Mitsu Chem Plast Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Demand trough, recovery spark: Demand was very poor in Q2 and Q3 across exports and domestic markets, but management sees a pickup from January and is "very bullish" entering Q4.
• Margins squeezed by high-cost inventory: EBITDA margins faced pressure from crude-linked raw material costs held in 60–80 days of inventory; sequential improvement is expected from Q4 as that inventory is exhausted.
• Pails ramp-up delayed to FY24: Commercial sales began in Q3 at very low numbers; the product's technical nature and tender cycles push meaningful revenue to Q1 FY24.
• Capacity utilization at 65%: On an expanded base of 24,000 (including pails), utilization reflects both growth and weak demand; some competitors ran as low as 45–50%.
• What to watch next quarter: Whether the January demand spark converts into sustained orders, the pace of margin recovery as high-cost inventory clears, and any early signs of pails order conversion ahead of the Q1 FY24 target.

Demand Environment

• Broad-based weakness in H1: Demand in Europe and the USA was very poor in Q2 and Q3, and domestic demand was also very less, with clients in key sectors (chemicals, pharma, agrochemicals) showing a decline in growth.
• January inflection: Inquiries started increasing from the first week of January and are converting to business; management is awaiting all sectors to grow and sees a spark in inquiries continuing into the current month.
• Export demand turning: Demand is coming up not only from India but from other countries as well, with chemical and pharma sectors described as "booming now."
• Election-year tailwind: Management noted that FY24 and FY25 look very optimistic, partly because India is expected to see very good growth in an election year.

Dedhia: "I am looking very bullish from the January first week itself. Now in the future it looks like demands are coming up not from only India from the other countries also like chemical, pharma that is booming now."

Margins & Cost Pressures

• Raw material pass-through is structurally difficult: When crude prices rise, the company must hold 70–80 days of inventory; when demand drops and market prices fall, customers become opportunistic and resist price increases, making it hard to pass on costs.
• High-cost inventory drag: Inventory held for 60–80 days created margin pressure earlier in the year; management expects sequential improvement from Q4 as that high-cost stock is exhausted.
• Energy costs manageable: Electricity costs are increasing every year, but management does not think it will have a very big impact on margins; better utilization and better demand will have a compensating effect.
• Finance costs rose on working capital: YoY quarter finance cost rose from 137.05 to 172, and 9M from 403.92 to 481.67, driven by increased working capital utilization due to higher turnover.
• Employee costs up with scale: YoY increase attributed to substantial growth in the last 1.5 years, more machines, recruitment, and salary increases.

Dedhia: "You can say that way. ... Yes we should because it is like now we have to at least 60 days to 80 days inventory is also with us. So, there is a lot of pressure earlier and then so I think let us hope for the best."

Pails Business

• Commercial start, tiny scale: Pails commercial sales began in Q3 but at very low numbers; the product is technical, requiring long sample approval and supplier audit processes.
• Tender-cycle delay: Larger orders are expected only from Q1 FY24 because the supply chain operates on accounting-year cycles, not calendar years, and the company is participating in RFQs and tender systems.
• Client identity guarded: When asked which clients have received pilot samples, management declined to name them, answering only "mostly new companies."
• Paint sector opportunity: The company is receiving inquiries from paint companies including Grasim and is talking to them on a serious note, though Grasim has not started production in a big way yet.

Dedhia: "We have already started, but it is a very low number in the Q3 as well, but what you are thinking for like the big numbers will come from the maybe first quarter of 24."

Capacity & Utilization

• 65% utilization on expanded base: Capacity utilization for 9 months was 65% on a base of 24,000 (including pails capacity addition); management noted that Q2 and Q3 demand was weak and that some competitors were running as low as 45–50%.
• Growth alongside addition: A lot of capacity was added in the last two years, so the 65% utilization for 9 months reflects growth alongside that addition, not just underutilization.
• No near-term CAPEX: Management has no plan right now for future CAPEX; past expansion was done with debt or internal accruals.

Product & Client Mix

• Hospital furniture share diluted: Contribution at 9% for first 9 months vs. prior years reaching 11%, 12%, 14% during pandemic; management attributes the percentage decline partly to the container business growing from ₹15 crore to ₹19 crore, diluting the share, and notes limitations on new hospital construction.
• Export push for hospital furniture: Company is participating in exhibitions abroad for hospital furniture and receiving a good number of inquiries, but no exports have materialized as of now.
• Client additions steady: Around 25 to 30 new clients added in the last 6 months, primarily in plastic packaging, with some new customers in hospital furniture.
• No new product launches: No new innovative product has come out from the portfolio in the last quarter.
• Sustainable packaging ambition: Management stated Mitsu will be one of the leading players in sustainable packaging, citing demand from both industry and government.

Dedhia: "There is a demand from the industry, there is a demand from the government and you will see Mitsu will be one of the leading player in sustainable packaging so I can say that much."

Guidance & Commitments

Key Metrics