EPL Ltd

NSE:EPL

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the Q4 FY '22 Results of EPL Limited. Call hosted by Systematix Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pratik Tholiya from Systematix Institutional Equities. Thank you, and over to you, sir.

[Pratik Tholiya, analyst]

Yes. Thanks, Aman. Good evening, everyone. On behalf of Systematix Institutional Equities, I would like to welcome all the participants who logged into the EPL conference call to discuss the fourth quarter and full year results for FY '22. From the management, we have Mr. Anand Kripalu, MD and CEO; Mr. M.R. Ramasamy, COO; Mr. Amit Jain, CFO; Mr. Suresh Savaliya, SVP, Legal and Company Secretary; and Mr. Deepak Ganjoo, President AMESA region. Thank you management for giving us the opportunity to host this conference call. I would like to now hand it over to Mr. Anand Kripalu for sharing his opening remarks. Post that, we'll open the floor for Q&A. Thank you, and over to you, sir.

[Anand Kripalu, executive]

Thank you very much, and hello, everybody, and welcome to the Q4 and FY '22 earnings call. My opening remarks this time will be a little longer since we're also covering our full year performance. So the previous quarter, in particular and the full year in general has been exceptional in terms of challenges, something that this business has never experienced in its history. The year saw unprecedented volatility and inflation in input costs, be it polymers, aluminum, packaging or freight, continued COVID-related issues in the Western world led to absenteeism and overtime costs with COVID having a significant impact in China as we exited the year.

Finally, post our last call together, just when we felt that things could not get any worse, we have all seen the unfolding drama of the Russia-Ukraine conflict. Given this context, I am pleased with where the business has ended. In the quarter gone by, we delivered revenue growth of 8.6%, which is 9.4% adjusted for Russia in the base, which -- and this growth was broad-based across regions and categories. Oral Care grew by 8% and Personal Care grew by a faster 9.5%. EBITDA margin for the quarter stood at 15.4%, a little lower than the 15.7% of the previous quarter, impacted by the recent unforeseen events.

Given the nature of our industry, we would like to reiterate that we do not run this business from quarter-to-quarter, but more on a full year basis. In the full year, in line with our commitment, the business achieved a double-digit revenue growth of 11%. Performance on a like-for-like basis, which excludes Russia, [ CFPL ] and hand sanitizers, was similar at 11.2%. During FY '22, Oral Care grew by 10.2%, and Personal Care grew by 11.2%. The latter, which is Personal Care was significantly impacted by the decline of the category in Europe due to COVID. Within the regions, 3 of the 4 delivered double-digit growth. AMESA grew by a strong 23.4%, EAP by 10.3% and Americas by 12.9%. Europe declined by 2.6% and -- but however, if I excluded Russia and hand sanitizer, it grew by 4.7%. Importantly, Europe grew by 4.2% in Q4 with an adjusted growth of 7.3% without Russia and hand sanitizer. EBITDA margin for the year was 16.8%, a decline of 306 basis points versus FY '21.

Both Europe and Americas have seen challenges on margin during the year. I am pleased that both these regions delivered improved exit margins versus the full year average. Europe recorded a Q4 margin of 11.9% and Americas, 15.7%. The -- the biggest challenge to margin has been the ability to recover pricing in not just an inflationary but also a highly volatile environment. Our model of a quarterly lag based price recovery, we served us well for decades, has left us with clear gaps in this one-sided volatile environment. This is something we are urgently and aggressively working to address.

Overall, net profit declined by 16%. Net of one-offs, PAT was down 12.3% versus the previous year. Despite the challenges of the year, we believe that EPL has achieved an overall performance that is competitive.

Moving on to sustainability. ESG and other business updates for the year. Our purpose and ambition is to be the most sustainable packaging company in the world. Having spoken to customers across the board, we believe that this will be a significant source of sustainable competitive advantage.

Consequently, we are stepping up our efforts to innovate and lead the pack with an expanded set of 100% recyclable offerings. This ensured a ramp-up of Catena volumes across several of our large and small customers alike, such as Colgate, P&G, Unilever, GSK, Hella and Vico. We expect this to further ramp up exponentially in FY '23. Significantly, we won the World Star Global Packaging Award in 2022 for sustainable offerings in the health and personal care category.

In service of leading the pack sustainably, we have made global commitments by joining the new plastic economy and initiative by Ellen MacArthur. We are a founding member of the India Plastics Pact, we're a signatory to the UN DC of the United Nations Global Compact and our carbon disclosure project ratings have also been improving year-on-year. We recently published the second edition of our sustainability report. This is available on our website, and I would urge all of you to access our website and take a look at this sustainability report.

Finally, we have been honored with the best government Company award by the Institute of Company Secretaries of India. So looking ahead, as mentioned earlier, our ambition is to be the most sustainable packaging company in the world and deliver sustainable, profitable double-digit growth. We have a clear strategy in place driven by the 4 Cs of category, customer, country and costs and enabled by the 4 enablers of innovation, both sales and marketing, digital and one EPL culture.

The short term, specifically due to COVID in China remains challenging. However, we are cautiously confident of performance in the rest of the world. Our focus and effort of pulling out all stops to contain costs remains. This includes actions across every line of the P&L. For example, in-house manufacturing a caps of which India has already commenced, a reduction of scrap and waste and scrutiny of our organizational effectiveness and efficiency.

However, in this environment, we recognize that getting more and quicker pricing from customers is key. We are significantly enhancing our efforts on this and are confident of getting more. So with our robust business development pipeline, our cost-saving efforts and above all, our pricing actions, we remain committed to our objective to deliver sustainable, profitable double-digit growth. Thank you very much.

With that, we will now open this up for questions.

[Operator]

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Sameer Gupta from IIFL.

[Sameer Gupta, analyst]

I have two, so I'll go one by one. First is on this China performance, there's a sharp Q-o-Q decline. Would you attribute this entirely to the COVID lockdown impact? Or is there any other variables that are playing out? And any outlook that can be shared here in terms of the COVID lockdowns, how is the situation right now? Is it improving your take on how we should look at it going forward?

[Anand Kripalu, executive]

Give me the second question as well?

[Sameer Gupta, analyst]

Sure, sir. So in -- basically, this pertains to India on the growth outlook, now most of the FMCG companies that we track, they're all alluding to titration of volumes by consumers who are also facing the brunt of inflation. And for us, the volume growth number basically is what translates to gross profit and EBITDA growth. So how are we looking at growth in India apart from the -- driven by price pass-throughs, would that be under a sort of challenge in FY '23 or at least the first half?

[Anand Kripalu, executive]

Okay. So let me take one at a time. As far as China is concerned, yes, Q4 was challenging. Typically, Q4 is probably the smallest quarter in the year. because of CNY and Chinese New Year. And I think this time, it was probably impacted even a bit more than usual. Second is the fact that -- I mean, China, like anyone else has faced huge input cost increases, and that impacted their performance. And finally, yes, as I said in my opening comments, towards the end of the quarter, COVID started having a material impact to the quarter.

Now as far as outlook is concerned, honestly, and that's why I called this out, that it remains challenging and remains a bit uncertain because China has this kind of no tolerance policy on COVID. Now we know the number of cases are coming down in Beijing. However, Beijing largely still remains under lockdown, okay? Shanghai, Sorry, Shanghai remains largely under lockdown. The number of cases in Beijing are very few, but because they are spread all over the city, it's not easy for anyone from outside Beijing -- go into Beijing or somebody from Beijing to come out of Beijing, okay, because of the kind of restrictions that are there.

So the COVID crises is not huge in Beijing. But the -- but the zero-tolerance model, right, is putting a lot of restrictions over there. Now it's really hard to predict, right, what's going to happen. We have a sense that the worst mainly behind us, right, as far as March and April is concerned. But in this game, I would hasten to caveat that by saying we don't know for sure. So we're keeping our finger on the pulse. We're looking for every opportunity to get volume. But one of your customers' plants [ shutdown ] and they're not producing, there is pressures little you can do with that.

So I think China, you will know as much as we know because you will hear it from the news as well in terms of what is happening, okay? But China remains challenging. And that's why I said in my opening remarks that outside of China, we remain cautiously confident about performance in the rest of the world.

Now as far as India is concerned, yes, I mean, we know that a lot of [ FGD ] players are taking significant cases. And there could be some impact of that. All I will say is that we still remain positive in terms of our internal business plans as far as India is concerned. We are stepping up pricing and the aggressiveness of getting more pricing done. And that's going to help both our top line as well as margins and help us to cushion some of the gaps that I spoke about between past pricing and raw material inflation.

So I mean, there could be some dampening of growth. But as of today, I don't think we are pessimistic about growth and performance in India. We remain to say cautiously optimistic even as far as India is concerned, both from a growth standpoint and a pricing and therefore, revenue standpoint.

[Operator]

The next question is from the line of Ritwik from [indiscernible] Financial Consultants.

[Unknown Analyst]

Sir, I have a couple of questions. Firstly, what would be the volume growth for us in FY '22 and Q4 FY '22?

[Anand Kripalu, executive]

So we report revenue growth, right? Yes, and we don't report volume growth, right? And we have stayed consistent to that, and it's important that I keep reiterating the reason, right? We do believe that our strategy is a strategy of mix improvement -- and therefore, tubes -- revenue from tubes are different are higher as the mix improves. And you have all kinds of [ money ] like modules in travel, getting impacted during COVID and stuff like that. Therefore, we do not believe that volume is a good representation of our overall top line performance. And therefore, we stick to reporting revenue.

[Unknown Analyst]

Okay. Sure. Sir, my second question is, you have seen a couple of times that we need to increase the prices. So historically, if I look at our gross margins, they tend to be around 57% to 59% band. So would it be fair to assume that we need another 3 to 4 percentage points or 2 to 3 percentage points of increase on the pricing to for us to reach that [ 50%-70% ] -- 58% to 60% of gross margin to come back to around 19%, 20% of EBITDA margin? Would that be a reasonable assessment.

[Anand Kripalu, executive]

So I think the way you should think about it is this. So you can see what the specific erosion of gross margin has been right. That's very, very clear in the results. Because we are broadly operating around the 50% mark, about half of that, I would say, is due to under recovery of pricing, and the other half is just so simple mathematics of translation losses. Now the half that you see that is because of under recovery in pricing, recognize that this is a moving number. Because every day, every month, every quarter, the input is not stacking.

So it's a moving number and therefore is a complicated average of cumulative set of numbers, right? And as we go and push for pricing, it's possible that input cost may go further. And even if we get the pricing you met you not see as much as of the improvement, as you would expect, right, in the gross margin.

So suffice to say that we are pushing as hard as we can, right? We are trying our best to make sure that we don't lose volume and lose customers, right? But we are not easily taking no for an answer. And what we are also figuring out is that the model of having one price conversation and then forgetting about it, is a matter of history now, right?

Now, I mean, every month, you have to go back again to the customer if this is the volatility in input costs and say, what you gave us last month is great, but next month is a different plan altogether. So I don't think you can simply aggregate it, but our intent is to catch up at least some of the loss in price versus cost that we have seen.

[Unknown Analyst]

So probably, we can flow back the increase in raw material prices and some part of the rate and other expenses we will have to take a bit on our P&L. And some part, we can get a part to hopefully.

[Anand Kripalu, executive]

Well, so by the way, our intent is to try and recover all input cost increases and not just polymers and other input materials. So we would like to recover freight. And in certain regions, it could be energy or it could be labor costs because of general inflation like in Europe and U.S., general inflation is 80% plus now, right?

So it is not that we are only recovering input COGS and not looking at the rest. Now how successful we are recovering 100% of everything, I think that is the question really. But we are trying every lever of justifying price increases from customers every lever of input cost.

[Unknown Analyst]

Sir, just one last question from my end. We've been maintaining since we have taken over from the promoters that we will try and grow in double digit improving margin. So does that goal of on our medium-term basis 3- to 5-year basis our goal is grow a double digit as with this on the lending, the encountered in the business.

[Anand Kripalu, executive]

So I probably heard 50% of what you're saying because the line is very muffled. But you're saying compared to the promoters, -- what's the difference?

[Unknown Analyst]

No. No, no. since have taken over from the...

[Operator]

So it seems that we have lost the line for the current participant. We will move to our next question. That is from the line of Sanjay Jain from ICICI Securities.

[Sanjesh Jain, analyst]

Three from my side. First, on the China situation. We also manufacture files in China. Now that there is a restriction and all, is that also one of the reason why there is a higher cost that we need to sort it from any other place or we are sufficiently recovered from the [ freedom ] perspective -- that's one.

Number two, on the Brazil side, we did disclose that we are getting into Brazil last quarter. Any further plans formed up in terms of CapEx, in terms of belong capacity we need to put in India or China? What are the investment plans for Brazil? And when should this Brazil operations start and should add into the revenue? That's the second one.

The third one is on the cost side on the Europe and U.S. wage and energy costs have significantly gone up. What are the percentage of revenue with these costs last year? And what are the costs of these costs this year? And how much of it practically is recoverable going into FY '22? So these are the 3 questions.

[Anand Kripalu, executive]

All right. Thank you very much. Yes, we make time China, we make [ film ] in India. And we [ film ] manage the allocation centrally here on who should make how much, right? For instance, China could be a better supplier to certain countries and India could be a better supplier to other countries. And also, we constantly look at the input costs in China and in India to see wherever there is an optimal opportunity reduced and shipped at the lowest cost. So we know that dynamically in terms of allocation.

As far as Brazil is concerned, we don't believe we need new [ film ] capacity as we speak. And the Brazil plan are probably getting, I would say, finalized as we speak. We haven't yet put CapEx inside and so on, but we will be doing it soon, right? And I think we've got to give it a few quarters before we believe that we'll be up and ready with any supplies out of Brazil, right? But very clearly, the project is up and running and on track, okay?

As far as Europe and U.S. is concerned, yes, wage costs have gone up. Energy costs have gone up, as you very rightly said, our intent is to recover as much of that as possible through wear pricing. And I can tell you this that our teams are absolutely seized of this issue. We have put together ambitious price recovery plans from our customers, and we remain hopeful that we are going to get a significant part of it back by way of pricing, right? So the teams are absolutely all over this one. And on pricing, it's not just Europe, U.S., but everywhere, we are all over this in terms of trying to get more pricing down.

[Sanjesh Jain, analyst]

Fair enough. Just one follow-up on that. So is it safe to assume that Brazil will have a very minimal contribution in FY '23? Any material contribution will come only from FY '22? Is that a fair assumption?

Now why I'm asking this question because it's an existing product, new geography, new customers that means ramping up should not ideally take too much of time, but now that we are telling it will take a few quarters to firm up. Is it fair to assume that FY '22 is where we should see the impact of Brazil coming into the revenue?

[Anand Kripalu, executive]

I think it's fair to say that the impact of the revenue from Brazil will be relatively small in FY '22 and FY '23. And the big impact will happen in the subsequent year, right? And at the end of the day, we are going to drive this project as fast as we can considerably drive it. But for it to be material in terms of volumes coming out and therefore materially impacting EPL's numbers, I think it's fair to assume that, that FY '23 will be normal.

[Operator]

The next question is from the line of Douglas Turnbull from Invesco.

[Douglas Turnbull, analyst]

On the point of pricing, you say you're not easily taking no for an answer. Can you give a bit of color on what other options your customers have and in what are your competitors doing with price? How sticky is their business with you? And how does that translate into pricing power? And perhaps if you could give us any color as well on how does that vary globally?

[Anand Kripalu, executive]

So the thing that this industry is that there is reasonable stickiness, certainly in the short term between customers and suppliers like us. And the stickiness comes from longer-term relationships and contracts and a certain belief by customers that we are able to deliver quality service and ultimately, sustainability and sustainable solutions, right, in line with what they want.

Now I think we have to believe that while tactically any competitor can offer lower cost, and we can do that to a customer of one of our competitors, right? [indiscernible] anyone can do that. But in a sustainable way, in this commodity environment, nobody can deliver with prices that are significantly better than us. And we'd like to believe that we are amongst the lower-cost producers in the world because of where our manufacturing is, which is -- a large part is certainly in India and China. And therefore, we'd like to believe, and of course, in Poland as well, that we are one of the lower-cost producers in the world. So nobody can sustainably deliver something at significantly lower cost in this kind of commodity environment.

So a customer can threaten to move business and in some extreme cases, they could. But we'd be surprised if anything significant moves away -- and we have to believe also that our relationships are long and deep enough and customers are cognizant enough of the environment we are in and of the input costs that we are experiencing that what our asks are is no not unreasonable at all, but is absolutely justified.

And part of it is about the case we are able to make, right, riding on the relationship that we already have. So I think that's how we are thinking about it. Now we may lose a fringe bit of volume here or there, but I'd be surprised if you lose anything material.

[Operator]

The next question is from the line of [ Naveen Sahadi from Edelweiss ]

[Unknown Analyst]

My question, I'm looking at your slides and looking at especially the raw material challenges. I would just like to request a directional sense on the margin front in the sense that if raw material prices have been volatile until Q4, it is like only being that much more higher or volatile into the current quarter as well.

You said there are efforts are on to take price hikes, which is appreciated. But I would really like to understand if directionally, at least from a near term, would we still see margins continue to be under pressure? Or there could be some respite. -- some directional color will be really helpful here.

[Anand Kripalu, executive]

I mean -- so we don't want to give any margin guidance, okay, to be very, very clear. I mean there are moving pieces. So one is you are seeing -- we've got a slide on commodity and input costs. And you're seeing the fact that, listen, it's continuing to go. So even if I do pricing today, but tinge that approval, the input costs have already gone up further, right?

So we're trying to make sure we get pricing ahead of cost, but it's not always easy to that, let's at least guide the cost that we have suffered already, right? And then there are a few other moving pieces, like I said, which is particularly COVID in China, right? And there could be some impact on volume, and therefore, it could impact the margin because the certain amount of costs or fixed costs anywhere there, particularly in the short term.

So the margins will be an amalgamate of all that. But let me put it this way that I think if we are able to pursue and realize the price increases that we have embarked on, right? And I have confidence that we will get a good part of that. Then I think that we are not going to be on a significant land slide on margins. But we will try and contain where we are and start building back from here, okay? But I have to caveat this by saying that the environment just remains unbelievably unpredictable.

Last time we said that our margins have bottomed out and then the Ukraine war happened, right? And there was a concomitant set of impacts because of that, okay? So I have to carry this by saying that it's really hard for us to predict things beyond the point. I think what you need to be reassured of is that -- is management doing everything it can under the situation to become fitter as an organization and to get pricing from customers, right?

And really what is in our control is what is the only certain thing right now. Everything else is somewhat uncertain because that the environment we're in. So I can't give you any clear guidance that margin will go up or not go down further or stay the same. I think we will just have to wait and watch, right? But I do believe the actions we are taking are material enough to help see us through this phase.

[Unknown Analyst]

Right. And appreciate your answer. Just a follow-up there, and pardon my ignorance place, I recently started tracking this. But sir, since -- like how much inventory from a raw material perspective from a policy perspective, how much inventory do we carry? Is it like more like 1 month, 1 to 2 months a broad average would help here?

And then second part is since our customers are largely these large companies and typically, it's a B2B segment. So is there some sort of a possibility given the volatility, some cost pass-through basis or some mechanism can be worked out, wherein margins become that much more sustainable for us?

[Anand Kripalu, executive]

I'm going to request my colleague, Ram, to tell you inventory in what we are carrying, right? And then we'll talk about -- you could also talk about the fact that we have a pass-through model of pricing with a very large number of our customers.

[M. Ramasamy, executive]

We -- normally, we keep 2 months of inventory, but it varies in places that we have our own input going to operations like Americas and things like that, we keep slightly larger inventories to 3 months. But anywhere between 2 to 3 months of inventory that we carry, then we repaid as we start consuming it. So that's where it is sustainable.

What the pricing is a pass-through mechanism of the last quarter. We have quarter-on-quarter that we go for a price change based on the indexation. So normally, what we buy since I also have an inventory of 3 months, that gets recurred automatically.

[Operator]

The next question is from the line of [ Chirag from Keynote Capital ]

[Unknown Analyst]

Yes. Thank you to the opportunity. earlier we used to give a segmental that of a...

[Operator]

You audio is not very clear. It's muffled.

[Unknown Analyst]

Yes. Is it audible now?

[Operator]

Yes. Very clear.

[Unknown Analyst]

Earlier, we used to give a revenue by section of how Personal Care revenues come from areas like it, [indiscernible] and America. So are you seeing that since last few quarters, like 3 quarters we're not providing that. Is it possible to give annual days number that how much have we earned important...

[Anand Kripalu, executive]

I think -- sorry, your question is region-wide category performance, is it?

[Unknown Analyst]

Personal Care, region-wise performance. Are we reporting that?

[Unknown Executive]

So we were reporting earlier by [indiscernible] It's a portfolio of the various category in various regions, sometimes some regions are down in some category like Europe, we told earlier that [indiscernible] cosmetics is getting hit. But overall, if you see, we have managed and sustained to keep the composition of our Personal Care category at 46%. So that was sustained and have 3, 4 quarters where even Europe is getting down, we are at 46%.

[Unknown Analyst]

Sir. Actually, I just wanted to know [ entirely ] from the Americas point of view because earlier we were said that cross-selling of Personal Care products is to be high sales in Americas. So just wanted to know how we are growing over there.

[Anand Kripalu, executive]

Personal care, which is beauty and cosmetics and pharma combined, has grown double digits in the Americas and full year '22, okay? So it's grown double digit. And by and large, performance has been good everywhere excepting in Europe, which I called out in my opening comments because we've had a shrinkage of the category through the entire COVID wave in Europe, but we are optimistic that things are going to start bouncing back.

[Operator]

Yes. Next question is from the line of Akshay Kothari from Envision Capital.

[Akshay Kothari, analyst]

Sir, I just wanted to know that would it be fair to assume like the population growth in the geographies which we are operating, would be the -- what we can say ballpark number for the volume growth, which we are having...

[Anand Kripalu, executive]

I don't know you have to tell me answer [indiscernible]. See at the end of the day...

[Akshay Kothari, analyst]

I'm coming from that perspective, like these are very volatile times. So we cannot say anything about the margin front. So volume growth is one we can look for. So...

[Anand Kripalu, executive]

No, I'm not going to give any more [ lease ] on volume growth, right? But because -- I mean, the segment can grow because of travel tubes or it can grow because of 50 [indiscernible]. I mean it's really, really hard to add apples when oranges and bananas together right and give you a number. And to use population growth as a surrogate for volume growth I think is at your own risk honestly. I cannot see the simple correlation of these 2.

[Akshay Kothari, analyst]

Okay. Okay. And would there be any impact of the [ EPR ] loans on our business?

[Anand Kripalu, executive]

Of the [ EPR ] loans. Which is what the extended producer responsibility...

[Akshay Kothari, analyst]

Yes, yes, yes.

[Anand Kripalu, executive]

No, no. I think you see we are going to be a responsible manufacturer of plastic right? And like I've said, sustainability is a core part of the purpose of our business. So we will take our responsibilities along with a larger industry seriously and partner with the larger industry to do what we must do as a responsible producer, okay? Now will it impact our business No, not at that we can see immediately at all.

[Pratik Tholiya, analyst]

The next question is from the line of Sumant Kumar from Motilal Oswal.

[Sumant Kumar, analyst]

In recent analyst meet, we were talking about we have taken through price increases, and we are going to take one more price increase. So can you talk about how much price increase we have taken recently and when this price increases effective?

[Anand Kripalu, executive]

There's no simple explanation because different customers, different regions happen on different dates. So I don't think there is any simple thing about income this day one on a increase on this date another run. And because the commodities are have moved away they moved, it's been a continuous process okay, or price increase. Now each phase of price increase, right? It's also not the same as the quantum of the other 6, right?

So for this time, we may be trying for a higher quantum than we have tried in the previous 2 times. So honestly, this is a continuing process of input cost increases and a continuous process of trying to negotiate higher prices, okay? But if you were to look at a few simple metrics like our ASP per tube and so on, you'll get an idea of aggregate that has other complications of SKUs and mix and other those things there right? But you will get some sense there.

[Sumant Kumar, analyst]

Okay. So can we see, overall, assuming normal scenario from here if the commodity price is going to correct or say, stabilize here? This is the bottom of the margin from the company?

[Anand Kripalu, executive]

Nobody can say that commodities have corrected or will bottom outcome. Nobody from whatever I know, nobody has that business, right? And therefore, I cannot say anything more on margins than I've already said earlier, actually.

[Operator]

The next question is from the line of Jenish Karia from Antique Stock Broking.

[Jenish Karia, analyst]

Am I audible?

[Operator]

You are audible.

[Jenish Karia, analyst]

Sir, just two questions from my side. Firstly, how much will China be contributing to our top line -- in terms of revenue?

[Unknown Executive]

China is around 25%.

[Jenish Karia, analyst]

Okay. And so if I come to assume that first quarter, there is a nominal revenue or lower revenue from China. How much will be the AMESA growth rate that FY '23 could do?

[Anand Kripalu, executive]

Sorry, nobody said that there will be no volume in China it's not even a full business is shut...

[Jenish Karia, analyst]

Marginal volumes, sir. Marginal volumes for the first quarter of '23.

[Anand Kripalu, executive]

No. I don't think. I said that the marginal volumes in the first quarter there. will be an impact of COVID. There will be a significant impact of COVID, right? But the overall volume and revenue will still be material in China.

[Jenish Karia, analyst]

Got it. Got it. Understood, sir. And secondly, you see there is a jump in inventory days in FY '22. So is it attributable to the raw material price increases? Or is there an additional volume of inventory which has been maintained?

[Unknown Executive]

FY '22 is very volatile. Availability of material was an issue, freight was an issue. So wherever there was an opportunity to stop we stop, right? Because we placed service over cost, right, because that's how you grow. There is now over a period of time that we will be back once it's normalized, we will reduce our inventories. And one more that all our China operations, as we speak, are running or we are not even for a -- some of our customers are closed. We are not closed for...

[Operator]

Our next question is from the line of [ A.C. Alagappan from -- as an Individual Investor ]

[Unknown Analyst]

Just I have only one question. This company acquired in class part. What was the impact on that I don't find any improvement in margin after acquiring. Do it contribute to the turnover?

[Anand Kripalu, executive]

Sorry, you are expecting question is you don't see an impact of creative in our numbers...

[Unknown Analyst]

Sir because the company acquired Creative [indiscernible]. And see, there should be an impact on the price. -- iterate margin should improve or the turnover to be improved, what is the impact on that?

[Anand Kripalu, executive]

So I mean, Creative is a small part of the total revenue and P&L of EPS, okay, first of all. So you're not going to see a dramatic movement because it was never meant to be that way. Now has it strengthened our position with customers has given us access to a whole new capacity or [indiscernible] tubes, -- has it been margin accretive and so on, the answer to all that is yes. But you will never see the materiality in the total numbers because Creative itself is a relatively small part of the total EPL business.

[Unknown Analyst]

But any company in spent about 120 basis, isn't it?

[Anand Kripalu, executive]

Sorry, say that again . Your voice was not very clear.

[Unknown Analyst]

So company spent INR 175 crores because of the company [ debt ] increase, isn't it... what do you think are inviting me. Hello.

[Anand Kripalu, executive]

We just answer that. I'll hand over to our CFO, Amit.

[Amit Jain, executive]

What's your question? So yes, company has invested INR 168 crore run money for Creative acquisition. But that's out of the internal accruals.

[Unknown Analyst]

But that's the content to increase the company get also increased.

[Amit Jain, executive]

Yes. But that is not because of Creative. That is a normal because geographical, you do CapEx in each and every geography. There are 10 countries. So -- and even the debt, if you see from the ratio perspective on the overall balance sheet, the service ratios, interest service ratios, the debt equity and those are, I think, much, much strong if you see the balance sheet.

[Operator]

Next question is a follow-up question from the line of Doug is Turnbull from Invesco.

[Douglas Turnbull, analyst]

I appreciate you said you don't want to talk too much more about margins, but I wonder if I could understand some of your kind of longer-term thinking here. You said half of the margin compression we've seen is recovery -- a lack of recovery from cost increases and half is just a mathematical pass-through of the [indiscernible] to a lower percentage margin. If we pass our lines forward and think to a more normalized cost environment and are confident in your ability to regather -- recover the gap in pricing over costs.

How do you think about how important you are percentage margins? Can those actually recover back some of that mathematical impact? Or do you feel we've maybe rebased margins a bit lower, but just on a higher value of top line?

[Anand Kripalu, executive]

So I mean -- so let me put it this way. First of all, do we believe that all commodities and input costs will remain at these levels forever hereafter, okay, which are enormous levels, and we know that commodity companies are lapping all the way to the bank right now. And the way commodities go from my limited understanding, honestly, is that right now, you're seeing the demand and the less supply and more supply will come into this market over time and prices will start neutralizing so that people make sensible margins and not crazy margins, okay? So I do not know if I should think about the future at these levels of commodity and input costs are even higher than this, right, looking at more recent trends, right?

Now having said that, I think, listen, at the end of the day, as a going concern, the absolute margins we make and the percentage margins we make are important, right? So I'm not saying that the percentage margins we make and report are not important. I think we are trying to manage the interim of this highly inflated and volatile phase of the commodity cycle is the input cost cycle, right?

And during this phase, it's I would say, important to recover cost increases to the extent you can and worry less about the optical translation loss in terms of your margin, right? But long term, I think there are multiple other forces that we play. And I'd like to believe that as commodities temper right? And maybe this time will be different. But I think for the past 100 years, if you look at commodity markets, they have gone through cycles and tempered again, right? When that tempering happens, I'd like to believe that our margins will not only be good but also look good, right, and get back to where they were or even better. So that's really what I can tell you, honestly, as far as that is concerned.

[Douglas Turnbull, analyst]

Understood. That's very clear. And I agree, of course, I don't think commodities stay at these levels indefinitely. I just wonder as part of the conversation you're having with customers, they realize that it's a very unusual situation for input costs. And so your ability to rebuild the percentage margin in the long term kind of implies that you can hang on to some of this pricing even if commodity prices come down. Is that part of the conversation with customers? What's your -- what do you think their expectations would be in an environment where commodity prices normalize, would they expect to see perhaps some price cuts from you?

[Anand Kripalu, executive]

Well, they will might see, because in any case, a significant half of volumes are contracted. And your -- if your input goes up, your pricing goes up, if the input costs go down, your pricing will follow that, okay? It's contracted, right? It is the noncontracted volumes where you have to negotiate for price increases.

And I did say there sometimes there could have been more of a lag, and therefore, there's a higher propensity to retain some of those when the commodity prices up, but obviously, this is not a conversation to be had at this point in time. And I'm sure you would appreciate that, too, right now, we just have to get what we can get, right, and cover our costs. And we are not really having a conversation right now whether we will retain it, if and when commodities soften, right? So -- and there's no point pending that conversation either.

[Operator]

Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Pratik Tholiya for closing comments. Thank you, and over to you, sir.

[Pratik Tholiya, analyst]

Yes. Thanks, Aman. Thanks to all the participants for logging on to this call, and thanks to the management for giving us the opportunity. So indeed, it was a very candid and a detailed discussion on the outlook. Sir, would you like to make any closing comments?

[Anand Kripalu, executive]

No, no, I just want to thank everyone for their time for logging in. And most importantly, for the active interest that everybody on this call continues to show an EPL. Thank you. Bye-bye.

[Operator]

Thank you very much. Ladies and gentlemen, on behalf of Systematix Institutional Equities, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines. Thank you.