Ladies and gentlemen, good day and welcome to the Camlin Fine Sciences Limited Q2 and H1 FY 2023 earnings conference call hosted by Sunidhi Securities & Finance Limited. As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Rohit Sinha from Sunidhi Securities & Finance Limited. Thank you, and over to you, sir.
Thank you. Good evening, everyone. Thank you for joining us for the Q2 FY 2023 earnings call of Camlin Fine Sciences Limited. I would like to thank the management for giving us this opportunity to host the call and congratulate them for a robust set of number amid this challenging environment. From Camlin Fine Sciences management, today we have with us Mr. Ashish Dandekar, Chairman and Managing Director, Mr. Nirmal Momaya, Executive Director and Managing Director, and Mr. Santosh Parab, CFO of Camlin Fine Sciences. I now hand over the call to the management for their opening remarks. Thank you, and over to you, sir.
Ladies and gentlemen to our quarterly earnings call. As is our usual practice, I'll be handing over to Santosh Parab, our CFO, who will give you the highlights of the quarter. After that, our Managing Director, Nirmal Momaya, will be available to answer your questions. On to Santosh.
Thanks, Ashish. Good evening. Thanks, everyone, for attending our investor call for Quarter and Half Year ended September 30, 2022, that too on a weekend. We truly appreciate your time and attendance. You would have read our financial result as well as investor presentation for the quarter and half year ended 30th September, which we have already published, and I have also hosted on our website. Now let me dive directly into the financials of our company. Our company has posted the highest ever consolidated operating revenue, both quarterly as well as half yearly. The consolidated operating revenue for the quarter stood at INR 483 crores, which is higher by 25.9% quarter-on-quarter and 55.3% as compared to corresponding quarter of last year.
Gross margins were at 50.7% as compared to 53.6% and 45.1% for last quarter and corresponding last year quarter. You would agree that looking at the volatile currency situation, global economic circumstances, inflationary trends, company has been able to control its gross margin. The Russia-Ukraine crisis continues and has impacted our operations financially during this quarter also. The energy cost increased by around INR 22 crore as compared to last quarter in our European subsidiary which produces dyes in Italy. This has impacted the overall margins, albeit with some relief from Italian government which gave a subsidy on this high cost of around INR 7 crore in this quarter, and transfer of some of this enhanced cost by increasing the sale price.
Despite all these issues, CFS Europe recorded a turnover of INR 155 crore and is still making reasonable EBITDA margin. We are closely watching the situation more so with winter around the corner. Our Mexican subsidiary continued its growth trajectory by posting turnover of INR 90 crores in the current year. Turnover of CFS do Brasil increased to INR 33 crore in the current quarter, while CFS North America recorded turnover of INR 17 crores. CFS do Brasil has been breaking even. However, the volatility in currencies, currency markets have been impacting its results. CFS North America is expected to steadily improve over the year. Shutdown at our Chinese subsidiary continued owing to the Supreme Court order. Management is pursuing avenues for alternative use of the plant for an aromatic product, which is a catechol derivative.
As you are aware, the trials are successfully carried out at our vanillin plant, which is under construction at Dahej. We would be commencing commercial production in the very near future as we are awaiting certain statutory authorization. We expect them to be received very soon and would be starting the commercial production. Coming to the balance sheet items now. Consolidated net debt as of September 30, 2022 is at INR 637 crore. The increase from last quarter was primarily on the long-term borrowing to fund the vanillin project, as well as increase in utilization of revolving credit owing to increase in operations. Rising interest rates remain a concern in short-term future. Now, about the future. Destocking by customers, volatile currency, European war and subdued global economic trends would be the challenges in the coming quarters.
Here I am confident of facing these challenges and come out winners. Thank you. I will now open the floor for questions.
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 handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Reminder to the participants. Anyone who wishes to ask a question may press star and one at this time. The first question is from the line of Abhay Mal Lodha from Sanmati Consultants, please go ahead.
Sir, good evening, sir. Am I audible, sir?
Yes, sir, you are audible.
Sir, my question is about this new plant of this vanillin plant which is under trial of 6,000 metric ton. How much will be the total cost of this plant, sir? What amount incurred for this plant. What is the amount of the CapEx?
Amount of CapEx is about INR 250 crores.
Sir, how much turnover at present prices this plant can generate on full capacity?
On full capacity, it should generate about INR 700 crore.
Okay, sir. My second question, sir: debt to equity ratio. The debt to equity ratio has gone up from below 0.1 to 1.2. How much money the company would be borrowing more in second half?
No, in the second half there is no plan to borrow further.
Sir, my last question is capital work in progress is the new cost of the new plant is INR 250 crore, and we find from the presentation, capital work in progress is three hundred plus crore, three hundred something crore. Can you give us a brief idea of where you are incurring CapEx other than these three plants which is under trial?
Yeah. We have several other maintenance CapExes which we are doing in all our facilities. This includes all the CapExes that are in progress in all our plants.
Okay, sir. I will re-join the queue, sir.
Mm-hmm.
Thank you.
Thank you. The next question is from the line of Surya from PhillipCapital. Please go ahead.
Hi, sir. Congratulations on that great set of numbers. First question is on the standalone business performance. The sequential revenue we have seen there is a positive surprise, obviously, because of expanded capacity, possibly. Here, is it fair to believe, sir, that even the expanded portion of the capacity is being utilized to the, let's say, around 30%-40% or something around that? And, are we selling more hydroquinone now, given the expanded capacity of Dahej ? And also if you can give some clarity whether we have started selling some of the derivatives of the HQ which is bringing in this business.
Yes. At this point, we are not selling much of hydroquinone in the market. What we are doing is we are selling value-added products. We've also introduced MEHQ now in the market. We have started sales of other downstream products. You will see, going forward, in the next quarters, there will be substantial focus on these downstream products and we'll try and scale them up.
Sure. About utilization, it would be at what level of utilization, sir? Generally considering 1,500 ton capacity.
We are running at about, roughly, 1,100-1,200 tons per month.
Okay.
Yeah.
Okay. Second question is on the energy subsidy, sir. This INR 7 crore subsidy what we have received, is it relating to the quarter specific or it is relating to the first ten or so far? What is the subsidy that they have decided and given? Or is there any outlook for that subsidy that is till the time the energy cost is remaining elevated, we could be getting similar amount like that going ahead. Also on the energy amount or energy prices outlook, if you can give something.
You ask for a question which nobody has an answer to. Yeah. As far as the subsidy goes, it is up to what has accrued up to date. Going forward, depending on what the prices of gas will be, the Italian authorities will probably give some subsidies. Based on you know how these market prices move, of course there's a lot of volatility, so very difficult to predict where it will go and kind of stabilize. Because we've seen prices go from EUR 300 to EUR 50 back to EUR 100 back to EUR 200 and again down again. It's very difficult to predict which way that will go.
Sir, on the vanilla plant, you tried to mention something on the opening remark, but I think is there any technical challenge to commission the plant, sir? Or, let's say considering the supply availability, considering the global market situation and all that, whether that is a kind of hindrance for commissioning vanilla plant?
No, the commissioning of the plant is no issue. That has been done.
Okay.
The question is scaling up and starting commercial production. We're just waiting for the last approval, which should come, and then, you know, once we have that, we can start production on a full scale.
Okay. Just one thing, sir. If we see the consolidated earnings, then large part of that has come from obviously the standalone operation. Obviously, that is because the kind of a value-added operation for us. But given the kind of economic slowdown kind of signs, there are challenges that is visible trade-related, also cost-related and all that. If you can give some clarity and outlook for your subsidiaries and your global supply capabilities in the subsequent quarters.
The next two quarters are challenging because there is demand slowdown, there is price corrections, and of course, we also see some raw material prices coming off. We are trying to see and balance, you know, based on what the market conditions are. We are trying to balance on the product portfolio, rearrange, realign some of the products, and focus on those more than on other ones where demand could be a challenge. All in all, of course, like everybody else, the next couple of quarters are uncertain. You know, we are taking all the measures that we can take to try and maximize what we can do out of our Dahej facility as well.
As far as other geographies are concerned, in the blends business, there is no significant slowdown or demand shrinkage that we are facing. That's more or less kind of stable. Italy, of course, is very volatile in terms of you know the availability of hydroquinone and catechol in the European market as well as the energy prices. Italy is also a bit uncertain as to how it will pan out. You know, we are trying to take whatever best advantage we can of the situation and try and maximize what we can get.
Okay. Just last question, sir, from my side. On the, let's say, the gross margin front. Sequentially, we have seen some softening in terms of gross margin, quarter-on-quarter basis. Whether that would be led by the softening of the product prices or it is really led by the input cost rise?
It's more, also to do with the increase of the production of catechol and prices of catechol under pressure. Once the vanillin comes in, you know, it kind of will balance out, because there the margins are significantly better than when we sell catechol.
Okay.
we increase the production of diphenol, we get more catechol, as you know, in percentage terms as compared to hydroquinone. That is one of the reasons why the margin has been impacted.
Okay. Just Santosh sir, can you share the EBITDA numbers for key subsidiaries, sir, for the quarter?
One moment. Key subsidiary EBITDA number.
Key subsidiary EBITDA number. I can tell you the turnovers of these subsidiaries, so Brazil was INR 33 crore. North America was INR 16 crores. Europe was INR 155 crore. Mexico was INR 90 crores. India, you know.
Yeah.
The difference will be the elimination.
Okay. If I just lastly I can ask on the Mexico side, sir. In fact, we have consistently been doing around 18%-19% kind of growth year-over-year. Now we have consolidated our stake there. Any kind of incremental growth momentum that should we see going ahead or the global outlook is not so great, we still can maintain possibly this is a run rate?
See if you see sequentially, corresponding last year quarter of Europe, Mexico was INR 76 crores. It has gone to INR 90 crores.
Correct.
There's certainly growth. If you take even the subsidiaries like Brazil, it was 20, it has become 33.
Mm.
Small like, North America, 12 has become 16. The difference will be INR 4 crore, but the percentage increase you can see. Europe also 110, 155. Let's not talk about Europe, about the blends business.
Mm.
The traction is there. As Nirmal was saying. We are not seeing any shrinkage in the demand in the blends business.
Okay.
destocking and the volatility in the currency markets, lot of developing countries who consume blends are under stress.
Mm.
We don't feel that we will be degrowing in Blends.
Mm.
The growth part may over the years also some of the few quarters we will not see the growth, but seasonal quarters are very good. On a yearly basis we have been consistently clocking growth on blends.
Sure, sir. Okay. Yeah. Thank you, sir. Wish you all the best.
Thank you.
Reminder to the participants. Anyone who wishes to ask a question may press star and one. The next question is from the line of Pallavi Deshpande from Sameeksha Capital. Please go ahead.
Oh, yes, sir. Thank you for taking my question. Just wanted to understand industry dynamics, and the change in that.
Sorry to interrupt you, ma'am. The audio is breaking from your line. Please,
Okay. Just a minute. Is this better?
Please use the handset mode.
Yeah. Better.
Ma'am, please go ahead.
Hello. Yeah. Just wanted to understand right now the industry dynamics. I understand that Clean Science and Technology has increased their capacity for MEHQ, and they have the anisole as starting process. They seem to be the lowest cost producer currently. Is Solvay backing down? Is this you know affecting the catechol prices also globally because of their capacity?
Sorry to interrupt you, ma'am. Again, the audio is not clear from your line.
Yeah, just wanted to understand the industry dynamics. Clean Science and Technology, basically, they have increased their MEHQ capacity. Just, is, you know, given their starting material is anisole, are they currently the lowest cost producer? How does this play out for the market as a whole?
Basically, if you understand the chemistry, the chemistry is very similar. Cutting raw material listing all for all of us. We make hydroquinone, catechol, and from hydroquinone we make MEHQ. Clean Science starts from phenol, makes anisole, and then makes MEHQ from that. Really speaking, it's only the catechol that we get in a higher percentage, which is where we are not competitive. Now with the vanillin facility coming in, that catechol, which was a loss-making business, is, will turn into a profit-making business, which will mean that our cost structures will be very similar to our competitors.
All right, sir. On this, just to understand chemistry again, do they use vapor phase technology, I understand, for MEHQ? Am I on the same page?
We are not using vapor phase for making MEHQ. We're using another route. In terms of cost, it doesn't make much difference.
Sir, they have been gaining market share globally. Is that falling phase still now?
No, MEHQ, we were not selling MEHQ for the last one year.
Right.
Now we have started.
Okay. Right. Right. Secondly, on vanillin, prices, where are they currently?
Can't hear you. Sorry, can't hear you.
What are the vanillin prices currently?
The vanillin prices currently are about, depends on market to market. Anything between $15-$20, depending on the market that you're selling.
Right. China is not exporting to us as much because of those on the anti-dumping.
Sorry to interrupt you, ma'am. The audio is breaking from your line. Please be in a network area.
Yes. Is China not exporting to the U.S. now because of anti-dumping duties? Is it less? The exports to the U.S. just might possibly play a part in these prices.
Can't hear you. Your voice is doubled.
Ma'am, I would request you to rejoin the question queue.
Right. I'll do that.
Reminder to the participants. Anyone who wishes to ask a question may press star and one. The next question is from the line of Satish Kumar from Incredible Capital. Please go ahead.
Good evening, sir. My question is regarding vanillin. How much production we can do, I mean, in our rough estimate, sir, this year?
That depends on when we start the production. The plant has to run at a minimum of 50% capacity. That's. At 6,000 tons, it's 500 tons. Two hundred and fifty tons a month is the minimum that we have to produce.
Understand, sir. Thanks. That's all. Thank you, sir.
Okay. Thanks.
Thank you. Participants, to ask a question you may press star and one. The next question is from the line of Ravi Mehta from Deep Financial. Please go ahead.
Yeah. Hi. Great set of numbers. Congratulations. Just had a question on the Italian subsidiary. You said it made a reasonable EBITDA. If you can just give some color, like, will it be like 5%-6% EBITDA on these costs or?
Yeah. The EBITDA is roughly about 8%.
Okay
on this increased gas prices.
Okay. You've been highlighting it in the notes regarding the delta in the cost of energy. Despite that, probably if you are hitting this kind of EBITDA. I believe there is still some under-recovery, meaning everything is not possible to pass on. The numbers what we see are still suppressed in a way.
Yes, that's right. We can't pass on the whole thing.
Okay. If things probably normalize, there is further upside, maybe to the European margins.
Yeah, I mean, it's very difficult to say with this volatility right now. Extremely difficult to say what will happen to gas prices. Yeah.
Yeah, yeah.
Yeah.
One question to Santosh, bookkeeping one. The tax provisioning has been very high, both in standalone and in consolidated.
Yeah.
Yeah. Where should we see?
As on a consolidated basis, you know. We get hit because we have losses in some of the subsidiaries. As I during my opening remarks, I said that though we are breaking even in Brazil, there's an issue of foreign currency volatility in almost all of these developing countries. I end up getting a net loss before tax, and then this cannot be adjusted against the tax paid in other countries or the profits made in other countries. That's why that's the issue. If you see the profit-making companies only, we are in the range of 30%-35%. We move down if you include the loss-making, then the rate effectively increases. As far as India is concerned, it's again a very bookkeeping issue of this high tax.
What's happened is that, tax, as you know, is calculated on a yearly basis. We had a relatively lower estimate of annual profit. The current quarter and looking at the future, we did increase the taxable annual profit at the year-end, which ended up a larger pie this year on a mathematical basis. On the overall basis, India is under MAT. If you see, we are getting hit on tax on the deferred tax assets because we have this huge capitalization of diphenol last year and another vanillin capitalization coming in this year is creating a deferred tax asset. As far as cash out on tax rate is concerned, it is MAT because we have cash already on diphenol plant.
This will stabilize once we reach all over the world, start making profit, then this situation will improve. India level once vanillin starts generating profit, then even the deferred tax will even out. As far as cash is concerned, we see that at least for the next two years India will be in the MAT.
Okay. Probably I missed if you shared the utilization levels of the Dahej diphenol in this quarter?
No, we were in the range of 80%-85%.
On the-
Nirmal said that around 1,100-1,200 metric tons per month is what is our capacity utilization.
Okay.
Around 14,000 hours annual.
Okay. Sure. Thanks. Thank you.
Thank you. The next question is from the line of Dhruv Shah from Ambika Fincap. Please go ahead.
Yeah, hi team. Congratulations on a good set of numbers. Nirmal, my first question is on the downstream product you said. Is the INR 70 crore of capital work in progress apart from vanillin for those products?
Not necessarily. Also for some debottlenecking projects we have. We have some optimization of energy projects. We have some water recycling projects in the pipeline. These are several small projects, yeah, for zero liquid discharge in Tarapur. There are many projects like those which are in the pipeline.
Right. Another question related to the same thing. Because two quarters back our spread on HQ was pretty good, so we were emphasizing more on selling HQ. Has the spread on HQ reduced that we are emphasizing more on downstream products now?
No. We continue to sell HQ from Italy. From India, from Dahej we've not really sold much of HQ because that's all for downstream products.
Right. What will be the realization on HQ right now?
HQ realization is currently about $10 or so.
Okay. My next question is on Lockheed Martin. Where are we on that part? If you can just share something on that.
Lockheed Martin, like we shared in the last call that we are in the process of producing material for them for their first commercial battery, which we need to supply to them in mid of next year. That's going on target and some other business also from them is under discussion. Once we have more clarity, of course we'll come back and inform you.
Sir, just last bit. How sustainable is this EBITDA number going forward? I understand that you said that there's too much volatility, but sustainability of this EBITDA considering that we right now are emphasizing more on downstream and the new capacity. Is this EBITDA in absolute term sustainable going forward?
Very difficult to say. Like I said, because of raw material prices, final prices of products that we produce, gas prices, all these are, you know, question marks. Very difficult to give you a guidance on which way it will go. Of course, with the vanillin coming on stream soon, that should support the EBITDA.
Right. Great. Congratulations once again for good set of numbers. Thank you.
Thanks.
Thank you. The next question is from the line of Rohit Sinha from Sunidhi Securities & Finance. Please go ahead.
Yeah. Thank you for taking my question, sir. Now, with first half already completed and, as we normally say, H1 is normally close to 40% of our annual business. Just wanted to understand, is there any revision in the guidance for the full year of 2023? Just wanted to know how we see the second half, particularly for 2023.
The second half should be on similar lines. There should not be too much of a variation. Also, of course depends on vanillin. That also is something that can add to what we are doing. Yeah, generally it'll be on similar lines as the first half. Some prices are coming off, so that could also impact the top line going forward. At this point of time, I mean, we are saying it should be around the same.
Okay, as you were saying earlier that for vanillin plant will be operating at a minimum 50%. Just wanted to understand if at all, I mean, if somehow we are not operating at 50%, would that mean there would be some, you can say, operating losses at our level?
No, no, not operating losses. This is, the plant design is such that we have to minimum, it has to operate at 50%. That, that's a design constraint.
Once with this vanillin plant would be operational, what kind of incremental EBITDA we would be expecting?
Difficult to give that number because it's all, you know, till we are in the market and we are selling, I mean, right now the prices are between $15-$20. You know, based on what the market is then, the EBITDA will kind of evolve from there.
Okay. Just wanted to understand that, how has been the HQ prices post our capacity addition at Dahej at the global level?
It had gone up from the time we started pre-production. It has gone up 50%. Now we are seeing that the prices are stabilizing and it at one point had gone almost to $11.5-$12, and now it's come down to $10. Yeah, effectively after we started the Dahej diphenol, which was a couple of years ago, the prices have gone up by more than 50%.
Okay. Okay. That's it from my side, Kalpataru. Thank you.
Thank you. Reminder to the participants, anyone who wishes to ask a question may press star and one.
Mm-hmm.
The next question is from the line of AM Lodha from Sanmati Consultants. Please go ahead.
Sir, thank you very much for opportunity. There is even follow-up question, sir. In addition to this CapEx of INR 350 crore including this, 6,000 vanillin plant and maintenance CapEx, are company planning for further CapEx in FY 2024, sir?
No, at this point of time there is no further plan.
Okay, sir. Now my second question is, sir, how the net debt, the, this, there is no CapEx except maintenance CapEx regularly. Project CapEx is not there. How the company is planning to reduce the debt in coming year, say 2024 and 2025?
The accruals that will happen, cash accruals that will happen will go to reduce the debt.
Thank you very much, sir. Thank you. That's all then. Thank you. That's all.
Thank you. The next question is from the line of Pallavi Deshpande from Sameeksha Capital. Please go ahead.
Yes. I just wanted to understand better what is hurting the catechol prices globally currently. Is it only the shutdown of our China facility, vanillin facility, or any other factors at play?
No, no. It's always been in oversupply situation for many years.
We don't produce any.
It's not really because of the China vanillin plant not being there. It's because global capacities are much larger than global demand.
Right, sir. Sir, what are the prices currently for catechol?
catechol price will be $1.5-$2, in that range.
Okay, sir. Sir, secondly, just coming back to the previous question on, you know, Clean Science, the margins they enjoy are, you know, operating margins are around 40% and you know. Just wondering, and they are 70% of their revenues in the MEHQ, HQ segment. Just wondering how, you know, how is it so different and, like.
I don't know that. I don't analyze their P&L, but I don't know. I mean, our gross margins are 50% and which will improve as vanillin comes, so I can only comment on that.
Our cost of production for MEHQ, would that be available?
That's what I told you earlier. I answered that already.
Right. Okay, sir. That's all from my side. Thank you.
Thank you. The next question is from the line of Rohit Sinha from Sunidhi Securities & Finance. Please go ahead.
Yeah. Thank you, sir. On the debt side, what kind of reduction plan we have for FY 2023 and 2024?
Rohit, Santosh here. As you know, we have a FCCB of
Around $15 million of FCCB in that around INR 120 crores, where the option price is 105. If the IFC converts it, then without any cash outflow, my debt will reduce by INR 100 crores. That is one. On an average basis, long-term debt is old. We are repaying long-term debt every year in the range of 30-32 crores. Naturally. The other ECB loan, which we took for vanillin of $15 million, is a long loan. Nine-year loan, very low interest rate. It's like very cheap loan. In Exim also, which we took INR 95 crore loan for the balance vanillin CapEx is also a seven-year loan. Long-term debt, barring these two, ECB and FCCB, ECB from IFC and ECB from Exim, are going to stay for 5-6 years.
Revolving credit is also there. The credit, the cash credit is also there. With increasing turnover, the internal accruals will help me not to increase the debt. Zero debt, everybody likes zero debt, right? Next 2-3 years at least we'll be repaying the long-term debts. Revolving debt will remain.
Okay. Also, with this given higher interest rate environment, is there any loan standing at the subsidiary level for us? Do we see any kind of increase in interest rate or interest cost for the coming quarter?
Fortunately for us, outside of India, we have some working capital loans in Italy, which are even at higher rates, it's 3.5%. In Mexico, the acquisition loan, the last year acquisition of 33%... That's a business that's linked to the SOFR now with 4% spread. It's a 4% spread. How the interest rate goes up or down, my interest rates come up and down. As far as India is concerned, FCCB we have fixed loan, 5% coupon. ECB is also in the range of, taking the spread, it is in the range of 6%-7%. Exim is also 6%-7%. We don't know.
It looks like for short term, the interest rates will be high, but they will come down at some period of time. The basic average borrowing rate at present on a global basis is around 8%.
One last thing, I mean, with our vanillin plant about to commission and we have already completed the boiler cleaning of Dahej also. I think by FY 2024 end we will have all our CapExes running into operation. Post that, wanted to understand what kind of margin level and EBITDA contribution we would be expecting, if at all it is able to share.
If you go a bit past Rohit, we are always saying that at a full scale, all balanced, all the businesses balancing out, we'll be very close to the high teens. We are always eyeing for that. Of course, this will be decided by the economic considerations, foreign exchange rates, raw material availability, this war situation and everything. The potential, this business has a potential to be high teens or even 20s.
Okay. That is, that's it from my side. Thank you and best of luck.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.
Thank you, ladies and gentlemen, for participating in this call. We know that you have less time, so we value your time given to us. Thank you very much. Till the next time.
Thank you. Ladies and gentlemen, on behalf of Sunidhi Securities & Finance Limited, that concludes this conference call. Thank you for joining us and you may now disconnect your lines.