Ladies and gentlemen, good day and welcome to the Sudarshan Chemical Industries Q1 FY 2025 Earnings Conference call hosted by HDFC 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 the star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nilesh Ghuge from HDFC Securities. Thank you, and over to you, sir.
Thank you, Steve. Good morning, everyone, and welcome to Sudarshan Chemical Industries Limited Q1 FY 2025 Post-Results Earnings Call. The management team from Sudarshan Chemical Industries Limited will be represented by Mr. Rajesh Rathi, Managing Director, Mr. Nilkanth Natu, Chief Financial Officer, and Mr. Amey Athalye, General Manager, Finance. We will start the discussion with a brief management overview on the earnings performance, followed by an interactive Q&A session. Over to you, sir.
Hello.
Yes, sir. Please go ahead.
Thank you, Nilesh and HDFC Securities for hosting our earnings call for the quarter one FY 2025. Good morning to all of you, and thanks for joining us to discuss Sudarshan Q1 FY 2025 financial figures. It's a pleasure to be with all of you. 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. Let me begin with an important update about the changes in the constitution of our esteemed board of directors. Members from the existing board, Mrs. Rati F. Forbes, Mr. Dara N. Damania, Mr. S. Padmanabhan, and Mr. Sanjay K. Asher, are retiring from August 6th.
On behalf of the entire management team, I would like to thank them for their exemplary contribution towards the growth of Sudarshan. I would like to welcome Ms. Anu Wakhlu, Ms. Bhumika Batra, and Sudha Navandar, who joined the board on August 2nd. We look forward to gain from their experience in our journey towards leading global pigment player. There are two key achievements to highlight. I am happy to inform that the long-term external rating of the company has been upgraded by India Ratings, a Fitch Group company, from AA- Stable to AA Stable. While our short-term rating of the company remains affirmed at A1+. This rating upgrade demonstrates strengthening of the business profile, improvement in the financial performance, and healthy financial ratios. This long-term rating is upgraded in a span of three years, rising from AA- to AA.
Furthermore, in the last 10 years, the long-term rating has been upgraded from A to AA, which is three notches up, while short-term rating is upgraded from A1 to A+, which is the highest rating. This rating upgrade reflects testament of our prudent financial management practices and resilient business performance. We also wish to update that the company has recently achieved EcoVadis Gold Rating with 97 percentiles. With this rating, we join the league amongst the top 3 percentile companies in the chemical sector. The upgrade from Silver to Gold is a reflection of our strong ESG value proposition and committed measures which are taken by the company, which will be pivotal going forward during our customer engagements. We also achieved a score of B Management Band on CDP Climate Change and CDP Water Security Assessment 2023.
This accolade reflects our strong focus toward ESG and our commitment towards sustainability. I will now begin with the update on the quarterly financial performance. We have uploaded our financial results and investor presentation on the stock exchanges. Hope you have gone through the results. Quarterly performance. On a consolidated basis for the quarter, total income from operations stood at INR 634 crore as compared to INR 608 crore for the same period last year, higher by 4% year-on-year. EBITDA for the quarter stood at INR 81 crore as compared to INR 70 crore in quarter 1 FY 2024, higher by 15%. EBITDA margin is at 12.7% as compared to 11.5% over the same period last year. Profit after tax is INR 29 crore as compared to INR 21 crore for the same period last year. Now going into the details of our segment business.
For quarter 1 FY 2025, income from operations stood at INR 589 crore as compared to INR 536 crore for the same period last year, growth of 10% year-on-year. Domestic sales for the quarter is at INR 287 crore, higher by 9% as compared to INR 264 crore in the same period last year. Export for the quarter grew to INR 302 crore versus INR 272 crore in the same period last year, higher by around 11%. What we have seen in Q1 is a normal demand increase, and normally Q4 is a seasonality effect and a strong quarter. We see current demand improvement in the overseas geography. After the second pigment player insolvency filing in Heubach, there is a clear increase in the customer inquiries for samples and product approval process getting momentum.
With the recently commissioned CapEx, we are well positioned to capture the market opportunity in the domestic and export markets going forward. Specialty pigment sales stood at INR 402 crore as compared to INR 362 crore in the same period last year, higher by 11%. Non-specialty sales for the quarter is at INR 187 crore, which was higher by 7% as compared to the same period last year.
Gross margin of the pigment business for the quarter is at 47.2% as against 42.9% for the same period last year, and it is higher by 320 basis points compared to the sequential quarter. Year-on-year increase in the gross margin is due to softening of the raw materials and ramp-up of sales in high performance pigments. EBITDA for the quarter stood at INR 90 crore in Q1 FY 2025 as compared to INR 64 crore in the same period last year, higher by 41%.
EBITDA margin stood at 15.3% as compared to 11.9% over the same period last year. Now coming to the balance sheet. The balance sheet of the company as at June 30th, 2024, as per the statement. This is reflecting from the improving financial ratios. The net debt of the company stands at INR 375 crore in Q1 FY 2025, down from INR 395 crore in Q4 FY 2024.
With overall better results from operation, the debt of the company continues to reduce and placing itself with strengthened balance sheet. Net debt- to- EBITDA stands at 1.2x as compared to 2.1x in Q1 FY 2024. Debt- to- equity stands at 0.3x as at June 30th, compared to 0.5x in Q1 FY 2024. The working capital cycle has been managed as per the plan, resulting in the cash conversion days at 73 days in Q1 FY 2025, compared to 66 days in Q4 FY 2024.
Five days is mainly due to planned increase in the raw material inventory. The current ratio is at same level of 1.4x in Q1 FY 2025 as seen in Q4 FY 2024. To summarize, I would like to thank our customers, partners, employees, analysts and shareholders who contributed to and stood by us during our growth journey. We continue to leverage our strength and remain confident in the company's potential to be a leading pigment solution provider to global players. With this, we can now proceed for question- and- answer session. Thank you.
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 touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use answers 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 Nitesh Dhoot from Dolat Capital. Please go ahead.
Hello. Am I audible?
Yes, sir, you are. Please go ahead.
Okay. Good morning team, and congratulations on an encouraging pigments performance. My first question is, despite the gross margin jump of 320 basis points, the EBITDA margin is flat sequentially. As we understand sequentially, the volumes would be lower. But why have the pigment overheads, that is, the absolute gross profit minus EBITDA, remained flat or only increased marginally to around INR 188 crore from INR 183 crore in Q4? Is there any unusual or one-off increase in any cost item for pigments in Q1?
Hi. Thanks, Nitesh. There are two points. One is, what we have seen is increase in the gross margin of 47% compared to 44% odd last year in Q4. However, as we mentioned earlier, the Q4 is usually a strong quarter and compared to the Q4 are fairly that financial so the operating leverage to that effect in the quarter one will not get reflected though there is an increase in the gross margin. Second is also on the cost side. Q1, we normally see a kind of a quarter wherein there will be a kind of strain which will be there on the exhibition, which will be there in the overall geography. We see that normalized GM day and the cost structure in the quarters to come in the next couple of quarters.
What will be the cost there, sir? I mean, anything that you can quantify? I get your point on the operating leverage bit, but the only thing is that the costs have only increased. So, I mean, ideally it should have come down, but given the cost that you are explaining, any quantification if you can provide, that will be really helpful.
Sure.
Nitesh,
Yeah.
Continue. Sorry. Please continue.
Yeah. Nitesh, another point also there is we are also seeing that, if you are looking at the other expenses in the result, there is also the impact of the increase in the tech force, correct? So there also has been some part of the variability, selling variability is also there. And in terms of the exhibition costs, these are event specific, case specific. I would not like to give the comment on the number. What I can say, it is a front loader in the Q1. I do not expect that to come in the coming quarter.
Understood. Can we say that the per kg gross margin or the gross spreads there, what we are currently witnessing, would be sustainable going forward or can even improve from here on, given the improvement on the product mix side and maybe some price tailwinds also led by the industry consolidation?
Nitesh, we expect this 47% gross margin to impact. What we are also seeing is the specialty pigment is growing. We are seeing good traction to our high-performance pigment. I expect this gross margin to remain in this range, subject to the raw material variability, what we have already seen in the past. Currently, the raw material prices are more or less stable, and given the current market scenario, I expect this should range in the similar range.
Sure. And sir, given your earlier outlook of being able to utilize the capacity in four years' time, first, any revision in terms of the guidance that we are looking given the kind of strong volume growth that we would be having. Any upgrade on the guidance side that we would be looking at?
This is Rajesh, Nitesh. I think the guidance, it's a little too early to give a guidance for that, but I think like we are seeing the engagement with customers, the inquiries, et cetera, we do feel that we will be able to achieve this within three years instead of four years. But I think we will be able to give you, as we progress through the years, we will be able to give you a better number on that.
Sure. Sir, just a follow-up on that. I mean, even if we take a four-year period, since say by FY 2027 you will be fully utilized, by when do we need to start working on the next leg of CapEx, if there is any color on there or if you have maybe evaluated or you can give some sense.
We do not expect, sir, any CapEx in the current. The board has not approved anything. We do not need any CapEx right now. We will, currently, right? And anyways, everything will be downfield expansion, which will probably take six months to one year. So at that time we will evaluate that probably. Yeah.
Okay. Only about six months to one year would be required. Sir, just one last thing. Are we evaluating or do we have any plan to acquire Heubach assets in any part or the entire thing? Any plans on that side?
There are two aspects, sir. I think there are many, I guess there are several indirect opportunities which keep coming to the management. We do evaluate several of them, and given the sensitivity of the information, can't speak anything more on this subject.
Sure, sir. Appreciate you answering the questions, and wish you all the best for the future. I will get back with you. Thank you.
Thank you.
Thank you.
Before we take the next question, we would like to remind participants that you may limit yourselves to two per question, as there are several participants waiting for their turn. If you have a follow-up question, we request you to please join back the queue. The next question is from the line of Sanjesh Jain from ICICI Securities. Please go ahead.
Yeah. Good morning, sir. Thanks for taking my questions. First on the Rieco side of it. This quarter looks like it was a challenging quarter for them. We had losses at the EBIT level and revenues on a year-over-year basis have also materially declined. While if you look at the general capital goods industry, it appears to be very buoyant as of today in India. What is happening with the Rieco and how are we evaluating this as a going concern entity?
This is Rajesh Rathi. Sir, I think we are embarking now on the transformation of Rieco. We are working on that. We feel we will be able to build a good, healthy business. Currently there are a few challenges in the business which has come to this point. Going forward, this year we do not expect to have a negative impact on the numbers. But going forward, we would definitely look at, I guess we should give it two to three years transformation time. And the transformation we are going to kick start in September. Atul, you would like to add anything more on Rieco, sir?
Yeah. Thank you, sir. Sanjesh, thank you for your question on Rieco. As Mr. Rathi has mentioned that the current quarter has been poor in performance compared to the last year Q1. Last year Q1 we had a large yearly order which got executed in the quarter. Normally, while the capital goods industry is also doing good and we are seeing the current order book, Rieco is having the healthy order book and also the contribution on that order book seems to be comfortable. In the current quarter, the revenue has been more in line, whatever has been projected for the quarter. But with the current cost base, this kind of revenue will always have the challenge on the EBITDA. What we as a management are focusing on two strategies.
One is while the revenue growth we have seen in the last four years, how to have the sustainable growth also in terms of the EBITDA and we are working on that particular transformation project. Going forward, you will see quarter on quarter there will be the improvement in the Rieco performance. I expect the year-end should be positive going forward. And then the years to follow you will see the sustainable EBITDA improvement. That is what we are focusing as a management as far as the Rieco business is concerned.
When you say you are looking at transformation, what are we really trying to do? Are we changing the product segment? Are we changing the facility? Are we changing the go-to market approach? What are we really transforming in the Rieco?
First is how do we get a healthy EBITDA, right? And a consistent EBITDA. So focusing on some of the core processes where we can kind of jump up the EBITDA on the current business, right? And a little bit of a lean approach. We see the fixed cost has swelled up a lot, right? That is one. And the second is, then can we really build a healthy business, right? A stronger top line in this. As I said, we are just launching this transformation but these will be the top two directions. So first is focusing on the current and improving the EBITDA and then focusing on the top line.
Got it. And second on the pigment side, when we say that we are looking at a very good inquiry particularly from the international market, are these inquiries for the existing product, high-performance product or the new product which we have launched and the demand is largely coming from coating plastics or ink? Can you give more color on the inquiry which we are receiving?
I think the inquiries are in general more on the coatings side and plastic side and of course, plastics we were already quite strong so the coating industry is where we are getting several more inquiries and engagement.
Okay. This will be for what? High performance pigment, the new product that we have launched?
No, these are mainly for the new products and the new CapExs.
Okay. Because I thought the new product is only 50% of the capacities which we have put while the existing was remaining 50%. That is what we said in the earlier calls. How is the traction from the existing product? Are we seeing more demand coming in from the international market?
Sorry, can you repeat your question?
We said that out of the INR 750 crore of CapEx, 50% was for the new product, 50% was for the existing. When we say that there is a stronger demand which we are seeing for the newer product, how is the demand inquiry for the existing product where we have enhanced the capacity?
They are for both the lines. The entire CapEx, new products and the existing products.
Okay. The next is-
I am sorry to interrupt.
Yeah, I will come back in the queue. I got it. Thanks, moderator. Thanks, sir. Thanks for taking my questions and best of luck for the coming quarters.
Thank you.
Thank you, sir.
The next question is from the line of Ankur Periwal from Axis Capital. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity and congratulations on the good pigment performance here. First question on the specialty portfolio. If I look at the last four or six quarters, we have reported a double-digit revenue growth here, slightly ahead of the non-specialty portfolio. This is expected to continue going ahead as well. A parallel question to this will be, is this led by the existing clients you gaining more business from existing clients, or there is new client additions here as well?
Ankur, great question. I think it's a combination of executing our strategy, which was based on these new CapExes which we did, and changing our product portfolio to more of specialties. If you look at the health of the pigment industry, people with a broader portfolio and a specialized product portfolio are doing well. Whereas the other industries, whether it's phthalocyanine or the traditional other pigments, there's a big profit pressure. Given our engagement on all these new products and the existing CapExes which we increased volume, this is where the business is coming in. It's mainly to similar customers, but with a broader portfolio because we had probably one or two product customer combination information, and the same thing is expanded now to several products which we are engaged with those customers. Sorry, did I answer your question, sir?
Yeah. Sure, Rathi. Just a follow-up there. We had expanded our distribution network to Japan, South America, other countries as well.
Yeah.
Plus we had the distribution tie-up in Europe.
Yes.
Those benefits have started coming in, and if I recollect right, we were waiting for product approvals from newer clients as well. Has that benefit started coming in in this quarter or it is yet to come?
No. This quarter, we are seeing our normal demand coming. We haven't seen any demand still coming in due to the turbulence because, as I mentioned last time, it takes some time to get the approvals and then get the products going, which is happening, and we expect as we ramp up through this year, we will see the numbers stepping up. To answer your question, sir, Q1 quarter was our normal demand. We had a lot of groundwork done on engagement with customers. We would see some results in Q2, but as we keep ramping up the quarters, we will see much better numbers coming in.
Great, sir. Just last-
Sorry, I didn't answer your question fully. Our southern strategy, sir, on Japan is a slow market. It will take some time to ramp up and we are getting into more, I would say, demanding fields like digital inks, et cetera there, which we are getting good success, but to ramp up the business takes time. The distribution which we are appointed, it still needs to ramp up. Our South America strategy, South America is doing well, sir, for us.
Great, sir. That's helpful. Just lastly, on the freight rates rising. Historically, we had seen some impact of increase in freight rates on our margins as well, given there was no pass-through arrangement, especially in terms of export. What is the scenario now with respect to our client contracts, incremental for the existing business as well as for the older ones?
Sir, generally, what we are not able to pass through is any utility on indirect cost increases. But freight cost, raw material cost is a little easier to pass on. We will be able to pass on the increase in cost. We have to absorb certain costs, but going forward, we will be able to pass on the increase in freight costs. We don't see that as a challenge for margins.
Great, sir. That's good to hear. Thank you and all the best.
Thank you, sir.
Thank you. The next question is from the line of Madhav from Fidelity. Please go ahead.
Yeah. Hi, sir. Good morning. Thank you so much for your time. I have two questions. Firstly, on the pigment business margin. Quarter one obviously isn't the strongest quarter for Sudarshan from a seasonality point of view. But we have crossed 15% in quarter one, which I thought was quite encouraging. Given that the earlier commentary that gross margins at these levels also seem sustainable for us, would you think that as we move ahead and our CapEx will ramp up, EBITDA margins should move ideally closer to the 17%-19% range for the company? Would that be a fair assessment? Without giving a number, just directionally, is that the right way to think?
I'd say whether the gross margin would be in this area or slightly less, but the main advantage would be through operational leverage. So as we ramp up our volumes, et cetera, we should be able to improve our EBITDA margins.
Understood. What would our capacity utilization be currently on the expanded capacity?
We don't give out capacity utilization numbers.
Okay.
And similarly.
Understood. Got it. Sir, my second question basically was that I think you had mentioned that next round of expansion for the company will likely be brownfield in nature, which again basically means that operating leverage benefits should keep coming through for us, not just in the next two years, but even if it is three, four years out. Then, just how much is the scope of brownfield expansion? If we are at, let's say, capacity is 100 today, how much could we add via the brownfield route over the next five to seven years for the company?
Whatever expansion, we have enough land, enough scope to add on capacities on our existing sites, and that's what I meant by brownfield expansion. Too early to comment, sir, on how much we can do and how much would be needed, but whatever is required, I think we should be able to expand in these areas.
Some of the costs will get shared is what I was wondering, like at the existing sites, you can share some of the costs as we add these new lines for the next round of expansion.
Sorry. Why we would want to do a brownfield is that you do not incur very large
Exactly
CapExes and fixed cost. Your fixed cost gets leveraged going forward, too. Yeah?
Correct. Thank you so much, sir.
Thank you, sir.
Thank you. The next question is from the line of Chetan Thakur from ASK Investment Managers. Please go ahead.
Good morning, sir. Am I audible?
Yes.
There you are.
Yes, you are.
One question. When I look at the numbers, it appears that the international subsidiaries on the pigment side, they have not performed too well in this quarter, particularly both on the revenue and profitability side. Is there some one-off or something sitting there?
I would let Nilkanth Natu answer this, but basically, sir, I think I do not know how you interpreted that because there is a lot of transfer pricing which happens, right? Transfer pricing rules happen. I think our international business is doing well, right? We are seeing a good growth. Nilkanth Natu, would you like to add?
Yeah. Am I audible?
Yes, sir. You are good.
As Mr. Rajesh Rathi had mentioned, our sales under over the subsidiary is normal. Rather, if you have seen that the export sales for the quarter is also on a higher side compared to Q4 also. What we have seen in the current quarter, that there has been an intercompany sale anticipating the demand in the quarters to come in. If you really see then standalone profitability versus consolidated profitability in the pigment business, in the segment, you will find that delta. But as overseas subsidiary sales and the EBITDA and all the margins are intact. It is just as we have done some stocking up of the stock at the subsidiary, which will get reflected in the coming quarters.
Got it. Sir, because I did not see too much difference between increase in inventory both at conso and standalone levels. Both those numbers are nearly similar. That is why I was trying to understand where has this impact come from.
No, these are the inventory in transit.
Nilkanth Natu, I think Amey would like to comment. Yeah.
Chetan, I am not sure in terms of global versus standalone inventory because in June, we do not publish the balance sheet figure. Just to get a reference, which is the data field you are referring to?
I was just looking at the increase, decrease, which is the change in inventory, which is INR 30 crore both at conso and standalone. While standalone, I understand you have explained there is a buildup of raw material that has happened and to some degree, finished goods. I just wanted to get a sense of, I see the same number on conso. The only thing I wanted to clarify is that there is inventory that is sitting on the international subsidiary where sales are yet to be made, which is impacting this quarter number.
This number is mainly from a standalone perspective. I think whatever sales are routed through subsidiary, it directly impacts the COGS. It is not part of the change in stock line which you are referring to.
Okay. Understood. Sir, I'll take this offline once with you.
Yeah.
Sure.
Thank you. The next question is from the line of Kastav Bhugna from PMSPL. Please go ahead.
Yeah, hi. Thank you for taking my question. Wanted to understand more about the Heubach situation. We are saying that inquiries are coming in, and gradually we'll see demands shifting there to Sudarshan. My question is kind of different. What happens if someone else comes up and takes this asset off? Because, the company is saying that it's open to acquisition from other players, and then this opportunity goes away. How do you see the sustainability of this Heubach opportunity present to us, and what are we doing to capitalize on it, and do you see the risk that it's a very short-term opportunity given that some resolution happens on their side or someone acquires them, and then all those capacities come back on track?
That's a good question, sir. Firstly, I think there are two points, right? We are playing in the market on our strengths, and that's where we've been preparing Sudarshan in the last three or four years for this while building the product portfolio, setting up a world-class site, and really posing ourselves as a global, reliable supplier to our customers, right? That's how customers now see us. That's what our strength is. What is getting accelerated is the turbulence in the pigment market. I would say turbulence in terms of several factors. One of the factors may be Heubach, but there are several other factors. These are long-term turbulences which people are looking to kind of, whether it's the geopolitical situation that people want to move out of China, right? It's the high cost of production in Europe and India being favored.
Playing on our strengths, playing on the external areas, these are long-term advantages which we have, right? Customers, when they engage with us, is not looking at a short-term view, right? It's not a question saying that it's the flavor of the month now and the situation is bad, they'll come to us and then they go away. That's how we've been seen by the customers and that's how we've acted in the market.
All right. Just last question. I was just trying to understand the variance between quarter 4 numbers and quarter 1 numbers, given also that understanding that there are seasonality. In quarter four, just wanted to get my understanding right. Did the company see any advantage from the Heubach issue or it was just strong seasonal sales?
Q4 is our strongest quarter. The only thing probably we saw a little bit of is, because of the Red Sea crisis, there was some stocking up by customers, right? That was a minor one, right? That's what we saw. But going forward, we would see better trajectory in our numbers.
All right. There was no Heubach benefit in quarter four?
No. Too soon to. Yeah.
All right. Okay. Understood. Thank you so much. Thank you.
Thank you. The next question is from the line of Jatin Sangwan from Burman Capital. Please go ahead.
Thanks for taking my question. My first question is, what is the peak revenue in the pigment business that we can do at full capacity utilization?
I think, for our new CapEx investment which we've done, as we've been maintaining, our peak revenue on the new CapEx would be about INR 1,200-INR 1,400 crore.
Only the new CapEx at current prices?
Sorry? Yes, correct.
It's for the new CapEx at the current prices.
Yes.
Okay, got it. My second question is around the power cost. If I look at power cost, let's say in FY 2019 and FY 2020, they were used to be 4.5% or so. Now they have increased to 7.5% in FY 2023. Of course, it came down to 6.7% in FY 2024 for the pigment business. How should we see the power cost going forward? Because the gas prices and all have started reducing.
Firstly, we don't use gas. We have green energy, and we do have coal for our boilers. I will request Amey to comment on this.
I think the FY 2019 or FY 2020 level, if you see it is pre-COVID and coal was at much lower rate than it is today. Normally we have own in-house boilers where we are producing the power. To that extent, I think there will be impact in terms of the power cost because that's the input into generation of power in-house. Compared to FY 2023, if you refer, you will see that the overall cost has come down in terms of percent also because now the coal rates have come down at much lower level of FY 2019 or FY 2020.
Got it. My last question, sir, what kind of volume growth we saw in this quarter, year-on-year?
Sorry, we are not disclosing the volume growth. We won't be able to answer that question.
Sure. Thank you.
Thank you. As there are no further questions from the participants, I would now like to hand the conference over to the management for their closing comments.
Thank you. Thank you, Nilesh, and thank you, participants, for your time and interest in Sudarshan Chemical and putting forth business questions. We remain confident in the long-term prospect of our business, and we look forward to engaging with you again in future. Thank you.
On behalf of HDFC Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.
Thank you.