Q3 22/23

Feb 13, 2023

Ladies and gentlemen, good day and welcome to the Neogen Chemicals Q3 FY23 earnings call. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nishant Solanki from CDR India. Thank you and over to you, sir. Thank you. Good evening, everyone, and welcome to Neogen Chemicals Q3 FY23 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 question and answer 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 will be forward-looking statements. The actual results may vary from these forward-looking statements. A detailed disclaimer and risk factors available in Neogen Chemicals Q3 FY23 earnings presentation, which has been shared publicly. I would now like to invite Dr. Kanani to share his perspective. Thank you, and over to you, sir. Thank you, Nishant. Good evening, everyone, and welcome to our Q3 FY23 earnings conference call. We published our Q3 financial results and subsequently earnings presentation over the weekend. I hope you were able to go through them. I will be sharing the performance overview, key developments, and strategic insights while our CFO, Mr. Ketan Vyas, will share the financial highlights for the period under review. Q3 of the current fiscal year was an eventful period for us. Not only did we demonstrate financial performance, but also undertook several strategic initiatives to further strengthen our business model across both existing as well as lithium-ion space. I will share some of the key fine prints of this development in just a bit. Firstly, on the financial performance, we reported 40% gains in revenue in Q3 FY23 with solid profitability, where EBITDA increased 1% and profit after tax grew by 40%. Also as a result of our relentless efforts of having higher plant throughput with increased focus on value-added portfolio based on incremental capacities available. This was achieved despite impact of continued high inflation in some of the key input costs, especially lithium, which stood elevated during the period under review. Having said that, we were able to pass on this cost pressure to our customers, thereby protecting the absolute EBITDA. in Q3 FY23, we registered 30% gains in organic chemicals revenue, while growth in inorganic chemicals stood at 85%, which was steered by a mix of realization improvement and volume expansion. The demand trajectory continues to be favorable, and we are capitalizing on the incremental opportunities emerging in the sector. Our scale-up in advanced intermediates and custom synthesis manufacturing is progressing well and as expected, we are taking up more complex assignments that require multiple steps, thereby leveraging our process expertise and manufacturing infrastructure to deliver customized solutions. The objective is to further elevate the performance trajectory of high-margin, value-added portfolio within the business mix by utilizing our competent R&D capabilities. During the nine-month period, we have added eight new customers across various geographies and industries, and with this, we are now engaged with more than 39 customers in this custom synthesis and manufacturing segment. Overall, we are working on 23 products with combined revenue potential of INR 2,100 crores, with further pipeline and new inquiries flowing in. Now let me take you through some of the major developments in this quarter. Firstly, I will update you on some of the existing CapEx initiatives. With regard to the expansion of specialty organic chemical capacity by 60,000 liters or 60 meter cube, we are glad to have commissioned 15,000 liters or 15 meter cube, while remaining 45,000 liters will come up by September 2023. We have a total reactor capacity of 466,000 liters or 466 meter cube in organic chemicals. Our expansion of inorganic chemical capacity from 1,200 metric tons to 2,400 metric tons in Dahej, which amounts to 30 meter cube reactor capacity in the existing inorganic MPP is in progress, and we are on track to commission this by May or June 2023. Within battery chemicals, the new capacity of 400 metric tons per annum or 92 meter cube reactor volume for manufacturing of specialty lithium salts and additives for electrolytes will be commissioned by June 2023. Lastly, as you may know, we have announced CapEx for building a pilot plant to manufacture 250 metric ton of electrolytes at Vadodara facility. This will now come at Dahej SEZ facility and based on expected demand, we are enhancing this capacity to 1,000 metric tons, which will be ready by August, September 2023. All these initiatives will start contributing to our revenues in a phased manner from FY24 and will peak out in FY26. Moving on to second key development. We are setting up a wholly owned subsidiary of Neogen Chemicals Limited that will accommodate the battery chemicals business of the company. This was executed after numerous internal discussions and considerations. The key rationales of this are battery chemical business requires a high volume setup with different CapEx and OpEx as compared to the legacy business. This business requires different kinds of skill set and expertise across functions, and we would like to take advantage of lower corporate tax rate of 15% for newer corporates. The third development in line with robust demand environment for battery chemicals in FY25 and beyond. The board has approved expansion of one electrolyte capacity to 5,000 metric ton, which will be operational by June 2024, followed by specialty lithium salt capacity of 1,000 metric ton, which is about 232-meter cube of reactor volume, which will be operational by June 2024. The board has also approved further greenfield expansion of electrolyte and specialty lithium salts at a new site for dedicated battery materials. This will include additional 5,000 metric ton of electrolyte capacity, making total installed capacity across sites 10,000 metric ton and additional 1,000 metric ton of specialty lithium salts, making total installed capacity about 2,000 metric ton. Both of which will be operational by September 2025, which is expected to meet the incremental demand rising from FY26, FY27. These projects once commissioned will add to revenue from FY25 and will peak out by FY26, FY27. The overall CapEx for all the new projects will be close to INR 454 crore and will be funded by a mix of debt and internal accrual. While the debt levels will increase with this expansion, the debt equity will continue to remain below 1.25x as guided earlier. These CapEx initiatives will significantly contribute to our earnings from next financial year. At a consolidated level, our goal is to attain more than 30% revenue compounded annual growth rate, translating into INR 2,000 crore to INR 2,250 crore of revenue by FY26 or FY27. This compares to INR 487 crore top line achieved in FY22. I am immensely pleased to outlay our growth plan and let me assure you that our teams will work tirelessly, judiciously to achieve that. Neogen is anticipated to experience a substantial increase in its financial performance and demonstrate its proficiency in manufacturing to clients worldwide. An optimistic outlook for demand and India's position as a desirable manufacturing center will increase the market size and attract additional customers throughout the supply chain. That ends my opening thoughts. I would now request our CFO, Mr. Ketan Vyas, to share the financial highlights for the period under review. Over to you, Ketan. Thank you, Dr. Hari. Good evening, everyone, and welcome to our Q3 and nine months FY23 earnings call. I will now take you through the key financial highlights. Please note that these are on standalone basis and based on year-on-year comparison. In Q3 FY23, revenues grew by 40% year-on-year basis to INR 186.3 crore, and in nine months FY23, it grew by 46% YOY to INR 482.3 crore. The growth was boosted by the increased utilization at plants, which was aided by firm demand in crucial end user industries. The company has started to see positive results from the efforts around scaling up its high margin advanced intermediates and custom synthesis manufacturing business, as highlighted by Dr. Hari. Organic chemicals saw a growth of 30% YOY at INR 136 crore in Q3 FY23, whereas inorganic chemicals jumped 85% YOY at INR 50 crore. In nine months FY23, organic chemicals saw growth of 23% YOY to INR 326 crore and inorganic chemicals grew by 137% YOY at INR 157 crore. The domestic and export mix for Q3 FY23 stood at 47% and 53%, respectively. EBITDA increased by 27% YOY at INR 30.1 crore in Q3 FY23, and 32% YOY at INR 79 crore in nine months FY23. Despite the persistent inflation in some raw materials and utilities, a robust EBITDA was attained through effective management of the product mix. The company faced a rise in certain costs such as employee expense, which aligns with the management plan to enhance workforce across various departments. Coming to PAT performance for Q3 FY23, it improved by 40% YOY at INR 14.7 crore and in nine months FY23 it enhanced by 23% YOY to INR 35.7 crore. The increase in profit after tax demonstrated our operational efficiency, which was marginally impacted by high depreciation resulting from the additional new capacities and surge in finance costs caused by rising interest rates. Those were the key financial highlights. I will now request the moderator to open the forum 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 one on the touch 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 Mihir Damania from Ambit Asset Management. Please go ahead. Yeah. My first question is, you alluded that we are looking to fund the entire INR 450 crores of CapEx by debt and internal accruals. Do you envisage or do you want to give a breakup of how we are going to fund the entire INR 450 crores? An indication would be really helpful. Just a follow-up on that, are you also looking to raise additional capital to fund this INR 450 crores of CapEx? Hi. Thank you for your question. Based on our projections and numbers that we have looked at, for this INR 450 crores, the capital which we had raised in last financial year would be sufficient in terms of our equity. Approximately the banks normally fund 70%-75%. So we would utilize maximum funds from the bank. Somewhere between 70%-75% of the INR 450 crore will be funded through bank term loans. We are also requesting banks for longer maturity and longer moratorium term loan considering the business is growing significantly well, and so far we've received positive response. The balance will be funded through our own internal accruals, and part of the equity which we had raised last year, which we have kept aside in the form of investment and financial products will be brought in, and together will be funding the equity portion of the INR 450 crore. Got it. Thank you. That is very helpful. My second question is, what do you envisage the anticipated payback for the CapEx of INR 450 crores is going to come on board? Or internal ROCEs which are- Sorry, I did not get your question. What would be the anticipated payback for the CapEx of INR 450 crores which we are doing? Or what would be the internal return on equities on the said project? When we are looking overall, when we look at when the CapEx is fully utilized by FY27, our ROEs and ROCEs will stand much above 20%, is what we are predicting. This CapEx would be ROE accretive to the current business? That is what my understanding is from. Yes, that's true. Okay. I would say it would be more or less similar because even existing on a full utilization, once the business is stabilized, would be a 20% plus. The way so far we have looked at it, that if we are making currently in the electrolyte and lithium salt business, what we have seen is that if we are making the salt ourselves along with the electrolyte, it looks almost similar to our existing business, at least in our projection, that's what we've taken. We've taken similar asset turns. We are taking similar kind of operating margins as well. Again, as I've said in my previous call, this is a new industry, first time being established in India. As it gets established, we'll have a better picture on it. But at least currently in our models and based on whatever we've looked at, pricing, investment, and internal cost structures, we feel we should be able to get at least similar asset turns as well as similar margins on investments. Got it. This is my last question. Do you have any firm orders or something of a guarantee of sorts which gives us the confidence of achieving the INR 2,000-INR 2,250 crores of revenue? Yeah. From this 2,000 to 2,250, about 1,000 odd crore is coming from our regular business. When we look at our pipeline, the incremental demands of our customers, we are fairly confident that our existing business can easily earn INR 2,000, INR 2,200 crore, let's say by FY26, FY27. When it comes to battery business, what gives us the confidence in this is, we have worked both with international customers for lithium salts, as well as we've worked with Indian customers for their electrolyte requirements. Several of these customers have started evaluating Neogen samples, and some of them have given very positive feedback that the first sample submitted us also met majority of their criterias. This is both for our electrolyte as well as international salt customers with whom we have worked. I think together, this has given us the confidence to basically continue the journey what we had started. We already discussed the initial trial investment which we had already planned, the 250 metric ton of electrolyte, which we are now revising it to 1,000 metric ton, and the salt of 400 metric ton. Looking at the timelines which are required for India from our customer side, we've decided to basically take the decision. Based on the feedback received from customer and their plans getting more and more clearer, we have decided to go ahead with our CapEx plan. Got it. Thank you, and all the best. Thank you. Next question is from the line of Saurabh Kapadia from Sundaram Mutual Fund. Please go ahead. Yeah. Thanks for the opportunity. Sir, for this project, as of what I understood, we do not have firm contracts from the customer for this electrolyte capacity. But approximately by when we can get that clarity in terms of number of customer for electrolyte and whether it will be one customer or there will be 2 or 3 customers, what you are looking at? Thank you for your question. We are working with almost 15 potential customers for electrolytes within India and maybe a couple of customers outside as well. Several of these customers are starting by 2024, especially those who are part of the PLI team need to start, and some others also will start by 2024. Therefore, we need to be ready by at least end of 2023 to take care of their initial requirements. That is why we are projected initially to increase the capacity from 250 to 1,000 metric ton, followed by immediate increase of that 1,000 metric ton to 5,000 metric ton, hopefully by June 2024, which will take care of their FY25 requirement and early FY26 requirement. Still customers, some of them have already approved our samples, like in the phase 1 trial. The next approval will be once the pilot facility starts. We need to start the pilot facility from where we can submit the samples, and then we can start more commercial supplies to them from, let us say, in FY25. Similarly, as I explained on the salt side also, the customers have already approved our R&D samples, and once the pilot facility starts, let us say by June or so, they will also start approving these samples as well. The firm contract will only come post the pilot facility for the get up? Yes. After the pilot facility. Somewhere, let's say beyond June to December period. Before that, we may get some conditional contracts. The contract will be approved or we may have some conditional contracts, but they will be subject to final qualification of the final plan. Okay. Also if you can give some color in terms of how the margin profile will be, or also how the working capital cycle could be for this new business. We are expecting that the margin profile will be at an EBITDA level. We are expecting, let's say between at least same what we have 18.5% plus or minus 1%. That is the bare minimum we are currently considering. We are considering this when we are making from, let's say, starting from lithium carbonate and making the salt ourselves, and then we are making the electrolyte. If we are doing the whole thing, the minimum margin we should be getting is this much. If we are able to get a better margin, we will of course try for that. It will depend upon how much value we are able to add and how the competitor landscape looks like. This is on the margin. In terms of working capital cycle, we hope because this will be fewer products and fewer customer and more long-term kind of business, from a working capital cycle point of view, it should be significantly better as compared to our existing multi-product, multi-customer organic business. We believe the working capital cycle would be better. This is what we have presumed in our model as well. Okay. Lastly, where do we stand in terms of working capital improvement on our existing business? Our working capital utilization, our inventory remain more or less similar to what it was at six months level. But our revenues are increasing. So if you are looking from number of days point of view, the working capital cycle is improving. And let's say by next quarter it will improve further. So we stand by what was our original kind of view that, let's say by FY24, we want to come down to net working capital cycle of around 120-125 days. And then beyond FY24, we will look at further improving this. Okay. Thank you. All the best. Thank you. The next question is from the line of Archit Joshi from B&K Securities. Please go ahead. Yeah, thank you. Thanks for the opportunity, sir, and congrats on a great set of numbers. My first question is rather a clarification. I couldn't hear the number that you said about the CSM business. Did you, by any chance, say that the potential of CSM business is INR 2,100 crores? Or is it for the total potential that we are expecting after the battery chemicals in the results come up? No. The number which I mentioned in the call, INR 2,100 crores, refers to all the molecules which are currently under development. We are currently like there are 23, 24 molecules which are various stages of development. Something which is in R&D, something which is in pilot, something which is, let's say, in our first trial run. The total value of that is around INR 2,100 crores. Right, sir. And in the due course of time upon considering the waiting period, and once it gets approved, any direction that you're looking at with respect to achieving any milestone for when this will be realized into place? This is at R&D level. This is the total potential of this molecule. Depending on how successful this R&D, like how much percentage of revenue, how much percentage of then succeed, it will determine finally how much is realized. This is basically the pipeline, what we have. When we, let’s say, go from INR 480 crore last year to, let’s say, INR 1,100 or INR 1,200 crore revenue potential, what we are saying, let's say by FY 2025, FY 2026. That’s the healthy pipeline we have. Some of it may even replace some of the existing molecules if the demand or the margin profile were to change. This is just to kind of give an idea of what is the pipeline. Understood. It doesn't mean exactly all of that will get consumed. Understood, sir. Thanks for that clarification. Also currently, at what run rate or what annual number would be looking at, only in the CSM business, I think which is largely on the agri side. Is there a meaningful change that you are seeing with respect to all these molecules under in the pipeline in the R&D stage? Are the application areas increasing or any color on that, sir? I think in terms of application areas, I already gave a little bit of additional information last call that we are also seeing interest from flavors and fragrance area as well as another specialty chemical industry, which is non-agri, non-pharma. Both these we are seeing more interest coming in and that continues. In terms of CSM margin percentage, our target was that by FY 2024, we wanted to achieve 20% of our revenue coming from CSM business. Currently in this year, we are at about 15% number. We are getting close to that and we are hoping, we have received several further initial first commercial orders, which we are planning to execute, let’s say between now to June. Depending on that, we feel this will add further. Plus, we are trying to work with the existing customers with their increasing demand. Hopefully by next year, as we had planned, we are reaching at least INR 700 crore, INR 750 crore on a standard lithium price, which with today’s lithium price might become somewhere close to around INR 800 crore, INR 850 crore, with at least 20% contribution coming from CSM. That was our target, and we stand by that target still. Understood, sir. That’s great. Sir, just one more on the battery chemical CapEx that you have announced. Sir, the greenfield expansion that you are planning, which as per the presentation, most likely to be commissioned in FY26, and the total revenue target that you are looking at of INR 1,000 crore to INR 1,200 crore only from the battery chemicals division. Would it be fair to assume that after we commission the 5,000-tonne plant in electrolyte and another 1,000 tonne specialty lithium salt, there will be some evades in terms of ramping up that capacity going into say FY27 or FY28. Is there a number that we are looking in FY27, FY28, also with the contribution coming from a capacity that we will commission in FY26? Or right now, for now, we are just looking at INR 2,000 crore in FY26, FY27? What we have said so far is, first of all, in the battery materials, we have only assumed India electrolyte demand currently. Of course, we keep the international demand as a backup, but we have not taken any significant number from that into our projection. We also have said that the capacity which we have said, it could peak by, let’s say, FY27. We will be fully utilized by FY27. This is based on the clarity that we have. This is the minimum we feel what we need. As we go further, as we talk to more customer, as customer requirements crystallize and as we keep signing contracts, if there are opportunities beyond this in electrolyte, depending on what market share we are able to get, we may have to further increase our capacity. For sure, we will have to increase capacity beyond FY27, FY28, as we get into FY30, where the overall demand is expected to be around, let’s say, 100,000 to 150,000 metric ton per annum. With this capacity which we have said, we will have only capacity of 10,000 metric ton. By 2030, we will definitely need more. Depending on the market share, even by FY27, FY28, we may need more. But this is a bare minimum that we need. It’s just to keeping in mind this additional capacity which we may require beyond this as well as let’s say if our initiatives for salts in the international market may work as well as if the cathode material requirements also work. To consider these opportunities, that is why we felt the subsidiary having its own space and maybe having a greenfield site would be beneficial and that's why the board is currently considering if this can be done at a greenfield site. Especially once we have taken care of the initial requirement of the next 2 years. Afterwards, in parallel, we can get the greenfield site ready, and then that becomes the main site for our battery chemistry. Got it, sir. Sir, pardon my ignorance here, but how easy or difficult is it to ramp up these capacities? Because I can see that in FY 2025 you'll have a 5,000-tonne plant in place, which will be a brownfield expansion, and then we'll have 5,000 tonne from a greenfield expansion. We are looking at INR 2,000 crore potential in FY 2027 or FY 2026 at earliest. Is it that once it gets- No, sorry, just to clarify, that INR 2,000 crore number is both battery and regular molecule together, right? Out of that, for the regular demand, we have already made most of the investment are already in place and the remaining will come, let's say by, middle of next year. Right, sir. Actually, not the INR 2,000 crore number, but the INR 1,000 to INR 1,200 crore number that we have talked about only from the battery chemical division. My question was how easy or difficult is to ramp up these capacities? Because as I said earlier, FY 2025, we are looking at a brownfield expansion of 5,000, and then immediately in the year after that, we have 5,000 more. All in all, with these 10,000 tons in place, we'll be able to achieve this INR 1,500 odd crore number. That will happen in the same year instantly. Is my understanding correct? Yes. What will happen is the greenfield and the brownfield will be running in parallel because the greenfield will take a little longer time. Some of the things like site development, et cetera, will be happening in parallel. We will start the 1,000 metric ton we are doing is in the existing plant with very limited modification. That will come first. Then in parallel, in our existing facility, we will do a brownfield to 5,000. In parallel, we will also increase the salt capacity, which is 400 metric ton to 1,000. All these will come at our Dahej site because this is where our majority of the lithium chemistry and the expertise currently is. In parallel, we will start working on the greenfield. We feel that is why we have made all the announcement together, because some of this may run in parallel. It is not one after another. It will take a little bit of a challenge, but we feel with what we have been doing in preparing for this for last one and a half years, we are now fairly well prepared to be able to achieve this time. Thanks a lot for answering all the questions, sir, and I wish you all the best. Thank you. Thank you so much. Thank you. Next question is from the line of Anirudh Shetty from Solidarity Investment Managers. Please go ahead. Hi. Thanks for taking my question. My first question was on the INR 1,000 crore-INR 1,200 crore revenue potential that we see from our battery chemical business. Of that, how much would be from salt that we will be selling to third-party customers? I believe that a majority of the salt capacity will be used in-house. My second question around this is, why are not we investing more aggressively towards salt for international opportunities, especially given that the pace at which EV is growing globally is much faster than it is in India at this point in time. Sure. The way we have currently said is that 10,000 metric ton, if you are using, then it will require somewhere around 1,200 to 1,500 metric ton of salt itself, and then remaining 500, 600 ton would be available to us. Let's say for now, we do not want to commit ourselves that so much will come from electrolyte and so much will come from salt. As the business will develop closer, because we are three years away and we are just starting. As the business will develop closer, we will keep evaluating, and we will see how the mix kind of develops. How much comes from salt and how much comes from electrolyte. As I have said in my previous calls, in terms of strategic advantage, in terms of moats, when we think of India electrolyte demand, we feel we have the maximum number of moats or the strategic benefit or the value add which we can do. Right now, when we are working with electrolyte, we have advantage of local, being able to take care of logistics. We have some benefits over China. Now, if we are targeting a non-Chinese international market, we are in a direct competition, and it is a head-to-head comparison. China has a clear scale advantage over us, whereas the only thing which we have is, we can be China plus one. Other than that, so far, we are a catching up phase in the international market. That is the reason why our primary focus remains on domestic electrolyte demand. We keep exploring international salts. We have got positive feedback, but at least at this point in time, it's our plan B or a second source. As we go forward and as once our trial production starts, we do commercial supplies, and we really can see, we understand our cost structure as compared to the Chinese, how much is it different, and also willingness of customers to be able to pay a premium over China for a China plus one or a supply security kind of a strategy. So that's when we'll have a better idea of how much further investment which we would need, let's say, for the salt demand for the international market. So there are many moving things here. The capacities which we have announced is the capacity which we feel we barely need to take care of India's demand, and we need to get started on that to meet the customer timeline. So that's the announcement we made for now. And as our pilot facility start, trial production start, as we keep getting more customer feedback, that's when we can keep revising our plan further. Got it. So my next question is on the margin profile for the battery chemical business. I remember in one of the past calls you had mentioned that on the innovation curve, the organic specialty would be higher than the electrolyte and the salt business. So what would explain why the margin profile would be similar for this new business? And second question is, within electrolyte and salt, is there a difference in the margins that one would make if you sell this salt directly to a third-party customer? When we are looking at our salt business, it's similar to making a simple lithium salt. It's just like in bromine derivatives, as we made bromine derivatives, and then we went on to make advanced intermediates, and then maybe making advanced intermediates for this innovator, which is a CSM business. So I think it's almost like that, in the sense that we have to first make from lithium carbonate, a basic lithium salt. Of course, the purity requirements are much higher. Then we have to make a lithium salt, which will be a little two-stage, three-stage kind of a reaction. And it also has its own stringency in terms of purity. It has its own stringency in terms of the moisture control and other impurity control requirements, and also some of the handling challenges of these materials. Then you are also doing a value add and making an electrolyte out of that, which adds to another layer of complexity and customization for each individual customer. So when we are doing all three together, we feel it's similar to basically making bromine derivatives, making advanced intermediates, and then doing CSM on an OEM basis. So that's why we feel it's kind of a similar margin profile. When we've looked at it also from a cost point of view, the reactor volumes versus business point of view, it looks similar. So that's why we are hoping that, let's say we will get at least similar margins. So that's the bare minimum we are looking at. Depending on the criticality, customization required by the customer, and if we are able to add further value and compete the scenario, we may try to get a better margin there. But at present, in our models, we are using similar margins as our current target, which is 18.5% plus or minus 1%. So basically on that. And in our models to be more comfortable, we are using a 17.5% as a base. So we'll see. As the business develops, the right number will emerge. Got it. But if, say, the margins are similar, then shouldn't the return on capital employed for this business be higher at scale? Because like you mentioned, the working capital days are much tighter over here. And I believe in lithium the asset turns also tend to be better. So, if everything goes as per plan, couldn't this be a higher ROCE business for us? So two parts. The asset turns we have seen are similar because this has the other complexity of moisture control and very high purification requirements, et cetera. So ultimately, the asset turns are coming similar to that of an organic production that we have seen based on whatever we can see now. But yeah, working capital cycle could be better. And in that term, yes, on a ROCE level, we could have a separate business. And we can have an improvement over our existing organic business. But for now at least, let's consider similar margins and returns. They should be 20% plus ROE at ROCE level. Got it. I had one final question. May I go ahead with it? Yes. Okay. In our existing business, with our current run rate we could probably do around INR 600 crores, INR 650 crores within this year. The revenue potential by 2027 is around INR 1,050 crores. That translates to anywhere between 13% to 15% kind of CAGR. Given the opportunity that we have in this business and the China plus one tailwinds and go for more value add, is 13% to 15% a conservative number, or you think that the opportunity is much larger and the growth could be higher than this as we make further investments along the line? Yeah. Anirudh, I think this is just based on the investments which we have done so far. As Dahej is stabilizing we are seeing a lot of customer visits to our site. We are seeing several pharma, agro, aroma and other industry customers also come in and show a keen interest to work with Neogen for this new project. Some of them are also discussing fairly large project volumes. Our right now target is how we can have single molecule between INR 50 crores to INR 100 crores or INR 100 crore plus as a single molecule. We are seeing several projects come in which kind of meet this criteria. We remain hopeful there. But the number which we have shared is based on our current existing CapEx, which we've already announced. Beyond that as I said, we think we will max out by FY 2025 and maybe FY 2026, FY 2027 if we require further investment. It might require further capacity. For that we may have to do further CapEx in FY 2025 or FY 2026, depending on how the business develops. Got it. Thank you for answering my question. Thank you. Before we take the next question, I would like to remind the participants to limit the question to two per participant. If time permits, you may join the queue for any follow-ups. The next question is from the line of Noel Vaz from Union Asset Management. Please go ahead. Hello. Yes. Thanks, Maheep, for taking my question. I just had one question relating to CapEx. 50 crores is the total CapEx. Exactly how do you see it being paced out over the next five or six years? Also you had mentioned regarding CapEx itself, in case the demand is much higher than expected, then accordingly you would have to make changes also. If that were to happen, then how would that exactly happen within the next two years, you could see another revision to the scope? Yeah. If you see, in the next financial year we are increasing the 250 metric ton to 1,000 metric ton electrolyte capacity. In parallel we are also building a facility which can increase this up to 5,000 metric ton, which will come by, let us say, June 2024. This is the first part. In parallel we are working capacity which will come online by June 2025. I think we do not have a year-wide number which we can share at present. Yes, we do have in our internal models, but we wanted to further fine-tune it before we give you a year-wide breakup of the CapEx. Based on that, you will see that initially we are just doing 1,000, 1,000 will be coming 5,000, and then the 5,000 is again doubling. The majority of the CapEx will come when we are setting up a greenfield and when we are doing the doubling part. Which is basically coming online by FY 2026, so you will see significant CapEx happening on that line in FY 2024 and FY 2025. This is on the CapEx breakup. Also as I explained, this is the bare minimum demand that we see and we are quite confident that we can achieve this number through several customers. But as I said, we will be able to give more clarity whether this is sufficient, whether we need more, or let us say we need more of the salt or more of the electrolyte, et cetera. So that kind of a slight adjustment that we will have to do. We will be able to do, let us say maybe six months, nine months down the line, once our pilot facility starts and more approvals start coming in from our customers and then we can give more clarity. If required, based on that our FY 2025, FY 2026 CapEx plans can be fine-tuned. Okay. Quite simply put, based on the off-take that you would be getting at the pilot plant, then definitely you will get a much more clearer picture as to what the demand scenario would be. So we will get a much more drilled down idea of the whole demand scenario. Yes. Okay. Because this side the demand is a bit more fluid as compared to our bromine derivatives and pharma business. That is the reason why we felt having a separate subsidiary gives a very clear view of how the operations are shaping up and how the changes are taking place. Okay. Just one last query regarding the revenue guidance. This is assuming a full utilization or is this like an 80% utilization? What is the best way of thinking of it? So basically the guidance whenever we give is considering 80% utilization of the facility. Okay. Thank you so much. That is all my questions. Thank you. The next question is from the line of Yash Shah from Investec. Please go ahead. Hi, sir. Thank you for taking my question. My first question was regarding our capacity on formulation and salts. We can see that we will be increasing our capacity in tandem, which will be basically 20% of the salt capacity for the formulation. Wanted to understand from you, sir, how much of the demand will be captive consumption and how much will we have to procure from outside, the electrolyte salt for the formulation? That would be my first question. Most of the salts will be made in-house. In fact, we have slightly excess above what is required for internal consumption. Let's say depending on the formulation, how it forms a 10,000 metric ton electrolyte facility would need somewhere between 1,000 to 1,500 metric ton of salt. Against that we are planning a 2,000 metric ton. We always have a little bit of a buffer because the lithium salt reaction takes a bit longer time. It's always good to have slightly over capacity there. If at all you have an additional electrolyte requirement you can quickly do the electrolyte and be able to serve your customers at a shorter period of time. The additional capacity can always be used to target international demand. At least the way we've taken it, most of the lithium salts we should be able to make ourselves. However, there are many new additives. The main electrolyte salt, and then there are some specialty additives that we need to take. Usually, specialty additives in terms of volume are not much, and new additives keep coming all the time. Some of the additives we will be making ourselves and some additives, if it's a specialized one, we may have to buy from Japan or Korea, where it has already been established till we make on our own. Majority of the salts should be made in-house. Only small quantity additives, some specialized additives might be bought, till it becomes of a scale where it makes sense for us to make ourselves. Got it, sir. That was going to be my next question, if we intend to sell the additives as well to the third-party customers. If my understanding is right, we do not intend to sell them, right? No. The salt which we are making, whenever we have excess capacity available, we are. Similarly, additives also. If we make our own additives, even additives also, if we make ourselves, we would be happy to sell them as well, if we have excess capacity on it. Sure. Okay. Sir, my next question was about our inorganic segment, the traditional lithium salt business, which has been performing extremely well in this year. Can we expect a similar kind of growth to continue in the fourth quarter and in the year ahead, FY 2025? Also, if you can provide some kind of commentary on the prices of lithium. Yeah. Prices of lithium, as we have shared earlier, as compared to their standard lithium price, what has been there for many years, it's between 6 to 8 times of whatever is the usual lithium prices. They are significantly on a higher side. When we are comparing last year versus this year, a significant portion of that is also because of this price increase. When you go a year forward, yes, as we will explain, we are increasing our Dahej facility, and over the next 2 to 3 years, we also expect that that facility should get fully utilized. If the lithium price remains the same, you may see a 40%-50% increase over the next 2 to 3 years. But in terms of percentage, what we are seeing, 85% and stuff like that, with the lithium prices, a significant portion of that is because of the higher lithium prices. Next year, we'll maintain the same level, and then show further volume increases. On an absolute value term, whether it remains the same or it might even drop if the lithium prices start going down. Let's say what we are estimating is that when the dust settles and when enough lithium demand supply is balanced, it might be 2 times or 3 times of what was historical lithium prices. As it goes there, that transition, when it will happen, it's very difficult to predict. Will it happen in 2 years, will it take 4 years, or will it take 6 years to reach those levels? It is very difficult to predict. That's why lithium price remains a bit of a question mark, but at least from what we've heard, it is not going down to the previous level for sure. Even when it settles down, it will be 2 times or 3 times what was historical lithium prices, and it might happen any time between the next 2 to 4 years. Volume-wise, we expect the additional 1,200 metric tons which we are adding, which will give us additional volumes over the next 2 years, 3 years. But value-wise, it's a bit uncertain, depending on how the lithium price behaves. Got it, sir. Last question from my side would be, as in the previous quarter, sir, we had mentioned that we had added about five customers on the CSM side, on the flavors and fragrance, which had a revenue potential of INR 200 crores, and wherein some of our projects had moved from pilot stage to the commercial stage. Have you already started supplying them in the current quarter? Yes. Whatever has moved from pilot to commercial stage, we have started supplying. Some we will be supplying in Q4 of this year. We did supply something last year, something this. The aroma ones are still under discussion. The flavor fragrance ones are still under discussion. They've not yet commercialized, but we are hoping in the next financial year, we'll see some revenue contribution coming from there. We remain intact with the 20% contribution from the CSM business by FY 2025, right? By FY 2024, yeah. That is the target. Okay. Sir. Thank you so much, sir, for answering all my questions. Thank you. Thank you. Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in the conference, please limit your question to one per participant. Thank you. The next question is from the line of Nitin Tiwari from Yes Securities. Please go ahead. Good evening, sir. Thanks for taking my question. My question, sir, is actually on the CapEx side. The first part to that is, the INR 150 crore CapEx that you are doing on the existing- Your voice is not very clear. Can you please proceed? Sure. Is this better? Yes. Yeah. My question is a clarification question on the CapEx side. The INR 150 crore CapEx that we had announced in the existing business, is that completely over or what percentage of that CapEx is over? That is one. Secondly, is that INR 150 crore a part of INR 450 crore in new businesses that you've announced? Thirdly, if not, then does that INR 450 crore cover both the phases of battery electrolyte plant expansion? Thank you for your question, Nitin. About how much INR 150 crore we have done. As I said in my opening remarks and in the investor presentation, 50 meter cube out of 60 meter cube inorganic capacity has already been commissioned and the remaining 45 meter cube we are expecting to complete, let's say by September. On the lithium capacity increase, we expect most of the reactors to be in place, let's say, by March. So anytime between March and May is we are targeting full commercialization of that. And the third part of the INR 150 crore was the lithium salt trial production. This we will be completing by June. I think of the INR 150 crore, we have already spent somewhere around INR 50 or INR 50 odd crore, maybe a little bit more than that. Ketan would have a number, but that is where we currently are in terms of the total CapEx which we have done. Your second question was that does the INR 450 crore in addition of this INR 150 crore? Yes, this INR 150 crore is separate. INR 450 crore is for the additional CapEx, which is basically to increase the 250 metric ton to, let's say, 1,000 metric ton and then 1,000 to 5,000 metric ton, increasing the salt source from 400 to 1,000, and then another 1,000 and another 5,000 at a greenfield site. So together, this will be INR 450 crore CapEx, and it includes both the phases. Does the INR 450 crore CapEx also include the cost of land at the new site which you have not declared? Or is it excluding the cost of land that you would have to acquire? Yes. Yes, as in it is excluding the cost of land? It includes the cost of the land. Let me summarize. For 10,000 tons of electrolyte and 2,000 tons of salt, the entire CapEx requirement is INR 450 crore. Yes. Can you break it up in terms of how much would be required for the salt capacity and how much for the electrolyte capacity? Currently, because of confidentiality reasons, we do not want to share the breakup of this. Please give us some more time where we are comfortable sharing the break. Sure, no worry. Lastly, sir, any comments on the lithium deposit found in Jammu, India? What is your take on that? Would that work to bring the prices down or how do you see it evolve? We are very happy to know with this development. We are sure that as the world progresses further, more such deposits will be found because originally if you look 3 years ago or 4 years ago situation, we already had identified a lot of deposits as compared to what the world needed. If you just think of India also, it required hardly 2,000, 3,000 metric ton of lithium, so nobody was motivated enough to look hard. Now I am sure the entire world is looking hard, and I am happy that in India we already found a deposit and there will be more deposits also which will be found. Because previously people were just not looking hard enough because the demand was not to that extent. It would not help us immediately because I personally believe there is a lot of work still to be done to understand the exact composition. They have an estimate on the quantity, but what is the commercial viability of that? We are also still trying to find out the exact composition, concentration, what are the other minerals and how the separation would work. So we keep our fingers crossed. We are still trying to find more. But I do not think this alone will solve the lithium price issue. But overall, I personally feel that ultimately demand supply will catch up. There is a lot of lithium capacity being added world over. So over a period of next, let us say somewhere between 3 to 6 years, the lithium price, the demand supply will match up and the prices should become more closer to what they were. As I answered in my previous call, it might be 2 times or 3 times what was the historical average just because some of the new resources which are being found, the processing cost is much higher and the royalty which you have to pay to the government is much higher. Therefore, it will never go back to the historical level unless there is some very strong demand crash or something or a pathbreaking new innovative technology, but it will be lower as compared to what it is. It is just difficult to predict when. Thank you. We take our last question from the line of Subhasachi Mukherjee from Centrum PMS. Please go ahead. Yeah. Hi. Thanks for the opportunity. First question is, if you can explain the reason behind the gross margin dip during the quarter, both on QOQ basis as well as YOY basis, it is lower. Yeah. It's just a function of both the lithium prices as well as the product mix in the current quarter. You have been saying that we are increasing our CSM mix, which I believe is a higher margin, and which was kind of reflected in the gross margins in Q1 and Q2. But then sequentially, has there been any other thing other than lithium prices, let's say bromine prices were very expensive or something like that, or any other reason? No. So between CSM projects also, there are some projects which are more longer and have different gross margin profile. It is again, just product mix difference between these models. Got you. But in the long term, you would stick to around 45%-46% of gross margin. That we intend to do, is that remain intact? Yes. So, what I had explained earlier that we used to be, like 40 plus or minus 2 historically, and now we expect 42 plus or minus 2. So let's say between 40% to 44% on a stable basis. That is the way so far we have seen. So at least till FY 2024, we expect that to be the case. Sometimes we may have a slightly higher margin, but more or less right now, the way the looks. Okay. Next is, on this electrolyte capacity that we are putting up, so 10,000 metric tons, and the salt is largely almost 1,200 to 1,500 metric ton will be internally consumed. So largely, if I do a broad math, 10,000 metric ton yields INR 1,000 crores of revenue. I know this is not so easy, but then broad crude math, one metric ton yielding INR 1 million of rupees. So the 150,000 metric ton of potential capacity that India will need by 2030, does it reflect that it is probably a INR 15,000 crore market size that we are looking at, and then probably we would be having a bare minimum of 25% kind of a market share or more than that. Is that the way we are looking at? So, that's why, for purpose, we have still not said how much 150,000 metric ton means. Again, this is a mix of salt and electrolytes. These are the capacities and as I said, not all can happen together. So we would still not want to comment on the exact price and the exact market size. We would like to wait till at least some few contracts are signed or, let's say there's a better clarity in terms of how this business develops in India. So please allow us time till that time. Sure. And this INR 2,000 crore to INR 2,050 crore, whatever you are guiding in FY 2027 as peak utilization, these are, I believe at stable prices and, on top of that, if I do the 18.5% or let's say 18% EBITDA margin. So you are looking at a INR 350 crore, INR 360 crore of EBITDA by FY 2027. Is the math correct? We wanted to keep tracking what is stable lithium price and what is normal lithium price. Currently, for now, the current price looks like the price is going to stay for the next two, three years. So that's why when we give the revenue projection, it's more keeping in mind the current lithium prices. And you believe this 16%, whatever we are doing, 16% of margin, that will probably inch up to again, probably 17.5%, 18% or 18.5%, by the time we reach the INR 2,000 crore or INR 2,050 crore by FY 2027. Right? Yeah. If the lithium prices remains the same, then it might be, again, a little bit on the lower side. The way you are seeing it, I'll have to do the exact math that how much lithium will contribute. And it'll be somewhere around 16.5%-17.5% in that region. And with a stable lithium price, it'll be somewhere around 18.5%-19% in that region. So far in our business, if we do the lithium price correction, we've been able to, depending on how for lithium as well as the currency or how frequently we do the correction, we are again in that range of 18.5%-19% EBITDA. This year also, we had targeted about INR 110 crore EBITDA, and with the run rate that we are at, most likely we should be able to increase, like overshoot, the INR 100 crore-INR 110 crore target, which we had kept for this year. We should be overshooting beyond INR 110 crore. For more specific, like EBITDA level targets, et cetera, my request is, let this business develop a little bit, and then as we are more closer to the years, we'll keep giving you guidances on what the EBITDA looks like, what the lithium price looks like. This is just to kind of give an approximate idea on what kind of revenues we can generate and what kind of CapEx which we are planning, which we wanted to give today. Sure, sir. Appreciate. Last question if I can squeeze in. The greenfield capacity for the battery chemicals, I believe would be mostly domestic focused and hence, probably the siting will not be in Dahej or in some other place. Is my assumption correct? Have you finalized any land? It will not be in SEZ. You are right, it will be largely domestic and it will not be in the SEZ. That's correct. Okay. Thank you. That is all from my side. Wish you all the best. Thank you. Thank you so much. Ladies and gentlemen, that would be our last question for today. I now hand the conference over to the management for their closing remarks. Thank you, and over to you. Thank you all the participants for joining the call. 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, CDR India, and we will address them. Thank you once again. Stay safe, and we look forward to connecting with all of you again in the next quarter. Thank you very much. Ladies and gentlemen, on behalf of Neogen Chemicals Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.