Emmbi Industries posted a solid quarterly performance where top-line has shown roughly 13% growth YoY and 14% growth QoQ. Operationally, it has done even better where EBITDA margins have expanded from 12% YoY and 11.36% QoQ to 13.4% this quarter. Quarterly EPS stood at 2.31 vs 2.09 YoY and 1.35 QoQ despite higher tax expense (EPS would have been higher by 0.40 at applicable MAT rate).
Management “has walked the talk” in their focus on –
1. Introducing value added high margin products which have resulted in EBITDA margins at current level from 7-8% level 3 years back.
2. Reducing interest cost from over 13% to below 11%.
Key takeaways from the recent con-call post Q4 2017 results-
• Pre Expansion capacity was 18,000MT. Capacity utilisation stood at 92%. Company has undergone 2 expansions –
‘Dedicated Pond Lining Manufacturing Unit (3,600MT)
‘Dedicated Food & Pharma Packaging Unit (2,400MT)
This takes total capacity to 24,000 MT and capacity utilisation to below 70%. This takes care of capacities required till 2020 that means no further capex for next 3 year except for maintenance capex (roughly 5 Crores per year.). The management has reiterated that they aren’t looking for any further debt till a really great business idea comes in its mind. Also their philosophy is to build capacity, reach a 90-95% capacity utilisation and then go for a capex to bring it down to 70% level and keep doing it over years.• The company is predominantly a B2B company. However, recently the company is focussing on developing B2C business. The company has created 2 brands for its B2C business –
o “Jalasanchay” for water conservation.
o “Krishirakshak” for crop protection.
The company has also started a distributor level brand – “Dr.M” where the distributor is required to undergo 15 days training from the company. This will enable them to help farmers with technicalities of the product.
• In previous interviews, management has clearly said that the focus is on replacing low margin products with high margin products. This quarter, they have introduced one such product – “Emmbi Aluminium Liner – Coffee Aroma Lock Technology” – this helps in locking the aroma & freshness of coffee and can also be used for a product which needs a leak proof packing. This product helps in maintaining the freshness & quality of the inner product for a longer time.
The focus of the management is to create products & processes which are hard to replicate and differentiate them from competitors.
• Newfound focus on automation ensures optimal utilization of manpower. This,combined with continuous training and up-skilling ensures lower attrition.
• Management is clear that any new business has to be ROCE accretive. On being asked if they have any timeline in mind for a magical 1,000 crore top-line, they clarified that they have never thought it this way. It will come someday but any additional business has to be ROCE accretive.
To conclude with numbers –
? Dedicated Pond Lining Manufacturing Unit at 100% capacity utilisation will fetch a top-line of 100 crores and the product carries roughly 16-18% EBITDA margins.
? Dedicated Food & Pharma Packaging Unit at 100% capacity utilisation will fetch a top-line of 40 crores and the product carries roughly 16-18% EBITDA margins.
? Phasing out low margin products and replacing high it with high margin products will improve the realisations/MT of the company. However, it’s tough for now to quantify the same.
? No capex for next 3 years will help them reduce their debt which will further add to EPS.
To conclude, interesting times ahead for Emmbi and it has the potential to be a real compounder.