Rossari Biotech Ltd

NSE:ROSSARI

Earnings Call Transcript 2024-Q1

[Operator]

Good day, and welcome to the Rossari Biotech Limited Q1 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you, sir.

[Anoop Poojari]

Thank you. Good afternoon, everyone, and thank you for joining us on Rossari Biotech Limited's Q1 FY '24 earnings conference call. We have with us Mr. Edward Menezes, Promoter and Executive Chairman; Mr. Sunil Chari, Promoter and Managing Director; and Mr. Ketan Sablok, Group Chief Financial Officer of the company. We will begin the call with opening remarks from the management, following which we will have the forum open for a question-and-answer session.Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature and a disclaimer to this effect has been included in the earnings presentation shared with you earlier.I would now like to invite Mr. Edward Menezes to make his opening remarks.

[Edward Menezes, executive]

Thank you, Anoopji. And good afternoon, everyone, and thank you for joining us on our earnings call. I hope all of you had the opportunity to go through our results presentation that provides the details of our operational and financial performance for the first quarter ended 30th June, 2023.We have recorded a steady performance during the quarter, demonstrating the resilience and adaptability of our business model amidst the challenging global economic landscape. Our commitment to sustainable and innovative solutions has kept us in a stable position despite the current subdued demand scenario witnessed in the chemical markets.We are delighted to share that we have acquired the remaining 16% stake in our subsidiary Tristar Intermediates during the quarter, and we are now nearing the completion of the acquisition of the remaining stake in Unitop, leading to 100% ownership.As we move forward, our strategic intent remains to seamlessly integrate both Unitop and Tristar into our operations. We believe this move will drive growth and enhance our overall competitiveness. While our recent organic performance has been tempered, our commitment to growth remains intact.Our approach to growth includes both seeding new businesses and strengthening our presence with existing segments. Central to this strategy is our focus on developing innovative sustainable solutions across all our business verticals.In our HPPC division, our R&D team has made remarkable strides in creating morpholine-based derivatives, serving as integral components for pharma API and a diverse range of other industries. In addition, we have made significant progress in devising innovative solutions tailored to the institutional chemical needs of the Indian Railways.In the AHN division, our R&D team is actively designing smart, sustainable aquaculture solutions that are tailored to meet the specific needs of farmers. These state-of-the-art solutions span a wide spectrum of areas from probiotics, feed additives to disinfectants and comprehensive pond management.Overall, R&D continues to be the cornerstone of our growth strategy and plays an important role in the company's future roadmap. Our confidence in customized products as a differentiator is backed by our track record in developing unique and innovative solutions for our customers. As the market landscape continues to evolve, we see our emphasis on R&D and customized solutions as an important pillar in maintaining consistent growth in a volatile environment.To conclude, despite the macroeconomic challenges, we remain optimistic about the remainder of the year. We firmly believe that our strategic initiatives focused on broadening our customer base, prioritizing high-margin segments along with our commitment to R&D position us favorably for delivering healthy operational and financial performance in the coming years.With this, I would like to conclude my address and I now hand it over to Mr. Ketan for his comments.

[Ketan Sablok, executive]

Thank you, Edward sir, and good afternoon, everyone. At the outset, I would just like to inform everyone on the call that Mr. Chari due to some unplanned exigencies is traveling. He is, however, on the call with us today and he would interact based on his connectivity. My apologies for this.Let me update you about the 2 key developments during this quarter. One, of course, as Edward sir said, we acquired the 16% stake in Tristar Intermediates Private Limited for an aggregate consideration of INR 16.9 crores from the existing shareholders. Post this, the entire 100% stake now has been acquired. Second, as part of our digitization initiative, we have successfully transitioned to SAP S/4HANA across the group. We went live across all 6 group companies and multiple locations. This digital transformation required a planned shutdown for a week in April, followed by we had about another week set aside for the system stabilization.I am happy to inform you that the transition has been executed seamlessly and the new ERP system is operating smoothly. This planned migration led to slight lower sales in the month of April due to the necessary downtime.Now, let me provide you with a brief overview on the financial performance for the quarter ended June 30, 2023. Despite the challenging global environment, the quarter's performance remained steady. The company achieved a revenue of INR 410.6 crores for the quarter compared to INR 406.5 crores in Q4 FY '23 and INR 434.7 crores in Q1 FY '23.EBITDA stood at INR 57.7 crores as against INR 54.6 crores in Q4 FY '23 and INR 57.8 crores in Q1 FY '23. PAT during the quarter stood at INR 29.2 crores as against INR 29 crores in Q4 FY '23 and INR 28.7 crores in Q1 FY '23.Despite the challenges and the difficult conditions, we were able to improve our EBITDA margin by 14.1% -- to 14.1% of about 70 bps quarter-on-quarter and about 80 bps Y-on-Y.Our focus on prioritizing products with higher margins and our tight control on costs have contributed to enhancing our margin performance during the quarter. In the HPPC segment, performance was stable even amidst softer demand from key domestic industries. The introduction and contribution of new products supported the performance.Meanwhile, in the Textile Chemical Division segment, the segment was steady, though growth was muted due to significant inventory de-stocking witnessed in the global market.In the AHN segment, we exhibited a decrease quarter-on-quarter, but Y-on-Y there was a growth. Given that the first 4 to 5 months are typically softer for the poultry industry, we have seen this trend quarter-on-quarter. However, we are confident that revenues will pick up through the year and we expect this segment to show a good growth during the current year.We are also happy to share that ICRA has assigned AA- stable on the fund-based term loan and fund-based working capital facilities and A1+ on the short-term non-fund-based limits. These ratings are a testament to our robust financial position and strategic growth initiatives.In closing, I would like to state that we remain dedicated to our strategic growth initiatives, consistently driving innovation and improving operational efficiency. We are confident that these initiatives coupled with our disciplined financial management and investment in our people will enable us to deliver sustainable growth in the coming years.On that note, I would like to end my opening remarks and would request the moderator to open the forum for any questions that you may have. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Sanjesh Jain from ICICI Securities.

[Sanjesh Jain, analyst]

I got a few of them. First on this pharma API, which we mentioned in the opening remarks that one of the chemical lines we are entering will also allow us to get into pharma API. Can you elaborate slightly more deeply in terms of how do you want to look at the pharma API? What are the products we are looking at it? Where does it fit in the value chain for us?

[Edward Menezes, executive]

Actually, what we have done is, we had an opportunity in the viscose manufacturing. So you know that we are also dealing in pin finishes for viscose. And there is a product, modified cellulose, which is called lyocell, and the solvent that is used there, which is NMMO, N-Methyl Morpholine N-oxide.So we had developed -- in the last year, we have started to develop this product. And since this morpholine chemistry had other opportunities, we also developed other chemicals like HEM, which is Hydroxy Ethyl Morpholine, or N-Formylmorpholine or N-Methyl Morpholine. So these are the 3 or 4 products that we have been targeting, out of which NMMO is a big product which goes into lyocell worldwide and the potential for this product is pretty large and there are not very many players whose products are approved here.We have got approval for this product with some major multinational manufacturers as well as from the local manufacturers of lyocell in India. And therefore, in -- as an extension to the NMMO, we also ventured into the same chemistry with HEM, NMM as well as NFM. So out of which HEM is a molecule which is used in the manufacture of drugs for kidney transplants and heart diseases. So that's how this new chemistry was added to our portfolio.

[Sanjesh Jain, analyst]

When we say API, this is just one molecule, right? We are getting into an intermediate or we are getting into an API?

[Edward Menezes, executive]

No, no, it will be an intermediate. Actually, it must be a misnomer there. It's an intermediate for the drugs, actually.

[Sanjesh Jain, analyst]

Okay. And who else produces this product today in India?

[Edward Menezes, executive]

That is my -- my, actually, pharma technical team will be able to tell. But I can share that information with you on the side.

[Sanjesh Jain, analyst]

Got it. Got it. Second on the HPPC consumer side of the business, which is sanitary, depository and other white-label manufacturing we do. How has been the consumer trend? Because if you look at the FMCG companies, volume growth remains steady, while for us if you look at the performance, it's still not catching up. What is the expectation for this year in the HPPC category?

[Edward Menezes, executive]

So the HPPC category has actually done very well for us in the last year. Unfortunately, because of the softening of the raw material prices, the selling prices have come down. And therefore, you see a dip in the HPPC revenues. But if you actually see the HPPC volumes, we have an almost 19% increase in volumes year-on-year. So that is a very healthy trend for us overall.And in the ARD also, we have a very healthy volume increase. It was only because of the price correction that happened that you see a small decrease in the HPPC sales.

[Sanjesh Jain, analyst]

But again, that volume growth is not showing in the gross profit growth as well, because if I look at the gross profit for the standalone business, it has grown by 11%, while there is a tailwind of lower raw material prices in the margin. Is that the new business what we are doing is a margin dilutive versus what we were doing last year?

[Edward Menezes, executive]

So you will see a gross profit increase of only 11%, but if you see the EBITDA margin, because of the volumes that we have incorporated and the fixed cost coming down, the EBITDA margins have grown dramatically in the standalone, say, from INR 27 crores to INR 35 crores.

[Sanjesh Jain, analyst]

Got it. Got it. No, I was just looking at the prices and the volume, that this EBITDA captures a lot of operating leverage. The other question is on the --

[Edward Menezes, executive]

The volumes have gone up, therefore, we are able to reduce the cost for the production.

[Sanjesh Jain, analyst]

Got it. Next, on the Buzil side of it, I was just going through your annual report. It appears that Buzil-Rossari Pvt. Ltd.'s revenue in FY '23 has declined from INR 85 crores to INR 79 crores, while we were anticipating a very strong growth in the Buzil-Rossari Pvt. Ltd. What's transpiring there? Why there has been a revenue EBITDA impact decline last year in the Buzil-Rossari?

[Edward Menezes, executive]

I will ask Ketan bhai to explain that.

[Ketan Sablok, executive]

So Sanjay, on the BRPL front, last year we started off with a new line of business which was into tender -- the government tender business, where we supplied a cleaning product to large government schools and these government contracts.Now, these tenders -- we realized that we were unable to do it through Buzil-Rossari because of certain conditions in the tender documents with respect to the net worth and minimum sales and things like that. So all that part of the sales in the business was routed through Rossari. So that's why you will see that the growth which we were expecting or planned in BRPL, part of that could not happen. It is actually not visible in BRPL numbers because they have come out -- come in the Rossari numbers.But generally for our internal MIS, we always show that as a BRPL sale because it was generated by the BRPL team.

[Sanjesh Jain, analyst]

So how much [ crores ] last year compared to INR 85 crores of '22?

[Ketan Sablok, executive]

Last year, this was about -- I think about INR 20 crores to INR 25 crores of sales which was done through Rossari.

[Sanjesh Jain, analyst]

Okay. So we have done almost INR 100 crores versus INR 85 crores in '22?

[Ketan Sablok, executive]

INR 100 crores is what we talk about last year's sales of [ this thing ].

[Sanjesh Jain, analyst]

Fair enough. Fair enough. The last 2 questions, one on the Tristar. How has been the trend? Have we seen any slowdown? Because I think Europe market generally is very weak and Tristar had a larger presence there. That's number one.Number two is a bookkeeping question. The depreciation quarter-on-quarter has declined from INR 16 crores to INR 14 crores. Anything there? Why has it changed?

[Ketan Sablok, executive]

So Tristar -- yes, you are right. We are seeing some pressures on the-- from the European market. But I think this quarter should be a better quarter for us. In fact, June was also good for us in Tristar. So we are not really much worried on the Tristar front because we expect -- in spite of April, May being a little soft, we are seeing a good traction in Tristar.So overall, on an annualized basis, we are quite good on the Tristar front. We should see good numbers coming in through the year.And on -- your second was on depreciation. So last year, Q4 being the last quarter, some of the asset adjustments in terms of accelerated depreciation, et cetera, we had taken on some of our older assets at Silvassa and I think some also in Dahej, the Unitop facility in Dahej. So those accelerated depreciation impact has come in the quarter 4.So that's what impacted -- resulted in a higher depreciation rate last year. I think now -- and, of course, since we follow the WDV method on depreciation, the rate should be lower quarter-on-quarter.But I think now the current rate of about INR 14 crores is a more efficient rate that will be there on a quarterly basis.

[Sanjesh Jain, analyst]

Fair enough. Just one last question. Any update on the FY '24 guidance? Anything which we think is doable in terms of top line EBITDA impact?

[Ketan Sablok, executive]

Yes. So top line, I think we should be at about low double-digit. 12% to 14% is what we still think we'll be able to achieve at least post the Q1 performance.

[Sanjesh Jain, analyst]

And EBITDA margin?

[Ketan Sablok, executive]

It will be on the similar line.

[Sanjesh Jain, analyst]

14%, 15%?

[Ketan Sablok, executive]

Yes. We would be happy if we can do around 14%. It would be a good target for us.

[Operator]

[Operator Instructions] The next question is from the line of Ankur Periwal from Axis Capital.

[Ankur Periwal, analyst]

First question on the segmental growth here of first quarter. If you can help us break it up into volume and realization. You just mentioned on a standalone basis, you have seen a double-digit growth. But is there a significant slowdown on the subsidy side, because there is EBITDA or revenues with de-growth on a year-on-year basis?

[Ketan Sablok, executive]

I think I will talk more from the consolidated basis, because as we indicated that it is better to look at the numbers on a consol because a lot of the sales happens on an inter-company basis, where all the new businesses that are coming into Unitop, Tristar are being done through Rossari. So if you see on an overall consolidated basis, I think, we have seen good volume traction. And that's quite happening for us, even though some of that growth has not come -- the similar kind of growth is not being seen on the top line because of the RM price softening, resulting in some price corrections at our end.But if you see year-on-year, I think, we've done about 20% kind of volume growth. And I think that's what is important for us. Our top line has been more -- it's down about 6% on a consolidated basis. I think that's more to do with the pricing part.

[Ankur Periwal, analyst]

Okay then. If I heard you right, 20% volume growth year-on-year across all the segments?

[Ketan Sablok, executive]

Yes.

[Ankur Periwal, analyst]

Okay. And broadly, if you can give a...

[Ketan Sablok, executive]

Sorry Ankur, not all the segments. I'm giving an overall number of...

[Ankur Periwal, analyst]

Yes, yes. So if you can broadly highlight which are the leading ones here? How was the growth in HPPC, for example?

[Ketan Sablok, executive]

Yes. And textile was almost stagnant in terms of volumes.

[Edward Menezes, executive]

Very small textile [indiscernible].

[Ankur Periwal, analyst]

Okay. And given the share, I believe HPPC would have grown much faster here.

[Ketan Sablok, executive]

Yes. Yes.

[Ankur Periwal, analyst]

Sure. No -- also referring to the earlier discussion which came on the operating leverage side, so if I look at the consol side, the EBITDA or the gross profit are largely [ impacted ] despite the volumetric increase. Is there some RM inflation which is yet to be passed on? Or how is the margin situation there?

[Edward Menezes, executive]

Sir, the RM prices in the last 2 weeks have started to have an uptick again. So we are not really sure how we will be passing on the price or whether there will be an increase in price. So most commodities have started going upwards.If you look at styrene, if you look at butyl acrylate, if you look at formic acid, acetic acid, all of them have started an upward trend -- are showing an upward trend in the last 2 weeks. So I really will not be able to -- we will really not be able to give you a guidance on whether more price correction will come or there will be a price increase, more so because the HPPC -- the price correction or increase comes quickly, because it is passed on immediately to the customer.

[Ankur Periwal, analyst]

Correct. So Edward sir, presuming the same -- let's say, the RM inflationary scenario is what it is, at today's prices, are we expecting our margins to be largely stable or probably some pass-through is happening there? Should things improve there since volume metric started coming back?

[Edward Menezes, executive]

Ankurji, our strategy is to actually fill our capacity, basically. Therefore, we are not looking to add a very high growth in margins. But we would like to keep the margins stable, but fill capacity. And therefore, costs will come down and help us boost our EBITDA margins.

[Ankur Periwal, analyst]

Sure, sir. Just lastly on the new product launches which you highlighted and pretty healthy growth in AHN this quarter. How should one look at the product launches and the margin profile here? Will the focus still be on volume metrics, capacity utilization and volume growth here and probably the margin may take a beating in the near term?

[Edward Menezes, executive]

Sir, for the new products, there will always be a higher margin idea. So there is not going to be volume growth -- I mean, we are not going to run after volumes over there. So all the new products based on morpholine or the new products introduced in Aqua, they will have healthy margins for us. And then we will build the brand and the business there.Whereas the HPPC business is the biggest engine, I would say the fastest engine for us to fill in capacity. So there -- where we will focus to fill capacity will be HPPC products. Whereas with the new products that come in, we are not using a strategy of low price. It will be always at a healthy margin.

[Operator]

[Operator Instructions] The next question is from the line of Aditya Chheda from InCred Asset Management.

[Aditya Chheda, analyst]

If you could help us...

[Operator]

I'm sorry to interrupt, but the line is breaking up in between.

[Aditya Chheda, analyst]

Yes. Hello?

[Operator]

This is much better, sir. Go ahead.

[Aditya Chheda, analyst]

So my question is again related to the raw materials versus the previous long-term trends. Do you feel that those have normalized more or less? Or if you could sort of guide us from a more medium- to long-term perspective as to how much realization de-growth is possible if you compare some long-term trends? And also if you could help us understand the quarterly run rate of the subsidiaries? And if you can quantify the inter-company sales which we are doing right now, if you can quantify them just so that we can understand the performance better at least for now?

[Ketan Sablok, executive]

So I think RM prices, see, currently are more or less steady. But as Edward sir said, sometime back, last 2, 3 weeks, we are again seeing some hardening in the prices. So we'll have to take this as it comes, because it's a little difficult for us to currently understand how the prices are going to pan out. But we are generally not taking very long-term position on the -- of the raw materials. So I think we will be in a much better position to handle the pricing whichever side it moves out.Again, on -- so your second question was on -- on the inter-company sales, I think, as I said, it's better to look at the numbers on a complete consolidated basis because now a lot of these sales are actually happening across companies depending on the want of the customers and the development of products and certain parts of the products which are happening in different plant locations of various group companies. So the ideal way would be to look at the number on a holistic basis. And -- yeah, you had anything else also, Aditya?

[Aditya Chheda, analyst]

No, that's it from...

[Ketan Sablok, executive]

Sorry?

[Edward Menezes, executive]

And the voice is cracking.

[Aditya Chheda, analyst]

That's it from my side.

[Operator]

The next question is from the line of Rohit Nagraj from Centrum Broking.

[Rohit Nagraj, analyst]

Sir, my first question is on the Unitop side. . So we -- from Unitop, we serve predominantly the agrochemicals and oil and gas. And from the agrochemical companies we have seen a very muted commentary. So was there any impact during Q1 on the agrochemical side? And how has it been looking like in the foreseeable future given the demand or the POs that we are receiving?

[Ketan Sablok, executive]

So in the Unitop side, see, this quarter, I think we've seen a good demand. The only thing that impacted slightly on the Unitop sale was we had about 8 to 10 days of complete shutdown on the dispatches early in April because of the SAP implementation. So that actually impacted more on the Unitop site, but it took us some time for us to consolidate and go live on the system there.But post that, I think we've seen good demand. And I think even July has been a good month for us in Unitop. So the capacity utilization at Unitop I could say in the last 3 months, including July has been significantly good. So it's been at about 85%, 90% plus utilization of the capacity. So for us at least in terms of the orders and the POs, it has been good for the last 3 months at least.

[Edward Menezes, executive]

And Rohit, to add to that, actually in Unitop because of the synergies between Rossari, BRPL, Romakk and Unitop as well as Tristar, a lot of non-agro surfactants have also been –- sales for -- demand for non-agro surfactants has been generated by the group and we are looking at pending orders this month. It's pending orders in excess of 2,000 tonnes. So we are seeing that Unitop is doing pretty well for us, and I'm sure this quarter also will be strong for Unitop.

[Rohit Nagraj, analyst]

Right, sir. Got it. The second question is from the export side. So how has been the performance during Q1? And what are we hearing, because generally for the chemical companies exports have been a dampener over the last few quarters? So what is our feedback on the same?

[Ketan Sablok, executive]

So exports -- this quarter we've done about INR 80 crores of exports. Roughly about 20% of our turnover is on the export side. Partly you're right, we have not seen the growth coming in. Last quarter also we were at INR 80. Last year, we were at about 85-ish. So we have not seen the traction there. So it's more I think impacted from the textiles slowdown. So even on the export side, a lot of the countries where we used to export we have become rather more cautious, because many of these countries like Bangladesh, Egypt, et cetera, there are issues on the payment side in terms of ForEx.And we are quite cautious of the customers that we are dealing with. We don't want any of our funds to get kind of stuck there. There are headwinds in Europe and U.S. also in the textile space. And we expect at least the next 2 quarters also to be slightly sluggish. We may not see growth coming in, but we would be happy if we can maintain the current run rate. Maybe post that, we'll see some inventory used up in the textile space and then we can see the export turnover in textile also going up. And then the overall turnover on the export side should also grow.

[Operator]

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to the management for closing comments. Over to you, sir.

[Edward Menezes, executive]

Thank you, everyone. I hope we have been able to answer all your questions satisfactorily. Should you need any further clarifications or would like to know more about the company, please feel free to contact our team or CDR India. Thank you once again for taking the time to join us, and have a very good evening. Bye.

[Operator]

Thank you. On behalf of Rossari Biotech Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.