Ladies and gentlemen, good day and welcome to Sudarshan Chemical's Q4 FY 2025 post-results earnings conference call hosted by Axis Capital Limited. 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. Please note that this conference is being recorded. I now hand over the conference call to Mr. Ankur Periwal from Axis Capital Limited. Thank you, and over to you, Mr. Periwal.
Thanks, Neerav. Good afternoon, everyone. Welcome to Sudarshan Chemical Industries Limited Q4 and 12-month FY 2025 conference call. We are pleased to host the management for the discussion post-Heubach merger here. As usual, the call will start with a brief management discussion on earnings performance, followed by an interactive Q&A session. Sudarshan Chemical Industries Limited's management will be represented by Mr. Rajesh Rathi, Managing Director, Mr. Nilkanth Natu, Chief Financial Officer, and Mr. Amey Athalye, General Manager, Finance. Over to you, Natu ji, for your initial remarks.
Thank you. Thank you Axis Capital and Ankur Periwal for hosting our earnings call. Good afternoon, ladies and gentlemen. Welcome to Sudarshan's Q4 FY 2025 earnings conference call. Our investor presentation has been uploaded on the stock exchange for your ready reference. During the call, we could make forward-looking statements. These statements consider the environment we see as of today and carry risks and uncertainties that could cause our actual results to differ from those expressed in today's call. We do not undertake to update any forward-looking statements made on this call. I will now request Mr. Rajesh Rathi to give his opening remarks.
Good morning, everyone, and I hope you can hear me clearly. Thank you, Axis and Ankur, for hosting our conference call. It is a great pleasure to be here on the desk. I would like to give you a little bit of history on our acquired group, Heubach. After World War II, one of the largest chemical company which existed in the world was IG Farben. IG Farben was split up after the World War II in three companies, BASF, Bayer, and Hoechst. Heubach, the acquired group, belongs to the legacy of Hoechst. Hoechst was a EUR 30 billion chemical company. In years to come later, it spun off its specialty chemical business into Clariant, which in 2022, SK Capital and Heubach bought this pigment business and it was called as Heubach. Going forward, I would refer to three legacies. One is the Clariant legacy, Heubach legacy, and Sudarshan legacy.
Clariant came with a great history of pigments. Many pigments were invented there. For us, this acquisition is not only about a strategic and financial fit, but it is also preserving history. We have deep-rooted technology with us. With this, and as you all know, Sudarshan legacy was the fastest-growing, most profitable company globally for pigments. With 75 years of experience, entrepreneurial and agile culture. Together, both these companies together, the new ONE Sudarshan, we feel that we could become the most value-creating pigment company with customer centricity and agility. The company is together now as ONE Sudarshan. We have 19 manufacturing facilities in 11 countries across five continents. We represent all major industry segments. We have 4,000+ global customers and a very large range of products. Our combined turnover is about 1 billion together, and it is a very exciting opportunity for us.
Sir, sorry to interrupt you. We are losing your audio. It is breaking a little bit.
Okay. Is this better, sir?
Yeah. Yes, sir.
You can continue.
Okay. Let me know if otherwise, we will change the laptop. I think there has been some technical glitch where we are not able to log on to the conference call. Do let us know if there is a problem. This is a global manufacturing footprint of the 19 manufacturing facilities. Yes, please. If you see our product range, we have one of the widest product range now in the industry. Organic pigments, a very wide range of high-performance pigments to classical pigments. Both Sudarshan legacy and legacy Clariant have a very strong footprint put together in organic pigments. Legacy Sudarshan also brings the effect pigments portfolio. If you see the portfolio in terms of inorganic pigments, corrosion protection, pigment dispersion, and dyes, these are the areas where Sudarshan had a big weakness, or I would say, a weak portfolio, and this has really strengthened our product portfolio.
Some of the specialty dyes find very exciting applications like your phones selling into. We have several colors approved in iPhone, Samsung, et cetera. The aluminum dyes is a very interesting business given this addition. Some of our pigment dispersions find applications in personal care, seed coating markets. Again, a very good presence, which comes along with us. The corrosion protection pigments find very good application in automotive on the base coat which we get. All in all, I would say, a very exciting portfolio which we bring to the table. Altogether, we have about 200 - 250 people in the technology roles, and we are looking to further strengthen this. Is my audio clear now?
Sir, slightly better.
Okay. Sorry, should I try your laptop?
You have the presentation on mute.
Sorry, I'm just going to change my laptop. Give me one second.
Sure, sir.
Is this better?
Better.
Hello.
Yes, sir.
Hello. You can hear me now? Is this better?
Yes, sir. Much better.
Thank you. Apologies for the same. I think some reflections from our integration process. All in all, I think there have been very good pleasant surprises, I wouldn't say, on a net basis, I would say. I think some of our areas, as I said, this was a combination already of two legacies, Clariant and Heubach, but both the companies had very limited integration of data systems, culture, processes. We have really launched building one culture, integrating our SAP systems. Today, we probably operate on four different SAP systems. We want to integrate this into one. We want to build one culture. I am glad to tell you, in a short span, more than 70% of the employees have been covered for our purpose, mission, values, going forward.
We have also launched a large cost reduction program where we find we are able to create a substantial value creation fund. All in all, I would say, we started the integration on the right space. The second area which we found, the customer centricity was lost. For example, there was no customer service in several geographies. This was all in the back end. Giving you a very stark example, if a customer wants to find out where the material is, they would have to send an email, they would get a code, they would have to log on to the code after 24 hours and try and find out, if they are lucky, where their material is. We believe customer service is a very important priority, and we are kind of bringing customer service back.
What we mean is, in each geography location, we would have customer service who customers can reach out, who are proactive, reaching out to customers, and they are present in the local languages. So in Europe, Spanish, Italian, Germany would be common languages which we would kind of equip with. That is one area. As a consequence of this, what would happen is a lot of the salespeople are spending time on doing customer service and supply chain jobs instead of focusing on building the business, developing the business. None of the senior management was in touch with the customers. Thus, if you are not in touch with the customer, how do you build trust and reliability? Also, it is the customer pulse which you need to understand and drive internal initiatives to kind of meet the customer requirements. That was missing.
I am glad to tell you that my entire team is very on the market, on the ground. In fact, I have met more than 100 customers personally, and to discuss how we can build this trust and reliability back. There was no one face to the customer. So there were several salespeople who would kind of call on to the same customer. We have created one person contact at the customer, and we have already launched that within the 10 days of acquisition. One more important part which we have done is we have built the technical competence back. I think customers valued the technical collaboration. So we have built the technical marketing function. We have built the R&D function back. We have rehired several people. We have not just rehired them, but brought in a lot of focus for them and a lot of importance.
We feel that they are the backbone of our organization, and this is also leading to a lot of good confidence with customers. During the insolvency, of course, supply chain processes were broken. We need to rebuild these supply chain processes back, but one decision we have taken is, though we may be inefficient till we build back our supply chain processes, we have upped our safety stock so that the delivery performance to the customers does not suffer. There were critical gaps. As I mentioned, the technical workforce was already kind of put in place, but still we had several gaps, particularly in the support functions, HR, IT, finance, and we have made good progress by hiring senior resources in supply chain, procurement, finance, and HR already. Just deep diving. As I mentioned, cost reduction is going to be a very important phenomenon for us going forward.
We are together working across the organization. We are just not focused on one area, but we are looking at building right from operations, supply chain, looking at what are the cost savings initiatives. We are looking best practices across manufacturing sites. We make several products across sites. Where do I get my best yield? What are my best manufacturing facilities, and how can I replicate on these other sites? Procurement, I think we are looking at how we can lead digital-led procurement more and negotiate better contracts. IT, we are fast-tracking. There were several initiatives which we had done already to reduce IT costs. We will continue to do that, but more importantly, we have already started working on the One SAP. There are other SG&A costs we are working on.
The R&D or the product management is really focusing on building portfolio optimization, removing inefficiencies, and looking at few strategic backward integration projects. We are looking at how we can win back some businesses which were lost. Finally, we would come back to some net working capital. We do have some room in the future to release some working capital. Some of the core principles which we are driving the business, and I think it is very important to understand that even before the business went into insolvency, the business was on the block from Clariant for some time. Thus, the business has been defocused now, I would say, for several years. So the culture in the organization was survival from day to day. Look at cash flows. Do not think long-term. We are saying that we want to build a mindset.
What we are saying is move the mindset from playing to survive to playing to win. We are saying be bold, be passionate, and ambitious. We would love to dream big, but stay humble with all your stakeholders where you can listen to them and continuously improve. I already spoke a lot on customer centricity, and this is going to be a building block for us. Building ownership and agility as we have put in our organization structure. The very design of our organization structure has been to build entrepreneurship and agility in the organization. I am already seeing good results where people are willing to make quick decisions which elsewise would have taken years. Simplicity, this is a very important part. As I mentioned, the heritage of our legacy comes from Hoechst, which was a large multi-billion euro chemical company. Today, we are a pigment company.
But the processes which we follow in some of the legacy companies especially, are still inherited from Hoechst. That is where we are saying that we need to make them more relevant for the business today and make the simples very simple. Financial stability going forward is very important. We are very prudently managing cash. We are being very conservative. We want to ensure that cash is king and we are going to keep conserving cash as we going forward and being very conservative from that perspective. My team and I are very excited about this opportunity to build on our legacies, merge as one of the most valuable pigment companies. Customer centricity, building customer centricity, building the trust and reliability with our customers. We could become a world-leading color solution provider.
There is a great platform and opportunity given our technical competence, our comprehensive product portfolio and our global manufacturing footprint. We are again looking forward to truly acting as one global team. We will talk now more on the numbers and there are several numbers which we are going to present. So I would request your attention going forward, close attention going forward. Some of the reflections from the market environment. The market is not easy. That is no secret. Everyone knows, given the geopolitical and the tariff situation, it remains uncertain. There is a flat demand and there is also de-stocking which is happening. But on the positive note, as I mentioned, we have had several customer conversations and it has become very clear that customers want to partner with us. They want us to become a reliable long-term supplier.
This is a very positive and this is somewhere we are using these areas to build our business. Apologies that our audit took longer than it was expected and we could not meet with the timelines, but I think Natu ji will explain some of the areas where we had a few concerns going forward. Yeah, Natu ji.
Thank you, Mr. Rathi. As Mr. Rathi has mentioned, we have completed the audit for the financial year of 2025, including the acquired group. However, this annual audit took longer than expected. Couple of reasons. This particular acquired group was not audited at the consolidated level since the calendar year 2022. It has 48 acquired group entities under the reporting coverage with three different ERP systems in the acquired group, and that is also not integrated, created some kind of data challenge for us to extract as far as audit is concerned. The last is the acquired group was not used to the rigor of the statutory audit of the listed company, and since it was not audited for the past two years, it took lot of efforts.
Our team has put in tremendous efforts to complete the audit, and we feel happy that team has delivered this humongous task. Thank you. On the transaction details, as we have mentioned, just to have a recap, this is a transaction which has asset purchase agreement and a share purchase agreement. The preliminary purchase price paid as per the APA and SPA is at EUR 151.9 million. As against this purchase price, the assets which were taken over on the deal closings, the significant ones are the tangible and the ROU assets for the various manufacturing plants taken over are at EUR 181 million. The net working capital which we have acquired from the acquired group is EUR 190 million, which is inventory, trade receivable, and trade payables.
Apart from that, we have also got cash and cash equivalent, as well as investment in mutual fund to the extent of EUR 68 million. So this is overall the comparison of the purchase price paid and the assets which we have taken over on the closing. Now next couple of slides are very busy with the numbers, and I would like me to take you through the slides. The first slide is on the ONE Sudarshan quarter four financial year 2025 performance, and this slide has three parts. One is a legacy Sudarshan. When I say legacy Sudarshan, it is a legacy Sudarshan pigment business plus RIECO. Then we have acquired group to present the ONE Sudarshan as the performance parameters.
The sales for the quarter, as far as the legacy Sudarshan is concerned, is at INR 825 crore, which shows 8% growth over the last year's Q4 number of INR 764 crore. While Sudarshan Pigment legacy has delivered the robust sales growth, which we can see in the subsequent slides at the rate of 16%. Somewhat subdued performance of the RIECO has pulled down the overall percentage of the legacy Sudarshan. The gross margin shows good improvement from 42.9% - 44.2%, which is 1.3% up, which has been reflected in the adjusted EBITDA for the quarter, which is at INR 126 crore compared to INR 119 crore. In terms of the percentage, it is at 15.2% compared to 15.6%.
For the acquired group, for the month of March, the sales stands at INR 525 crore with a gross margin of around 55.8% and the first month EBITDA is at INR 22 crore. With this, one Sudarshan performance for the quarter on the sales side is INR 1,349 crore as compared to INR 764 crore last year, and the adjusted EBITDA is at INR 148 crore compared to INR 119 crore of the last year Q4.
You want to mention about the one-off?
Yeah. When we say the adjusted EBITDA, this adjusted EBITDA is for the employee cost of INR 12 crore, which is relating to the acquisition. There are one-off expenses of INR 8 crore, including earlier period MIDC CETP settlement, which we expect that this will be one-time cost. Next. Now coming back to ONE Sudarshan financial year 2025 performance. Again, this is a legacy Sudarshan, which is the Sudarshan pigment plus RIECO and the acquired group. On the full year basis, the legacy Sudarshan sales stood at INR 2,821 crore compared to INR 2,300 crore last year, showing growth of 11%. The gross margin shows good improvement, which is at 45.3% compared to 44.2% last year, which is 1.2% up.
The adjusted EBITDA for the Sudarshan legacy group is at INR 380 crore compared to INR 316 crore last year, and the EBITDA percentage is at 13.5%. Acquired group, we have covered in the last slide. Since this is only for the month, the number remains same. When we see that total Sudarshan, ONE Sudarshan on a consolidated basis for the financial year, the sales are at INR 3,346 crore compared to INR 2,539 crore last year, and gross margin is at 47% compared to 44.2%, majorly also because of the acquired group gross margin, which is at 56%. EBITDA adjusted is at INR 402 crore compared to INR 316 crore. Next. Coming to the pigment performance.
Now, this is the performance for the Sudarshan legacy pigment plus acquired group pigment business. For the quarter four, the Sudarshan legacy pigment has delivered the sales growth of around 16%. The sales stands at INR 744 crore compared to INR 644 crore last year. With the gross margin at 44.7% compared to 44% of last year. Adjusted EBITDA for the quarter is at INR 121 crore compared to INR 100 crore last year with 16.3% EBITDA margin. The pigment global business for the quarter, the sales stood at INR 1,269 crore compared to INR 644 crore last year, and with the EBITDA at INR 143 crore, including acquired group, compared to last year, INR 100 crore for the quarter four. Next. Yeah.
This is a performance for the full year 2025 pigment business. For the year pigment business, sales growth is at around 17%, INR 2,595 crore sales compared to 2023. Gross margin shows good improvement of 1.9% reflected in the EBITDA margin of 15.2% for the year with adjusted EBITDA of INR 396 crore. For the consolidated pigment global, the revenues stood at INR 3,119 crore compared to INR 2,223 crore. EBITDA adjusted for the pigment global is INR 418 crore compared to INR 300 crore last year. Coming to the RIECO performance. RIECO performance during the year was subdued, while revenue dropped by 28%, which is at INR 228 crore, and also reduction seen in the gross margin, putting entire year EBITDA number under negative.
The revenue was impacted due to the lower carry-forward of the order from the FY 2024 and lower order booking of H1 in the last financial year. Gross margin has also been impacted due to the cost overruns, which we have seen for the projects which were executed during the last year against the orders booked in the FY 2024. We are rebuilding the organization for this business with experienced team in the project business with the right skill and experience in the project execution, which will help us in streamlining the operation, building strategic sourcing capabilities, and working on the reduction in the overhead. We have seen marginal improvement in the quarter four performance due to the stringent control over fixed cost and project execution with detailed process review put in place for the project cost. We have seen during the year opening order book for the current year.
The opening order book balance is double as compared to the last year, and with good visibility of order booking in the near future, we remain confident that RIECO business will turn around during this year. A couple of key financial ratios. Earning per share is at INR 22.5 compared to INR 16. ROCE is at 10.3% versus 11.7%, but just to keep you posted, this is the ONE Sudarshan ROCE with the acquisition assets and the capital employed being considered. Net debt to equity is at 0.3. Net debt level at the year-end is at around INR 650 crore, and net working capital as a percentage of sales is at 25%. I will hand it over to Mr. Rathi for the outlook and the priorities ahead.
Thank you, Natu. Sorry, technical glitch. We have to keep shifting our chairs. How we look at the acquired group, and I think we are very confident of the turnaround, as I had mentioned even earlier. This financial year, looking at some of the cost synergies which we are building up, the cost reduction initiatives. We are very confident that we should be able to deliver an EBITDA of EUR 35 million this year. In the next three to four years, we should be able to deliver EBITDA of EUR 90 million-EUR 100 million in the acquired group. From this perspective, I think we are on a good path going forward. Of course, this is all given that there are no untoward or force majeure situation. We feel that we can kind of confidently turn this around. Some of our key priorities is we're double-downing on winning back some business.
We are continuing to focus on cost and value capture. Till we get the One SAP up, how do we build in the interim MIS and also accelerate our One SAP roadmap? These are some of our key priorities going forward. Thank you. Thank you so much for carefully listening to us. Natu ji, I do not know if you mentioned, but we planned this VC as there were a lot of numbers which we wanted to share, and this is the first time. Probably we could go back to the normal audio presentations from the next conference, but I hope you all have found this useful. Thank you.
Thank you very much. We will now begin the question- and- answer session. Anyone who wishes to ask a question may click on the raise hand icon to ask your questions. Kindly accept the prompt and join as panelist. Unmute your audio and announce your company name before proceeding with your question. You may also write your questions in the Zoom chat option in the bottom of your screen.
Nirav, till the time we get the queue, maybe there are some questions on the chat box. Should we take them accordingly?
Yes, sir. Sure, sir.
Sure. Rathi, I will probably take up some questions from the chat box, and you can address them accordingly.
Ankur ji, your voice is feeble. Can you be slightly loud?
Sorry. Is it better now?
Yes, it is much better.
Sure. Some questions from the chat box, so I'll take them up accordingly. The first question from the chat box, total addressable market and the market growth, approximately.
The organic pigment market is about $5 billion, with a growth rate of about 3%.
Sure. I hope that addresses the question. Taking the next one, exceptional cost for FY 2025 stood at INR 104 crore. We believe these were largely related to Heubach acquisition. Could you provide a ballpark estimate of the integration related costs expected in FY 2026 and FY 2027? Natu ji, I was audible?
Sir, the management is on mute. Sir, can you please unmute your line and proceed with your question?
Yeah, just one second please. 2025, 2026, we expect about EUR 10 million integration costs. For the year ahead, we've still not planned for it.
Sure, sir. Thank you. There is another question from Abhay Jain, Hillview Global. My question is, are you looking at cost cutting, which is optimizing cost and facilities as of now?
I think from a manufacturing footprint, we do not plan to optimize any manufacturing or close any facility. The right sizing of the Frankfurt site has already been done, even before the acquisition, which the administrator had initiated. From a perspective of cost reduction, we have a huge cost reduction drive, which I had explained in my presentation.
Sure. Neerav, probably you can take some questions from the raise hand option there now.
Thank you. We will take the first question from the line of Rajesh Kothari. Kindly accept the prompt, join as panelist, unmute your audio. Kindly provide your company name and then proceed with your question.
Hi. Thanks for this opportunity. I hope I'm audible.
Yes, sir.
Sir, I have two questions. Recently-
Sir, sorry to interrupt you. Could you please introduce your company name and then proceed with your question?
Sure. Rajesh Kothari, Founder and CIO of AlfAccurate Advisors. We are a large shareholder of your company. I have two questions. First of all, congratulations for this great asset what you have acquired. I am sure you will turn it around over the next three, four, five years to your company's profitability. Sir, I have two questions. My first question is, recently when I look at DIC results, which is also the largest player in this industry, they have also reported 5% EBITDA margins. If I go by their press release, it is equivalent to 2021. Almost five years back, that margin they have achieved, and they are back to that. Even you reported a strong 4.5% margin, although it is only for 26, 27 days, without much benefit of your cost optimization program.
My question is, what is leading to the improvement in EBITDA margins for the global industry, despite the challenges of tariff and restocking by customers? That is my first question. Should I also put right now my second question or how the flow should be? I can ask once you answer that question. Whatever way you are comfortable.
You can go with your second question too.
My second question is with reference to RIECO in particular. It will be great if you can give a little bit more details about what led to the revenue decline. Is it a loss of customer? Is it loss of market share? What will lead to getting back to that revenue and that market share? Also the EBITDA margins in particular, because your gross margins are already healthy despite decline in revenue. Is it a volume growth versus value growth? How we should read that? The key steps what you are going to take to come back to profitability. Because, after two, three years now, Sudarshan stand-alone is doing very well. Mobile is also hopefully will improve. All of a sudden, we saw the new puncture from the RIECO perspective. Can you give some little bit more color in that? That will be useful. Thank you.
Thank you. Thank you, sir. I will address your question on the pigment performance of this. I request, Natu ji, if you can add in the RIECO, if you can take the RIECO question. I do not want to comment on our competitor's performance, but I think if you look at our industry, I think historical average has been an EBITDA margin between, let us say, 8%-11%, r ight? With our integration as ONE Sudarshan and the cost synergies and the focus on technology and technical people, building strong relationship with customers, some of the fundamentals which we are kind of getting. We are very confident about the projections which we have given on the acquired group. Sudarshan's business, of course, would run on a business as usual, the legacy Sudarshan business. Yeah.
I see. Basically, from the global market perspective, sorry, I did not get answer on that. My question was, how do you see the global industry? Because there is improvement in profitability, right? You have also acquired only for 22 days, but all of a sudden, the company's reported 4.5% margin. What has led to the improvement in margin? My question is that, sir.
The cost reduction efforts which we have been making, we already started planning some of the cost reduction efforts after the definitive agreements. With the administrator, we have been supporting him on stuff, and these are some of the areas of margins we have seen. When I say the global situation is difficult, we are not getting natural tailwinds that we could kind of grow our business from that perspective, and that is the concern area. That is where I think the EBITDA margins you are able to see. Going forward, we should be able to improve, even in this financial year, our EBITDA margins.
And this assumes what revenue for Heubach?
It's just been three months, and I don't want to overly emphasize. But I think on a rough basis, I think we should assume that the current run rate is at INR 650. We should kind of get to at least INR 700 by the year-end.
Okay. Thank you for answering the first question.
Thank you very much.
Answering the question, Mr. Rajesh, on the RIECO bit. Correct. As I mentioned in my opening remark, we have started the transformation project for the RIECO business. RIECO business has been going through positives and negatives in the past couple of years. Couple of levers where we as a management are working is rebuilding the RIECO organization with the right mindset and the leadership which knows the project business. We have, I am happy to state that we have completed this exercise. Along with that, the key is how to drive the project execution and how to build a capability for seamless execution of the large projects, which we had seen in the past, we were having some challenge in terms of the large project execution.
With the right set of team which is being there, we feel confident that this team will be able to deliver better performance and better project execution going forward. Simultaneously, we are also working on the reduction in the overall overheads so that the fixed cost control is one of the critical lever which we have started working on in the RIECO. We strongly believe that you will see the results of those initiatives or all these initiatives in the coming quarters in FY 2026. Thank you.
What steady state margins we should assume at RIECO level?
Great question. Currently, we are at a very lower end of the EBITDA percentage. We expect that this particular business should deliver somewhere between 7%-8% as a range to start with. Our endeavor is to take this forward to the lower double digit number in the years to come.
Great. Thank you, sir. Wish you all the best. Thank you.
Thank you, sir.
Thank you very much. A request to all the participants, kindly restrict to two questions per participant and join the queue again for a follow-up question. Next question is from the line of Manoj Bahety. Kindly accept the prompt, join as panelist, unmute your audio, introduce your company name and proceed with your question. Go ahead, sir.
Hello, am I audible?
Yes, sir.
Hi, this is Manoj Bahety. I am from Carnelian Capital. Rathi, first of all, thank you so much for giving such a detailed presentation. Also congratulations on a successful integration and getting the audited financials done. I have three questions. I will just put those questions together. First one is, I wanted to get some color on that how do you see the cost competitiveness of your operations in Europe vis-à-vis manufacturing in emerging countries, because I think the way the earlier owner under Heubach ownership has landed into financial trouble. One may be related to their internal inefficiencies or higher cost thing, but was it something related to that operations in Europe are not that competitive vis-à-vis operations in India and China? Your initial reading on that. Secondly, how do you see the incremental capital allocation for the business as a whole?
Would you be required to put some additional capital after assessing their existing infrastructure manufacturing facility? My third question is, if you can elaborate a bit on that, what will drive the EBITDA margin expansion of your European operations considering the tariff threat which is there right now? These three questions I do have. Thank you. Was I audible?
Yes, sir, you are audible. Management, may I request to unmute and proceed with your question, and with the answer?
Yes. The first question regarding Europe, of course, there is no denial that the cost in manufacturing in Europe is higher. That is the reason our strategy has been to make only specialty products. That is where we have right-sized our operations in Europe to make specialty products. We do feel that that is a place to make specialty products, and it has inherent advantages of building reliability and trust with customers, and you get a better value. That is where you see the gross margins, even though we plan for higher gross margins compared to the legacy Sudarshan. However, the fixed cost and other costs are going to be heavy, and that is where I think it pulls down the EBITDA margin. We do have a good plan to ensure that Germany becomes part of our global integrated facility with this new manufacturing footprint. Your question on the tariffs.
I think, of course, tariffs situation is very uncertain. However, given our global manufacturing footprint, it gives us the most flexibility now to respond favorably to our customers. So we have options to deliver from Europe, Mexico, Brazil, India. So that is the flexibility we bring in now with our manufacturing global footprint. If you see legacy Sudarshan, I think, if you look at it from that perspective, we would be able to supply only from India, given that. So that is the new context for us.
Yeah, sure. My question on incremental capital allocation and EBITDA margins are?
I think, currently we do not see any addition. So from a volume perspective, we have enough capacity for our growth for the next four to five years. We do not need any CapEx. The plants were fairly well-maintained, so whatever normal maintenance CapEx is required, that is what will be required going forward. So I would say, to sum up, no major planned CapEx. There may be a few strategic projects which we may want to backward integrate, et cetera. Those will be minor CapExes.
Sure. Last one on what will drive uptick in EBITDA margins going forward other than the cost initiatives and the integration initiative which you have already taken?
Sorry, come again, please.
My last question was on the EBITDA margin uptick. What will be the drivers other than the cost initiatives which we have taken?
I think there are two, three drivers. One is the cost reduction initiatives, which will go on for the next 18 months. They will continue for 18 months. The second initiative is we are trying to win back businesses which we have lost in some time. These will be the d rivers. These will be the two drivers going forward to build the EBITDA.
Well, thanks for taking my questions and wish you good luck.
Thank you very much. We take our next question from the line of Nitesh Dhoot from Anand Rathi. Kindly join as panelist. Unmute your audio and video and proceed with your question.
Hello. Am I audible?
Yes.
Yeah. Hi, team. Good afternoon, and congratulations on the successful integration. My first question is on the change in product mix as part of the integration, something that you highlighted earlier, more of specialty in Heubach and non-specialty more towards Sudarshan. How do we see Sudarshan's margin trajectory going forward? The legacy business, that is.
I think legacy Sudarshan also had a very good specialty portfolio, so I didn't say that. I think the question is that as per our projections we've given, I think the legacy Sudarshan business will be business as usual, will keep growing at 10%-11% going forward. The other part of EBITDA growth will come from the acquired entity.
So you mean to say there will be no shift of products between the entities? I mean, some of the specialty products moving to Heubach from the legacy business, that is not going to happen. I'm sorry, I recollect from one of the previous discussions that there was supposed to be some shift where you would have gotten more commodity products into India and shifting some of the specialties to Europe.
Yeah. I think what you're referring to is transfer of some of the commodity Frankfurt products which have happened to the legacy Heubach India business already. Right?
Okay.
That's completed.
All right. Okay. Sure. Next question is on the depreciation for Heubach, which annualizes to almost about INR 270 crore. So what will be the depreciation numbers for the acquired entities, I mean, the run rate? How much is the gross block for the acquired entities? Net block, as I understand, is somewhere closer to INR 1,200 crore. What is the gross block there?
Nitesh, for the acquired group, the depreciation run rate on a yearly basis will be in the range of EUR 23 million -EUR 24 million for the year.
All right. The gross block, sir? You hear me well, sir?
Nitesh, as we had presented, the value of the tangible asset is EUR 181 million.
Okay. All right. Just one last question on the working capital. I think with the numbers given out, if you just do some working, it is coming out closer to 85 days, you can correct me if I am wrong, for Heubach. Will we need additional working capital there, especially on account of market receivables, which appears to be limited at just about 27 days basis, the workings that I did. How much will the receivables be in terms of number of days going forward? Will there be an increase there?
The working capital increase will come from increase in inventory. As I mentioned in my presentation, some of our sub-planning processes are broken, which will take some time to fix. We do not want the customers to kind of face issues in supplies. That is where I think we expect that inventories would increase as going forward right now. From our accounts receivable and payables, I think they would offset each other. As we keep getting more payables, our receivables also would increase.
All right, great. Great, sir. Thank you so much. I will come back in the queue.
Thank you.
Thank you. A request to all the participants. Kindly restrict to two questions per participant and join the queue again for a follow-up. Next question is from the line of Madhav Marda. Kindly join as panelist. Unmute your audio and proceed with your question. Also, kindly introduce your company name.
Yeah. Hi, am I audible?
Yes, sir. Go ahead.
Sir, thank you so much for your time. Just wanted to understand a bit below the EBITDA line. Mainly of the deleveraging. If you could just help us understand how much annual free cash flow generation in your view, the overall Sudarshan business can generate in FY 2026 and 2027. If you could give us some broad sense. Just to get the path for deleveraging. That's my first question.
Hi, Madhav. Nilkanth here. As we have seen the net debt at around INR 650 + level. Going forward with the visibility on the free cash flow over the next three to four-year period, we expect that we should deleverage and come to a zero debt level.
How many years do you think it takes to hit zero debt, given combined business? It takes three years in your view to get to zero debt position?
We expect between three to four years.
Three to four years. Okay.
Yeah.
Just one another basic question was, for the underlying Sudarshan pigment business excluding Heubach, what was the underlying margin in that business? Like the sort of business that we had before Heubach and adjusted for the RIECO operations, how is that business doing today, the underlying margins?
Madhav, we have presented the legacy Sudarshan pigment business.
Okay.
For the quarter under consideration, our pigment business delivered 16.3% on-
Oh, okay. Got it.
adjusted business. Thank you.
Yeah, that's what. Okay. Thank you. Thank you so much.
Thank you. Next question is on the line of Dhruv Muchhal from HDFC Mutual Fund. Kindly join as panelist. Unmute your audio and proceed with your question.
Hello.
Hello, sir. You are audible.
Yeah. Thank you so much. Sir, thank you for the chance. Sir, first thing on the cash payment that we have done for the acquisition. Sir, you have to pay EUR 151 million, and from the cash flows, I see you have currently paid about INR 800 crore, INR 900 crore for the acquisition. Is there some pending payment remaining for the acquisition, which probably comes now?
Dhruv, can you please repeat your question?
Sir, the acquisition price is about EUR 151 million, which is probably around INR 1,400 crore, INR 1,500 crore. From the cash flow statement, I see you have currently paid about INR 850 odd crore, INR 850 crore or probably INR 900 odd crore. Is there some remaining payment for the acquisition?
So Dhruv, there is no remaining payment which is required to be paid for this EUR 151 million.
Okay, everything is done. As of Q4, everything is done.
Yeah. As of Q4, EUR 151 million has been paid.
Okay. And sir, the other thing was, there is a good amount of working capital which has come along with the acquisition. This is all mark-to-market. There is no significant write-offs or once you evaluate it better, you will understand. There are some, say for example, inventories, there is some unmonetizable inventory. Everything is mark to market.
Yes, Dhruv, your understanding is correct. All these are fair value.
Got it. Sir, last thing is, when the acquisition was done earlier, you had mentioned about, if I am not wrong, INR 800 crore-INR 1,000 crore of further investment in working capital and capital refurbishment and all those that will be required over a period of time. Does that estimate still hold? If yes, over what period of time do you think that investment will happen? That cash flow or investment will happen.
I think a normal maintenance budget of EUR 15 million - EUR 20 million, that will be required. From a perspective of working capital, there may be slight, probably EUR 8 million - EUR 10 million, which we are investing. I don't think we will require above that.
Okay, perfect. That's helpful. Perfect, sir. Thank you so much. That's all. All the best.
Thank you. Next question is from the line of Rikin Shah. Kindly join as panelist. Unmute your audio. Introduce your company name and proceed with your question, please.
Hi, am I audible?
Yes, sir. Go ahead.
Hi, I am Rikin from Boring AMC . I wanted to ask firstly on the product overlap. Sir, is there any sort of product overlap between the two companies and what is the degree of the overlap? My second question is, for the entities where we have not done an asset purchase deal, is there any sort of contingent liabilities that we have taken on?
From a product overlap, as I mentioned in my presentation, there is a fair level. If you look at a high level, there is a fair level of, I would say, either where Sudarshan was present at a low level. That is where we have added on inorganic business, corrosion protection, pigment dispersion, and dyes. In terms of the organic pigments, there are few complementary products and of course there are few products which are overlapping, but I think we have a good strategy to ensure that we do not cannibalize or lose any of this business. Regarding the contingent liability, Natu ji, you want to.
Regarding the contingent liability, as far as the solvent companies are concerned, we have evaluated those contingent liabilities and we have suitably factored those in as a part of our purchase price allocations, and which has been given in our notes.
We know that in the foreseeable future, we are not likely to see any of them materialize?
Sir, what we are saying is that based on our assessment where we see the probability, we have considered those provisions as a part of our fair valuation exercise. We do not expect that to get materialized unless there are any other post-measure or unless there are any facts which get altered or change in near future. Thank you.
Okay. Thank you, sir.
Thank you. Next question is from the line of Bharat. Kindly join as panelist. Unmute your audio, introduce your company name and proceed with your question. Go ahead, Bharat.
Hello. Am I audible?
Yes, sir.
Thank you, Rajesh ji, successful integration. I am Bharat Sheth from Quest. Rajesh, I have one question, particularly on inventory. You said some of the inventory which has come from the acquired entity. When do we expect that inventory to run down at normalized level, in what time frame? That is first question. Second, we have projected an EBITDA of EUR 35 million for FY 2026 for this acquired. Is it after a one-time integration cost of EUR 10 million or is it before? Last question, any thought process, we have a lot of on hand. Any thought process on RIECO divestment? Hello?
Yeah. Your first question, as I mentioned in my presentation, we are building inventories. As planning processes are broken, we will be inefficient for some time and we will work on a high working capital. That is the first question. The second question on the EBITDA is that, the EUR 35 million is of course after the integration cost. Third thing is, as we explained in RIECO, we are investing to build that business, and Natu ji already explained some of the steps we have taken on fixed cost reduction, building the order book, getting the right people, and we are very confident that RIECO will turn around and it will become a good part of our business.
My question is, when do we expect inventory to normalize? What time frame? Three quarters, four quarters or?
At least for this financial year, I would say it will take time for us to build the supply chain process.
Oh, thank you and all the best.
Thank you. A request for all the participants, kindly restrict to one question per participant and rejoin the queue for a follow-up question. Next question is from the line of Rohit. Kindly join as panelist, unmute your audio. Introduce your company name and proceed with your question.
Yeah. Hi. This is Rohit Nagraj from B&K Securities. Just two questions. One is on the business perspective. On Heubach in terms of the user industry, where is the largest concentration in terms of auto segment, polymers or decorative coatings, et cetera? If you can just give a little bit on that. Second question, when we are talking about $35 million EBITDA for the acquired group in 2026 and later about $90 million-$100 million in 2029, what is the kind of EBITDA margin expansion that we are looking at from current March level of 4%? On a longer-term basis of your indicated EBITDA margins of 8%-11%, when are we targeting that from a strategy perspective? Thank you.
The strength, I think the concentration of business, as you rightly said, is the coatings or the paint market. Where it is decorative paints, auto paints, is a good strength for the legacy Clariant business. In addition to this, some of the personal care businesses, some of the stationary businesses and seal coat and agro business is also important. The third area is digital inks. A good strength in digital inks. These are the three areas which we look at.
Regarding the EBITDA margin for the acquired group, when we are saying we will reach $90 million-$100 million, I think that reflects already an EBITDA margin of 9%-10%.
Sure. Thanks a lot, and all the best.
Thank you.
Thank you very much. Ladies and gentlemen, we will take that as the last question. I now hand the conference over to the management for closing comments.
Thank you, Mr. Ankur and Axis Capital. Thank you, participants, for your time and interest in Sudarshan Chemical. We are very confident that this acquisition marks a strategic move for our company towards leading global pigment industry. We are confident in our ability to integrate the business effectively. We remain confident in long-term prospect of this business, and we look forward to engaging with you again in future. Thank you.
Thank you very much. On behalf of Axis Capital Limited, that concludes this conference. Thank you for joining us, and you may now disconnect. Thank you.