Ladies and gentlemen, good day, and welcome to Shaily Engineering Plastics Limited Q1 FY 2023 earnings conference call. 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 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 star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Sanghvi, MD, Shaily Engineering Plastics Limited. Thank you, and over to you, sir.
Thank you very much. Good morning, and a very warm welcome to all the participants to the post-results earnings call of Shaily Engineering Plastics. I have with me Mr. Sanjay Shah, our Chief Strategy Officer, and SGA, our investor relations advisors. I hope you've had a chance to look at our investor presentation that is uploaded both on our website as well as the document exchange. I am very happy to share that while we have registered our highest quarterly revenue in quarter one of FY 2023 at INR 172 crores. However, I'm sure everyone has this question on their mind, so I'd like to address it upfront, that we've also registered lower than normalized margin.
We've had some very tough significant challenges in quarter one of FY 2023, particularly with respect to rising material prices as well as rising or weakening rupee against the dollar, which have both resulted in margins taking a hit. We anticipate these margins to normalize by quarter three of this financial year. We have made significant improvement in traction across various verticals, and we have very strong visibility that gives us immense confidence that we will be able to scale up further and grow, including margins. We are deepening our foray into the intellectual property that we're developing in the U.K. for healthcare. Healthcare is now our second-largest revenue contributing segment. During the quarter, we finalized contracts for two additional pen injectors with leading pharmaceutical companies. We've built a scalable model which will help us achieve higher revenue growth in the coming years.
We've also embarked on a journey to create a new drug delivery technology that will be groundbreaking and world-leading for oncology. Where currently the therapies are administered by healthcare practitioners in hospitals, we intend to change this by taking the drug delivery at home. We're also deepening our foray in contract manufacturing of medical devices, where I'm happy to announce that we've just signed an agreement with a customer to manufacture dry powder inhalers for them. Under our automotive and engineering, we have started commercializing orders that we received and expect ramp-up in the current year, as we had mentioned in earlier calls. Last year, we raised funds and have started utilizing it to expand our core business of home furnishing, toys, as well as towards healthcare.
We are planning a CapEx spend of approximately INR 200 crores over the next two years, out of which more than half of the spending will be towards the pharma part of our business. This will be towards scaling up the existing devices that we have spent years developing and putting on clinical batches for customers, as well as for new IP-led devices that we're currently in the process of developing and handing over to customers. That is all from my side. I shall now hand over the call to Sanjay Shah, our Chief Strategy Officer, to give you the operating and financial highlights. Thank you very much.
Thank you, Amit. Good morning, everyone. I shall share with you the highlights of our operational and financial performance of Q1 FY 2023. Following this, we will be happy to respond to your queries. During the quarter, we processed 6,544 tons of polymers against 4,093 tons in Q1 FY 2022, an increase of 60% year-on-year. In Q1 FY 2023, we've already achieved 34% of the volumes of FY 2022 in the current quarter. Machine utilization rates stood at around 50% in Q1 FY 2023. Exports during FY 2023 stood at 80.4% of total revenue as compared to 76.1% in FY 2022. I shall now brief you on the standalone result highlights. Revenue stood at INR 172 crores during FY 2023 as compared to INR 121 crores during Q1 FY 2022, a growth of 43%. This is our highest quarter result, as mentioned by Amit already.
EBITDA stood at INR 21.7 crores during Q1 FY 2023 as compared to INR 20.2 crores during Q1 FY 2022, a growth of 8%. EBITDA margin stood at 12.6% for Q1 FY 2023. As mentioned by Amit, margins have been under pressure for a couple of quarters due to increase in raw material prices. These costs would be passed on as we go in the future. We received INR 7.4 crores during Q1 FY 2023 as compared to INR 8 crores during Q1 FY 2022. PAT margin stood at 4.3%. Cash PAT for Q1 FY 2023 was reported at INR 15.2 crores as compared to INR 13.9 crores during Q1 FY 2022, a growth of 9%. On a consolidated basis, revenues stood at INR 175 crores, EBITDA at INR 24.3 crores, and PAT at INR 9.5 crores for Q1 FY 2023. We don't have a comparable for Q1 FY 2022, so we're not having any comparable numbers there.
We would like to highlight that on the basis of recent developments, including operation and financial performance of the company, Care Ratings has upgraded our bank loan ratings from A- to A with a stable outlook for our long-term securities of INR 270.17 crores, and the short-term bank securities have been upgraded from Care A2 to Care A1. This is all from our side. We can now open the floor for Q&A.
Thank you very much. We'll now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. Participants, you may press star and one to ask a question. The first question is from the line of Manish Gupta from Solidarity Advisors. Please go ahead.
Thanks for the opportunity. Sanjay bhai, my question is that my understanding is, and please correct me if I'm wrong, that your business model is primarily a complete raw material pass-through model. With our largest customer, that's the European customer. Can you hear me?
Manish, we lost you. Could you please repeat?
Okay, I'm going to repeat. I said my understanding is that our business model is-
You're breaking again. I'm sorry about it.
Sanjay bhai, I think it's your network. I can hear Manish very well.
Participants, please stay connected. Sanjay bhai, I'll reconnect your line to the call.
Amit, should I wait for Sanjay bhai to get back?
No, I will try to answer it, Manish. Why don't you go ahead?
My question is, Amit, that as my understanding is that your business model is primarily a complete raw material pass-through model. With our largest customer, our billing is in rupees. We are also hedged for currency. My question is that how does one interpret the quarter-on-quarter gross margin decline? I'm saying practically, from a medium-term perspective, this metric, does it mean anything? Because if your revenue is on a formula basis linked to raw material prices, even if raw material prices were to crash or move up, over the medium term, your absolute cash gross margin remains the same. Is that understanding correct?
Yes and no. Yes and no. See, there is a material margin that is charged, and there is also a manufacturing margin which is charged. What happens in a scenario when you have rising material prices quarter-on-quarter is that we get the effect of the rise in the last quarter during this quarter, and the rise during of this quarter in the next quarter. The other thing that plays out is the product mix for each quarter and the volumes that we manufacture and sell. For example, if we've done the best quarter we have in the current quarter, and sales go up and we get the price increase, we benefit out of it, or we at least negate the margin erosion of the previous quarters. If volume comes down, even though you get the material revision, you benefit less.
You will have some losses that you make because you've not done the same volumes. Product mix volume also plays a little bit of a role. Throughout in a given year, it balances out. Unfortunately, we are in some unusual times at the moment. We are seeing product mix changes. We are seeing certain products going up in volume, certain products coming down in volume, and it has a little to do with the customer strategy as well, because there's limited capacity in terms of logistics available. Prioritizing products which are their best sellers is always going to be key for them to sustain their business. Did that make sense for you?
Yeah. I have a follow-up on this. What I hear you say is that under the assumption, for example, that we were only selling one SKU, and let's say it was 100 units, and that remains flat, then no matter what happens to commodity prices or the rupee, your cash flow remains preserved over time. Is that understanding right?
Yeah. As a percentage, it goes up or down, but the value part probably remains the same over a period of time.
Okay. What I didn't understand is that now I understand product mix, but if volumes go up, right? Let's say that you're growing pretty rapidly. Your volumes are up 50% Q- on- Q, give or take. If commodity prices have gone up? Are you saying that you will lose out because you will get a lower raw material adjustment based on the higher volume? Is that what you're saying?
No. Think about it. Our raw material buying cycles on average are, we will have stock of no more than 20 days in raw material, for example. Whereas the price revision with the customer is quarterly. You have one price revision every three months. Whatever I've supplied in Q1 FY 2023, I've also bought a substantial, barring three weeks, I've bought the most substantial amount in Q1 FY 2023. The prices we have paid in Q1 FY 2023 are substantially higher than Q4 of FY 2022.
Okay. My second question is that-
We will see this revision in Q2. We will get this adjustment in Q2.
If the prices completely collapse, it's not as if the customer will not give you the adjustment. They will give you the adjustment for the higher price you paid.
No. The same formula applies. Prices collapse, our margins go up. For example, materials have been at the highest in Q1 FY 2022, and if prices start to come down, then we will benefit from prices going down.
Okay. My second question and final question on it is that, we are seeing across the board opportunity in China plus one. I guess in some of the segments that you are in, that opportunity is quite strong, toys, furnishings. Can you just talk a little bit, and you mentioned some of this in your prior calls, but what are we doing for talent retention as we scale up? This is manufacturing, so, I guess you need a lot of talent on the design and manufacturing side. Can you talk a little bit about what you're doing for talent? Thank you.
Sure. I'm, again, glad that you asked this question. We've brought down our attrition from 14%-15% down to very close to 10% over the last two quarters. We have great camaraderie within the teams. What we have done is we've introduced the performance-linked incentive or a portion of our employee salary up to level of senior management, too, is all based on PLI. Based on performance, quarterly performance of the company as well as quarterly performance of the team, and then the individual. We've seen that this has been a great motivation for people to, A, to perform higher, to do better continuously. We see the results of that, especially when it comes to manufacturing. Unfortunately, our utilization is low because the order book, while we've done INR 175 crore, the order book is not what we anticipated it to be.
That's playing a bit of a downer. Overall, our retention has gone up, employee retention has gone up substantially, we are introducing long-term wealth creation up to a certain level of employees so that we improve that further.
Okay. Perhaps the second thing, the last one, Amit, that given what we are seeing, how the world is evolving, I guess there are some recessionary headwinds, but there are also tailwinds of global supply chains diversifying. On a rolling five-year basis, would you venture a number of what you'd be disappointed by if Shaily does not reach in five years from now?
You put me on the spot, right?
Amit, I think we would retain something here, right?
Well, I'll tell you what. I think if Shaily does not achieve an average CAGR of 17%-20% year-on-year, I would be very disappointed.
Okay. Thank you. Good luck.
A given year could be bad, but overall, I think we can still get there.
Super. Thanks, Amit. Thanks for your candor.
Thank you.
Thank you. The next question is from the line of Ritesh Shah from Investec. Please go ahead.
Yeah. Hi. Thanks for the opportunity. A couple of questions. First, continuing with the prior question, what percentage of volumes will have a cost-plus arrangement? You explained on the price revision, that was useful. Just wanted to get a number on percentage of volumes which will have a cost-plus or a pass-through arrangement.
All of our business has a pass-through arrangement. Some pass through on a quarterly basis, some pass through on a six-monthly basis, some pass through on a yearly basis.
Most of our volumes, right? Did I hear it right?
I would say that 80% of our business passes through on a quarterly basis or more.
That's it. Okay. That's quite useful. My second question is, Amit, in your initial remarks, you did mention about healthcare. You did mention about an inhaler device and a new mechanism, to get the delivery at home. Possibly if you could provide some more color over here. Thank you.
Two separate projects. One is we've developed a new technology. I will explain about it more in upcoming quarterly calls. It's too soon to talk about it. Basically, it's for oncology, you know therapies where patients are required to take very large volume drips currently at hospitals. We're trying to develop something where they can do this same activity at home. Second is that we've gotten into a contract with someone to manufacture a dry powder inhaler.
This is dry powder inhaler. Any quantum, any timelines over here of the size of the market that you are looking to cater?
It's a contract manufacturing. Because it's a contract manufacturing job, it purely depends on how the customer does. Here I will not be able to give you any further information at this point. Once product is fully industrial, we will be able to give you some indications. That's going to be 12 months out.
Lastly now, prior conference calls we have indicated about the ramp-up trajectory that we are looking at on insulin pens. We had also indicated that we have a number of innovative products which are there. Any color over here?
That business is growing well. We're making a lot of headway in now also different geographies of the world. We've currently targeted Middle East, where we see great volume opportunity scale-up in 2024 and 2025. The earlier indication stands true even today.
Okay. Would it be possible to indicate the number of pens produced? The earlier number was, I think, 7 million pens per year. We were looking to a ramp-up of maybe 20 million over the next two years. Any updates over here? If you can split it up between contract manufacturing versus IP, that would be useful.
All right. Currently, contract manufacturing would account for 60% of the pens. I would say 60%, maybe 65% or 55% or 65%. Let's say somewhere around there. It changes. It's quite dynamic. The rest would be our own IP. We see the IP growing significantly. When we gave the indication of 20 million over three years, most of that will come from our own pens.
Okay. Where are we right now?
That will come from our own pens.
That's quite encouraging. Where are we right now versus this 20 million pens number? Are we around about 7 million or have we moved up?
Yeah. Somewhere around 6 million, 6.5 million pens.
Sure. This last question, I think in the prior question you did indicate that the order book is not to what you expected. Can you provide some color segment-wise on any particular reason? I presume it would be on back of logistics or the global macro. If you could provide some color over that would be great.
It's purely the global slowdown in logistics and price rise. From a segment perspective, we've not provided it in the past, and unfortunately, I'll not be able to provide that right now.
Sure. Thank you so much for the answers. I appreciate that.
Thank you.
Thank you. Next question is from the line of Pritesh Chheda from Lucky Investment Managers. Please go ahead.
Hi. Congratulations for a fairly good traction in revenues. Just have two questions. One on the gross margin side. We were about 40%, now we are about 33%, there is about 5%-7% loss in gross margin. When do you see this getting recouped? When do you see the incremental contributions or the incremental business from the pharma side start kicking in, which would then influence the next leg of gross margin expansion? This is my first question. My second question is, usually at the beginning of the year, you have some broader revenue target for FY for the fiscal ongoing year. It would be nice if you could share what should be now the expected revenue for FY 2023, if it is possible to share.
Thanks, Pritesh. Let me answer your second question first. We are very hopeful we maintain similar momentum as we have done in quarter one. Quarter one has been exceptional. I will not lie, quarter two is at best going to be as good as quarter one. We anticipate ramp up in quarter three and quarter four. On the margin side as well, with the pharma kicking in, you will see margin expansion. You will first see normalizing of margins in quarter three, then an expansion of those margins. I do not know how much, some expansion of those margins in quarter four. We do have significant deliveries planned in quarter four for the pharma business.
When you mentioned that you will be hopeful to maintain the quarter one traction, is it INR 175 crores times 4? Is that how we should look at your business with quarter four seeing further expansion of the revenue? Pharma will start kicking, that is how I should read your answers or a different answer should I read?
Pritesh, very difficult for me to tell how demand will pan out this year. What we see is quarter four, we have additional pharma revenue from the INR 175 that we have done. We should grow in revenue in quarter three and quarter four. Quarter two, I am telling you right now because we are already in August, I know for a fact that we are at best, we are going to do INR 175 or somewhere a little less than that.
Lastly, sir, what is the progress now at the furniture factory which you were trying to stabilize and ramp up over the past one, one and a half years or so. Where are you on that journey?
On the steel, on the sheet metal? [audio distortion] Sorry, did you say something? [audio distortion]
Yeah. Again, steel furniture factory, our manufacturing capability has improved. We have come over the learning curve when it comes to fabrication of sheet metal. We have some challenges in powder coating, but we have improved significantly. Again, what we're seeing with this, unfortunately, is that we've seen demand drop in quarter two. Whatever manufacturing gains we have in terms of efficiency, in terms of quality, in terms of rejection, unfortunately, will not really give great numbers in quarter two.
Have you stabilized the teething problems in the factory?
I would say 80% of our problems, 85% of our problems have been resolved. We have some for which we have sought external expertise, external consultants and experts. We will be resolving them.
What is the utilization at the furniture factory?
We don't give out individual utilization. You know that.
No problem, sir. Okay. Lastly, sir, if you could share the CapEx number now for 2023 and 2024.
Pritesh, the CapEx number will stand same as what we talked about last time. We're looking at investing about somewhere between INR 100 crore and INR 120 crore this year. A majority of that will go in our expansion of our pharma facility. That's what's going to be under CapEx numbers this year.
Okay. Thank you very much, and all the best to you, sir. Thank you.
Thank you. Thanks, Pritesh.
Thank you. Participants, you may press star and one to ask the question. The next question is from the line of Aman Vij from Astute Investment. Please go ahead.
Yeah. Good morning, sir. First on the gross margin and EBITDA margin side. If you see our gross margin has fallen by 7%, 8%, but the fall in EBITDA margin has been lesser, at around 4%. Whenever in Q3 or Q4, we expect the gross margin to go back and maybe then pharma will kick in. Can our EBITDA margin be much, if not much, but higher than the average 16%, 17%, which we used to do historically?
Yeah, that's what we expect going forward. I don't know in terms of a time frame what it will be. Yeah, if you were to look at between this year and next year, we do expect margin improvement happening over that period.
Sure, sir. That helps. Next question is to Amit, sir. On the pen side, you have talked about you'll see most of the traction for this year in Q4. Are we on track to our target of around 9 million pens this year and around 12 million pens, which you had talked about for next year?
No. It's 6 million, 6.5 million pens going to 20 million in two to three years. That is what we have said. We are on target for that. We've done decent pharma sales in quarter one. We're manufacturing and are selling more in quarter two for pharma as well. You'll see good pharma traction before the end of this year.
That 10 million number is halfway. Do we expect to cross next year? The main jump up will happen next year?
From filing to launch is a two-year cycle typically. Next year, yeah, I think we should get somewhere closer to 10 million at least. I don't know how much. Maybe 9 million, maybe 8.5 million.
It's totally back-ended, because from 6 million to 20 million, we are not very sure of this year or next year ramp up happening, two and a half years will happen to reach-
Because it's always going to be. That's the approval cycle.
Aman, it's not that we're not sure.
Global volumes are there.
We're just not sure on how it's going to happen, and there's a great plan with the customer in terms of it. As Amit mentioned, there will be batches given for trials and everything. For those trials, we know what quantity we are supposed to give. Post that we know the ramp up which is going to happen. That's the cycle which happens for this business.
Sure, sir. Next question on the toys division. We had talked about this year to be little soft. Any change on this part? Any new customer addition we are trying? Any new campaign we are trying? Because we hear a lot of emphasis on the toy manufacturing in India. Given we have a lead we have done quite well up to now. To reach to the next level, are we putting more effort? Are we trying to talk to more customer, more orders from same customer? If you can talk a little bit about the steps we are taking to ramp up toys business.
What we're doing is we are in discussions with existing customers to add more products. At the same time, we are in discussions with new customers also. Again, here what's happened is, because of the global slowdown and unwinding which has happened, global demand for toys has come down as compared to last year. While we are in discussions, we should be able to give you some better clarity as we move forward.
Sure. Final question on the employee addition, which we are targeting for this year, if you can talk about this thing.
Sorry, I didn't understand your question.
We have 1,800-2,000 employees. Any number you have in mind for the addition for this year?
We're not planning anything major this year for additions or employees at least.
We are accommodating people. Yes.
We are adding people in key positions as required. Amit, do you want to talk about the CEO, which we're looking at? Give some, just a rough idea.
We've said before, we close the CEO mandate before the end of this calendar year. We will have someone on board with us. That remains. We're on the right track in terms of timing to achieve that.
Sure. That is it from my side. Thank you.
Thank you. Next question is from the line of Nikhil Jain from Galaxy International. Please go ahead.
Yeah, thank you for the opportunity. Just a couple of questions. Looking at your initial commentary, it seems, at least to my mind, it was that you are shifting towards more on the healthcare side, right, as an organization. Three years down the line, or three to five years down the line, where do you see Shaily? Let's say the healthcare contribution right now is second largest. Will it become the largest contributor to the business in maybe three to five years?
No, it will remain second largest even in three to five years.
The second question is related to the patents that you acquired actually last quarter and this quarter also, I think there was some IP that caught. If you can throw a little bit of light on what are the patents that you acquired and what's the kind of news that you would see on that?
Last quarter, we talked about an auto-injector.
Yeah.
What is it for?
Yeah.
Yeah. The difference between a pen injector and an auto-injector is that typically an auto-injector is a two-step device, where the amount of medicine to be injected is already predetermined. The user does not have to dial a dose like you do in a pen injector or decide the quantum of the dose. Here, the user simply has to take a cap off and inject. It's meant for different therapies, and typically in a pen injector, you're delivering lower volumes, whereas in an auto-injector, you would typically, I'm not saying this is true all the time, but you typically deliver, I think no less than 0.25 ml to as high as maybe 2.25 ml in one shot.
We acquired some IP related to that device, right?
We developed. Yes, we acquired and we developed further. We are looking at commercializing that auto-injector in the current financial year.
Okay. One more question that I just wanted to ask was that on the peptide devices that you have some customers on. Have any of our customers received the tentative approvals? Or you're still in the process?
We are expecting our first approval for first quarter this year. We seem to be on track for it.
All right. It would be a global MNC, right?
It is, yes.
Just the last question. The CapEx of INR 150 odd crores that you are spending over the next one and a half, two years. Can you just give the breakup? I missed it actually in your initial remarks, and here I just missed it. If you can just please highlight it again, how much to healthcare and how much to other businesses?
It's going to be more than 50% to healthcare. I think about 50%. I didn't give an exact number, right?
Yeah.
Sorry, how much is it Sanjay ? 60% to healthcare and 40% non-healthcare.
No. It will probably be 70/30, Amit.
70/30, fair enough.
Yeah. Right. Okay. See, generally, the return from especially the healthcare CapEx should be reasonably high as compared to the other CapEx that is more on the contract manufacturing basis. Do you agree with that, or is my understanding correct?
No. We have to be patient with time.
Sales turnover would probably be lower as compared to contract manufacturing. Your margins at an EBITDA and a ROCE level will be high. On the long-term basis, it will be much higher.
Okay. Yeah. Okay, fair enough. I will join back in the queue. Thank you.
Thank you. Next question is from the line of Bhavin Rupani from Investec. Please go ahead.
Hi, sir. Thank you for the opportunity. I have one question, sir. Can you give us some visibility and idea about your toys and home furnishings segment, please?
Sir, could you repeat your question, please?
Can you hear me?
There's this background. There's a lot of background noise.
Yeah. Can you give us some visibility and idea about your toys and home furnishings segment, please?
Home furnishings as compared to what we did last year, we will grow this year. We'd probably grow at a lower pace as compared to what we would've thought about growing six months back, but we will still grow this year. On toys, as we had talked last time, whatever we did last time, we would basically be looking at similar numbers in the current year and then growing next year.
Okay, sir. Yeah. That was it.
Thank you. Participants, you may press star and one to ask a question. Next question is from the line of Manish Gupta from Solidarity Advisors. Please go ahead.
Wanted to check that how many years typically do we depreciate our equipment over, and what is the true useful life of the equipment?
Manish, typically for our machines, we take useful life as 15 years for our equipment, and then we run three shifts, so equipment get depreciated between 7 to 10 years.
The useful life there is-
Sorry. Please go ahead.
Useful life is 15 years based on a single shift working. When you look at a three-shift working, it basically depreciates between 7 to 10 years, depending on the usage. At the same time, if you look at injection molding machines and everything, we have machines which are 15-year-old, 20-year-old, or even higher, which are in operation and which are running very well.
Would it be fair to say that the useful life is at least 2x the life over which a typical machine is depreciated?
I think that would be a fair assumption to assume that, yeah.
Okay. Sanjay, do we take maintenance CapEx to the P&L account or to the balance sheet?
Some of it goes to the P&L account, some of it goes to the balance sheet. Depending on if it's a major overhaul of an equipment where you are adding gears to the equipment, it would probably be to the balance sheet. If it's a normal routine wear and tear and everything, it would basically be under P&L.
Okay. You mentioned that you're undergoing the CapEx program. A lot of that is for the pen, and there will be a portion of the CapEx that I guess is for toys and for furnishings. Given that, I think either you or Amit made a comment that you're not seeing so much of demand pick up for toys. How do you think about CapEx in the context of businesses which could face recessionary headwinds, given also that the steel furniture business is not picking up. How do you guys think about making CapEx decisions when you see the rest of the world facing, the developed part of the world facing quite a lot of recessionary headwinds? Could you just talk us through the thought process there?
Yeah. Amit, you want me to take that or you want me to take that?
No, I can take it. Manish, typically, pharma is a business where we make CapEx decisions based on our judgment calculations, discussions with customers, and the pipeline that we have. If you look at this year's CapEx, a very significant portion is going to the pharma business, not the other space. On the other businesses, we only take CapEx decisions based on confirmed businesses. We don't invest anything without confirmation. Now, again, we're in unusual times right now where confirmed businesses have seen drop in volumes. We try to be as meticulous in taking CapEx decisions as possible on the non-pharma business. Unless we have confirmation, we will not invest anything upfront.
Okay. When a particular customer does not meet their confirmed or high probability order book, do you get compensated for that in some way, higher margins in future orders or perhaps higher volumes? How does the customer compensate you?
Manish, that probably takes time to happen. It does not happen immediately. Yeah, in various discussions and negotiations which you have with the customer, the customer would take that into account and keep that in mind when new businesses get awarded or higher volumes get pitched for. Those are things which the customer does take into consideration in terms of commitments made by him.
Okay. My last question is, what are some of the risks that you guys are seeing right now? Risks that you are conscious about.
Manish, I would like probably Amit answer part of it. A couple of things which we feel with what's happening on global headwinds. If actually a recession happens in the U.S. or something, we really do not know how demand will pan out. That's one thing which we see as a risk.
Manish, our goal is to create a business vertical, which is also more domestic. We need to increase our domestic supply. That's what we see as a risk right now. That's what I see as a very significant risk. We will continue to do whatever we're doing for exports, but we want to increase our domestic business very significantly.
Will you get the same margin on domestic orders as the export orders?
The immediate answer is no. If we do the same thing we do for exports in domestic market, we will not likely get the same margin. We have to think of a different product portfolio. There's something in the works. We can't comment on it right now, but we don't think it will pan out in the current financial year. In the upcoming financial year, we would see some progress, good progress there.
Okay. Thank you.
Thank you. Next question is from the line of Chirag Jain from Kamayakya Wealth Management . Please go ahead.
Thanks for taking my question. I had a broad question. If we compare Shaily in 2018 versus Shaily in 2022. We had Shaily in 2018, which had a long order book, but it couldn't be executed due to some labor issues or due to operational issues. Now we have seen to that, we have order book reducing and operational capacity increasing. What would you like to say on that?
The good thing is we have sorted out our operational issues, which means we don't have labor issues. Our efficiencies are also higher in the plants. Our processes have become more streamlined, more robust, fingers crossed, we see demand pick up again, we will really benefit out of that.
What's on the order side? What are we doing to grow the order book currently? I see that the capacity, obviously, because it has dipped due to some capacity addition, but it's below that which we used to have 70% in 2018, 2019.
We've added a lot of capacity in the last two years. If you think about sheet metal capacity as well as the new plastic factory that we added last year. As of now, like I said, quarter two is not going to be better than quarter one, we anticipate quarter three and four to be better than quarter one.
Do we hope to soon 70% utilization, which we used to have historically?
We hope to end the year with that number.
Secondly, on the healthcare segment. That's also a big drag on our segment because the capacity realization on the healthcare segment hasn't been as per you have set your targets. What would you like to comment on that?
No, I didn't say anything about capacity utilization on the healthcare segment being lower than what we have anticipated. In fact, capacity we don't report individual segment capacity, but utilization on the healthcare segment has been very good.
No. I had joined the previous con call also. I had mentioned the same question regarding the healthcare segment. You mentioned that it was below our target. It was obviously because, one year prior. That time I asked, and that was your response. That's why I'm asking.
I think your question was probably to do with CR closures and bottles.
Yeah.
Yeah. This has been mentioned on several calls. We do not actively market those products anymore. The same capacity is fully being utilized to manufacture the pen injectors and the other devices that we have.
Okay, got that. I understand that one. Sure. Thanks. Also, lastly, would you like to provide a color on the U.K. subsidiary which you had incorporated? What's going on there?
We have three active projects in the U.K. at the moment, plus the fourth one that I spoke about briefly on this call, where we've developed some new technology, which we will be taking forward now. Out of the three active projects currently ongoing in the U.K., we plan to commercialize two before the end of this financial year. The third one will go into production only next year. The fourth one, the new technology, is at least 24 months away from being a full product.
Sure. I enjoyed that here. Thank you.
Thank you.
Thank you. Next question is from the line of Aman Vij from Astute Investment. Please go ahead.
Thank you for the opportunity again. Sir, we had talked about plastics business. On the furniture side, we becoming third largest this year in terms of supplier to our key customers. Are we on track on that? If yes, is there opportunity in the next three to five years we can even become second largest?
I certainly think so. Whether we become third largest this year is a little unknown. We might end up at position four. In the next three years, we certainly do see us surely moving up in position.
Yeah. Even second is possible, you are saying that?
Yes.
Sure, sir. On the steel side, what we understand, again, the opportunity even bigger than the plastics. We had some settling issues initially. You have explained that 85% problem is solved, but there's remaining 15% odd, especially on the steel side. Is that reason we are ramping up slower than the opportunity? Even if, say, there's some recession generally in steel, but we are so small a player, shouldn't our ramp up be much faster? Any targets we have, like can we reach maybe top five in the next three, five years in steel also? If you can talk about this thing.
No, no. Top five in three, five years is probably not possible because in steel, with the customer we're talking about, their typical suppliers are all the way from EUR 100 million to someone being as large as EUR 350 million. That's not going to be possible in three years or even five years. Steel as an opportunity is larger than plastics within the customer. The customer is ready to give new business provided we are able to ramp up what we've currently taken on.
I think from an opportunity perspective, there's no lack of opportunity. We are working very closely with the customer, and they're also helping us in this ramp-up and solving the issues that we have. It's a very active dialogue. It's a very active business where they're also participating, providing us with all the expertise they have. We're very, very hopeful and confident that this year we should be able to solve basically our teething issues or learning curve.
Okay. You expect ramp-up happening or newer orders coming mostly next year in steel?
Yes.
Okay. Sure, sir. Final question. You have talked about four projects in the U.K. subsidiary. Two we are maybe commercializing this year, one next year, and maybe the final one, which you have recently talked about in two years. The final one, the way you are hinting, maybe our understanding, what we could guess is something related to the bags or the patches. Is the opportunity big enough in these products? The question was that, because, maybe I'm wrong, but that technology has been there in the last three, five years. It hasn't scaled as much. If you can talk about this thing.
Wearables or patches as you call it, like on-body injectors and patch pumps are different. What you're referring to are meant for diabetes treatment, which have been on the market for quite some time. They're pumps. What we are developing is a single-use on-body injector. There is a difference, and they're meant for different therapies. Yes, you're right that the scale-up hasn't happened because new molecules are going into such therapies, or existing molecules which are in IV form are going into such devices. We're also targeting a different type of customer for this new device. We're not necessarily targeting the generic pharma companies that we targeted with our pen injectors and auto-injectors. With the wearable, we're also looking at a different kind of customer.
Sure, sir. That helps. That is it from my side.
Thank you. Next question is from the line of Ritesh Shah from Investec. Please go ahead.
Hi. Two questions. One is, given significant percentage of our incremental CapEx is going towards healthcare, if one had to understand the payback for this, how should one look at the numbers?
Ritesh, payback, I would say we would still look at somewhere between a four to five-year period for incremental investments which we are making. This is keeping in fact that we are basically making investments for developments which have already been done, and we are now looking at ramping up on these products.
Sanjay bhai, would it be possible for you to give more color on the CapEx if you would like to split it between, say, R&D efforts and physical infrastructure just to better understand the payback?
A large part of our CapEx is going to be in physical infrastructure and expansion of facilities and everything. R&D or the development would probably be a little lower. I don't have the numbers in front of me right now, but it will probably be not more than about 10%-15% of what we are investing overall.
Right. 80%-85% is towards physical infra, to my basic understanding, correct me if I'm wrong. I think we have significant spare capacity when it comes to insulin pens. Is there anything incremental that we are looking at? Is it towards inhaler what Amit pointed, or is it towards the insulin pens?
No, Ritesh, we don't have capacity when it comes to pens.
Okay.
I mean, we don't have significant capacity when it comes to pens.
Right.
We're managing whatever we currently are manufacturing and the demand we have in the current facility. The ramp-up that for which we have, of course, secured customers as well as orders need to come from the new facility, new expansion.
Okay. Do we have land and building already in place for this? The incremental investment will be only to the equipment. Would that understanding be right?
No, we are adding.
We have land available, we are adding 125,000 sq ft of building space to our existing pharma facility. This is mainly being added for all the new projects which we have talked about. We are looking at ramp-up on these projects happening from this year onwards for the next three years, so it's essentially for that.
Sure. That is perfect. My other question is for Amit. I am just taking a step back. I am just trying to connect the dots. Basically for home furnishing, what you indicated will still grow on a year-on-year basis, but it is not as we expected. Secondly, toys, what you indicated will grow in next year. If I have to read between the lines, what we are saying is probably will be flattish on a year-on-year basis, which I will keep some color over here. Pharma, you indicated the pipeline is actually backended and then lastly indicated the order book was lower than expected. How should we read through these four data points? Are we facing headwinds across business segments because of exposure to U.S.? I think one of the participants earlier made a very valid point where time is actually our advantage.
Do you think that the segments should actually come to us and hit us whether the revenue trajectory actually goes down? How do you look at this?
Pharma business does not have really any headwinds. It is a very simple process. From the time our customers file to the time they can commercially launch, it is a 24-month process. When it comes to pharma, I do not think there is any global scenario which is playing out, economic scenario which is playing out against us. It really depends. I mean, anytime you do a new product in the pharma space, we have 50% of the responsibility and customer also has 50% of the responsibility. Basically, cycle starts from when they file. Some customers have been very good at hitting their targets in terms of filing. Some have had setbacks, various reasons. Some could be attributed to us sometimes, or could be attributed to their own formulation or final assembly processes, et cetera. There are various reasons for delays that happen.
Right now what we are seeing and the numbers you said for pharma remain true. They are mostly for products which either have been either filed or are on stability. On the non-pharma side, again, when we talk about a slowdown, we are not talking about a slowdown using the last financial year as a yardstick. We are talking about a slowdown from the perspective of the capacity that we have created based on the orders that was awarded to Shaily. We are not seeing volume up to that level. We are certainly seeing growth from last year that you guys can see in the quarter one results as well. We are not seeing the volume that we had anticipated and built capacities for in quarter two. We are hoping that ramp-up will happen in quarter three and four.
Sure. Okay. If I want to just rephrase it, probably Sanjay bhai can chip in . If one had to look at the volume growth versus the value growth, pharma and non-pharma, would it be a right way to look at it? Something like toys and home furnishing, there will still be a volume growth. Obviously, value growth is something which has coming down and probably it's coming to ground. What would be a right way, a yardstick for us guys externally to actually look at the company?
Ritesh even on the non-pharma part of the business, while we're looking at very high volume growth. We were also looking at improvements at an ROCE level. This was basically keeping in mind higher than normal acceptance which we would have got on that business. Unfortunately, because of what's happening globally, we have not got to that volumes. I hope things get corrected. I do not know whether it's three months, six months, nine months. That's what it is. While pharma, as you rightly said, yes, it's value growth where you need to make investments upfront, which we have done in the past, and now investments which we are now making which will basically help us scale up that in the coming years.
Sure. All those questions answered. Thank you so much. Wish you good luck.
Thanks, Ritesh.
Thank you.
Thank you very much. I now hand the conference over to management for closing comments.
Just a moment. Thank you very much. Thanks, everyone, for joining the call. We hope that we've been able to answer your questions adequately. For any further information, I request you to get in touch with SGA, our investor relations advisors. Thanks again, and have a great day.
Thank you. Thank you, everyone.
Thank you very much. On behalf of Shaily Engineering Plastics Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.