Sudarshan Chemical Industries Limited (506655) Earnings Call Transcript

Ladies and gentlemen, good day and welcome to Sudarshan Chemical Industries Limited Earnings Call for Q1 FY '27 Financial Results. [Operator Instructions] Please note that this conference is being recorded. With that, I hand over the call to Mr. Ranjit Cirumalla from IIFL Capital. Thank you, and over to you.

Thank you, Swapnil. Good morning, everyone. Ranjit Cirumalla here from IIFL Capital. We are pleased to host the conference call with the management of Sudarshan Chemical Industries Limited to discuss earnings performance followed by an interactive Q&A session post declaration of its Q1 FY '27 results. From the management, we have with us today, Mr. Rajesh Rathi, Chairman and Managing Director; Mr. Amitabha Mukhopadhyay, non-independent, Non-Executive Director; Mr. Nilkanth Natu, Chief Financial Officer; and Mr. Amey Athalye, Vice President, Finance. I now request Mr. Rathiji to begin the proceedings. Thank you, and over to you, sir. .

Thank you, IIFL Capital and Ranjitji for hosting us. It's a pleasure and thank you all for sparing your valuable time and joining this call. Pretty excited to share our journey with you. Giving a small introduction to people who have joined the first time on the call giving you some background. More than 18 months ago, March '25, Sudarshan kind of merged the business with Clariant and [indiscernible] to form one of the most value-creating pigment dealer rooted in customer centricity and agility and innovation, right? And this new entity would really create a new benchmark for the color industry. In total, we have just to give you a footprint. Now totally globally, we have 19 manufacturing sites, 11 countries in 5 continents, right? We have products more than 1,600 more than 4,000 global customers over close to $1 billion. And on the way we can really boost our EBITDA. If you see our plants are very well spread across the globe. But the most competitive advantage for Sudarshan against any other players that more than 60% of our assets 55% to 60% of our assets are based in Asia, right? And that's a big competitive advantage for us, and this is the spread of our global manufacturing footprint. We also are very proud of our technical marketing centers, technical marketing centers and we are able to -- again, very -- this provides us a provider teated solution to our customers. Giving you all some flavor on -- before I actually go into the Q1 performance, I wanted to give you a flavor on how the integration is going and what gives us the confidence that it has really laid down a very strong foundation. It's been a remarkable transformation journey for Sudarshan and I've been blessed with leading this journey, if you go 2 to 3 years ago, our sales were the tune of about INR 2,000 crores with the EBITDA in the range of INR 200 crores to INR 250 crores and net debt of about INR 800 to at a peak, let's say, INR 950 crores, to INR 1,000 crores, right? Today, what we are, we are almost 4x the revenue, 4x our EBITDA and our net debt is reduced by 60%. What we aspire to be is really 7x of what our EBITDA was in '23, right? And also reach a debt-free level, and that's our aspiration going forward. So just to remind you, when took over this business, this business was driven by silos regions, and there was more unified culture or a unified approach, right? What we feel very proud that we created this 1 Sudarshan culture, 1 aim, 1 goal for everyone of us to work towards, right? We are very happy and proud to say that we have opened our second global headquarters in Frankfurt. There were critical gaps in [indiscernible] pipeline. If you look at finance, HR, level, IT, supply chain, they have very big critical caps, and we've been able to very good talent now and set up a very good organization structure. And again, that gives us a great confidence to boost our governance and our plans. So a complete lack of harmonized reporting systems. We are working -- we're still working on more than 4 different SAPs, 113 different applications, so this adds to a lot of complexity and very differed to get any financial information at this. What we are moving towards. We start up a very good -- but we are moving towards advanced 1 SAP project. We are well advanced with the 1 SAP project, we call it project in Tika,and we expect to go live with our integrated system and reducing a lot of complexities in this financial year. When we start looking at the business, the EBITDA was almost 0. Today, we have registered a strong EBITDA in Q1 of the acquired INR 446 crores in Q1 and feel very happy and satisfied with this performance. There were a bit cash flow issues, very high debt in the books when we acquired the business. Very glad to tell you that we have already been able to reduce the debt to -- from the peak when we took over the business we go at INR 922 crores, and we have brought this down in less than 18 months to INR 531 crores and this journey will continue. Some of the priorities, which we have kind of looked at right customers adversity has been at the core. And we have been expanding developing products and our technical marketing is doing a great job in product management to be a partnership with our customers. This makes a big difference. We have now set up a customer service, world-class organization to ensure that the customer service is top now. In terms of value capture, this has -- or cost reduction. This has been a continuous focus and one of the most important areas along with customer centricity, which we've been driving. And today's performance, which we see is majorly backed by this initiative. In terms of the old kind of operating model, we have set up a global capability center in Pune. We are also ensuring that we build a center of insurance in this global capability center. One culture, I have described this what we are doing, and we've also set up a second global headquarters I spoke about SAP, and I think we are very happy that we would be going ahead and kind of lodging -- completing project in growth in this financial year. Coming now actually to the Q1 numbers. First, I think looking at a little bit of the Middle East crisis. As you all aware, we are not very different to face this issue, we faced energy cost spikes everywhere in Europe, in India, substantially with substantial assets are based. We've seen substantial fees in raw material costs. Logistic costs have increased some, but more importantly, this whole logistic cycle has increased by 2 weeks. And because of so many uncertainties, many customers across industry have been delaying their cases, right? They don't want to create stocks, et cetera, from that perspective and that half has been one of the areas. What we've done to address open is our procurement will ensure that we have enough safety stock so that the continuity of business is there. At the same time, supply chain is ensuring that we have the right inventory at the right place so that we don't overstock and have high-cost inventories on logistics, we had to increase some of our inventories in our subsidiaries because the longer logistic times and sales, we are working very closely with customers to ensure that we deliver the best solution. If you look at our Q1 performance, the Q1 performance has been very robust. There are 3 areas. One is the first 4 colums to go talk about legacy Sudarshan and then the blue shaded box would be acquired group and then the pigment has global? And that's just been very happy to share that now the numbers, what we've delivered looks solid and we are now confident that we can continue building on this journey. Legacy Sudarshan, you'll see going recencies I would say, we should be able to continue our performance of -- in the region of 12% to 13% in that work mark figure from that perspective. In terms of acquired group, given all the geopolitical situation, we've still been able to grow by 5%. The good part is if you look at the reported and business EBITDA, we've been able to do a very good job in the acquired group. We've grown the EBITDA from the business build up from INR 65 crores to INR 128 crores. For the reported EBITDA from INR 78 crores to INR 146 crores. And as One Sudarshan delivered EBITDA for the Pigment business of 275 million.

Thank you, Mr. Rathi. So, as Mr. Rathi has mentioned, we started this year with a strong Q1 with the revenue of INR 2,600 plus crores and with the business EBITDA INR 257 crores. As we mentioned in the couple of quarters earlier, we started reporting the business EBITDA, just to remind the business EBITDA is the operating profit from the actual sales without the impact of any inventory changes. So reported EBITDA for the acquired new group for the quarter and consideration is INR 146 crores and inventorized overhead impact due to increase in inventory is INR 18 crores. And so the business reported EBITDA number is INR 128 crores. For the Rieco business, we had one of the tough quarter to start with. The revenue from operations is at INR 38 crores, and we had these challenges in the execution due to delay in the customer cycle and also in some sites due to the subcontracting. And this reduction in the revenue has related to the EBITDA drop. As we mentioned earlier, we are in the transformation journey of the Rieco business. We remain confident about the business and recovery in the coming quarters. This slide gives the business performance for One Sudarshan, including Rieco business. So just to recapture the key numbers, the revenue from operations is INR 2,642 crore with the business EBITDA of INR 247 crores and a reported EBITDA of INR 266 crores for the quarter and as we give showing around 60% plus growth year-over-year and 5% in terms of the revenue. In terms of the key financial ratios for One Sudarshan, we have this situation as far as the balance sheet is concerned, the earnings per share for the quarter, which is not annualized is INR 12.3 per share. The return of capital is at 20.7%, and which is a very strong number However, just to mention here the return on capital employee number reported is based on the annualized number. We have a strong quarter to start with and we expect the year to be also better subject to the seasonality, which we might -- which we normally see in the Q3. As far as the net debt number is concerned, we are at INR 531 crores, and that gives us a good leverage ratio of 0.2 in terms of net debt to EBITDA and net working capital on an annualized number is at 23.6%. So overall, on the balance sheet and the key ratios, the performance is good and ensure the solid position on the batch.

Looking at the outlook, I think as we mentioned, we have entered FY '27 with a strong profitability momentum and doing conviction in its long-term position as one of the largest global pigment platforms backed by a very broad technology depth and a global manufacturing footprint. I think this kind of sets up on stage. We also feel much better in the goal of our business global business now. And it's set up a very strong foundation for future. . On an ongoing return basis, we have to navigate through the challenging boat market environment given the current geopolitical situation and we will do that with all programs. Our priorities still remain very strongly build for the year. Value capture remains very, very important. Our cost reduction still remains a very important driver, which will drive the growth -- profitability growth. We want to ensure that we are able to release some cash also from the working capital in the remaining year. SAP and GCC again, remain a very important priority for us. We feel very confident to deliver the numbers which we had stated. We have given our guidance of earlier in the year of EUR 700 million for the acquired group and EUR 25 million EBITDA. Though the Q1 performance has been much stronger. Currently, we are not revising our guidelines given the geopolitical situation, we want to do a wait-and-watch situation and come back to -- and we consider this after. Thank you very much.

Management team, can we begin with the question-and-answer session?

Yes, yes. We can.

[Operator Instructions] We are taking our first question now. We have Sanjesh Jain of ICICI Securities.

I got a few of them. First, on the Q1 number, I just wanted to understand the underlying growth because if I adjust for the currency depreciation because we now have a very large international business, which has a translation gain and the price increase because of the raw material inflation, it appears like this quarter, at least the volume -- underlying volume has declined. In this backdrop, we are expecting very solid growth over the next 2 years, which is over 20% growth at the lower end of the guidance. Now what gives us the confidence that being the #1 player, we will grow at least 2 to 2.5x that of an industry growth rate, while this quarter implies some decline in the volume. That's my first question.

So I think firstly, I think great question. I would say that the influence that the volume has a decline may not be very accurate. We are in a very broad spectrum of our product reach, right? We sell a product range, right, from EUR 1 to EUR 130, EUR 140. We are not able to kind of set that aside. However given that we've seen a modest growth of 6% this quarter in spite of the geopolitical situation. We must remember that the last Q1, last year, the Q1 included a lot of sales from the March onwards, when we are taking over the business because on the acquired entity, we were doing live with some of the SAP areas. And so the growth is better than that. What gives us confidence in delivering growth and EBITDA, I would say, let me talk about the EBITDA. As I mentioned, it is a lot of value capture still coming in. We've not seen the full value capture states going into the numbers, right? And that journey will continue, and that is completely in our control. In terms of growing of the business, this is a business which has lost a lot of business. And we are looking to recover the business. So we are not saying that we will try and grow completely out of line, et cetera, but there's a last for where we can regain some of the lost business. The business was lost because of various reasons, lack of a focus the insolvency issue exactly, right? So this gives us the confidence of how -- why we would deliver those numbers.

Got it, sir. Sir, one related question to this. You said that there's a lot of value yet to be captured. When you talk about the value, these are the cost efficiency benefit. And if it has, then how much of this journey from INR 800 to INR 1,400, 1,500 will be led by the revenue growth? And how much of it is the benefit of the value capture that we are talking about? .

I think the numbers are clear. I mean, a substantial this would come from cost reduction or value capturing .

My second question is on the CapEx plan. We have a large capacity. Can you help us in terms of where are we in the utilization cycle and do we envisage any large CapEx requirement, either from a product development category, new product or our backward integration that we foresee in, say, next 12 to 18 months? .

From a volume perspective, we do not need any new CapEx, right? We have enough capacities to grow on the numbers which we began. However, we are looking at some special initiative, either backward integration or special products. And these are determined by the ROI, right? And if the return is good, we are going to do this. We don't expect any substantial or anything substantial. There will be some moderate CapEx.

Got it. One last question on the gross profit margin. This quarter, we did probably one of the highest margin, which is 54%. How do we see gross profit margin? And was there any benefit of lower inventory, which we were carrying, which may normalize going in next 1, 2 quarters? And what would be the impact if raw material prices start reversing again and there have already been approved prices, which have fallen down substantially from the peak.

So actually, if you want to look at the -- if you look at the business gross margins, right, the gross margin will not be that's high, right. The gross margin movement from last quarter to this quarter on a basis will be about 2%. Out of this 2% movement, I would attribute this to kind of looking at some cost reduction areas which have come in are due to this production, et cetera, from that perspective. And there is a very minor I would say, one-off areas which are looking from that perspective. So I would say that we should continue to be in the range of 50-plus percent of gross margin.

Just one question to add here. Last 1 year.

Sanjesh, just a request, would you like to please rejoin the queue if you have any follow-up, we have other participants. [Operator Instructions] We have Ankur Periwal of Axis Capital.

Congratulations on good set of numbers. First question on the guidance. Now while we are building in 5% to, let's say, 7% sort of a revenue CAGR depending upon the range that we are looking at, over the next, let's say, 2, 3 years. How much of this will be volume and how much of this will be value. Value could be here more premiumization, et cetera. And related on the question on the margin side, the synergy benefits of the value capture that you mentioned is still pending. Over what time lines are you going to achieve that? Is it '28 only or probably it will sort of flow through in '29 also?

Great question, sir. Ankur, as I described, it is our of product portfolios very complex now, right? As I said, we sell a product, which we sell a product which is EUR 1 and we sell a product which is EUR 120. So us looking at rather value growth or volume growth, we're not -- I mean, it's important that we grow annual growth is profitable, right? You should not hamper or gross margin, the growth should not hamper our gross margin, and that's what we are really focused on looking at that. So that's the first area. The second is the value capture will be continuous. We will be delivering more value capture in terms of FY '27- '28. Our major portion will be FY '27- '28. Some will be of course some of the '28 value capture will also flow into the '29.

And a second question on our -- on the balance sheet side, on the debt repayment. What are our plans on the debt repayment side, given that a lot of debt also sits on the global side? And secondly, on Rieco, earlier, we had plans to hive off that business. any revised thoughts on the same?

The acquisition did have partly we have retained. Very small part of business, we will be efficient prepaying some of the loan as our net debt position is improving as visible in the presentation, we think we will be able to accelerate the payment of acquisition. On Rieco, this first quarter, we had faced certain execution challenges, primarily because of some of the subcontractors, subphase difficulty with labor availability. We expect the things to normalize from the current quarter onwards. And we are confident that we completely positive by the year before the year-end, it will be posting a positive number that is what we are trying.

So Ankur, summary is that our transformation of Rieco will continue, we will continue to see how we can get to better numbers.

We have our next question coming in from Rohit Nagraj of 360 ONE Capital.

Again, unfortunately, on the guidance front, given that for FY '29 for the consolidated business, we have significant improvement from FY '27 to '29, almost 17% -- 16%, 17% CAGR at the higher end. And on the EBITDA front also, it's closer to doubling. On the EBITDA front, do we expect that the acquired business will have margins of almost touching to double digits and historically, have they any time done that .

Historically, they did 2 double digits always consistently and as I described June earlier to the earlier question was on the sales side, we are looking at a lot of business regainand on the EBITDA side, we are looking at a lot of value capture, which will kind of come in as being a we have been holding this from day 1, right. So we've not -- this is not a new guidance.

Right. Got that, sir. Sir, second question is, in the last 3, 2, 5 months, have we taken any material price increases? And have they been completely absorbed Obviously, there will be an element of the RM cost inflation, but we don't expect that the pricing should again correct and that may have mainly put some impact on the margins right?

Can you -- are you seeing -- I didn't follow your question, Rohitji -- are you saying.

I'll repeat it. So in the last 3 to 5 months in our portfolio, have we taken any price increases across our product portfolio. Obviously, there will be 1 element which will be because of the input cost inflation. And another element could be from the demand-supply dynamics. Is it that these prices will sustain going forward? Or if the demand supply situation again gets impacted, we'll have to reverse a part of that?

So most of our cost increase price increases right now have been only to pass on whatever cost increases we have experienced, right? We have not -- we have been very in order to build across the customer. We have been very particular not to take any advantage of the demand and supply situation. So if the raw material prices soften, et cetera, oil prices soften, et cetera, at that point, we will only reverse some in .

We'll take our next question now. We have Nitesh Dhoot of Anand Rathi.

Team, congratulations on a good set of numbers. My first question is if you could lay down the strategy behind acquiring the 70% stake in Sudarshan colorings from the overseas subsidiaries. What is the rationale behind that? I mean is it like the cash transfer that we are probably looking at from the parent to the European entities for any deleveraging purpose or what exactly is the thought process behind that. .

So this decision that it was envisaged right at the time of acquisition, we have gone for indirect acquisition that is because of financing reason. It becomes simpler to acquire this entity through its earlier holding structure. But at that time, it was a plan that eventually, we would like to pull these shares directly from the related -- and we are now just carrying out it is only still within the group for the structure rationalization, which was planned are itself. There is nothing further to that. And we don't see this will have any impact on the business certainly.