Ladies and gentlemen, good day and welcome to Neogen Chemicals Q3 FY 2022 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing Star, then Zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nishid Solanki from CDR India. Thank you and over to you.
Thank you. Good afternoon, everyone, and welcome to Neogen Chemicals Q3 FY 2022 earnings conference call for analysts and investors. Joining us on the call today are senior members of the management team, including Dr. Harin Kanani, Managing 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 session for Q&A, where the management will be addressing queries of the participants. Let me leave you with 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 Q3 FY 2022 earnings presentation, which has been shared earlier. I would now like to invite Dr. Harin Kanani to share his perspectives on performance and progress that the company has made. Thank you and over to you, sir.
Thank you, Nishit. Good afternoon and a warm welcome to everyone on our Q3 FY 2022 earnings conference call. Our result documents have been shared earlier and available on stock exchange website. I trust you would have got a chance to go through them. I will share my perspectives on the performance, key development and outlook going forward. Later, our CFO, Mr. Ketan Vyas, will take you through the financial highlights for the period under review. We reported strong all around performance during third quarter of the financial year, backed by higher contributions to recent commissioning phase one and two greenfield expansion at Dahej SEZ in Gujarat. More importantly, we registered by far our highest ever quarterly revenue of INR 133 crore in Q3 of FY 2022, which was in spite of a challenging macro situation.
Let me reiterate that this is just the beginning and we have exciting plans lined up to take Neogen to the next phase of growth. Let me share some financial metrics here for Q3 FY 2022. Revenues expanded by 56% year- on- year, while EBITDA increased 41%, translating to margin of 18% and profit after tax grew by 23%. Our organic chemical business registered a gain of 53% while growth in inorganic chemicals stood at 70%. Overall, we witnessed favorable demand and firm realization trends across our segments. In a key development, we raised INR 225 crore through issuance of equity shares on preferential allotment basis at an issue price of INR 1402.12 per equity share. We saw participation from some of the high quality and marquee institutional investors.
The main objective of the fund raise is to support the current growth momentum while capitalizing on the upcoming high potential opportunities across advanced intermediates, custom synthesis and contract manufacturing and lithium-ion battery material space. This fund raise will make us further ready and help us gain first mover advantage in several emerging demand areas that hold great potential over the next few years. Although the immediate plan is to deploy these funds to repay our debt and strengthen our balance sheet, which can then be leveraged as we invest into our expansion plans. Our new CAPEX announced last year to manufacture electrolyte for lithium-ion batteries Advanced Chemistry Cell is progressing well, and we remain on track to commercialize this by September 2023.
Once commissioned, this initiative will help us test the market and reach out to all market players that consume electrolyte for lithium-ion batteries. With experience of over three decades in the lithium chemical sector, we remain confident of delivering a successful initiative in this emerging space. Going forward, establishing our presence here will put us in a sweet spot to capture substantially higher demand for electrolyte arising over the next few years. Post-commissioning, both our phase one and two greenfield expansion at Dahej SEZ are rapidly ramping up. The intention is to focus on niche and value-added products that require expertise in complex chemistry with multi-stage processes, and we are moving well in this direction. Having said that, we are also running our Mahape and Vadodara plants at high utilization levels. We believe all these initiatives will allow us to maintain our business momentum over the next few years.
We will remain confident of surpassing our guidance of INR 450 crore in revenues this year, while the aggregate revenue potential currently stands at INR 700-INR 725 crore, including the expansion and initiatives around lithium-ion batteries, which we continue to target to deliver by FY 2024. Overall, I am excited with the growth opportunities available for us in chemical as well as, lithium-ion battery material space. We will make the right moves at the right time to ensure that we capitalize on this high potential opportunities to deliver sustainable and profitable growth for all our stakeholders. That concludes my initial thoughts. I would now request our CFO, Ketan Vyas, to share the financial highlights for Q3 FY 2022. Over to you, Ketan.
Thank you, Dr. Harin. Good afternoon, everyone, and welcome to Neogen's Q3 FY 2022 earnings call.
I'm here to share the financial performance for third quarter ended 31 December 2021. All comparisons are on year-on-year basis and refer to standalone financial performance. In Q3 FY 2022, our revenues stood at INR 133 crore, representing a strong growth of 56% driven by higher contribution from recently commissioned phase one and two expansion at Dahej SEZ. This was complemented by 41% growth in EBITDA to INR 24 crore. EBITDA performance includes an element of transient cost impact related to recently commissioned phase one and two expansion. Once we run our new plant at optimal utilization levels, this is expected to neutralize. EBITDA also includes some impact of elevated utility costs and other operating expenses linked to COVID-19 related safety protocols. Our profit after tax stood at INR 10.5 crore, higher by 23%.
Tax growth appears moderated due to higher finance costs and depreciation, which is in line with new capacities added during the year. Again, this will improve once the new plant operate at optimal utilization levels. In Q3 FY 2022, our domestic and export mix stood at 55% and 45% respectively. That ends my opening commentary. I will now request the moderator to open the forum for questions from participants.
Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may please press star then one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star then two. Participants are requested to use handsets while asking a question. Anyone who wishes to ask questions, please press star then one. The first question is from the line of Dhaval Shah from ICICI Securities. Please go ahead.
Yeah, thanks for the opportunity, sir. I have a question on the Dahej phase 1 and phase 2 plant.
Yeah.
You already mentioned that we have seen some ramp up in both of these capacity. Can you please share the utilization? I think it may not be meaningful at this moment, but if you can share thoughts on that and what would be, you know, your actual timeline by when we can see, you know, the peak utilization from both of these capacities. If you can share thoughts on this thing.
Hi. Thanks for your question, Dhaval. I think, you know, both, the phase one part is now, you know, used more, and phase two, which came, afterwards, in which we are also doing some pharma molecules. This also require, you know, some trial production, customer approval, et cetera. It is ramping up a little bit slow. Going forward, you know, like I want to consider start thinking like, okay, the CAPEX was planned in a phase-wide manner, but it's going to be in the same manufacturing block. Going forward, in our communication also, I want to just think of Dahej capacity as a whole, between phase one and phase two.
Yes, right now the phase one, which, in which we started making the molecule for agro innovator, so that's kind of already at like 50%-60% kind of utilization levels. The phase two in which we did some bromine derivatives and pharma intermediates is still overall ramping up. My guess is with all the approvals and, you know, we had to do our audits, et cetera, for them to happen. My guess is, by, let's say, mid next year, by let's say September, max, we should be in a position where we are at full utilization levels, so we will start hitting peak revenues.
If you recall, you know, without the new CAPEX, we were at around INR 650 crore-INR 675 crore kind of a revenue estimate which we had originally given before our last CAPEX related in Karakhadi. That was majorly. We are going to reach INR 650 crore-INR 675 crore based on the Dahej phase one and phase two, which makes roughly around INR 175 odd crore of INR 160 crore-INR 170 crore peak revenue. I think, we should reach those numbers by at least Q2 of next financial year is what I'm targeting.
Okay. In the opening remarks, I think you mentioned that by FY 2024 our revenue guidance would be INR 700 crore-INR 725 crore odd.
Yeah.
including this electrolyte.
Mm-hmm.
If we, you know, if we are going to reach in this FY 2023 itself, then I think FY 2024 guidance we have to revise upwards. Maybe because I think we also did QIP of INR 225 odd crore.
Mm-hmm.
Are we going to see CAPEX announcement within some time? Because I think based on our order inquiries, if we are going to utilize optimum by the next year, then I think we should come up with the another CAPEX also in Dahej if I'm not wrong. If you can share thoughts on that also.
Sure. I think you know once we hit I think there are two CAPEXes or I would say three CAPEXes which we can potentially consider. One is going to be the larger CAPEX for the electrolyte that we are considering. Then second is you know some CAPEX related to the lithium electrolyte salt requirement in the international market. If you remember or if you look at our presentations the opportunities one is selling electrolytes in India and electrolyte salts in the international. That is the second potential CAPEX which will be in Dahej. Electrolyte ideally should be in Karakhadi because it's suited for the domestic industry. The third will be the increase in the organic capacity. These are the three CAPEX which are under active consideration.
As we keep getting, you know, customer clarity and confirmation, like, where we can get certainty of the business, then, you know, we will start basically considering that. Now, like, at least the electrolyte, you might have seen news that, you know, the final PLI scheme applications were all submitted, I think by fifteenth of January, the extended deadline, and there are 10 applicants in the PLI scheme. Now, the outcome of this is expected somewhere between March and June, by which time we are also expecting a smaller capacity of electrolyte to start, even a kilo lab kind of a facility to start. We will also have approval. I am expecting somewhere between June to September.
Once there is clarity on PLI, you know, some approvals from customer, that's when we will have a clarity on, let's say, the electrolyte, investment in, India. This is my expected current timeline based on today's situation. I personally would feel that first we would like to hit the full utilization level, and then we should be able to see good order visibility of that. Somewhere in the second half, between September to March, which we will be looking at, you know, the decision on a organic CAPEX. That will be more towards, like, you know, end of FY 2023. Either third or fourth quarter of FY 2023, we'll take a decision on that.
This international lithium salt, again, maybe little bit before, like, June or slightly afterwards, we will take a decision on the international to meet the international demand of lithium salt. I think these are three CAPEXes which we are currently considering, and I expect that the timing will be based on what I just informed you earlier.
Okay. Sir, this will cover entire INR 225 odd crore, this three CAPEX, or it will be just part of that?
You know, again, they're depending on. Again, the reason why we are not doing it is because we don't know the exact size. We don't have the customer commitment. You know, whether it will be phased out or how much. Depending on the responses that we will get, we will decide. The CAPEX decision is going to be based on the market, like, you know, what is the market where we see good visibility. You know, because these are very dynamic markets, there are many moving parts, so it will be based upon that. And that will take a decision of, you know, how much CAPEX we are doing now. Normal case, you know, each of these CAPEXes, like, if our MPP investment, if we are making, is about INR 100 crore, right?
My expectation is this would be in the range of INR 50 crore-INR 100 crore individually, okay, in the first phase. We will also plan that we're not going to do everything from the equity which we've raised. I mean, this is just adding to our equity. Considering the future potential, there will always be some debt component and some equity component. While immediately we are using this to reduce the debt and bring our debt equity ratios down, but we are still going to keep some money aside, which will go towards margins of this project.
That will be like we'll be carrying cash for a while, and then we will take the optimum decision between using equity and, like, you know, the debt over the next two to three years, depending on the best financial combination which we can come up with and financing. I'm not saying all three may happen. Out of three, one may happen, two may happen. Depends on how market kind of develops.
And.
You also mentioned about, you know, FY 2024 guidance. I think, again, our policy has been that the CAPEX that I have or what I've committed today is equal to INR 700-INR 725. Unless I have done additional CAPEX and taken a decision of that, you know, I can't say that I will do a CAPEX and then from that additional revenue can come. Therefore, the guidance of FY 2024 remains on that side. When it comes to kind of FY 2023, since we are not hitting the peak utilization, correct, till at least second quarter in the best case kind of a scenario. Also the electrolyte investment also get fully utilized in the next year. It will be not full for FY 2023.
Okay.
We'll have a better idea on this, like, you know, somewhere in our May call when we have the final year view and once we have a better clarity on, you know, some of the customer approvals on the pharma advanced intermediates sides. We'll give a guidance on FY 2023 there. FY 2024, that INR 700-INR 725 looks doable. This year, you know, based on the run rate which we are doing, crossing INR 450, like, seems easily doable. We will be crossing INR 450. We expect somewhere between, let's say, INR 475, or slightly above that. In that range is what we are expecting. FY 2023, it should be somewhere closer to INR 600.
On which side of the INR 600, I'll be able to tell you, like, you know, by, let's say, May call.
Right. Sir, this pre-CAPEX you highlighted, so how long will it take to commission? Will it be around 12 months something or it will be lower than that?
I think the lithium salt, if we are enhancing, it will be, you know, in Dahej facility where we already have a dedicated inorganic block. That should be one year or slightly lesser than one year. The organic MPP, you know, generally organic plants are more complex, so I would give, like, 12 months to 15 months. Like, good case scenario will be, let's say nine months, but I think bare minimum we should take 12 months plus or minus three months. Electrolyte, you know, because we are doing it for the first time, my guess would be, like, 15 months to 18 months at least.
That's why, you know, we are targeting somewhere around September so that we are at least ready by December 2023 or early 2024, when Indian demand for the battery is likely to come, based on the PLI scheme initiatives.
Right. Right. Sir, my another question is on these two contracts which you got last year.
Mm-hmm.
You were envisaging roughly INR 60 crore-INR 80 crore kind of revenue this fiscal. Can you please share how much of that is recognized till nine months, and particularly for the third quarter?
You know, because there are two, I can't say that, but it becomes too specific, you know. Yeah, whatever range we had given that together they are contributing in this year INR 60 crore-INR 80 crore, that guidance what we had given continues.
Okay. My last question, if I may, is on the lithium carbonate prices. We have seen, you know, increase in the lithium carbonate price. Have you seen any challenges in the inorganic chemical segment, maybe, for passing on the input price increase or maybe the demand headwinds on the particular this segment? If you can share your thoughts on that.
I think the real answer of that we will get into next financial year, because as you know, last year, you know, we had given that the prices were historically lowest. Correct? Now they have come to like, it's still not yet crossed, or just crossed or just crossing in Q4, what has been a historical high. Historically, you know, these prices have, like, gone up to, at least for us, they've gone up to $18-$20 per kg. Up to Q3 it was within that, and we were able to pass that on. Of course, today it's too much in shortage, and just because of our relationship, we are getting full quantities or sufficient quantities to meet all our customer requirements. That itself is a plus. But I don't know whether, like, we will be able to pass on.
Sometimes, you know, it may create a bottleneck at our customer end and like, you know, for them, for example, this vapor absorption chillers, right? They compete against a compressor-based machine. Now a compressor-based machine doesn't have a price increase because of lithium, and if the vapor absorption machine has a price because of lithium, what will be the overall impact? You know, so that's something which we are not able to say as yet. I think, you know, we will have to see whether the overall volume goes down a bit, at least in some segments, because of such a high price increase.
That, the answer of that will be, you know, the Q4, and it's going to be even worse, for the next two, three quarters, because the lithium prices are likely to further increase, at least, till end of this year, after which they are likely to taper off and improve. So this entire calendar year of 2023 is going to be a test of that.
Sure, sir. Sure. Thank you so much, sir, for answering all the questions.
Thank you. Thank you.
Thank you. The next question is from the line of Anshul Verdia from Edelweiss Wealth Management . Please go ahead.
Thank you, sir, for this opportunity. I have couple of questions. First, on the gross margin. Could you throw some light? Is it driven by the lower raw material cost or there is a shift in our product mix?
No, Anshul, I think mostly it's been the product mix, and you've been seeing last two, three quarters that our gross margins have improved. You know, historically, the gross margins, I mean, when I'm talking historically, I'm looking at a very 10-year, 12-year kind of perspective. Neogen used to be between 38%-42%. Now with this advanced intermediates and some of these CSM molecules we're doing where we are doing 7-stage, 8-stage kind of chemistry, because of that, like, the raw material contribution is a bit less and the processing cost is a bit higher. What gross margins that you are seeing is, like, some reflection of that.
What at least based on whatever I've seen so far, the historical range of 38%-42% seems to be now more, like, 40%-44% seems to be the new quarter-over-quarter. You know, depending on the product mix, price of lithium, like, you know, these kind of the range, what we are seeing. I am seeing at least a 2% increase, like, on average improvement over what has been historical. Okay. Now I expect 42% ± 2% as our, you know, as our, gross margin. But consequently, we've also seen that manufacturing cost as a percentage will also increase because, you know, we are taking more of the manufacturing resources for achieving the same revenues. Therefore, the manufacturing cost and depreciation as a percentage will increase to some extent.
Thank you. That's really helpful. Follow-up on the EV. We have spoken about the PLI scheme, the Advanced Chemistry Cell Scheme, which will be helpful for the companies like Neogen in providing the electrolyte as one of the leading domestic manufacturers in the coming years. With your initial interaction with the customers, the potential customers, what is the sense on the electrolyte market as such? Because from time to time we have seen the shift in the technologies. Now people have started talking about the sodium-ion battery. Is this something, a risky territory we are foraying into? Or what is your views from the initial interaction you had with the customers? Because even the people who applied for the plants for ACC and the PLI, they are not sure of which technology would they be using.
Any initial thought there could be really appreciated. Thank you, sir.
Again, you know, then currently at least based on our views, and I think what we discussed a little bit also in the last call, that for EV applications. There are two major applications of these storage batteries. I mean, two large applications. One is the EV and second is, you know, storage for renewables or intermediate storage for, let's say, hydrogen production. When you are talking of intermediate storage for hydrogen production or, let's say storage for, let's say renewables, that is where, you know, a sodium-ion battery can have an advantage if it becomes efficient, because these are static systems. You know, the charging of these batteries happens over a period of time, so it's not a very fast charge, fast discharge, and the performance and the weight of the battery is not critical.
To the best of my understanding for EV, lithium-ion battery is going to stay. Within a lithium-ion battery, there are different cathode chemistries, and depending on different cathode chemistries, there would be slight variation in each customer's electrolyte composition. The salt which they choose or the additive that they choose or the stabilizer that they choose will be customized for each customer. The basic requirements remain the same, you know, for the electrolyte as long as we are talking of lithium-ion batteries application. I think, at least in my understanding, the kind of electrolyte which we are making is going to be required, irrespective of the lithium chemistry which they choose. I think again, ACC also has some battery performances that you have to have some GWh per kg performance or, sorry, not GWh .
Some cell kWh per kg and some performance parameters are there. I think, based on my understanding, most of these are going to be lithium-ion batteries. Of course, sodium-ion will be there, but lithium-ion continues to be one of the key technologies and the demand for electrolyte is still going to be significant. Of course, you know, the reason why we've not yet done the final investment is because we are waiting also for clarity. You know, at some point of time, like I said, by June, by June or maximum September, our customers will be making this decision. As our customers make decisions and we get comfort from them and they get comfort on the developments that we do, we will go ahead with that. That's something we'll keep watching.
Thank you, sir. That was really helpful. Just last couple of ones on the modeling side. We saw the other expenses increasing, almost doubling this quarter, and also they increased quarter-on-quarter 30%. In your initial opening remarks, you said it consists some of the COVID-related protocols, some cost on the transient cost. Can you quantify COVID-related protocol and is there any component of QIP raising the cost related to QIP raising in that which is not a one-off for next quarter?
No. There is no QIP raising cost. You know, more or less let's say, you know, the capacity that we have today is good enough to like do INR 165 crore-INR 175 crore worth of revenue, correct? It's kind of almost double as compared to what we were doing earlier. That's one of the criteria that, okay, most of the capacity has come in place while we have not yet reached full utilization level. You know, people and some of the maintenance systems, QC, R&D systems, all of those have already come in at the full level. As the utilization improves, as a percentage it will drop.
The second reason for increase is what I've shared with you earlier, that our product mix is such that, let's say by 1% or 2% our gross margin has improved, but at the same time the manufacturing cost has gone higher.
Got it, sir. Lastly, on this interest cost. This will continue to be the trend going forward. This quarter we had a little higher interest cost.
The interest cost, again, should improve, because of the fundraise that we did. I would ask Ketan to maybe give a better idea on that.
Yeah. As we did our fundraise and the funds have come in, we try to deploy the funds to optimize the finance cost. While we look at what best rates we negotiate with the banks to optimize our interest cost and use the fund that we have to lower down the working capital cost that we have and park off some of the funds to gain some interest while the CAPEX plans get finalized in coming quarters. We do expect that we should have a better lower interest cost in the current Q4 quarter.
Thank you, sir. That's all from my side. Thanks very much.
Thank you. Participants who would like to ask questions, please press star, then one. The next question is from the line of Manish Jain from Moneylife Advisory Services. Please go ahead.
Yeah. Thank you for the opportunity. My first question is, what is the traction you're witnessing on the custom manufacturing business? Have you added any new projects or customer under this segment?
We've added new projects, but those are, you know, early stage projects. We've not added like, you know, other than what we had commercialized, you know. We've not yet, like, signed a multi-year agreement, if that's the question being asked.
Okay. Any new inquiries from the customers?
We keep getting new inquiries from customers all the time. Also as we had informed earlier, once our Dahej site is like, you know, fully commissioned and we are also in the process of getting, you know, this quality certifications completed by this quarter. Once these are completed, we have in parallel also started approaching some key large customers who we were holding back because we did not have the site, SEZ site fully ready at that time. Also, you know, the capacity, availability was also a question. Now with Dahej ramped up, you know, having some extra capacity, we have started approaching these clients. Again, you know, these take one or two years to develop.
I think, between now and as I mentioned next year Q3, Q4, we will have a clear idea of what the pipeline looks like, beyond FY 2024. What happens in this one year is going to determine, so how many of the existing molecules are kind of ramping up and the new customers with whom we are discussing, what is the potential volumes of this, is what is going to allow us to take the decision on the next CAPEX, in the MPP in Dahej.
Secondly, can you provide some insights on how you're planning to utilize INR 225 crore raised through the preferential issue of shares?
I think, initially we will be paying off, you know, our rupee debt because, we also export, we also get export funding, which is at low interest cost. Lower than like, you know, what we can even get normally. The remaining we would pay off and some of the term loans we will pay off, which anyway have a maturity in next one or two years. Those will be paid off and then remaining additional money will be deployed, will be kept as a cash in the form of an investment, till, you know, our further capital, further CAPEX plans get formed up.
Okay. Thank you and all the best.
Thank you.
Thank you. The next question is from the line of Saurabh from Asian Markets Securities. Please go ahead.
Yeah. Thank you for the opportunity. I just wanted to understand more on the electrolyte thing. Also, based on your comment, is it right to understand that you'll be working on three or four types of salts with the different customers?
Different customers might not have the same. I mean, they may have different salt or they may have the same salt, but generally salt, solvent. There are three major parts, right?
Mm-hmm.
Salt.
Mm-hmm.
Solvents and additives.
Mm-hmm.
The combination of these, how much of salt, how much of solvent, which solvent, which additive, that remains different for different customers.
Okay. What about the additives? Are we also looking at making that as well?
Yeah. If the additive is a lithium-based additive, then yes, we are looking at making that in-house. Some are non-lithium additives where, you know, we will take a call whether it makes sense or whether it makes sense to just buy them.
Okay. In your last call you mentioned you're also working with the international customers. Is there any, you know, further progress in terms of export opportunity for the electrolyte?
Yeah, I mean, we are evaluating that. As I mentioned, you know, we want that small facility to start with which we can start working with the customer. The customer does remain interested and we are exploring. Although I have to say the international customer is, the main interest is that he will also eventually tie up with somebody in India. Once we've done the evaluation, whoever he ties up in India has an already approved source. Again, how much he will purchase internationally or more he's interested for whatever they are planning to do in India is something which time will tell.
Electrolyte inherently have some challenges in shipping, like some disadvantages if you are shipping it very long because the tanks which are required or the containers required are very specialized and you need to bring them back and forth. You know, then the cost of doing internationally sometimes can be higher. Again, if they don't have a domestic source with enough quantities, they may still do it as an option. Like my personal feeling is that majority of the electrolyte business will be domestic.
Just maybe a broad comment on the next, I don't know, three to five years timeframe in terms of investments. Are we, you know, looking at higher CAPEX outlay on the electrolyte or EV part of the business and probably organic CAPEX will be maybe 20%-30% of overall CAPEX?
I wish I could answer you that, but I think, you know, when it comes to CAPEX, it just makes sense to take one decision at a time, you know, in our view. You know, it's too early to predict. We have opportunities in both the segments. Each opportunity we will take, you know, what are the risks associated with that? What are the opportunities in front? You know, that will be the main driver for CAPEX. I think it's too early to predict how much will be lithium and how much will be the organic.
Okay.
One thing I am certain that there will be investment into both. Percentage, like, seems difficult to predict now.
You know, all the CAPEX maybe, you know, over the next one and a half years or so, is it fair to assume that the earliest, you know, this CAPEX can contribute is after 2024?
No. I mentioned the CAPEX decision is going to be taken, let's say earliest, like, of the three CAPEX which I mentioned.
Mm-hmm.
The earliest can be June, for example. The maximum would be, let's say, by Q4 FY 2023. That's when we will take the decision. Majority of this will come online, let's say, in FY 2024. FY 2025 is when they will contribute. Depending on timing, some of them may contribute in FY 2024 also. Let's see. If these CAPEX, for example, if it happens, let's say by June, you know, we can get it to contribute in FY 2024, that will be great, if the visibility and the clarity is there. Most likely it will. The major contribution or significant contribution will be in FY 2025 onwards.
Okay. Just last one on the other expense. You mentioned now maybe as percentage of revenue will come down. Can you give, you know, maybe what is the break-up of variable and fixed cost of the other expense?
That's a bit difficult to do, but as I mentioned that, you know, on a steady-state basis, once we have full utilization, I am currently expecting, like 2%, for example, 2% improvement in our gross margins, so at 42% and 2% increase in other expenses. More or less, right? Over what was kind of a steady situation, let's say last two to three years. So remaining more or less EBITDA neutral. Of course, if we are able to do better than that, then that's where the EBITDA margins will improve. As I've said earlier, one of the major driver of that is going to be, like, you know, the innovation that we do or some higher efficiency which we achieve.
Mm-hmm.
As compared to what others have done. I think once we start doing this stabilizes, like innovation kicks in, improvement kicks in, that's when we can basically see further improvement on that. The only variable here I would like to say is the lithium prices, because the way lithium prices are growing very high, you know, on, like, the absolute margin, the margin levels, there might be some impact there. Depends on how long, how high they go. Like I said, sometimes we'll also have to support our customers in this, very demanding three or four quarters which is going to be there. Depending on that. Otherwise, like, my expectation is like a 2% improvement in gross margin, 2% increase in other expense, on a steady-state basis.
Any innovation will help us go beyond, you know, that 18%-19% EBITDA, which we usually consider.
Okay. Any price hike taken in our organic business?
Yes, some of the raw materials have been increasing and, you know, because of those increases, we also have been passing on to our customers. Like, solvent prices have increased. Bromine prices also have increased, but so far, because of our long-term contracts, we are, like, you know, on an average, the impact has been very limited, which we were able to cover. The more impact of the bromine price hike will come in the next financial year when our contract will reset and we'll also have to reset with our customers.
Okay. Thank you. No further questions.
Thank you.
Thank you. The next question is from the line of Manish Gupta from Solidarity. Please go ahead.
Dr. Harin, you know, India has such aggressive plans for lithium ion.
Yes.
From a supply side perspective, I mean, has India tied up the amount of lithium we will need to import?
India as a country has not tied up. Individual players like Neogen or whatever Neogen is planning to do in lithium, we've talked to the major lithium guys, and we are quite confident, at least for the electrolyte or the lithium salts that we are considering for international market, we should be able to get. Although the big demand of lithium is going to be in the cathode side. The cathode requires much larger lithium as compared to the lithium which is present in the electrolyte. Some of the companies in cathode, and Neogen is also exploring some cathode chemistries. That is where we'll be more worried about will we get enough lithium.
Now, again, the way we see it, the good news is that India is starting in 2024, and the major demand where we become a significant player where, you know, we have to worry about will we really get, like we become a bottleneck or decision-making for the world lithium is not going to be by, you know, FY 2026, 2027 or maybe 2028, because the world lithium capacity is increasing so much that, you know, we should be able to get some share of it. How competitively we'll get, you know, time will tell. I think Government of India also has set up a particular company, and they've taken some initiatives to, as a sovereign nation, to secure the materials, like, you know, to secure lithium for India, you know. So that companies like Neogen can then tie up with a company.
It's a concept similar to, like, ONGC Videsh, you know, to kind of give you the most easiest example. I think there is some action on that front by the government. Like, you know, again, I hope, I know they are also working very hard, and I think by the time it becomes critical, if everything goes well, you know, these, like as a sovereign nation, we have done something to secure lithium. Otherwise, you know, we will have to kind of step up, and each individual company will have to go and secure its lithium from what is happening internationally.
Say for Neogen right now, if you are putting up capacity, you would have tied up back-to-back long-term arrangements for supply.
Yeah. When we will set up a capacity for X or whatever capacity X that we are planning, the lithium which will be required for that. We've talked to the existing lithium suppliers, and they are confident that they can give to us, that material. Lithium will not become a constraint for us, for the plans that we have so far.
Okay. You know, this first phase that we're doing, 250 metric tons.
Mm-hmm.
At steady state, what's the revenue potential of this?
You know, this 250 metric ton is gonna be really trial volumes. Okay?
Mm-hmm.
Therefore it doesn't really make. Again, this 250 metric ton is, you know, not. The prices will be, because we are doing a smaller quantity, the lithium prices will be different. I would not want to put a number on that at this moment.
Okay.
Okay?
Yeah.
As we said, you know, the INR 35 crore CAPEX was both for this as well as for the pilot facility where we can, you know, make we can make, like the initial requirements of international customers in the CSM business, and together they will contribute INR 45 crore-INR 50 crore. That's something which we think we can achieve. Let's say even if, you know, some of the revenue doesn't come from here or it's a bit lower, that's something which can be absorbed very easily with, like, you know, incremental CAPEX in my existing facility or just, like better utilization of my facilities and stuff like that. Therefore, I would not like to put a number on the 250 metric ton.
It's more essential as, like, you know, getting approval, demonstrating and the knowledge to gain knowledge so we can design our larger capacity, which will be at least 2,000 tons more efficiently.
Okay. Let me rephrase my question, Dr. Harin. In slide 18 of your presentation.
Okay.
You know, you have a chart which you say that the electrolyte demand for India will be 70,000 metric tons as per the estimates given, right?
Yeah.
You know, right?
Yeah.
Let's say that the electrolyte demand of India is 70,000 metric.
Yeah.
Just for a minute, assume that Neogen is only supplying 10% of that, right?
Okay.
If we say for a 7,000 metric ton capacity.
Mm-hmm.
What is the revenue of that then?
Manish bhai, for various reasons, I don't want to name the value of that.
Okay.
If I wanted to, in the same slide, I could have done a comma and added the number so it becomes easier. One is, you know, because lithium prices are moving so much, still not very clear clarity of what is going to be the composition of this 70,000 metric ton. Although I have the number with me, very clearly, of the range, but currently I'd not like to share if it's okay.
No, absolutely. Absolutely, sir. You know, the intent is not to put you on the spot.
Yeah, I can just tell you one thing. If you just Google electrolyte prices, you know, worldwide, like, you know, there are some research reports also which kind of give you that. Again, some of them are on a lower side. That's what we believe, and that's why we don't want to put a number till we understand. Also, the price of these electrolytes in China is very different, in Japan it's very different, in Europe it's very different. What's going to be the India one? You know, and that range is also quite a bit. That's why I don't want to put a number on it as yet.
Okay. Thank you very much.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in this conference call, please limit your questions to two per participant. For any further questions, you may come back for a follow-up. The next question is from the line of Sabyasachi Mukherjee from Centrum PMS. Please go ahead.
Yeah, hi. Thanks for the opportunity. You know, congratulations on a good set of numbers. My first question is, you know, on the electrolyte CAPEX. You mentioned that it is around INR 50 crore-INR 100 crore, probably in phase one. What would be the likely asset turn out of this CAPEX?
Again, sorry, I don't have an accurate number for you as yet. As I said, you know, because as I answered in the earlier call also, earlier answer also, that, you know, the exact composition which the customers are going through, what is going to be the price. Still these numbers are varying quite a bit and like, you know, although I have approximate number in mind. Also exactly, you know, what capacity which we are going to put up. So we can put up, let's say, considering a 10% market share, 20% market share, 30% market share, or we can put up a capacity for three years versus five years. So a lot of these questions still need answered. So unfortunately, I'm not able to answer at this moment.
My, like, you know, guess is generally inorganic CAPEX is usually like requiring having better asset turns than organic. If in the organic we are able to achieve like two and a half, my guess is it has to be better than that based on whatever. How much better, whether it'll be same or better, that's something, you know, I need to be more sure of a lot of some of the details. Only after that I can share.
Sure, sure. Only other thing, a follow-up to that is, you know, if you can probably indicate what would be the, you know, CAPEX for, let's say 1,000 metric ton or I don't know, I mean, what figure you are looking at. But if a ballpark figure, if you can, you know, give us that what would be the CAPEX for, you know, 1,000 metric ton capacity. So that would help us.
Most likely the capacity, because the existing one itself will be 250 metric tons. The capacity that we will set up will be at least couple of thousand metric tons. It will be more than that. Again, unfortunately, I don't have a number on that yet. Please allow me. I hope, by May, I can give you in the next call, I can give you better clarity on this. Worst case scenario, definitely the call after that. July, I think we should have a much clearer answer on that.
No worries. Thank you. Next question is on again on the CAPEX side. You mentioned three areas of CAPEX that currently you are thinking of.
Mm-hmm.
One is electrolytes, the other is salts for international customers, and third is inorganic.
Third is organic.
Third is organic. Okay. That is where actually my question is coming from is, you know, so probably our organic chemical CAPEX would be fully utilized by FY 2024. I mean, what is the plan over there, and what is the, you know, again, probably quantum of CAPEX you are looking at?
Sure. I think as I mentioned earlier in one of the answers, as you very rightly said, in FY 2024, we expect to be fully utilized condition. Somewhere in second half of FY 2023, like, you know, we should be making a decision. Most likely, I would say in Q4, taking a decision on the organic CAPEX. If the demand remains very strong, we have good business visibility, etc. That, you know, that if we take the decision by, let's say even if we take the decision by end of FY 2023, so by end of FY 2024, we have a new capacity which comes online, which can help us continue our growth in FY 2025.
Generally my expectation is it will be somewhere around INR 100-odd crore of CAPEX, with again 2-2.5 asset tons, which we should be doing. Usually it's an incremental CAPEX, so I think we should be able to do that in Dahej. Again, more precise numbers we can give you at that time, but this is my general expectation.
Understood. Last bit, on the other expense side. So is there any element of elevated freight cost and the high utility energy costs, also impacting the margins?
Yes, to some extent. Of course, the bigger driver is like, you know, just the utilization as we improve the utilization levels. Again, it's still within the range which I always mention, right? 18% ±1%. It's still there. Maybe, like, you know, not on a higher side of it, but I think, you know, yes, freight has been higher. Again, I think most of that we've kind of passed on. Fuel prices have increased. It will take some time for us because that's not something which we anticipated, and it will take some time. The contribution of that is there. In my mind it's more my Dahej plant getting fully utilized efficient manner.
The efficiency and the increased utilization levels is what is critical for us to improve. Some of that, as you've seen, I mean, maybe the comparison, it directly looks double, so it becomes more stark. If you look as a percentage, it has been increasing because of the product mix already, as I mentioned earlier.
Understood, sir. Thank you. Thanks a lot. That's all from my side.
Thank you. Ladies and gentlemen, we take the last question from the line of Mihir Damania from Ambit Investment Advisors. Please go ahead.
Yeah. Hi. Hi. Am I on?
Yes, Mihir.
Yeah. For the interest, are we maybe looking at any inorganic acquisition for the fiscal? That's my first question.
No, I mean, historically, what we have stated same remains, that normally our growth strategy is not through inorganic. Inorganic, if at all an opportunity comes in front of us where we think it can add a lot of value, we are always open to consider that. Usually Neogen's plans are more, like, you know, organic growth. The fact that we have land available both in Dahej, Karakhadi, you know, we already have approvals. Like, you know, unless there was a specific reason, we would not think of an inorganic growth. I mean, acquisition or something like that.
Got it. Thank you. My more on the fundamentals. Fundamentally on the.
Excuse me, this is the operator. Sir, I'm sorry to interrupt, your voice is breaking.
Is it though?
Sir, it's still breaking.
Loud better?
Yeah, a little better. Let's try. If we get the entire question, then that's good. Yeah.
Yeah. Fundamentally on your initial estimate, how does the electrolyte opportunity change on the margin front? I'm not looking for guidance or something like it's a number. I just want to understand how it stacks up compared to what your other segment is. Will it be more over CSM margins or will it be more the advanced intermediates or your organic chemistry, or maybe even better or worse off than each of the segments? What is your initial assessment on that?
You know, again, as I mentioned, you know, because the exact mix complexity and, you know, even the plant investment is still not yet clarified, you know, there is no current answer to give you exactly how the margins are gonna change for the electrolyte. However, the expectation is that the margins could be lower as compared to organic. Expectation is that the asset turns will be better. Let's say on a ROE or ROC basis, they will be equal to what we would see in a incremental CAPEX in organic. This is just what I would wish for or if I were to put my model, that's how I would put it in my model. Again, it's too early to, like, give you more clarity on that.
Got it. Great. Thanks. That answered my question. Thank you.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.
Thank you all the participants for joining the call. I hope we were able to respond to all your questions. If you have any further questions, please feel free to contact our investor relations team, CDR India, and we will address them. Thank you once again. Stay safe, and we look forward to connecting with you in the next quarter.
Thank you very much, sir. Ladies and gentlemen, on behalf of Neogen Chemicals, that concludes this conference. We thank you all for joining us, and you may now disconnect your line.