.

Yes, so in terms of the royalty, so would we have to pay any royalty on the current products? Or is there any R&D that you're using from the previous seller? Or right now it's complicating [indiscernible] royalty payment which [indiscernible]?

Yes, there is no royalty involved, and there is no R&D support required either.

Okay. So this is for both the existing products and for the new products, you won't need any R&D support for that?

Correct.

Got it. And how do you feel about the competitive intensity? Because I think Supreme Petrochem has tied up with a foreign player, right, for putting up a large ABS capacity. Would they be competing with you? Or they are in different segment completely?

So broadly speaking, there are 2 technologies for ABS in the world. So you're referring to their ABS announcement, right?

Correct, correct.

So broadly, there are 2 technologies. There is an ABS technology which we are using, and the ABS technology which Supreme is proposing to put up the plant with. These are different technologies, and there are some nuances in terms of what kind of product can be made and what kind of applications they can be used. I don't want to comment too much on what our competitors are doing or what our potential competitors are doing. It would not be right for me to do that. But specifically about the product grades made from the technology which is being suggested, we do believe that we have a sound business case going forward in spite of that competition coming online.

Got it. This was helpful, actually. And my last question is on the polystyrene part of the business, which is right now 30% of your overall business. So globally, is there a move away from polystyrene to polypropylene? And how should we think about the growth of this business for you in the next 4, 5 years?

So if you look at the polymer chain, whether you talk about polyethylene, polyvinyl chloride, polystyrene, polypropylene, any of the polymers, each polymer has its own place and is application based on what properties that product offers. One can argue that at specific points in time, there could be cannibalization or substitution of one polymer with another, but each polymer does have its space firmly within the industry and specific uses. So we don't see any significant or really any threat in terms of substitution of this product by polypropylene, like you mentioned, which has a significant nature.

Got it. Got it. And so overall, in terms of -- I know it's too early right now for you to give any numbers, but say, over the next 4, 5 years, what kind of a growth if you don't do will kind of disappoint you, in the next 4, 5 years, some broad number. I'm not asking specific, but any broad numbers. What kind of growth would you want to aspire for or what is the opportunity there?

So it would be speculative in nature, but anyways...

I'll tell you -- I'm the Chairman, Rakesh Agrawal. I welcome you here. But the thing is, you can understand that today, the 50% of demand in the country is being served by the imports, number one. Second thing, the industry is growing almost at the level of 7% to 8%. So we have to be part of the competition. So the growth will always take place. So to assign any number right now, it will be too premature.

[Operator Instructions] We have our next question from the line of Sushital, an individual investor.

Sir, I just wanted to understand what are the low-hanging fruits that you initially want to focus on after you take over?

So like we have mentioned in our investor presentation, we believe there are certain efficiencies that we see in the business. Obviously, in terms of fully utilizing our capacities and improving productivity is another one, which we are looking to address. And finally, also there is products or grades which can be developed in a short period of time where we are using our R&D center and using our capabilities in terms of our overall infrastructure, we will be able to tackle. So these 2 or 3 areas, keeping in mind the new applications which are growing significantly, whether it is EV or it is in consumer durables or household appliances, we do see an opportunity to have a more active role over there with existing and new products. So these are some of the kind of low-hanging fruits, if you will, which we can tackle in the short to medium term.

Understood. Got it. Also, have you experienced any unpleasant surprises post takeover? Do you see any pending cleanup or write-offs in the coming quarters? Or any other kind of litigations or anything post takeover?

No, we don't see any such thing. Again, it's been 45 days. And based on the due diligence that we carried out, we haven't come across any, but...

That was helpful. And also, do you see any kind of attrition in the senior management? Are you seeing any change in the senior management? Or can you just throw any light on the manpower, what your strategy looks like?

So I think in terms of the team that we have, it's a very robust team which is handling the business. Obviously, with any change of management comes certain challenges which one has to face. But we believe that these challenges are not significant, at least from a management perspective and team perspective. And we believe that we are in a very good space to very quickly transition in terms of what we need to achieve with this company.

Got it. That was helpful. And just wanted to understand on the ABS part of your business, how do you see it growing in the next 3, 4 years? Also, the margin dipped versus the last quarter. So what can be a steady-state margin for this business?

Again, difficult to say right now. It would be a little speculative for me to say an exact number. But we do believe that with the efficiencies that we would look to bring in terms of some fixed cost dilution with hopefully better utilization of capacities and better efficiencies, we will be able to see fairly decent kind of margins in this business.

Got it. That is helpful. My last question is, I think a holding company of Styrenix is also in the same field, probably more into the trading. So potentially, do you see a merger of these two businesses subsequently down the lane, or any thoughts on that?

No, nothing for now.

We have our next question from the line of Abhishek Lakhani, an individual investor.

My name is Abhishek Lakhani. I would like to ask my first question. We have seen a spike in the volume of pledged shares, almost 100%. One of the reasons also to ask this question is the current market scenario. Can we see a gradual decrease or invocation of these pledged shares in the near future?

Yes, Abhishek. Thank you for your question. In terms of pledge of shares, as you realize, it's a transaction which has happened in the last few months. And as per transactional requirements, certain things have been done. We believe that over a, again, short to medium period of time, difficult to specify exactly what that time period would be, we would see a gradual reduction as you are correctly predicting.

Okay. Also my second question is that with the restriction on the single-use plastic in many states, what impact does management see in the revenue in percentage terms? What eco-friendly alternatives have we planned for that ban also, sir?

So I think from between the 2 businesses, on the specialties business, there is 0 impact. And on the polystyrene business also, we are not present in a large part of the business which would be single-use plastic. From overall perspective, I think the impact is almost close to nil or very, very negligible.

Okay. Sir, my last question is on what we can expect the dividend payout ratio? Or is the company planning for any capital expenditure, sir?

So right now, we have our work cut out in terms of what we need to do for improving efficiencies and doing what we can in terms of the low-hanging fruit which was mentioned in the earlier question. So once we tackle that, I think we can go to the next stage. But it is a little premature to answer when and how that will happen. Any kind of questions or thoughts on dividend also are premature because we have taken no decision on that as of now.

[Operator Instructions] We have our next question from the line of Gautam Bahal from Mauryan Capital Private Limited.

Congratulations on the transaction. Sir, Mr. Rakesh Agrawal had mentioned in the initial press release of vigorously expanding capacity here. And I suppose that is because you see an import substitution opportunity. So would you like to comment on where do you see sort of growth CapEx going in? Would it be brownfield? What kind of return metrics you see on the growth CapEx. Any comments on that?

See, it is right now very difficult as MD has already suggested that currently there are low-hanging fruits. I mean the efficiency currently utilized is only 70%. We believe that utilizing the current facilities itself, there is a reasonable scope to increase the productivity as well as the total production. First we are exploring on all that. But going forward, as you know, I mean, philosophically wise we can say that today only 50% of the demand is being catered by the local supplies, 50% being imported. And normally, all these customers have been in the market for the last 2, 3 months. They will always prefer a local material rather than being dependent upon the imported material. So give us an opportunity. Today, it's too premature to say that when and what we will do and what we'll do there. But obviously, this is a situation in front of us, and we are going to explore the situation and we'll be keeping you informed and to the stock exchanges in times to come.

Okay. Okay. So you see -- before any proper growth CapEx, I guess, you see a lot of debottlenecking opportunities, et cetera?

Absolutely.

Okay. Okay, sir. And just for me to understand philosophically, like when you say this import substitution opportunity, and local customers preferring your product, is that also because you are a sort of lower cost producer versus imported products in the final cost? Or is it just because of better customization that you offer?

So Gautam, I will quickly answer your question. So there is -- like I mentioned, you have thought rightly about the customization part. For a lot of components or parts, it's very difficult to replace and substitute with any product other than the product that they've been using. So that itself becomes a challenge. So unless there is a significant business case for our customers, they are not inclined to do or make those kind of changes. I believe that if we have better supplies in place, there is no reason for a lot of applications for that substitution to happen. While in the entire market there could be some cases, yes, where obviously price does play a role. And if global demand supply metrics do put pressure on pricing, that could have an impact. But of course, that is only a fraction of the market.

Okay. Okay. And sir, given your sort of long history in this industry, like where would you say we are in the commodity cycle here as we stand, in terms of spreads for you guys?

So things have become much more volatile in terms of commodity cycles, if you will. I'm not sure if I want to categorize all our products as commodities, but if you look at commodity cycles, it's become hard to predict due to international events and international scenarios. Like I said, what happens in different parts of the world does impact us to some extent, because we are not isolated. So whether it is COVID in China or opening up of China or it is war in Ukraine, or in terms of energy costs, or you look at other demand supply factors globally, they do have an impact. But these events seem to be much more volatile and much more difficult to predict. Hence, also equally difficult is to predict the cycles in the commodities. I mean, if things change quickly and there is a demand surge, all of this changes as well. So I don't believe, we can have a very good prediction and estimation of where we are exactly in that cycle. But we are seeing improvements in the market overall, so to speak. And we do believe that going forward, the outlook does seem to be good.

Okay. And sir, just last question from my side. Could you expand a bit more on this EV opportunity you talked about? I mean, what exactly is that for you guys?

So if you look at the EV segment, there is a significant push by the government, and even in the recent budget, to give a lot of impetus to shifting away from fossil fuel-based vehicles, whether it is two-wheelers, whether it's passenger vehicles, commercial vehicles and so on and so forth to the electronic vehicle segment. In the EV segment, the use of polymers broadly, not just the polymers we produce, is going to be significant, as there is a need for EV producers or other EV vehicle producers to optimize the weight of their vehicles to replace more metal with polymers, which offer the properties which are needed for specific components, whether it is fire resistance, heat resistance, weather resistance, or impact resistance, any of the properties which vehicles would need in different components, polymers can deliver on that. And a lot of our products are ideally suited to meet those needs in those different applications.

And are these products sort of more value-added or similar in terms of margins, et cetera?

So we believe some of the products will be similar and some of the products will be higher value.

As there are no further questions, I would now like to hand the conference over to Mr. Abhijaat Sinha for closing comments. Over to you, sir.

So we'll take this opportunity to thank everybody and thank you for showing interest in the company and for joining the call, and we look forward to seeing you in the next few investor call. So thank you, and have a nice day.

Thank you.

Thank you.

On behalf of Styrenix Performance Materials Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.