Q2 23/24

Nov 9, 2023

Ladies and gentlemen, good day and welcome to the Neogen Chemicals Limited Q2 FY24 conference call. As a reminder, all participant lines will be in the listen only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference, please signal an operator by pressing star and then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nishad Solanki from CDR India. Thank you, and over to you, sir. Thank you. Good evening, everyone, and welcome to Neogen Chemicals Q2 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 the conference call today may be forward-looking statements. The actual results may vary from these forward-looking statements. A detailed disclaimer in this regard is available in Neogen Chemicals Q2 FY24 earnings presentation, which has been shared earlier. I would now like to invite Dr. Harin Kanani to share his perspectives. Thank you and over to you, sir. Thank you, Nishad. Good evening, everyone, and thank you for joining us on Neogen Chemicals Q2 FY24 earnings conference call. Firstly, festive greetings to each one of you. Wishing you all a very happy Diwali and a prosperous new year. We announced our Q2 FY24 financial results yesterday and subsequently circulated the result documents. I trust you had an opportunity to review them. As always, I will begin by guiding you through the performance highlights, important updates and expansion initiatives. Following this, our CFO, Mr. Ketan Vyas, will provide an overview of the financial performance. I am delighted to announce that we have sustained a steady performance even in the face of ongoing external challenges that have negatively affected the end user demand. These headwinds relate to persistent inventory reduction, continuous dumping by China, as well as deceleration in several developed markets. Furthermore, the ongoing conflict in the Middle East has had global ramifications, resulting in increased price volatility of raw materials linked to crude oil. Although a significant portion of our revenues comes from non-discretionary segments like agrochemicals and pharmaceuticals, which experience demand challenges, we are partially insulated thanks to the diverse product range and the expansion initiatives which are already underway. We have maintained a strong emphasis on value addition and have established long-term arrangements with our customers. While it is still early days, we have begun to see some signs of recovery and anticipate the situation to normalize towards the end of the current financial year. All our expansion projects are on schedule and advancing as expected. Let me now give you an overview of our consolidated financial performance for Q2 FY24. Revenue grew by 9% to INR 161.7 crore, while EBITDA came in at INR 25.9 crore, higher by 7%. Profit after tax stood at INR 7.9 crore. Alongside the incremental gains from recent capacity expansion, the performance was bolstered by the contribution from BuLi Chem. Improvement in EBITDA was a result of a better product mix and rationalization of key inputs and RM costs. in Q2 FY22, we witnessed 24% growth in organic chemical revenue, whereas inorganic chemicals reported a decline of 21%. This was mainly due to historically high lithium prices prevailing during the same period last year, which have now approached a more normalized level. Overall volumes remain unaffected and slightly improved. I will now share an important update. As you may be aware, we successfully concluded the preferential allotment on 1 November 2023. Through this allotment we have raised INR 253 crore from esteemed high-equity institutional investors. I would like to convey my gratitude for the confidence shown in us and support provided for our future growth initiatives. We propose to utilize the net proceeds to establish a long-term presence in the battery material space while maintaining the growth trajectory in the existing business segments of specialty bromine derivatives, advanced intermediates, and custom synthesis and manufacturing, including our recent acquisition in the organolithium chemistry space. In addition to this, we strategically deployed these funds to retire some of the existing debt to create enough leverage and quickly expand based on the evolving market situation. Let me now expand on our expansion plans. Within organic chemicals, we have totally expanded capacity to 463 meter cube as on date and additional 29 meter cube is likely to be commissioned closer to the end of financial year and year around that. For inorganic chemicals, we have totally installed 39 meter cube as on date, which includes 15 meter cube reactor capacity added till March 2023, and I am happy to share that this has started contributing to the revenue. With respect to the battery chemicals, I am glad to share that trial production has commenced for one section of our 400 MT per annum lithium electrolyte salt and additive capacity, and final checks and tests are underway for the remaining section, which is just before commissioning. For electrolyte salts, we are also now proposing to put a 2,000 MT for the electrolyte. We are now proposing to put a plant of 2,000 MT instead of 1,000 MT plant earlier, and this will be operational by Q4 FY24. Based on the evolving demand and capacity put up by the ACC cell manufacturer, as well as international customers from Japan, Korea, Europe and U.S.A. We have seen interest across the globe. We also propose incremental expansion plans for battery chemicals, which are now under consideration. The electrolyte salt capacity, which will be 1,000 MT, will be increased to 1,000 MT and this will be operational by Q1, Q2 FY25. A greenfield expansion of electrolyte salt is now increased to 3,000 MT of electrolyte salt. The greenfield expansion will be at a new site, which will be dedicated for battery materials and new business opportunities. At the new site, we are planning additional 30,000 MT of electrolyte salt and 3,000 MT of electrolyte capacity and 3,000 MT of electrolyte salt capacity. Together, the plan is that from our original plan of 10,000 MT of electrolytes, we are increasing that to 30,000 plus 2,000. So 32,000 MT. Our earlier plan of electrolyte salt from 2,000 MT total, we are increasing to 4,000 MT. We are doubling this and the additional greenfield site also should be operational by 2025 calendar year or Q2, Q3 FY26. All of these expansions, the electrolyte salt will utilize MUIS manufacturing technology while the electrolyte salts will be based on our own technology. Let me conclude by saying that we are excited on the next phase of the growth that lies ahead and are well poised to garner a significant share of battery chemicals, given our domain expertise, various initiatives undertaken in the past which will bolster our offering, strengthen our market position and relationship with our valued customer. Neogen will continue to leverage its expertise in complex chemistry and R&D to deliver sustained performance and enhance value for all the stakeholders. That ends my opening thoughts. I will now request our CFO, Mr. Ketan Vyas, to share financial highlights for the period under review. Over to you, Ketan. Thank you, Dr. Hari. Good evening, everyone, and welcome to Q2 FY24 earning call. I will take you through the key financial highlights. Please note that these are on consolidated basis and based on year-on-year comparison. We reported revenues at INR 161.7 crore, depicting a growth of 9% over last year. While external pressures such as inventory destocking, slowdown in key export market and geopolitical uncertainty prevailed, the company maintained its revenue momentum with business gains from recent capacity expansion, stable demand for key products and higher contribution from B2C. Organic chemicals saw revenue growth of 24% at INR 124 crore, whereas inorganic chemicals noted a decline in revenue by 51% at INR 39 crore. As highlighted by Dr. Hari, decline in revenue in inorganic chemicals was mainly due to historical high lithium prices in the same period last year, which has now come closer to normalized level. The domestic and export mix too were 69% and 31%, respectively. EBITDA increased by 7% at INR 25.9 crore, fueled by enhanced product mix and lower RM and key input cost. PAT saw a decline of 30% at INR 7.9 crore. This was due to rise in finance cost and depreciation associated with ongoing CapEx initiatives. Our strategic debt repayment from the recent fundraise will lead to a reduction in finance cost in the short term. That concludes the financial highlight. I will now request the moderator to open the forum for Q&A session. 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 touch-tone 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. The first question is from the line of Noyon Vaz from Union Asset. Please go ahead. Yes. I just want you to clarify a couple of things. Just to get a different sense on the electrolyte and the salts business. The customer approvals are expected for salts in fourth quarter, or are we expecting electrolyte approvals in fourth quarter? Hi. Thanks for the question. So for both salts as well as electrolytes, our customers have already approved our lab-based samples. Several customers have approved our lab-based samples. For the salts, in Q4, our electrolyte salt phase one has already, like part of the section has already started some trial productions and likely to stabilize by December. Similarly, the second phase also will be ready by end of December with some trial production. So we expect by Q4 we will start getting approval for the salts. Similarly, in Q4, we are also expecting the electrolyte facility to be ready, and some of the customers may want to audit such a facility. We already have some non-binding MOUs also in place for some trial quantity which companies want to produce from us, and we expect by Q4 or Q1, our electrolyte sales also can start from the 2,000 MT electrolyte line. Before, we were going to make 1,000 ton, then 5,000, then 10,000. But looking at the current demand scenario, we have directly decided to, instead of 1,000, do 2,000 MT at our Dahej SEZ site, and then from 2,000, we will directly go to 30,000. This 2,000 MT per annum kind of a line will be installed in Q4 and either in Q4 current financial year or Q1 next, we will start revenues coming in from there. Okay. Just to kind of clarify something else, working capital, how much are we expecting it to, because considering the fact that we are now starting up this new business, how should we see working capital move closer down to the end of the financial year? What should be the steady state going forward? I think, again, this last six months have been very volatile with things. We had made some plans, but the demand has been much lower as compared to what we had expected. This is something which has affected our plans to improve working capital amount. If you look our last year performance, in the first six months, the working capital was significantly, the operating cash flow was negative. In the second half, we were able to do a positive cash flow and overall for the year, while it was negative, there was an improvement. Similarly, we will also aim in the current year also in the second half to improve operating cash flow. However, things are very volatile. Of course, our aim remains that as business is stabilized, we would like to go to around 120, 130 days on next sales versus inventory, which we had. Let's say the debtors between 60 to 90 days and creditors around 60 to 75 days, what used to be Neogen's normal working capital cycle. Then as we hit full utilization levels and our bigger molecules improve upon that. Again, we will try to achieve those numbers. But just with the amount of volatility we have, we've been not able to execute our plans fully. But you would expect an improvement in the second half as compared to the first half, just as we had in last year. Okay. That's all from my side. Thank you. Thank you. Thank you. The next question is from the line of Nilesh Ghuge from HDFC Securities. Please go ahead. Yeah. Hi, Dr. Harin. Hi, Ketan. So my first question is on battery chemicals. Okay. Sir, it is good to hear you from that, from 10,000 you are planning to raise your capacity to 30,000. Also in your in-house developed electrolyte business, you are expanding capacity from 1,000 to 2,000. What gives you confidence? Is there any agreement signed between, or there are chances that you believe that agreement will be signed for such a huge capacity? Sure. Let us take, there are three aspects. Let us talk our own electrolyte, which we have to start, where we have increased from 1,000 to 2,000. We have talked to almost three to four customers who are now quite certain that in 2024 calendar year, they are going to start their cell production maybe at a half a gigawatt hour, one gigawatt hour kind of a level. We are seeing a clarity of demand. We have one international customer where the demand is not very large, but we even signed a MOU, and they are just waiting for their production line to stabilize. Once that happens, they will basically be needing this. This gave us a clarity on 2024, with three to four customers very keen to start working with Neogen. We are very sure that between them, let us say 2,000 metric ton is just two gigawatt hour. We thought this is the bare minimum capacity, two gigawatt hour we should have to basically take care of the initial demands of this customer. The larger demand, which is basically what we are building with Mitsubishi technology. We have again seen two or three large giga players make significant advance. We keep talking to them about what is the status of their equipment, how they are doing. At least two of them are very confident to start in 2024 towards second half and ramp up in 2025. The third one also is likely to start sometime towards end of 2025 or early 2026. With these guys who are coming up with giga capacity and scaling up, and so far whatever work is going more or less as per their plans. We are more confident that the demand for the electrolyte at a large giga scale is going to come to India, and the demand will start. Further, we have seen many international players also wanting to come to India. As we get into 2026, 2027, some of the international customers also may start having demand for their plants in India. Again, if we are ready with the 30 gigawatt hour, we can do a very seamless approval with a track record of these. The last consideration in this decision is that whatever initial design considerations and discussions we had from MUIS, we felt that instead of 10,000 ton, when we go to 30,000, the CapEx does not become three times. There's a significant saving when we do further scale-up. By doing that, our CapEx efficiency per ton improves, and therefore, our ability to be more competitive becomes improved. I think with all this consideration, we made a decision to directly go from 2,000 to 30,000 tons. We'll see in the interim if that 2,000 is really needed. It depends on exactly when 30,000 starts and when the gigafactory scale up. It means that the 2,000 we might scale up to 3 or 4, but we feel this should take care of the early demands of the customers, and the 30,000 will come on time to take care of their larger requirements. The last bit is on the salt side, where originally we had said we will start with a 400 ton, which is maybe delayed by a couple of months, but it is starting, and we have seen a tremendous interest in that facility. We had said that we will increase this to 1,000 MT in Dahej, so that plan remains on schedule. There's no change in that. The increase which we were going to do in the greenfield, where we are going to add another 1,000, that we have now changed to 3,000, and this is largely depending on the demand that we saw from customers in Japan, Korea, Europe, U.S. Almost all geographies are very keen to have a non-China electrolyte salt supplier. What was our plan B is becoming almost like a plan A, and especially U.S. requires till 2025, when they are not allowed to use electrolyte salts from China. Therefore, we have ramped up from this 1,000 to 4,000, which can take care of the initial demands of these international customers. To be honest, this demand keeps evolving. We keep having customer visits. Even every month, we are meeting new customers or new customers are visiting our demo facility, and most of them have gotten confidence and are now discussing more concrete action plans further. This is what is giving us confidence to increase both the electrolyte salt and electrolyte capacity. Sorry, Nilay, it's a little bit longer answer, but I hope it gives a clarification on the thought behind. No, thanks, Arun. Thanks for the detailed answer. Can you just throw light on the CapEx front, how much CapEx you will incur? Any ballpark number? So see, we have doubled our electrolyte salt from what we had said earlier, and our electrolyte capacity, we have needed three times. Overall, if you just go ballpark, just on scale, it will be sometime 2.5 to 3 times, between 2.5 to 3 times where we are doing this. But like I said, because there are efficiencies involved, so it has to be lower. So we are expecting somewhere between 2 to 2.5 times of what we had said earlier, which was about INR 450 crores. But the exact number we will be able to tell you once Mitsubishi finishes their design. And once we have the design, so that's expected December. So hopefully, before February call, we will have a more clarity on that, and we will be able to give you the exact CapEx number. But the current estimate is between 2 to 2.5 times. So somewhere between, let's say, INR 450 crore, INR 900 to INR 1,100 crores, sometime in that range. But the exact number we will be able to give once we have the Mitsubishi design finalized. Okay. As you said that for a huge capacity, as you mentioned that for a 30K TPA, two, three large significant players are coming. They are planning to ramp up in FY 2025. So at what stage the approval process with the large gigawatt hour electrolyte battery manufacturers? I am not talking about the small ones, the large capacity. For the large guys, we have been providing them samples. Like I said, some of them have been testing our samples for last almost more than a year. Some of them sometimes had struggles because they were dependent on their technology partner. But let's say now two of them have already evaluated our samples, and they are now working with their technology partners for their final approvals. And one of them, we are still working with them and their technology partner, because the technology partner is not willing to share the recipe. Therefore, we are working somehow how we can try to give the comfort to their technology partner to share the recipe with Neogen. So once that happens, we can submit the samples. But I feel we have enough time, and one of the good thing about it is that it's just a question of the recipe. Most of the customers are quite convinced that with the plant being made by Mitsubishi design, they do not have a question or worry about quality of the electrolyte being made. They just feel it is just going to be a procedure for that, but it is just we are discussing more on the other aspects, on the timing, on the size, minimum volume commitment, what kind of a formula pricing we can have, and stuff like that. Those are the major discussions, and in some cases, how do we get the recipe from their technology partner if they are not willing to share, how Neogen can help them find a solution around that. All of them fortunately have said that they want localization, because they have all realized that electrolyte is going to be very complicated to directly import. Okay. Just one clarification. As you said that you already supply their samples, you are working with those customers since last one year. But we signed this contract with MUIS just six months back. I am just confused. No. See, we were making samples on our own and before the proposal was that, in that 1,000, 5,000, 10,000 kind of plant. From that we were going to supply them the electrolytes. Correct? But we are already making samples. So we have a large facility where we can make 200 kg of electrolyte per month. So that facility is there, and from there we keep submitting samples. Right? Okay. And what kind of involvement that Mitsubishi has while marketing these products? So are they completely involved? They are coming along with Neogen Chemicals while marketing this product, or they are just a technology supplier as far as this whole process is concerned? So, as I said in the agreement, one part is the electrolyte, how to make electrolyte, and the technology of the plant, which is what they are giving it to us. So basically we are the end user of that side. So there is no marketing of that. But they are also approaching some of these customers to convince them to use Mitsubishi recipe. So that is the second bit, where there are some customers whom we have contacted and there are some customers who are already in contact with Mitsubishi. So basically together we are taking it, trying to convince the customers to basically use a Mitsubishi recipe and share the advantages of Mitsubishi recipe. But again, that is something which is an ongoing process. Some of them may start with their existing tech provider recipe and then switch over to Mitsubishi. Or some of them right from the beginning may use Mitsubishi. So that is something which the customers are evaluating. Okay. And Harin, let us say, as of now there could be N number of recipes available with the Mitsubishi or maybe in the market. With involvement of a technology, suppose there could be some recipes come up over next, let us say, five, 10 years. So will Mitsubishi help us, or can Neogen go back to Mitsubishi and get those new tech recipes from them? Is there such a kind of a clause in your agreement? So we are already actively working in a way where if a customer has a particular cell design, we are gathering all the information, going to Mitsubishi, and then Mitsubishi will recommend us which kind of a recipe would work best for the customer. So that is something which we are currently doing. And like I said, the second bit on the recipe agreement, and that is something the final details and the clauses of these are still being worked out. But like I said, that is a separate agreement about technical support and recipe which is still being discussed. But we both are actively working till all the details and the contours of those will get worked out. Okay. My second question is on our organic chemical business. So organic chemical business grew by about 25% year-over-year. However, if I break up between the, or I knock off the BuLi Chem revenue from this quarter, 50% growth can be attributed to BuLi Chemicals. So does the traditional business, organic business grow just about 13%? What percentage of this growth is volume driven? I am talking about the traditional organic business, ex BuLi Chemicals. Yeah. So the traditional business in volume terms have grown more. It is just that some of the rates, like especially because of bromine have gone down. We have seen even higher effect of this in lithium. Even though there is a volume increase, but because of the significant reduction in lithium prices, we have seen reduction because last time this business was lower. But the main impact that we are having, we are guided for a, let us say INR 800 crore to INR 900 crore kind of a revenue. In that we said if the lithium prices are softer, it will be more closer to INR 800 crore. When we are thinking of this INR 800 crore, we have to think of last year revenue not as a INR 680 crore, but like INR 600 crore, INR 610 crore, which is what it would have been if the lithium prices would have remained stronger, right? So INR 610 crore, when we wanted to do that INR 800 crore, our organic should have been at INR 150 crore per quarter by now. But the fact that the bromine prices have reduced that, and the other raw material prices also have reduced. So the de-growth because of that and also the lower demand is why we are still not at a full utilization level. So this is the impact that we are having, that ideally organic should have been at, let us say if the rates remain same, if the demand remain same, it was INR 150 crore plus BuLi Chem somewhere around INR 10 crore, INR 15 crore. So that is INR 160 crore, INR 165 crore. Let us say around INR 165 crore odd is the Max potential of the organic chemicals. Against that, we have just done INR 124 crore. That is where we are hurting, and we need to do a better job. We are working very hard. Of course, the markets also need to improve. But from our side, we are trying to work on more molecules. We started working a little bit more aggressively in the flavors and fragrance side, and trying to go back to some of the older molecules which we have not done for quite a while, and see if we can get some of this business. So this is something which we are trying, and let us see what best we can do with the demands that we have in the next six months. Sorry to interrupt, sir. We request you to please rejoin the queue for follow-up questions. The next question is from the line of Abhijit Akella from Kotak Securities. Please go ahead. Yeah. Hi. Good evening, Dr. Harin. Thanks for taking my questions. Just had two, three of them, if you do not mind. Sure. One was, I really wanted to get your thoughts on this whole noise about solid-state batteries that is going around in the world markets in the recent past. Toyota has spoken about some technology that is fairly imminent, apparently. So in that context, how do you see the technology adoption shaping up in this industry, in EV batteries in coming years? In terms of our sort of marriage with a particular technology, do we have the flexibility to change in case technology changes, or how do you see this whole shaping up? Sure. Generally, most of the people who are working with batteries and on the EV, some of the primary concern for them is testing and especially when you are talking of EV testing in a real world kind of an application, and the safety of the battery. The solid-state batteries are still very nascent. There are many technologies. Technologies are getting finalized. Yes, Toyota has done some tie-ups, and they are quite confident, and they might do or not. But most of the time, the way this technology will spread is, you launch on one model in one particular geography, then you take it to more models, then you take it to more geographies, and then after the innovators start, everybody else comes. Most of the people, be it scientists, be it industry veterans, none of them see solid state becoming a significant play before 2030. The other thing about the solid state is also going to be the cost of manufacturing and the technology for manufacturing. While you can make small but large scale production of these is still a big challenge. Therefore, till 2030, some people say 10 years, some say 2030, solid state will not be very significant. If at all, they are saying it will be more for- 30 where you want a higher range kind of a volume, where you want a higher range or a higher cost kind of model. We also have looked at what is required in solid state. Of course, right now we just have our plate full just with the traditional one. But in our R&D moment, some of our salt additives, which we are seeing strong demand for electrolyte, these are set. We will also be ready whenever solid-state batteries come. But for a large scale adoption, it is still time, 7 to 10 years. That's great to hear. Thanks for that. Also, one other thing I just wanted to check was, in Europe, for example, there are some concerns that EV adoption itself is maybe lagging behind original expectations because of various reasons. Maybe in a place like India, it could even be because of absence of, or shortage of charging infrastructure, et cetera. In that context, how do you see the adoption curve shaping up in India in coming years? Look, what most people, when they estimate, they say 30% penetration, for example, in India by 2030, and globally maybe between 35%-40%, let's say by 2030. This is the number which most of the people, like be it the mining companies, the other trade estimates which I have seen. So this is a number which fairly everybody believes in. If I actually add up the OEMs or the battery makers' numbers, they are actually going much higher than this. If I just add up, I met all the Indian battery guys, and somebody said capacity X, somebody said Y. If I add all of that, the number is actually even 2 times of that. But even if we go with this is something which is what has been based upon, and I think that is not a very difficult number. I do not know three-wheelers, but one of the numbers which I recently saw in three-wheelers, like we are already in new car sales, new three-wheeler sales, we are already at 80% plus kind of numbers which are estimated for the current year. So I personally still do not see this as a big challenge to that 30%. If the 30% becomes 25%, 27%, it would still not make a very big impact because especially for India, we are starting from zero. So if we are at that 30%, 150 gigawatt hours, the electrolyte demand is going to be like 150,000 MT. So it will just basically change the decision that when we go from 30 to whatever 50, 60, 70 next, what will be the speed of that? So it is something which is what I need to consider when we are doing future cases beyond this 30. Perfect. Just one other thing on the quarter itself, the quarterly numbers. We have got some 20 odd percent growth in organic and 20 odd percent decline in inorganic. Would it be possible to just share the volume versus price breakdown in each of these roughly, if that is possible? With the product mix we have, it becomes very challenging. But I can say both from our utilization levels as well as the volumes, and I think both we have a volume increase, but we are not able to give you exact percentage volume increases because the product mix keeps changing especially so much. So it is very difficult to compare. If I am selling 10 tons of one stage molecule versus 2 tons of H, how do you compare volume? So that is why it is a bit more challenging to do. But overall, the way we see it, there was a significant decline in the RM, in the rates. So that is there, and in spite of that, when we have given 24%. If I were to kind of say, if I look at a volume growth, effectively it is more than 24% in the organic. Just for inorganic, in case if this helps you, this year we basically have done around Sorry, just one second. Yeah. We have done INR 39 crore against INR 49 crore. But just a year before, when the prices were normal, it was INR 22 crore. If you look at our FY 2022 Q2 numbers, it was INR 22 crore when lithium prices were more or less kind of normal. We are almost double of that. If you remove last year where the prices were very high, we are still double of that. That's a good growth, and we are seeing good interest in companies internationally who want to have Neogen as a package source. Perfect. That's helpful. Just one last thing if I may- Sorry to interrupt. We request you to please rejoin the question queue for follow-up questions. Thank you. Thank you. Ladies and gentlemen, to ensure the management is able to address questions from all participants in the conference, please limit your questions to two questions per participant. We have the next question from the line of Jason Soans from IDBI Capital. Please go ahead. Thank you for taking my question. First of all, just would want to confirm the capacity expansion which you mentioned. Lithium Salts, you said you are expanding from 2,000 MT to 4,000 MT, and electrolytes is from 10,000 to 32,000 with the MUIS technology and Lithium Salts with your own technology. Is that right? That's right. Just in that 32,000, just a clarification, the 2,000 will be with our own, and the 30,000 is with the MUIS. Okay. Lithium Salts from 2,000 to 4,000. Is that right? That's right. Out of that, 1,000 will be in our existing site and 3,000 will be in the Greenfield site. Okay. Sure. Sir, you also mentioned about CapEx. Of course, initially we had a plan of INR 450 crores of CapEx before the MUIS agreement. Now, you alluded to that the CapEx will be probably around INR 900 to INR 1,000 crores, and this will completely take care of the entire expansion. Is that right again? So INR 900 to INR 1,000 crore of CapEx for the 30,000 in Yeah. Yeah. No, it's right. Now it's just an estimate because I'm able to give you the exact number. But what we are saying is my expectation is between 2 to 2.5 times for this. So it's somewhere between 900 to 1,100 is what I said. So in that range is what we are expecting, more or less. But that's for the entire expansion, right? For everything. Yeah. For everything. Okay, sir. Sir, just would want to know, you did speak about you are getting a lot of traction from a lot of customers, Japanese, Europe, Korean customers. Now, again, in the current scenario, we are also seeing a lot of Chinese companies and hosts of other chemicals. I just wanted to know from a Of course, de-risking is one theme, and China Plus One is a theme. But just when you look at from a long term, do you see some competition coming in from China and pressures on electrolyte salt since you are adding a lot of capacity in that sense, and China probably will be one of the most cost competitive producers. That's a well-known fact. So how do you see this picture shaping up in the long term? Sure. So there are two parts, right? One is electrolyte salt for India and electrolyte salts for the world. Okay? So when we're talking of electrolyte salts for India, we feel here localization has two benefits. One is just the complexity of handling electrolyte isotanks internationally is very complicated, and sometimes the quality also gets degraded. So worldwide, these electrolyte salts are always made locally. So let's say if I take the bigger Japanese producers, MUIS, they also went and set up plants in each and every continent. If I look at some of the Korean electrolyte producers, they are also setting up plants in all the parts of the continent rather than just have one large plant from where they will supply. Therefore, the competition, if at all comes, they have to come to India and set up the plant, and right now no one's come yet, right? Now if anybody comes, they will be a little bit delayed. So that's the reason why if a Chinese guy has to come set up a plant in India, that is when they will be able to really compete with us. I'm not saying they can't do it, but that's the way, and with the today's scenario, it's very difficult even for them to come set up a plant here, set up all the supply chain here. That's one part. The second is because we are making, starting just what is coming out of mine, and we are doing all the value addition in India. Therefore, the companies who are the PLI beneficiaries, for whom the local value addition is a key criteria, so we are able to take care of their requirements. So this PLI benefit, the need for localization, and third thing in electrolytes, basically the customer wants a knowledge partner because cost-wise it's not that much, but the criticality of this is very important. So having a Mitsubishi technology, we're working with them for the last one and a half years, hopefully also working to give them a kind of recipes which will improve their cell performance. So I think all of these makes our electrolyte play very strong. Now, and we'll be able to take care of the Chinese competition. I'm not saying we'll not be completely affected by them. I mean, they will be there. But what I'm saying, we'll have at least a significant market share, especially for India electrolyte demand. Now, the second bit is electrolyte salt, which we are basically targeting the world. Now, there are only two things which can support. One is de-risk from China, and the second is U.S. has put a very strong trade barrier in the form of IRA, in which they have said that to ensure that supply chain is not concentrated, they have made sure that as per the IRA rules, there are foreign entities of concern, and from these countries, your critical minerals cannot be sourced and coming. So therefore, most of the cell producers or electrolyte producers who are part of the U.S. value chain, they want to have a salt alternate or additive alternate which is free of China. Not only just my electrolyte salt, but even my raw materials which I am buying also have to be completely free from China all the way up to the mine. So I think this is a strong message. So these are the two things which is generating a lot of interest. So as long as this continues, this is where Neogen can add value. What we also got in the feedback that while of course sometimes China prices are very low, but outside China, India has been one of the good destinations and very competitive destination where, with our background, we can add capacities faster. Whereas other geographies where the salts are made, Korea and Japan, they take a little bit longer to add capacity. I think this is a strong point which is attracting most of the customers, and they are very keen to work with us. Okay, sir. Thanks a lot. Sir, just finally to- Sorry, Mr. just finally to confirm. We request you to please rejoin the queue. Sure. Thank you. The next question is from the line of Sabyasachi Mukerji from Bajaj Finserv Asset Management. Please go ahead. Yeah. Hi. Thanks for taking the question. I have two questions. First is, on the working capital situation, and we are still not being able to generate positive OCF, and the CapEx burden that we are seeing close to, you mentioned INR 900-INR 1,100 crore. How do you plan to fund such a huge CapEx? Will some of our partners help us? Will they partially fund? How are you looking at it, and what would be the timeline of this CapEx amount of INR 900 to probably INR 1,100 crore? Yeah. This timeline, as I said, it gets over second half of FY 2026. It is whatever is remaining FY 2024, 2025, and let's say maybe two or three quarters of FY 2026. It's going to be spread over seven to eight quarters. We hear you, and one of the reasons what we've done is we've raised this additional INR 253 crore, which will partly give us some breathing time till the, let's say, regular business kind of stabilizes. Again, we are quite confident, it's just last six months have been very difficult. Whatever we plan on one molecule, but suddenly the demand in that goes away. Even BuLi also when we started, that is also stabilizing now. There also some of the biggest customers who basically were the biggest customer for BuLi, since the time we have got it, we have zero demand. In spite of that, in the first quarter itself, we were able to add revenue, more or less in line with what can be good revenue. Also, we were able to break even in the first quarter itself. In spite of the top customers not being there, our samples were still getting approved. There are a lot of things happening, but in the second half, we'll try to improve on that. But over seven, eight quarters, we keep evaluating. We are very sure about the business, and we are, again, very sure that we don't want to do any of this at a high risk. So our target remains at 1.25 debt equity ratio. Anytime we feel we need to raise more funds or we need to evaluate options with partners who would like to fund this together, we will remain open to that. We'll also keep watching how the pharma and agro will improve. Most of the people I've talked to expect pharma to start improving from Q4 of the current financial year. We've also seen signs of some of the customers' interest. But we'll see whether that is sustained all the way till end of next year. So how the whole next year pans out. But we'll keep evaluating options there if it's needed to make sure that our cash flows are basically being managed. Sorry, just to follow up here. The entire 30,000 tons of capacity in electrolyte and 4,000 tons of salt capacity, we are aiming to be done with end of, let's say, CY 2025. Are we gunning for that? Yeah. Even calendar year 2025, right? Yes. Yes. That's currently the target. Again, the 30,000, we will basically phase out some of the sections, so it will depend on the final. By the time we get there, we will see if the demand is still lower or if India, in case there is any delay, we can phase it out further. But currently, we are preparing ourselves to complete it by calendar year 2025, basically by second or third quarter of FY 2026. Because we expect by FY 2025, at least three to four giga guys. Sorry, calendar year 2025, at least three to four giga companies getting ready for scale-up. We also see some of the international guys who would like to come in 2026. If we are ready in calendar year 2025, then we can be their supplier from the beginning. Got it. My second question is, we have seen a sharp increase in employee expenses this quarter. I think the run rate was somewhere around 12, 13 crores. It has gone to probably 17, close to 18 crores. Have you done some top-level hiring in the battery chemicals business, and what would be the stable run rate going ahead? It is two, three things. One is addition of BuLi Chem. As you remember, we acquired BuLi Chem towards the end of May. In the previous quarter, it is there only for one month, but there were around 50-odd employees which got added. There is some jump in it because of that. The increments which we take, these were also done in the second quarter. We are now starting to get ready to also start building team for BuLi Chem. Of course, some of it is right now more project related and capitalized, but other leadership teams also will start. We will do that. I do not have an exact absolute number, but again, our safe target is around 7%-8% of the revenue. What is right now hurting is just that, like I said, we should have been doing our organic at around INR 150 crore-INR 160 crore if everything was going right as per our plan. That is a little bit delayed, hitting the peak utilization level. We keep planning our recruitment plan as much as possible to basically remain within reasonable numbers. But ultimately, on a stable basis, we are looking at least for now, what our historic was, 7%-8% of the next sales as employee expense. Sir, does it change the INR 140 crore-INR 145 crore of EBITDA number that we are currently targeting for FY 2024? Or you still stick to that number? See, our FY 2024 was INR 800 crore, let us say at around 18%. Again, it looks a little bit difficult for us to do INR 800 crore at 18.5% today, just because if you look at the first six months, we have done hardly around INR 335 crore. The run rate becomes very high for the remaining two quarters. Actually, Q3, I am not expecting a very large jump. Q3, we will see slightly better contribution coming in from BuLi Chemicals, because the other pharma customers are now coming and we are also expecting international approvals. Q4, we will have battery revenue which will kick in. But it looks a little bit difficult to get to that INR 800 crore kind of number. The number will be at our stable lithium price. Right now, the way it looks, somewhere in the range of 700, 725 would be a good number, unless we see a very sharp recovery in Q4. Again, we still will try our best to reach that, but the way last six months have gone, that 140 number looks a little bit of a challenge at present. Got it, sir. Thank you. All the best. That's all from my side. Thank you. Thank you. The next question is from the line of Anirudh Shetty from Solidarity Investment Managers. Please go ahead. Thank you for the opportunity. My first question is, in our battery chemical business, typically given that lithium prices are so volatile, is it fair to assume that our profitability will largely be immune to this because whatever contracts we enter into with our customers, we will lock in the raw material price beforehand. In a way, we will hedge ourselves. Is that a fair assumption to work with? Yes, with a slight correction. We will not lock in the lithium price, but it will be basically some kind of an index-based price, and we will have a back-to-back price reset kind of clauses based on index prices. Got it. Given prices can be volatile, margin might be a bit misleading here because the sales realization also moves in tandem. If one just looks at your business on a per ton basis, then what is the right, for electrolyte salt business specifically, what is the right gross profit per ton on the right EBITDA per ton that one should look at as a more steady state number? There are two things. You are right that the percentages will keep varying because of two things. One, as you said, was lithium price and other raw material prices also can have bottlenecks, and therefore, the price can fluctuate significantly. The other thing is as your volumes ramp up, as I explained earlier, when you increase your capacity three times, your CapEx does not go three times. As the volumes go, there is also going to be some price changes which has happened because of volume. The way I am seeing at least this business is this is more going to be driven by what are the ROCEs that you are able to generate. Because ultimately, as you have CapEx efficiency, your competitor is also going to have CapEx efficiency. And what any good businessman would do is to basically protect the ROCE and try to get as much maximum market share while protecting the ROCE. I think this is a business where ROE and ROCEs which are going to be the key factors. We would like ROCEs to be upward of 20%. We like to model and try to get sizes of ROCEs above 20%. But as I've said in the past, for those electrolytes at least, today there is no buyer, there is no customer. Like there's this business, and if you look globally, the way the electrolyte prices are in China, the way the prices are in Europe, Japan, and U.S., the cheapest and the costliest, there is 2 to 3 times difference in the electrolyte price. Part of it is also the performance. Sometimes if you have a very high-performing battery, customers might give you a higher price depending on the additives. So that's where if we have a very good recipe from Mitsubishi which is benefiting a customer, it can really help us. I think we'll see where the market comes, but at least on the Neogen side, our intention would be to try to get a 20% plus kind of an ROCE. Let's see. Only once the market really stabilizes we'll be able to say where exactly it is going. But I would say more than per ton or more than percentage, it's the ROCE which is going to drive this business. This is my own assumption. I know. And this is 20% post-tax? Is that okay, understanding? No, I've thought of it as a pre-tax. Okay. Just a follow-up to the earlier question around the solid-state batteries and everything. My broader question is, what do you think is actually a technology risk to our battery chemical business? Keeping in mind that there are certain changes that we can do in our formulation to keep up with changing technologies like solid-state batteries. Under what situation do you feel that there is a technology risk which we cannot adapt to? What would that scenario be? See, the only technology risk is, I told you that, for example, solid-state batteries are going to take 7 years, 10 years, and this is what rest of the world is thinking. Again, the way it will work is, there will be a new technology which can come. But that technology, will it take away 100% market share of batteries within the next few years? That's not possible with the amount of investment which is happening. So we are right now very safe other than solid-state battery. Okay? Wherever you require a liquid electrolyte, whether it is a sodium-ion, whether it is a lithium-ion, maybe tomorrow even flow chemistry, vanadium, all of those with slight modification of my plant, the skill set that we have, how to remove metals, how to make it very pure, less than 1 ppm impurities. How do we control moisture? How do we pack and transport this? How do we keep them stable? How do we test the performance of this battery? All of these skill sets that we have is always going to be useful. Now, when we think of solid-state batteries 6 or 7 years down the line, that is basically the scale question. That as and when you stop increasing capacity on the liquid electrolyte and start putting more capacities on the solid. So the way I see it, let's say if we are talking of a 10-year, 20-year period, we'd have to keep watching the market, keep adding electrolyte capacities beyond this 30K. When we do that beyond this 30K, whenever I'm doing from 30 to 50, from 50 to 70, et cetera, that's the time every time I'll have to ask myself that how long this is going to be sustainable. In parallel, I'll have to start building also solid-state batteries. In fact, if you see in electrolytes, we are catching up. Mitsubishi made liquid electrolytes 30 years ago, right? There are some other Korean companies who have made it 15 years ago, 20 years ago. As compared to that, we are just going to start making it. So there's a 1 decade, 2 decade. With the knowledge that we have, with the connections that we have, in solid-state, we hope instead of decades, we are talking of couple of years, right? So we'll be ready by same time. How our liquid electrolytes capacities will scale and how our solid-state will scale. That's something which will depend on how the technology adapts. Again, the amount of investment which we are doing, even in a worst-case scenario, there is going to be at least 30 gigawatt hour of electrolyte requirement, whether it is India or somewhere. It is not something that you worry about. I think, in my view, it is more a question of it is something which you will consider when you are scaling up your plants, whether it is liquid and solid, and yes, as and when solids come, you will be ready for it. Got it. Just one final question. I just want to understand- Sorry to interrupt. We request you to please rejoin the queue for follow-up questions. Thank you. The next question is from the line of Rohit Nagraj from Centrum Broking. Please go ahead. Yeah. So- Sir, you are not audible. Hello. Rohit, you have a bad connection. Yes Yeah. Is it better? This is better. Please go ahead. Yeah. Thank you. The first question is on the supply chain. Electrolyte salt to electrolyte formulation and all the components or all the raw materials required for the same. How are we placed for the entire supply chain? Given that you also alluded, in U.S., the IRA regulation is changing. If we were to supply these electrolytes to a U.S.-based company, all the supply chain has to be completely away from China, or given that they have the largest reserves of the rare earth materials plus other key starting materials, how are we going to tackle this? From the capacities perspective, are we already in talks with the suppliers from supply continuity perspective, given that there may be other players who also would be looking at simultaneously putting up capacities? Thank you. Sure. First of all, when we are thinking of IRA, we are not talking about electrolyte, we are only talking of electrolyte salts. Electrolyte salts, fortunately, because we are starting from scratch and doing things, it basically requires just three raw materials. Like three or four raw materials, and again, depending on, I’m talking of right now, multiple salts. Most of these salts, like lithium is one of the key one in that. Neogen has been buying lithium China free for the last 30 years. We have good relationships with these guys, and we already talked, and because electrolyte takes a relatively lesser number of lithium, as compared to cathode material or something, the quantities or the volumes which we are talking about, our lithium suppliers are very happy. They are ready to get into long-term agreements even now. It's just that we need a customer who gives us a back-to-back assurance, because they would want a minimum quantity guarantee. If a customer gives me a minimum quantity uptake, I can go and get a minimum uptake lithium, and we can tie into that. The other raw materials also required for the Lithium Salts, we have worked out with our existing suppliers with whom we've been working last two, three years. We have multiple sources, and they can be China-free, like right to the level of the mine. We can meet the international IRA requirements when it comes to Lithium Salts, which is relevant from an IRA perspective. When it comes to India's demand of electrolyte, the salt, whatever we said remains true. We can be completely China-free. For the solvents and the additives, most of the lithium additives, one by one, we are making on our own, because that's also something which is needed by the international community and requires to be that IRA compliant. There we can have this, and we don't have a challenge. Some of the things which you mentioned, like rare earths. Thankfully, rare earths are not required for electrolyte, any raw material, anywhere. We don't have that dependency on China. We do have dependency for solvents needed for electrolytes, because while we have European and Japanese and Korean sources for that, sometimes the capacity is not enough and we have to rely on China. Although, there are Indian companies who have already taken leads, this is basically petrochemical kind of molecule, who have plans to basically put capacity in next, let's say two to three-year period. What we have built a capacity that even if the Indian guys can make a technical grade, purifying this to battery grade is something which we can do on our own. So that even if the Indian companies can make technical grade, we can again, develop them very quickly. This is where we are. There is a dependency on the solvents of the electrolytes on China at present, but other than that, we also have a backup that, like you said, if there is a shortage, the backup capacity for the solvents is relatively lower. That's where still more work is needed, and we are working with potential Indian partners for that already. Right. Good. Good to hear that. Second question is on the competition in domestic market. Unfortunately, basically, maybe my knowledge is lesser. We hear only about the listed companies who are currently involved in the electrolyte and electrolyte salt opportunity and segment. But from your understanding, there could be other unlisted or other people who also would be working on the similar space. Do you see that there could be a greater amount of competition from the other people who are also working in a similar space and targeting the similar set of clients, maybe domestically or internationally? I mean, just your thought process on this. Maybe my understanding from the industry perspective is relatively limited. Yeah. So even whatever we have seen and one of the reasons why we also increased capacity. I think we've also not seen, especially when we are talking of electrolytes, we've also not seen any significant other players who are coming other than me and another few of the companies who have already announced. The listed companies who have announced their electrolyte plans. We have so far not seen other companies come in for electrolytes. Again, we've already been supplying this electrolyte, so we already have a head start. We already have been working, trying to work with these customers for last one and a half years. We are working also. We also have now Mitsubishi's license. I think we've done enough to at least make sure a decent market share for Neogen. At present, other than me and one more company, I don't see any other companies who have actively shown interest or who have actively done something. Whoever comes now will be a little bit late, in my view, to take care of the initial demands of these customers. But this is my view, and I think even with that, at least we should be able to get a decent amount of market share. I would say broad range, anywhere between 25%-40%, at least in the initial years, is what I am seeing. And that's been the basis for my judgment to really set up this capacity. Sure. That's really helpful. Thanks a lot for answering the question. Best of luck and Diwali wishes to you and your team. Thank you. Thank you. 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. Thank you all the participants for joining the call. I hope we were able to address your queries. I know, because of some of my long answers and little bit delayed start, some of the queries were left. 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 next quarter. Wish you all a very happy Diwali with your family. Please take some time off and enjoy. Thank you, and have a great day ahead. Thank you. On behalf of Neogen Chemicals Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.