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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good day and welcome to The Sukhjit Starch & Chemicals Limited's Q2 and H1 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aman Setia. Thank you. And over to you, Mr. Setia.
Thank you. Good morning, ladies and gentlemen. On behalf of The Sukhjit Starch & Chemicals Limited, I would like to extend a warm welcome to all of you who have joined us for the Q2, H1 Earnings Call. We appreciate your time and interest in our company's performance. I hope that everyone had an opportunity to go through the financial results, which have been uploaded on the stock exchange. As we present the financial and operational performance for the first 6 months of FY '24, we also take this moment to wish you a very happy Diwali and a prosperous new year. While we maintain a positive outlook for our company's prospects, we also remain committed to delivering the value to our shareholders. By prioritizing the key areas, we are confident in our ability to drive sustainable growth and generate long-term shareholder value. Our legacy for the past 8 decades provides a solid foundation for the future success. I will now share the highlights of our financial performance for Q2 and H1 FY '24. For H1 '24, the company has reported a total revenue of INR 647 crores against INR 705 crores in H1 FY '23. EBITDA stood at 63.40 crores against 76.41 crores in the corresponding previous half year. Profit after tax stood at INR 27 crores against INR 39 crores in H1 FY '23. Now coming to the quarterly performance for Q2 FY '24. The company has successfully maintained its revenue at INR 323 crores against INR 324 crores in Q1 FY '24 despite 15 days annual maintenance shutdown at its largest manufacturing facility. Company has also maintained its EBITDA margins at 10.05% with an improvement of 51 bps in Q2 compared to Q1. EBITDA stood at 32.46 crores, as against 30.94 crores in Q1. Net profit margin has also improved by 21 bps from Q1. The profit after tax stood at INR 13.66 crores in Q2 FY '24, as against INR 13.04 crores in the previous quarter. Dear friends, from the management, we have with us Mr. Bhavdeep Sardana, Senior Vice President and CEO; and Mr. Dhiraj Sardana, Senior Vice President and CEO of the company. Now I hand over to Mr. Dhiraj Sardana to give a brief about the company and its operations. Mr. Dhiraj Sardana, please.
Hello, everyone. Sukhjit Starch & Chemicals, incorporated in 1943, is an agro processing company that specializes in the production of starch and its derivatives. With a rich history as one of India's oldest and largest starch producers, Sukhjit Starch & Chemicals Limited has forged enduring partnerships with major brands and end users. Our diverse product portfolio includes starch, dextrins, liquid glucose, HMS, maltodextrin, monohydrate dextrose, anhydrous dextrose, sorbitol 70% solutions and various byproducts, catering to a wide spectrum of industries. The products are used in diverse industrial and commercial applications such as food and beverages, paper and board, personal care and pharmaceuticals and textiles, FMCG, animal and pet food, et cetera. I now hand over to Mr. Bhavdeep Sardana for more insight on the company's performance.
Good morning, investors and stakeholders. Briefly: In the quarter ending September 2023, our company navigated a challenging period marked by pricing pressures on finished goods and subdued demand for certain high-value seasonal products. While raw material availability and pricing remained stable, the impact of weak demand persisted, particularly for some high-value seasonal items, affecting our Q2 revenue from operations. This was also mirrored in FMCG majors citing weak rural demand. Regional constraints emerged due to erratic monsoons and floods, impacting the demand for specific products. Responding to these challenges, our company proactively secured an ample supply of basic raw material at an optimal cost, considering the unpredictable climatic conditions affecting the sowing of kharif crops. This strategic approach positions us for improved operating outcomes in the upcoming quarters. Notably, our revenues from operations remained robust during Q2 FY '24 even amidst a 15-day maintenance shutdown at our larger facility in Punjab. This was also highlighted by Mr. Aman Setia in his remarks on the financial performance. Looking ahead, we are actively progressing with plans to expand our installed capacity by 25%, aiming for completion in the coming quarters. The exploration of expansion avenues, including greenfield projects and brownfield facility acquisitions, is underway, contingent upon market dynamics and internal assessments. Our commitment to enhancing the product portfolio and advancing operating margins remains steadfast. We adhere to a business model focused on serving key customers and markets near our plant locations. This philosophy aimed at sustaining growth across existing locations while exploring new avenues for expansions continuously drives us to enhance overall business and create value for our stakeholders. Our strategic placement of facilities in our local domain allows us effective client service. Expanding our presence across different geographies remains a key objective strengthening our market share and gaining a competitive advantage. To address evolving customer demands, we optimize our product mix, emphasizing high-value offerings. This approach enables us to stay competitive amidst changing market dynamics. Aligned with this strategy, we have allocated capital expenditure to enhance the capacity of existing plants, increasing daily installed production capacity from 1,600 metric tons per day of corn grind to nearly 2,000 tonnes over the next few months. Importantly, these investments are entirely funded through internal approvals , underscoring our financial strength and company sustainability. In line with our commitment to efficiency and volume enhancement, we are prioritizing higher capacity utilization, striving for optimal performance and maximizing operational efficiency and productivity. Despite margin pressures from higher raw material costs and energy costs due to geopolitical conflicts, we partially offset these impacts by passing on costs to the market. Our forward-looking strategy involves prudent market entry planning to diversify into new product segments and adding new and diverse customers as we ascertain demand visibility. With a resilient foundation, we are poised to harness emerging opportunities and drive sustainable growth in the years to come. So that is the commentary from the management side. We now request the moderator to open the floor for questions and answers. Thank you very much.
[Operator Instructions] Our first question is from the line of [ Aditya from Securities Investment Management ].
Sir, in a release, as well introductory speech, we mentioned that we are seeing pricing pressure on finished goods. So if you could just elaborate what is happening in the industry which is leading to pressure on realizations. And is this pricing pressure for all products, like starch dextrose? Or is it for select products only?
So thank you, [ Aditya ], for this question or asking for more details. There was a moment in the last quarter where there was pricing pressure on some of the products, not all of the products. As we mentioned that some products have a seasonal demand -- so there was a higher pressure on those. And due to relatively soft raw material prices, the finished good products pricing also corrected in-line. And another factor which happened was, the co-products which we -- the company manufactures [ broad ] which the industry manufactures, it has competing products, competing usage from others such as oil from other sources or protein input from other sources. So there was a certain softening in that, but that period is over now and we are looking at consolidation in pricing going forward.
Got it. So just to understand better: There was a drop in raw material prices, which we passed on to customers, but the overall demand for our products is still pretty strong. Will that be a correct assessment?
Yes, yes. Demand is strong because we are -- our raw material is an agro commodity. Naturally the finished good pricing also fluctuates accordingly.
Got it. And sir, we have seen a surge in pricing for all our end products, after COVID, due to a variety of factors, so are the prices now back to pre-COVID levels? Or we are still above those levels.
See. Everything gets correlated to the raw material. And I'll start with the second largest cost, which is energy. Energy is higher than pre-COVID levels as on date. Raw material is now getting towards stability towards the higher end because of multiple stakeholders of the main crop in India, multiple users manifesting [ itself ], so we are now going to see prices of finished goods at a -- pretty much at a higher end from here on.
Okay. So that was the next question. So corn prices pre COVID used to trend around INR 12 to INR 14 a kilo, which I think now is around INR 20 a kilo. So I just wanted to understand. What has led to this rise in maize prices? So...
So as you said -- you are not looking at the larger picture. Maize pricing was -- immediately in the quarter preceding COVID, it was INR 22, INR 23. It fell during COVID to INR 12 to INR 14 and it has been steadfastly rising since then. And price landed -- in North India, it's close to INR 22 to INR 24, wherein -- and in Southern India or Central India, there's -- kharif crop is there. You are very right. It is hovering between INR 20 to INR 21. That's at the farm yard pricing. So pricing is higher -- or is back to COVID levels, pre-COVID levels. That's the scenario.
Got it. And sir, considering the erratic rainfall which we've witnessed, so do you think the maize price is going to [ transform ] or maize price is increasing further? Or the maize prices should be stable around these levels only.
Your voice is not very -- it's sounding very muffled. Can you speak a little bit more clearly? Can you bring your handsets just a little bit more close? Or can you repeat your question?
Yes. So considering the erratic rainfall which we have witnessed this year. So are we witnessing that the corn prices may increase further? Or do you think these levels are sustainable for now?
See, the erratic monsoon has resulted in a delayed harvest of the crop. And that will sustain higher pricing till the -- all the [ multi come in arrivals ], all the market yards which grow maize during kharif season. So the pricing will remain on the higher end. And I believe that there is enough raw material for the industry, all stakeholders, all users of the maize in India to get adequate maize, but I think the pricing is not going to soften. Pricing will remain firm.
Got it. And sir, just one last question. So U.S.A. and Brazil and Argentina have seen, have been seeing good harvest of maize, with maize prices trending downwards for them, so do you think this could have any impact on our end-product pricing? Or we are relatively insulated.
So India is a non-GM producer of maize. As such, U.S. corn and Brazilian corn cannot enter India. As a sentiment, as a global sentiment, there is a certain mindset where people assume that there will be a correction in India as well. However, because of the sustained demand from India, all the stakeholders in India which are consuming maize, they will ensure that the -- every sector will ensure that [ they have corn ] raw material. And the pricing will remain stable or range bound.
[Operator Instructions] Next question is from the line of Harsh Shah from Dimensional Securities.
My first question is on demand, as we mentioned that Q2 demand was pretty soft, reflecting the sentiment seen by the FMCG companies. So I just wanted to get your sense on how demand is trending now if we look at the festive season. So how is the demand scenario since Q2? If you can give some explanation on that.
So vis-à-vis Q2, we are seeing good demand rising. And I think demand in the rural sector has also -- or should be picking up. And typically we witness this during the festival season, that this demand does play out during the festive season and the wedding season. And all kinds of product categories start coming into action, and naturally, as a company, we also stand to gain from it.
Okay. And it's fair to say, over last 1 year, when -- the demand has been pretty subdued, so would we have gained any market share with our clients or -- by adding new clients or any new products within the existing client bucket?
Of course. That's always our endeavor, to keep adding new clients. And we add clients at -- across all levels and categories. We -- there is a continuous effort to add clients of a certain scale and at all scales, so we'll keep doing that. As far as new products are concerned, what we do is -- as a company, we are very quick and nimble to tailor-make specification and -- within a particular product range. And that constitutes as a new product for a new customer. So if someone has a very tight specification of a particular product and they are unable to source it, we look at it as a value proposition and try to get a higher margin from it. And we are able to do it because of how we have set up our product lines in all our facilities.
Okay. And on the margin front: So FY '22 was a best year for us. We saw margin of around 13.5%, 14%. Since then, we have reached the low of 8.9%. So just wanted to get a sense on what could be the sustainable margin from here on. And what will be the key drivers towards achieving those numbers?
See, coming back on off a strong COVID recovery, the industry did very well. The margins, EBITDA margins, we are doing between -- 9% to 12% is the range I would assume the company and the industry, well, most in the industry, to achieve. And we would also be hoping to achieve those numbers. If you see our [ back-to-back ] quarter numbers, we are maintaining and preserving our margins. If you see, in the last 2 years, we've had triple-digit operating profit of more than 100 crores. And this year as well, we are on track and we hope to at least come up to that level. And if you go back to 4 years ago, see where we were. So demand is there. Our company, with a higher capacity which came online in the last 2 to 3 financial years, has been able to service that demand within India. And we've grown our market share. We've grown with the overall industry; and looking, going forward, we hope to continue this run.
Okay. And just last question to get a macro picture on the company. So what is the kind of growth rate that we can anticipate for, so said, if we take a 5 years view? And currently we are sitting on ROCE of around 11%, 11.5%. And so I just wanted to get a sense on what kind of sustainable ROCE can the company make. Because I believe that 9%, 10%, while this could be sustainable but -- it would not translate into superior ROCE for us. Like, FY '22, we saw maybe 18% to 20% kind of ROCE, so going ahead, I just wanted to get a sense on what could be the 5-year growth outlook. And what kind of ROCE can we expect from the company?
As an analogy -- I have used a factual analogy which I have used in the past. In FY '04, FY '05, the company was barely INR 100 crore in revenue. And last year, we did INR 1,400-odd crores in revenue. That's a 14x growth in 18 years, so you can imagine what the next 5 years is going to look like. We are a young team both at the promoter and the management level, and we are very excited about the opportunity in India. And we are working very hard to grow both our capacities and therefore our market share and have a healthy bottom line coupled with a very aggressive top line.
Okay. And what is the, [ obviously, timing ]? Is it [indiscernible]?
Your voice is coming very muffled.
[ Sorry to interrupt ], sir. May we request you to use your handset, sir? You are not audible.
What is the ROCE target that the company is working with?
See. We are -- if I can say, we are aiming for 20% to 25%.
Our next question is from the line of [ Darshit from RoboCapital ].
Am I audible?
Yes.
Yes, you are.
Yes. So firstly, like, a couple of my questions have been answered, but you said that we will be in the range of 9% to 12% of EBITDA margins. So currently, say, we are at 9%. When do you think will you clock in this 11% or 12% kind of OPM, in Q3, Q4 or in the next year? What will be the time line [ approx ]?
So we are at 10%-plus margins as on date. And as and when the demand fully plays out in all sectors, urban and rural demand, we hope that our margins will also increase. There is a high possibility that Q3 and Q4 will have better margins. Like I said, we are an agro processing company which has to deal with vagaries of nature and, off late, geopolitical conflicts, so if things don't change much, we are on track to achieve these better margins. So keeping our fingers crossed.
Okay, okay, great. And you had mentioned that you are planning on doing capacity expansion, so any kind of update on that, whether we have finalized where and what kind of CapEx is -- you're going to require?
Yes. So the 25% increase in overall installed capacity comes online in the next few months. It starts getting released in the first quarter of the next financial. It will start getting released then. And it -- I think, by the end of the next financial, all of our capacity enhancement would be in play. As far as a new greenfield or brownfield expansion is concerned, we -- our teams are evaluating multiple options. And we will discuss internally and chart what is good for the company and announce at an appropriate time in the next couple of quarters.
Okay. And no plans for taking any debt, right?
No plan -- pardon?
No plans of taking any debt, correct?
We are not planning on taking any debt for the existing expansions underway. For any greenfield or a large brownfield expansion, we will decide at that time of deciding what path we are going to take.
Okay, okay, all right. And lastly, just finally, what would be the maize price currently that we are...
Maize price in South India is about INR 22 to INR 23. Maize price in Central India is about INR 20 to INR 21. Maize price in North India is about INR 24.
Next question is from the line of [ Tanishka ] from [indiscernible].
So I think most of my questions are based on the longer-term CapEx, so if you can answer any, that would be helpful. Currently we're expanding from 1,600 TPD to 2,000 TPD, so when you said that you all are doubling the capacity over the next 5 to 6 years or so, would that mean 2,000 to 4,000? Or would that mean 1,600 to 3,200?
So these, our exact plans, whether it is 3,000 or 4,000, are being discussed internally; safe to assume that we would be looking at a bare minimum 3,000. If we can go higher if it makes sense and if we see an opportunity which is immediately cashable or executable, we will not hesitate, but like I said, those are very forward looking. I don't want to commit to it. We are evaluating, and our decision-making process is going to take maybe 3 to 4 months. And in the subsequent, immediate subsequent, quarters, we will announce accordingly.
Okay. Also again this may be a bit premature because it's not finalized, but how do you usually do your expansions? Is it done in phases? Or is it usually done where the whole thing commences at -- [ 3, 5 ] years down the line of -- we will commence?
That's pretty much an operational decision. Largely, as a company, we like to commission the entire capacity at one go. Utilization may take longer, but if I'm working with a manufacturer or from machinery, he is not going to keep coming back unless I go in for various small modules and then have an aggregation [ with him ]. Somehow, going forward, it doesn't seem very cost effective. It's better to have a large throughput facility and commission it in one go. And the utilization factor can increase over the next few years of operating. So this is the methodology which we will follow and we -- which we have been following in the recent past.
Okay, great. And is there any industry standard figures you can give for CapEx of, let's say, 1,000 TPD?
See, there are many numbers going around. It all depends on the location, type of plant, type of products, type of utilities, so it's a very -- someone could set it up for 350 crores. Somebody -- with basic product, somebody will spend over 650 crores, depending on -- so there is no fixed number, so there are many variables to it.
Sure, sir. I understand. And when are you all going to be focusing more on exports? And do exports give better margins?
Not all the time, but yes, they give similar margins to what we are telling provided the facility one is exporting from is ideally placed to look at an export demand. As of now we don't have any exportable surplus to cater to it, so we are not very aggressive in looking at export opportunities. Some do come, and we do offer our products in the export market. Going forward, our decision on expansion, even the export markets, would be a variable in our decision-making process.
Sure, sure. And just one last question. So it's regarding the debt-to-equity ratio. Is there any peak debt-equity ratio that you're okay going to? Is there any gap on the debt-to-equity ratio over the next 5, 6 years?
See, we've shown with our performance that we've gone up as high as 0.7 debt-to-equity ratio. Or some -- now it is at 0.2 to 0.3. So that's the flexibility that we have shown that our company can take on that and service it. It's at a very healthy [ 0.2 or 0.21, 0.22 ]. So as a company, we are mindful of not being aggressive debt takers, and using our own funds. And we plan our expansions accordingly. We will be prudent going forward as well. And that's the yardstick which, our management and all the promoters, have -- the legacies, they have instilled in the current state of minds.
[Operator Instructions] Next question is from the line of [ Harshit from BottomsUp ].
Am I audible?
Yes, you are.
Okay. Sir, the first question is that -- as you mentioned, that -- current quarter demand slightly abnormally low because of the festives getting delayed, but can you just quantify some kind of number for capacity utilization, say, broadly if we are at 1,600 TPD capacity today? Then for September, what was the kind of number we were operating? I wanted to get a sense of the volume growth over Y-o-Y or a Q-on-Q basis.
See, we've been consistently working at a good capacity utilization. And we timed our -- [ we did the market ] and we timed our annual maintenance shutdown accordingly so that we did not go below a volume number. And you've seen our Q1, Q2 numbers are pretty much similar with margins in that. So I hope that answers your question and that -- and it shows that -- how our company managed that scenario.
Okay, okay. So I mean -- so just, I mean, when we look at our volume -- so when we look at this 320 crore revenues, right, versus last year September, 347 crore. At the same point of time, we know that some of the finished good pricing is better today than a year back, so logically we should [ read it ] as a volume decline.
No, not really. There was a -- you have not understood what I was trying to say earlier. Or the numbers don't -- I'll just clarify it for you that maize prices corrected during the rabi crop. That reflected in a lower selling price, while volume growth or volume has been similar...
Okay, okay, okay. Understood, understood.
Maize corrected by 20%. And the company has -- the top line has only corrected by 10%, so our company has [ actually ] worked harder.
Got it, got it, got it.
[ This company has worked harder ]. And it's a huge credit to our manufacturing team, for what they have achieved.
Understood, sir. No, got this, got it. So basically maize prices have actually fallen, so the final good prices is [ lower by -- right ]? So that compensates for the volume [ growth ]. Understood, got it.
Our next question is from the line of Senthil Manikandan from ithoughtPMS.
First, in terms of mentioned that in the short term we'll be adding around 400 TPD; and then over the mid to long term, maybe eyeing for a 3,000 TPD, so can you just explain, what's the industry growth over the medium term? And is -- the [indiscernible] incremental capacity, we will be utilizing it for -- by gaining market share. Or is -- the industry growth [ still will ] be sufficient to utilize the incremental capacity.
That's a very intelligent question and it gives us an opportunity to talk about our industry. Our industry has -- typically grows at a rate -- or at the rate of GDP. So that's the entire industry growing at the rate of GDP. Not everyone in the industry is growing. A -- there are a handful of manufacturers who are continuously growing, and typically they are the top 5 manufacturers within the country. And not everyone is timing their expansion every year, so there is adequate demand growth within the industry for any capacity utilization to get absorbed. Now as our company, how we scale up: Let's say -- if I set up a "600 tonnes per day" plant, I may start the plant at 300. And then over the next 3 calendar years or 3 fiscal years, I go up to 90%, 95% utilization.
Okay. And in terms of products, if you can just explain. It will be going for a derivatives, higher-value-added kind of products or like import-substituted kind of products. Or it will be existing line of products.
See, we are evaluating all the 3 options which you have mentioned. Naturally, when we set up a new plant, it will have a mixture of starch and derivatives. What type of derivatives, that, we are evaluating. Now there is another [ scope world ] which you mentioned, import substitute. That, there are certain fermentation products which we may look at going forward, but that may not happen immediately. That may happen in Phase 2 of that [ location ]. Then again, we are evaluating those and I'm not committing to any.
Next question is from the line of Deep Gandhi from Astute Investment.
So yes. Am I audible?
Yes, you are.
Sir, my first question is, sir, you did mention that we -- you are expecting maize prices to firm up given the weather. And so in the presentation, just linking [ with the point ] that you mentioned: You have stored the inventory. So if you can talk about how many months of inventory you have stored. And because you are expecting maize prices to firm up, are you expecting any inventory gains for the next 2 quarters?
Normally we store inventories between 3 and -- at a maximum of 3 to 4 months. So naturally, if maize prices go up, there is gain, inventory-related gains, to be had. And we expect to have some releasing of those gains over the current quarter, but to say that it will also continue in Q4 will be very a forward-looking and very ambitious statement.
Sure, sir. And sir, a second question I have is we've mentioned that you are also looking at some new products, in the presentation. If you can talk about what kind of products are you looking at and the opportunity size of the new products.
See, as a company, we are evaluating, working with -- so see, post COVID, there has been a big change in consumer preferences. Skin care, skin cleansing, those lines are -- everyone is taking seriously. I think those habits are there now in everyone's daily life. There are certain products which we manufacture which can be tailored with, which can supply -- where we can supply to the larger skin cleansing majors of the country. And we are evaluating those as a segment entry. As far as totally new product lines, there are fermentables both for animal feed nutrition and in the human consumption products which go into those -- the vegan movement for human consumption. So we are evaluating, again, the opportunity size in that, whether it is only an export opportunity or will the India demand also play out. So again, we are working with the larger retailers in India and the larger producers in U.S. and Europe and how they perceive the market, so it's a wait and watch in that space.
[Operator Instructions] Next question is from the line of [ Aditya from Securities Investment Management ].
Sir, I had a couple of questions on our food park business. So if you could just help us understand: How much area has been leased? And how much is pending? And are you seeing any delays? Because the revenue is not increasing that much in the food park business.
Yes. This was -- food park business is a very small part of our overall pie. As far as the area to lease out, about 55% has been leased out. We are under talks to lease out another 20%. And since the overall land area is not very large -- 55 acres. And out of that, only leasable area was about [ 35, 33 acres ]. And 24 acres leased out, there's only 11 acres of land or [ plot in ] development which we'll need to lease out, so it's not that huge. As far as top line not increasing, it's we must understand that it is a very -- it is a [ job out ] model. Or it's an infrastructure play, so you get utility service charges, whether it is [ team ], whether it is electricity or warehousing. So that top line will not be there, but yes, it's a sustained utilization of the infrastructure which we've directed. And we have become EBITDA positive in the food park, and going forward, we will see further improvement there.
I believe we had invested around 140 crores to 150 crores in this business, so what kind of revenues can this generate when the -- all the area is leased out?
See, again I -- as I mentioned, it's an infrastructure play where the utilities are on a user pay model. Now 65% to 70% of the utilities are already fully occupied or fully generating revenue to the company. Going forward, I can say that, at full utilization of those utilities, we may see an increase of about 35% to 40% from here, from these levels.
Got it. And sir, we are supposed to receive, I think, 50 crores from the government subsidy, so have you received this yet?
We have received 40-odd crores already from the 50 crores.
Thank you. Ladies and gentlemen, that was the last question of our question-and-answer session. I would now like to hand the conference over to the management for closing comments.
Thank you. I would like to thank everyone for taking out time and joining us today for this con call. I hope we have been able to respond to your queries adequately. We look forward to your continued support as we navigate the road ahead together. If you have any further queries, you may kindly reach out to our investor relation partner, Orient Capital. Thank you so much, ladies and gentlemen, and have a good day.
On behalf of The Sukhjit Starch & Chemicals Limited, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.