Camlin Fine Sciences Limited (532834) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Q3 FY '20 Earnings Conference Call of Camlin Fine Sciences hosted by Ambit Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Prasenjit Bhuiya from Ambit Capital. Thank you, and over to you, sir.

Thank you, Margaret. Good afternoon, ladies and gentlemen. On behalf of Ambit Capital, we welcome you to the 3Q FY 2020 Earnings Call of Camlin Fine Sciences Limited. We have with us today, Mr. Ashish Dandekar, Managing Director; Mr. Nirmal Momaya, Director; and Mr. Santosh Parab, Chief Financial Officer of the company. Now I hand over the call to the management for their opening comments, post which we can take the floor open to questions and answers. Thank you, and over to you, sir.

Thank you. Good afternoon, and welcome, everyone, to the earnings conference call for the Q3 FY '20 under review. I'm Ashish Dandekar, and as per our usual procedure, I will give you a brief view of the quarter, and then, Mr. Nirmal Momaya and Mr. Santosh Parab, our CFO, will answer questions. I hope you had an opportunity to look at the company's financial statements and earnings presentation, which have been circulated and uploaded on the company website and the stock exchanges. Firstly, let me run you through the key financial highlights for the quarter on a stand-alone basis. In Q3 FY '20, operational revenues increased by 2% on year-on-year basis to INR 153.2 crores. The adjusted EBITDA, after adjusting for foreign exchange fluctuation gain or loss, stood at around INR 14.1 crores in Q3 FY '20 as compared to INR 2.8 crores in Q3 of the previous quarter -- of the previous year in the same quarter, representing a growth of more than 400%. The adjusted EBITDA margin stood at 9.2% for Q3 '20 as against 1.87% in Q3 '19, which is a growth of 733 basis points. The net profit for Q3 FY '20 was reported at around INR 4.7 crore as against a loss of INR 5.3 crores in the previous -- in the same quarter of the previous year. On a 9 monthly basis, the stand-alone operational revenues stood at INR 440.2 crores, marking a growth of 17% on a year-on-year basis. The adjusted EBITDA stood at INR 45.7 crores, which signifies a growth of 125% on year-on-year basis. The adjusted EBITDA margin stood at around 10.38%, which is a margin expansion of 497 bps on a Y-o-Y basis. The net profit for 9 months of financial year '20 stood at INR 14.2 crores, marking a growth of 75% on a Y-o-Y basis. Now coming to the consolidated performance for the quarter. In Q3 of FY '20, operational revenues increased by 13.5% year-on-year to INR 273.9 crores, and the adjusted EBITDA grew by 42% to INR 29.6 crore as against INR 20.8 crores in Q3 of the previous year. The adjusted EBITDA margins were around 10.81% for Q3 FY '20 as against 8.62% in Q3 '19, which marks an expansion of 219 bps on a Y-o-Y basis. The net profit for the quarter was reported at around INR 3.8 crores as against a loss of INR 8 million in Q3 FY '19. The consolidated performance on a 9 monthly basis has been quite remarkable. The operational revenues stood at INR 756.3 crores in 9 months of this year, which is a growth of 21% on a yearly basis. The adjusted EBITDA stood at INR 96.4 crores, marking a growth of 86% year-on-year. The adjusted EBITDA margin stood at around 12.75%, which is a margin expansion of 443 basis points on a yearly basis. The net profit for 9 months of this year stood at INR 27.8 crores as against a loss of INR 3.3 crores last year. On a consolidated basis, I'm very happy to report that on a 9 monthly basis, there is -- on a 9 months, there is good improvement in the consolidated gross margins, which was mainly driven by a better product mix and yield improvements. However, on a Q -- quarter-on-quarter basis, stand-alone gross margins were slightly impacted on a -- due to a change in the product mix. Also, revenues from the Aroma Chemicals vertical was substantially higher in this quarter, driving the overall consolidated revenue growth. Giving you a very short brief on each subsidiary's operational performance for Q3, CFS North America, which is mainly based for the U.S. market, has shown significant improvement in revenues, which stood at INR 9.1 crores in Q3 of this year as against INR 3.2 crores in Q3 of last year, marking a growth of 184% on a year-on-year basis. Our Brazilian company, CFS Brazil, has seen good growth in revenues, which stood at INR 17.3 crores in quarter 3 this year as compared to INR 9.1 crores in quarter 3 last year, representing a growth of 90% on a year-on-year basis. CFS Europe reported revenues of INR 53.3 crores in Q3 this year versus INR 85.7 crores in Q3 of last year, marking a degrowth of 37.8% on a year-on-year basis. CFS Mexico reported revenues of INR 64.5 crores in Q3 this year as compared to INR 58.1 crores in Q3 of last year, which is a growth of 11% on a yearly basis. CFS Wanglong in China reported a revenue of 72.8% -- sorry, INR 72.8 crores in Q3, as against INR 62.9 crores in Q3 of last year, which shows a significant growth of 15.7% on a year-on-year basis. Of course, the operations in CFS Wanglong have been affected by the impact of the coronavirus. The situation there is still fluid. As on date -- the authorities have given an expected start date of 17th, but it is still fluid, so we will keep you updated as and when the situation develops. Lastly and importantly is the update on the Dahej plant. The mechanical completion has been successfully done in January of this year. All the utilities and electrical installation have been completed. The trial runs have commenced by end of January, and we expect commercial production before the end of this financial year. With this, I would like to open the call for question and answers. Thank you very much for being present.

[Operator Instructions] The first question is from the line of Debanjana Chatterjee from HDFC Securities.

So I wanted an update on your Tarapur plant. I missed the opening remarks. So any updates on your Tarapur? When is it going to reopen? And what is the -- what would be the impact on your top line on an annual basis?

So yes, the Tarapur plant has reopened on 2nd February. In all, totally, it was shut for less than 7 days. There is no significant impact on our annual figures based on this reopening.

Okay. And second is, you have not paid dividends since past 3 years. Are you planning to pay dividends? Any...

That, the Board will decide at appropriate time.

Okay. And you have a very low promoter holding of some 22%, if I'm not wrong. Your -- out of which, 10% is pledged. So any -- how are you...

We are working on de-pledging those promoter holdings.

Okay. And how is it -- how are you planning to do the same?

In the next 12 months, we are working on a plan to de-pledge.

In the next 12 months?

Yes.

Okay. And can you give a product-wise breakup?

No, we cannot give product-wise breakup.

Any peers of your -- I mean, like for products, peers and market share of the same?

No, no, we cannot give that. We cannot disclose that.

[Operator Instructions] The next question is from the line of Rohit Sinha from Emkay Global.

Two -- I mean, a couple of questions. First off on Europe side, there is a significant decline in the revenue front. So what's the basic reason there? And next, there would be -- might be on the gross margin front, as you mentioned, that there is a change in product mix. So where it has shifted and how we're looking forward going ahead?

So the first, on CFS Europe, we had an annual maintenance shutdown in October for about 12 days, which did impact the production slightly. It's not a major impact, but the bigger impact is that we held stocks in the month of December in anticipation of -- to match the timing of Dahej start. So we were holding stock in December in Europe and did not ship all that stock out to India of both hydroquinone and catechol. So you will see the impact of sales going up in the next quarter because a large part of that stock has now been sold and the impact of that will be in Q4. So that was as far as CFS Europe was concerned. The second 1 on the gross margin. The product mix on a consolidated basis, we sold almost INR 80 crores of vanillin as opposed to, in the last quarter, it was INR 33 crores. So the idea was we were seeding the market to take market share in anticipation of our catechol, which is from Dahej, which would be a far more cost-efficient raw material. So from that perspective, to create end-use market, we got aggressive in the market in this quarter and established ourselves amongst the flavor/fragrance houses as well as across all geographies, established ourselves as the leading player in the vanillin market. And that was the reason why you saw that vanillin did not have -- we sold vanillin at a very low margin, that's how the impact on the EBITDA margin overall even though there has been a growth in turnover.

Okay. So coming back to this Europe thing, as you said that in next quarter, we'll be back on revenue side. So whether we will be able to get that INR 85 crore, INR 87 crore kind of a run rate? Or will there be anything on the lower or higher side?

No, it will be more than what it was, because we have -- we sold the stock which was lying -- the December production. So typically, Europe used to, in the past, sell to India everything because we're consuming all the hydroquinone and catechol. There was no third-party sale. But now in this quarter, the third-party sale has started. And we are establishing ourselves in the market even to sell some hydroquinone and catechol in anticipation again of the plant starting with Dahej. So I think we should be able to maintain the run rate which has been there of about INR 80 crores in this quarter. Maybe some more also depending on whether we hold stock or we decide to liquidate all the stocks here.

And in China front, still we are at EBITDA negative side or whether we have improved something on that?

So on a stand-alone basis, yes, it is negative, though we make a margin in the guaiacol from the India -- the supply we make from India. But on a stand-alone basis, in China, we are in the negative zone.

Okay. And coming back to India side, I mean, if we look at the last 5, 6 quarters run rate, we have been significantly growing in double digit, whereas in this quarter, it's a slightly muted number. So going forward, where -- what kind of a run rate or improvement we can expect in the stand-alone India side? And which product would there be contributing to this growth?

Yes. So stand-alone India, the first and foremost, the biggest impact will be Dahej, which, in this quarter, we should commercialize Dahej. So from the next quarter, you will see the impact of Dahej. So the growth has been -- I mean, we've reached our full capacity utilization in all products, most products rather. So therefore, with the existing capacities, to increase turnover significantly is not possible. So the new additional capacity which is coming and which will give top line as well as health in the bottom line is Dahej. In Dahej, we are also in the process of setting up an ethyl vanillin facility and then MEHQ, which is a downstream of hydroquinone facility, which will be completed by Q3 of FY '21, which should again add significant top line and -- to the EBITDA margin. So in the near term, this is what we are trying to execute for FY '21.

Okay. So earlier, I mean, we were largely of the view that with Dahej commissioning, there would be a significant improvement at the EBITDA level, but...

Right.

Revenue side, we don't -- we were not expecting anything significant.

Right.

So now since you are indicating on the revenue side also. So just wanted to check whether if it is possible to give a rough figure or idea how much additional revenue run rate we can expect from this Dahej facility.

So Dahej, ideally, we don't want to sell anything in the market. We want to consume the entire thing. Right? So on a consolidated basis, what happens is that today, what we make in Europe, we consume in India. Therefore, it doesn't add to the turnover. But on a stand-alone basis, in Europe, it is turnover, whereas in consolidated, it's not. So what will happen is, it'll only shift to India. So you will not see a significant growth in the top line because we [ want to ] consume all the hydroquinone and catechol because it's the same capacity as Europe. The entire thing we want to consume ourselves. We don't want to sell this product in the market.

Okay, okay.

So the margin improvement will be significant. Turnover marginally will increase, but the big jump in turnover will come with new products and the new capacities that we are building out.

And that would be in India or across the...

In India, in India. In India, stand-alone.

Okay. And just last 1 question on the interest cost side, it has come down 25%, 30%, I guess. So is it all because of debt side? Or is there currency benefit also there?

No, no, no. It's not...

It's just not currency.

It's not -- the interest cost has not come down but under the new regulations, you have to -- the foreign exchange difference is -- on the debt that we have, is considered in the interest cost. So we got a benefit of almost INR 5 crores in this quarter. That's how the interest looks lower by INR 5 crores.

So I mean, the change in -- the currency fluctuation benefit we can expect of this thing, INR 5 crore?

Yes.

Yes.

The next question is from the line of Aakash Sharma from Goldman Sachs.

Yes. My first question is on the Tarapur plant which was shut down. Which products were manufactured in this plant? And what was the reason for the shutdown?

Yes. So the shutdown -- the first -- we produced TBHQ, BHA and ascorbyl palmitate, 3 products we make in Tarapur. The plant was shut down. You see, there were some accidents in the area in the month of January, where there was a large blowup of a boiler and an accident which I think several people were also -- several people died in that. So in the area, they came down on all the large users of steam and boilers and they give closure notices. It was actually -- in fact, it was -- we had an inspection done in October, and we had complied to all what they had asked for. And we had replied to them on the 18th of October, actually, the day after they had inspected, which was ignored, and then they issued this closure notice, of course, which then we got a restart very quickly because we went in, showed that we have complied with everything. So...

Sir, you just now mentioned that in Dahej, the MEHQ capacity is expected to commission in Q3 of FY 2021?

No, no, no. MEHQ, yes. Of MEHQ, yes.

Yes. So this will be consumed captively or this will be sold in the market?

No, this will be sold in the market. MEHQ is a product we sell in the market.

Okay. And what is this capacity? Like how much tonnes capacity is expected to...

So we are planning 2,500 metric ton capacity.

Okay, okay. And as of now, we are not manufacturing MEHQ, is it?

No, we are. We are manufacturing it in third-party site. So -- but there is a constraint on how much we can produce because it's contract manufacturing in very limited capacity.

So as of now, how much MEHQ we're selling in the market?

We've been selling about 40, 50 tonnes a month.

40, 50 tonnes a month. Okay. Sir, this Dahej plant, I understand, as of now, only HQ and catechol will be commissioned, right?

Right. That's right.

Which will be consumed captively, so there's no prebooking kind of thing which will happen, right?

Correct.

Okay. And sir, in terms of new products, because as you have been expanding into new products since FY '13 till now, which is commendable. So what is the product pipeline looking for us from now over next 2, 3 years? Are we looking at any new products? And how is the R&D shaping up?

Yes. Okay. So we have actually 3 or 4 products which are in the pipeline. MEHQ is one of them. And with MEHQ, there's another product which is -- which goes into the pigment market. So it's called naphthol IRG, so -- which is another product that we are in the process of developing. It's out of R&D. Now we are in pilot scale. So that's going to be another product that we will launch in the market sometime next year. There is another product which we have already launched, but it's a very small market as yet. We're establishing ourselves in the market. It's called HQEE, it goes into polyurethane. And, of course, we have a product for the Lockheed Martin business. So these are the 4 new products that essentially we will be focusing on. And ethyl vanillin is the fifth one, which we'll be focusing on in the next 24 months.

Got it. And sir, you previously mentioned that this quarter, we reported a sale of INR 80 crores for vanillin product. Is that correct?

That's right.

Okay. And vanillin is a B2C product, right? Or is it a B2B?

No, it's a B2B. So typically, it is consumed mainly by the flavor and fragrance companies, as well as some direct users, chocolate makers, to bakeries, to ice cream makers. So it's a mix of either to flavor houses or to actual user of vanillin, which gets finally sold to a consumer. So it's B2B2C. We are in the B2B segment.

The next question is from the line of Surya Patra from PhillipCapital.

Congratulation for the best-ever revenue number that you have reported. My query is on -- first query is on, obviously, the vanilla thing. This quarter, the -- it seems that, okay, it is a kind of a conscious and planned way that you have expanded your vanilla base for this quarter. But at this utilization, with this revenue base, it seems that, okay, we would have possibly achieved more than 80% kind of utilization. So that [ means ] whether we have seen the profitability to the bottom line? Or when -- in what scenario that we should really see the profits for the China operation?

Yes. So in this quarter, the production we would have reached would have been about 70% or so. We've not yet reached -- I mean, we want -- we wanted to take it to 80%, 90%, but since the market conditions were not so -- the prices were not very profitable. So we said, let's do the best we can do in terms of pushing the production and assessing the plant, at the same time, not actually losing money on a gross level there. So the way to look at it is that as soon as our catechol from Dahej starts, our cost of guaiacol and cost of vanillin will come down considerably.

Okay.

And if we stress our plant -- and at that point, if you take it to 80% even with -- those prices have started correcting a bit, but even if the prices were where they were, we would be very profitable there.

Okay. Just an extension to that same point, sir, see, like all the 3 global leaders are operating from China. And all of them are having their large plant in China, including Camlin. So what is the scenario that it should emerge if the coronavirus thing that prolongs for, let's say, for a quarter even? Then in that scenario, what would be the like near-term impact that we should see, impact or benefit, in whichever manner? I don't know. Can you elaborate?

See, there are 2 plants of Solvay which are not in China. They're in U.S. and Europe, which is very good for the vanillin market because there is no impact in that. So always, the risk is if a product is not available, it gets replaced, right? So that is the bigger risk for us, was -- will vanillin get replaced by something else because of this crisis? No, it will not because there is enough vanillin available right now, okay. It's in short supply. Also, the province in which Solvay plant is has not been as badly impacted as the province in which our plant is. So we think that as soon as this embargoes, on 17th or 24th of February, whatever, whenever they do release that -- it's now -- they're saying 17th, that's the new directive, it should get into production. So there's no reason why they should be out of the market for more than maybe the months that they've been shut. As far as we are concerned, we've been shut from 22nd of January and we have, of course, a situation where we have migrant workers. So they need to be -- they need to come in to our province and be isolated for 14 days. So the earliest -- even if we bring them in tomorrow, the earliest we can start will be end of February. So that's -- our aim is to try and be ready for end of February. So that means about a month -- we'll lose about a month of production after the Chinese New Year.

Okay.

That seems to be the main -- and we also have some impact on some of the performance chemicals that we sell into China, because if those plants that we are supplying to are in these provinces, then the startup of that also is a question mark. But fortunately, I think about 80% of our business is in North China, which has not been impacted. So...

Sir, we have talked about the kind of an impact from the development, but do you ever see or anticipate that, okay, there could be a kind of price escalation in a few of the chemical products and hence, there could be some positive impact to you?

See, it's difficult to say because, really, I mean, until it restarts -- China restarts, we will not know what is the position, who has what stock, have they been destocked. It's very, very difficult to say. They're not even allowed to open their offices as of now. They're all working out-of-home. So documents are not available. So it's too early in the day to say whether there will be an impact positively or negatively.

No. For example, since the TBHQ, BHA and all that, so there is a kind of a large producer even within China. So -- and this was a kind of a quite well-balanced market. And if anything happens in China products, the situation even remains under pressure or under such scenario for a quarter, then don't you see a kind of pricing advantage for your Italy operation, let's say, or wherever that you had -- since you are talking about selling TBHQ, BHA in the third-party market now given the Dahej commissioning happening?

Yes. So TBHQ and BHA, there is a producer in China which services the Chinese market because there is an anti-dumping duty on us till early last year. And now, of course, we've started selling a bit into China. So that producer is also not impacted by this in the sense, they're not in the impacted province. So they probably will restart, so the gap will be only 1 month, 1.5 months. It will not be like a whole quarter that they'll be out of business here. So yes, maybe short term, I mean, maybe a few consignments, you may get some advantage, but not significant. I don't think there'll be really a very big significant upside for a sustained period of time. I mean, a few transactions, yes.

Okay. Sir, coming to Dahej thing, see a couple of things about Dahej. Obviously, now you have already indicated that we are all set for commercial commissioning of the plant anytime in this quarter. But if you can just share the kind of a preparedness that you have already achieved there about the commercial operation there, and also kind of in the Dahej site itself. So this is the first about the -- first commercial activity, but you have also mentioned about the other 2 units that would be set up about ethyl vanilla and the MEHQ. So the kind of investment that would be required and the time line that you are expecting for that, setting up that.

Yes. So basically, in Dahej, we've started the trial production. So on the reaction section, we've done several trials, and that's working well. Next week, we start with the distillation section, the trials on the distillation section, which should take about a week or so to stabilize, and then we go for continuous run then. And we are hoping in -- by mid-March, we should be running on a continuous basis. So that's the kind of time frame we're looking at, as of now, subject to, of course, everything going as we anticipate, and there are no other hiccups on the way. But any which ways, by March end, we should be in commercial production. As far as ethyl vanillin and MEHQ is concerned, the time lines are, after we start the commercial production, only then we will start -- and after we stabilize the production, we will start the work on ethyl vanillin and MEHQ. Right now, we are only at design stage. The execution of that, since we already have the utilities and all the common infrastructure planned for in advance, it's only the plant construction which needs to be done and which, our anticipation is, it should take between 6 to 9 months to execute the plant construction. The investment required will be about INR 40 crores to INR 50 crores for both these plants put together.

Okay, sure. So I have a couple of more questions. I'll come back in the queue.

The next question is from the line of Debanjana Chatterjee from HDFC Securities.

Yes. Just wanted to ask your long-term and short-term borrowings [ backup ] for the current quarter and 9 months?

The short-term borrowings are not increased on a stand-alone basis with respect to last quarter.

Can you give the consol number?

Hello?

Can you provide the consol number?

Yes. So as far as stand-alone is concerned, it has not increased. It's at the same level which was during the half yearly. As far as consolidated debt is concerned, this is [ discounted ] of around additional INR 20 crores at various locations outside India. So the overall short-term borrowings, which was at around INR 200 crores, INR 195 crores, INR 200 crores last half yearly...

Half year, it was INR 264 crores, short-term, on a consol basis.

Yes. So it was including non-funded. So fund base limit is around INR 220 crores and another INR 35 crores, INR 40 crores is non-fund base. So overall, the short-term loans have not increased. Secondly, as far as long-term loans are concerned, we have not taken any long-term loan during this quarter, and it remains at the same level as September '19.