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

Ladies and gentlemen, good day, and welcome to the Styrenix Performance Materials Limited Conference Call. We have with us today from the management of Styrenix Performance Materials Limited Mr. Rahul Agrawal, Managing Director; Mr. Munjal Parekh, Head of Accounting and Reporting; and Mr. Abhijaat Sinha, Head Legal and Company Secretary. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Munjal Parekh. Thank you, and over to you, Mr. Parekh.

Thank you. Dear all, good afternoon. We welcome you to this earnings call. The company Styrenix Performance Materials Limited has declared its results for the quarter and half year ended September 30, 2023 on October 20, 2023. Our quarterly performance July to September '23 versus April to June '23, the operational revenue for the quarter is INR 595 crores versus INR 543 crores. EBITDA is INR 86 crores versus INR 53 crores and margin stands at 14.4% versus 9.7%. The net profit before tax is INR 76 crores versus INR 43 crores and the margin is 12.8% versus 7.9%. Profit has improved over the previous quarter due to higher sales and effective cost management. About half-yearly performance April to September '23 versus '22. The operational revenue for the half year April to September is INR 1,139 crores versus INR 1,199 crores. EBITDA is INR 139 crores versus INR 170 crores and margin stands at 12.2% versus 14%. The profit before tax is INR 119 crores versus INR 148 crores and margin is 10.5% versus 12.3%. These are brief details about the financials. And now we can take your queries. Thanks.

[Operator Instructions] The first question is from the line of Nirali Gopani from Unique PMS.

Congratulations on very good results and announcing the new growth CapEx also. Sir, my first question is that in our presentation we've given a capacity numbers till FY '28, which roughly indicates a growth in capacity of about 25%. Sir, my question is can we do a similar level of growth on the revenue side also?

Thanks, Nirali. This is Rahul Agrawal. Thanks for your question. So essentially, the pricing of the products will determine the revenue, what we have given are volume numbers. The pricing of the products typically tracks in along with the raw material pricing and the market pricing of the products at that time. But if one was to consider current pricing as normalized basis, taking that assumption, yes, the revenue would also increase in the similar manner the capacity would increase.

Okay. Perfect. And Rahul you had also guided for a target EBITDA margin of 15%, and we are very close to that number when you see this quarter's result. So were we conservative when we said 15%?

I have never given any indication of target EBITDA margins of 15%. However, I have mentioned earlier as well in all my calls that we need to come to a normalized basis for EBITDA margins, which is achievable in the company using measures such as better capacity utilization, having a better product mix, improving cost efficiencies wherever possible. And we are doing all that we possibly can and there is still work continuously going on to improve on that front.

Okay, okay. And lastly, Rahul, also currently we have a gross loss of about INR 530 crores and we do a revenue of about INR 2,300 crores on an annual basis. So when we say a CapEx of INR 650 crores, what kind of asset turn should we assume?

So if you're assuming -- the assumptions being that you will be able to kind of -- with a similar pricing as an assumption and keeping revenue 3x, I think we can calculate the asset turn based on the additional revenue that would be generated from that CapEx.

[Operator Instructions] The next question is from the line of Jayesh Gandhi from Harshad Gandhi Securities.

Congratulations on good set of numbers, sir. Sir, my question is regarding -- can you throw some light on the industry growth? I mean, I'm seeing at all your competitors' announcing CapExes, most of them are running at 100% capacity. Any competitor landscape? And all the more, when you are saying that you are increasing your -- I mean, enhancing your CapEx, it is more towards specialty? And if yes, then can we think that in future -- currently material cost is closer to like 80%, 85% of our sales. Can we gravitate it downwards towards 60% or 70%? I mean, can we increase our EBITDA margin in that case?

Is that all Mr. Gandhi?

Yes, yes, yes. That's all. That's all.

Okay. With regards to competitive landscape, there is the sectors that we currently sell our products into, include automotive, household, consumer durables, electronics, medical devices, toys, stationery and many sectors, many other sectors as well. All the sectors have a fairly robust growth and the outlook for the next 3 to 5 years is also fairly robust growth. Currently, if we break up the polystyrene as well as ABS market, the ABS market is between 2.5 lakh tonnes and about 1.5 lakh tonnes thus far has been serviced by the local incumbents. Assuming a 7% to 9% kind of a growth rate is what we are assuming based on the growth rate of the target industries, which information has been provided to us. We believe that there will be ample opportunity for us to participate with the added capacities as those additional capacities come online and enough opportunity for us to still remain at fairly fully utilized kind of capacity levels once those capacities are adding on. Polystyrene also, similarly, we have announced capacity augmentation from where we are at. And there also -- there is current imports which are happening. And we believe, again, with the downstream growth in the segments where we participate, we assume that we shall be able to have kind of fully utilized capacities in that case as well. As far as your question on material cost is concerned, I think material cost is around -- yes, around 73%, 74%. It's not at 85%, but it's around those numbers. We assume that currently this is the normalized situation. There will be, of course, an effort to improve the product mix, thereby reducing your material cost as a percentage of sale value. However, that will be a gradual process, and I cannot comment whether that would come down to a level of 65% as of now.

Okay. And sir, while I was looking at 2 of your competitors, who are increasing the capacity, looks like by next 3 -- 4 to 5 years probably, we will reach at around 6 lakh tonnes per annum of production in India itself. And you are just saying that from [ 270,000 ] to 7% annually, we will grow at what, in next 4 years only 4 lakh tonnes of demand? So in that case, will there not be [indiscernible]?

Can you please explain the breakup of the 6 lakh tonnes?

Sir, Styrenix is looking at -- from 85,000 to 210,000.

Right.

Supreme is looking at 140,000.

Okay.

Bhansali yesterday announced from 75,000 to 145,000.

Okay.

So it looks to me like -- okay, I'm missing out. It should be closer to like 5 lakh tonnes.

Right. I think I cannot actually comment on the competitor's CapEx plan. However with Supreme, I think you need to relook at them as Phase 1 and Phase 2 is coming online and also, you have to consider the time line in which the entire capacities will be added on. If you look at total market being between 2.5 to 3 lakh tonnes and an average growth rate of 7% to 9% year-on-year, actually the math does work out, where there is not too much of excess capacity in the market. Because we are looking at a next 3- to 4-year horizon where additional about 1, 1.5 lakh tonnes additional demand will also be generated in the market.

Okay. And one last question, sir. Any discussion in the management to bring down the debt of promoters? I mean not the debt, sorry, pledge.

So that is a separate conversation. We are working on that. And the promoter has its own strategy to take care of it. However, any of the promoter pledges have no recourse to the company of Styrenix or its balance sheet. So that is not a concern for any of the shareholders.

The next question is from the line of Pratik Banthia from Girik Capital.

Am I audible?

Yes.

Yes, so I just had a couple of questions, first one being, what is the incremental demand size that you see from the IT hardware manufacturing opportunity that would come up in India? And the second question is what are the threat of imports in the both products that you manufacture namely ABS and PS? That's it.

I'm sorry, can you repeat your second question again?

Threat of imports in the products that we manufacture.

Okay.

Yes.

So as far as IT hardware is concerned, government did announce -- has announced its clear intention that it would like to have more and more manufacturing within India. We do believe that with the government's intention and, of course, the demand of the iron sector in India, there will be more manufacturing in India so long as the right ecosystem does develop over a period of time. And we do believe that will eventually also be a good growth driver for the use of our products. So -- but we shall wait and watch as that unfolds. Because currently, the products that we supply into IT hardware is a smaller component, and we'll have to see how that pans out over a period of time. We do believe that the existing segments that we cater into are also growing at a robust pace, which will allow us at least to have a good demand for our products in the future. As far as threat of imports is concerned, I -- we do believe that -- again, breaking this into 2 parts, ABS business as well as polystyrene business. On the ABS business side, we have a good kind of position with the market and with the customers, where our brand is the preferred brand. Most of the producers, our customers in India, would prefer a locally produced product so long as the local product is available and the capacities are there. So that has been obviously also our first intention, is to first debottleneck and try to maximize the capacity that we can produce. And also to -- now, of course, we have announced what we intend to do going forward as well in terms of capacity augmentation. So I think we are well positioned to cater to the demand, which is already present in India as far as all of our products in ABS is concerned. Even in polystyrene, we do believe there is going to be a kind of a significant demand which is going to come from some specific sectors such as air conditioning market, refrigerator market, also in toys and other areas. We do believe that there will be ample demand growth where local production will be preferred, and we will be in a good position again to cater to that demand. In terms of threat of imports, that will always remain, because we live in a fairly globally transparent world where how demand-supply scenarios pan out in other parts of the world would affect us. But I think we are placed in a strong position to undertake any challenges that come our way.

The next question is from the line of [ Nihar Shah ], an investor.

Yes, Nihar.

Yes. So in the last, we have seen good growth rate. So is this growth sustainable...

Sir, sorry to interrupt, but you are not very clear. I request you to please speak closer to the mic.

Yes, I was saying that in the last few quarters, we have seen a growth rate. So going down the line, do we see the sustainability in the growth? Or do we expect to cross that growth rate?

So [ Nihar ], thank you for your question. Unlike we have mentioned earlier, so the demand in India where we primarily cater to does exist. Currently, the total production in India is not catering to the entire demand, which is existing in the country. So long as we are able to augment our capacities and produce quality products, which is meeting the demands of these customers, we do not see any problem in us being able to capture more of the market. In addition, the overall market will also increase because that is increasing in relation to our GDP, it's increasing in relation to our consumptions and also increasing in relation to all the specific sectors that we are catering to, whether it is automotive, whether it is household, consumer durables, electronics, medical devices, all these other sectors are also witnessing robust growth. So our own sense and judgment is that for the foreseeable future, there will be good growth in India, for the Indian consumption potentially even as an export hub. And that in turn will mean a good growth for the overall industry and also for us.

Okay. And one more question is that are there any...

I'm sorry, Nihar, you were not audible. Can you please repeat that?

Yes. I was...

Nihar, the line for you is not audible at the moment. You are not very clear, I request you to please move to an area with better network.

Yes, Nihar.

Yes, I was, sir, just asking that is there any particular factor which will...

Sorry, once again Nihar, the line for you is not clear, you're not audible clearly. Nihar, you are not audible. I request you to please reconnect with this conference and ask your question later on.

Okay.

The next question is from the line of Yogesh Bathia from Sequent Investments.

Sir, I have 2 questions. One, I want to know what is our annual envisaged CapEx for the next 2, 3 years? And secondly, do you -- how sustainable are these margins, do you think? And why? Maybe if you can throw some light on that.

Thanks, Yogesh, for your question. We have, in our recent declaration as well as the announcement that we have made, we have estimated a certain cost associated with the CapEx that we are planning for the growth sales, next growth sales of the country. However -- for the company. Now in terms of -- this is an overall CapEx number we are carrying out engineering studies to fine-tune those numbers. Once those engineering studies are completed, we'll have a better idea. And we'll also have a better idea of the exact time lines on how the CapEx will be carried out and how -- in which year, exactly that will be done. So that still remains to be fully mapped out. However, we have given a number of around INR 650-odd crores, which will be required for the entire CapEx wherein we will move ABS capacities currently from 85,000 tonnes per annum to 210,000 tonnes and polystyrene from 66,000 to 150,000 tonnes. So we do believe that, that CapEx would be spent in the duration of the projects that is anticipated, which is the next 36 to 48 months. In terms of margins sustainability, we do believe that, again, going back to both the businesses, that we are a preferred supplier in the country. So long as the capacity is in place, we would be able to meet good sales numbers. Having higher sales or better asset utilization is going to be key. Secondly, as we are doing most of the projects are brownfield or are augmenting existing infrastructure, existing capacities with a lot of it being existing infrastructure, hence, our fixed costs would get diluted. To some extent our efficiencies would improve. And any kind of margin pressures would also get then offset by some of the benefits we would see on those fronts. I think net-net, we do see that the margins should be sustainable in the business.

We have the next question from the line of from [ Naitik ] from Sequent Investments.

Congratulations for a good set of numbers. So just to reiterate on the questions of the previous participant, so like I wanted to understand how susceptible are our margins to the polystyrene -- national polystyrene prices in the very short term? And are we like more secure compared to our peers because of our better product mix or something like that?

Thanks for your question, Naitik. I won't comment as to our competitors. But as far as our own polystyrene is concerned, we do believe that we have certain inherent advantages in the product mix that we have. We are also targeting more OEMs as we go along. We have been able to produce more polystyrene in this last year than probably the last decade. And we have proved to be a far more reliable supplier once we have taken over management in the last 1 year for the entire market, And we see a lot more acceptability from key, reliable, large OEM customers. So this is going to help us going forward as well, where, again, the preference is to buy local. As you know, government has come out with a lot of PLI schemes where there is a lot of manufacturing of consumer durables and other products, other sectors where our product is go in. And there is a clear push on part of all of these customers to buy more locally rather than import raw materials. So I think with -- in spite of global pressures, we'll be well placed, because there will be some preference given to us. Of course, we cannot escape what happens globally and there will be some pressure on account of that. But we definitely are placed better than companies globally.

Sir, just to add on to that. So you have seen additionally this business, it involved a very wide swing in margins in the short term. So do you think that from here on with the step that you have taken and the foresight that you have regarding the market, the delta of these margins going forward will not be as wide as they used to for the company?

So I can't completely comment on what was done earlier when we didn't have -- we were not in management control. But we do believe and what we understand is the last few years, you can say '21 and '22, those years, there was of course kind of an up cycle for a lot of products, including the products of this company, where the margins were unusually high, because of demand/supply gaps and supply chain issues internationally during COVID. However, that has lapsed and that period has passed. And we -- what we see today is more of a normalized kind of a situation. We do believe that the measures we are taking, that we should be able to effectively control our margins and keep on trying to improve it.

We have the next question from the line of [ Utsav Adani ] an individual investor.

I have a fairly basic question on the technology aspect. So what are the major differences between mass ABS and emulsion process? And what are the primary reasons why you prefer emulsion process?

So emulsion process consists of producing HRG rubber and SAN and then compounding the final product to make ABS. Mass ABS, we don't produce. But from what we understand, it's a continuous process where a specific grade of product is produced in C2, where the rubber is purchased from outside and then dissolved into the other monomers. And finally, in a continuous process, the ABS is produced. What we believe is that the emulsion process or emulsion ABS process allows for more flexibility, specifically for making the specialty grades, which the Indian market does demand, and hence, our preference is clearly towards that technology.

The next question is from the line of Krunal Shah from Enam Investments.

So sir, we've done around 88,000 tonnes of volumes in H1. So what is the expectation for the full year FY '24 volumes?

So Krunal, we believe that based on our capacity utilization, which is close to fully utilizing it, we are looking at this year on an annualized basis around 170,000 tonnes of product. So essentially, it would be similar levels of what we have seen in the first half. And going forward, I think in the investor presentation, we've even outlined what the next 3 to 4 years our targets would be in terms of capacity augmentation and subsequent sales.

Right. Got it. So coming back to that capacity expansion. So your presentation mentions that capacity is 85,000 tonnes for ABS and 66,000 tonnes for polystyrene currently.

Right.

But our production is much higher than that. So where is the gap in the understanding, sir?

Yes. So there is, of course -- what we have not mentioned in that is there is also emulsion SAN that we are selling. So if you calculate all those 3 things, then it will come close to the number that we have already projected. There's also some tolling or product that we get work done outside and there are some additional blends and products which we are also making in addition to ABS and polystyrene and SAN. So all of that putting together would be the number that we have published.

So this is something which we are making outside? And even the SAN would be made outside or that will be at our plant?

SAN is made at our plant.

Okay. And that we are selling, okay.

Correct.

Got it. And so again, on the CapEx, so a lot of the CapEx is coming in FY '28. So I think that's the green -- is it mostly greenfield or there's a brownfield element to it?