Q3 23/24

Feb 5, 2024

Ladies and gentlemen, good day, and welcome to Q3 FY2024 Sudarshan Chemical Industries earning conference call hosted by Dolat Capital. As a reminder, all participants' line will be in 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. Nitesh Dutt from Dolat Capital. Thank you, and over to you, sir. Thank you, Ms. Khan. Good morning, everyone. On behalf of Dolat Capital, I would like to thank the management of Sudarshan Chemical Industries for giving us the opportunity to host the Q3 and nine months FY2024 earnings conference call. From the management team, we have with us today Mr. Rajesh Rathi, Managing Director, Mr. Nilkanth Natu, Chief Financial Officer, and Mr. Amey Athale, General Manager, Finance. Without further ado, I would like to hand over the call to the management for their opening remarks. Post which, we will open the forum for our Q&A session. Thank you, and over to you, Mr. Natu. Thank you. Thank you Dolat Capital and Mr. Nitesh Dutt for hosting our earnings call. Good morning, ladies and gentlemen. Welcome to Sudarshan's Q3 FY2024 earning conference call. Our financial results and investor presentation has been uploaded on the stock exchanges for your ready reference. The company continues to deliver growth in revenue as well as improvement in EBITDA margin in quarter 3 FY2024 as compared to the previous year. I will initiate the call by briefly taking you through the key financial highlights for the period under review, following which we will open the forum to have question and answer sessions. Quarterly performance. On a consolidated basis for the quarter, total income from operations stood at INR 566 crores as compared to INR 528 crores for the same period last year, higher by 7% year-on-year. EBITDA for the quarter stood at INR 62 crores compared to INR 42 crores in Q3 FY2023, higher by 48%, and EBITDA margin is at 10.9% compared to 7.9% over the same period last year. Profit after tax is at INR 15 crores as compared to INR 1 crore for the same period last year. Nine months performance. In nine months, the total income from operation stood at INR 1,775 crores versus INR 1,611 crores in the same period last year, a growth of 10%. EBITDA for the period is INR 197 crores versus INR 126 crores last year, higher by 56%, and EBITDA margin is at 11.1% versus 7.8% over the same period last year. PAT stood at INR 54 crores compared to INR 12 crores for the same period last year. Now going into details of our pigment business. For the quarter FY 2024, income from operations stood at INR 521 crores compared to INR 483 crores for the same period last year, growth of 8%. On a sequential basis, revenue of Q3 FY 2024 has remained flat in comparison with Q2 FY 2024. India sales for the quarter is at INR 278 crores, higher by 11%, as compared to INR 251 crores in the same period last year. On a sequential basis, India sales is marginally higher by 2% compared to INR 272 crores in Q2 FY 2024. Exports for the quarter is at INR 244 crores as compared to INR 232 crores last year, higher by 5%. Q3 is seasonally weak quarter for some of the international geographies considering the calendar year-end and holiday season. On the international demand, we have seen it is a mixed bag, where EU region continues to have a subdued demand, whereas other geographies, we have seen the moderation in the moderated demand. We see the impact of these talking is nearing the closure, and we expect the demand revival from the international geographies. However, we remain vigilant towards these geographies considering the multiple geopolitical issues, inflationary pressure, and global macroeconomic situation. In the plastics segment, we are seeing improved demand while ink segment has remained stable in Q3 FY 2024. As mentioned during the last quarter, demand from the coating segment is expected to pick up in H2 FY 2024, and we are seeing uptick in the coating segment in Q3 of this year compared to the Q2 of FY 2024. Specialty pigments sales stood at INR 358 crores as compared to INR 340 crores for the previous year same quarter, 5% year-on-year higher. Non-specialty sales for the quarter is at INR 163 crores, which is higher by 14% as compared to the same period last year. We continue to witness positive response for our product offerings from our recently completed CapEx, resulting from continuous engagement with the customers. We are progressing well in terms of ramp-up from the new commissioned capacity. Gross margin of the pigment business for the quarter increased to 45.5%, as against 40% for the same period previous year. Comparing with the sequential quarter, gross margins have gone up by 70 basis points. The increase in gross margin is due to improvement in the product mix and also due to some effect of time lag in selling price pass-through. We will continue to take our calibrated pricing decisions based on volume growth. During the quarter, we have seen the stabilization in the raw material cost and coal prices as compared to the previous year. Evolving geopolitical environment can pose some uncertainty which may have the impact on the crude prices and other intermediary prices, and we are evaluating those. With the better gross margin, EBITDA for the quarter stood at INR 69 crore in Q3 FY 2024 as compared to INR 38 crore for the same quarter previous year, higher by 82%. EBITDA margin stood at 13.3% compared to 7.8% over the same period last year. On sequential basis, EBITDA margin is higher by 50 basis points. In the nine months, total income from operations from pigment business stood at INR 1,579 crores versus INR 1,486 crore in the same period last year, a growth of 6%. Gross margin has improved to 44.4% in 9 months ended December 2023, as compared to 39.7% same period last year. EBITDA is at INR 200 crore versus INR 121 crore last year, and EBITDA margin is at 12.7% versus 8.1% over the same period last year. Now coming to the balance sheet. The balance sheet of the company as at December 31, 2023 has strengthened with stable business operation, improvement in the EBITDA, effective working capital management and funds received from monetization of the assets in Q1 FY24. Net debt of the company has reduced substantially to INR 434 crore in Q3 FY24 from INR 946 crore in Q3 FY23 and INR 445 crore in Q2 FY24. The reduction in debt has resulted in improving net debt to EBITDA to 1.5 times in Q3 compared to 4.5 times in Q3 of the last year. The working capital cycle has been effectively managed, thereby resulting into cash conversion days at 88 days in Q3 FY24 compared to 112 days in Q3 FY23. The current ratio has improved to 1.4 times in Q3 compared to 1.1 times in Q3 of the last year. ESG focus. Before we conclude management commentary, I would like to take this opportunity to highlight our ESG focus. We have formulated strategy towards key pillars of environmental responsibility, strengthening social inclusiveness, business accountability with continuous focus on manufacturing excellence. We believe that companies will get differentiated based on their ESG practices in coming years and our continued focus and sustainability journey with the concentrated effort will strongly position us globally. In our endeavor to achieve the benchmark performance on business practices and responsibility towards environment, we have recently achieved silver medal certification from EcoVadis 2023, reaffirming the company's dedication to sustainable and responsible business practices. During the quarter, the company also received prestigious certification, EcoVadis. This certificate recognizes our adherence to environmentally responsible manufacturing processes and the use of sustainable materials in our product. To summarize, we believe the Indian pigment industry will benefit from continuing India growth story in global volatile environment, China plus one global customer de-risking theme and consolidation of the leading industry player. However, we remain attentive and continue to be cautious to the geopolitical development and global macroeconomic situation. Our long-term growth prospects remain intact given commissioning of the new products and positive response from the customers, availability of broader product portfolio and geographical reach. We remain confident in our growth story and continue towards commitment to deliver long-term value to our stakeholders. With this, I now open the floor 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 the touch-tone telephone. If you wish to remove yourself from question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while question queue assembles. The first question is from the line of Sanjesh Jain from ICICI Securities. Please go ahead. Yeah, good morning, sir. Thanks for taking my question. First, on the Rieco side, just wanted to understand that this quarter also it is again in the red. Can you explain what is happening on the Rieco side and how should we look at that part of business? We also earlier tried to divest that part of the business. Are we still pursuing that? Hi, Sanjesh. Thanks for your question. Nilkanth here. So during the current year and for the year YTD performance, we have seen the performance dip in the Rieco business. This was mainly due to the lower revenue in one of their segment grinding business and also the execution of one large order in another segment where we had seen the estimation shortfall and during the execution, the cost overrun. However, based on the current order book, which we have an order balance and the margin on that and the current projections, we remain confident that this business will turn around the performance in the coming quarter and we should see that in Q4 onwards. So year end, this is Mr. Rajesh Rathi. So year end, we expect Rieco to deliver positive results. Positive results. Yeah. In general, capital goods is seeing a significant order booking and all those things. Increased CapEx intensity in India is clearly helping that segment. Are we seeing the same trend in the Rieco as well? Some of the business segments are seeing a good order book. However, one segment is dragging it down from that perspective. What we are asking the business to focus on is EBITDA margin rather than growth. We are now focusing on more profitable growth in that segment. Fair enough. Second, on the pigment side of the business, on the specialty pigment side, it is the third quarter where we have seen a sequential decline, and that is true for exports as well. Is it a correlation that specialty is selling lower or exports demand is lower and hence the specialty sales has also got impacted because of that? How should we see the recovery from here? We have said that H2 will be better, but clearly Q3 FY24 is not showing that trend with sequentially flattish revenue. How should we see that? Hi, Sandesh. Nilkanth here. As I mentioned in my commentary, typically the Q3 FY24 is seasonally the weak quarter for the export market. The export market has been a mixed bag, wherein the Europe region continues to deliver the subdued demand there, whereas other geographies, we are seeing the demand revival. In terms of the specialty segment also, while quarter-on-quarter it remains flattish, what we have also seen in there is a moderation in the realization given softening of the raw material prices. While value-wise you will see the moderation or maybe the flattish trend, we are seeing a good traction in the volume side. To add to that, this is Rajesh Rathi. To add to that, if you see last year quarter to this quarter, both on the margin side and on the growth side, it has been a very good quarter. Like Mr. Nilkanth explained, even sequential quarters, we are seeing good traction on volume growth. Can you just benefit to understand it better, can you help us understand what was the volume growth and the realization mix in this to appreciate the performance? I think the volume growth has been in double digit numbers. We see a good attraction on demand continuing there. This is on a year-over-year basis, right? Yes. Fair enough. One last question. Again, volumes if I see year-over-year for the pigment exports out of India, they have grown at a very strong 20%-25%. On a low base I could understand that. In the October and November month data whatever has been put in the incentive, we appear to be lagging there. It is more of a commodity so they are selling higher speciality generally seeing a muted demand. Are we seeing some erosion in our market share, any color there? No, absolutely we are not losing any market internationally. I have not looked at the figures you are talking about of 28%, but I think the industry in general if you see the results of quite a few companies. The industry in general is not doing very well whereas I think we have been able to deliver good results. Fair enough, sir. That is it from my side. Thanks for taking my question and best of luck for the coming quarters. Thank you, Sandeep. Thank you. The next question is from the line of Ankur Periwal from Axis Capital. Please go ahead. Yeah. Hi, sir. Thanks for the opportunity. First question on the global demand outlook. Any feedback you can share from the clients, given we have been launching new products, any addition to the new customers across the geographies? Sir, this is Rajesh Rathi. I think we are getting good attraction on the new products, good engagement, and we continue to engage with customers. However, in general, the demand on the international side outside of India has been a mixed bag, where Europe demand is still subdued. U.S., we are hoping that the demand de-stocking, which really happened in Q3, that effect is over and our Q4 would look much better in that perspective. I would say international general demand is a mixed bag. Our new CapEx says there is good engagement happening, so Sure, Rajesh. Just to follow up on that, our earlier timelines of optimum utilization for the new CapEx that we have put in terms of revenue run rate over a 3- to 4-year window, any changes to that? No, sir. I think like we said last time, we would still, looking at this, 4 years is our window. As we start ramping up, we will start looking at how we can reduce that window. But still, I would still give a guidance of 4 years. Yeah. Great, sir. Second question on the RM deflation as well as the freight cost increase that we are seeing. If I heard it right, Natarajan did mention in between that the pass-through of RM deflation is more gradual. You mentioned double-digit volume growth here. What timeframe should we look at in terms of full pass-through of this RM deflation? Secondly, on the freight cost front, any increase that we are seeing and will it be pass-through or can it impact our margins in the interim? Ankur, Nilkanth here. In terms of the RM prices getting stabilized or deflationary trend there, what we see normally that it can take a quarter or two for full pass-through. As I mentioned in my call also, in commentary also, that we will take that particular call based on the volume and the demand side, so that it should be a very calibrated approach. In terms of the freight cost, yes, we are seeing the increase in the freight cost given now the Red Sea crisis. Our endeavor is to pass on this cost increases to the customer while keeping our focus on delivering the goods to them. So this will be a calibrated approach there, but our endeavor is to pass on the cost increases to the customer because this is something which is a kind of forced measure for all the companies. And which customer also recognizes. Sure, Natarajan. Directionally, if I look at it, nine-month average gross margin is at around 44-odd percent. I am looking at more pigment business gross margins here. Absolutely. You believe directionally we will either sustain or probably improve these numbers. Would that be right assumption? Absolutely, Ankur. YTD number for the gross margin is at 44.4%. So directionally, I believe that we will be sustaining this gross margin numbers. Great, sir. Last question, if I may. From a cash flow perspective, you had earlier highlighted that you will be looking to optimize the working capital further. Given that there are no significant incremental CapEx plans, what is your thought on the utilization of cash apart from the debt repayment which may happen? Ankur, currently I have a debt of INR 434 crore. In the short term, my endeavor will be to repay that first. As we get more cash in the system, then management may, at appropriate time, look at the interim dividend or maybe the dividend outflow for our stakeholder. But current focus is to deleverage the balance sheet. Great, sir. That is it from my side. Thanks for all your answers and all the best. Thank you. Thank you, sir. Thank you, Ankur. Thank you. The next question is from the line of Archit Joshi from B&K Securities. Please go ahead. Thank you, sir, and very good morning. Thanks for the opportunity. My first question is on one of the Canadian competitors that we had, DCL Corporation, who had to kind of shut their shops. Have we seen any benefit coming in from the perspective of market share? I think they used to do close to $35 million-$40 million of sales. In the current scheme of things, have we seen any positive traction building up from their closure? This is Rajesh Rathi. First of all, sir, they have not shut down. They have shut down one of their plants, right? And they are having financial difficulties. Their sales was also much higher in the triple-digit numbers. So it was not $40 million. But in general, to answer your question, they were more focused on the Americas. And we are able to capture some of their demand in the Americas. Got it, sir. That is already seen in our numbers. Would that be a fair assumption that we have been able to cater to some of that demand already? We've been able to cater. But I think, as I mentioned, U.S. market had a big destocking kind of effect there in our Q3 FY24. So the numbers there were a little bit subdued. Got it. That should improve sequentially going ahead with demand coming back. Yes. Got it. Sir, my second question is on the Red Sea issue, not from the exports perspective, but I believe that quite a significant chunk of our RM does come from China, especially some of the key raw materials or intermediates required to manufacture high-performance pigments. I think one of our global competitors is already kind of speaking of increasing the freight surcharges and trying to secure raw material as soon as possible. Would that also have some bearing on the freight cost that we might have to bear the burden of because of the Red Sea issue from the imports perspective? So far, sir, we've not seen so much of an issue on the import perspective. Our anticipation, at least for the next quarter, we don't see that issue. We are seeing a major hike in our export especially to Europe and U.S., that we continue to see. Right, sir. Sir, my last one, just a general rhetoric that was part of one of our investment arguments that globally we have seen a major consolidation. That's already in the past, and I know that then we kind of went through, the industry entirely went through some supply shocks and COVID and geopolitical tensions. But in general, would you still believe that the consolidation of the two or three majors that has happened is rather to benefit us even going ahead, that there might have been some spillover of their products coming into our foray, wherein we have been able to benefit because two or three of our large major competitors have consolidated? I know that this may not have happened in the last few years because, like I said, for some external pressures. But going ahead, would still that be a theme that we might get some market share because of the consolidation that has already happened, sir? Your thoughts. Thank you. Sir, absolutely. I think that's a major theme. We are already seeing a good attraction because of that, and it will continue for us to be in the market as a very good, reliable supplier, as an alternative, reliable supplier to some of these major competitors. Sir, have you still seen, even in the past, sir, we have seen that play out in our favor. Would that be a fair assumption? And that we have gained market share even by a single percentage point. Archit, can you repeat the question, please? Sir, my question was, in the past also, the consolidation has already happened, like I said. Have we seen that benefit accrue into our finances? Have we been able to gain market share at all, even if by a percentage point? Do you think that in your assumption that has played out for us in our favor? It's a very dynamic situation, right? What we can tell you as trends is that the customers look for alternatives. Also, consolidation makes our competitors look more inwards rather than focus on this. There are, of course, several. You must have already heard about the external, some of our competitors are facing major concerns issues. There are two aspects. One is, of course, the external environment where there's consolidation going on, there are internal issues going on with our competitors. Secondly, Sudarshan Chemical Industries is a company who's come up with these all new products, very focused on the business. I think both factors together, I would say the extrinsic and the intrinsic, where we strengthen ourselves over the last three, four years, definitely helps us to place ourselves much better before the customer. In years to come, we will definitely keep gaining more market share. Sure, sir. Thanks for all your answers, sir. Really appreciate this. Thank you, and all the best. Thank you. The next question is from the line of Nitesh Dutt from Dolat Capital. Please go ahead, sir. Yeah. Hi, sir. Hi, team. Congratulations on a good set of numbers, especially in the core pigments business. My first question is, you have highlighted about deeper penetration in select international geographies in the presentation. If you could provide some more details in terms of which geographies, which end applications are these. We got associated with the BASF distribution. Is this beginning to take shape? Hi, Nitesh. Nilkanth here. When we are talking about deeper penetration in the international geography, as mentioned earlier, we are getting a good traction in the Japan market as well as the Korea market, and also a few other geographies wherein we are trying our sales force, wherein we are getting a good traction. We are strengthening our presence in South America. South Americas also. In terms of our engagement with BTC, the BASF distribution arm, this engagement is there, and we are seeing a gradual ramp-up and the progress there. We have still not seen the complete benefit of the engagement because products do take a little longer to sync. We are hoping next financial year we are able to see this benefit of this cooperation. All right. Sir, if you could share your overall capacity utilization, a ballpark number would be good. Just trying to understand that we are currently at 13.2% EBITDA margins in the pigment business, while a large part of the CapEx is still to be absorbed. Where do you see these margins progressing to in a couple of years as the capacities get absorbed? I do understand that this is also a function of the RM prices, but say we assume constant prices in this period, where could the product mix change and the operating leverage take us to in terms of EBITDA margins? Any indications there would be helpful. Nitesh, Nilkanth here. As a management, we also guided earlier that capacity utilization, we are not right now publishing the data. With regards to your question in terms of the EBITDA improvement, if you really see the current EBITDA percentage is at 12.7% YTD numbers compared to the 8.1% of the last year. Structurally, if I see our company's performance going forward, the two levers which we mentioned earlier and which we believe will drive the growth, one is a specialty and second is the export market. Given the new CapEx product, new CapEx which is commissioned and majority of the products are in the high-performance or specialty pigment side, we believe that we will see the uptick in the EBITDA margin, our highest EBITDA margin which was around 15% in 2021. Structurally and directionally, I can see over a period we should scale back to that level and then once the utilization ramp-up benefit will come in, we should see northward of that particular percentage. Directionally, this year, if I see the performance, we are scaling back to our original run rate. As we go along and see the demand improvement as well as the new CapEx commercialization, it should directionally give us the EBITDA margin on a higher side. Sure, sir. This is helpful. Just one last small bookkeeping one before I join back the queue. How much is the gross debt currently? How much of a reduction have we seen sequentially from around INR 622 crore was reported at the end of Q2. Nitesh, as mentioned, our net debt number for Q3 is INR 434 crore, versus INR 946 crore of the last year Q3, and sequentially if I see the INR 445 crore in Q2 FY 2024. All right, sir. Thank you so much for answering the questions. All the best. Thank you, Nitesh. Thank you. The next question is from the line of Sandeep from LKP Securities Limited. Please go ahead. Yeah, hi. Thanks for taking the question. Congratulations on the good set of numbers. Just I wanted some guidance from you in terms of your specialty and non-specialty. Can you give us what would be the major difference between both these majorly consisting the high-performance pigment specialty and can you provide us some discipline and some guidance on that? The specialty and non-specialty, non-specialty mainly is the complete commodity products, where most of our commodity products where we are not able to have, I would say, a sustained customer engagement sales. People are able to quickly switch because of our pricing. That's the major. The specialty products are more towards higher-end applications and products which are more sticky with the customers. Okay. Can we say that the specialty products are majorly customized kind of product which are having a customer requirement from customer side? Can we conclude that? No, it's not customized, but it's mainly higher-end applications, products which probably do not have that intensive competition. Okay. Just in terms of outlook for the next quarter. Generally, Q4 is one of your best quarters in terms of if I see the past numbers. Can we expect the next quarter to be around similar levels? Are we expecting like a good spillover effect or the lag effect in the Q4 as well? Hi. As you rightly mentioned, we believe that we will continue the current momentum and we as a management are bullish on the Q4 numbers. Given the current demand scenario, as mentioned, the India demand seems good. The coating de-stocking effect is over. We see the good demand in the plastic and similar trend we expect in the export market subject to the geopolitical situation, though. In a nutshell, we expect to keep the momentum continuing for Q4 also. Okay. Just last question. Can you give breakup of your plans in coating things, plastics and automotive or cosmetics, like you provide any breakup of these verticals? Currently, we are not publishing these numbers, and we are internally reviewing this. Maybe going forward, we will look at which kind of dataset further release can be possible, and then we will connect back to you. Okay. Just like generally, coatings is the higher in terms of industry, as far as industry, as in like more than 50% is coating, almost 50%. Can we also gauge for Sudarshan Chemical Industries that coatings would be the highest in terms of your verticals? For us, our strong area is plastics. Though the market size of plastics is lower, our sales in coatings is number one, but the difference between coatings and plastics is much narrower for us. Then would be printing inks and then cosmetics in the rank. Okay. Thanks very much. Thanks for the answer. Thank you. Thank you. Thank you. The next question is from the line of Dhruv Muchhal from HDFC AMC. Please go ahead. Yes. Thank you so much. Sir, the last time when the safe rates had increased, export market was a bit impacted because the local players probably in Europe and U.S. had become more competitive. We are seeing that same trend now, but do you think the implication can be a bit different this time? I think the question is on two, three areas. One is obviously they are also majorly impacted. All their raw materials come through the Red Sea, so they are majorly impacted due to that. The impact I feel this time will not be there from a perspective of being competitive because of logistics. Okay. And sir, secondly, if I look at the other expenses in the pigment segment, I mean the gross profit minus the EBITDA, the absolute other expenses are increasing. If I compare it versus Q3 2022, they have increased despite broadly similar sales. This, I would assume, is despite the fact that the power and fuel cost for you would have declined and in the base quarter, that is Q3 2022, your freight cost would also be significantly higher. Just trying to understand what is driving this cost increase. Dhruv, you are comparing this with the last year Q3, correct? No. Q3 2022, that is 1 year, I mean 2 years back. I thought last year was very weak. But Q3 2022, when you had the worst of freight cost, worst of probably the power and fuel cost. Dhruv, it is also the impact of the volume, correct? The kind of realization which we are seeing right now versus the past 2 years trend wherein we have seen the inflationary pressure there and the price pass through. Currently we are seeing the volume scale up compared to those particular period and which will definitely have impact in our other expenses also. Basically, the volumes are significantly better, but the revenue is low because of the realization impact. Yes, absolutely. Okay. Some sense you can give how has the realization declined over one, two years on a per KC or as a percent? Dhruv, this is indirectly getting back to the volume question. Since we are not declaring the volume, we will not be able to give you the exact number. But you have seen the inflationary trend which has been at the higher end of 8%-10% over last two years period. Based on that, you will be able to see the impact. Okay, sure. Thank you so much. Thank you and all the best. Thanks. Thank you, Dhruv Muchhal. Thank you. The next question is from the line of Madhav Marda from Fidelity International. Please go ahead. Hi. Can you hear me? Sorry sir, we are unable to hear you. Am I audible now? Yes, Madhav, you are. My first question was just on the supply side landscape. I think last couple of quarters you've been speaking about some disruption in some of the larger competitors in Canada and Europe. Just any update there in terms of are we beginning to see some market share shift happening from those vendors or any sort of opportunities coming up on the product side? Madhavji, I think as I mentioned, we continue to see good tailwinds for us from an external perspective of the competitive landscape. The engagement with customers increases because of these tailwinds. Given that our stronger product portfolio, there is more reason for our customers to talk with us, engage with us more. Understood. Got it. In terms of the newer products, the new portfolio which we have commercialized in last one or 2 years, basically, how much higher is the gross margin profile for these newer SKUs versus, say, the pre-FY 2019 or 2018 portfolio which we had? If you could share some outlook there, that will be helpful. Sir, I think it is a little bit of a mixed bag, right? Because our volume utilization, as you may realize, is low. We also, initially we went through some, as we were commercializing the CapExes, we went through some of the teething problems. We have not fully realized the full potential there of the gross margin. As we mentioned, the whole idea of getting into these product lines was having improved margins. This side of the product line should give us a better margin, sir, in the future years. Got it. Okay. Thank you so much. Thanks, Madhavji. Thank you. The next question is from the line of Rohit Nagraj from Centrum Broking. Please go ahead. Yeah. Thanks for the opportunity and congrats on good set of numbers. So first question is in terms of the customer engagement that we are having after the start of 2024. How are we perceiving them in terms of outlook for their businesses and probably giving us some firm commitments in terms of orders? So last couple of years have been completely in turmoil. But now is there a greater sense of confidence and probably the same is percolated to us in terms of some firm commitments on a quarterly or yearly volume basis? Thank you. Thank you, sir. Very good question, sir. This is Rajesh Rathi, and I think demand is a mixed bag, right? So if you look at India, we are hoping that the destocking of coatings is over, and we should be able to see good demand now going forward from coatings. Plastics, the demand was very good, and we are hoping that the plastic demand will continue in India. So that's the India story. If you look at the global scenarios, Europe demand is still subdued. Q3 in U.S. had a big destocking effect, which the supply chain should be tied up, and we expect that our Q4 we should see better demand in U.S. Middle East, Africa, we have a very strong position, but I think couple of countries where there are either issues from a currency perspective, et cetera, that kind of has a damper on our demand. Though the demand is there, we are not able to service some of that demand. Right. Got it, sir. Sir, second question, in terms of the cost increase because of freight rate increases, would this be transitory in nature that in Q4 probably we will have to take a hit before the prices are increased and that effect of freight cost increase will be nullified in subsequent quarters? Just your perspective on this. Sorry, can you repeat the question? Yeah. The freight cost increased because of the Red Sea issue on the exports front or even from the raw materials front. Just to get a perspective whether we will have to absorb these costs for the time being with a transitory in nature, and then further in coming quarter, the customers will give us the price increases, and that impact will be nullified. Sir, I think what we are doing right now is, as far as possible, we are pushing the cost increases because this is a very transparent cost increase, right? Everyone is aware of this. There are few areas which we are not able to pass on the complete increases. That is the area we will seek further looking at this, but we do not expect material impact on the margin. Sure. Just one last clarification on Rieco. In terms of management bandwidth, how much of our energy is invested on Rieco and whether there will be a further thought on to divest Rieco, as we had indicated probably a few years ago. Thank you. Sir, the endeavor has been that we should not defocus from our growth business of pigments. I think our bandwidth, also the company is very well independently managed. However, the board has given us a direction that the growth has to be profitable, and our focus and drive of Sudhir, the overall corporate management now will be to help them guide them towards profitable growth, right? We will not get distracted from our pigment business, but help Rieco reach respectable profitable numbers. Thank you so much for answering all the questions, and the best of luck, sir. Thank you. Thank you, Rohit. Thank you. The next question is from the line of Jay Shah from Capital PMS. Please go ahead. Hi. Thank you for the opportunity. Congratulations to the management for the good set. Sir, my question was more on the specialty side that, how is the whole generation of new products happening? Is it like we are pushing new products or is it like the customers are telling us what is their need? Because why I ask this is we have seen that a lot of our peers, especially the one called Heubach, is also moving towards specialty and high-performance pigments. This move is seen globally, that people are going up the value chain. I want to know two things. One, how does the ideation and commission happen? Second is, what would give Sudarshan the right to win if the space gets very competitive? Excellent question, sir. I think first of all, with the Heubach and Clariant merger, Clariant already had the existing portfolio. I see the market differently because their portfolio, they are not transforming, right? It is because of the merger, that is what the portfolio is. In Sudarshan's case, we have created this new portfolio. I think the market is looking for a good, reliable supplier other than the traditionals, right? I would now classify Heubach into a, since you said Heubach, they are one of the traditionals because Clariant and Heubach has combined their business, right? So, we do become a good alternative, given a very broad portfolio, broad competitive in terms of quality, in terms of value to the customers. Okay. If you could throw some light on how the ideation generally happens. Is it like constantly R&D from our end, or is it like even the clients are asking us for value add or a functional strength in reaction to that? Good question, sir. So what happens is, four years ago when we launched, we already had done a good market survey. We had a good engagement with customers, identified the products, and we have introduced those products, right? Now, we do engage with key accounts, and there are times when with key accounts, some of our products do not work to their expectations. Then you come back to the lab, you modify the product, and go back to them. So it is a dual approach. There is a mass market where you go and you launch the product, right? There are few key accounts where the volume justify you would customize the product for them because they do have a little bit of a different requirement. Got it. Understood, sir. Just last question. Throughout the call, I could figure out that the management focus is more on coatings, inks, and plastics. I just wanted to ask from the management, is it that the paint industry is a lesser focus for us? Because, given the way the country is, India, and the real estate segments that we are seeing- Yeah. Is the management not planning to focus on paints as an industry? I am sorry to use our jargons sometimes, but coatings is paints. Okay. Coatings and paints is used interchangeably. Our focus, sir, is paints, plastics, cosmetics, and printing inks. All core industries we try. Of course, we choose segments in each of them, where we should go and try it. Got it. Okay. Thank you so much, sir. That is all from my side. All the best for the future. Thank you, Yash. Thank you. The next question is from the line of Rolene, an individual investor. Please go ahead. Yeah. Hi. Thank you, sir, for taking my question. I have a few questions. The first one is on your specialty and non-specialty mix. Could you help me understand, either in terms of your capacity, in terms of gross block, how much is the gross block which is dedicated to specialty, how much is for non-specialty? Or once all our CapEx comes on stream and is optimally utilized, what could the sales mix look like? Hi, Nilkanth here. On the split between the specialty and non-specialty, we have been in the range of around 66%, 67% on the specialty side, 33%, 34% on the non-specialty side. While we don't publish the gross block separately for specialty and non-specialty, what we have also guided the market earlier that the new CapEx which has been commissioned is more towards the specialty side. And once we get the full scale up, I see the specialty pigment as a proportion in our entire sales will move towards the higher numbers, maybe a couple of basis points higher than what we had. Compared to current 66%, 67%, we will see the move upward once we get the full benefit of the CapEx commercialization. Thank you. As that was the last question, I would now like to hand the conference over to management for closing comments. Thank you Nitesh Dutt from Dolat Capital, and thank you participants for your time and interest in Sudarshan Chemical. We remain confident in the long-term prospects of our business, and we look forward to engaging with you again in future. Thank you. Thank you. On behalf of Dolat Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.