Ladies and gentlemen, good day and welcome to the Q2 FY 2026 earnings conference call of Sudarshan Chemical Industries Limited, hosted by B&K Securities. 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. Please note that this conference is being recorded. I now hand the conference over to Mr. Rohit Nagaraj from B&K Securities. Thank you, and over to you, sir.
Thanks, Michelle. Good morning and welcome, everyone. We thank Sudarshan Chemical Industries management for providing us the opportunity to host the company's Q2 FY 2026 post-results conference call. Today we have with us the Sudarshan Chemicals management, represented by Mr. Rajesh Rathi, Managing Director, Mr. Nilkanth Natu, CFO, and Mr. Amey Athalye, General Manager, Finance. Without taking further time, I shall hand over the call to the management to walk us through the company's performance, post which we can conduct the Q&A session. Thanks, and over to you, sir.
Thank you, B&K and Rohit, for hosting us. It's a real pleasure to speak with all of you and a pleasure to talk about the last quarter's performance. I hope you all can see my screen. Just want to I know this may be a repeat. At the cost of being repetitive, I just wanted to ensure that everyone just recap on the fantastic deal we did on March 3rd, which gives us a real opportunity to become an Indian MNC. Heubach belonged to the legacy of Clariant and Hoechst, which was among the top two global players with more than 200 years of experience. Quite a few of the pigments were actually invented there. With Sudarshan acquiring this business, it gives us a great opportunity for growth. What we've acquired is 17 global manufacturing sites and a very broad portfolio and a great technical team.
Together with Sudarshan's agility and entrepreneur spirit, we believe that we can create a true Indian MNC. In terms of the manufacturing sites, now today, we have 19 manufacturing sites across 11 countries, five continents. We serve almost every country and have more than 4,000 direct customers. Phenomenal. We have a very broad product portfolio, and we serve not only the traditional industries like coatings, plastics, printing inks, but have a great presence in digitizers, in special applications like we do supply colors for iPhone, Samsung, et cetera, and hence gets us on a higher notch. This is a little bit on the reminder of this, and we completed this transaction on March 3rd. To begin speaking on the quarters and half-yearly performance, basically, I want to begin with talking about some of the market reflections. As you all can see, the Q2 quarter has been a little disappointing.
Disappointing from a perspective that the fundamentals of the business remain very strong. There is a temporary dip in demand, which I am going to explain a little more in details. One is we have seen low demand across most of the pigment end use. Our business is global and main economics like Europe, U.S., LATAM kind of affects our sales a lot too. We have seen lower demand. This was mainly for coatings and plastics. This was driven also by very high interest rates, which kind of led to a lower household demand and lower demand on paints and automotive industry. Most of our global customers have de-grown. Added to the problem of this de-growth was, as I had mentioned last time, during insolvency, customers bought above normal stocks, not only from Heubach, but products which were similar from competitors.
We never anticipated such high level of stocks with customers. As we were reflecting with the customers, that is what we have now come to know that there, and because of their poor demand, the rate of depletion has been much lower than what we had anticipated. That has caused a concern for the Q2 performance. Going more deeper into the performance, Sudarshan's sales has been flat quarter-on-quarter. If you look at versus Q1, we did a 13% growth. EBITDA has been flattish and we will talk a little more in details later. To explain this slide, legacy Sudarshan means Sudarshan's pigment business and Rieco put together. The acquired group business, and then one Sudarshan includes the legacy and acquired group. This is how this slide. We are going to continue looking at the same format of slides. This is a pigment-only slide.
Legacy pigment business was flat. This was mainly affected due to the coatings market in India. We will explain a little more what has happened in the coatings market. The plastics market has done well. We also saw marginal impacts in some of the markets where we were changing our distributors, et cetera, due to the new go-to-market strategy. The drop in EBITDA has been even higher. None of the fundamentals of the business have. This is a temporary phenomenon. We had to lower our production given the high inventory during Q2 quarter. This led to a lower operating leverage, and this has caused the EBITDA drop. As I mentioned, this is a temporary phenomenon. Going forward, we should come back to our 14%, 15% levels going forward on our EBITDA margin. Right.
On the acquired group, as I mentioned, there were two issues. The demand of the customers has been soft, and customers had a large stock on Heubach products, which resulted even in a lower demand for us. Right. The EBITDA margin, due to the sales and volume drop, the EBITDA margin would have been even more severe, but given some of our initiatives on value capture, we were able to bring this back into a good positive. Right. Any other points? No. H1 performance. So, Mr. Natu, you want to take it.
Yeah. These are one Sudarshan H1 performance, and the legacy Sudarshan here includes Sudarshan pigment business and the Rieco business. The sales for the first half is flattish at INR 1,340 crore compared to INR 1,330 crore, and EBITDA is also in the range of INR 178 crore.
For the acquired group, the first half we see the turnover of INR 3,565 crore with INR 103 crore of the EBITDA, and which is at the 3% of the EBITDA margin. We have seen the legacy Sudarshan pigments sales marginally grow, which is mainly the softness in the Europe and North American region. Acquired group revenue for the first half is around INR 590 crore. This is the H1 for pigment only. Further deep diving into the pigment performance business for the first half, the legacy Sudarshan pigment business, we see the flattish or a slight de-growth of 1.6% in the revenue. The sales is at INR 1,229 crore. EBITDA is at INR 172 crore with 14% EBITDA margin for the first half.
On the financial ratio, the key ratios, which are net debt to equity and net debt level are at the same level what we had reported earlier in Q1 also. From the financial balance sheet side, we see the financials are robust. On the net working capital, we are at 26%. As we guided earlier, we had to reduce the working capital, and this will be the gradual process as we have stocked up some inventory for serving the customers forward.
On the projections, we have to revise our guidance. This year we expected that the acquired group we would do about EUR 35 million. Given these circumstances which I explained to you, we also expect Q3 to be subdued and hence we have to revise. We expect customers to really start buying from Q4 onwards.
That's where I think we have to revise our projections to EUR 25 million to EUR 30 million, but our three to four-year guideline still remains the same. As I mentioned, this is a temporary phenomenon due to the demand adjustment, and that's the reason why we have to only adjust for this year. Our long-term three to four years guidance remains the same. I'm also glad to inform you that our integration is going very well. If you look at the fundamentals of the business, other than the temporary demand issue, I think all the other fundamentals are well in place and going very well. Right? With this, I'd like to give you a little bit of an integration update on how we are doing. I think we are in H1 today. We've been able to stabilize some of our operations and product availability.
We have been able to generate good leads, and as soon as demand comes back, we will be able to get these sales back from our perspective. Our value capture process is progressing very well, and we've already launched a project to integrate our IT and entire data. We've defined and setting up a new GCC structure, and we finalized the full org structure. From that perspective, the integration is well on track. It's almost six to seven months that we've completed this, and I think when we reflect on was there any positive surprises or any negative ones, I think the first positive is all assets and all inventories are in very good condition. Right? We have recognition of a great connection depth with high-value customer applications. Right? We've been able to bring that trust with customers back.
Our core functions, like operations, technical, are in good shape. We were able to confirm whatever value opportunities we saw during our diagnostic. A few negatives, I think the costs are quite high. Fixed costs are quite high, and especially on the manufacturing side. Even when the volume drops, the fixed cost of manufacturing is high, and you are not able to see that much drop, adjustment in the manufacturing cost. We never anticipated the customers to have such high level of inventories, especially the global key accounts we have seen. That is where our Q2 sales from India affected, but it is a temporary phenomenon. Our value capture goes across five major themes. One is operations and supply chain. There are great opportunities for us to optimize across products, across our legacies.
There are product synergies, which today we see we have two units in Roha and Mahad, and we have already seen some successes in that in getting some value capture opportunities. Optimizing the supply landscape and leveraging on the scale to negotiate better contracts has been our lever. We have done a lot of clean sheet-based negotiations, recognition on volume rebates, and that has given us good deals. IT, I think the infrastructure contracts have been renegotiated. Some of the apps which were high cost have been rationalized. On the org and SG&A, this is an ongoing process. We have been able to remove some duplicate roles, but we do see there is still some potential going on this. In terms of the technical and product management, we are looking at several opportunities to in-source a lot of pigments, compare recipes, footprint optimization.
We have already seen a grand success with some of the recipe harmonization of other portfolios. Thank you. Thank you very much. As we go forward, I think we will continue to build trust and commitment to grow with us. I think there is a high interest and a very serious relationship building. Once the restocking or once the stocks of our customers are over on these, we will see a good upside, right? A strong value capture funnel, we will keep accelerating this. A big potential in the future to free up some of the working capital. We are going a little slow on that, but we will see as we progress in this year, we will see better results. Systems and data integration is kind of to solidify the one Sudarshan. These are some of our major priorities as we are going forward.
To kind of talk about, as I said, our three to four year guidance remains the same. This year's guidance is adjusted to between EUR 25 million- EUR 30 million, with caveat that Q3 will still remain subject. Thank you very much. One moment. First option.
Sir, shall we start with the Q&A?
Yes, please.
Thank you very much, sir. We will now begin the question- and- answer session. Anyone who wishes to ask questions may click on the raise hand icon. Before asking the question to the management, please introduce yourself, providing your name and your organization name. Please limit yourself to a maximum of two questions so we can accommodate as many as possible. Ladies and gentlemen, we will wait for a moment while the question queue assembles. You may please click on the raise hand icon to ask questions at this time. The first question is from Sanjesh Jain. Please accept the prompt on your screen. Turn on your webcam, unmute yourself, and proceed with your question.
Hello?
Yes, sir. You can proceed.
Thanks. Sorry, I got a bit confused. Yeah. Thanks for that opening remarks. I got a couple of questions. First, looking at your guidance on the acquired company, we are talking of EUR 25 million- EUR 30 million. In the first half we did EUR 10 million, and if I assume Q3 generally seasonally weak for the acquired company considering the festive season and the winters. That means we are looking at what?
Upwards of EUR 10 million to be done in the fourth quarter. What is giving this guidance? That's number one. This is a generally seasonally weak quarter because this is a post-festive season. I think coating will have a relatively lower demand. What is giving us the confidence that Q4 financial year, which is January to March, will be a stronger quarter and we are expecting to do almost what, EUR 10 million plus kind of EBITDA in the acquired company.
That's my first question.
Thank you, Mr. Jain. First of all, I think Q4 is our strongest quarter, whether it was legacy Sudarshan or for Heubach. Q3 is a weak quarter, as you rightly mentioned, especially given the Christmas season, most of the western economics, half the month is closed. Also November is slightly affected, the U.S. is affected because of Thanksgiving. So, in general, Q3 always remains subdued and Q4 is always the best quarter ever. That's one. The second is, as I mentioned, customers expect to kind of deplete their stocks because of their slow run rate by December end. From January, we are seeing a strong message from the market that they will start buying, and we'll see the demand come up.
That's the confidence which we have going forward, and we expect the Q4 quarter to be even stronger than what we mentioned in terms of that.
Got it. One follow-up there. What kind of inventory is there in the system, customer system? Any color on that, whether that is a significantly larger inventory? That is number one, and number two, any color on the order book that we are getting for the Q4 in terms of lead indicator that gives us that Q4 will be a much stronger quarter.
Sure. I think this phenomenon, what gives us the confidence. Given this Q4 base demand. Given the current—
Mr. Jain, I would request you to kindly mute your line.
Yeah.
Thank you.
Thank you, sir.
You may continue.
Yeah. What we see in the current phenomena, the global key accounts have done a major stock up. Given their insecurity, and they were very dependent on Heubach . These customers and rest of the customers have done better. And really the greater impact we are seeing is due to the global key accounts. We have had deep engagement with these accounts, and they have assured us that the demand will start coming back from January. We have already seen some of these customers place orders for January onwards months. And that gives us the confidence that this will come up.
No, that is very clear. One last question on the domestic business. I was just looking at the standalone number. The gross profit margin appears to be rather quite weak, drop from 47% to 43%. In a scenario where I think chemical commodity prices appears to be quite benign, what explains such a sharp drop in the margin? This is the material margin.
The gross margin includes the manufacturing margin, and that is where we described that we lowered our production so that the inventories we are able to lower, and this led to a lower operating leverage.
What we are telling you is that we have de-inventorized our balance sheet, that we have sold from the inventory.
Yes
Operating costs will now get captured above the gross profit level rather than below the profit.
Yes.
Can you tell us how much inventory have you reduced in the standalone business in this quarter versus last quarter?
Sorry. Yeah. Can I—
Is it okay to give?
About, yes. About INR 100 crores.
No, sorry, that I can get from the change in the inventory from the P&L. That's fine. Apologies for the repetitive question. Thank you. Thank you very much and best of luck for the coming quarters.
Thank you.
Thank you. The next question is from Rajesh Kothari. Please accept the prompt, introduce yourself and proceed with your question, sir.
Hey, hi. Thanks for this opportunity. Just two questions from my side. Sir, you mentioned that in disappointment perspective, the negative surprise perspective, you said that the fixed cost are experienced, there was a negative surprise on fixed cost, it showed as much higher than what you thought. Can you be a little bit more color in terms of probably it also means more scope for cost reduction compared to what earlier you would have thought for? That's first question. The second question is, you said on the working capital efficiency you will continue to further. You found it to be a little bit higher than what you thought it should be. How do you see the working capital efficiency to drive over next 12- 18 months?
I think, absolutely, sir. First, I think we see a good potential of cost reduction. However, some of the fixed cost to reduce takes time due to regulatory frameworks. But I think there's no doubt that there is a big potential to reduce and value capture has been a major theme for us, kind of, looking at that. Some of the initiatives like setting up the GCC, setting up ONE SAP will also give a leverage going forward beyond our regular operations purchase cost reduction and so on. That's the first question and we are looking forward to that. In terms of working capital, as I mentioned earlier, we wanted to gain trust of our customers and because of our four different systems, different banking systems, some of our processes were not in line.
Plus, we did not anticipate this much of high stock with the customers that demand will come from. We planned for a little bit of a higher demand and that is where our working capital has been high. But going forward, we are already taking steps to start reducing this working capital and we see a good potential even there.
Therefore, as you go forward, moving forward, what kind of working capital days do you think one should assume for FY 2027, particularly for this global business? In terms of this cost savings building, some cost savings probably you can achieve a little bit more compared to what you said. That is what my question is. Hello?
I think, sir, for next year our aim is to get to about 24% of working capital to sales. Going forward, of course, we are not happy with this number. Going forward, we would kind of look at how to optimize further. But I think this is the visibility we see for next year.
Where is it currently?
I think at around 26.2%.
Okay.
Yeah.
Because when you acquire you also have a good amount of data and there was expectation that even from there you can drive more efficiency in terms of overall the valuation, what we paid. So whether those data are getting realized?
Yeah. You want to respond?
Yeah, Mr. Rajesh, so as Mr. Rajesh mentioned, currently we are at the 26.2% of the net working capital and we expect by FY 2027 we should reduce it to 24%. Answering your question on the data realization, the data which we have acquired in the Convent too, those realizations had taken place in the first two quarters and we don't see any and that is all.
Great, sir. Thank you, sir. Thank you very much.
Thank you. We will take the next question. Before we take the next question, a reminder to all the participants that kindly limit your questions to only two per participant so that we can accommodate as many as possible. The next question is from Gagan Dixit. Please introduce yourself and proceed with your question. Mr. Dixit, please accept the prompt. Mr. Dixit, I have unmuted your line. You may proceed with your question. Please proceed.
Yeah. Am I audible?
Yes, sir. Clearly audible. You may proceed now.
Yes. Sir, just giving your ambition of the top three global segment players that over the time you want to become, you want to compete with, I think, BASF, Clariant. When I see over the time, after the Heubach acquisition, what will we see that you have some sustainable advantage we see? If you can give some color on the cost advantage or this product mix or the customer reach, that would be helpful, sir. Just from the point of view over the next three years, sir.
I couldn't follow your question, but basically we have acquired Clariant and Heubach together, right? There are only two global players now. The other global player is the DIC group, which includes BASF and Sun Chemical, right? And we are Sudarshan, Heubach and Clariant together, right? I think given our player there, I think we're very strong in coatings and digital inks, right? Legacy Sudarshan was strong in plastics, and that's where we are growing. But with the acquisition of Clariant/Heubach, what we have also great access to special applications like iPhone, agro market, stationery, et cetera. That's how we are playing a great Also our product portfolio is expanded by tremendous.
Okay. My second question is that, sir, there is a few months back the news came that, in the media that you have done the some continued the legacy deal with the Brenntag, that group of the distributor of the Australia, if I'm correct. Can you quantify that what are the benefits you see from this entry into the Australia market, that's-
Australia we were always present. This was a minor, it's not a very large market for us, and that's why it's a small market, and I think it's a small go-to market change. There are several distribution channels we are changing globally due to the new situation of our new situation in the market. Yeah.
Yeah. Thanks for my turn. Thank you.
Yeah.
Thank you. The next question is from Jatin Sangwan. Please accept the prompt on your screen. Turn on your webcam, unmute yourself, and proceed with your question. Mr. Sangwan, please unmute yourself and proceed.
Hello. Thanks for taking my question. My first question is just a follow-up on the revenue part. When you mentioned that Q3 will be subdued, is it right to assume Q3 will be lower than Q2 at Heubach level or we will see some kind of improvement quarter-over-quarter going forward as some of the inventories will start easing out?
Jatin, it's a complex question to answer because there are two phenomenons. Like I mentioned, December is a very You have half the December month only. But at the same time, certain businesses are coming back. So the mixed impact, it's also new to us, right? Because we never saw half the month of December not being there in major geographies. Now Decembers they don't operate. So it's very difficult to kind of come at that, but I think we should be in the close range probably of Q2 numbers.
Got it. My second question is around you mentioned that there are fixed costs at Heubach level. Our back-of-end calculations suggest that the fixed cost could be as high as 36%-37%. Linked to that, is it right number to look at it? Linked to it, another question is, we have seen some reduction in employee expenses and other expenses at Heubach level. Is it right to assume when the revenue will decrease in, let's say, in Q4, these employee expenses and other expenses will still look at reduced level, and that's why we'll see higher EBITDA margins in Q4?
Absolutely, sir. The operating leverage with the higher demand would definitely be in Q4, but there's a systematic effort also on our part to reduce fixed cost. You will see both. Hopefully, you should see both the impacts.
Sir, is this 36%-37% number, is it directionally right or are we missing out on something?
Sir, cannot answer this question offline. Maybe our team will revert to you. Yeah.
Okay. Thank you.
Thank you. Participants who wish to ask questions may click on the Raise Hand icon. We would request all the participants to also introduce themselves before going ahead with their questions. The next question is from Dhavan Shah. Please accept the prompt on your screen, unmute yourself, and proceed with your question.
Hello, am I audible?
Yes, sir. Please proceed.
Yes. My question is on the standalone legacy business. In the last console, I think you mentioned that the Q2 would also be soft like Q1 in terms of the pigment. But if I look at the Q2 number for pigment, we have already witnessed 12% quarter-on-quarter growth. Can you please explain what led to such growth in Q2, and how do you see the second half for the legacy pigment, in the domestic market as well as the export business?
Yes, sir, absolutely. We did 12%- 13% growth, but our anticipation was even better numbers on last year quarter. That is where I had said that compared to last year quarter, it will be subdued. I think the growth phenomenally came from the plastics area. In India, the plastics area, we saw good growth. The coatings growth was subdued.
Okay. Going forward for the next second half, how do you see the picture overall in terms of the domestic as well as the export business? Given that you already did the CapEx, I think three, four years back, roughly INR 700-odd crores. How is the utilization right now and what is the progress over there, if you can share thoughts?
Sure. I think given the second half, I said we expect a very good strong domestic performance. Export Q3 should be subdued. Q4 onwards, we should see a good pickup there. Our capacity utilization on the CapExs are going as per plan. In fact, given the new situation, some of our CapEx's performance would even get accelerated.
Okay. But last quarter you mentioned that the growth would be around 8%-10% for the legacy pigment. So that guidance maintains now?
All in all, I think given the performance so far has been subdued, Q2 is subdued. Q4, we should come back. And how the number we end up is, we are looking at how we look at that number.
Understood. And sorry, if I look at the published numbers, and if I compare it with the investor presentation numbers for the pigment or maybe the console legacy Sudarshan, there is some discrepancy. So if you can help us to understand, because the number is not matching with the as reported number, even though if we add up the record numbers also.
Just one second. I think Natuji and Amey, will you answer that or you will get in touch with him?
Sir, I will get in touch with you because the numbers which we have reported are for revenue from operations. If there is anything, post this call, I will connect you.
Unless you have any specific questions we could answer, otherwise they will get in touch with you separately.
Sure, sir. I will get in touch with you. Thanks.
Thank you. We will take the next question from Rohit Nagaraj. Please proceed with the question, sir.
Yeah, thanks for the opportunity. First question in terms of the 17 manufacturing sites outside of India. What is the plan in terms of getting some of those products from those high-cost destinations to India? Have we started the process? Will that also be one of the levers to reach the $90 million-$100 million of EBITDA by, say, FY 2028, 2029? Thank you.
Out of the 17 manufacturing sites, five are in India itself, right? The rest of the products, some products from Germany, there was already a move to move some of the product lines into India. That project will get completed in some time, and that will give us a good benefit. Other than that, we don't see too much of movement. In fact, given the tariff situation, we are moving some of the products actually to Europe and to Mexico, right?
Sure. Sir, second question in terms of the R&D or product development. We have said in the opening remarks that we've been working with the likes of even Apple, Samsung. How has been the inquiry flow from our customers? How do we see that those inquiries getting to fruition and finally turning into revenues? Just a broader understanding on the technology side, the R&D setup, and how we are integrating both the Heubach technology with the Sudarshan's R&D capabilities. Thank you.
Rohit, great question. I think, Rohit, in the last two years, this whole process of innovation was quite broken, right? There was not much technical emphasis. We have created these technical teams, and reactivated the technical teams. I think the first step was to set up a confidence and a trust with customers, right? Which we've achieved in Q1 to even regain some of our lost businesses. Then get into some of the innovation partnerships on what. We're already kind of looking at several ideas on working on innovation with our customers and are looking at that perspective. Obviously, looking at these projects, the whole lead time to get this done, et cetera, is more than a year, et cetera, right? More than a year. But I think that engagement and the customers then don't find you that transaction, right?
It's a more meaningful relationship as you kind of build going forward.
Perfect. Got that, sir. Thanks a lot, and all the best.
Thank you. Ladies and gentlemen, that was the last question. I would now like to hand the conference over to the management for closing comments. Thank you, and over to you, sir.
Thank you everyone for your interest in Sudarshan. As we close the investor call, would like to kind of say that our three to four-year projections remain the same. There is a temporary setback, I would say, due to external situations on the demand and where our customers have a lot of stocks. This situation will improve. So we would require your patience and looking forward to working with you.
Thank you, members of the management. On behalf of B&K Securities, that concludes this conference. We thank you for joining us, and you may exit the meeting.