Q3 23/24

Feb 12, 2024

Ladies and gentlemen, good day and welcome to Neogen Chemicals Q3 FY24 earnings conference call. 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 and then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nishit Solanki. Thank you, and over to you, sir. Thank you. Good afternoon, everyone, and welcome to Neogen Chemicals Q3 FY24 earnings conference call for analysts and investors. Today, we are joined by senior members of the management team, including Dr. Harin Kanani, Managing Director, Mr. Anurag Surana, Director, and Mr. Ketan Vyas, Chief Financial Officer. We will commence the call with opening thoughts from the management team, post which we shall open the forum for Q&A, where the management will be addressing queries of the participants. Before we commence, I would like to share our standard disclaimer. Certain statements made or discussed on today's conference call could be forward-looking in nature. The actual results may vary from these forward-looking statements. A detailed disclaimer in this regard is available in Neogen Chemicals Q3 FY24 investor presentation, which has been uploaded on the stock exchange site. I would now like to invite Dr. Harin Kanani to share his perspectives. Thank you, and over to you, sir. Thank you, Nishit. Good afternoon, everyone, and thank you for joining us on Neogen Chemicals Q3 FY24 earnings conference call. We released our quarterly results on Friday and subsequently distributed the earnings presentation. I trust you had a chance to go through them. I will be guiding you through the performance highlights, important developments, and update on expansion initiatives. After which, Mr. Ketan Vyas, our CFO, will walk you through the financial performance. Our performance during the period under review was marked by sustained weak demand environment, influenced by recessionary trends in few geographies. This, along with persistent inventory destocking, ongoing conflicts in Middle East, and Red Sea crisis, collectively hindered the momentum, leading to a sharp correction in the prices of the raw materials. Both our key end-user industries, agro and pharma, continue to be under pressure, barring select products that remain stable. In light of this situation, I believe we have performed satisfactorily while preserving our base volumes and managing at least a small volume increase. This achievement was aided by the resilience of our business model, coupled with active engagement with customers and partners. We are beginning to observe a gradual demand recovery in pharma sector and select pockets in agro and anticipate this trend to gain momentum in the future. On a consolidated basis, our performance appears weak primarily due to two factors: initial expenses, CapEx linked to battery materials arm, Neogen Ionics, where contribution is yet to come, and one-time impact on BuLi Chem and a little bit on Neogen due to liquidation of high-cost inventories and lithium, in addition to subdued demand for products linked to agrochemicals and pharma. Our standalone performance, on the other hand, exhibited slight improvement as we navigated through the sector uncertainties. For Q3 FY24, our revenue stood at INR 167 crore, while EBITDA came in at INR 26 crore, PAT at INR 6 crore. Mr. Ketan Vyas will provide a detailed overview of our financial performance. Moving to our segmental performance in Q3 FY24, organic chemicals revenue reported a decline of 5%, mainly on account of year-on-year drop in bromine and other RM prices, which when adjusted, increase our revenue by INR 12 crore. Likewise, inorganic chemicals revenue declined by 30% year-on-year due to steep fall in the prices of lithium raw material, which otherwise would have been higher by INR 23 crore if we compare to the same period last year. Let me now share an important development. Neogen Ionics Limited, 100% subsidiary of Neogen Chemicals, recently completed land acquisition totaling approximately 264,285 sq m in Pakhajan, Dahej, PCPIR, Gujarat, to establish a world-class, state-of-the-art battery material facility. This greenfield site will be our largest facility dedicated solely for battery materials and new future business opportunities. Here we will set up electrolyte plant using manufacturing technology license from MUIS, Japan, and electrolyte salts and additives plant based on Neogen's indigenous technology. The MUIS team has completed the design of the plant, and accordingly, now we are preparing ourselves to start construction of the plant. We expect permissions to be received by March, and by March or April, we expect to start construction of the 30 KTA electrolyte plant. This plant is expected to be operational in second half of FY26. Coming to our existing expansion initiatives, our battery material project is progressing well and adhering to the schedule and advancing with the plant design using MUIS Japan technology. Construction is also expected to begin shortly thereafter. Let me provide you some more specific updates. In our existing business, brownfield expansion of specialty organic chemicals by 60 cubic meters, out of which 31 cubic meters was already commissioned till Q4 FY23, and remaining 29 cubic meters will be commissioned during FY25, depending on business needs. In the battery material business, new capacity of 400 metric tons per annum for lithium electrolyte salt and additives. Trial productions have already commenced stage-wise, and final checks and tests are currently ongoing. We expect customers' approvals to start coming through by end of Q4 FY24, and start revenue by end of Q4 FY24, early Q1 FY25. The 2,000 metric ton electrolyte manufacturing facility at Dahej using our indigenous technologies also scheduled for commissioning by end of Q4 FY24. Furthermore, we propose to expand our lithium electrolyte salts and additive capacity at Dahej SEZ to 2,500 metric ton in phases, which will be operational during FY 2025 to cater to immediate demand of electrolyte salts and additives in the international market. At our new greenfield site at Pakhajan, Dahej PCPIR, we will set up the 30 KTA plant using MUIS technology and 3,000 metric ton of electrolyte salt and additive plant using our indigenous technology. The aggregate CapEx for all these capacities set to come online in FY 2024 and beyond will be close to INR 1,500 crores and will translate into peak revenue potential ranging from INR 2,500 crores to INR 2,950 crores, depending on the lithium prices. This investment will be done in a phased manner and funded through mix of debt, internal accruals, and recently raised equity. Once operational, these projects will drive us into a rapid growth trajectory in the sunrise sector of lithium and battery materials, leveraging our first-mover advantage over competitors. Our aim is to become the most dependable player by maintaining consistent product quality and ensuring timely supply. This will establish Neogen Ionics as the market leader for electrolytes in India for EV applications. While this remains our effort to strengthen the existing business, we continue to make deep inroads in advanced intermediate and custom synthesis and manufacturing by leveraging our skill set and customer relationship. This, along with increased contribution from BuLi Chem, will anchor our performance going ahead as now we are able to onboard new customers in India as well as in the international market on top of the existing customers of BuLi Chem, who after a brief period of six months of low demand, are now starting to consume n-butyl lithium on a regular basis. I will conclude by saying that India remains an attractive destination for global majors with promising sector prospects in the medium to long term. Our sound understanding of market nuances, unique value proposition, and unwavering commitment to innovate will set us apart, fostering our growth potential and delivering value to the shareholders. That ends my opening remarks. I would now request our CFO, Mr. Ketan Vyas, to share financial highlights for the period under review. Thank you, Dr. Harin. Good afternoon, everyone, and welcome to Neogen Chemicals Q3 FY 2024 Earnings Call. I shall now take you through the key financial highlights. Please note that these are on consolidated basis and based on year-on-year comparisons. The reported revenue at INR 154.4 crores, reflecting a fall of 20% over last year. The quarter witnessed a decline in raw material cost and resultant realisations, albeit on steady volumes. Basic chemical revenues moderated on the back of slowdown in pharma and agrochemicals. Organic chemicals saw a revenue decline of 5% at INR 129 crores, whereas inorganic chemicals noted a decline in revenues by 30% at INR 35 crores. As stated by Dr. Harin, this was due to significant fall in prices of both boron and lithium, excluding which the overall revenues for Q3 would have been higher by INR 35 crores. EBITDA lower was at INR 30.4 crores, reflecting the impact of higher employee costs and other expenses related to ongoing expansion initiatives around Neogen Ionics. This was in addition to liquidation cost of high cost inventories in BuLi Chem. That said, the gross margins were largely maintained. In line with the moderated operational performance, PAT came in lower at INR 1.1 crores. This includes the impact of higher finance cost and depreciation, coupled with one-time tax charge incurred owing to transition to new tax regime. This means our effective tax rate from next year will be lower. The domestic to export mix stood at 78% to 22%. on a standalone year-on-year basis, our Q3 revenue came in at INR 167.4 crores versus INR 186.3 crores. EBITDA was at INR 35.8 crores versus INR 35.1 crores, and PAT was at INR 5.8 crores versus INR 14.7 crores. That concludes my initial remarks. I will now request the moderator open the floor for Q&A 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 1 on their touchtone phone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets only while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants, you may press star and 1 to join the question queue. The first question is from the line of Manish Gupta from Solidarity. Please go ahead. Thank you for the opportunity. Just wanted to check a few numbers with you. Our gross block at the end of FY 2023 was roughly INR 400 crores, and the CapEx that we are doing in FY 2024, FY 2025, and FY 2026 is about INR 1,500 crores. Barring any new projects we announce, roughly by the end of FY 2026, will we have a gross block of approximately INR 1,900 crores? Is that approximately right? Yes. Okay. Now, sir, on our existing gross block of INR 400 crore, you do help us by giving revenue numbers. But the challenge is that because these revenue numbers are so strongly linked to lithium prices and bromine prices, it becomes a bit complex for us to interpret. Would it be useful if you can guide a range that on what is a peak practical capacity utilization, INR 400 crore of gross block will roughly translate into how much EBITDA at what is the practical peak capacity utilization? Sure. Thank you. See, we always try to give you a range that with lithium prices variation, what is the fluctuation that you see, what is the range in the revenue which can happen, and similarly, EBITDA ranges also. But let’s say if we take a case, so on a INR 400 crore, as we had guided earlier, we can have a revenue potential of around INR 950 crore to INR 1,050 crore. And let’s say, with whatever is our understanding now of the BuLi business, with the same CapEx or with slightly incremental CapEx, we can get more revenues out of BuLi. So, we can say around INR 1,000 crores of revenue we can earn. And, till we reach the full utilization level, our target would be to achieve at least 18% plus or minus 1.5% kind of a EBITDA range. So let’s say around INR 180 crores, and let’s say if you consider the plus or minus range, then somewhere between INR 170 crore to INR 200 crore EBITDA on a full utilization level in the base business. Okay. Excellent, sir. So now, if we say that, let’s just work with a round number of about INR 180 crores. I do understand the range you’re talking about. Yes. Would it be fair to assume that when we reach peak utilization on the 1,900 gross block, our pro rata EBITDA for the company would be 1,900 divided by 400 multiplied by 180, roughly in that range. Could that be broadly similar? Or because bulk of the incremental CapEx is actually happening in battery chemicals, you think the EBITDA there would, on a pro rata basis, might be lower or slightly higher than the base case? Yes. So, as I’ve shared earlier, in the battery business, basically we are looking more from a ROCE concept. So we are basically targeting because that business is going to be driven more, with the lithium price and even other battery materials also will fluctuate, depending on supply and demand. I mean, what we have seen is the prices of solvents and lithium, what they were a year ago or a year and a half ago versus today sees a lot of fluctuation. So we look more from a ROE/ROCE point of view. But let’s say if we were looking, again, the EBITDA there was more like 16%-18%, depending on lithium price fluctuation. So broadly speaking, yes, and even if you take the revenue potential, which we have given you, of let’s say INR 2,500 to INR 2,950. On the INR 2,500, you can assume about 18%, again, plus or minus 1.5% kind of an EBITDA. So that will basically translate into a total EBITDA of about INR 450 plus, around INR 600 to INR 650 crores. That is the mental math here. But basically you can take INR 1,000 crore at 18%, and another INR 2,500 crore at 18%. So beyond that, it will be a pass-through. And of course, as we reach full utilization levels in FY 2026, our target would be then to do a better product selection in our base business and then try to improve our EBITDA margins in the base business. Yeah. Great. My third question, sir, is that, while the electrolyte is a new business for us, basis discussion with your technology partner, what is the typical life of these electrolyte plants? Life. The electrolyte plant which was established in Japan, I think two or three decades ago, that is still running. Wow. The plant which was set up in the U.S. also for eight, nine years ago is still running. They keep making improvements as customers' recipes become more complicated or modification, but generally the plant will run for a long period of time. And sir, how do you propose to depreciate these? I am sorry, I do not have a very accurate answer on that. I think it would be similar lines of what we have. As of today, I do not have a- Accurate number. I do not know if, Ketan, in our models, if you have taken depreciation, if there is a percentage depreciation you are taking, if you can add. But I do not right now have an exact number or a decision on that currently. No, we do not do on a percentage basis. We do on a life of the assets, which we await to get confirmation from the technical team. Currently, are you using a particular number which you have? It is between 10 years, 15 years, 20 years. We do about 15 years odd. Okay, fine. The last question, if I may, sir. Right now, we haven't announced any CapEx for the LFP cathode. Yes. I wanted to ask that, for a minute, if we assume that Neogen will not be participating in this opportunity. I wanted to understand that players who are getting into the LFP cathode- How will they source the lithium? Will they themselves start with lithium carbonate and refine it? Or will they be looking to source lithium salts needed for the LFP cathode from a player like yourself? As we have shared in the past also that Neogen has not announced any capacity in lithium cathode, but we have capabilities around lithium cathode, both our own developed technology as well as in partnership with international customers. Let's say maybe not as reputed as MUIS, because when it comes to cathode and LFP and some other cathode chemistries, very few companies have worked on this outside of China. But we do have this technology. The main reason why we have not done is because our customers are making several choices. Will they do NMC or will they do LFP? If they do LFP, would they want to import or would they want to make it in-house? Some of them, because cathode is a very large contributor, they also consider when they want to make in India, whether they would want to make it in-house or buy from a company like Neogen, right? Because there is not enough demand clarity like we have in electrolyte and electrolyte salt. We have not moved up with the CapEx or any plans around that. But we do have a visibility and our only condition is, for cathode, we will move ahead only when we have a very firm, like a binding contract or some kind of joint development or a joint plan. Some such situation is only when we will basically venture into a cathode area. The way we have currently moved in electrolyte and electrolyte salt, we would not move into the cathode area just because there are multiple options. Whereas for electrolytes, there's a strong clarity that it has to be local, people want to buy from us, and most of the companies are not going to make it ourselves. This was just clarifying on your cathode comment about Neogen. But on the second side Sorry to interrupt, sir. We had lost what you said in the last. I think the management may have dropped off, operator. Yes, sir. Right now it's just dropped. Please stay connected. I'll connect the management line back. Thank you. Ladies and gentlemen, we have the management line connected back. Sir, you can please continue with the question and answer session. Yeah. I am sorry, the call got dropped. Basically, Manish, to answer your question, I do not know how much got, but Neogen has made work in battery materials, in the cathode material. But we will basically proceed in cathode material only when we have a strong business clarity and a very committed customer clarity. Because in electrolyte, we have that clarity now. We also have that strong need of localization. That is why we have proceeded further on the electrolytes. Just to answer specifically your question about where they will source the lithium from. The lithium mining majors generally make lithium carbonate and lithium hydroxide battery grades. Depending on the technology which you are using, in such a case, you directly buy carbonate and hydroxide directly from them. At least in the lithium, to the best of our understanding, most of the companies would do that. Okay. Thank you, sir. I have another few questions, but I will come back in the queue. Thank you, Manish. Thank you. The next question is from the line of Abhijit Akella from Kotak Securities. Please go ahead. Yeah. Good evening and thanks for taking my questions. Just on the inventory write-down first, would it be possible to share a number regarding how much is actually being written down? Oh, I think in BuLi Chem, not a write-down, but basically what happened in BuLi Chem is that we acquired the company in June, and in June there was a very strong demand both from pharma and agro sector. We imported the raw material, which is lithium metal and other materials required for making n-butyl lithium. This material came through by, let's say, August or September, but that is when the specific customers with whom we were working, their demand had gone down significantly or they had already entered into some contract. Last quarter, the lithium prices, instead of being above stable lithium price, they actually went below stable lithium price. Basically we had to then sell this material at lower cost, which is today's market cost. Because of this timing mismatch, by the time we ordered, the material came, and we were able to sell. Because of just the stock-up related condition, we were building that inventory. There was a charge of around INR 4.5 crore to INR 5 crore is our estimate that we lost just because of the price fluctuation on lithium. That was on the BuLi side. Also as I explained, lithium had gone up to stable price. We were able to manage the journey of lithium from, let's say, $15 all the way up to $80, and then back at $20, $25, which is supposed to be the stable lithium carbonate prices. But today those prices have become even half of that. On Neogen side also, we had around INR 2.5 crore related losses, which were because of the price dropping very fast. We had an option either to wait more or for the prices to recover. Since we didn't see the price recovery happening very seriously immediately, we basically decided to go ahead and sell at what is today's market price. There was a 2.5 crore hit on Neogen and around 4.5-5 crore hit on the BuLi because of this lithium price fluctuation. Of course, with that, majority of the high price inventory, it's kind of already factored in. There'll be some bit of impact of this on Q4. Q1 onwards, next financial year onwards, we should be back at normal and you'll not see too much of further erosion or impact because of lithium price fluctuation. In BuLi also, we have a regular set of customers who are getting established. Understood. It's not that we are building up inventory to support. It will be more pass-through. Whatever material comes, we think we will have better pass-through, and we'll be able to better take care of this in the coming financial year. Understood. No, that's really helpful. The other thing was on the CSM business, would it be possible to share some update on how the business has been progressing? If it's possible to share a split between the three components of the base business, that would be helpful. Then specifically on CSM, how we are progressing in terms of relationships and molecule development and that sort of thing. Sure. I think, unfortunately for us, the CSM business has done well. It's now already contributing almost 14%-15% of our revenue. Our goal was to move from 10% to 20%. However, in the advanced intermediate segment, we see a little bit more strong competition from China in the pharma side. Together, they are still at about 30%, what we had targeted to reach up to 40%, the advanced intermediate and CSM. This is the exact contribution. In terms of the relationship, the positive news has been that more and more agrochemical companies have already now approved Neogen. We did the first trial campaigns for them, and we have done more than now nine or ten different molecules for different agrochemical companies. The demand for these molecules can be as low as INR 10 crores-INR 15 crores just to start the relationship to as high as INR 50 crores per annum kind of a revenue potential. That is the good news. The difficult news is that in the next year, most of them don't have a very large demand. While the number of relationships have increased, number of molecules we have increased, but still we don't have a very good clarity, at least in the first half for the next financial year. We are again hoping that beyond Q2, these existing relationships that we have built or the approvals that we have done will start contributing as the customers will start planning their 2025 calendar year demand, let's say in the second half, and that is when if the agro recovers, then we have a good way to basically increase our revenue contribution from CSM business. Further, as we had mentioned, we also have now several projects into flavors and fragrance segment. These are also now moving along, as well as some non-agro, non-pharma, non-flavor, like specialty application kind of molecules. These also are now contributing. To some extent, whatever agro we were not able to get because of weaker demand, these flavor and fragrance and other industries have supported. When agro comes back, it will help us to make our CSM and advanced intermediate business stronger. Finally, our goal was that once Dahej site is there, we start talking to the large five agrochemical companies in Europe and U.S. Most of these discussions have initiated. They have also started their evaluation work. Of course, there is a bit slowdown because of lack of demand or lower demand from their side. But still, they have recognized the capabilities that we have in bromination chemistry, Grignard chemistry. Now that we have a proven seven, eight different molecules of multi-stage synthesis, as well as the synergies which come with this n-butyl lithium. In fact, those projects where there is n-butyl lithium used, we have seen maximum interest. I think all of these, once the agro demand will pick up, will really benefit us. Understood. Sorry, just one more point to clarify with regarding our strategy in the CSM business. We intend to focus only on commercial scale molecules or like some other peers in this industry, we intend to get in into the relationship right at the stage of, say, molecule development early on during the R&D or early commercialization and ramp up the relationship from there. How would our thought process be? So far all the work which we have done is more on the commercial manufacturing side, and basically developing commercial business and focusing our R&D efforts on that. However, we are in the process of expanding our R&D lab also in Karkhadi. This capacity will basically come online sometime in the next financial year. Once we have this additional CapEx, part of this, especially in pharma, what we have seen is that sometime it helps if you start the relationship really early on. We will also maybe offer a little bit of our R&D capabilities of that. But in terms of revenue significance, it's not basically for revenue, it's just to start the relationship early so that we can have a better pipeline. That's the only difference, but otherwise our focus still remains on more commercial and in terms of revenue coming in, the revenue will largely be from the commercial manufacturing activity. Got it. And one last thing from me. On the battery chemicals business, there has been some sort of growing amount of news reports regarding somewhat of a slowdown in the adoption of electric vehicles, et cetera. In that context, how do you see the industry progressing? I mean, is it broadly rolling along as per your original expectations or are things moving a little bit slower than you expected? And with regard to your projects commissioning timeline, plus maybe what others have announced, how is the situation looking in terms of timelines, in terms of demand, et cetera? Sure. So far whatever we have seen, we still feel that the India demand kind of continues to grow. See, the fact in India is that there's already a demand which is not being met because today we are not manufacturing the cells, right? I mean, there's already a strong demand which would have existed today for battery materials if there was a cell manufacturing capacity. Most of the cell manufacturing capacity in India, as we had stated earlier, remains on track. In 2024, we will start to see some cell manufacturing happen, like one or two gigawatt hour level project will just make their start and then they will basically ramp up in early 2025 and few more will come, let's say, in the second half of 2025. If you go to 2026, my estimate is you will at least have four or five projects. We'll already have four or five projects, four to five plants which are basically working at a gigawatt hour level. By 2026, I also see the one we will start in 2024 scaling up their operation. I think from a timing perspective, our electrolyte plant, starting now, will take care of the initial gigawatt hour plants which are coming up in India, as well as some international customers, as well as some non-EV, but let's say electronic battery customer demand as well. We'll start with that in 2024, which is basically FY 2025, and then their initial ramp-up also will take care from Dahej. Our target remains that in the second half of 2025, so let's say somewhere around December 2025, one quarter before or after, is when we expect the 30 KTA plant to come. I think it will be in a perfect time that in 2026, when majority of these customers are ramping up and more new plants are coming online, we will be right ready from the beginning to take care of them for their electrolyte needs. Similarly, if you would have observed in our opening remarks, the international battery material demand non-China, because of IRA and because of heavy dependence on China, our alternate source to China remains strong. There's a very strong interest in a non-Chinese electrolyte salt and additive demand. This is why our original plan was to increase 400 to 1,000, and then from 1,000 directly go to the 3,000. But we had to increase the capacity to 2,500 metric ton to take care of the demand before our new plan will come up. In fact, the way we are seeing that demand come in, is actually getting preponed, the electrolyte salt and additive demand, as compared to what we had originally estimated. Whereas I think electrolyte demand remains on track. I think overall, if we talk of just EV and energy storage, we feel there's a bit of slowdown mostly in China. Of course, there's a little bit of challenge which people have seen in the U.S. But still EV numbers keep continuing to grow in all the regions. I think the commitment of majority of the automakers also still remains. The non-EV, which is basically energy storage application, is still picking up. Still the models are getting set around that. That is also still a demand as the world moves more and more to renewable, they will basically need more energy storage. More or less, we feel our electrolyte demand, the way we see, remains on track. The electrolyte salt and additive, we have actually preponed and added some more additional capacity, which has been also one of the reasons why our estimated CapEx numbers are higher. That's based upon the final design that we received from Mitsubishi and the additional salt capacity which we needed to have, because we see the electrolyte salt demand kind of getting little bit preponed in the international market. Understood. Thank you so much, Dr. Harin. I wish you all the best. Thank you so much. Thank you. A reminder to all the participants that you may press star and one to join the question queue. The next question is from the line of Jason Soans from IDBI Capital. Please go ahead. Yeah, sir. Thanks for taking my question. First of all, sir, just actually wanted to confirm. I mean, from a previous participant, you mentioned that on a gross block of, just wanted to confirm this, on a gross block of INR 400 crores, just considering stable lithium prices and bromine prices, we are able to do revenue of INR 1,000 crores with an EBITDA margin of 18%. Then same thing you mentioned that for battery chemicals business, with an EBITDA of 18%, INR 3,000 crore revenue potential. Is that right? That is what you mentioned? 18% on INR 2,500. Yeah. The lower side. INR 2,500. 18% on INR 2,500 crores. On the base business side, INR 1,000 crores with an EBITDA of 18%, right? Correct. Plus or minus 1% is what we take in that. Both. Yes. Okay. Depending on the raw material. Yeah. Yes. Sure. Sir, just wanted to know, I mean, we have spoken about this before that, in terms of realizations, probably we are looking at a number of, for electrolyte salts, probably something in the range of $5-$10 per kg. Just wanted to know, in terms of electrolyte salts as well as lithium salts, what are you taking an average realization considering a stable or an average lithium price? Just wanted to know what are the realizations you are taking in your calculations for both these, electrolyte salts as well as lithium salts. Yeah. The electrolyte realization is somewhere around $10, and it will depend basically on a recipe to recipe kind of a situation. Okay? Okay. Because each customer has a unique recipe, it is very difficult to give one single price. Also, like I said, there is one price in China, there is one price in Japan, there is one price in U.S., and all of these are varying quite a bit. So what will be India's price depends on the volume. It will change as the volumes will increase. But again, as we said, electrolyte business is mainly going to be a ROCE-driven kind of a business, and at least we see a ROCE of 20%+. So that is basically the basis of our assumption. Actually, EBITDA number is like a derived number, but Right ROCE is what we are targeting, because as you keep increasing higher capacities, you can afford a lower price based on the ROCE that you are doing. Okay. So $10 per kg is what you are working with currently, of course. And lithium salts, sir, in dollars per kg? Again, there are multiple salts, and the range would be, let us say around $27-$28 to $35, in that range. Okay. Sure. Sir, just in terms of electrolytes, lithium salts, how are you looking at the traction on the ground with the Neogen customers being Ola and TVS, Panasonic, et cetera? How are the negotiations with the customers? Just could you speak about some color on the ground? How is the traction going on? Yeah. We are having very good conversations with all our customers. We have been giving few kg samples to these customers for almost last 15 months. Now some of these have started a larger trial. They are also now buying, let's say, 100 kg, 200 kg kind of electrolyte volumes. Most of them are expected, at least two or three of them are expected, and actually are after us to ensure that our facility will be ready, let's say by end of the current financial year. Because they are expecting trials, like larger trials of their commercial plant start, let's say, in the first half of FY 2025. We are on track, basically, to deliver that. Our facility will be ready so that we can give them the initial trials. So far, whatever they have visited Neogen, whatever quality systems of Neogen they have seen, or the quality of electrolytes they have seen, they are very happy with that. Also now with MUIS, we give them the option that if they want to try MUIS recipes, we can also work with MUIS to suggest to them recipes which can improve the performance of their cells. This is also taken very positively, and most of these customers remain engaged. In fact, what we are seeing that even more new OEMs in India, who are either planning in future two-wheeler and four-wheeler, they are also engaging, basically, when they want to consider the option of making the cells in India. This is in the Indian market. Internationally, basically, when we are talking of the electrolyte salts, again, we are working with several customers where they are visiting our sites, they are taking our samples. Some of them have already approved our samples from either R&D or the early production sample runs from the trial production runs. We are also seeing a very positive feedback, both on the salt in the international market as well as the Indian electrolyte customers, future potential Indian electrolyte customers. Sure, sir. Sir, just if you could just explain, sir, electrolytes of course, have to be sourced locally. What is the impediment or what is the hurdle so that it cannot be exported? I mean, if lithium salts, that can be exported. Is my understanding correct? Yes. Could you just. So what is the impediment towards an electrolyte solution being exported or something like that? Yeah, so Why does it have to be made locally? Please. If you look at Mitsubishi, when they started in Japan, this technology started in Japan to set up a plant in Japan. Then similarly when their customers moved to, let's say, U.S., Europe, or China, they also set up a plant in U.S., Europe, and China, instead of just setting up more capacity in Japan and ship, right? The main reason in this is that electrolytes require very low moisture content, very low acidity, very low impurities. Some of them have additives which require also temperature below 10 degrees. So if you think of tanks which are required for transporting this across the world, right? The cost of such a tank and the cost of transportation and sending the tanks to the customer, bringing them back, and especially if you have multiple customers with multiple chemistries, making sure that you deliver them on time, whatever is needed, the particular recipe. This is more complicated and that's why, in terms of the performance and the quality of the electrolyte, it is always preferred that the electrolyte is made locally. Okay? Now, when you think of electrolyte salts, these salts, first of all, the volume of the salt that you are sending is usually between, let's say, if it's a salt, it's between 10%-15%, and if it's the additive, it's between 2%-5%. So the quantum of salt that you need to ship as compared to the quantum of electrolyte reduces, right? The second thing in this is that, this doesn't require low temperature. The shelf life is longer. It still requires moisture-free condition, so it requires a specialized packaging, but the volume of it is lower. The fact today also remains that 90%, 95% of the salt is in China. So people are heavily used to buying from China and then making the electrolytes locally. Therefore, when we are going and offering, let's say, a salt, then what's the question which is simply remaining, "Oh, instead of importing from China, I have to import from India," right? That's why we are not making a very big change from what is already being done. That's the reason why salts are more easier to export in the international market, whereas electrolytes are usually made locally. Therefore, we are not targeting very large export market in electrolytes. As well as the fact that, we are also not seeing most of the Indian customers, basically relying on imports totally to basically get the electrolytes into India on a large scale, on a sustainable basis. Yeah. Sure, sir. So, okay. Sir, fine. Now, in terms of, sir, of course, we have seen specialty chemical companies. We have seen a weak underlying demand, which is driven by driving down raw material prices and hence realizations as well, especially with Chinese competition, especially with generics, et cetera, being very intense. They are driving down intermediate prices also. Just, sir, in your sense, do you think we have bottomed out? I mean, just some color on how, have we bottomed out? Probably we can see a gradual recovery from here on the world markets. What is your sense on the entire pricing scenario? Of course, with the falling prices, our EBITDA also, absolute EBITDA definitely has gone down. That has been the story of this. Just wanted to understand from, in your sense, how is it? Do you see the prices realizations having been bottomed out and a gradual recovery from here on, or is there more pain still left? What we have seen is that in pharma, we are basically saying that, more or less, again, in pharma, there are some customers who are basically doing okay. There are some customers who have already recovered, and there are still some customers who are still recovering. There are some categories like antiretrovirals or some specific large molecule, even related to heart-related ailments. We are still seeing that there is still inventory corrections happening and the demand is still coming up. Whereas there are some segments, more specialty, more niche pharma, have already recovered, on the pharma side. On the agro side is where we have seen more challenge, where people are still not getting visibility. Of course, our supply chain is in the international market, especially in Japan and in India, basically people who are working with innovators. Most of these are basically guiding us that only in the second half of the calendar year, when they will start looking at 2025 demand, that is when basically agro will improve upon. In terms of raw material prices, we really feel that most of the people had predicted a stable lithium price, which is slightly higher than the previous 30-year-old average. Let us say the 30-year-old average is at around $12-$15 of lithium carbonate. What most of the people were predicting, $20-$25 will be a long-term stable price of lithium. Unfortunately, today, the lithium prices have gone down towards historically low or historical low average of $10-$12. We don't see further decrease because as that happens, more and more new-age mining companies or the newer mining companies, especially those based out of Australia, will not be able to sustain it for a long period of time, reducing the supply. Anyway, this is what is our belief, that it should not reduce further down. If at all, maybe 10%-15%, but not a very large decrease from today. Because the prices have gone down so much, by 2025, 2026, when there is again revival and more battery production will come in non-China markets, that is when you might see another lithium price jump. This is anyway my estimate, but let's see how the markets proceed. I think our EBITDA, it's bearing this particular lithium thing and the fact that we have not yet reached full utilization the way we have targeted. We feel more or less our EBITDA margins, we have still done a decent job to protect it. It's just that this $25 to $12 was something which took us by surprise, and our customers held back, and especially the duty situation, because we were just starting. It came at a little bit wrong time when we were not fully ready. But going forward, we'll be able to manage it better. Sure, sir. Sure. Just one little- Sorry to interrupt. Yeah. Jason, sir, may we request you return to the question queue? Sure. I'll tell the other participants so as well. Sure, sure. Thank you. The next question is from the line of Yash Shah from Investec. Please go ahead. Hi, sir. Thank you for the opportunity. My first question is more of a clarification question, sir. Last quarter, sir, we had revised our expansion for the electrolyte salt from 2,000 tons to 4,000 tons. I heard you saying basically mentioning 2,500 something. I am really not sure about it. Can you please reiterate the same? Sure. The 4,000 was broken down into 1,000 metric ton in our Dahej facility and 3,000 metric ton in the greenfield facility. Now, because we are seeing more stronger demand of the salt, that 1,000 is being increased to 2,500 metric ton, and we are seeing 3,000 metric ton still in new greenfield remains constant. So total is becoming 5,500 metric ton. What we had increased from 2,000 to 4,000, now stands increased to 5,500 metric ton. The increase is basically coming in our Dahej facility because the customers are not able to wait till our new facility comes online. So we are using the existing land available in Dahej to increase to this capacity. Understood, sir. The rest of the 600 tons, it was expected to come by the end of next quarter. Now since you have increased it to 2,500, when is that expected to come, sir? Since you have increased the capacity on the brownfield side. Yeah. Our 400 ton, like I said, all the trials and everything has started. That is basically commissioning this. Let us say we are having several phases, so like 1,000, then maybe we will have a 1,500, and then ultimately 2,500. So our target is at least 1,000 and a 1,500 to come online, let us say, in Q2 or Q3, and 2,500, let us say, by end of Q4. So by end of next financial year, we would be at 2,500 totally, and it will be in phases. As you said, 1,000 will come first, then there is another particular plant getting added, which will increase it to 1,500, and then 2,500. All of that will be happening in next financial year, and then that will take care of FY 2026 requirement of our customers. Then another 3,000 metric ton will get added in FY 2026. That will basically take care partly of our own electrolyte requirement and partly take care of the additional requirements of our customers. Understood, sir. That was really helpful. My next question was on the base business. As you mentioned before that, we had a INR 36 crore impact in the current quarter. If you just look at the numbers which were there in the last year same quarter, we would ideally touch INR 200 crores, and that will be ideally at the same amount of volume. Just really wanted to understand, since agro makes about 60%-65% of our base business, which end user industry did you see this demand from? Also in which geography, sir? If you can just harp a little bit more on that. Sure. Just to clarify, that INR 200 crore, what you have calculated is where the lithium prices were at its highest, right? That was a peak volume. Of course, on a full utilization, we will cross that. Today we are not there. The plants are not fully utilized. The second clarification I wanted to make, for us, pharma was always higher. It's 50%-60%, and agro was around 20%-25%. That 20%-30%, in that range. That 20%-30% is a bit lower, which has been right now made up by pharma and some business which I told you, flavor and fragrance and some non-pharma, non-agro, basically other industries. That has made it up. Understood, sir. Any particular geography, sir? Is it Europe or U.S., Japan? If you can- No. Currently, especially our agro business, as you know, was mostly international. Even in India, it was linked to the international. That is where you have seen our exports have gone down significantly, mainly driven by that, as well as the fall in lithium prices. Mostly, we have done more pharma customers. We have done molecules which we were normally not doing, but we have done those molecules in this quarter to make up for the shortage in the demand. Mostly it is pharma, generic India. Got it. And sir, one last question. I just wanted to understand what is our current gross debt, and with this expansion coming in, what do we target as our gross debt to EBITDA ratio or net debt to EBITDA? Our gross long-term debt today will be somewhere around INR 150 crores. And like I said, working capital will range between around INR 200-INR 250 crores, in that range, depending on which period of time you are basically looking at. I am sorry, I do not have the number for long-term, and maybe in the next call we will prepare, and we will give you update on that. Or you can send us an email, and if it is not a non-public information, we will try to share it with you. Perfect, sir. Thank you very much for answering all my questions. All the best. Thank you. Thank you. The next question is from the line of Anirudh Shetty from Solidarity Advisers Private Limited. Please go ahead. Hi. Thank you for the opportunity. My first question was on when you look at our battery chemical business, the assumption of margin behind that ratio of 20% upward is actually 18%. I just want to understand, unlike our bromine business where we have a long-term history, the business model is more established. This is more of a nascent business, the economics are still evolving. Wanted to understand the basis behind our assumption of 18%. Also, there is two segments, electrolyte and salt. If you could just give some color around what is the implied margin for electrolyte and salt respectively. The basis for our assumption is basically what we are looking is that, okay, if we are doing investment, we are taking the risk, if we are the first mover, and to able to justify the risk and the investment, this is the bare minimum that we need. When we put that bare minimum number and arrive, let's say, at what is my selling price, right? Because you'll put all your costs, your depreciation interest, then you'll put this number and arrive at a cost. What we have seen is that when we put that cost, let's say when I am talking of salt, we are expensive as compared to China, but we are cheaper as compared to Japan and Korea, which are the next two available options, right? We are confident that, look, this is something which if somebody says, "I want a non-China price," or in fact, if we are looking at more stable, because right now the China prices are very depressed because of over capacity. If I were to put the old lithium prices and if I were to look at stable salt prices in China, we are more or less tracking that. That is the reason why we feel confident enough that this is something which we will be able to use it, we will be able to get. Similar situation in terms of electrolytes. When we put this number in our models, look at the electrolyte prices, what we feel that when I am looking at the price, we are somewhere lower than the prices which are, let us say, prevailing in Japan or Korea and, let us say, within the range of the lowest and the highest Chinese prices. We feel like if the remaining markets also are able to sustain that, and this is what we have done. Therefore, this is a business. Again, there is no buyer, there is no seller of this in India today, and this is a fragmented, more geographical concentrated market the way we have seen. Therefore, right now, this is the basis of our assumption. Got it. Right now, there is no local manufacturing. A lot of it is being imported. Would it be fair to assume that a lot of the imports are coming from China? At a certain scale, would it be fair to assume that as a local supplier, and there will be some PLI benefits as well, would we be cost competitive versus China at a cell level? Will there be requirements for some anti-dumping duties to kind of bridge the gap? You are saying at the cell level? Yes. I think this is a question you have to ask my customers, cell manufacturing. But most of them are confident enough that they should be able to, because what we have seen worldwide, and I think if you see some international reports also, while the cell manufacturing costs have dropped, like dollars per gigawatt hour has been dropping, but what people are commenting that majority of the scale benefits are already achieved. For example, when somebody was making only 10 megawatt hour or 100 megawatt hour. From there you went to 1 gigawatt hour. So, the savings that you do when you move from 10/100 to 1 giga is substantial. Then from 1, people started going to 5 or 10 gigawatt hour, and then from 5 and 10 now, today, people talk of plants which are 20, 30 giga. As you start going to these scales, as long as you started designing your plant at 10 giga, 20 giga and multiples of those, what I have got as the feedback is beyond that, the scale benefit is not that much. Okay? So basically, then you are basically driven simply by what is the material cost, what is the efficiency with which you are operating, which will basically make 10%, 15% kind of a difference. I personally believe majority of the scale benefits that we needed to get, we have gotten. The Indian companies are also talking of at least their initial plans are all 10 giga, 20 giga, and some of them are even considering an ultimate 50 or 100 giga kind of volume. So I'm confident that they will be competitive in terms of competing against China in a fair competition. Now, I personally feel the PLI benefit will help them get to that scale. And after that, if the fight remains fair, then I think they'll be able to manage well. Now, if it's unfair, then you need something like anti-dumping duty protection if somebody decides to just dump like crazy. And we've seen China do that in, let's say, even in pharma markets and in other markets. So that's where the government, if it needs help, I feel they are quite committed to protect the Indian companies in that light. Got it. And just one final question. Sorry to interrupt, Mr. Shetty. May we request you return to the question queue for the follow-up questions? Thank you. Yes. Will do. Thanks. The next question is from the line of Archit Joshi from B&K Securities. Please go ahead. Hi. Good evening, Harin sir. Thanks a lot for the opportunity. I just have one question. Just building up on the previous discussion that you were having with respect to the amount of gigawatt hour capacity that is rather going to be built up over a period of time. But I am slightly looking at it from a myopic perspective from, let's say, for CY 2024 or CY 2025. I think your anticipation was that we will have close to half a gigawatt, maybe one gigawatt hour sort of a capacity in India in this year. Then it will start sort of doubling up exponentially over a period of time. In the current scheme of things, sir, in your discussion with your customers on the same account, especially in domestic battery manufacturing, where we are mostly going to sell electrolytes. Sir, what is the progress there, sir? How exactly do the scale get generated? Is it that it goes into a testing phase wherein our pilot plant will be occupying more of capacity towards that particular demand, and then it takes maybe a year's time to ramp it up from zero to one gigawatt hour? That time frame is essentially something that I'm curious to understand. If you can explain both these things in one. Thank you. Sure. I think, the way this will work is that, see, our principle has been we have to be ready when the customer is ready. Okay? Because if they want electrolyte and if I don't have a plant to make electrolyte, then basically we are forcing them, even if they don't want to basically import. Correct? Right. If you look at what Neogen has done is, there were several customers in India who for last 15, 18 months had developed a capability to test, make the cells in a lab. So a few hundred cells, 200 cells. So we were also ready with our facility and even up to 10,000 cells, et cetera, kind of a demand when they wanted, we were able to basically give them the few hundred liters of electrolyte. We were the only Indian company who was able to do that for last, let's say, 18 months. Most of these customers have either bought the material to make their initial cells or send the material for evaluation to their international partners who can physically evaluate the cells. Now, next, what will happen is, as these people set up their giga plant, they will also need electrolyte to support the giga. As I said, one gigawatt hour, depending on the NMC or LFP, is somewhere between 500 to 1,500 metric ton. So let's say the 2,000 metric ton capacity can support up to four gigawatt hour of NMC cell production in India, or let's say one and a half gigawatt hour of LFP, or on an average, basically two gigawatt hours of cell production can be supported by our existing facility. This is a facility which we have from now till, let's say, September or December 2025. So will India at least make two to three gigawatt hours of cells, let's say, by December 2025? To me, the answer is yes. With whatever is happening today, they will be at a 2-3 gigawatt hour, or let's say per month, if you are thinking of around 0.2 giga per month kind of a production, which can be supported by my existing plant. In fact, if they really ramp up well, I might even have to increase this. Until the bigger plant comes up, I may have to increase this 2,000 to 3,000 or 4,000. But with the basic infrastructure in place, that can happen relatively quickly. We will be ready for that if it is needed. I think that will take care. I personally feel that once they start giga production in 2024, 2025, they will start stabilizing, and there will be more people who will come online in 2025. 2026 is when the guys who will stabilize in 2025 will jump, make the 5x jump in 2026. The guys who are stabilizing in, let's say, 2024, 2025, who are starting, they will also have some initial requirement in 2026. So 2026 is when we need that Mitsubishi plant to come online. We will keep watching how they are progressing while the Mitsubishi plant. They already finished the design. They have already shared the final design numbers, like estimation of what is it that we will need. We have also completed that, and we are in a very advanced stage talks with some of the lenders who want to give us a very long term. They also look at this as a priority long-term project finance kind of a mode. They are giving us preferential terms also so that we can manage our debt service coverage ratios and things like that. I think what I feel, if you look 2030 number of 150,000 metric ton kind of electrolyte demand, I personally feel that will happen. By 2025 end, will my 2,000 metric ton run at a full capacity? My guess is yes. If I am starting in, let's say, March 2024, and by in, let's say, 18 months or 21 months, if I am reaching full utilization levels, I will be very happy with that. The 30 KTA plant, I still believe, if it starts in end of 2025, basically in FY 2026. Full utilization of that might happen in FY 2028 or FY 2029. Got it, sir. Just a small one. This year, we are not expecting any battery capacity to come online, right? No, that is all coming online. Like I said, already trials on them have started, and if everything goes well, before March, we will start at least make some trial sales. That is our internal target, to achieve that, some factory sales before March 2024. Sir, not us. I was talking about the gigawatt hour capacity in India for this year. Any visibility on that? When you say this year, meaning FY 2024 or FY 2025? Let us say CY 2024, this calendar year. No, there is battery capacity which would come online in calendar year 2024. At least whatever I have seen so far, they will not be fully optimized, they will not be running at full capacity, but they will start manufacturing cells in the current financial year. I mean, in the current calendar year 2024. Got it, sir. Thank you. That's great, sir. Thanks and all the best. Thank you. The next question is from the line of Manish Gupta from Solidarity. Please go ahead. Sir, just wanted to ask, for this entire CapEx program, would you now need to raise any more equity? We will answer that question. As of now, we feel what we have raised is sufficient enough. The banks, also the financial institutions also with which we are also working with are also satisfied with the amount of equity which we have raised. It is not a necessary condition, but whether it is a desirable condition or not, and when, between, let us say, now till 2026. That is the question we will take a look. That will depend on how fast and how aggressively the base business will recover, how BuLi will start contributing, and how exactly we are phasing out the electrolyte salt and electrolyte capacity. We will keep a watch on that. Again, it is not a necessary condition, but if it is a desirable condition considering market volatility, we will basically take a view on that as a year of progress. Just a follow-up on this, sir. You mentioned that you are comfortable with a debt-to-equity of 1.25. But if we were to look at a lot of our earnings are perhaps going to be more back-ended, more FY 2028 and FY 2029, right? What is the debt-to-EBITDA number that you will be comfortable with, say, going into starting FY 2027? FY27? Yeah, because that is when the battery chemical business will really start contributing, right? Till that is the build-up phase. Okay. If it is a INR 1,500 crore CapEx program and you are not going to raise any more equity, the amount of debt in the business relative to the earnings or the EBITDA seems to might really expand. So what is the number you are comfortable with on debt to EBITDA? Ideally, we want debt to EBITDA to be below 3, but like I said, for a certain period of time, as long as we have comfort in terms of the repayment schedule. The DSCR and those numbers also become more relevant. Right. What is the interest you are going to cover, et cetera. I think ideally we want it to be below 3. We know for a certain period of time it will be high. That's a call that we'll have to take at that time. Thank you, sir. That's the reason why I told you that it's not that we are close to taking equity. We have the necessary equity. If we want a desirable equity, that's something which we'll keep evaluating. Yeah, very clear. Thank you. Thank you. Ladies and gentlemen, we would take that as our last question for today. I would now like to hand the conference over to the management for closing comments. Thank you all the participants for joining the call and your very interesting and insightful questions. I hope we were able to address your queries. If you have any further questions, please feel free to reach out to our investor relation team and we will address them. Thank you once again, and we look forward to connecting with you again in the next quarter. Thank you. On behalf of Neogen Chemicals, that concludes this conference. Thank you for joining us. You may now disconnect your lines.