Q1 23/24

Aug 9, 2023

Ladies and gentlemen, good day and welcome to the Q1 FY24 earnings conference call of Sudarshan Chemical Industries Limited, hosted by IIFL 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 with 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. Viral Shah from IIFL Securities. Thank you, and over to you, Mr. Shah. Thank you, Michelle. Ladies and gentlemen, good morning, and thank you for joining us on the post-results conference call for Sudarshan Chemical Industries Limited. It is my pleasure to introduce the senior management team of Sudarshan Chemicals, who are here with us today to discuss the results. We have with us Mr. Rajesh Rathi, our Managing Director, and Mr. Nilkanth Natu, CFO. We will begin the call with opening remarks by the management, and thereafter we will I would like to now hand over the call to Mr. Nilkanth Natu to take the proceedings forward. Thank you, and over to you, Nilkanth. Thank you. Thank you IIFL Securities and Mr. Vridich for hosting our earnings call. Good morning, ladies and gentlemen. Welcome to Sudarshan's Q1 FY24 earnings conference call. Our investor presentation has been uploaded on the stock exchange for your ready reference. I would like to take you through the financial highlights for this quarter. On the overall basis, we have commenced the current financial year with improved financial performance compared to the challenging previous year. Taking that view to the quarterly performance, on a consolidated basis for the quarter, total income from operations stood at INR 608 crores as compared to INR 504 crores for the same period last year, higher by 10% year-on-year. EBITDA for the quarter stood at INR 70 crores as compared to INR 41 crores in Q1 FY23. EBITDA margin is at 11.5% as compared to 7.5% over the same period last year. Profit after tax is at INR 21 crores compared to INR 7 crores for the same period last year. Now, going into the details of our pigment business. For the Q1 FY24, income from operations stood at INR 536 crores as compared to INR 526 crores for the same period last year, growth of 2% year-on-year. On a sequential basis, revenue is lower by 10% compared to INR 594 crores of Q4 FY23. India sales for the quarter is at INR 265 crores, marginally lower by 1% as compared to INR 269 crores the same period last year. On a sequential basis, India sales is lower by 12% compared to INR 301 crores in Q4 FY23. Exports for the quarter is at INR 272 crores as compared to INR 258 crores, higher by around 6% year-on-year. On a sequential basis, revenue is lower by 7% compared to INR 293 crores of Q4 FY23. Value growth has remained soft due to pass-through in the selling prices due to fall in the raw material prices and the logistic cost. In the plastic segment, we are seeing relatively stable demand and expect further improvement in the coming quarters. We have seen subdued demand scenario from coating and ink segments, majorly due to domestic players differing buying decisions owing to destocking and falling price regime. Demand in this segment is expected to pick up in the coming quarters in H2 FY24, and we continue to be vigilant towards international geographies concerning the global macroeconomic situation. Specialty segment stood at INR 363 crores as compared to INR 352 crores for the previous year same quarter, 3% year-on-year higher. On a sequential basis, revenue is lower by 12% compared to INR 413 crores of Q4 FY23. Non-specialty sales for the quarter is at INR 174 crores, which remains flat as compared to the same period last year. On a sequential basis, revenue is lower by 4% compared to INR 181 crores of Q4 FY23. We see good engagement with the customers to gain healthy opportunity funnel from recently commissioned capacity. As guided earlier, revenue ramp-up will be slightly delayed due to the macroeconomic conditions. Gross margin of pigment business for the quarter increased to 42.9%, versus 40.3% for the same period last previous year. Comparing with the sequential quarter, gross margin has gone up by 140 basis points. Apart from raw material costs, we continue to see softening of coal prices as compared to the previous year. Logistic costs have also come off the peak levels seen earlier. In this softening price regime, we will continue with the calibrated pricing decisions to volume growth in the coming quarters. EBITDA for the quarter stood at INR 64 crores in Q1 FY24 as compared to INR 44 crores for the previous year same quarter. EBITDA margin is at 11.9% as compared to 8.3% over the same period last year. On a sequential basis, EBITDA is lower by 4 to 6 points, and this is due to lower operating leverage and annual employee increment effect. Recent update on the land monetization. During the quarter, the company completed sale of freehold land located at Pune, Maharashtra, for a total consideration of INR 356 crores. Net gain of INR 305 crores from the sale transaction has been reported as a part of exceptional gains in the P&L statement. Proceeds from the land monetizations are being utilized towards de-leveraging the balance sheet. To summarize, business environment has mixed vibes from headwinds due to the macroeconomic situation and positive tailwinds from the external factors such as consolidation of top layer pigment industry, China Plus One strategy, et cetera, which are expected to favor Indian pigment industry. We are well prepared internally with all the capex projects being commissioned, with wider range of product portfolio, cost efficient operation, and capacities to quickly ramp up. To summarize, we are confident in our growth journey and look forward to continuing the same and delivering value to all our stakeholders. With this, I now open the floor for question and answer session. Thank you. Thank you very much, sir. We will now begin the question and answer session. Anyone who wishes to ask questions may press star and one on their touch-tone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants, I request you to use handsets while asking our questions. 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. Please go ahead. Thank you. Good morning, sir. Thanks for taking my question. First on the domestic revenue growth. If you look at the plastic companies, pipe companies, they have reported a volume growth anywhere between 15%-30%. Coating industry got benefited because of the delayed monsoon. While if I see our number, it really doesn't show that kind of increased volume. Is it because that we have passed on the price benefit to the customer and volume growth has been healthier than what we see in the revenue growth? That's number one. Number two, how has been our market share in Indian market? Because if that's not true, the earlier statement, then it looks like we are losing market share in the domestic. Can you provide some color there? That's my first one. Hi, Sanjesh. Thanks for your question. Welcome here. As I mentioned in my opening commentary, we are seeing a good unit sales growth in the plastic segment, and there is a good traction. While the coating company has reported a good number, we have seen a destocking effect there, and the sales value growth was subdued there. We expect that this should be transitionary, and the demand revival in the India market should come in. As regards your second question in terms of our market share in India, we are currently a market leader with 35% market share in the domestic industry. Currently, we don't see any debase in our market share. We are not losing out on the market share in Indian market. But we have invested so much into the high-performance pigment. We are expanding the portfolio. If I see this 35% number for last four or five years, despite such a significantly higher investment, that hasn't been moving up. Were the other player who are being equally aggressive because we haven't seen too much of a capacity addition in the pigment segment, why our market share is not reflecting that? Sir, this is Rajesh Rathi here. As Natujji mentioned, we have seen a good growth in plastics, which the growth has happened. The second is in the coatings section, we have not lost anything, but we have not seen growth because of the destocking happening in the coatings industry. Our entire product portfolio was designed for a global market. Of course, some products do go into India. From that perspective, whichever were main designed for India, they are getting well entrenched in the product. I do not know why you come to a conclusion that we are losing market share. That is not true. No, I got your point that volume growth could be higher and destocking could be a transitory phenomena. I am just dwelling on this 35% market share which has been stable for last four, five years, if I remember it right. Why is it not improving considering that we have been investing so much in the product portfolio and all? One would have anticipated it to go up materially. I think, once you reach a certain product, certain market share, it is difficult to. Especially on some of the commodity sides, we have been losing some product shares and that has been by design and that is where this new product portfolio was designed that we gain market share there, right? If you see the phthalocyanine, you see the chrome industry in organics, there is a very big competition there and margins are constantly falling in that region. There is a certain level of market which we have lost there in the last few years. Got it. To just summarize, you are telling that we are improving on the product portfolio where we are shedding some of the market share in the lower end or highly competitive product and moving up in the value chain. Is it a fair assumption? Yes, sir. Absolutely. My second question is competition from China. We have generally heard from many chemical companies that due to the lower domestic demand in China, those products are flooding in the export market and we do have a competition from China on the azo portfolio. How has been our experience, what has been the competitive intensity pricing margins in the export market for that part of the portfolio? We have seen intense competition and probably some of the utilization has been at their lowest for the Chinese companies. We have seen intense competition. I think last year also we saw huge competition there. Compared to last year, I wouldn't say that it's become worse. Whatever we saw last year has been continued and with our product portfolio and even in azo, we have been able to get back some of our market which we had lost in the export market. Got it. Last two questions. One on the new product approval and the ramp-up. I know you have told that it will get slightly delayed considering the global demand scenario. Can you tell us how is the yellow and violet being accepted by the customer? How many have approved it? Some color qualitative statement to give us a confidence that when the demand turns around, we should be able to gain that benefit. That's one. Number two, on the phthalo side, I think China anti-dumping on India is now anniversarized. It's already in the base. Are you seeing that continues to hurt us? These are my two questions. Right sir. I think one question is, and Mr. Natu will kind of allude to it, that our new CapEx change, we are getting good engagement. What we had earlier given our guidance that earlier we had anticipated to utilize the full in 3 years, it will go to 4 years. That's what the guidance we are giving you last time. Currently we are on track on this year's target also as per defined by that 4-year target. We are on track on that. If the macroeconomic situation changes, the team, we all hope that we will go back to the 3 years utilization, what we had thought. A good engagement on all those products across customers and across geographies. That's one question, if I've answered. The other, what was it? The second question was on China anti-dumping, it's hurt the entire industry. The Pigment Manufacturers Association has decided to fight this together and we hope that we do this. What has happened in the phthalocyanine industry, the macroeconomic situation globally, it was majorly blue and green was an export market. We've seen a depression in demand plus the China demand going off. It's a double whammy for the phthalocyanine industry. Okay. But the anti-dumping has been put beyond a year now, right? At least there is no incremental hurt from the anti-dumping for the phthalo side of the portfolio. I can understand the destocking part of it, but from the purely anti-dumping there is no incremental impact now because it's already in the base, correct? Is it already a year? I think yes. I don't exactly remember whether it's 9 months or a year, but there's no incremental after the last instance of anti-dumping. Whether it was a year, I don't recollect exactly. Okay. That's it from my side. Thanks, Ratji, thanks Neelkanth Nattu for answering all the questions and best of luck for the coming quarters. Thank you. Thank you. Thank you. The next question is from the line of Ankur Agarwal from Axis Capital. Please go ahead. Yeah. Hi, Rajesh Rathi. Hi, Nataraji. Thanks for the opportunity here. So, continuing with the earlier discussion on the overall demand scenario, and given that exports are more relevant for us in terms of ramping up the newly launched products, capacities, et cetera. If you can share your thoughts on how you are looking at different geographies, both from a specialty as well as a non-specialty portfolio perspective. Yeah. Ankur Agarwal, welcome here. So, as we guided in our opening commentary, in the short term, we may see the demand variation due to destocking of the inventory level and buying decision deferment due to the softening of the prices. However, we expect this to be a transitionary phase. On the domestic demand, we expect the recovery in the coming quarter, that is in H2 FY 2024. On the export front, as we mentioned, the uncertainties due to the global geopolitical scenario remain. With the cycle of monetary policy, the demand we expected to be moderate. However, given the last year performance in the first two quarters, we expect the growth will be there in the export as well as the domestic market as far as our company is concerned, and we will continue to monitor that. Sure. Secondly, on the RM deflation side now, and since we have been improving on our gross margin front. This gross margin improvement is more optical because of the decrease in freight cost, or there is a genuine full pass-through of RM inflation and probably the deflation is helping now? Ankur Agarwal, the current quarter gross margin is at 42.9%, and which shows the improvement over the last year Q1, as well as the last year Q4. If you really see, historically, we were operating at the similar level of gross margin, and we aspire to have this gross margin level always. However, this gross margin improvement, what we have seen in the current quarter is due to softening of the RM prices and also some part of the lag effect of the pass-through. Our endeavor is always to maintain the gross margin level at the same percent, and we expect that the gross margin should remain at the similar percent given the softening of the cost element in terms of the raw material, in terms of the coal and all that. We expect that this should remain at around same level in the coming quarter. However, we will have to take the balance carefully, as I mentioned earlier, between the volume and the price, looking at the demand scenario in the coming quarter, given the uncertainty around, but we will try and aspire to have this gross margin level around the same level. Sure. Nataraji, where I was coming from was, the existing portfolio, if I look historically, our gross margins have been largely stable in that 42%, 43% range. But given the new INR 7 billion CapEx that we have done, and over the next, let's say, four years, we are looking at a ramp-up there, which is more on the specialty side, this number should move up materially. So from a, not immediate near term, but let's say from a three-year perspective, we should see a decent improvement in the gross margin number? Or will it be a case that probably we'll have to offer our products at a slightly discounted or maybe lower prices to gain market share, and hence the margin accretion may not be as high, while revenue growth will be good? Ankurji, Rajesh here. Yeah. Very good question, sir. Obviously, this product portfolio was designed from a tool that it receives a higher gross margin. Right? Correct. There are two things happening, is that given the current micro scenario and the levels which all the industries are operating on, our existing portfolio also, we have to look at how to maintain the volumes, and at many cases, we have to drop our gross margin. Right? We are aggressively pushing our other portfolio also. So it's a combination. So this portfolio with a higher gross margin and a combination of our existing portfolio is kind of leading this. Directionally, once we come back to a normal scenario, our gross margin trend should improve in the long term, sir. Once the macroeconomic situation changes, the demand, the Chinese are not at the same level of utilization to what's happening today, et cetera. Sure. Rajesh, just a follow-up on that. So from a product approval perspective, all these products will have different time cycles in terms of approvals, et cetera. Where are we right now, and maybe when should we expect the full approval in place? We are absolutely on track on stage reaching our first-year target, given the four-year horizon. Right? So we are right on track on that. So Q1 also, we've been able to meet that target, and we'll continue to. There's a great emphasis in the company to drive that. Okay, great. If I may follow up, just one on the coal cost comment that we had in the initial remarks. Coal cost being lower, earlier there was a hit on the gross margin because of the coal cost being higher. So if the coal cost is coming down, the benefit stays with us on the margin front. Will that be a right presumption? Coal will affect the contribution margin, not the gross margins. Yeah. You are absolutely right, sir. Coal we will try and maintain the margins which we had lost. Great, sir. Thank you. Thank you for your reply and all the best. Thanks. Thanks. Have a good day. Thank you. The next question is from the line of Madhav from Fidelity. Please go ahead. Hi, good morning. Thank you so much for your time once again. I think in the annual report of FY23, you had mentioned that one of the key North American competitors for Sudarshan is facing major challenges. Could you help us understand what's happening there? Is it part of the global consolidation which is played out? Is that part of that, or what's happening there? One of the competitors based in Canada is facing financial difficulty, and they have been curtailing their product portfolio. We have seen also in the market that supplies from them to customers have been disrupted for some areas. Okay. Got it. How big were they? Given we are ranked three, I think today, were they in a top 10 player in the pigment space? Or any ballpark, were they a very large player, very small player? Yes, sir. Definitely among the top six or seven players, sir. Okay. Understood. The other commentary which was there in the annual report was you all said that China Plus One in the pigments industry specifically is gathering pace now, and you all expect the Indian pigment players to benefit. Is it something like the pigment space is now beginning to see that trend picking up where some of the other subsegments in chemicals have benefited in the last four or five years at least? Is pigment that coming through now? That is what I gathered from the annual report. I am not sure if I read it properly. So sir, I think China Plus One has been a talking point for a long time, but first time we are seeing that customers are looking at alternatives, and India is definitely in the focus area. That's what we see. Got it. Lastly, again, from the annual report only, you all said that in Europe there could be higher imports of pigments in the next few years given, of course, they have their own cost challenges. Is that the right understanding, that imports into Europe of pigments could pick up in the next 3 to 4 years? I think the second tailwind which we talk about in the energy crisis in Europe, they become uncompetitive, right? Also looking at the whole de-industrialization or what's happening in Europe where they're reducing capacities. We are hoping that there is more opportunities for us to export, yes, into Europe. Understood. Got it. Thank you so much. Thanks, Madhav. Thank you. The next question is from the line of Archit Joshi from B&K Securities. Please go ahead. Hi, sir. Thanks for the opportunity. Sir, I just wanted to seek your understanding on your geographical presence in Europe and U.S. specifically. This entire inventory destocking story that is playing out, which is possibly we are not able to push our volumes incrementally because of that. What is the exact situation there? How big is the level of inventory that needs to be corrected so that we start seeing some recovery in terms of volume? If you can speak on both the geographies specifically. Sure. In general, I think the destocking in the inventory has been through the geographies. Specifically to EU and U.S., I would say that EU, last year we saw worsening of demand. We see demand slightly better than last year, right? Last year we saw the worst coming in. In terms of U.S., so far one is the destocking, but the future demand scenario in U.S. given the economic situation, et cetera, customers are giving us a cautionary note in U.S. That's the area where we are closely monitoring how to gain our sales with our new products. Sure, sir. In the supply chain, correct my understanding if I am wrong here. In the supply chain, while we are into a pure B2B business, the inventories are stocked up at what end exactly? Is it that the customers bought in quite a lot in the last financial year, or is it in the distribution channel somewhere if you are at all dealing with distributors? There are two things, right, sir? One is that the inherent demand, if that is weak, then probably it will be difficult to push the inventory from any of the ends. But if the demand is picking up, then the levels of inventory repetition going ahead will be quite useful if we have to push back the volumes that we have reduced in our facilities. Where exactly is the pain point from whatever interactions if you had, if you can throw some light on that? I think the first pain point was the Indian market, especially coating industry, where we saw the de-stocking that we did not see the muted demand. It now all depends on Diwali, how the Diwali season now picks up and the coating demand comes up. That is one scenario. The second scenario is really Europe and North America, the macroeconomic situation where the demand itself is kind of subdued. But what we find is that it all depends on the reference to context. If you compare to last year, we are in a better position even in Europe and U.S. But onto the absolute where we want to reach, what we want to do, that still is upbeat. Understood, sir. Sir, one last question. When we planned this new capacity, we have added INR 700 crore, INR 750 crore to our gross log. While we plan these products, which are essentially, as you rightly said earlier, have a relatively higher gross margin profile than our existing tail of products which we are trying to curtail. While we plan these products, do we immediately start getting in touch with our customers for qualifications of these products? If at all these products have already been qualified or is it that once demand starts picking up, we start this process altogether newly wherein we can expect some delays because of the gestation period also that is involved in approving those products at the customer end. Just wanted your thoughts on how the planning is done from your standpoint when it comes to introducing these new products. And just one supplementary information if you can provide. You have spoken about this earlier, but to what extent have you started setting these assets? From these new assets, what would be the current capacity utilization like? Thank you. Absolutely, we do not wait for the demand to come back. We are engaging with customers for approvals. However, like the guidance we gave in the last call, we were expecting to utilize the capacities in three years. This has been, right now given the situation, it looks like four years. We are bang on target to achieve the target of four years today. We will continue to push this. Given when the situation improves, we hope to bring this back to three years. Got it, sir. Basically, we do not have to really wait for the approvals. The engagement is ongoing, and that will not increase the gestation period of realizing the benefits from the CapEx. Sir, if you can also answer the utilization part that I asked. Thank you. Utilization part, as I mentioned, sir, on the four-year, we are on track to achieve the four-year target. Sure, sir. Thanks. That helps. All the best. Thanks. Thank you. The next question is on the line of Mitesh Todi from Dalat Capital. Please go ahead. Yeah, hi. Thank you so much for the opportunity. My first question is, if you look at the reported segment assets, the net effects have increased by INR 270 crores quarter on quarter. Could you give some color on the same? Mitesh, I am not able to hear you clearly. Mr. Todi, maybe I request you to kindly use your handset to ask questions, please. Yeah, is this better? Yes, sir. Please continue. Yeah, so I was asking that if we look at the reported segment assets, the net assets what I see has increased by INR 270 crore quarter-on-quarter. If you could just elaborate on the same. Hi, Mitesh. Nikunj here. I think on the segment asset side, the major increase which has come is on account of the investment in the mutual fund, which is based on the monetization. Since our monetization happened in Q1, we utilized proceeds for repayment of the borrowing. Some part of that is parked right now in the mutual fund. That is giving us the increased value in the asset side. Also, as I mentioned earlier, there has been some effect on the inventory slightly on a higher side for the quarter. To some extent that is also impacting. Third point is on also the repo side, the business has gone up. There has been some also waived as well as unwaived revenue which is also contributing increase in overall segment revenue. Sure. My next question is on the pigment business. If you see that sequentially, the gross margin has gone up from 41.5% to 42.9%. However, the EBITDA margin has come down from 12.3% to 11.9%. Is this purely because of weaker fixed cost absorption given the lower volumes sequentially or is there an increase in some overheads also? Nitin, your understanding is absolutely correct. If you see, the EBITDA margin is down substantially by 36 points, while if you see net sales value has come down by around 9%-10%. It is more of the operating leverage there, no improvement overall. All right, sir. Thank you so much, and all the best. Thank you, Nitin. Bye. Thank you. The next question is from the line of Dhruv Muchhal from HDFC Mutual Fund. Please go ahead. Yeah, sure. Thank you so much. Sir, we understand based on some reports that the Chinese real estate market is weak and probably continues to remain weak. I believe that would also be impacting the coating segment there. Dhruv, I have Nitin here. Sorry to disturb you. Can you be slightly loud? Yeah, I'll try to. I hope this is better. We understand that the Chinese real estate market is a bit weak and continues to remain weak. Excuse me, sir. I'm sorry to interrupt. Sir, your mic is too close to your mouth and we are getting very disturbed. One second. Is this better? Thank you, sir. Yeah. So, sir, on the Chinese market, we understand that the real estate market is weak, and probably that is also influencing the coating pigment segment. Sir, is that the reason that which is impacting the overall supply demand situation globally, and the Chinese are exporting more and more, probably in your European U.S. market, which you earlier used to target and probably also the domestic market? Or is it that a lot of new capacities have come up, which is influencing the market? Just trying to understand what is causing this. China has nothing to do with the coatings market, sir. Coating market, what we saw was in India, we didn't see growth. I think China is generally active in the painting ink markets, and some lower-end plastic markets where we have seen good competition. Right? Competition, yes. But that's not the main reason where we are seeing the In general, we are saying that the microeconomic situation is such that we are not seeing that growth which we used to see earlier in the market. Okay. So this Chinese pressure is related to the domestic market in printing inks and plastics. But for the exports market, like Not domestic. Okay. This is a global market. Global market. Okay. Got it. Sure, sir. This is helpful. The second thing is, now that the RM prices are falling, I believe you will also take some adjustments in your selling prices to some extent, probably. So your earlier guidance of incremental revenue from a new CapEx, I think it was about INR 1,500 odd crores. Does that remain or will that see some change given that the RM is now falling? It will see a slight, not a material difference, sir. Probably a 10% difference. What the material difference in earlier guidance was three years, which is moving to four years. I mean, that's the bigger difference here. The value broadly remains the same. If you expect, I mean, you had already factored in for this RM price fluctuation or the decline as such. No, no. I am saying the decline right now we expect is to make an impact is 10%. 10%, got it. Sure, sir. Great. Thank you so much, and all the best. Thanks. Yeah. All right. Thanks. Thank you. The next question is from the line of Chetan Thacker from ASK Investment Managers Limited. Please go ahead. Mr. Thacker, I have on your- Yes. Chetan available? Yes. Please proceed. Hi, sir. The question is more on the other expense line item. Just wanted to understand how this will move as a percentage of revenue over the next four years, because some bit of our CapEx has also gone into backward integration. How should we expect this line item to move as capacity utilization inches up? Hi, Chetan. Nitin here. Our CapEx has been predominantly on the revenue side, growth side. As we guided earlier, we have not done any significant CapEx for the backward integration. That will be the next phase once we stabilize the current CapEx. As regards the other expense, these are two, three variables. The fixed costs, which I see in that particular bucket, they remain fairly constant. The other part, which is the manufacturing as well as the selling variable, will vary as we ramp up our capacity. It should get reflected in our contribution margin. I expect the margin should be at the similar level, and we should see growth compared to year-on-year basis. Sure. Sir, this was largely coming from the fact that if I look at your more long-term other expense as a percentage of revenue, it would hover between 20% and 21%, while this quarter it is 25%, because utilization would be lower. So fair to assume we would start inching towards that number as utilization starts to inch up? It is fair to assume that. Okay, sure. So we had been predominantly in the range of around 23% to 24% as a percentage to sales. If I see the last year for the pigment business, we were at around 24%, and currently I see as a 23%. As we move along, and as we see the capacity utilization and ramp up, I expect this percentage to drop further. We should stabilize this on the lower end of the scale. And just a last bit on the interest expense line item. What is the current cost of debt? And given that we would have utilized to repay debt, we have done that. So what should we expect going ahead on the interest expense as well? Keshav, currently, if you really see our loan portfolio, it is a mix of the rupees and the rupee loans. It is more on the export commercial borrowing, which is the foreign currency borrowing. And given the current risk management policy, where majority of them are covered into the fixed rate. So I expect the blended rate on this should be around 5.5%, given the foreign currency loans in the portfolio. Got it. Whatever we have repaid, to that extent, that benefit will flow as we move ahead. Absolutely. Whatever we have repaid, you can see in the quarter, compared to the sequential quarter, you see the reduction in the interest cost number. As we go along, further repayment also will have the impact on the reduction in the interest cost. Sure, sir. Thank you so much, sir. All the best. Thank you, Keshav. Thank you. The next question is from the line of Huseain Bharuchwala from Carnelian Asset Management. Please go ahead. Hello, am I audible? Sir, there is a static on your line. May we request you to use your handset, please? Am I audible? Yes, sir. Please proceed. Sir, I just wanted to understand from the organic pigment side since you are moving more towards the export market. Can we see the gross margins increasing from here on? Is there any target gross margin that we are looking at? I just wanted to understand some bit of that. Secondly, I wanted to understand, sir, you plan to increase the ROCE going forward, and that was there in the presentation. How will you be able to increase the ROCE? One thing I understand in the last call, you said that we will look at working capital and bring down the working capital down. Are there any other means that we are looking at in order to improve the ROCE? How are we planning to do that, sir? That was the two questions from me. Hello? Yes. Hello. Hi, Huseain. Nikunj here. Am I audible? Yes, sir, you are audible. Yeah. The first question was on the gross margin. Rather than looking at organic, inorganic, I see the split between the specialty and non-specialty to play the important role. As we mentioned, our CapEx has been tilted more towards the specialty chemical side, specialty pigment side. So over a period, directionally, we should see the gross margin expansion. We have seen earlier the gross margin in the range of 43%-44%, if I see the peak of FY21. So we should expect that there should be the expansion in the gross margin directionally, not in the immediate future, once we get along more switching of the current CapEx, new CapEx which are putting to the EU. That is on the first part. Second is on the ROCE, yes. ROCE has couple of levers wherein we are working. The last year, which we have seen is the drop in overall gross margin, EBITDA, and this has reflected in the EBIT percentage aspect. With the current quarter, with overall financial performance, we expect the margin trajectory to be maintained compared to the last year first three quarter performance. So we have seen that traction coming in, and we at the management are focused how to expand our margin, which will reflect better in terms of the EBITDA percent as well as the EBIT percent. On the capital employed side, we are also working more on the net working capital. If you have seen last year, there has been a good net working capital release over a one-year period. And we continue to do that. There may be some seasonality which will be there as far as the net working capital side is concerned, but over a period, I expect we should stabilize the net working capital around 21%, releasing further few crores from the capital employed. And third, as we move along in terms of the ramping of the stage from the new CapEx project, more weighting of those CapEx will give us the further benefits going forward. So as here the growth will follow the CapEx, we are in the initial phase. We will see the ROCE ramp up in the coming year. And these are the two, three major levers which we are working at. Okay, got it. Also, one point, Huseain, also here, we have also taken a decision that there will not be any further expansion of new CapEx to the three which we have seen, except the maintenance CapEx. This will also help us in managing our capital employed better. Got it. Sir, your maintenance CapEx will be around INR 40 crores. Am I correct? That is what you had guided earlier? Yes. Around INR 40 crores CapEx, yeah. Got it. So that was the only question, sir. Thank you. Thank you, Huseain. Thank you. The next question is from the line of Rohit Nagraj from Centrum Broking. Please go ahead. Yeah. Thanks for the opportunity. So first question is on the European competitors. Given that out of top 10 players, most of them are located in Europe. Plus, on a year-on-year, the energy situation has been relatively linear. You also mentioned the raw material prices have been falling. So how is the competition shaping up over there? Are there any incidences where some of the mid or small-sized players have gone out of the system as you explained for one of the competitors in Canada? Thank you. I think, like we said, in Europe, a lot of consolidation has happened, right, in the large areas. I think with consolidation comes opportunities for independent players like us, where we get an opportunity to grab market share. Right? So, in terms of if you see Europe, if you scan through Europe, there are two major players who are present, right? Who are the top two people. All right. Have we seen competition from the top people, given that from the raw material side or from the energy side, the situation is also favorable for them as it is favorable for us? Basically, I think two areas. One is obviously the energy in Europe is still. We have some advantage over that. So, we are staying in favor from a cost perspective. And given that consolidation is happening, we do see a more attraction towards better engagement for us with the customers. Right. Got it. Sir, second question is that on the commodity pigments capacity. You mentioned in one of the comments that we are driving margins from commodity to specialty. However, the market share has remained constant. Just wanted to understand from the operating point of view, the capacity that we have put for commodity pigments, the previous ones plus in the new CapEx, are those capacities fungible and can be used for specialty pigments? Or at any point in time, if we were to scale those down, we will again have to incur some CapEx if we were to upgrade those capacities to specialty pigments? Thank you. We have not put in any new CapEx on the commodity side. Right? Most of our CapEx has been on the specialty side. If you look at fungibility, it is not possible to transform a commodity capacity into a specialty. All right, sir. Got it. Thank you so much, and best of luck, sir. Thank you. The next question is from the line of Yogesh Bhatia from Sequent Investments. Please go ahead. Hello. Yes, sir. Please proceed. Sir, like you mentioned, our target is to ramp up this new capacity in the coming three years. Is it a possibility that if things are better off earlier than we expect, we can ramp it up faster? My second question is, like you said, we have started utilizing the new capacity recently from Q1. Is it fair to assume that some higher fixed costs must have been a part of the P&L in the last one or two quarters, given the ramp-up has started in the new capacity? Hello. Hi, Yogesh. Welcome here. As regards the ramp-up in terms of the new capacity, as we mentioned, we earlier estimated that ramp-up should be within 3 years. Given the current scenario, we expect that this should be around 4 years, and we are on target to have the ramp-up of this new capacity by 4 years. As we move along, if we see the improvement in the macroeconomic condition, our endeavor is to bring back this particular ramp-up to the previous period, but that will always depend on the external factors. That is the first part. Second part is in terms of the additional fixed cost. This project has been commissioned in the last quarter, and majority of the fixed cost in terms of the manpower and all that is already been there. I don't expect any incremental fixed cost to come for this newly commissioned CapEx. Okay. So basically higher fixed cost has been incurred in the last quarter and maybe this quarter also, for the new capacity, right? Yes. I expect more of a normalization, no incremental cost, fixed cost due to this recently commissioned CapEx. Okay. Thank you, sir. That should be all. Thank you, Yogesh. Thank you. Ladies and gentlemen, we will take that as the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you, sir. Yeah, thank you, Nilsha. Thank you, Yogesh, and thank you, participants, for your time and interest in Sudarshan Chemical. We remain confident in the long-term prospect of our business, and we look forward to engaging with you again in future. Thank you. Thank you, sir. Ladies and gentlemen, on behalf of IIFL Securities, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.