Sudarshan Chemical Industries Limited (506655) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Sudarshan Chemical Industries Limited Q1 FY '22 Earnings Conference Call hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhijit Akella from IIFL Securities. Thank you, and over to you, Mr. Akella.

Yes. Thank you, Nirav. Ladies and gentlemen, good afternoon, and thank you for joining us on the first quarter earnings conference call of Sudarshan Chemical Industries. It's my pleasure to introduce the company's senior management team who are here with us to discuss the results. We have with us Mr. Rajesh Rathi, Managing Director; Mr. Nilkanth Natu, Chief Financial Officer; Mr. Vivek Thakur GM, Finance; Mr. Amey Athalye, DGM Finance; and Mr. Mandal Velankar, Company Secretary. I would -- we'll begin the call with opening remarks by the management team. And thereafter, we'll open up the call for a Q&A session. I'd now like to hand the call over to Mr. Natu to take proceedings forward. Thank you, and over to you, sir.

Thank you, Abhijit, for hosting our earnings call. Good evening, ladies and gentlemen. Welcome to Sudarshan's Q1 earnings conference call. Our investor presentation has been uploaded on the stock exchanges for your ready reference. I would like to take you through the financial highlights for this quarter, starting with the consolidated. On a consolidated basis, total income from operations stood at INR 474 crore as compared to INR 352 crore for the same period last year, reporting a growth of 35% year-on-year. EBITDA for the quarter stood at INR 62 crores as compared to INR 53 crores in Q1 FY '21. EBITDA margin stood at 13.1% as compared to 15% over the same period last year. Financial performance of the company's substrate, Rieco, was impacted due to higher cost of project execution, which caused reduction in the consolidated profit by INR 4.2 crores. Profit after tax stood at INR 26 crores as compared to INR 18 crores for the same period last year. PAT was up by 44% year-on-year. Now going into the details of our Pigments business. Income from operations stood at INR 453 crores, a growth of 33% year-on-year. EBITDA for the quarter stood at the INR 66 crores as compared to INR 54 crores last year Q1. EBITDA margin stood at 14.5% as compared to 15.7% over the same period last year. Company continues to see good traction on the export market in all categories of product line. Export for the quarter were at INR 250 crores as compared to INR 221 crores, growth of 13% year-on-year. Our domestic sales for the quarter were at to INR 203 crores as compared to INR 120 crores last year Q1 growth of 68%, owing to lower debt expense. However, during Q1, the domestic market demand softened as COVID led to cause serious disruption. The second wave of the pandemic did impact business due to the lockdowns imposed by the states at various intervals, starting from the month of April and continued restrictions through the quarter. Master-wise, all plastic segments had major impact due to lockdowns as also increasing other input material cost for plastic manufacturing. Sales into the coating and ink segment were also impacted when we compare Q-on-Q basis, quarter-on-quarter basis. With normalcy returning due to easing of restrictions, we expect the momentum to gradually pick up in the next few months in the Indian market. Specialty sales stood at INR 300 crores as compared to INR 240 crores for the previous year same quarter, up 32% year-on-year. Non-specialty sales for the quarter stood at INR 135 crores as compared to INR 101 crores for the same period last year, up by 33%. Gross margin for the quarter stood at 47.1% as compared to 43.9% for the same period last year. There have been sharp increases in the intermediate prices going into the various pigment chemistries. We have passed on majority of the cost increases to the customers. However, we continue to see price pressure on select intermediate, and this is likely to continue for the next 2 months. Apart from the raw material cost increases, we see energy and logistics costs also rising. Increase of over 50% in the coal prices is pushing up the manufacturing cost. The challenges in the logistics area are continuing, leading to the freight cost escalation of over 50% to 60%, and there is also a problem with the container availability. Unlike in the immediately preceding year, we have given annual increment effective April this year. This has also been -- this has also been the practice we followed before pandemic. Please note that the Q1 FY '21 did not have any increment impact effect as it was rolled out from October '20. Two revisions are now reflecting in the employee cost for this quarter. Salary revisions, along with ongoing of resources in various roles during the previous year is leading to higher employing benefit expenses. Q1 FY '21 had export benefits from MEIS. RoDTEP scheme was implemented from Jan '21. We keenly await details on rates under RoDTEP scheme and currently have not accrued any income. All these factors together have led to EBITDA margin of 14.5% for the quarter. Now coming to the CapEx projects under commissioning. Despite temporary disruption during wave 2, we are on track for completion of CapEx under execution during the current fiscal year. We expect to complete CapEx projects worth INR 120 crores by end of September. Our manufacturing plants continued to operate in line with various practices of the government during the last quarter, and we continue to deploy and practice necessary safety precautions regularly to ensure continuity and uninterrupted functioning of our plants with safety and welfare of our employees being of utmost importance. We look forward to continuing our growth journey and delivering value to all our stakeholders. With this now, we open the floor for questions-and-answer session. Thank you.

[Operator Instructions] The first question is from the line of Ashwini Agarwal from Ashmore Investments.

Could you just help us understand what happened in that subsidiary, which is causing -- which caused a loss of INR 4 crores? You briefly mentioned it in your opening comments, but can you just give some more color to it? And what should one expect going ahead?

Ashwini, Nilkanth here. So on the substrate part, as you are aware that this is -- this company is into the engineering business. So it is a capital generating business. And due to the Q1 partial lockdowns in the various states, they were not able to scale up the revenue. It is not on the order balance or backlog side issue. It is more of the execution because there were lockdowns. And due to this, the revenue has been lower than what we have expected, but we expect this substrate to make up with a lost revenue for the Q1, but from the execution in the coming quarters, and they will be able to be profitable from the coming quarter.

So if I adjust for this INR 4 crores, then on a consol basis, your EBITDA margin declined by about 100 basis points. And there, you mentioned that you have like 2 salary increases and you have the MEIS benefit going your way as well. And your gross margin actually expanded on both on a year-on-year and a quarter-on-quarter basis despite input cost pressures. So is this a fair thing to say that, look, if your subsidiary kind of comes back in the coming quarters, and let's say, MEIS gets restored as RoDTEP in some form or the other, then we should expect your EBITDA margins to expand as compared to what we saw for the full year last year? Would that be a fair expectation if these 2 things were to happen?

Yes. One second. Ashwini, it's a very fair point. And we agree with you in terms of our Pigments. EBITDA has been 14.5%, wherein there has been a MEIS impact and all that. What we also see, there has been a cost pressure and costs are increasing, whether it is a coal cost, whether it is a freight cost. So -- and this trend we expect will continue. So we expect that the margins will be under pressure, and we are continuing to monitor this and try to improve.

Right. Right. On the subsidiary, could you broadly provide the EBITDA number? I mean, it comes to minus INR 4 crores. If I just take the Pigments and the consolidated. I'm just wondering, is there anything else there? Or that should be the gap for the subsidiary?

Yes. This is the gap. It is a small substrate so around INR 4 crores is the gap.

Next question is from the line of Sanjesh Jain from ICICI Securities.

I got a couple of questions. First, on the cost inflation, growth on the -- okay. Two full question, both on the cost side. The one on the raw material inflation, we said that we have passed some raw material inflation, but we continue to see some of the raw material prices going up. Is it fair to assume that in the medium-term until the raw materials settle, there could be a volatility in the gross profit margins in the next few quarters? And this 43.6% can come down for a quarter or so before it goes up, is it a fair assumption? And second, on the coal and freight cost. Because the other expenses have gone up by -- have declined by only 1.5%, while our revenue decline is close to 17%, 18% on a quarter-on-quarter basis. So is the -- on the other expense side, is the fuel and the freight the only reason? Because generally, from Q4 to Q1, we see a decline that has been a historical trend for us. And this time, it has been flattish. Is there anything more in the cost we need to understand? Or it's just the fuel and freight which is causing this high other expenses, sir? These are the 2 questions on the cost.

Nilkanth here. So I will answer the first question, so yes. What we have also said that there is the raw material escalations we are seeing, and there are many intermediates where prices are going up. So rightly pointed out by you, we expect that pressure or variability will be there for the short term. In terms of the other expenses, yes, there has been a reduction, not in line with what you mentioned in terms of the sales revenue drop. But the major cost increase, which are coming, is from the coal as well as freight. There are no onetime items in this particular cost. So we continue to monitor this closely.

Got it. Got it. Second, on the product launches. In the Q4 call, we mentioned that September, we were looking to launch a couple of products. So just wanted to understand the new product launches pipeline and because of this COVID thing, is there any changes in the product launches we were anticipating? And can you just elaborate on what are the product launches planned for this year and the year after this?

This is Rajesh here. I think you're right, I mean most of our product launches are planned for September. However, we still expect some launches to happen in September. But April, May, as you're aware, a lot of CapEx got delayed because of lack of availability of oxygen and also manpower. So some CapEx will get lower on the Q3. But by Q3 -- and we expect most of our product CapEx is to be completed and product launches to be completed.

So can you give some color on the number of products we are looking at and whether it's in specialty, non-specialty, whether it will be export-oriented...

So I think they're all specialties, all specialties, and we expect -- if you look at color group points, maybe 3 product lines mainly. But in that, obviously, each product line will have 10, 15 products.

Okay. So 3 product line and each product line with 10 to 15 kind of a product and it is what we are trying to launch. This all should happen in this fiscal year, right?

Yes. Absolutely, sir.

And it's a commercial launch, not that we are sending this for client approval and all this will be...

For commercial launch, this year. All that is in process. So it will be a commercial launch this financial year.

Okay. Okay. That's helpful. One last bit of question, more of a bookkeeping question on the Mahad facility, which we shut due to the reasons we know, that heavy rainfall. So can you just brief what was the impact? And how should we look at Q2 on backdrop of this shutdown of facilities?.

So yes, on the Mahad flood, our facility was not operational for 2 weeks. After 22nd of July, we have resumed the operation in this stage. So there was a 2-week production loss. And the operation has started from yesterday.

So do we also expect sales loss? Or we have -- we had an enough inventory and we could manage it through Roha? Or this 2 week of production loss will also mean we would have lost certain revenue?

Yes, we started yesterday. Obviously, there was a production loss as those lines were running fully. So there was a production loss. There was a sales loss.

The next question is from the line of Ankur Periwal from Axis Capital.

So first question on the revenue growth here. Now given the low base, we are looking at a strong growth year-on-year. But if I look at H2 average, let's say, Q3, Q4 average run rate growth on the domestic and exports, there is a pretty significant decline on the domestic side as well as subdued growth on the export side. The reason I'm taking Q3, Q4 is when sort of COVID-led impact was easing out there, both in the international and domestic market. So your comments there, mid-20s, more like 24%, 25% decline on domestic, was it largely led by the plastic sanding segment, which you highlighted in your initial comments? And more importantly, on the export side, if we are seeing any softening of demand there.

So basically, I think there are 2, 3 factors: domestic, as Natu J. has elaborated in a statement. Domestic because April, May, and all of June also we did because the COVID lockdown we did in -- we saw a lot of demand, which was -- demand was issue. In addition to this in the plastic industry, there was polymer availability issue, pricing issues, et cetera, which kind of caused the domestic market to be -- or India market to be a concern. In terms of exports, in general, I think the trend is good. If you look at Q3 last year, there was some pent-up demand as supply for a issue in the first half, right? So I think looking -- going forward, I think, barring a little bit of logistics issues, which we are facing some on the export front, we should be able to keep up the export. And we see the sales picking up in Q2 for domestic group.

Sure. And sir, on the revenue growth side, given most of the products may get sort of still lower to maybe Q3, Q4 launch. But FY '23 will see a significant benefit of all these product launches there. Will it be fair to assume that, unlike our last, let's say, 4-, 5-year average of 12%, 13% early teens revenue for each year, we should look at a reasonably higher number there, incremental contribution of these top products being there? Will that be a right assessment?

Yes. Sir, the CapEx should definitely give us a boost in our revenue growth. Other 2 reasons -- like we've been saying the realization of the full potential of the CapEx should be over 3 years. But of course, revenue growth will start as soon as our CapEx is -- some of the CapEx is go live.

Sure. That's helpful. And just, sir, one last clarification. On the freight cost side, as I understand, the logistics cost being higher year-on-year, but these costs will be effectively passed through to the customers? Or do we take it on our books?

So some of these indirect raw material cost is easier to pass on. First time we've experienced such a high cost on the indirect items like coal and freight, right? So -- which we are making -- there is a lag but we are making amends to pass it on, but that's the area of concern, sir.

Sure. But if I got you right, there will be a lag in passing through this, but it will be passed on as well, maybe by -- like by a couple of months.

Yes. Lag by a quarter, I would say.

The next question is from the line of Rohit Nagraj from MK Global.

So the first question is in terms of the CapEx. So you mentioned that about INR 150 crores will be commissioned by September. What is the time line for the next 2 years in terms of the incremental CapEx, whether that's likely to get commissioned to understand how the revenue profile probably would look for the next 3 to 4 years?

Sir, Nilkanth here. I would like to clarify, what I said in my opening remarks is INR 120 crores by September end, not INR 150 crores.

My apologies, sorry.

Can you please repeat the question? There was some lag in between.

Yes. So this INR 120 crores will be commissioned by September. For the rest of the projects, how do they look like over the next FY '23 and FY '24 in terms of commissioning?

So the balance CapEx projects, we will be completing in Q3 not in '23 -- FY '23. So we will complete all this CapEx projects in the current year itself.

Okay. Sorry, I think I may have asked a wrong question. So just to understand, INR 120 crores will be commissioned by September. And are there any other capital work in progress, which will get commissioned in subsequent quarters and in FY '23?

Yes, sir. Unless we get some balance, CapEx, capital availability will get commissioned in Q3, right? So we said around INR 300-plus crores in our earlier presentation in Q4. So INR 120 crores will get commissioned by Q2, balance around INR 180 crores to INR 200 crores will get commissioned in Q3.

All right. That was helpful. Sir, the second question is in terms of the order. So we have seen that last year, because of the validation getting postponed due to COVID issues. We have got the new product launches have got delayed. So are we facing such delays then because of the second wave and the ongoing probably impact of the third way so that the product launches would further get delayed and will hamper revenue profile despite being good in terms of the CapEx being commissioned?

Sir, as -- this is Rajesh here. Natu J. mentioned that the CapEx are -- because of the Q1 issues we had, the CapEx did get slightly delayed but the [ converter ] team has done a great job in making up some of this. And we expect for any unforeseen reason, anything not to happen, we should complete everything by Q3. And the commercialization also should happen after that launch period, okay?

The next question is from the line of Archit Joshi from Dolat Capital.

Sir, my question is largely related to the mica-based pigments piece that you have in the business. I believe we have recently got some antidumping duty in the month of June for some of the products under that category. So I just wanted to ask you if you can throw some light on what is the strategy that you are having on that front? What kind of benefits you might accrue from this readily? And where are we in terms of any product launches or any capital expenditure on that part? So just a broad understanding on how that business unit is panning out, sir.

Archit, Nilkanth here. So currently, the proposal is pending with the Ministry of Finance, and we are awaiting the result, okay? So we will await for that and then -- a notification and then we'll see.

Sure, sir. But sir, even otherwise, without considering the antidumping duty impact, which you probably might have clarification on later. How is the business on that front? I mean I'm supposing that the margin profile of that particular piece, even if it is smaller in terms of the current capacity that we have. It's fairly higher than the blended margin that you are having in the other HPP than some of the other pigments. Any, sir, thoughts on that front? How are you trying to ramp that up? And how is the demand panning out in that particular smaller piece even if it is right now?

So majority of the market on the industrial side, we don't participate in a big way because of the dumping from China into the India market. And that's the reason I think the government is looking at protection for this. As soon as we are able to keep that, we will be able to participate in that market. The margin profiles are not very different on those businesses.

Right, sir. And sir, for the same product, how are you faring on the export side? Is the growth momentum -- if you can comment something on that as well.

That product range -- so on the industrial side, we don't participate in the global market because we sell more into the other markets, the automotive and cosmetics market.

The next question is from the line of Dhavan Shah from Girik Capital.

Yes. Sir, just one broad level question. So the global level consolidation, which you have spoken about between the top 2, 3 players. How do you see helping us? And also, has there any capacity which has completely gone out or there has been consolidation so it's not gone out of the global demand and supply?

No capacities have gone out. It's just consolidation. And we expect reactions -- the #1 and #3 player become one and maybe the #2 and #5 players can become one. We expect 2 areas. One is that people -- customers are looking for alternatives and also some of the China crisis. India does look like a good alternative, and that's where we are looking at, acting on the favorable sights towards us.

Sir, how much capacity, if you can quantify, which has got out of the market and in which category it is?

No capacity has gone out of the market.

Okay. It's not gone out of the market. Okay. But we see opportunity in which any specific product segment where we see a lot of opportunity because of this?

We've seen only the organic pigments.

On the organic side, okay. So that's where all the major are largely present, the top 3.

Yes, yes. That's right.

Okay. And our focus will be also more on the cosmetics side going forward when we say about more complex or specialty pigment?

No. No, not really, sir. It's coatings, coatings, plastics is our major focus.

The next question is from the line of Naushad Chaudhary from Systematix Group.

Two, 3 questions. Firstly, on -- in Pigment business, I just wanted to understand from the client point of view. How important it is for them to have a balanced supply of wallet share or the concentration is okay from the client point of view? Yes, that's my first question.

So I think from a brand -- from a client perspective, they do look at -- usually, there would be 2 suppliers at least familiar to supply acquisition.

Okay. And secondly, in terms of raw material supply and availability, if you look back 3, 4 years back versus now, do you see has there been any changes in terms of number of suppliers or availability? Has there been any change in terms of overall ecosystem?

There have been several issues from China and the perspective of raw materials, and that's where we are seeing a lot of increase in cost and raw material.