Ladies and gentlemen, good day and welcome to Sudarshan Chemical Industries Limited Q3 and Nine Months FY 2025 Earnings Conference Call hosted by ICICI 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. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjesh Jain from ICICI Securities. Thank you, and over to you, sir.
Thanks, Manav. Good afternoon, everyone. Thank you for joining Sudarshan Chemical Industries Limited Q3 and nine-month FY 2025 results conference call. We have Sudarshan Chemical management on call, represented by Mr. Rajesh Rathi, Managing Director, Mr. Nilkanth Natu, Chief Financial Officer, Mr. Amey Athalye, General Manager, Finance. I would like to invite Mr. Nilkanth Natu to initiate with the opening remark. Post this, we will have a Q&A session. Over to you, Nilkanth .
Thank you. Thank you ICICI Securities and Sanjesh Jain for hosting our earnings call. Good afternoon, ladies and gentlemen. Welcome to Sudarshan's Q3 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 as 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 statement made on this call.
Now taking you to the financial highlights on the quarterly performance. On a consolidated basis for the quarter, total income from operations stood at INR 666 crore as compared to INR 566 crore for the same period last year, a growth of 18%. EBITDA for the quarter stood at INR 79 crore as compared to INR 62 crore in quarter three FY 2024. EBITDA margins stood at 11.9% as compared to 10.9% over the same period last year. On the nine months performance, the total income from operation for the nine months ended December 2024, stood at INR 1,996 crore versus INR 1,775 crore in the same period last year, reflecting a healthy growth of 12%. EBITDA for the period at INR 254 crore versus INR 197 crore last year, and EBITDA margin is at 12.7% versus 11.1% over the same period last year.
Now going into the details of our pigment business. For the quarter three FY 2025, income from operations stood at INR 601 crore as compared to INR 521 crore for the same period last year, growth of 15% year-on-year. This is the eighth consecutive quarter of sales growth on year-on-year basis. Seasonally, Q2 is always strong quarter while post-festive India demand and the calendar year end at the international geographies has translated into the softer Q3. The EBITDA from the pigment business has been INR 79 crore as INR 69 crore in quarter three FY 2024. During the quarter, the export sales stood at INR 315 crore as compared to INR 244 crore, higher by around 29% year-on-year. During the quarter, we have seen healthy growth from a couple of large regions in the market.
The export market continues to grow with the share of pie increased at 52% in quarter three FY 2025 versus 47% in the previous year. India sales for the quarter is at INR 286 crore, higher by 3% as compared to INR 278 crore in the same period last year due to the muted demand from the coating segment. Specialty pigment sales stood at INR 416 crore as compared to INR 358 crore for the previous year same quarter, 16% year-on-year higher. Non-specialty sales for the quarter stood at INR 186 crore, which was higher by 14% as compared to the same period last year. Gross margin of the pigment business for the quarter has remained flat to 45.2% as against 45.5% for the same period last year.
In YTD FY 2025, the total income from operation for the pigment business stood at INR 1,850 crore versus INR 1,579 crore in the same period last year, a growth of 17%. EBITDA for the nine months at INR 274 crore versus INR 200 crore last year, and EBITDA margin is at 14.8% versus 12.7% over the same period last year, thereby increase of 210 bps. Have grown from INR 765 crore to INR 977 crore with a growth of 28%, while the domestic sales have grown from INR 816 crore- INR 873 crore, with a growth of 7%.
Now coming to the balance sheet. The balance sheet of the company continues to remain healthy. The net debt of the company has reduced to INR 362 crore in Q3 FY 2025 compared to INR 434 crore of the last year Q3. The reduction in debt has resulted in improving leverage ratio to 0.3x in quarter three, as compared to 0.4x in quarter three of the last year. The working capital cycle continues to be managed efficiently. Cash conversion cycle is lower by four days to 80 days in quarter three FY 2025, and remain in the same range during the year.
Now coming to the engineering business. RIECO performance for the quarter compared to H1 FY 2025 have shown improvement due to the execution excellence and control on the cost. The revenue for the quarter is at INR 65 crore compared to INR 45 crore last year, increase of 44%. EBITDA for the quarter FY 2025 is at breakeven compared to the negative EBITDA of INR 7 crore same period last year. We have initiated the transformation project to turn around RIECO business into sustainable, profitable business, and we expect this turnaround will be visible, and benefits of the same is expected over the next 18- 24 months. I would also like to update you on the status of the acquisition transaction.
Post Q3 FY 2025, we have completed equity fundraising via qualified institutional placement and the preferential allotments. Despite challenging secondary market, the QIP order book demand was healthy, and we take this opportunity to thank our investors for their confidence in Sudarshan growth story. Equity financing raised along with the debt financing will be used towards the proposed acquisition of Heubach Global Pigment business. We have received all the antitrust approvals, and we are making constructive progress to consummate this transaction by March 2025. The company has incurred the acquisition and integration related cost of INR 41.9 crore in the current year, and the same is being presented as an exceptional cost in the profitability statement.
To summarize, we are confident in our growth journey and are committed to deliver long-term value to our stakeholders. With this, we now open the floor for question and answer session. In this Q&A session, we request everyone to restrict the questions related to Q3 FY 2020 financial performance. Thank you.
Thank you so much, sir. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to use handsets only while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles.
Before we move on to the questions, I would like to remind all the participants, you may press star and one to ask a question. The first question is from the line of Rohit Nagraj from B&K Securities. Please go ahead.
Thanks for the opportunity. First question is on the financials. If I look at the pigment segment sequential EBIT as well as other engineering, RIECO segment EBIT, both have improved QoQ. However, we have seen that the EBITDA and EBIT, which is in the reported consolidated numbers, it has declined sequentially by about 16% and 27%. Could you just help us with why this anomaly is there?
Rohit, can you please repeat your question once again?
Yeah. In the segmental revenues, if I look at the EBIT of pigment as well as the other segment, sequentially, that is QoQ from Q2- Q3, it has improved. The pigment segment EBIT has improved by almost 27%, while the other segment losses have reduced. But if I look at the EBITDA for Q2 and Q3, there is a decline. Just wanted a little more understanding why it has happened, or even the EBIT has also declined. And if I consider the exceptional item, in which it is below EBIT.
Rohit, if I see the segmental revenue, which is given as a part of our notes, correct? Now, if I break this down between the pigment and the engineering business, yes, you are correct. The engineering business, the revenue sequentially has grown to INR 65 crore from INR 36 crore. And as far as the EBIT is concerned, it is INR - 1 crore compared to INR - 11 crore in Q2. So there is a sequential, there is an improvement. As far as the pigment results are concerned in terms of the EBIT. The revenue, as we mentioned, has come down to INR 601 crore, and this has been reflected in our EBIT segment results, which is at around INR 48 crore compared to INR 74 crore.
I have a follow-up.
That has been calculated into EBITDA, Rohit.
Right. EBIT, segment EBIT was INR 38 crore, if I am not wrong, in Q2, and this quarter it is INR 48 crore, if I remember correctly. However, if you look at the EBIT on the consolidated reported numbers, it has come down sequentially. Even the EBITDA has also come down sequentially. Just in terms of the EBIT, considering on a QoQ basis, in the segmental reporting, it has improved, but on the consolidated basis, it has declined. I just wanted to have your perspective.
Yeah, Rohit, you are comparing standalone results versus consolidated results?
No, I think it is consolidated only. Maybe otherwise I will take it offline once.
Okay. Yeah. Okay.
Yeah. The second question in terms of individual consumer or user segments, how has been the demand during this quarter? Whether we have seen improvement or deceleration, just from coatings, polymers, inks, et cetera.
I think if you look at the two markets, in India, we have seen Q3 is generally a softer quarter in general for the whole business. In terms of Q3, especially on the coating side, we have seen softer demand. Also demand inventory de-stocking has taken place. That is why Q3, I think coatings we saw a weaker demand. In terms of overseas, I think our new products are getting good traction, and we are able to gain good share there. I think that has been the general trend.
Yeah. And other polymers as well as the inks, et cetera, segment?
I think those have been fairly good. We have been doing okay.
Okay. Both in domestic as well as international markets?
Yes.
Fair enough. I will get back with you. Thank you.
Thank you. We have our next question from the line of Ankur Periwal from Axis Capital. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. First question on the pigments business. If I look at our gross margin, and I am referring to your slide number 11 on the presentation. If I look at pigment business, the gross margin has sort of dipped on a quarter-on-quarter basis. There is a decline in the EBITDA margin as well. While I understand that one should not look at this business on a sequential basis, but the upward trajectory in margins that we were seeing in first half, in the second half, we are largely flattish on a year-on-year basis in terms of gross margin. Any specific reason to highlight here?
Ankur, generally, our business has taken an upswing where the product mix change has helped us improve our gross margins, which used to be probably in the 43% range and below, which is now moving north of 45%. I think we should be now in the range of 45%+ in the times ahead due to our product mix change. Obviously, quarter-on-quarter things will keep changing, depending on what is the product mix, which customers have bought, et cetera, and how this has panned out. Right?
Sure.
I wouldn't be too concerned on the gross margin area. On the EBITDA bit, of course, a few things we had to add in some extra resources to plan for the new growth which is coming up and also few expenses which we had to incur also on the extra bit. Generally, December is also annual plant maintenance, which there is an extra. We had some extra costs. Last year's annual kind of shutdown came into January. So that's a little bit of a difference.
Sure, Rajesh. That's helpful. Just on the revenue breakup, and you rightly, when you mentioned that gross margin now should be more 45%+ versus 43%+ historically. This is largely led by the product mix, higher proportion of specialty revenue versus the non-specialty?
Yes, absolutely. The new molecules which we have launched, our whole strategy was to change the product mix.
Correct. So this ramp-up is led by the new CapEx, the new products that we have commissioned?
Yes, sir.
Okay. Sir, in the first half, we were seeing a deflationary trend, and hence, volumetric growth was higher than the pigment revenue growth. Is that trend continuing in Q3 as well, or we have largely caught up and now volumetric growth will be lower or at par to the revenue growth?
I think we have caught up and I think they are in line now.
Okay, fair enough. Just lastly, if you may, highlight some initiatives that we have taken from a Heubach side, more at Sudarshan in terms of ramping up the softer aspects, the manpower, the distribution network, et cetera, especially in European market. Thank you.
Yes. Hi, Ankur, can you please repeat the question?
Natu, just wanted your thoughts on the investments that we would have done in the company, more on the softer aspects, which is, let us say, from a technical manpower perspective, marketing, distribution strength, and how do you plan to ramp it up?
Yeah. So obviously, sir, given the current scenario, I think today we are still operating on an arms-length basis and once we close the target. But we have been doing preparation for the integrated structure. So where we've looked at rehires of the technical area folks, and we are preparing post-day one to really have a customer-centric technocrat organization. So a lot of preparation and investments have gone into that. But of course, post day one, we can activate this.
Sure, Natu. Just one follow-up. As I see, you have highlighted that by March we should be able to consummate this transaction. By what timeframe can we look at you ramping up Heubach Group business? They are into operational losses right now. So how quickly we can see a recovery there? Any broad timelines will be great.
Sir, it's very difficult to talk about it now because of the antitrust issues, even we don't have full transparency on the business, right? So I think we will at least require, once everything is closed, we will need some time to introspect and kind of come up. We have very high level, but we need to go into depth to get finer numbers, et cetera, to kind of come up with the detailed turnaround strategy. But I'm quite confident that year one itself, we should be able to kind of at least deliver positive results.
Great, sir. That's it from my side. Thank you and all the best. Thank you.
Thank you.
Thank you, sir.
A reminder to all participants, you may press star and one to ask a question. We have our next question from the line of Yash Bhandari from Neo Wealth and Asset Management. Please go ahead.
Good afternoon, sir. [audio distortion] . A question on open offer. What are the approvals?
Yash, your voice. We are not able to hear you. Can you please slightly louder?
I am audible now?
No, sir. Please use your hands.
No.
Mr. Yash is disconnected. We will move on to the next question from the line of Mr. Sanjesh from ICICI Securities. Please go ahead.
Yeah, good afternoon, sir. Thanks for taking my question. First question on the mix and margin. The impression was that as the export grows, that will have a positive impact on the gross profit margin in the pigment business. In this quarter, exports have done well versus the domestic. But we see gross margin slightly deteriorating. Any particular reason you want to use. I know you said that there is some product mix changes and sequentially it's difficult to call out, but just broader understanding from a trend perspective, as the export grows, the margin should improve, right?
No, I think absolutely, like we said, with the product mix change, we should be north of 45, right? And that's the area where we want to kind of focus our area. And that's where we will continue to deliver the growth.
Got it. From the new product perspective, can you help us understand in the current scenario, with the ramp-up in the CapEx which we completed last year, how have we seen the contribution of new product growing in the overall business for Sudarshan?
Sanjesh, Nilkanth here. As we mentioned earlier, the revenue ramp-up from CapEx projects which were commissioned till FY 2023 is progressing as expected. We had earlier guided the market that the entire ramp-up, revenue ramp-up from these particular projects will take three to four years' time. We are at the midpoint of this particular projection period. Whatever the target which we have set in for this particular new CapEx utilization and currently what ramp-up we are getting are in line. And that is also, if you can see that there is a slight tilt which is also happening between specialty and non-specialty pigment revenue due to that ramp-up which is happening.
So we see a good progress, good acceptance from the customer. And we are on target, as we mentioned earlier, to take this ramp-up between three to four years' period. We are just in the mid of this projection period. Thank you.
That is very clear. From a new product which got introduced with these new clients, where are the contributions today?
I think that is what Mr. Natu tried to describe. I think we are right on track on delivering those products which we had said that three to four years, we should be able to fully utilize the capacity, and we are right on track on delivering those numbers, and that is where you see the margin change coming into.
Got it. Next on the CapEx front. Any CapEx guidance you want to share for FY 2026?
No. Right now, I don't think we will have any major CapExes. As an integrated company, we will present sometime once the day one happens, the new budgets, et cetera, to the board, but we don't see any major CapEx happening in the next year.
Got it. Now that RIECO is showing the benefit of the transformation, what we have been speaking in last two, three q uarters, how should we see RIECO performance going into FY 2026?
Full benefit of the, it should be at least 18 months where you see the benefit. I think as a standalone unit, we want to see good growth and a sustainable EBITDA of 10%+ in that business. That's what we want to deliver through this transformation.
Got it. When we say good growth, do we mean 20%+?
Like I said, sir, we don't give forward-looking statements, but I think the transformation will entail that. We want to see how we could grow that business healthily. I think more important is the EBITDA growth, the ROCE, working capital kind of control. Then, of course, some strategic initiatives on the top-line growth, too. All this is getting executed together now.
Right. Last question on the domestic pigment business. This quarter appears to be unusually soft. You did mention that coating had a drag, but if I look at the paint company's result from the volume perspective, it's still doing better because I think for us, plastics are doing growth as usual. I assume means 8%-10%. Just +3% growth in overall domestic business means that in coating business on a YoY basis, we have declined. I don't think paint companies' numbers, whatever they have been reported, they are declining.
Yeah.
Where are we missing?
I think there were two points. I think, like I said, there was a de-stocking effect because they had taken in a lot of, in Q2 they had taken in more inventories, which were lying as inventories there, and that is where we saw the de-stocking effect. Already in this quarter, we are seeing a good gain back, right? I do not think there is any business loss. I think quarter-on-quarter these adjustments are happening on the basis.
We are supplying-
We are not losing any market share. Right? We are not losing any market share, but that is what I think he is looking at, right? Yeah.
Very clear. Just one last question. Are we also supplier for the new entrant in the pigment business so that we maintain the market share.
Absolutely, sir. Absolutely. Yes.
Okay, got it. Very clear. Thank you. Thanks for answering all those questions patiently, and best of luck for the coming quarters.
Thank you, Sanjesh.
Thank you, sir.
Thank you. We have our next question from the line of Rajakumar Vaidyanathan from RK Investments. Please go ahead.
Yeah. Good evening. Can you hear me?
Yes, sir.
Yeah. Thanks for the opportunity. Sir, the first question is, with this government push for this mono-material flexible packaging, like the recyclable plastics. There is also a push to reduce usage of carbon black and not using strong color pigments, because the recyclability will improve when you do not use the colored pigments. I mean, you are more, you know.
Sorry, Mr. Rajakumar. Please go ahead again.
Yeah. Can you hear me now?
Oh, yes.
Hello. Can you hear me?
Yes, sir. We can hear you. Please go ahead with the question.
Yeah. Sir, the question is on the government push for this mono-material flexible packaging, particularly when it comes to plastics, to make the plastics recyclable. There are some guidelines given in terms of reduced usage of carbon black and also usage of, I mean, we should not use the strong colored pigments and so on, so forth. I just want to know what is the long-term impact of these initiatives on our business?
We are studying the regulation and the impact, but our preliminary analysis shows that we should not have much impact because the segment we serve is not very strong, and we are coming up with some solutions there. But our complete plan is not in place and we will share our plan as soon as we are ready. But we don't see a major impact on us. That is the initial analysis.
Okay. Second thing, what is the scenario on the raw material inflation with the rupee depreciating? Are we seeing escalation in costs or the material costs are still benign?
As you know, we are net exporters, so I think it is not. Hi, Rajak umar. As Mr. Rathi said that we are the net exporters and with this rupee depreciation, we had done the simulation analysis. The current impact of this depreciation is not that much there.
Okay. And sir, lastly, with respect to this Heubach acquisition, I just want to know, will we get the benefit of their whatever brought forward losses or we are only just acquiring their businesses?
Sir, your last line was not very clear. Can you please repeat?
The question is, will we get the tax benefit of whatever losses this Heubach Group has incurred in the past? Because when we turn around and make profit, will we be able to leverage their tax losses?
As we mentioned that this particular deal is a combination of asset deal as well as a share purchase deal. So wherever there is an asset purchase deal, those losses will not be available to the purchaser. That will not be significant for us.
Okay, sir. Thank you.
Thank you. We have our next question from the line of Vishesh Dhoka from Nuvama Wealth. Please go ahead.
Hi. Good evening, sir. Thanks for the opportunity. This is Archit Joshi from Nuvama. Sir, I just wish to get some clarification regarding the capital structure. I think beyond the INR 1,180 crore of acquisition cost, we are also expecting roughly INR 900 crore of refurbishments and legal costs, maybe some revamps required in the assets of Heubach Group. All put together, I think that number was coming somewhere between INR 2,000-INR 2,200 odd crore. Since we have closed the QIP at roughly INR 800 crore, the balance INR 1,600 odd crore will be fully funded through debt is the only question that I have. Rather, what kind of debt levels will we be settling at over the next maybe two, three years? Thank you.
I think we also have some preference shares issued. The equity raise is about INR 1,100 crore and the balance will be raised to debt.
Okay. With the existing roughly INR 350 odd crore of debt, another INR 1,000 odd incrementally. So INR 1,300, INR 1,400 would be a good number just for modeling purpose. That be right, sir?
Yeah. We are hoping that we don't need all the money right now immediately, but we are keeping all the lines open, but in direction, you're right, sir.
Sure sir. Thank you. Thanks and all the best.
Thank you. A reminder to all participants, you may press star and 1 to ask a question. The next question is from the line of Rohit Nagraj from B&K Securities. Please go ahead.
Yeah, thanks for the follow-up and apologies for the previous question on the segmental front. I think there was some calculation error. First question is on Heubach. If all the approvals are in place by March, when do we see the consolidation happening in our financials from Heubach members?
Hi, Rohit. As we mentioned that all the regulatory approvals and the antitrust approvals have been received. As far as the consolidation is concerned, the financials will get incorporated into Sudarshan India financials after day one.
Technically speaking, the day one could be April 1?
Got it. As we have indicated, day one, we are hoping in March. Exact date will be informed as soon as we are able to conclude on that. Yeah.
Sure. Second question is again on the Heubach front. We have the exceptional items, we have incorporated the legal or consulting charges. Beyond that, in Sudarshan standalone or consolidated within entity, have we taken any new manpower in terms of spearheading the business? Is it already in place or once the consolidation is done, then we will try to look at it given that hopefully the business on a broader front will be managed from India although it may be having individual subsidiaries in individual countries. Just on a manpower front or from the management front, any costs which we have incurred till now, or will there be incremental costs which will come post the day one? Thank you.
It is a process which is in process. I think our core manpower is in place, which we have already hired or are in the process of getting hired. As we go through, we will be building the organization, but I do not see any substantial costs coming into play.
Sure. That is it from my side. Thank you, and all the best.
Thank you. Ladies and gentlemen, you may press star and one to ask a question. I repeat, if you wish to ask a question, you may press star and one. The next question is from the line of Devansh Jain from Neo Wealth and Asset Management. Please go ahead.
Hello.
Yes, Mr. Devansh.
Hi, sir. Good evening. I have a few queries regarding the Heubach open offer. What are the approvals required in the open offer and what is the expected timeline? Hello, am I audible?
Yes. Just a second, please. Yeah.
Hello.
Yeah. Basically, this open offer process will be triggering post-closing of the transaction, and the draft letter of offer will be subject to SEBI's approval.
What are the approvals required? Are there any other approvals other than SEBI?
No, I think it is SEBI only. Stock exchange and SEBI.
Okay, so we are expecting the transaction to be closed on March 25, and then post that, there will be DLOs which will be published.
Yeah.
Okay, sir. Thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question, you may press star and one on touch tone telephone. We have our next question from the line of Nitesh Dhoot from Dolat Capital. Please go ahead.
Yeah. Hi, team. Thanks for the opportunity. My question is on the declining promoter stake or you can consider the declassification. With this, is there a plan to transition the company towards a professionally managed entity? Any changes in leadership, board composition or decision-making processes due to the reduced promoter involvement?
I think as we go ahead, we are getting professionally managed and also we have strategic holders of our stock, and that should continue, and I think we have a strong foothold. Going forward, of course, the board will look at how it should get reconstituted. Currently, there is no such thought right now, but I think they will actively consider this in the next few board meetings.
Thank you, sir. All the best.
Thanks.
Thank you. A reminder to all participants, if you wish to ask a question, you may press star and one. I repeat, if you wish to ask a question, you may press star and one. The next question is a follow-up question from the line of Rohit Nagraj from B&K Securities. Please go ahead.
Thanks, and follow-up. Just one clarification. For the open offer for Heubach Colorants, once it goes through, to fund the open offer, will we need additional debt funding at the group level beyond what we had currently considered in terms of the attenuation cost and the refurbishments or the capital expenses?
In our cash infusion, that was already taken into account, sir.
Okay. Sure. Thanks a lot. Thanks for the clarification. Thank you.
Thank you. Ladies and gentlemen, that would be the last question for today. I now hand the conference over to the management for closing comments. Over to you, sir.
Thank you. Thank you, Mr. Sanjesh Jain and ICICI Securities, and thank you, participants, for your time and interest in Sudarshan Chemical Industries. We remain confident in the long-term prospect of our business, and we look forward engaging with you again in future. Thank you.
Thank you so much, sir. On behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.