Ladies and gentlemen, good day, and welcome to Sudarshan Chemical Industries Limited conference call hosted by Axis Capital Limited. The discussion will be on regarding acquisition of global pigment business of Heubach Group. As a reminder, all participants' 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 touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Ankur Periwal. Thank you, and over to you, sir.
Yeah, thank you, Neha. I hope I'm audible here. Thank you everyone for joining in, and welcome to Sudarshan Chemical Industries Limited conference call to discuss the acquisition of global pigment business of Heubach Group. The call will start with a brief management discussion followed by an interactive Q&A session. Sudarshan Chemical Industries Limited's management is 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, Ankur and Axis Capital for hosting the investor call. Good morning to all of you, and thank you for joining us to discuss Sudarshan's proposed acquisition of Heubach global pigment business following signing of a definitive agreement on October 11th, 2024. Transaction is subject to regulatory approval. I hope you all had a chance to access the press release and investor deck uploaded on stock exchanges. Certain statements made or responses given to the questions during today's call may pertain to future expectation and plan. Our disclaimer regarding such forward-looking statement can be referred to in our investor presentation. As we are in silent period for Q2 FY 2025 financial results, we will be addressing questions only related to acquisition of Heubach pigment business and will not be able to answer any other questions.
Since we are yet to get regulatory approval, we will not be able to talk about revenue profitability or other balance sheet metrics for Heubach Group. However, we'll restrict to qualitative comments about the deal rationale and strategic lever to make this into profitable business. With this, I would now like to invite Mr. Rajesh Rathi to talk about the deal.
Thank you so much, Natu Ji and Ankur and Axis Capital for hosting this call for us. I'm delighted and excited to announce that through this acquisition, Sudarshan's dream of becoming a truly global player with a global asset footprint is coming true today. To give you some facts, the revenue for 2023 was about EUR 900 million of Heubach. There are 17 manufacturing sites and 33 stock points. The legacy of this company has been for more than 200 years, formerly Clariant and before that, Hoechst. Right?
And we at Sudarshan are very excited about this opportunity. We also have a very healthy global sales spread through the important markets like Europe, North America, ROW. They have a strong presence in several of our industries: paints, plastics, inks, and digital inks. I would also like to tell you all that all manufacturing sites are very well-maintained and all are in very good running conditions with a very respectable capacity utilization. That's a little bit of the sites. Just to give you a little bit of history. Until 2021, the company had revenues close to EUR 900 million and had a consistent profitability track record.
In 2022, SK Capital Heubach acquired this Clariant business at a valuation of the market estimation was about EUR 1 billion because they paid about EUR 850 million for the Clariant business plus the valuation of the Heubach business itself. However, post this acquisition, Heubach faced several challenges. There were headwinds from the Ukraine-Russia conflict leading to global inflation and demand reduction. I mean, not only Heubach, the entire pigment and chemical industry got affected, but the pigment industry was quite badly affected as we saw a big demand reduction in Europe and China. However, some of the other pigment industries could respond faster and recover well. Heubach also had significant debt on their balance sheet and rising interest rates which weakened their balance sheet. Some of their integration efforts may not have been able to capture all the benefits which they had in mind.
This created a financial distress situation for a great organization which has been profitable for many years. From, again, I think we at Sudarshan are very excited. As I mentioned, one of the areas which Sudarshan had a shortfall is that we didn't have a global asset footprint. All our manufacturing assets were based in India. So this gives us a very good coverage to and from a customer perspective, we are de-risked. The transaction is potentially EBITDA and EPS accretive deal, and we strongly believe that we would be able to add value to all our stakeholders. Talking about the deal itself, we got into the asset purchase agreement for the insolvent entities in Germany, and a share purchase agreement to acquire solvent entities of Heubach Group.
We bought this business at a debt-free basis, and we do expect some cash infusion for working capital restructuring, meeting some of the regulatory requirements to the tune of about EUR 100 million. This acquisition would be through a cash consideration funded by a mix of debt and equity. The deal is expected to be closed in the first quarter of 2025, subject to regulatory clearances. At Sudarshan, as I mentioned, we are very confident of making this acquisition a great success. There are several levers we are looking at. Firstly, we believe that we would integrate all these entities or businesses into one unified organization from day one. We would capture synergies across SG&A, manufacturing, and procurement. A strong focus on working capital and cash management to release some cash in the future. We would want to create a culture of customer centricity, our core value of Sewa.
In Sudarshan Chemical Industries, we would want to bring this part of the culture into this new organization, and we would want to bring in agility and efficiency. Lastly, I think we always believe people make a difference. We will create a high-performing management team with excellent quality of execution skills and technical competency. To talk about the areas of value capture, we feel there will be four levers for us. First is, kind of restructure some of the operations, where some of the sites may not be performing well. So, that is our first lever. The second is a big lever in SG&A optimization, which also includes efficient IT system, manufacturing cost, and procurement cost reductions. And lastly, in the last one or two years, there has been some volume loss, which we feel we will be able to regain by having the right customer connects and focus.
Thank you so much. And we will be more than happy to answer any questions you may have.
Thank you very much. We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handset while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Sanjesh Jain from ICICI Securities Limited. Please go ahead.
Good morning, sir. Thanks for taking my questions. I have few of them. First on the, you said that they had a lot of financial trouble, the merged entity of Clariant and Heubach, and that led to them looking to sell out at a distressed valuation. But if I look at the entire deal structure, the debt still sticks with them. It really doesn't give me an impression that it was only financial restructuring they were looking at. They were also looking to completely sell off the operations, which was, I think, bleeding for last 1.5 years. And if I look at the Clariant own disclosure and BASF, when they were looking, they were talking of the Western pigment company losing market share because cost leadership was moving more towards India and China.
In this context, how do we look at this entire turnaround plan for the acquired entity?
The way we look at it, this entity has got certain valuable technology, certain great customer connect, and strong in marketing and sales. Sudarshan brings on table low cost manufacturing and a great manufacturing facility in India. These are complementary capabilities. Over a period of time, through an integration process, the synergies of both the organization will be tapped, and we will be moving to create a successful organization. That will form the bed of the pillars on which this new organization will be built.
No, that's fair. I think that organization possessed that even while it in the previous avatar. Then why that entity was not able to capitalize on that was my whole question.
I think there were several. I think due to confidentiality reasons, we would not be able to delve into some of the details. What I can assure you is that we have captured how would we turn around this business and create value and bring back the glory which this company always had, right? So from that perspective, and which we've shared some of our levers, which I just shared, right?
I respect that. Probably I will take this question once the merger is fully completed. But a follow-up question, sir, is that you said that we want to bring in low cost manufacturing efficient. I would call it more efficient manufacturing process in the unified entity. Does this also mean that we may look at reducing the footprint of the plant to become more agile, and increase overall utilization of the unified entity?
I think we definitely feel that Europe has a manufacturing place for specialties. We would create the European manufacturing sites into serving the specialty markets. These specialty products are very sticky and Europe would be able to cater to these areas, right? Any commodities or manufacturing or intermediates, raw materials would be shifted to LCCs.
Okay. We will be looking at realigning where commodity and backward integration will be focused at India entity and specialty and contract manufacture will be focused in the European entity. Is that way to look at, say, two- year, three- year down the line, how the unified entity will look at?
Yes.
Got it. A follow-up question on India entity. We will now, post-merger, have two listed entity in India. How do you plan to integrate that and will there be an open offer and more cash outflow to India entity buyout?
Our legal team is still working on the details of the open offer, and it will be announced as per the regulatory timelines.
On the integration of India business?
As I said, from a legal entity perspective, whether we operate as two different, but as a business, we will be one unified business.
Got it. On the talent retention, because now we are talking of a one unified entity. So what will happen to the existing top management who were managing the business of the merged entity of Clariant and Heubach? How would the organization structure look like?
From day one, we will fully integrate this organization. We would want to create a high-quality management team with good technocrats and execution skills. This will be based on meritocracy from the combined organization.
Got it. I think these were my initial questions. For more, I will come back in the queue. Thanks and best of luck for the merger and the way forward.
Thank you.
Thank you. The next question is from the line of Jignesh Kamani from Nippon India Mutual Fund. Please go ahead.
Yeah. Hi. Congratulations for the great deal. Just
Can't hear you.
Yeah. You can hear me now?
Yes.
Yeah. Congratulations for the great deal. Just want more on the cash requirement and the funding requirement in immediate basis and over a period of next two or three years. Just want to find, like, if you think about, as you say, we acquired more asset transfer large part, with revenue of, say, close to around INR 8,000 crore. So what will be working capital requirements if you take about Sudarshan Chemical Industries in a standalone company? Our working capital is close to around 20%-25%. So if I go with them, see my number then close to around INR 1,500-INR 2,000 crore. So with our requirement will be there for the working capital, you can say, additionally once we take over the entity.
Second thing, there will be accumulated loss in past and there will be, since the plant is there in Europe with regulation requirement is very stringent. There will be many contingent liability and everything and that assuming that accumulated losses might continue in future, there might be additional loss funding for next two-year or three- year requirement from our side. Then you mentioned that we will need to take a 25% of an offer, which will also require. If you think about-
Sir, I think if you can talk slower and louder.
Yeah.
Let me take firstly your questions, first what you asked first, right?
Yeah.
I think I understood the second question was on contingency liabilities, right?
Yes.
As per our due diligence, there are no significant potential, contingency liabilities which exist there. That gives us the comfort, right? The first question-
Not even the pension liability and other parts?
Sorry?
Not even pension liability for the employer and everything?
No. All those have been, through our due diligence, we have got that comfort that there are no significant liabilities coming to us.
Understood.
Right.
Yeah.
Right. Your first question was, sir, regarding?
Working capital requirement, because-
We are acquiring the asset. We are acquiring the insolvency entities with agreed limits of inventory and the solvent entities as a going concern with a regular working capital. We don't see a major infusion required for working capital. There will be some, of course, required. That's where I mentioned that some of our cash infusion or cash outlay, which we are planning, we have included that, but it's a small amount.
Just to understood, like INR 8,000 crore kind of revenue, assuming 20% or 25% of the working capital to sales, we will need close to around INR 1,500 crore to INR 2,000 crore working capital. That has to be financed either through bank loan at the entity level of the-
We inherit, as I mentioned, sir, we would inherit that working capital.
That will be part of the loan or how the portion?
Oh, no, no. That will come to us as a working capital. As I mentioned, this transaction is on debt-free basis.
We inherit the working capital also.
Yes. Yes, that's what. Yes.
Understood. Third on the timeline of the restructuring and the synergy and everything, considering the regulation is very stringent and everything, how easy or difficult to, you can say, shift the manufacturing, you can say, realign manufacturing cost, re-optimize the manpower or the reduced everything. How easy or difficult it will be considering the regulatory environment, European, and what will be the timeline you can say for your year mark, you can say?
Our integration and our value capture planning, we are already working on. Our execution will start day one from when we close the deal. Right. From our perspective, the timeline, the significant value capture would happen in a year. But to get full benefit, probably it will take two years.
Understood. Thanks a lot.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address the questions from all the participants, please limit your questions to two per participant. Thank you. The next question is from the line of Archit Joshi from B&K Securities Limited. Please go ahead.
Thank you, sir, and congrats on this great deal. A few questions on numbers, sir. Earlier yesterday in the interview, you said that the entire entity was doing a little north of EUR 100 million in operating profits or EBITDA terms. Now, given that the German entity was insolvent, like you mentioned earlier, but the other entities were pretty healthy in generating cash. What would have been the entire entity's EBITDA as we close the calendar year 2023? Because you have sales numbers that you have given for the last calendar year.
Right, sir. Sir, due to confidentiality reasons, and of course, given the antitrust laws, we are not able to speak about the EBITDA numbers. The sales numbers we have seen, the number which I had shared was pre-acquisition, which is a public information before 2021, sir. The EBITDA numbers. Yeah.
Sure, sir. But can we assume that because there are 17 manufacturing plants and the plant in Germany was insolvent, and that was the only entity making operating losses and the other ones were fairly profitable, would that at least be an assumption that we can make?
Yes, sir.
Sure. Understood. Sir, just one more question on when the deal that had happened with Heubach and SK Capital, which was another entity involved in the acquisition of Clariant. What were the agreements with SK Capital when did they exit? If you can share some information on that also.
Sir, I think we won't be in a position to answer any of those questions from a confidentiality perspective, sir. We are still under confidentiality obligations.
Sure, sir. Thank you. I will come back in the queue. Thank you.
Thank you. The next question is from the line of Madhav from Fidelity Investments. Please go ahead.
Good morning. Thank you so much for your time. I just wanted to understand that, given that this was previously owned by a private equity company, and they had tried to combine two entities, give that clarity. Just a key question is, what is it that we will do differently with the combined entity which the previous management or the previous owners did not do? Given that Sudarshan is a smaller company acquiring a company which is 3x our size in terms of sales. Some of the synergies which we speak about in terms of SG&A or procurement, how do we execute that which the previous management could not do? I am just trying to understand what is sort of our advantage versus the previous one. Thank you.
Sure. Excellent question, sir. I think, firstly, we do understand the pigment business well and to let you know, I think we have created one of the most profitable pigment company globally today. So that is just one indicator that we do understand the pigment business well. Our cash management and cost consciousness has been very good. So that should give you first the comfort. Now this gives us an opportunity to scale up. What will we do differently, sir? I think first thing is that we would integrate all the entities into one unified organization. We will be one Sudarshan. We will create one culture in the company. I think lot of the industry does not take into account how important it is to have the right people and the right culture in the company. This is what we would be focusing from day one.
The second is, of course, capturing value, which we feel we are quite good at. We are not saying that we will grow exponentially, et cetera. We are just saying in the first two or three years, our focus is going to be is generating EBITDA profitability through various levers, which I just described. The second area is going to be working capital and cash management. There is a great potential even, of course, I spoke about manufacturing procurement, but also on the SG&A. There is a big potential on SG&A, which we could generate a good profitability. Yeah.
Okay. Understood. Just one more. The second question from my side is, how much scope there is to shift production from some of the sites overseas to the India side, because that seems like a, at least in my view, very clear synergy, given that we have a low-cost manufacturing operation. Is there big scope to shift key products to our site in India and then, obviously, which is much more profitable?
Sir, I think one first, like I described, sir, a big lever is the SG&A. Of course, the second lever is creating the German sites into speciality plants.
Okay.
They make great speciality products. We will focus on those speciality products and see how we can enhance those production. The commodities and some of the intermediates, either we would relocate or we make a make or buy decision on the raw materials.
Okay. Just a follow-up. Would that mean that we would need to probably just do a bit more of CapEx at our India site, given that there is a fair bit of products and intermediates which can be shifted, maybe at least in the commodity side. Will this expand our India side to cater to this?
No. First two or three years, we don't see a need. Between all the sites which we would have in LCCs, we would have enough assets to bring this back. We don't envision any CapEx. In fact, from a cash management perspective, we would not be making any major CapEx.
Okay. The funding structure will maybe suddenly be mixed into different-
Sir, I request you to come back for a follow-up question.
Maybe I can come. Okay.
Thank you. The next question is from the line of Nilesh Ghuge from HDFC Securities Limited. Please go ahead.
Sir, just one question. Can you compare the existing Sudarshan Chemical Industries business and the new entity's business in terms of the product quality, the types of customers, market, and the technology and the R&D front?
Right, sir. Good question, sir. I think just talking at a broad level, of course, I cannot go into details. I think Heubach has a strong focused products and markets in the coatings and printing inks area. Sudarshan Chemical Industries is quite strong, I would say, in plastics. And also some of the cosmetic industries which we serve. So from that perspective, we do have complementary strengths.
Sir, in terms of market technology that this new entity has and that we are not yet developed or do not have that, and also in terms of R&D capabilities.
In the last five years, sir, we've considerably enhanced our R&D capabilities too. I would not say that we don't have. I think however, given the 200 years legacy of this company, we would greatly benefit in both technology, manufacturing practices, and we will definitely be sharing our best practices, post-closure.
Okay. Thanks a lot, sir.
Thank you. The next question is from the line of Chetan Cholera from Pragya Equities Private Limited. Please go ahead.
Yeah. Congratulations for the fantastic deal.
Yes.
I have a couple questions.
Your line is very bad. We can't hear anything.
Hello, can you hear me? Can you hear me?
Yes. Now we can hear you.
Which other Indian operation other than Heubach Colorants we will get along with this deal?
You're a bit. I couldn't understand.
Sir, can you get into a better coverage and then maybe ask a question? Maybe you can get back in the queue because we can't follow.
Hello. One second. Can you hear me?
Yes. Okay. Yes.
Which other Indian operation of Heubach India will we get other than Heubach Colorants?
Heubach has got two companies in India. One is Heubach Colorants and another is Heubach India Private Limited. Both the companies, and Heubach India Private Limited has got certain underlying entities also. Both these will come to us.
Okay, and how the fundraising will be there, debt and equity?
As it was mentioned, it will be through a mix of debt and equity. Once it is finalized, the decision in this regard is taken by the board, we will share with you.
Got you. Okay. Thank you.
Thank you. The next question is from the line of Rohit Nagaraj from Centaur Broking Limited. Please go ahead.
Yeah, thanks for the opportunity. Sir, my first question is, when Europe is now struggling in terms of leaving the manufacturing, probably from Europe to other countries due to various operational challenges. We have gone ahead and we have bought a company. Obviously, it is a defunct company, and so we have got it at distressed valuations. Are there any chances that over a period of maybe three to five years, the manufacturing operations from these countries can be shifted to India due to its low cost and efficiencies, et cetera? Thank you.
Thank you, sir. Firstly, I would say, sir, I do not know what your definition of defunct. I would like to again clarify that all the assets are in a great working condition. A major part of the business is solvent, and it is like a going concern, right? All assets are well-maintained, decent capacity utilization. I think a lot of questions are being asked around Germany. Let me tell you that Germany is only about 30% of the manufacturing. What we are really acquiring is truly a global company, right? Truly a global company which we feel we will be able to kind of turn around very well in front of this. We do have a strong turnaround plan, which I already presented, and very confident that we will be able to add great value to our stakeholders.
There are two points to emphasize again for the entire team here, that Germany approximately presents only 30% of the product manufacturing. The rest is all global. Secondly, we would enhance Germany to become a specialty production site, so it will make it self-sustaining and profitable on its own.
Sure. Thanks. Sir, second question is on slide nine. We have given the rationale about the deal, where we have said that this transaction is potentially EBITDA and EPS accretive deal. Does this mean that as of now, if we consolidate, probably it may not be EBITDA or EPS accretive, given the current state of business the entity is operating at. Unfortunately, we have not given the last couple of years' other financials apart from the revenue numbers. Just wanted to get a sense of it, and if you want to skip it from regulatory reasons, probably you can skip it. Thank you so much.
No, no. I think I would like to clarify that when we mean that this transaction will be potentially better, it will be great value-adding to the stakeholders, right? That does not mean that currently it is negative.
Sure. That is it from my side. Best of luck. Thank you.
Thank you.
Thank you. The next question is from the line of Nitesh Dhoot from Dolat Capital. Please go ahead.
Yeah. Hi, team. Congratulations on the deal and fast execution of such a large acquisition, and wish you best for the future. My first question is that the largest player in the space, DIC, has been making money only in its home market, Japan, and losing money overseas, and that too for quite some time. The maximum operating margin they made was around 8%, and that is five years back. So where can we get to in terms of margins and-
We cannot follow you at all.
I will just repeat my question. Just a moment, sir.
I understood DIC, but I could not follow the rest.
Yeah. Is it any better now?
Yes. Now it's better.
Okay. I was asking that, DIC has been making money only in its home market, Japan, and everywhere else it's been losing money, and that too for quite some time. I mentioned that the maximum operating margin they made was around 8%, and that is five years back. So, where can we get to in terms of margins for Heubach there? How do you feel the consolidated margin is?
Sure. Your line has not been very clear, sir, but I'll try and answer. I think from a market perspective, I would say that the market is healthy and globally it's growing at 3%. From a perspective of whether there are two, three levers which we feel may not have been executed in the other organizations, and we feel that we are confident about this. I think the first one is about how do you operate as a lean company in terms of working capital, cash, costs. How do you create a customer-centric organization instead of being an internally-focused organization? We do feel that some of the areas which Sudarshan has been successful, that we need to bring that culture part. Of course, we would also like to learn Heubach culture and integrate well. We will integrate as one organization. We will be customer-centric and agile.
We'll continue to be very efficient in our operations. We've been talking about a lot on the manufacturing side, but there's a huge lever on the SG&A side, which we would be able to enhance and start working from day one on. That gives us the confidence that we will be making it a very value-adding company.
Okay. Sir, would it be possible to give some sense on what the employee cost is
Your line is very bad. I am sorry, but I cannot follow anything, sir. Can you get into a better reception area?
Hello?
Yes.
Sir, I was asking, in terms of numbers, would it be possible to share what our SG&A cost, what our employee cost would be as a percentage of Heubach revenue, if at all, some idea you can share?
I would love to, but given the confidentiality agreements and the antitrust laws, we cannot today share them. I am sure post-closing, from a legal perspective, we would be able to do that.
All right. No problem. I just have one more question there.
I request you to come back for a follow-up question.
Sure. Thank you.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address the questions from all the participants, please limit your questions to two per participant. Thank you. The next question is from the line of Dhruv Bhatia from Edelweiss Mutual Fund. Please go ahead.
Hi. Good morning, sir. Couple of questions. First is, just on the cost front, you did talk about each of the line item, but in your best understanding, which is the lowest low-hanging fruits in your sense where you can, once you integrate this business into one, where we could start to see some cost benefits starting to play out? That's question number one. Question number two is, could you talk about the balance sheet in terms of what is the asset base and the liability base? If you could just break up the asset into what is the working capital and what's the gross block?
I think firstly, sir, the biggest lever I feel is the SG&A cost and the manufacturing cost savings. I think these are two big levers, which I think we would start executing this from day one. Regarding the balance sheet numbers, sir, given the confidentiality nature of this, we can't reveal the numbers today.
Have you bought it more than one time book, less than one time book? Any sense there?
Just one second, sir. I'll check what we can. We cannot reveal that, sir.
Sure. Just lastly, sir, you did mention that the contribution from Germany as an asset base is just 30%. Could you just provide the split across, how big would Asia be and from both capacity standpoint and from sales standpoint, a little bit of color on the geography mix?
No, sir, that I can't because those will be giving too many details. I did mention the German numbers only from a perspective of aligning concerns, because there was a big fear on Germany, this being a complete German business. That's where I could, but I can't share any more details.
Sure. Fair enough. Thank you, and all the best.
Thank you. The next question is from the line of Ranjit from IIFL Securities Limited. Please go ahead.
Yes, sir. Thanks for taking my question, and congratulations on realizing your dream of becoming the leading global segment player. My first question is on the process. We believe that it was both the solvent and insolvent is what we have bought. Was it through a competitive bidding process that we have bidded for these assets and the highest bidder has got it, or it was through a one-on-one negotiation?
This was a normal process, sir. It started with a NBO, where there were several, probably 15 companies participating, and that's how the funnel kept getting narrower down, and in the end, Sudarshan was able to sign the definite agreements.
Thanks for that clarification. My second question is on the fundraising plans. We have a board meeting scheduled soon, and the acquisition is also going to be funded through a mix of equity and debt. Given that we have a bit of a low promoter holding around 30-odd percent, will that be a limiting factor in raising funds through fresh equity?
No, sir. Absolutely, sir. I think it will be a combination of equity and debt. As you all are aware, the board has always been very conservative on debt. It will be a combination of debt and equity, and the board would make a decision soon. From a promoter holding, sir, just to give you more clarity, none of the promoters other than me have any executive role in the organization. As in the past, some of the promoter groups may have chosen to not continue as a promoter, but they continued being shareholders and supported the management wholeheartedly, and have been very committed to Sudarshan Group story. Going forward, we don't see this as a concern.
Thank you. One last question, if I may. In India, we do have a business where at times we have been over-dependent on China for the raw materials. How are these assets? Are they fairly backward integrated, or they too remain a bit of an asset light and have dependence for the raw materials?
Over the years, Sudarshan Chemical Industries on its own had reduced its dependence on China by working on either technologies on our own and getting these products fully manufactured. With this acquisition, we would also acquire several more IP on some of the critical intermediates. I think our dependence would continue to reduce.
Thank you, sir, and wish you all the best.
Thank you, sir.
Thank you. The next question is from the line of Abhijit Akella from Kotak Securities Limited. Please go ahead.
Yeah. Good morning, sir. Thank you so much for taking my questions. I just wanted to confirm if I got this kind of guidance right. In one of the media interviews a day or two back, it was mentioned that the EBITDA of the consolidated entity could go to INR 800 crore in three years from our INR 300 crore today. Is that the kind of target you're holding out? Just wanted to confirm that.
No, sir. I think we're not sharing numbers. Of course, the fact of the matter is that Sudarshan's last year's EBITDA was INR 300+ crore , and this year, Sudarshan itself should be in a better position given the positive trends. As we said that we do have a very aggressive plan for turning around the business, but currently, we can't make any statements on numbers.
Okay, got it, sir. And just the other one from me was, any sense of what the market share of the combined entity would be in the global segment market? Yeah.
Sorry, sir?
Just what will the market share of the combined entity be in the global pigment industry please?
Right. I think between once Sudarshan and Heubach get combined, we will be a strong number two, very close to the number 1 player. From antitrust perspective and confidentially, I cannot share market share numbers currently.
Got it. Thank you so much, sir. I wish you all the best.
Thank you. The next question is from the line of Jatin Sangwan from Burman Capital. Please go ahead.
Thank you for taking my question. Sir, I need more clarity on this 925 crore number that you have given for working capital restructuring and open offer. If I include the open offer, the number would be around INR 300 crore or so, and working capital, since you are already taking whatever is there on the balance sheet, it will not be much. So why are the restructuring costs so high?
Like I mentioned, sir, I think we are looking at having, firstly, there would be some working capital infusion, there would be some minor CapExs on restructuring, and we are also keeping some buffer cash, which may be required as we integrate together. There will also be some areas where we would be kind of working on some restructuring, et cetera, which may require some cash. So that is the reason we are providing for everything so that we want to ensure that we have elbow room to focus on the business and not worry on the cash side.
Sure. Got it. Now, sir, with the acquisition of Heubach, we will become the second biggest player and very close enough to number one player. So do you think it will give us more pricing power and margins will improve in our standalone entity too?
Sir, I think it's all about delivering value to the customer. Sudarshan's attitude has never been to kind of have this, and we will continue to ensure that we add value to our customers. Based on our value, we would look at how we can enhance. So we do feel that we would have, from both technical marketing, also from R&D perspective, a lot more through this acquisition to add value to our customers.
Good. Sir, what's the maximum debt-to-equity ratio that we are comfortable with, since we will be raising a lot of debt and equity for this transaction?
Sure.
Thank you. The next question is from the line of Meet Gada from Emkay Global Securities. Please go ahead.
Hi, sir. Congratulations on agreement. I had just one question. Wanted to understand what will be the complementary set of customers for Sudarshan and Heubach, and where we'll be losing some customers over there.
Hello, am I audible?
Yes. Ladies and gentlemen, we have lost the management line connection. Please stay connected while we reconnect them. Thank you. Ladies and gentlemen, thank you for patiently holding. We have the management back on the call. Please, sir, go ahead with your question.
Hello, sir. Congratulations on the agreement. Wanted to just check that what will be the amount of revenue which we will be competing at with Heubach together. Let's say there is X customer and you both are competing for the same. So how much loss of sales will be happening on that front?
Sir, can you please repeat your question once because there was some disturbance on the line.
Sir, wanted to understand that. So you initially said that you have complementary benefits. So currently there might be products wherein they will be going for the same application. So over there, will there be any loss of revenue when we are competing together or when we are as one Sudarshan?
Meet, thank you for your question. As we mentioned, the companies do not have much overlap in the product. However, given the confidentiality agreement and antitrust law, we will not be able to give you more specifics on this.
Understood, sir. Will there be a change in terms of branding of the product, and it will be going by the name of Sudarshan's set of brands or?
It's too early to say that, but I think in the next three or four months, we would define our branding strategy and also the product strategy. Right.
Noted, sir. Thank you.
Thank you. The next question is from the line of Dhavan Shah from AlfAccurate Advisors. Please go ahead.
Yeah. Thanks for the opportunity, sir. My question is on Germany. I think you mentioned that 30% of the manufacturing comes from Germany. Is this the only insolvent entity or is there any other insolvent entities also? If you can share the mix of revenue between insolvent and solvent entities. What will be the mix of revenue between specialty and commodity of Heubach?
Sir, I think only the German entity is insolvent. The rest of the business is solvent. From a confidentiality perspective, sir, we can't give the revenue split. From a trend perspective, I can tell you that it's a very good mix of specialty products.
Is it fair to assume that this 30% manufacturing from Germany is largely from the commodity side and this will eventually transfer to the Indian operation?
No, sir. I don't think that's a good assumption. I think it's a mix of specialty and commodities and intermediates.
Okay. Other solvent entities are also manufacturing the commodities or are they more towards the specialty?
It's a mix, sir. I think it's never either this side or that side, right? It's a little bit of a mix.
Got it. Do you foresee that the Indian Heubach entities will also be used to manufacture the commodity pigments going forth or they will manufacture the same kind of products what they are doing right now?
One minute, sir. Like I mentioned, sir, I think we will be one unified company and the manufacturing strategies will be unified. So, specialties in Europe, the pigment preparations on the regional side and LCCs on the commodity and intermediate side.
Got it. Sure, sir. The last one is only on the gross fixed asset acquisition, if you can share the numbers. You already mentioned that 17 sites have been acquired. So what is the value of those 17 sites, the replacement value or any number which you can share?
Sir, from a confidentiality perspective, unfortunately, I cannot share these numbers currently. Yeah.
Got it, sir. Okay. Thank you.
Thank you. The next question is from the line of Parth Mehta from Vallum Capital. Please go ahead.
Yeah, hi sir. Good morning. Hi team. Congratulations on the great acquisition. Just a couple of questions from my end. If you could just help me understand, in yesterday's interview, you had mentioned that the high energy costs in Europe impacted Heubach's operations. So how do we plan on absorbing those high energy costs once the acquisition and operations are resumed and the deal is completed?
Sir, that's a good question, sir. Would like to clarify what I was saying is that when the Ukraine and Russia conflict started, the entire pigment industry, chemical industry, faced a huge challenge, including Sudarshan, of very high global inflation, high energy crisis, and reduction of demand. That attributed to the loss of EBITDA reduction of the pigment industry and impacted the profitability. Right? But it was a one-time serious event, which was over. As you can see from Sudarshan's numbers, we were quickly able to bounce back, right, as things came back to normal. What I mentioned is, Heubach could not come back at the same speed, and also they had balance sheet side of issues, and that's what caused the insolvency.
Okay. Just to have a clear understanding on this, once we consolidate the entity and with the given size and scale, will we have enough pricing power or enough influence on the pricing that will help us maintain our margins and absorb such kind of costs in future?
Like I mentioned, sir, Sudarshan Chemical Industries has never been of- I think so. But what we would want to create is the real value additions for our customers. It will be a combination of three levers. One is, of course, the product technology itself, technical marketing, and our customer service. This combination, we would be able to add great value to our customers and that's where customers would value it and would recognize the value.
Right. Okay. Just last one. If you could help me, what would be the gross margins of Heubach? You may not give me the confidential info, but if you can just give me whatever is public.
There's no information in the public and that's why we are not able to give you this information.
Okay. But can you make an assumption it would be similar to Sudarshan, in a similar range, approximations?
The lawyers are staring at me. I am just saying. So, yeah.
Okay. Yeah. Cool. Thank you.
Thank you. The next question is from the line of Amar Maurya from Lucky Investments. Please go ahead.
Sir, thanks a lot for the opportunity. Number one, as you said that the manufacturing of Germany is 30%, does this also mean that Germany as an entity also contributes around 30% to your revenue as well? Hello?
Ladies and gentlemen, we have lost management line connection. Please stay connected while we reconnect them. Thank you. Ladies and gentlemen, thank you for patiently holding. We have the management line back on the call. Sir, please go ahead with your question.
Sir, wanted to understand. You said Germany as an entity is 30% manufacturing base. What would be the revenue contribution from Germany as an entity? Hello?
Sir, cannot comment on the revenue from a confidentiality perspective. The manufacturing part, sir, I think I just wanted to give you all a feel of that this is not all a German business. That is why I used this number. Of course, 30% is an approximate number, right? Just wanted to give you all kind of a trend sense, right? Otherwise, can't give you all any more information on this.
Got it. Secondly, sir, you highlighted that SG&A cost reduction is relatively a low-hanging compared to the manufacturing restructuring. Let's say, whenever this deal get culminated, how fast we can basically see the reduction in the SG&A?
I think we are detailing out each initiative, but I think in the first year, we should be able to capture some of the SG&A costs, right? That's where we would look at it. Some of the manufacturing cost initiatives also we would be able to capture in the first year.
Okay. Secondly, sir, when you say the restructuring, do we have to do a complete closure of some of the entities plant over there or it will be like, as you said, some shift from commodity to specialty will happen at every entity level?
We don't envision, sir, any closure of any plants. We do feel that it's a big advantage to have a global manufacturing footprint. We will see how to ensure that the capacity utilization efficiencies of each plant is enhanced, right? From a product strategy perspective, I already spoke about our manufacturing strategy.
Got it. Thank you, sir. Thanks a lot.
Thank you. The next question is from the line of Sandeep Abange from LKP Securities Limited. Please go ahead.
Hi. Thanks for the opportunity. Just wanted to understand, like you mentioned, Germany is almost 30% of the overall Heubach Group. Just wanted to understand the debt part, like whatever the debt amount is. I am not asking the debt amount, but can we say that most of the debt is from the German entity and not from their other parts of businesses?
The debt is on the overall business, right? And what we are acquiring is on a debt-free basis.
Okay. Also on the Heubach part, what are the major synergies which we are looking at in terms of the products and in terms of the product mix as well as the geography-wise synergies? What are the synergies you are looking at then to leverage more?
Sir, I think firstly from a market perspective, industry perspective, I think Heubach has great strength in coatings. Sudarshan has strengths in plastics. So we could enhance both of these areas. The second area is Sudarshan had a very moderate presence in some of these geographies like Europe, Americas, et cetera. Whereas Heubach does have a good presence in several of these markets. So this will help some of our complementary products also in marketing.
Okay. Thanks for taking my question.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address the questions from all the participants, please limit your questions to one per participant. I repeat, please limit your questions to one per participant. Thank you. The next question is from the line of Sanjesh Jain from ICICI Securities Limited. Please go ahead.
Yeah. Hi, sir. Thanks for taking my follow-up question.
Sure.
I have just one question. On a combined basis at the three years timeframe, where do we see our EBITDA margin on a unified basis settling, as per your estimate? We are today at, what, 15%-16% EBITDA margin. Will margin drift lower because of this consolidated entity towards 10%-11%? Or we can still manage this 15% kind of an EBITDA margin?
Sure. I think from a three-year perspective, the combined entities, I would say somewhere in the region of teens, but I think very difficult to give you pinpoint exact numbers. But I think I would say somewhere in between the numbers which you were speaking.
Got it. With this acquisition, how much backward integration we will become as a unified entity? Will we improve the backward integration from what we are today?
Yes, sir, it will definitely improve our backward integration and in the future would provide. There is a lot of IP on some of the backward integration also available.
From the Sudarshan perspective, this will also save the CapEx going forward because we have now a lot of capacity available globally. That means the organic growth CapEx which otherwise would have done would be a saving for us?
Absolutely, sir. I think within a year, we would have utilized our own capacity, within a year or two, and we would have required a lot of capacities to be put in. In fact, if we needed to get to this size, probably we would have had to put a greenfield plant because we wouldn't be able to do it 3x of CapEx at this site. So definitely, sir. Absolutely.
Thank you. The next question is from the line of Archit Joshi from B&K Securities Limited. Please go ahead.
Thanks again for taking my follow-up, sir. Sir, I have just one question on the funding part. The INR 1,180 crore deal, along with that close to INR 925 crore. We will be potentially raising something north of INR 2,000 crore. I just wanted to understand the timelines of this. Obviously, the acquisition money will be paid upfront, but this incremental capital infusion that you might require, would that be a part of the current funding plan or that will happen over a period of time? This is just for bookkeeping purpose, if you can elaborate a bit on that.
Sir, we would plan for the entire finance in our master plan, but the funding would be required over the one-year period, I would say.
Sure, sir. Just one small follow-up there. I think we already have some debt on our own books, close to INR 450 crore. Would we have any number in mind, let us say, three years down the line? Because this might take a while to not just integrate but also start accruing benefits from the integrated entity. At what level of, let us say, gross debt- to- EBITDA, we might want to settle in that three-year timeframe?
Sir, our current net debt is in the range of INR 350 crore. As I mentioned, sir, our board has always been conservative on this. Hence, it would be funded through a mix of debt and equity. We would come back to you on more numbers once the silence period is over, and also, the board has taken a decision on how we fund this.
Thank you. The next question is from the line of Jignesh Kamani from Nippon India Mutual Fund. Please go ahead.
Hi, sir. Just on the manufacturing side, you mentioned that you have seven manufacturing facilities across 11 countries.
Some of the facilities might be high cost in nature, be it high energy cost or high labor cost and everything, in which employee, you need to take some bold decision. As a part of the state where they operate or country they operate, is there any restriction or as a part of the deal, any restriction which will restrict your freedom to downsize the particular facility or even if you want to shut down or right-size the employee? Is there any restriction?
As I mentioned, the only area we look at is Germany. Germany, there was a continuous right sizing of the sites in progress, and we will get a right-sized plant. We will inherit a right-sized plant when we close the deal. We do not see any major going for after that. There will be minor adjustments, but nothing major from a restructuring perspective. Restructuring of the manufacturing assets. There will be other restructuring, but not the manufacturing asset.
Thank you. The next follow-up question is from the line of Madhav from Fidelity Investments. Please go ahead.
One follow-up from my side was, you all said that SG&A is one of the important levers for synergy and margin expansion. Could you give some more qualitative sense? Does that come from letting go of some people at the acquired entity or is it any sales force, whether we have an overlap? Where exactly does this SG&A synergy exactly come from? If you could give us some better sense. Thank you.
Absolutely, sir. SG&A, first is looking at the IT. The IT costs are quite high. We have several levers. One is the IT. The second is the entire back-end operations, whether it's finance, back end, HR, IT back end. These are the other levers. Of course, they are already in the process of having a lean organization going forward, a lean, efficient organization going forward, and a very, I would say, non-complex or very simple organization. These are some of the areas of the SG&A levers, Madhav.
Okay. Understood. Okay, thank you.
Thank you. Ladies and gentlemen, we will take this as the last question. I would now like to hand the conference over to the management for closing comments.
Thank you, Axis Capital, and thank you all the participants on the call. Thank you for joining this call, Sudarshan's call on the current acquisition. We remain confident in our growth journey, and we remain confident in having your trust going forward. Thank you.
Thank you. On behalf of Axis Capital Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.
Thank you.