Ladies and gentlemen, good day and welcome to SRF Limited's Q2 and H1 FY 2024 earnings conference call, hosted by Axis Capital Limited. 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 call, please signal an operator by pressing star and then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Ankur Periwal from Axis Capital Limited. Thank you, and over to you, sir.
Thank you, Gio, and good afternoon, everyone. Thank you for joining us on SRF Limited's Q2 and H1 FY 2024 results conference call. We have with us today Mr. Rahul Jain, President and CFO, SRF Limited. While we'll hear Rahul's thoughts on the results as well as outlook shortly, but before that, let me invite Ms. Nitika Dhawan, Head of Corporate Communications at SRF, to initiate the proceedings for the results call. Over to you, Nitika.
Good afternoon, everyone, and thank you for joining us on SRF Limited's Q2 and H1 FY 2024 results conference call. We will begin this call with brief opening remarks from our President and CFO, Mr. Rahul Jain, following which we will open the forum for an interactive question and answer session. Before we begin this call, I would like to point out that some statements made in this call may be forward-looking, and the disclaimer to this effect has been included in the earnings presentation shared with you earlier. I would now like to invite Mr. Jain to make the opening remarks.
Thank you, Nitika. Good afternoon, everyone, and thank you for joining us today on SRF's Q2 and H1 FY 2024 earnings conference call. I trust all of you have had the opportunity to go through the results presentation shared with you earlier. I will initiate the call by briefly taking you through the key highlights for the period under review, following which we will open the forum to have a Q&A session. We witnessed lower revenues and profitability during the quarter, with both our chemicals and packaging films businesses facing headwinds. During the quarter, gross operating revenues declined 15% YOY to INR 3,177 crore. EBIT was lower by 23% YOY to INR 533 crore. Profit after tax came in at INR 301 crore in Q2 FY 2024, lower by 37% YOY.
Coming to our segmental performance, in Q2 FY 2024, our chemicals business reported lower revenues of INR 1,426 crore, down 22% YOY. Within the chemicals business, specialty chemicals witnessed a subdued demand due to ongoing destocking and inventory rationalization by customers for certain key products, and we believe that we have seen a large impact of the same in Q2 FY 2024. While we continue to encounter rescheduling of some orders, we have not witnessed any cancellations. We remain optimistic that Q3 will be better than Q2, and Q4 will witness more reasonable levels. Therefore, we firmly believe that H2 will be better than how H1 panned out. We also believe that fundamentally the business is in good shape, both on new products and capabilities. Cycles are a part and parcel of any business.
In such a scenario, marginal growth is also a fairly good position to achieve. This is further supported by the cautiously optimistic outlook shared by major agrochemical companies for 2024. We are consistently expanding our product portfolio, having introduced six new products in H1, comprising of four in agro sector and two in pharma. Our pipeline for complex products and AIs also remains on track. Over the past three quarters, we have successfully commissioned flexible and dedicated facilities, and are in the process of capitalizing projects close to INR 1,100 crore in the second half of this fiscal. Furthermore, the board announced a CapEx of INR 235 crore for setting up a new and dedicated facility at Dahej for the production of an agrochemical intermediate.
These initiatives signify our strong confidence in the segment's potential to create substantial value for all stakeholders as we work towards process improvements and increasing asset utilization levels in FY 25. In our fluorochemical business, we witnessed lower volumes and realizations in a seasonally weak quarter for the domestic market, as well as Chinese dumping, leading to lower revenues and profitability in Q2. In addition, the demand environment for some industrial chemicals remained subdued due to sluggish growth witnessed in agrochemicals and pharma industries. Having said that, in Q2, we achieved highest ever MDC domestic sales for a quarter, with a significant increase in market share. Dymel also delivered steady performance and is now serving customers across 27 countries, with a strong future growth potential.
Q3 should witness demand uptick from domestic players as stocking for 2024 season begins, and Q4 should witness volume traction from US customers. As we transition into the second half of the year, our expectations are focused on several promising developments in the segment. We anticipate an uptick in pricing for HFC, especially in the key markets like India, Middle East, Southeast Asia, South Asia, and United States. Industrial chemicals are also expected to perform better than H1, owing to higher demand and price expectations. Additionally, it is worth noting that our new HFC project should go online very soon, which will add to our capacity and allow us to cater to our key local and global customers. The company remains committed to prioritizing the commissioning and ramp up of our ongoing projects. Here, I am pleased to share that we have now commissioned our PTFE plant.
This project experienced delays due to challenges in obtaining support from our technology partners. In response to this, our internal teams proactively took the initiative and commissioned the project. This not only underscores the impressive R&D and engineering capabilities of our in-house teams, but also highlights our self-reliance and adaptability to cater to tough situations. We believe that the product has received a positive response from some of our customers, both locally and internationally. While there will be some time for the product approvals to come in, say, within the next 6-9 months, the ramp-up will be faster than what we had envisioned earlier. In our packaging films business, SRF reported a decline of 16% in revenues to INR 1,122 crore during the quarter.
Some of the decline in the business revenues can be attributed to lower price of key raw materials and some to the oversupply situation in the industry. While the ongoing challenge owing to significant demand and supply mismatch continues, the business is actively focused on improving profitability through operational efficiency initiatives, expansion of value-added products in both BOPET and BOPP, implementation of cost-saving strategies, and securing additional contracting success. I am happy to share that this quarter, the board has approved an investment of INR 275 crore at Indore for establishing a dedicated capacitor grade BOPP film line aimed at expanding in business adjacencies. This is our foray into manufacturing of higher value-added products to cater to demand emerging from manufacture of electronics and EV sector in India.
A more detailed rationale for this is available in the presentation that has been uploaded to the stock exchanges. The aluminum foil facility is now in trial phase, with commercial production expected soon. The project is expected to be value accretive to the business as customers remain similar and demand strong. Overall, in this segment, market trends point to the persistent imbalance in demand and supply, particularly in BOPET, which is expected to impact performance for the next few quarters. SRF will continue to focus on value-added products and ramp up the aluminum foil project at a fast pace. Moving to our technical textiles business, we reported a steady performance. During Q2 FY 2024, SRF successfully completed the phase capacity enhancement project for its C6 value chain. Further, progress in the expansion project for belting fabrics and polyester industrial yarn remains on track.
Market trends indicate a consistent growth in various vital segments, ensuring continued demand for nylon tire cord fabric. Additionally, the government's emphasis on infrastructure development is expected to drive increased demand for belting fabric and polyester industrial yarns. Lastly, in the other segment, in coated fabrics, SRF attained all-time high domestic sales and EBITDA, primarily driven by strong demand for our products, including value-added products. SRF has been able to capture maximum share of the growth that has happened in the market, and the outlook suggests continued healthy demand in the near term. For laminated fabrics, SRF achieved record sales in H1, with the plant operating at full capacity. However, an oversupply situation persists, and SRF anticipates market challenges due to new capacity additions while expecting stable demand.
Coming to our balance sheet, our net debt increased from roughly about INR 3,250 crore as on March 31, 2023, to about INR 3,900 crore as on September 31, 2023. This increase is primarily owing to our CapEx of around INR 1,400 crore in H1. Additionally, we are also witnessing an impact of the increased interest rates, both on the rupee and the US dollar borrowing, which is leading to higher interest costs being charged off to our P&L. Global interest rate cycles are now peaking out, and some positives should be witnessed on this account over the next 12-18 months. In our endeavor to achieve benchmark performance across functions, we were recognized with a slew of prestigious accolades in this quarter.
We received the Best Corporate Cash Management Services and Best Corporate Technology Adoption Awards from HDFC Bank, highlighting our excellence in financial and technological domains. Additionally, SRF's technical textile business won the MATEXIL Export Award for outstanding export performance for the year 2022-2023. On the social front, SRF Foundation was honored with the Shiksha Bhushan Award at the 27th Bhamas hah Samman Program by the Government of Rajasthan. Additionally, the SRF Foundation won CSR Times Award 2023 Gold for its rural education program and earned a certificate of appreciation under the Operation Kayak alp Program by the Government of Uttar Pradesh for development of infrastructure facilities in government schools. These accolades underscore SRF's commitment to excellence across various sectors.
In conclusion, despite the challenges faced in various domestic and international markets, we will maintain a positive outlook for the second half compared to our first half. While the near-term prospects for our packaging films business is weak. Our overall optimism is primarily based on our core chemical business and a stable technical textile business going forward. Over the years, we have developed a world-class infrastructure, nurtured exceptional R&D capabilities, and secured ample resources to invest in emerging opportunities across diverse chemical sectors, particularly in agro and pharma.
While some sectors may encounter transient challenges, we hold strong confidence in our chemical division, driven by our R&D breakthroughs, which we believe will consistently drive substantial growth and enduring value for all stakeholders. On that note, I conclude my remarks and would be glad to discuss any questions, comments, or suggestions that you may have.
I would now like to ask the moderator to open the line for the Q&A session. Thank you very much.
Thank you. We will now begin with the question and answer session. Anyone who wishes to ask questions may press star and one on their touchtone 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 questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Rohit Nagraj from Centrum Broking. Please go ahead.
Yeah, thanks for the opportunity. So, first question is on the specialty chemicals business. So you mentioned that Q3 will be better, and Q4 probably would be better than that. This growth will be primarily driven from volumes and whether it will be the incumbent business or the newer project that we have commissioned. Just like to, you know, understand a little color on that. Thank you.
So, the way we look at it, Rohit, is the fact that there has been some volume additives that we saw in Q2. Now, when we are looking at it from that perspective, there is some pickup that is likely to happen. Some of the orders from the customers have kind of got delayed, and that's where the volume pickups we are talking about in Q3 and Q4 coming through. So that's the existing products. Also, you would remember that over the last, I think six months or about 12 months, major capital expenditures have been commissioned. My sense is it would probably, including the MPP and the [audio distortion], be about INR 800-900 crore.
So some of the positive and new products that we have also launched, that we've talked about also, should come through in Q3. But the majority of those, those would probably come in FY 2029. So that's how we would look at it, Rohit.
Sure. Thank you. So second question is, just your view on the, segment-wise CapEx for FY 2024 and 2025.
Well, I mean, I don't think the position on that has changed, Rohit. I think FY 2024, our total CapEx, including land, is roughly likely to be about INR 2,900-3,000 crores. If that land has come through, which we are estimating to be in the range of about INR 400-450 crores, that would be the total CapEx. 80%-85% of that CapEx would be chemicals business, and the balance would be others. So that's how it is still structured. I don't think that has changed even one bit.
FY 2025 also will be similar in terms of the intensity will be 29,300, and a proportion of 80%-85% from the spectrum?
Absolutely right.
Sure. This is helpful. Thank you, and best of luck, sir.
Thank you.
Thank you. The next question is from the line of Sanjesh Jain from ICICI Securities. Please go ahead.
Yeah, good afternoon, Rahul Jain. Thanks for taking the question. First, on the refrigerants side, it's slightly backward-looking, but just curious to understand. We were anticipating the stocking up for the stocking up in the U.S. market, the HFCs, ahead of the next phase down. It appears that that really hasn't played out. Just wanted to understand, is it that Chinese are dumping more and the quota have been filled? What has caused this refilling kind of a benefit not playing out the way probably we would have anticipated?
So thanks, Sanjesh. I agree that it is a slightly backward-looking question, but the point to make is that, yes, there were some expectations of, of let's say the US market panning out in Q1. That did not come through. But I think instead of looking at it from a backward perspective, we should look at it from a forward perspective. What I can certainly say is, the order book seems to be in good shape from a Q4 perspective for all, for the international sales, specifically USA. Some of the very large customers that we have in the US, we've already kind of done ordering with them or their orders have kind of been frozen for FY. For calendar 2024 and for 2025 as well.
So I think that's in good shape. Why did that not happen in terms of what, what was going on? I think there were various dynamics with respect to Chinese that were playing out in the market, despite whatever be the, the pricing situation. So a lot of dumping happening into even the U.S. market, during that time, which created that kind of a situation. I hope it answers that.
No, it's fairly clear. Just on the 2024 and 2025, and now the tie-up has happened, which gives us a much better visibility. Are the pricings are also done that, or it will be more dynamic and it's more volume kind of a tie-up, and what-
Volume tie-up. [crosstalk] Our pricing ranges are also tied up, but unfortunately, I can't tell you anything beyond it.
Got it, got it, sir. That's, that's clear. On the R32 side, I think we anticipated to come in November, kind of a thing. Are we, are we in line with that anticipation?
I think end of November or mid of December is when this will get done. It is now getting through to a technical completion position, and hopefully by mid of December, we will be commissioning the 32 as well. Some delay, I agree, but I think it is more technical than anything else.
Got it. Got it. And on the specialty side, again, sorry to ask the similar line of question. But I think some of the guidances what we are seeing now, incrementally coming in, the agrochemical side, at least it appears that the volume pressure can persist in the H2 as well. We are not anticipating any such risk as of now?
So again, Sanjesh, to be very frank about it, on the volume side, we, we believe that there is some pressure, no doubt on it. But I've kind of articulated it out that in Q4 we should do better. There are some positives that we are looking at. Again, like I said, we don't-- we have not seen any major order cancellations coming in. So we are fairly confident of a certain growth number, even in the specialty chemical business, even during FY 2024 as a whole. So I don't think, in the current market there are many people guiding for a growth in, in specialty. I think we are probably the, we are probably fairly confident of a single digit growth at least coming through in specialty chemical space.
The single-digit growth in the H2, we are talking or for the full year 2024?
Whole of FY 2024.
Whole of FY 24. That's great. One last question on the PTFE side,
I think we'll have to come back in queue. Other people also have to ask questions. No, no, no, I will come back in the queue. I will come back in the queue. Thank you. Thank you, Rahul Jain and rest of the team
Yeah.
Thank you very much. Before we take the next question, we request participants to please limit your questions to two per participant. We take the next question from the line of Chintan Modi from Haitong Securities. Please go ahead.
Yeah. Hi, sir. Thank you. So with respect to ref gases and-
Slightly louder, Chintan. Can't hear you.
Yeah. Sir, can you hear me now? Is it better?
Better.
Okay. So with respect to ref gases and this quotas coming into play, can you tell, like, you know, explain how the mix will change between R-32, R-125, and R-134a? And what would be the total volume impact for us in U.S. market?
To be very frank, Chintan, it's a position that will play out over, over a period of time. The way we look at it is that there will always be a GWP equilibrium position in the U.S. market that will play out. Now, as GWP balance plays out, I think more of 134a and 32 should start to proliferate more. But again, that also depends on the local market, where production is there. So it's a position that we will also see how it plays out, how it plays out. Majority of the local players will start to shut down some of their. A nd balance out some of their existing capacity.
Based on that, they will do a quota positioning in terms of what the quota they have and how much do they want to buy from outside, import either from China or from India. The way it will probably work out is 125 starts to, 125 starts to go away first, then it will be 134A, and then 32. I think it's a position that will probably get more visible during 2025 and 2026. 2024 is probably more understood well.
Okay, sure. And, with respect to, sir, power and fuel cost, can you share, like, what was the savings on, say, on a Q-on-Q basis or a Y-on-Y basis in terms of per unit cost?
Sorry, Chintan, we will have to come back on that separately. I don't have the numbers right in front of me. It's a mix of various businesses that, that pans out. If you are looking at it only from a rate perspective, it could be different. If you are looking at it from a technical textile business perspective, again, it could be different. We will have to relook at the numbers and come back to you on that. While coal prices have witnessed a positive impact in CPP operations, mainly due to low demand of coal in China and Europe, I don't have the exact unit by unit numbers.
Okay. Sure, and lastly, on the capacitor-grade films, is this more of an imported product currently or there are suppliers in the domestic market today? And also, along with that, if you can explain a little bit of economics, like, how it would be better than our existing films business.
So on the capacitor grade film, the first question that you asked is there are existing players or not. There are a couple of existing players that have some capacity, but not doing too well as such, because of their other issues that are going on. What we believe is that this is a film that the requirement of which will continue to go up. India is going on and looking at electronics manufacturing in India, therefore, the need for capacitor-grade film is high. The demand is expected to grow at roughly about 10% per annum. The current people that are there in the businesses are not operating it very effectively, and therefore, we believe we will have a very large play in the business.
The demand stems from consumer electronics and energy storage systems, the major ones, and EV chargers and other applications in that space. So that's our strategic rationale around it. We want to become a global opportunity to manufacture these in India, to become a credible alternative, not just to Indian producers, but international guys as well. So that's the way we are looking at it. There are a couple of Indian producers also.
Sir, how much is demand today?
These capacities.
Actually speaking, the demand is about, let's say 40,000-50,000 tons.
Okay. Got it, sir.
Capacity at a rate is about 7,000 tons. Majority of this is still being imported.
Okay, got it, sir. That was helpful, sir. Thank you.
Thank you.
Thank you. The next question is from Surya Patra, from Phillip Capital. Please go ahead.
Yeah, thanks for the opportunity, sir. So my first question is on the, this HFC. Now, since the quotas are set and all that, you have commented something on that, but, in terms of the volume, any sense that if you can provide, sir, because, as it was earlier understood that, the ban on Chinese supplies or Chinese dumping on- in the U.S.-
There is no ban, Surya. [crosstalk]
Ban in the sense, implied ban, I mean, the anti-dumping duty. So because of that, it was expected that, there would be people would be a bit protected from Chinese dumping in the U.S. market. But now it looks like that is no longer the case. So if that is the case, if you can give some clarity about the volume progress that we would see in the calendar 2024, based on the quota that has been set for our clients and all. So that would be helpful.
Like I said, Surya, the position that we are taking on this is with some of our large customers, we have already tied up volumes for calendar 2024, to a certain extent for 2025 as well. I think that should augur well for us. We are also looking at areas, refillers that have the quota in the U.S. market, to be able to supply to them in volumetric quantity. The way we are looking at is that by FY 2025, and exiting 2025, our capacity on HFC should probably be about 80-85% utilized in total. What mix, what time, is something that the market position will play out on, based on which we will, we have the ability to use our capacities appropriately. So that's how we're looking at it, Surya.
To be able to give you a projected number on each of the gas separately is too detailed an exercise for me to get into.
Correct. Correct. But when you are giving view about 25 also, sir, so you are factoring the shift in the emerging market from HCFC to HFC? Or it is just from the-
Sorry, repeat the question. Repeat, please.
Starting 2025, January, even in the emerging market, the phase down of HCFC, that is, scheduled, right? So that should boost the demand for HFCs in the emerging market.
No, the way we are looking at it, transitions into 32, which is the 22 replacement, is already happened, mostly in the, even on the emerging market side. So I don't think that has too much of an impact. Yes, the growth is going to be significant. The Indian market is going to be a large one, and therefore, if you remember, I had also talked about that the domestic market on this should become a larger market going forward. So that's something that will play out as well.
Okay.
But whether it is because of the shift happening, I don't think so.
Okay. Sure, sir. So, for second question is on the, this PTFE project, sir. Since, although it has, it is coming with slight delay, but obviously that would have positioned you better in terms of the customer acquisition, in terms of the product approval and all that. So, now, about the ramp up of the project and, in terms of the utilization, let's say, by next year, any sense that you're sharing, sir?
So again, the way we are targeting this is the fact that for FY 2025, because the balance one for FY 2024 will probably be used for the approval process is coming through. For FY 2025, we should get to a decent capacity utilization. But I can tell you this, Surya, that from what we had envisioned when we had started this project, right, two or three to four-year ramp-up timeline of the PTFE project, I think the ramp-up is going to be significantly faster than that. So hopefully, in the next two years or so, so FY 2025 and FY 2026, it should be fully ramped up. Hopefully, we can do this even earlier and move to specialty grades on this.
Okay.
That's the target here, Surya.
Sir, just on the extension of this portfolio of PTFE, can you share something or you'll take some time to share update about the additional product?
Additional means what?
The additional products, specialty fluoropolymers.
No, no. So we have already announced the project for specialty fluoropolymer, right?
Yeah.
Which is PVDF, FEP and FKM. Right?
Yes. Yes, yes.
That's a 2-year project that is currently on. PVDF might see some delay given where our position on land is, but FEP, FKM are pretty much online, Surya.
Okay. Just one simple question, sir, about the new projects that was due to commission this year. So, whether it is whichever segment, ref gas, or it is the fluoro specialty and all that. So, I think there is some delay before, compared to the kind of earlier timeline. Is it a kind of planned, considering the kind of demand situation and this thing, or it is?
You are, you're right to a certain extent when you say that there is some delay. But on the specialty chemical side, I would say the delay is largely due to some supply chain issues, some procuring of certain key, let's say, engineering components and those types. Not with respect to, let's say, delaying from a product or a timeline perspective, time to market perspective. So that's not the case. It's largely because some of the supply chain issues we faced during this period, which has led to a couple of months delay in some of the projects in the specialty chemicals space. In the fluorochemicals, be it PTFE or the 32 project, yes, there were delays.
PTFE, the delay was largely due to the fact that there was a difficulty in obtaining visas for our technology suppliers. That did not come through, so we had to commission it online. Our engineers did it, so that took some learning exercise around it. On 32, I think certain government approvals that were to come through took some more time than we expected, which has led to some delays around that. But again, I think we are not very significantly delayed on that side.
Yeah, yeah. Okay. Sure, sir. Thank you, sir. Thank you. Wish you all the best.
Thank you. The next question is from the line of Arjun Khanna from Kotak Mahindra Asset Management. Please go ahead.
Thank you. Thank you, sir, for taking my question. The first question is on the Spec Chem side of it. So, in discussions with our clients, I understand offtake has been slightly lower, like you mentioned, given global circumstance. In-- when we have our discussions, is there any negotiation or rethink in terms of pricing of these particular products? Or, that's a discussion that's not come up, given that they are giving profit warnings.
Arjun, whenever you discuss some of these aspects with clients, there will always be pricing discussions that come through.
Sure. [crosstalk]
Never at our end, we always look at what are the technological positions that we can change around them, how much can we produce from the existing facilities, how better to look at efficiencies so that we can protect margins. But without a doubt, there are some pricing pressures also that are there. The only good thing, Arjun, that I can say is that the basic theme with respect to, let's say, the customer thinking about their own supply chains and robustness of their supply chain, I think that has not shifted. That remains pretty much well in shape even today. So while there may be some off and on discussions that will keep happening, I don't think the basic theme underlying has changed, Arjun.
Sure. And in terms of the way we look at the Spec Chem piece, in terms of what ROEs we would like to generate from it, even post these discussions, do you think that number needs to come down, or are we yet confident of the 20%+ ROEs that we are targeting?
Again, if you are looking at it from an FY 2024 perspective, we will not be 100% there, in terms of our, But I can still tell you the return on capital employed that we are generating is still beyond that number, right? When we talk about the 20%+ number, I think the way we look at it, in the very long term, what is the number that we are happy with? I don't think that position from our perspective has shifted any bit.
Sure. Perfect. Sir, my second question is just on the PTFE, while we talk of full ramp up in FY 2026. Just want to understand, while we know what the rated capacity is, in terms of output, just on the base, of commodity grade, what would be the output that's possible to generate from our current equipment?
Currently, I think it is about 5,000 tons. If I'm right, give me just one sec, I'll look at it. PTFE, 5,000 tons. Yeah, rated capacity 5,000, or 90% you can get to. Again, it is, it also depends on what kind of grade you are producing. So that's the way we look at it.
Sure. Wishing you all the best. Thank you.
Thank you. The next question is from the line of Nishant Shah from Emkay Global. Please go ahead.
Yeah. Hi, sir. Thank you for the opportunity. My basic question is on the PFB segment. What will be the percentage of the sales under the contract and for in India versus outside India? That's the first question.
Contracted sales, India and outside India?
Yeah.
So roughly speaking, our, our overall contracted sales will be in the range of 60%-70%, right? Which covers all our contracted positions, both locally and globally. Now, what is the difference between that in South Africa, Thailand, Hungary versus what is in India, is a difficult position. I will have to look at those numbers separately.
Okay. From the pricing point of view, what will be the difference when it comes to a renewal?
No, I didn't get the question, Nishant.
So basically, what will be the pricing levels when it's in the contract versus spot, when it comes to a renewal point of it?
So that can't be, it can't be looked at it from that perspective, Nishant. Contracted positions that get created are also to a certain extent, a formula in pricing that comes in. It is not based on a certain fixed price position that you create. So, I don't think if you're looking at it from that perspective, that's the right way to look at it.
Okay. Okay. And, my third question will be, when we say the packaging of business is not doing well, going ahead, so what will be the impact on the, competitors who are only doing, the, packaging business? Or, what will be the impact on the ongoing concerns?
So Nishant, to be very frank, I think, when you look at Q1 numbers, which are now out in the market, if you look at those, you will find that SRF performance, both on EBIT percentages, EBITDA margins or return on capital employed also in the business, is probably much better than any of our international, local or global competitors. So, so I would really say that SRF performs much better than some of our peers. Some of the players also have businesses which are, which are kind of combined businesses with lamination and others as well, which really does not give us the ability to analyze. But given our value-added product portfolio, we still believe that we are probably one of the best in the industry.
Okay. But do you see the big players will survive on this down cycle and the small players are getting out of it, so basically a consolidation in the industry?
To be very frank, Nishant, there are a large number of players in the industry today. There will be some, let's say, consolidation that will happen in the industry at some point in time. When, where, why, that only time will tell.
Thank you. The next question is from the line of Rohit Sinha from Sunidhi Securities. Please go ahead.
Yeah, hello. Thank you for taking my question, sir. So one question is on the new CapEx on the BOPP side. So that this INR 275 crore kind of CapEx, what could be the asset turn and-
Sorry, that was not clear. [crosstalk] Could you repeat your question, please?
Yeah. So on the this side, BOPP CapEx side, the new CapEx which we have announced. So just wanted to understand what would be the asset turn and margin profile for this company. And then is it the same product which Xpro India is making currently, or one which they have discontinued some time back? So basically we are slightly-
It is not a existing product. It is a BOPP film, yes, but it is not, let's say a BOPP, 10.5 meter type of line that we have today. It's a completely different product. We believe it, the project's realistic IRR should range in the range of about 16%-18%. That's how we are looking at it. The way we look at it, is roughly a payback period of about 5, 5.5 years should come through, and it should be value accretive, going forward.
Also, I think it is from the perspective that it is a film that will get required in India's requirement of electronics manufacturing, which is growing, be it in the EV side or the battery side. That's something that will, it will need some of this film and maybe certain other specialized films that go on in future. So it's a foray into that segment, where we think it will add to value from, let's say, entering into those high growth segments.
Okay. Okay. So, so, just on the margin side, would be fairly fair enough to say that the, it could be slightly the north side of of the current normal BOPP and BOPP side margins?
The current pricing is certainly should be, but we assume differential pricing. So on an overall basis, it should be more accretive than, let's say, a BOPP position today. But the margin should be really better than, let's say, the current BOPP systems.
Okay. Okay. And just on the aluminum foil business, what is the status right now there? And when should be-
It is under commercializing. [crosstalk] It is under final, let's say, installation. Hopefully, in by the end of November, early December, we should see capitalization of the project and commercialization as well.
Okay. Okay. That is all my side. Thank you.
Thank you.
Thank you. Before we take the next question, in order that the management is able to address questions from all participants in the conference, we request participants to please limit the questions to two per participant. The next question is from the line of Keyur Pandya from ICICI Prudential Life Insurance. Please go ahead.
Thank you. I just want to understand, just a clarification. The presentation mentions about the outlook, that the current inventory rationalization may last for two more quarters with regard to specialty chemicals. And your comments, you mentioned that probably H2 would be better, or Q4 should see better growth and overall growth for specialty chemical as a product segment. Just if you can just clarify better on the specialty chemical, that would be helpful.
Keyur, I think I was fairly clear in my communication.
Q3 should be better than Q2. Q4 should be better than Q3. Overall, from an H2 perspective, we will do better than H1 in the specialty chemical business. Also, when you look at it from an annualized perspective, comparing FY 2023 to FY 2024, I said even despite whatever has happened in H1, we believe we should be able to grow the business in single digit numbers on a revenue perspective. So that's the, the position that I have made. If that's unclear, please let me know.
Perfect. Clear. And when you say that, a single-digit growth, that is for specialty chemicals, right? Not for the chemicals,
Yes. [crosstalk]
segment as a whole.
Yes, please.
Okay, thank you. I'll get back in the queue, and all the best.
Thank you very much. The next question is from the line of Rohan Gupta from Nuvama. Please go ahead.
Yeah, sir. Good evening, and thanks for the opportunity. Sir, first question is on our confidence, which we still have that in specialty chemicals, with the Q4 and FY 2024, we still will be able to end in a positive number. This is primarily driven by the four new agrochemicals and two pharma intermediates which we have launched. If we adjust for that, do you see that there could have been big growth, or what is the growth contribution coming from these two, these, six new products launched?
Okay, so the six new products are only where the, let's say, commercial quantities have been sent to the customer. These have not been factored into the numbers that I've been talking about. They are very small today.
Okay, so this is- [crosstalk]
I have said that we've launched 6 new products, 4 in pharma, 2 in agro. 4 in agro, 2 in pharma, right? But I have not factored in any revenue positioning of those products in the number that I'm talking on an overall perspective. Those will probably come out much later in time.
Okay. So the growth trajectory, which we are still confident about in specialty, is primarily coming from that the inventory rationalization is broadly over. However, we still see that many global companies are still giving profit warnings, and for the calendar year, we are still talking about a degrowth scenario. So, I mean, saying there may be some kind of disconnect what these global companies are talking right now for Q3, what we are looking in a Q3 growth.
Okay, Rohan, I can talk about my position, right? This is the positions that we are taking on this are in discussions with some of our key customers. Some of the order positions that they have talked to us about in terms of just delaying the order, they have in fact talked about multiple new agrochemical intermediates also, which are kind of not, are not factoring into this. You've seen us talk about a new investment of INR 235 crore in a new product. We've kind of. We've probably get to over 600 metric tons of that product. It is also a product that can future, in the future, become a new AI that we believe we can do for the customer.
So all of this is based on our customer discussions, our order book, and our positions going forward. Specifically, to be able to answer what the customer is talking about in general, very difficult. But, my commentary is largely on the basis of what we are seeing and discussing with the customer.
That's very good, sir. Sir, the second question is on our CapEx. We have commissioned roughly INR 1,100 crore so far in H2. We initially guided for roughly INR 2,400 crore plus, kind of, in chemicals, and overall CapEx guidance was some INR 3,000 crore plus. So what is the number? What is the CapEx outlook right now? Have you revised that?
So for FY 2024, I believe we will still get to that INR 3,000 crore number, subject to the land. For FY 2025, I think again, the guidance of, let's say, INR 2,800 crore-INR 3,000 crore remains. With the new projects also, in parallel, starting to get, let's say, established and, and money spent on that, I think we should be in fairly good shape to get to that number. Again, the basic mix criteria of that as 80% chemical business still remains low.
Thank you very much, sir. Thank you.
Thank you. The next question is from the line of Abhijit Akella from Kotak Securities. Please go ahead.
Yeah, good afternoon, Rahul. Thanks so much for taking my questions. Just a couple on the chemical segment. First, on the segment margins, you know, they have come down a little bit this quarter to about 24.4 at the EBIT level. I understand this is probably to do with operating leverage and maybe a little bit of pricing pressure. But how should we sort of think about these margins? You know, can they sort of trend back toward the older levels of last year or so in the next, you know, next few quarters?
Again, Abhijit, what I said in the past also is that, in one of the quarters, we've seen a margin of 35%, EBIT margin, right? We have said that that's not a sustainable position, right? Given our, our position on this, we had said that, on an annualized basis, margins ranging between, let's say, let's say in the range of about 26%-30% range, should, should be something that we should be able to achieve. Again, to be very frank about it, we don't look at it on a quarter-on-quarter basis. I think it is best to look at it on an annualized basis. This quarter, what you've seen as margins are probably in the range of about, 24.5%.
Last even when you look at it from an H1 perspective, we were probably about 26%. So I think we are fairly well within that range that we've spoken about. It's business, Rohan, sorry, Abhijit, and to be very frank about it, is not linear. It will have its ups and downs. What I'm kind of telling you is that there is conviction on CapEx, there is conviction in terms of order book that we have, and that's in fairly good shape. So that's how we look at it, Abhijit. Not really a quarter-on-quarter position that we look at.
Right. Sure. Understood. Thank you. And, the other question was just on the revenue side. Would it be possible to share the specialty chemicals growth for the first half? I know in one Q, you had mentioned +10%.
Unfortunately, that remains where it is. Only annual basis, we will be able to give you the numbers around it. But let's say, like when we were talking about it on Q1 and Q1 perspective, where we had same, said that it is grown significantly. On an H1 perspective, the growth is probably not as much. It is probably flat to slight negative.
Okay, got it. Great, sir. And one last thing from my side. You did speak about the expectation of, you know, enhanced pricing in the fluorochemicals business next year. So again, I mean, if you could give us some sense of what sort of, you know, price increases we could expect potentially next year.
Well, it is early, Abhijit, to be able to answer that.
Okay. Fair enough, sir. Thank you so much. All the best.
Thank you. The next question is from Archit Joshi, from B&K Securities. Please go ahead.
Hi, sir. Thanks for the opportunity. Sir, I just have one on some global issues, in your conversations, you can help us explain. The way the business has been carried out on the inventory front, what we are made to understand that the MNCs were holding, let's say, 4-6 months of inventory in the last 2-3 years, looking at strong demand on the farm side. Wherein our growth were also quite strong, and certain macro conditions have sort of created this inventory snowball, due to which our growth also has been impacted. So I was just trying to understand if there is any correlation with the level of inventory that our customers or MNCs were holding.
Let's say that, in the ensuing quarters, maybe the next year, when the base is normal, if they shift back to inventories which are lower than what they were, they were last 2-3 years ago, maybe when the growth was quite strong, would that have an impact on our growth also in FY 25?
I think, to be very frank about it, I think you are answering the question yourself. You are absolutely right that there was a position on this that was being created, because of the fact that post-COVID, some of the supply chain issues have eased out. And again, I think one of the larger issues here is also the fact that interest rates cycles globally have gone up very, very significantly over the last, let's say, year or so. Right. When we look at it, I think the cost of holding inventory has become dearer. Because of that, some of the customers are facing working capital pressure, which is therefore leading to, to, let's say, delaying of some of the orders.
Also, what has happened is because of the fact that supply chain issues that were there in terms of delivery ability, cost of the container, shipping material out, availability of containers, I think that has kind of eased out very significantly. And therefore, people are saying that it is important to be able to keep it like that and keep a lower inventory, because, again, it boils down to the cost of carrying the inventory. Now, whether it has gone to 180 days or 270 days, and it has now come to 30 days or 50 days, I really don't know, Archit. That's something that is very, very different for each customer, each position that he's taking. Very difficult to be able to comment on where the inventory levels are today.
It's just a position that some of the customers are talking to us about, and we are seeing that kind of a delay happening when we talk to the customers. So that's where it is, Archit.
Sure, sir. Understood. Thanks for the clarification. All the best.
Thank you.
Thank you. The next question is from the line of Bhaskar Chakraborty from Jefferies. Please go ahead.
Hi, good evening, Rahul Jain. One question on the specialty chemicals. The recovery in demand that you are seeing from your customers over the second half of the fiscal, is it mainly driven by 2-3 products, key products, or is it more broad-based?
So to be very frank, Bhaskar, Bhaskar, well, I've said it in the earlier part of this conversation also, that we believe that some of the key products that we have, we've seen a lower demand and orders getting kind of shifted out to Q3, Q4. That's where we are saying that some of these will come back in. Some of the new product launches that have happened over last year and the plans that have got commercialized will also give him, let's say, from a revenue perspective and volumes perspective. But majority of that is not from, let's say, the new product launches that we have talked about. That's something that will come in over Q3, Q4. Bhaskar has roughly spread Q3, Q3 and Q4, and Syngenta is probably more towards Q4.
So that's, that's how the global commentary read out.
Sure, sir. Thank you. This last question is that in some of the other players' cases, we have seen that they have indicated that customers have sometimes come back and asked for higher volumes, but then after a little while, they have again toned it down, and then again, they have changed. I mean, the volatility in their assessment of their own demand has been very high. Have you also seen that, or you are seeing a betterment in that predictability?
Depends on customer to customer. To be very frank about it, I don't think it is generic in nature for me to be able to comment like that.
Okay. Thank you very much, sir.
Okay.
Thank you. The next question is from the line of Yash Shah from Investec. Please go ahead.
Hi, sir. Thank you for the opportunity. Sir, I have two quick questions. The first question was regarding on the PTFE side. We were expecting-
Yeah.
to sell around. Yes, PTFE. We were expecting-
Yeah. [crosstalk]
Okay. So, sir, we were expecting to sell somewhere around 1,000-1,500 tons of PTFE in the current financial year. Since the project has been delayed by a couple of months, so what, what is our revised expectation now that we'll be able to sell on the PTFE side for this year?
I don't think I ever said that we will expect 1,000-1,500 tons in FY 2024. I never said that. Maybe that was your expectation. The way we are looking at it is that, some of the sales, probably about 100-150 tons per month, should come through in Q4 FY 2024, and the full ramp-up probably by end of e verything FY 2025, is what we would look at.
Okay. Okay, fair enough, sir. And the second question was on the technical textile business. During first half, we were expecting pressure because of the lower Caprolactam prices. Since the prices have started holding up, in fact, have increased, starting September, can we expect better revenue on the technical textile business in the second half, sir?
Even if the prices go up 30%, revenue could go up 30%. It doesn't really matter, yes, because at the end of the day, majority of the Caprolactam , be it on a dollar margin basis or a rupee margin basis, is a pass through. It could be a 30-day pass through, or it could be a 45-day pass through, depending upon the pricing methodology, but how does it make a difference?
Okay. Got it, sir. Thank you. Thank you for answering that.
Thank you. The next question is from the line of Madhav Marda from FIL. Please go ahead.
Hi, sir, good afternoon. Thank you so much for your time once again. I just wanted to understand a bit on the pharma ramp up. I think you had been mentioned the PPT about some pickup expected, so by when do we expect more Q3, Q4, or how do we expect that to pick up then?
You're talking about the pharma ramp up in specialty chemicals space?
Yeah, that, that's right, sir. That's right.
So, Madhav, to be very frank about it, I think the agro traction has remained strong. Pharma MPP plan should pick up in, let's say, more towards Q4. There are products that have already been sent out for, for, let's say, as qualification lots. Three or four products have all have already been produced in the MPP, and I certainly believe that the full revenue potential will get realized more in the second half.
Okay, understood. Understood. And what is the gross block in the pharma MPP projects? Have you seen-
No, I've not broken it down as such. [crosstalk]
Okay, got it. All right. Thank you.
Thank you. The next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Thank you again for the question. Sir, on the fluorochemical business, you know, when you look through in FY 25, 26, you know, do you broadly stay with the volume assumption, guide, assumption that you would have had earlier?
Sorry, Nitin, could you just go a bit slower? I have been unable to engage your question.
Sure, sir. On the fluoro fluorochemical business, fluoro specialty business, do we, when you look through the FY 25, 26, sort of broad volume estimates for our projections for ourselves, are we largely hopeful of, you know, maintaining a similar, doing the similar volumes as you would have probably thought earlier, despite whatever happened this year?
Fluoro specialty you are talking?
Yes, sir. Sorry, I mean, the Ref Gas business or the fluorochemical business.
Oh, the Ref Gas business. See, again, I think the way our plants have come up and the 32 plants should get commercialized, I think we are in fairly good shape. Given where current revenue positions are, given where current margins are, even then, I think the IRRs are probably better off than what they were when we had initially envisaged the project. So we are probably in better shape than worse shape.
Sir, in terms of the dynamics of the industry, has anything changed, you know, barring the, you know, with respect to the Chinese dumping and all of that, that has really happened, which structurally changes, maybe some of your assumptions?
So not really to a certain extent. The change in assumption is that, let's say, another player wants to come up as capacity, some capacity has come up. There has been some rationalization that has happened on that side. U.S. quota positions are now frozen and will play out from January of 2025, 2024 onwards. So all of those have happened. But again, I don't think it has made us think about, let's say, shifting some of the positions that we are taking on the business. Those remain in fairly good shape and, going forward also are positive.
Lastly, just squeeze in. On the fluoro specialty part, this year you said it's a single-digit growth business. In the past, you've grown at extremely strong growth rate in this business.
I think you are misreading it, Nitin. I never said that it, it is a single digit growth business. I have said that this year, even if we get to a single digit growth position on the fluoro specialty side, given where the market dynamics are, I think it is much better than let's say growing 40% last year. That's what I have said.
Okay.
Please read it properly. I am not saying that it is a single digit growth business going forward. For FY 2025, FY 2026 and onwards, given our capital intensity around it, we still believe a 20%+ growth is still possible.
Okay, that's what I wanted to hear. Thank you so much.
Thank you. The next question is from Krishan Parwani from JM Financial. Please go ahead.
Yeah. Hi, Rahul Jain. Thank you for taking my question. Just two small clarifications. So the first clarification, I'm not sure if I heard it correctly, but did you mention that your HFC volume for CY 2024 for U.S. market is tied up, or did I hear something wrong?
I said calendar 2024 for some of our key customers, not the full load.
Okay, some of your key customers, the volume is tied up. Yeah, so, okay.
It's very encouraging, Krishan.
Yeah, yeah, yeah. Yeah, yeah. I mean, yeah, that's, that's why I needed the clarification. Yeah, that's, that's pretty good. And the second clarification, or rather a question rather, it is, so you highlighted single-digit volume growth, or sorry, revenue growth for specialty business in FY 2024. Just wanted to check whether you have any kind of guidance on the fluorochemical side for FY 2024.
Again, I think the way we've always looked at it, volumetric position, given where the 32 will come up, given where U.S. demand positions are, given where, let's say, PTFE should kick in to a certain extent, given where pricing expectations are, even if we could get to a flat number as to last year, we should, I think, be in very, very good shape. But I think as of now, it looks a bit difficult.
Okay, no problem.
Pricing is down, to be very frank.
Okay, understood. Understood. Thank you for these clarifications, and wish you all the best. Thank you so much.
Thank you.
Thank you. The next question is from the line of Vishnu Kumar from Avendus Spark. Please go ahead.
Yeah, thanks for your time, sir. Specifically on the ref gas volumes that you mentioned on, in terms of US, your expectation is, would be for 2024, would it be higher than 2023, or how should we look at it?
No, could you repeat question, Vishnu?
Sure. For the volumes contracted or rather, your expectation for 2024, the volume that you might export to U.S., would that volume be-
Calendar twenty-four? [crosstalk]
Yes, sir. Correct.
When you look at calendar 2024 versus calendar 2023-
Yeah.
Which would then be a good comparison to this, I think, our endeavor is to sell higher in the U.S. market. While some of that has got tied up, it will take a lot of effort to be able to do that. I think we should be able to achieve it.
This will be more towards 32 than 34?
See, again, then I will also have to tell you what volumes are of world 25, what is the position that I'm taking with each of the customer, that I don't want to do.
Understood, sir. Sir, and also, when you say that your EBIT margin medium term, you would want to keep it between 26%-30%, any, what would be the pecking order between the ref and the chemical business? Which would be higher, lower, and, any risk that you see to these numbers?
Sorry, Vishnu, your voice is kind of not appropriately coming. Could you repeat that question, please?
Yeah. So when you say that the EBIT margin range that you'd want to keep it between 26%-30%, which segment, whether the ref or in terms of pecking order, which one will be higher, the refs and the spec—I mean, the specialty business, and if there's a volatility or a higher risk, which one of these businesses would be that?
On a ROCE basis, again, on a, let's say on an EBIT margin basis, it really depends on, how each of the business segments is playing out. It is not, always true to say that a specialty chemicals business will always be at 5 percentage points higher than, fluorochemicals business. On a generic basis, we believe specialty chemicals on a long-term basis should give us higher ROCE compared to fluorochemical business. But when you look at it on a positional basis for one quarter, one year, depending upon where markets are, the positions could be different. FCB could be going through a boom, while specialty could be doing a stable position. So it really does depend on, on what is the, position on that side. If you take five-year averages, I think specialty should be higher.
Understood, sir. Thanks for all this, sir.
Thank you.
The next question is from Mr. Jason Soans from IDBI Capital. Please go ahead.
Yeah, thanks for taking my question, sir. So just a simple question I had in terms of our intermediates which go into agrochem and pharma. Just wanted to know from a ballpark perspective, what percentage of that goes into patented molecules and what percentage of that into generic?
Unfortunately, that's something that we can't track. There are products that go into both. Because these are not AIs in nature, it is impossible to be able to say.
Okay. Sure, sir. Okay. And sir, my next question is: What percentage of our specialty chemical business is contracted in terms of, in terms of contracted, basically?
Almost 90% of the business, 95% of the business is contracted. Some are 2-year contracts, some are 3-year contracts, some would be 1-year contracts also, some in 6 months order-based contracts also, but majority of it is contracted.
90% is contracted. Sure. So, sir, just in a follow-up to that, I just wanted to ask, you know, just last six months, this Chinese dumping has started and this intensity has come through in a large way. So in terms of these already established contracts, already made contracts, do you see any structural changes to the contracts? Of course, there'll be some de-escalation, you know, raw material prices coming down. Do you see any structural, structural changes to this contract? What I, what, what I'm asking-
There may be some other, let's say, positions that the customer would like to create. But I think again, you have to understand that the global theme that is playing out is de-risking. Right? So while there may be some, let's say, positional play that will play out, globally, the de-risking theme continues, which is what we said, I think in the earlier commentary also. Which therefore means, that when we look at it, while there may be a contract-to-contract position that plays out, if we are setting a facility for a customer, we will want to see, let's say, more longer term contracts coming through.
Again, we've been very flexible with the customers in terms of getting better positions with them, getting newer, newer products, more complex products, which have helped us in time for us being able to get, let's say, better shares from customers. So that's how we look at it.
Sure, sir. So but then here and again, what happens with the de-risking is vis-à-vis against cost competitiveness, so that's, that was my only sense of asking that.
To be very frank, I think the customer would want to buy from me at a Chinese price, if that's possible, right?
Right. Right, sir. Right, sir.
Is the debate that will always keep happening?
Right, sir. Right, sir. Yes, yes, and we have to match that. And just one final question from my side, sir.
I've never said that we have to match that. Again, we will always have to look at the economics of the position that we are selling in a manner that can be profitable growth for us.
Right, sir. Right, sir. Then just one final question from my side in terms of HFCs. If you could give us a revenue contribution from major geographies, you mentioned key markets such as US, Middle East, India, if we could get-
So I don't want to give from geography to geography perspective, but let's say exports is about 60% of HFCs, and the balance would be domestic 60%-65%.
Okay. Okay. Thank you so much, sir. Thank you so much.
Thank you.
Thank you very much. We'll have to take that as the last question. I would now like to hand the conference back to Mr. Rahul Jain for closing comments.
Thanks, everyone. I hope we have been able to answer, if not all, some of your questions. I hope, too, that each one of you continue to remain safe and healthy. If you have any further questions, we would be happy to be of assistance. We hope to have your valuable support on a continued basis as we move ahead. On behalf of the management, I once again thank you for taking the time to join us on this call. Bye-bye.
Thank you very much. On behalf of Axis Capital Limited, that concludes the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.