Tarsons Products Limited has informed the Exchange about Transcript of Analysts/Institutional Investor Meet/Con. Call
Tarsons Products Q3 FY2022 Earnings Conference Call”
February 08, 2022
Disclaimer: This document is subject to errors and may or may not contain words which have been included / omitted due to human error while transcribing the conference call. Any and all information should be verified with the company
by the reader.
ANALYST:
MR. ANSHUMAN GUPTA – INVESTEC CAPITAL SERVICES
MANAGEMENT: MR. SANJIVE SEHGAL – CHAIRMAN & MANAGING DIRECTOR – TARSONS PRODUCTS MR. ROHAN SEHGAL – WHOLE TIME DIRECTOR – TARSONS PRODUCTS MR. SANTOSH AGARWAL – CHIEF FINANCIAL OFFICER – TARSONS PRODUCTS
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Tarsons Products February 08, 2022
Moderator:
Ladies and gentlemen, good day and welcome to Q3 FY2022 Earnings Conference Call of
Tarsons Products, hosted by Investec Capital Services. This conference call may contain
forward-looking statements about the company, which are based on the beliefs, opinions,
and expectations of the company as on date of this call. These statements are not the
guarantees of future performance and involve risks and uncertainties that are difficult to
predict. As a reminder, all participant lines will be in the listen-only mode and there will be
an opportunity for you to ask questions after the presentation concludes. Should you need
assistance during the conference call, please signal an operator by pressing ‘*’ then ‘0’ on
your touchtone phone. Please note that this conference is being recorded. I now hand the
conference over to Mr. Anshuman Gupta. Thank you and over to you Sir!
Anshuman Gupta:
Thank you moderator and good morning, everyone. On behalf of Investec Capital Services,
I welcome you all for Tarsons Products first ever earnings call since listing. Tarsons
Products has already announced nine-month FY2022 and 3Q FY2022 financial results
yesterday. Today from the senior management, we have Mr. Sanjive Sehgal, Chairman and
Managing Director, Mr. Rohan Sehgal, Whole Time Director, Mr. Santosh Agarwal, Chief
Financial Officer. Congrats to all of you for a very good IPO. Now I will hand over to
Rohan. Thanks.
Rohan Sehgal:
Good morning and a very warm welcome to everyone present on the call. First and
foremost, I hope that you and your family members are safe during these unprecedented
times. Along with me, I have Mr. Sanjive Sehgal the Chairman & Managing Director and
Mr. Santosh Agarwal the Chief Financial Officer for Tarsons Products Limited and SGA
our investor relation advisors.
To begin with, I would like to thank and congratulate all our stakeholders, investment
bankers and business partners for helping us achieve a milestone of getting listed on the
Indian stock exchanges. We are delighted to see such a strong response for our IPO. Since
this is our maiden earnings call, I would like to take you through Tarsons Products Limited,
its journey so far, broad industry update on plastic LabWare and strategies going forward
followed by operational and financial highlights of the quarter and nine months ended 31st
December 2021 post that we will open the floor for questions and answers. We have also
uploaded our latest investor presentation on the stock exchanges and I hope everybody had
a chance to go through the same.
Tarsons Products was incorporated in the year 1983 and now is one of the leading Indian
suppliers of LabWare products engaged in the designing, development, manufacturing and
marketing of consumer goods, reusables and other LabWare products with more than three
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and a half decades of experience in manufacturing of trusted high-quality plastic LabWare
products. We supply our products to industries across research organizations, academia
institutes, pharmaceutical companies, PROs, diagnostic companies and hospitals. Today we
are one of the leading Indian suppliers of life science sector with a strong brand recognition
and high-quality diversified products across varied customer segments and end user
industry. We have a diversified product portfolio with more than 1700 SKUs across 300
categories including consumables, reusables and benched up equipment. Our consumable
categories include major product lines such as centrifuge ware, cryogenic ware, liquid
handling, PCR consumables and so on.
Our reusable categories include bottles, carboys, beakers, measuring cylinders and various
kinds of bench top racks. We also make bench top instrumentation such as vortex shakers,
centrifuges, pipettor and so on. We currently operate through five manufacturing facilities
located in West Bengal. Wide array of products are manufactured across these facilities
giving us a competitive advantage in terms of technology, which we have accomplished
over years of experience in the field of manufacturing, and plastic laboratory products. We
believe that we are focusing on stringent quality standards across all manufacturing
processes we have been able to provide a reliable efficient and cost-efficient product line to
our diversified end user industry.
At our facilities, we continue to invest in automation to reduce human error and improve
throughput. We are working on expanding our manufacturing capacities for both existing
and new products in a phased manner through construction of a new manufacturing facility
in Panchla, West Bengal. The project is on track and we target to commission the new
facility by the middle of 2023. We are also planning to develop a new fulfillment centre in
Amta, West Bengal to coordinate and expand our warehouse operations. At the same
location, we also aim to do backward integration in the manufacturing process by building
in-house sterilization centre for captive consumption. We have recently completed the land
acquisition measuring approximately 6 acres for the facility in Amta and the target to
complete this project will also be in the middle of 2023.
Our products are distributed to end users on a Pan India basis by our authorized distributors.
We have longstanding relationships with our end customers and distributors, which we have
accomplished by an on the ground sales and marketing team. As on December 31, 2021 we
have 150 active distributors spread across the country supplying to various end user
industries. High-grade quality products diversified product offerings alongside the trust and
the brand name developed over the years for Tarsons has helped us create a strong foothold
in the exports and the international market as well. Our share of revenues from exports
stood at 41% in Q3 FY2022 and 33% in the nine-month FY2022. We cater to the demand
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of export market through branded as well as OEM sales to more than 40 countries through a
network of distributors and we are very optimistic of huge opportunity lying ahead of us in
the segment. As an organization, we are constantly striving to improve our environmental,
social and governance parameters. Our products are manufactured using medical grade
plastic that is designed to withstand critical use. We work under clean room conditions,
which eliminates all chances of contamination. Productivity optimization will be done
through higher use of automatization. The company directly donates to various hospitals as
a part of its CSR initiatives. We regularly review and update our policies for change
requirements and have whistle blower polices in place. Our key strategies going forward
will be to expand our product portfolio, focus on branding and promotion, manufacture new
products in the cell culture and the robotic handle consumables, leverage the advantage of
“Make in India” and grow our domestic sales as well as our international business through
exports enhancing our manufacturing capacities to leverage growth. We will be expanding
our manufacturing capacities in various popular product categories. We recently acquired
five acres of land to develop a new manufacturing facility in Panchla, West Bengal and to
expand and enter into new product segments comprising of cell cultures, serological
pipettes and others. Increasing presence in overseas markets, we plan to grow our
international business to more than 120 countries in the next seven to 10 years by a twofold
approach of both branded products as well as OEM products.
Also, we plan to enhance our operational efficiencies by using higher automation and
higher throughput leading to operating leverage play. Going forward, I would also like to
reiterate that with multiple growth avenues for the future like large addressable domestic
market with continuous addition and product categories and addition of wallet share of the
customers, huge opportunity in the export market with OEM as well as branded products,
increasing skill and capabilities with in-house manufacturing and R&D, trust and reliability
for our products with gaining acceptability across the domestic and international markets.
We believe there is a huge runway for growth for your company and we are prepared to
leverage this opportunity with expertise and experience we have developed over the years.
Let me hand over the call to Mr. Santosh Agarwal our CFO for operational and financial
highlights for the quarter and nine months ended FY2022.
Santosh Agarwal:
Good morning, everyone and a very warm welcome to all in our maiden earning call. We
have uploaded our latest investment presentation on the stock exchange for our Q3 and nine
months FY2022 results. I hope everybody had an opportunity to go through the same. We
are delighted to share that we have surpassed our FY2021 profitability in just nine months
FY2022. On the revenue front, we would like to discuss revenue from operations for Q3
FY2022 stood at Rs.71 Crores as compared to Rs.60 Crores in Q3 FY2021 a growth of
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17.3% on a Y-o-Y basis. The sales growth was driven by higher demand across end-user
industries and exports. Revenue from operation for nine months FY2022 stood at Rs.216
Crores as compared to Rs.161 Crores in nine months FY2021 a growth of 34%. Revenue
split between domestic and export stood at 59% : 41% in Q3 FY2020 and 67% :33% for
nine months FY2020. Our export revenue for nine months FY2022 grew by 42% approx to
Rs.71.4 Crores in nine months FY2022 and 54% in Q3 FY2022. Gross profit margin for
nine months FY2022 stood at 79.7% as compared to 71.7% a jump of 800 basis points on
Y-o-Y basis. GP margin for Q3 FY2022 stood at 77.9% compared to 76.05% in Q3 FY2021
an increase of approximately 150 basis points and down by 120 basis point on Q-o-Q basis.
Dip in gross margin on quarter-to-quarter basis is majorly due to change in product mix
since we manufacture more than 1700 SKUs across 200 product categories however GP
margin on quarter-to-quarter basis might vary and a more independent figures to be looked
at its own annualized basis. At EBITDA level, EBITDA for Q3 FY2022 stood at Rs.33
Crores as against Rs.31 Crores or Y-o-Y growth of 8%. EBITDA margin for Q3 FY2022
was down by 400 basis points on account of increase in employee expenses, IPO expenses
, more consumption of Packing Material , Fixed Expenses an other one due to change in
productivity as highlighted above, which might taper off in the coming quarters. For nine
months FY2022 EBITDA was Rs.108 Crores as compared to Rs.69 Crores in nine months
FY2021 a significant growth of 58%. EBITDA margin for nine months FY2022 stood at
50% as compared to 42.5% in nine months FY2021. Therefore, inching a growth of 770
approx basis point on the Y-o-Y basis. At a PAT level PAT for Q3 FY2022 stood at Rs.21.5
Crores as compared to Rs.21 Crores in Q3 FY2021 a growth of 2%. PAT for nine months
FY2022 stood at Rs.71 Crores as compared to Rs.45 Crores in nine months FY2021 a
significant jump of 57%. PAT margin for nine months FY2022 stood at 33% a growth of
500 approx basis points as compared to same period last year. On utilization of proceeds
from IPO, we have repaid the debt up to the tune of Rs. 78.54 Crores and currently we are a
net debt free company, which will enhance our profitability. Also, the construction of new
manufacturing facility in Panchla, West Bengal is on track and we target to commission the
same by middle of 2023.
Lastly the demand scenario going forward looks robust and we are optimistic of sustaining
the growth trajectory with higher profitability on the back of operational efficiencies and
scale. With this, I would like to open the floor for Q&A.
Moderator:
Thank you very much. We will now begin the question-and-answer session. Ladies and
gentlemen, we will wait for a moment while the question queue assembles. The first
question is from the line of Praveen Sahay from Edelweiss Financial. Please go ahead. As
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there is no response from the participant, we will move to the next question, which is from
the line of Rishab Parekh from Sunidhi Securities. Please go ahead.
Rishab Parekh:
Congratulations on a very robust set of nine-month financials and thank you for the detailed
investor presentation. I had a few questions. Firstly, regarding the Q3 FY2022 performance
what we observe is there is no growth in the domestic market in Q3FY22 versus the
corresponding quarter last year, so just wanted to understand if what was going on there?
Secondly, you mentioned that there was a one-off in the margin so if you can elaborate on
what is the quantum was and I will ask my other questions after this.
Rohan Sehgal:
Sure, thank you. If you see our numbers on Q3 FY2022, 41% of our revenue has come from
the international business, but if you see our nine-month revenue in FY2022, it is in the
33% indicative of our company, which is at about two-thirds of domestic revenue and one-
third of international revenue. Now since our capacities are constrained and we are
expanding on newer capacities, the international business revenue is not very linear this
year and it is clumped in parts and portions because we are unable to get the container
availability and the vessel availability which is an issue with all across the country and all
over the world so you will see a higher proportion of revenue, which is coming out of
international business because of better availability of containers in this period as compared
to Q1 and Q2 so if you see our proportion of revenue changing, it changes from 75:25 in Q1
to about 64:36 in Q2 to about 59:41, but on our overall nine month basis if you see it stays
at about 67:33, which is indicative of our company over the last two or three years and
because of restricted capacities, we have back orders in both international and domestic
markets. We can only cater a certain market at a certain point and we cannot cater to
everybody hence we would have not had any back orders at this point of time and hence
you see a little dip in the domestic revenues and a little increase in the international
revenues.
Rishab Parekh:
Is this purely on account of capacity constraint that this was the case, right?
Rohan Sehgal:
On the account of capacity constraint as well as more importantly on container and vessel
availability constraint. We are unable to ship out containers at the right time and if you see
that there are clump sales in international business. International sales are not moving more
linearly. Every month there could be some really high peak months and some low months.
It is all reliant on the container availability and not on the actual international customer
demand.
Rishab Parekh:
I understood and on the expenses front, you mentioned some, one off items, which you can
just quantify.
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Rohan Sehgal:
We have employee expenses, which have increased slightly. The reason for that is we are
Tarsons Products February 08, 2022
investing a few quarters earlier, which we need to do as we are growing into our next phase
of growth, which is a pretty aggressive capacity expansion as well as new product lines. We
need to build people and teams for projects as well as build R&D capabilities so these
employee costs will start wearing off over the next few quarters as the revenues start
coming in. We need to invest a little bit ahead of time in employee costs. In packaging, we
see a certain increase in the packaging cost because of dramatic increase in the cost of
paper, which is again a very known thing all across the country. We believe that in the next
financial year, we would have certain price adjustments to take care of these price increases
as well as there is a about Rs.1 Crores to Rs.1.1 Crores one-time expense of IPO, which was
the ideal marketing expenses.
Rishab Parekh:
Is this for Q3.
Rohan Sehgal:
Yes, that would be Q3.
Rishab Parekh:
Okay, our steady state other expenses run rate would be about Rs.13 Crores going forward
as well?
Rohan Sehgal:
Approximately and similar to what we have seen in the other quarters yes.
Rishab Parekh:
My second question right was on our new product basket that we proposed to introduce
once our new manufacturing capacity is on stream so going through your presentation, the
Indian plastic LabWare market is about Rs.1220 Crores out of which about Rs.500 odd
Crores is PCR and cell culture so is my understanding correct that we are not participating
in about 45% of the market right now?
Rohan Sehgal:
Yes, I believe that we are not participating in about 35% to 40% of the market as over the
last five to six months, we have launched various lines of PCR products and we continue to
do so towards the end of this financial year. We believe with the launch of the complete
range of cell culture and further product categories, which are ancillary categories in cell
culture we would be catering to the entire market segment.
Rishab Parekh:
What could be the competitive intensity in the new products that we would launch and who
would be our main competitors and would we be competing mainly on price or a faster
delivery or better quality?
Rohan Sehgal:
Our competitive advantages would remain similar to what it is currently for our current
product lines offering high quality reliable products with a very, very strong and trusted
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giving quick deliveries to our customers in India and across the globe and a brand and a
product line, which they can trust so the value proposition would be similar for the new
product lines as compared to what our current product lines are. In the competitive
landscape, I do not see much of a change.
Rishab Parekh:
Who would be our main competitors in these?
Rohan Sehgal:
Global multinational players because we would be the first manufacture from India to enter
into these product categories. The first homegrown “Made in India” manufacturer so mainly
multinational companies from across the world.
Rishab Parekh:
And would we be cheaper than them and would they be manufacturing these products in
India or would they mainly be importing?
Rohan Sehgal:
These products are imported as of today and yes, we would have cost advantages being
producing the same in India and we would be passing on these benefits to the final
customer.
Rishab Parekh:
Understood and my last question right was, on our sterilization facility what was the
thought process of making it in-house and since you are backward integrating what kind of
margin improvements can we expect once this comes on stream?
Rohan Sehgal:
Approximately the cost of sterilization today for us is about Rs.3 Crores per annum and
moving forward I think over the next five to seven years that could grow by about five to
six times the cost of sterilization. Having sterilization in-house could probably give us an
advantage of about 100 to 220 basis points on our EBITDA margin, but we are looking at
sterilization not so much on our margin perspective, although it would improve our
margins, but we are looking at it more as developing a capability in-house because 100% of
the future capex what we have planned and what is ongoing today is reliant on sterilization
so we need to create a world class sterilization center with world class laboratories to cater
to our growing needs of sterile products.
Rishab Parekh:
Understood and sorry my last question was on exports. Would the export margins be similar
to our domestic margins especially in the export ODM business?
Rohan Sehgal:
Our export margins are similar in the ODM and branded business. On a gross level export
margins are slightly lower to the tune of 5% to 7% to domestic margins. That is because it
does not take into account importer margins in other countries as well as cost of larger costs
of trade as well as custom duties and clearances in respective countries, but on a net level it
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is pretty much similar or identical to domestic margins because the overhead costs are very,
very negligible as compared to overhead costs in domestic business.
Rishab Parekh:
Got it. Thank you very much.
Moderator:
Thank you. The next question is from the line of Pankit Shah from Dinero Wealth. Please
go ahead.
Pankit Shah:
Good morning, everyone. The first question is on the revenue, I want to understand how
much revenue is contributed by COVID-related product and as you said that do we have
some capacity constraint as of now, so how does FY2023 look like as the COVID subsides
the revenue will go away and we do not have capacity in place so how do we see FY2023
till the new facilities or the new capex come in place say by Q1 of FY2024?
Rohan Sehgal:
Good morning. So during peak COVID we estimated that about a third or probably 30% of
our revenue came from the COVID. The current wave and the current signals over the last
five to six months COVID revenues have been wearing out although the cases have been
high, but it is not the same as the first and second lockdown so today we estimate that our
current COVID revenues already are in the mid to high single digits and continuously
wearing out and more and more the regular product sales taking over. So we are in a
constant process of increasing capacities in both currently in this financial year as well as
next financial year so it is a continuous process and not a onetime process, which will show
at the middle of FY2024. So we are very confident of a strong and robust growth from our
existing as well as new product lines without COVID revenue in this Q4 of this year at
FY2022 as well as the entire FY2023.
Pankit Shah:
Okay, can you brief us on the entire capex program, which you were talking about during
the IPO and I think the program was about Rs.350 Crores to Rs.400 Crores including
Panchla, the fulfillment center and the existing facilities, the timeline, the capacity and how
quickly can we ramp up these new capacities coming in place?
Rohan Sehgal:
Yes, as you are right it is about Rs.400 Crores of capex plan. Rs.190 Crores has already
been paid. We have started receiving a lot of our increased capacities as we have made a
payment of Rs.190 Crores already. We have Rs.60 odd Crore’s earmarked from our IPO
proceeds, which should be paid in a phased-out manner for the construction of our facility
in Panchla and the remainder of about Rs.150 Crores to Rs.160 Crores would be evenly
paid by our internal cash accruals over the next 18-month period.
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Pankit Shah:
How quickly can we ramp up these capacities as you said you the orders are there so once
the facility comes up, we can quickly utilize it right?
Rohan Sehgal:
Absolutely. At least for the portion of our existing capacity expansions, the ramp up will be
much quicker in terms of the newer products, there would of course be a teething period in
which we launched the products and get products acceptability and slowly ramp our
products to reach full capacities.
Pankit Shah:
Okay. What would be our gross and net asset turnover?
Rohan Sehgal:
I believe that the gross and the net asset turnover should be identical or maybe slightly
better to our current net asset turnovers and the gross asset turnover maybe, we might
expect a slight dip from our current gross action asset turns and that is because of the higher
cost of infrastructure and construction what we faced in 2022, 2023, 2021 as compared to
few years ago.
Pankit Shah:
Sir if I am not wrong, our current gross PPE is at say 1.7 for FY2021? Do you expect it to
reduce?
Rohan Sehgal:
That is the net, and the gross would be lower.
Pankit Shah:
Okay, so gross as per the old accounting standard comes at a 0.74 to 0.75?
Rohan Sehgal:
Right, we believe that for our equipment plant and machinery, the asset terns would be
equivalent or better because we are getting into better value-added products, but things
which are out of our control which is construction and land infrastructure the costs as you
know of steel TNT and cement are at an all time high so that will play into certain more
expensive investments and hence the asset turn on the production infrastructure part might
be a little lower.
Pankit Shah:
Right. The last question actually more of clarification; in the IPO in the DRHP you have
mentioned that there was a serological pipettes manufacturing facility which was
temporarily suspended so what is the status there and again the status on the petri dish
automated system? That project was also suspended due to COVID?
Rohan Sehgal:
The first line was the serological pipette line. It was not suspended but it was more of work
in progress because there were certain technologies which we were trying to develop in-
house in order to perfect the product and hence it was a capital work in progress. The petri
dish line is a proven, tried and tested line. It had reached us but due to COVID restrictions
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we needed the assistance of certain engineers, automation engineers from Europe to fly
down to India to help set up the facility. This is a starting facility. When we start a new line
of automation, we always need this and because of COVID travel restrictions, we were a
little delayed in starting up the same however the engineers have visited us and the facility
is on the verge of getting started. For the technological pipette, as I said that, we are in the
midst of acquiring certain technologies to perfect our product and we are very, very
confident of starting serological pipettes in Q1 of FY2023.
Pankit Shah:
Great. Thank you. All the best.
Moderator:
Thank you. The next question is from the line of Saket Mehrotra from Tusk Investments.
Please go ahead.
Saket Mehrotra:
Rohan, one quick question; on the numbers what I can see is for the last three quarters our
EBITDA margins have actually been coming down? In H1 business update that you guys
had talked about the fact that this margin has gone from 46% to 52% whereas what I am
seeing is for the last three quarters our EBITDA margins has been consistently declining, so
any reason for this? Is there some one-offs or how do we see this going forward on a
sustainable basis?
Rohan Sehgal:
Sure, firstly on a sustainable basis, we expect expanded EBITDA margins from what we
achieved in FY2021, so on a higher level to FY2021 EBITDA margins there has been cost
and inflationary pressures in terms of packaging material, in terms of transportation and
other things. Being a very, very strong brand with delivering trust is what our slogan says.
We generally do not change prices mid-year unless there is an absolute necessity or need or
if a margin have gone completely haywire, so we generally change or reflect into newer
prices on an annualized business contract saying the customers domestically as well as
internationally. So we will look into what our pricing is and where we can recover some of
these margins on the new financial year, which is in FY2023, but I believe that the lowering
of the EBITDA margins is passed down. It is more or less a fixed-cost business so the more
we sell the more margins we make. The costs are almost fixed. We do not hire more people
when our sales are more and reduce people when our sales are less. On the gross margin
area, you would see certain fluctuations that is only because as I explained earlier we came
from domestic 75% and exports 25% in Q1 FY22 to 67%, 33% in Q2 FY2022 and to 59:.41
in Q3FY22. So most of our international business has been clumped into Q3, which if
ideally divided between Q1 and Q2, it would have shown more reasonable margins and not
so much of a spike.
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Saket Mehrotra:
Which brings me to my second question; is there some sort of saliency when it comes to the
sales that come in because, if I see the last three quarters and between September and
December we have seen a 7% decline. In sales so is a bulk of our revenues recognized
towards Q4 in a financial year because we do not have the data for March 2021, so just
want to get a sense with respect to how the saliency of our sales are when we compare it
across four quarters?
Rohan Sehgal:
March 2021 data is basically the nine-month ended FY2021 minus the whole year revenue,
but I believe that Q4 is always the strongest quarter for the company and Q1 is always the
slowest quarter because we are ending the year and we are beginning the year at Q1 so all
budgets and everything are being consumed and is when you know new business strategies
are being formed. But I believe that we do not look at business from a quarter-by-quarter
basis we look between Q3 of this year and Q3 of the previous year because Q3 especially in
West Bengal is a large festive year. We have our internal festivals which carry on for 10 to
12 days and by the time that ends, we have another festival which is Diwali, so there is not
continuity of business and we lose about two and a half to three weeks of business out of
the twelve weeks of Q3. So historically we have seen Q3 to be very, very similar to Q3 each
last year.. So we are not too worried about the de-growth what you see from Q2 to Q3 we
are looking at more from Q3 2022 to Q3 2021 perspective.
Santosh Agarwal:
Just to add okay if you see the Q4 number of last year that was Rs.67 Crores. That was
much higher in compared to Q3 so whatever we reported in Q3 this year if you follow the
same trend then Q4 will be better little bit
Rohan Sehgal:
Probably the last year Q3 numbers were looking stronger because we came from a very
muted two quarters because the country was almost under full lockdown, but this year we
came into Q3 with a very strong Q1 and Q2 so it was not in really an apple to apple or on a
like to like comparison.
Saket Mehrotra:
Okay. Final question, can you throw any color on, let us say, what sort of capacity
utilization you are operating at now because when I heard you say that there were
constraints with respect to supply and your orders were not being able to be met because of
let us say supply side issues. So that is one and two while I understand you mentioned you
typically take price hikes towards the starting of a new financial year so did we see volume
uptake in our international business compared to say last year and how do you see that
panning out in the future?
Rohan Sehgal:
I feel that it is very difficult to actually pinpoint as I said earlier on our capacity utilization
because we are running 1700 odd SKU across 55 to 60 odd machines, so although 20% to
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25% of the lines are dedicated the remainder 65% to 70% are mixed lines, which can cater
to various kinds of products and various kinds of molds. So we could be back ordered in
15% to 20% of our machineries and we could have spare capacities in the remainder part of
our machineries, but the need of the hour is in the areas we are back ordered. So giving an
accurate capacity utilization would not be possible because of the complexity of the same,
and yes we do change prices on an annual basis and internationally, we see a good volume
growth from our existing customers as well as constantly we are looking into newer
geographies and newer territories and adding on to newer customers as well as launching
newer products in the international market so we see a very positive trend moving in the
international market. We believe that the domestic market has such a strong runway for
growth that it would be tough to break this 65:35, 67:33 ratio in the near to medium-term
future.
Saket Mehrotra:
Okay. Thanks a lot.
Moderator:
Thank you. The next question is from the line of Hardik Vora from Union Mutual Fund.
Please go ahead.
Hardik Vora:
Good afternoon, everyone. Thank you for the opportunity and congratulations on a good
nine months performance. Sir my first question is actually on the gross margins? I know we
have already discussed on the EBITDA level, just wanted to understand one thing? If you
look at the gross margins for the first three quarters in FY2022 it is much higher that what
we reported for the previous financial year, so what is the reason for this improvement and
why is this persisting?
Rohan Sehgal:
We believe that you know the reason for this improvement is economies of scale as well as
more value-added products, newer products which have a slightly better margin than our
existing product portfolio as they take over and as they increase their share in our overall
basket as well as increase in revenue of sterilized products so as we see today about 25% of
our revenues comes from sterile products. We are going backward integrating, building a
sterilization facility and we believe most of our new capex expansion would be sterilized
products. We believe this number could go to about half of our revenue. I think a mix of
these factors have led to better gross margins from the 70% to 73% level close to the higher
70s touching 80 levels.
Moderator:
Thank you. As there is no response from the line, we will move to the next question, which
is from the line of Jaiveer Shekhawat from Ambit Capital. Please go ahead.
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Jaiveer Shekhawat:
Good afternoon, everyone. Just firstly on your revenue growth would you have data on the
split between the volume growth as well as the pricing growth on a Y-o-Y basis?
Rohan Sehgal:
No, we do not have that data off hand but we would assume that most of the revenue
growth is from the volume growth with certain price changes, which were made in FY2020
but not so much in FY2021.
Santosh Agarwal:
We have a 1700 SKUs spreading over 300 product segments and the price of each product
sometimes it is 10 paisa and sometimes it is Rs.10,000 right, so we are not tracking our
revenue on a volume basis because it will not give a right picture. We are more tracking on
a revenue basis.
Jaiveer Shekhawat:
Understood, so going ahead with the capex, could you specify how much you incurred on
land for your facility in Amta and what could be the incremental cost for setting up this
sterilization facility there?
Rohan Sehgal:
We purchased the six acres in Amta and approximately the cost was Rs.20 Crores or Rs.200
million for the purchase of the land. There would be incremental costs to set up
infrastructure, which is building and other utilities.
Jaiveer Shekhawat:
What would be the quantum?
Rohan Sehgal:
The quantum would be on our entire land and on our entire infrastructure in both Panchla
plus Amta would be close to about Rs.150 Crores to Rs.160 Crores.
Jaiveer Shekhawat:
We see that the other expenses have remained at an elevated level over the last few quarters
and what is the exact reason behind those, roughly touching almost about Rs.14 Crores in
2Q as well as in 3Q?
Rohan Sehgal:
I have explained earlier as well that there has been an increase in packaging costs and paper
has drastically increased in price and we are packing intensive so we require a lot of
packing products especially high quality packaging which you know adheres to meets
international standards for our domestic and international customers. So there has been a
cost pressure on the packaging side as well as there has been pressure on the employee
salaries side because we have a very elaborate expansion and capex plan for the next 18
months, so we are trying to build ahead of time, which will be able to execute these capex
plans in the right manner as well as build in-house R&D facilities, which we started for the
first time in FY2020 and have been building up our R&D and research and development
facilities. So I believe that over the next few quarters these costs will start drying up and
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will be absorbed as our revenues and scale grows up. So when we will start Amta and when
we will start Panchla the cost ratio of the people to turnover of that place will take a few
quarters to absorb because it is a new facility, which we are starting up and would not have
the efficiencies what our current facilities will have. Since we are planning such a large
capex plan, we would need to invest a little ahead in time and that is why we see pressure in
the salary side and the reason we see pressures in the packaging side because the rising
costs are deeper and the reason, we see pressures in the transportation side is because it is
known that transportation and freight is at an all-time high. These are all factors, which are
industry-related factors not related to our company. We would look to address the same
when we come to our next price revision, which is in the financial year FY2023.
Santosh Agarwal:
Just to add, whenever we are talking about opex tracking, we always recommend to do the
opex tracking and gross margin tracking on an annual basis because when you do the
analysis on a longer horizon, you will get a right picture. For example, in Q3 our gross
margin is 77.9%. the nine-month number, it is 79.7% and 79.7% is phenomenal, right? The
objective is to see the picture over longer time because quarter to quarter has a different
variation, export sales is there, sterilization is there, and different products require different
packaging so te longer the period you take, better will be the analysis.
Rohan Sehgal:
There are various factors and it gets complicated so we are at 59:41 this quarter for
domestic and export ratio. If we were at 65:35 or 67:33 the picture would be much different
because the realization from domestic sales is higher than the realization from international
sales so at the same cost level revenue would be higher and the margins would have looked
a little better than what they looked today?
Jaiveer Shekhawat:
Understood. I was actually looking for this. Thanks a lot for that.
Moderator:
Thank you. The next question is from the line of Sonal Gupta from L&T Mutual Fund.
Please go ahead.
Sonal Gupta:
Good afternoon and thanks for taking my question. Just on realization on exports is low like
you just mentioned, is that because it is a net realization or after taking the freight cost and
everything thing or is that the gross?
Rohan Sehgal:
It is also on the gross level on the EBITDA and net level the realization on exports is
identical to domestic if not slightly lower because our company has grown from about 5%
international business to about 30% to 32% international business with expanded margins
over the last seven to eight years. So it is on a gross level because the overhead costs of
doing business internationally is a fraction of the overhead cost of doing business in India.
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In India, we work on the customer level. On the international business, we work on the
importer level and that is the major difference.
Sonal Gupta:
Right. I am just trying to understand the freight cost and all those costs are reflected on your
P&L right?
Rohan Sehgal:
The freight costs are borne by the customer. Duties and custom duties and clearances are
paid by the customers, but the products are priced in accordance with the competitive
landscape taking into account the freight, customs, clearance as well as the importer of
margins.
Sonal Gupta:
Basically, it is a pass through, but it will reflect on your P&L?
Rohan Sehgal:
Absolutely yes. It is basically priced for the market. Like how we have price to the market
in India, we are priced to the market internationally. The difference is we produce in India,
we sell in India. We work on the customer level. Internationally, we produce in India. We
sell to an international country and we rely completely on the importer who is importing
and who is then passing it on through various channels to other distributors and sub-
distributors before it reaches the customer. We have not set up shop internationally. We do
not have subsidiaries and our people on the ground like the way we have in India, so this
difference in cost leads to the difference in realization.
Santosh Agarwal:
Financial statement, whatever revenue we are showing that is not including freight. Freight
had been netted off with the freight cost.
Sonal Gupta:
But then you are saying that other expenses are higher because of higher freight expanse?
Rohan Sehgal:
That is domestic freight and not the international freight. We are talking about the
international part at this moment.
Sonal Gupta:
Right, so the international freight is not reflected?
Rohan Sehgal:
It is net of the number on the invoice which is our price to the product. Our price to the
customer either in Euro or US Dollars.
Sonal Gupta:
Got it so the freight t and taxes will not be reflected right for international?
Rohan Sehgal:
Freight and taxes will be reflected. For example, we have a company in Germany called
Tarsus GMBH, when Tarsus is the importer in that country then we will have to account for
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the trade, the clearances and duties in that country, but today our responsibility seizes once
we ship the product out of our factory, so it is the responsibility of the importer and the
importer is a separate legal entity. Its is not our company, hence he looks into the account
paid of customs and duties, but we must account for that in our pricing so that we are
competitive in those markets and we can increase our market in those countries.
Sonal Gupta:
Got you. On an overall basis, because there is clearly a lot of expansion plans, etc., but
could you sort of indicate like what level of capacity because you are currently running an
extremely tight capacity utilization or high utilization so for FY2023 over FY2022 what
sort of growth can you expect with the capacity expansion?
Rohan Sehgal:
We are looking to expand critical products as well as reusable where we are short on
capacity. We aspire to become close to a Rs.500 Crores revenue company over calendar
year2024 that is the aspiration we are working towards it as a company to achieve the same.
And I believe that we will achieve pretty strong growth over the next two to three years to
reach that number and capacities will come into place in a phased out manner so we should
not believe that you will be out of capacities all through FY2023 and only commissioning
of the plant in FY2024 in the middle of FY2024 when the capacities come into place.
Capacities are coming in a phased manner and as we have already poured in Rs.190 Crores
out of the plant, Rs.404 Crores a lot of capacities have already started coming in place. So
things will continuously improve till 18 months and it will not be a one-time improve at the
end of 18 months.
Sonal Gupta:
Got it. Roughly, currently this year we would be Rs.280 Crores to Rs.300 Crores that will
go to Rs.500 Crores in the next two years, right?
Rohan Sehgal:
That is for our aspirations by calendar year 2024 yes.
Sonal Gupta:
Calendar year 2024?
Rohan Sehgal:
Yes.
Sonal Gupta:
Just lastly what is the capex expected for this year and next year?
Rohan Sehgal:
It would depend on the clients and how quickly the product lines and how quickly our
automation partners and tool partners and mold partners are able to prepare our products
and ship it to because the capex plan is Rs.400 Crores to Rs.410 Crores, which we have
already explained, but globally just like there are issues in supply chain and issues in
various parameters such as automation and a lot of parts which are required for the
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automation so it moves. You pay a certain advance portion and then you pay the remainder
on FAE testing, so the entire capex would be consumed in the next 18 months as we have
planned, but to give you identical numbers and to give you identical timelines as to how it
will move will depend a lot on how our molds, machines and other various instruments are
produced and prepared and sent by our vendors from across the world. In terms of the
infrastructure, the land has already been purchased and the infrastructure would move more
on a monthly installment basis till the end, so it would be about another 16 to 18 months of
equal installments of the amount of money, which is left to build up the infrastructure for
both our facilities.
Sonal Gupta:
I mean like because where I am coming from is like you said Rs.190 Crores has already
been paid? Out of this Rs.190 Crores being paid how much was paid till FY2021 itself?
Santosh Agarwal:
Till mid of FY 2023 , we paid Rs.160 Crores approx. .
Sonal Gupta:
Basically, you are left with Rs.240 Crores to be spent this year and next year?
Santosh Agarwal:
we already have a Rs.60 Crores ear marked for the Panchla so the remaining we will fund
from our internal accruals.
Sonal Gupta:
Got it great. Thank you so much.
Moderator:
Thank you. The next question is from the line of Rushil from Pioneer Wealth Management.
Please go ahead.
Rushil:
Good morning. Sir my question was that since CRO, CMO and diagnostic segment, which
are more of quality conscious and there is a stickiness of the customers and not much of
price sensitive in nature, so since we have global competitors who might have upper hand,
so like what is our strategy to increase share in that segment and how we compare on those
strong global brands?
Rohan Sehgal:
Based on our numbers, we are one of the leading players in India and we have done this
exercise over the last 10 to 15 years to build a very, very strong and reliable brand, which is
probably one of the most accepted brands in the country and we believe now is the
opportunity for us to add to our product basket by adding new products and increasing our
wallet share with customers.
Rushil:
Sir can we get like how much revenue comes from the CRO and CMO segment and
diagnostic segment? Do we track that?
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Rohan Sehgal:
We cannot track that because we work through distribution partners and our point of sale is
distributors, but we assume that diagnostics would account for about 20% to 23% of our
total revenue.
Rushil:
Since these are like more of customers stickiness and quality is the upmost priority so how
much time it takes to convert the customer because we do it on pilot bases and they will be
approved, quality department approval and all so how much time it takes? What is the lead
time basically for those products to convert the customer?
Rohan Sehgal:
For newer companies, it is a very, very long lead time because most of these companies are
resistant to change. As you said they have a very high precedence on quality but we are an
established brand into most of the large customers available in the country and hence as I
said earlier, we are just looking to add to our wallet share with these customers. We are
already an approved and reliable brand for most of these customers in diagnostics and CRO.
Rushil:
Sir. In just on some products there are going to be some product which might be price
sensitive and some might be not price sensitive and how do we balance that? Are there any
products where the volume growth plays out but there is no pricing power, but there are
some like where pricing power is there, but not much volume growth?
Rohan Sehgal:
I think it is a mix and we approach the market based on the product, based on the
competitive pressures of the product and we approach on a product-by-product basis. There
could be certain products where the comparative pressures are very, very high, but the
volumes are there and we act accordingly, so it is a mix of everything and what you see on
our numbers is a culmination of high margin, middle margin, and low margin products
everything put together.
Rushil:
Sir, can you name those products which are of low margin or like where volume growth
plays a lot?
Rohan Sehgal:
Standard products like beakers and measuring cylinders, which are a little less critical as
compared to products like PCR, liquid handling, and centrifugeware. Standard laboratory
products and having standard applications would have a slightly lower margin as compared
to a little more critical products such as PCR, liquid handling, and centrifuge like
cryogenics.
Moderator:
Sorry to interrupt. May I request Mr. Rushil to please rejoin the queue? We have
participants waiting. Thank you. The next question is from the line of Anuj Jain from
ValueQuest Capital. Please go ahead.
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Anuj Jain:
Thank you Sir. Thanks for the opportunity. I have couple of queries. First out of Rs.216
Crores of revenues, which we have done in the first nine months, what are the COVID
related revenues?
Rohan Sehgal:
I believe it is towards the late single digits as we have not experienced a lot of COVID
revenue in this financial year. Most of the COVID revenue came on the last financial year
and towards the beginning or the first two to three months or Q1 of this financial year. In
the last two quarters, we have seen COVID revenue waning off very, very strongly and it is
more of regular revenues to regular customers.
Anuj Jain:
Understood. For these late single digit revenues, what kind of margins were there;
abnormally high or low or what kind of margins if you can share?
Rohan Sehgal:
We do not have a very large spike. I do not believe we have a very large spike where there
is a big difference between margins, but we could expect certain products in the PCR
categories having more superior margins to standard products, but on an overall basis I do
not see much of a margin difference between COVID and non-COVID sales.
Anuj Jain:
Understood and Sir my second question is more from like long-term strategy; as you have
touched upon that, we have the aspiration to reach around Rs.500 Crores by calendar year
2024 and in the next two to three years what kind of margins we can expect at EBITDA and
PAT level?
Rohan Sehgal:
As we said we have fixed cost company and everything flows down from the gross margin
level. We have always remained in the area of 70% to 73% gross margin, but we believe
that with the new product lines and new value-added products as well as capacity
expansions and increase in our ratio of sterilized products, we believe that we can have
sustainable gross level margins of mid to high 70%.
Anuj Jain:
And at EBITDA level?
Rohan Sehgal:
As you can see, our current EBITDA levels of about closer to the 50% mark, on the late 40s
is what we aspire to be towards the late first 40% touching 50%.
Anuj Jain:
Understood. Basically, around similar margins, which we are doing and expecting to clock
around Rs.500 Crores in next three years right?
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Rohan Sehgal:
Absolutely because we believe that there are a lot of cost inputs which we are putting today
into the company, which we should actually iron out as our company grows in scale and
size and we are very confident about this number.
Anuj Jain:
Understood. That is all. Thank you, Sir. All the best.
Moderator:
Thank you. The next question is from the line of Vivek Gautam from GS Investment.
Please go ahead.
Vivek Gautam:
Is our business branded business or is it a commodity business? are we able to pass on the
price as you have the pricing power but our EBITDA margin and our net profit margins are
all coming down?
Rohan Sehgal:
I am not really sure about the question about branded or commodity business, but what I
can tell you is that we are priced to the market and we will price ourselves against the very
best in the market from multinational corporations to various able competition from within
the country and it is a common practice in our industry to change prices or review prices on
an annualized basis and not from a month-to-month or a day-to-day or a week-to-week
basis because that is not what the industry trend is. So unless something drastic goes on
where margins go upside down with a 50%, 60% and 70% change in margin where you
cannot sustain, we generally do not adhere to moving into midyear price changes that is not
been a norm for the company or for the industry.
Vivek Gautam:
The second thing is about the geographical risk our company has because you started out
from Kolkata agreed, but it is in one corner of India and the transportation cost I believe are
quite high as ours is a bulky item and extension again you are doing in the West Bengal
only. Does not that put us at certain disadvantages plus also the work culture with too many
holidays as you just mentioned in the Q3, so any parts of diversification geographically?
Rohan Sehgal:
We actually work through the standard culture all across India which is the fixed number of
holidays, which is also observed in West Bengal. We believe that our know-how and
technology lies in West Bengal and we would not like to spread that out across the country.
We would like to keep that know-how technology among our key people in West Bengal
and I do not see any reduction in margin. I think we are probably the most profitable
Labware company in the country.
Vivek Gautam:
On the cost actually I am talking about?
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Rohan Sehgal:
But I think the transportation cost is faced by other companies as well and in terms of
margins after paying such transportation costs from Kolkata we turn out to be one of the
most profitable companies in the country in the plastic lab this thing
Santosh Agarwal:
And we follow a centralized approach. We have all the factories and warehouse in one
place so we are getting the leverage of that and secondly our freight cost is not more than
5% of our top line, so it will not make much difference. And second thing is that we are
also building a sterilization plant so you cannot have the sterilization in different part of the
country, right? so this business model success is on the centralized approach.
Vivek Gautam:
What about the opportunity size CAGR and ROE you expect in the future Sir?
Rohan Sehgal:
We have already given you what we aspire to come over the next or two to two and a half
years by FY2024, a Rs.500 Crores company. I think the margins have also been told in the
last question where we aspire our margins to be and we will work toward our margins and
we expect the ROE levels to be at similar levels to what it is currently doing.
Vivek Gautam:
Okay, Sir thank you.
Moderator:
Thank you. The next question is from the line of Nikhil Chaudhary from Kriis PMS. Please
go ahead.
Nikhil Chaudhary:
This is Kriis PMS. Sir thank you for the opportunity and congrats on a good nine-month
number. I have just one question. I wanted to understand since the proportion of our cost,
the value addition in the end product of our products is quite small so cost cannot be the
factor for the customer switching to us from Thermo Fisher, so just wanted to understand
what actually triggers our entry into the customer base of the global MNCs? Is it the new
product or is it something else that excels into the new customer addition? Just wanted to
understand that.
Rohan Sehgal:
As you rightly said the cost component is smaller, so customers are very, very sticky so
actually we have done the hard part over the last one and a half to two decades. We have
spent a lot of time, effort, and resources on branding, marketing ourselves and actually
building a very, very high quality robust and reliable product, which customers have trusted
as their choice of supply for the research testing and production needs, so being a preferred
supplier for these product lines, we are in a very, very strong position to leverage this
strength and add new products and increase our product portfolio or wallet share with these
customers?
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Nikhil Chaudhary:
Understand Sir. I was just trying to understand more from the point of view of an inertia
where the customers is already getting it from the Thermofisher, what actually triggers our
entry into the new customer addition? I understand you are the best on the price and quality
point?
Rohan Sehgal:
What I am trying to explain to you is the customers are the same. We are not trying to enter
into new customers. We have the existing customers. We have to enter and get a larger
wallet share with those customers and we have launched various products over the last 10
years and since we do not see much of struggle to enter with newer products when we
already have strong-established relationships with these customers. as long as our product is
delivering the quality and the reliability and the consistency what we are promising. Since
we have a brand, which is well accepted we have to just deliver the quality what we are
promising as long as we do that, we get the entry.
Nikhil Chaudhary:
Understood Sir. This is very clear. This is all from my side. Thank you and wish you all the
best.
Moderator:
Thank you. Ladies and gentlemen, this was the last question for today. I would now like to
hand the conference over to Mr. Rohan Sehgal for closing comments.
Rohan Sehgal:
I would like to take this opportunity to thank everyone for joining the call. We will keep
updating the investor community on a regular basis for incremental updates on your
company. I hope we have been able to address all your queries. For any further information
kindly get in touch with me or strategic growth advisors or our investor relation advisors.
Thank you once again and stay safe.
Moderator:
Thank you. On behalf of Investec Capital Services that concludes this conference. Thank
you for joining us and you may now disconnect your lines.
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