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

Ladies and gentlemen, good day, and welcome to the Q3 FY '21 Earnings Conference Call of Camlin Fine Sciences Limited, hosted by Nirmal Bang Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Navalgund from Nirmal Bang Institutional Equities. Thank you, and over to you, sir.

Yes. Thanks, Ritija. Hello, everyone. On behalf of Nirmal Bang Institutional Equities, I welcome all the participants to Q3 FY '21 Earnings Conference Call of Camlin Fine Sciences Limited. We would like to thank the management for giving us the opportunity to host this call. Today we have with us Mr. Ashish Dandekar, Managing Director of the company; Mr. Nirmal Momaya, Director; and Mr. Santosh Parab, CFO of the company. Without further ado, I would request Ashish sir to start with his opening remarks. After which, we'll open the floor for Q&A. Thank you, and over to you, sir.

Thank you. Thank you very much. Ladies and gentlemen, welcome to the conference call of the earnings results of the third quarter of 2021. In the middle of the COVID pandemic, we have managed to not only survive but do well. And I will hand over now, as usual, to our CFO, Santosh Parab, to give you the summary of the quarter. And then after that, we will answer questions by Nirmal Momaya. Thank you very much. Santosh, over to you.

Yes. Thanks, Ashish. Good afternoon, everyone, and welcome to this earnings call for company. Firstly, let me start off by wishing a very happy new year, and hope you have a safe and healthy year ahead. Moving on to the quarter end under review, I hope you have had the chance to read the financial statement and earnings presentation shared on the exchanges and the company's website. As you have seen, this has been a good quarter for the company, more so because of the global economies are getting more stable and all geographies getting very close to normal. Vaccination drive, which has started, have added new sense of hope and buoyancy to the economic environment. Of course, the new wave of mutant virus though is a worry in some countries, the [ theme ] seems to be right around the corner. Let me now give you a short update on the Q3 performance. As you would have read, sequentially, this quarter had a strong performance with healthy growth in revenues and fortification of the margins. Stand-alone revenue was reported at INR 163.64 crores, which grew by 11.49% quarter-on-quarter and 6.84% year-on-year. The EBITDA margins have grown by 321 basis points and stand at 12.41% in the current quarter as compared to 9.20% in sequential quarter and 9.81% in corresponding last year quarter. As you are aware, company's diphenol facility in Dahej started its commercial production at the end of September 2020. Ashish, could you just mute to your phone, please?

Sorry?

Can you mute your phone? Because I think there's some noise coming from your side.

No, no. It's on mute. It has been on mute. Let me just do it.

Sorry to interrupt. I continue my remark. Current quarter includes the results of diphenol facility. The production capacity at Dahej has been steadily being ramped up during this quarter, and it stood at 55% at the end of December '20, while for the entire third quarter, the utilization stood at around 33%. Management is quite confident to achieve the optimum capacity of 90% at Dahej by the end of next quarter. Of course, full-blown impact of diphenol facility will be seen in quarter 1 FY '22. Going forward, an exciting outlook on the Indian economy, quite stable budget and, of course, past easing out of pandemic augurs well for the Indian business. Now I move to the consolidated numbers. Consolidated revenue for the quarter in rupee terms was reported at INR 297.92 crore, which is a growth of 16.01% and 8.78% as compared with sequential quarter and last year's quarter. EBITDA margins were stable at 16.35% and 16.55% in the current and sequential quarter. As compared to last year, the EBITDA margins were higher by 554 basis point. EBITDA margin in real terms for 9 months stood at INR 145.50 crore, which is partly more than last year, that is FY 2020's entire year EBITDA of INR 135 crore. Almost all geographies and business verticals have contributed in this robust growth. As mentioned earlier, the stability in the global economy bodes well for the group's business. Coming to the quarterly profit before tax of the group which stood at INR 27.81 crore as compared to INR 17.7 crore in last sequential quarter and INR 14.25 crore in last corresponding quarter. Consequently, the profit after tax was INR 19.42 crore in the current quarter. The tax rate for the quarter was 30.18%. While for 9 months this year, it was 35.10%. This was mainly due to nonrecognition and reversal of deferred tax assets pertaining to tax losses in certain geographies. However, we expect our normal effective tax rate on a consolidated basis for this year will be around 29% to 30% -- 29%, 30% without the impact of deferred tax losses. And on a long-term view, this rate has to be between 25% to 27% in years to come, especially because the tax benefits available for our Dahej SEZ -- at our Dahej plant, which is situated in SEZ. Now I'll come to the operations of our subsidiaries and the global business. Our subsidiary in Italy, which primarily manufactures diphenol, posted a revenue of INR 69.67 crore as against INR 95.06 crores in last quarter. This turnover was INR 53.29 crores in last year's corresponding quarter. Now the revenues were lower during the quarter due to the annual maintenance shutdown which we have to take, which is statutory and also for the upkeep of the plant has to be taken. It was around 3 weeks in the month of October 2020 when the plant was shut down for maintenance, and that impacted the revenues for this quarter. Now revenue of CFS Mexico, our Mexican subsidiary, which mainly manufacture blends, was INR 70.98 crores in the current quarter as compared to INR 60.66 crore in last quarter. And the same turnover was 64.5 -- INR 53 crore in the last year's corresponding quarter. You would have also read in the disclosure by the company that the Board has approved the proposal for acquisition of remaining 35% of the stake from the minority for an amount not exceeding USD 13 million. Company now -- will be now negotiating a structure wherein we are trying to optimize the internal accruals there. So we are going to structure it so that the optimum internal accruals are utilized for the acquisition so as to reduce the debt burden, which could have arisen. Post completion of this acquisition, CFS Mexico will become a wholly owned subsidiary of the group. Revenues of subsidiary Brazil were INR 18.26 crores, which was INR 15.88 crores in last quarter and INR 17.34 crores in corresponding last year quarter. But this trend of sequential is good. Growth is expected to remain in the subsequent quarter. In case of our North American subsidiary, that is CFS North America, which is situated in U.S., the quarterly revenues were INR 7.95 crores as compared to INR 9.67 crores in last quarter. This revenue was INR 9.14 crores in the last corresponding quarter last year. Vanillin manufacturing subsidiary in China recorded a revenue of INR 56.95 crores in this current quarter, which was INR 30.95 crores in last quarter and INR 72.78 crores in corresponding last year's quarter. As you are aware, in Q2, company had issued a 35.5 million preferential warrants of INR 47.89 each converted into 1 equity share against preferential subscription 33% on a preferential basis. During the quarter, company has received entire subscription of INR 29.45 crores against 6.15 million warrants out of that. Pursuant to which, these warrants are converted into 6.15 million equity shares. Consequently, the share capital has increased to that extent during the quarter. And now talk about the long-term debt and working capital of the company. The gross consolidated long-term debt and the working capital credit as on 31st December 2020 stood at INR 498 crore. The total consolidated net debt position as on December 31, 2020, stood at INR 351 crores. Before the end of the year, the company is likely to draw the ECB line of credit available from International Finance Corporation, IFC, to the tune of USD 50 million, that is about INR 108 crore, for the proposed ethyl vanillin project, which is coming at Dahej. With the increase in the overall revenues of the company and additional working capital of around INR 40 crores will also be required and is envisaged by the end of quarter 1 of FY '22. However, with the robust growth in the margins and revenue, the company is expecting to cap the net debt-to-EBITDA ratio at around 2.5 in the current financial year. Since the business is largely undertaken in foreign currency, it remains prone to vagaries of exchange rates as you know. On consolidated basis, the foreign currency exposure has a natural hedge as the net revenue exposure impacted by foreign currency borrowings. Due to increase in the revenues in the last few quarters as compared to the earlier year, there is a temporary mismatch in this exposure, which will be balanced -- of course, will be balanced after the borrowings of ECB line of credit from IFC is borrowed and the money is received. In the meantime, company has been systematically hedging the format exposure at India level. In the current quarter, on stand-alone basis, it accounted a net exchange loss of INR 1.74 crores. And on a consolidated basis, it was a gain of INR 1.34 crores. This figure includes the foreign exchange which has been accounted in financial expense. With this, I will close my opening remarks, and I will now open the forum for questions. Thank you very much.

[Operator Instructions] The first question is from the line of [ Rajnath from Milind Consultants. ]

I just wanted to know about Dahej facility. Once it is fully operational and running at full capacity, at that time, what kind of incremental EBITDA could come to the company on annual basis? Hello?

Yes, Santosh. Go ahead.

Hello. On a full run basis, we are expecting a saving of around $1 per ton on a per kg production on a full-fledge basis, which comes to INR 74. And our total capacity is around 10,000 tons, metric tons. So you can calculate that. It should be around INR 60 crores to INR 70 crores addition in EBITDA on a full-fledged.

Okay. And the -- and this will be your Italy capacity and this Dahej capacity will enable you to add value-added product then? And are you considering ramping up the value-added products?

Of course, we'll be always happy to value add on the basic raw materials. Rather than having a low margin, we'll always be -- we have always planned in such a way that the value-added products are produced from the raw material and those are sold. As you know, this -- what I had the number of INR 70 crores, which has stood is primarily on the assumption that we sold -- sell the basic product in the market. And naturally, this number will increase if [indiscernible] call the both raw materials are value-added to other products and the valuable products which we sell in the market. Of course, this will take some time. So over a period of 1.5 years, we will be utilizing entire raw material which is produced at India and Italy for value addition within the company.

[Operator Instructions] The next question is from the line of Ashish Thavkar from Motilal Oswal Asset Management.

Yes. So on Dahej facility, at what utilizations are we running currently? And any ballpark number you can share for the next financial year?

I didn't understood your question. Can you repeat it? Sorry.

So on the diphenol Dahej facility, 10,000 metric tons, what is the current capacity utilization? And what would be the approximate utilization rate for the next financial year?

So as I told in the opening remark, during December, by the end of December, in the month of December, the capacity utilization was 55% on an average basis during the month. At the end of the month, we have almost reached around 70% of the utilization. For the quarter, it was 33% utilization because you are stabilizing the plant. We are planning to ramp it up to an optimum capacity of 90%, 95% by the end of March. So chemically, we should reach almost optimum of 95% to 100% in the whole of next year.

Okay. Okay. And so once we reach that peak utilization levels, what could be the asset turns? I mean whatever, like INR 180 crores, INR 160 crores of CapEx that we have spent on this facility, how should we look in terms of how much revenues could come over the next, say, 2 to 3 years?

It will be very difficult because it's our value added. But Ashish, if you say that selling the 10,000, the raw material of 10,000 [ tonnage ] the -- at the current prices, we should get at least $3.5 to $4 on each tonnage. So 10,000 metric ton is our capacity of production there, and the average realization will be in the range of $3.5 to $4 on that 10,000.

Okay. Okay. This is very helpful. Okay. Sir, any update on the Lockheed Martin deal? Where are we in terms of setting capacities or any progress, if you could help us have some understanding on this?

So Lockheed, I'll answer that. Lockheed Martin is progressing. There, we are in the process of working out for the pilot plant project that we've said that we will be doing it, which will get crystallized in the next 2 quarters. So the progress is going well, though. So the update, we'll give you as soon as we have the final numbers that -- what the investment is and what it's going to look like in the next 2 quarters.

Okay. So would it be a fair understanding or the right way to say that the CapEx investments would be done via partner?

Right now, it's early days. We have to yet see what terms we arrive back.

Okay. Okay. Fair enough. So every call, we have this question on China. So China entities, the losses are continuing. So to that extent, what are our plans on China? Are we expecting to continue with China operations? Or some point in time, we feel that we can slowly start continuing the operations there?

Right now we have turned around in China. So this quarter, we were in the positive, and we continue to be for the next few quarters. So there is no immediate plan to curtail or to close down. But once our capacity in Dahej is up and ready for the ethyl vanillin, we'll take a view at that point of time to see whether we curtail, we expand, how -- what strategy we will work out will depend on the market conditions at that point of time.

Okay. Okay. Fair enough. Sir, just one more question from my side. What would happen to the Italy facility once we are fully self-sufficient at Dahej? So the catechol, vanillin, what would happen to that part in Italy? Is there a sufficient enough market for our Italy subsidiary to cater to?

Yes. So the idea is to -- in the next 3 years, we will consume everything we produce, whether it's Italy or Dahej, ourselves internally for value-added products. So we will -- right now, we are self-sufficient or more than -- we buy hydroquinone and catechol from the markets or catechol derivatives from the market at points of time. But since we're adding capacities like the ethyl vanillin capacity and other capacities for downstream products, we will be short of material from -- only if we were dependent on Dahej. So we will continue to buy from Italy. And in 3 years, we will be consuming everything ourselves. Till then, there is enough market to sell the surplus that we have.

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

Yes. Congratulations on the great set of numbers, sir. Sir, can you just give me an indication about the blends revenue this quarter? And what are the kind of growth trend there?

Yes. So it's -- the blend revenue, Santosh, was it [INR 70 crores, INR 50 crores?]

Yes. Sir, I'll just tell the basic numbers and answer some of it. In the quarter 3, consolidated, out of INR 294 crores of operational sales, blends was INR 87.20 crores and antioxidants sales was INR 65.56 crores. So out of INR 293.67 crores, shelf-life solution, including blend was INR 152.75 crores. Sir, you can proceed.

Yes. So the blend business is on target. Of course, there were many disruptions in various markets globally because of COVID. But even through that, our blends business has grown by about 10% as compared to last year. And as compared to last quarter, it was more than 10%, so almost 20% as compared to last quarter. And as compared to last year, more than -- yes, it's close to 15% growth, yes. So we are on track for growing this business. As normalization comes, we'll be back to the 20%, 25% growth that we are targeting for the blends business.

Okay. So that means the INR 87 crore is the best-ever blend sales that we have seen this quarter, if I compare historically. Then -- and along with the now consolidation in the Mexico, which has now been announced, hopefully, that would be over by this quarter. So what -- whether there could be a kind of enhanced trend or enhanced growth trajectory that one should really look at even having seen the kind of impact of COVID this year for the blends?

For the blends, like I said, that in the geographies that we're in, we will grow it at the same -- from now on, we should start growing at about 20%, and we are saying, 20%, 25%. But we're also adding new geographies which we will start now again from Q1 of next year, we will start adding new geographies so that we get a much wider reach on some of the markets where we're not present in. So the program will continue. And the idea is overall basis, we should grow at 25% on the blends business. So in countries where we are -- or geographies we are already existing, we should at least grow by 10%, 15%, and the rest will come from new markets.

Okay. Sir, regards to Dahej facility contribution, see, as you have in the opening remarks mentioned about kind of 33%, 35% kind of utilization so far in the quarter. So it would not have really contributed anything majorly to the quarterly performance. But is it fair to believe that the 200 basis point kind of swing sequentially on the gross margin what we are seeing, that is supplemented by Dahej?

Yes, there is a bit of Dahej in that. There is. Small, very small. Yes.

Okay. So then I think if I just extrapolate that and if we're thinking that okay next quarter or by first quarter we will be seeing the full-blown impact at the Dahej when the targeted or the anticipated kind of margin swing because of the Dahej can be visible in just couple of quarter times going ahead?

Yes. So it will be fair. The Q1, we should be coming close to where we are at capacity. In Q2, for sure, we will be at full capacity. So the progression you will see from Q3 to Q4, there will be a progression in Dahej and then Q1, Q2.

Sure, sure. And about Lockheed Martin, you have obviously indicated. But having seen their announcement about their readiness about commercial battery product, which is a green battery product, so you have already indicated in the earlier calls that possibly calendar '22 would be the first set of revenue numbers that we will be gathering out of that. But can you give some more incremental indications about like, okay, the first set of revenue number can flow in, let's say, calendar '22. But what is the kind of growth trajectory for that business that one can anticipate?

It's early days to anticipate. So the first pilot plant is 1,500 metric tons. And so the revenue of that will be what it is. But to grow it from there, we need a new plant. So which -- the earliest that will come within calendar year '24. So it's a little far out right now to say that what will be the growth. But the potential here remains the same. Potentially, it is a very large business where plant should be in tens of thousands of tons. So it continues to remain there. But first, we have to -- the first step is going to be the pilot facility. And then the next step will be the large commercial one.

Okay. Okay. And just last one question. On the CapEx plan, [indiscernible] already announced that INR 134 crores, INR 135 crores kind of number that further is. What is the progress there, sir? And by the -- and when would that be -- the construction phase would be completing. And by then, what is the change in the debt position that we should be seeing?

Yes. So the project now has been enhanced from INR 135 crores to INR 185 crores because we're also doing the intermediate guaiacol step in Dahej for better costs, operating costs instead of doing it in Tarapur. Because the technology we have now developed is that we take catechol and straight make ethyl vanillin out of that. So the intermediate step will be done in situ in process. So that saves considerable amount in operating expenses. So the project cost has been enhanced from INR 135 crores to INR 185 crores. The time line -- the construction has started. The civil work is going full swing. We expect the civil work, of course, will be completed in the next 2, 3 months, but then installation of equipment will start. So the idea is by Q1, we should commission mechanical completion we should do -- sorry, Q4 of this year, we should finish the mechanical completion. And Q1, we should be in full-fledged production. That's the time line.

Okay. So that means in the first half of the current -- FY '22, we will start to see the commercial operation of the new plant [indiscernible]?

No, no. Next year, I said. Next year.

FY '22 or '23, sir?

No, no, no. FY '22 -- we will see Q4 of FY '22 the mechanical completion. And Q1 of FY '23 will be the commercial production. And the debt profile, INR 100 crores of debt, which will be added now from IFC, and what Santosh mentioned, and INR 40 crores working capital, that's the additional debt that will come.

Okay. Okay. That INR 40 crores will be -- is factoring the expanded operation also?

Yes. For working capital, yes.

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

Congratulations on a great set of numbers. So sir, just on the Infinity Holdings fund, just wanted to know what -- till now how much fund has been infused. I mean, we have received proceeds from there? And how much of that has been deployed basically?

So Rohit, the cost 35.5 million warrants, which were issued at INR 47.89, we had received 33% upfront as per the SEBI guidelines. So we had first received around INR 17 crores. Thereafter, in this quarter, they have subscribed entirely 6.15 million warrants. They have subscribed entirely and paid the balance 61% (sic) [ 67% ]. So the total funds for 6.15 million warrants amounting to INR 29.45 crores were received during this quarter, which we have convert -- since they were fully subscribed, these shares have been converted and the equity share capital has increased to 6.1x total. So if you ask me the total amount which we had received, that's INR 56 crores for both 33% upfront and 67% for the 6.15 million warrants of around INR 20 crores. So till date, we have received INR 76 crores against the entire subscription. Out of that, 6.15 million warrants have been converted to equity.

Okay. Okay. Okay. That was helpful. Sir, just on this China business, since you mentioned that it turned EBITDA positive this quarter, but with sales was slightly down Y-on-Y basis. So is this -- I mean the benefit was because of better operations or there were some -- because of better realization in the vanillin prices? Or how we should see that?

It was a better realization in prices. So right now, for the next few quarters, it looks like the prices, the realization will remain at the levels at which they are. So operationally, because of all these disruptions in supply chain, we had some raw material shortages there because from India, we couldn't ship in time and all of that. But otherwise, the market is quite strong. So if we would have produced, we've been able to sell more. But anyway, the way you look at it is, right now, the prices are strong. And for a few quarters, it should remain. I mean we'll see how it goes from there.

Okay. Okay. And sir, just wanted to know, since this Q3 is basically a high revenue quarter for us from China. And in that quarter, this time on Y-on-Y basis is slightly down. So is there any shift in order or something like that?

No, no. I think we could not produce enough. I just said that in your last question that we had a supply chain issue where there was some disruption in supplies from India to China for the raw material because we make the guaiacol here. So therefore, we couldn't run the plant at full capacity.

The next question is from the line of Amit Agrawal from Burman Capital.

I'm just trying to work on the steady-state EBITDA margin. So if I see last year, it was -- we were in around 10% to 11%. And now, we are 16%. And with expected around 30 -- INR 60 crores savings from the Dahej plant, what is the steady-state EBITDA margin that we can have from this business?

Yes. So our aim and target is in the next 2 quarters we should be at high teens between high -- higher than where we are. So that should be -- the target is to bring it as close to 20% as possible, so probably 17%, 18%, 19%. That's the region.

Got it. And also, the 9 months number margins, is there benefit from supply-demand disruption? and because of the higher prices, are we seeing any benefit that is showing down to your EBITDA margins in 9 months?

Yes, there would be some, for sure.

Okay. So adjusting for that, what you're guiding is steady-state basis, 17%, 18% is something that...?

Yes. Yes.

And sir, second was in the performance chemicals, in 9 months, I think have we seen such a strong growth in our performance chemical division. One, if you can guide us, what is the market size for this business? And where we stand in this business globally? And how do you see the business scaling up from there?

So it's a complicated question because it's all connected to what we do in our hydroquinone catechol and then the downstream and how quickly we can add capacities of the downstream. So the performance chemicals essentially is the industrial chemicals that we do under hydroquinone and catechol. So the idea, of course, is that more and more of it will get converted, the hydroquinone and catechol, as that scales up into downstream products. So in the next 3 years, we will consume everything that we make in terms of basic hydroquinone and catechol into value-added products. The market for performance chemicals, the products that we play in, we have about, I would say, in some products, 30% market share. In some products, the -- between 20% and 40% market share is what we have in the established products. In the new products, we are new. So it's some 10%. But there is an opportunity to grow. So this business, also in the next 3 years, will grow at 20%, 30% a year.

Sir, what would be our current utilization rate for downstream capacity, the one which have in Tarapur?

So right now, it would be close to 65%, 70% because we just started debottlenecking and all of that. So -- and we also continue to do some debottlenecking in our downstream. So -- and we are adding some small CapEx which will again give us. So I think we can be at 30%, 40% more without significant investment.

But then, we would be requiring some CapEx here. Because, again, this INR 300 crores revenue potential from Dahej would translate into INR 600 crores for performance chemicals, right, with around 50% margin. So we would need to undertake a huge CapEx investment in performance chemicals. Would that understanding be correct?

No, no, no. It's just some downstream products where we have to build small capacity. It's not very, very large, substantial investment. The big one is what we are doing in ethyl vanillin, which is the 6,000 tons. That is the big one because that's 6,000 tons. The others are all smaller, 500 tons, 1,000 tons. So these are much smaller plants. And it's targeted over the next 3 years. So there's no 1 year where there will be a very large investment.

Got it. Got it, sir. And on the vanillin, again, here, what -- would the margin profile be similar as the group currently from the base plant, once we start producing in, let's say, like FY '23?

Yes.

The next question is from the line of Ashish Thavkar from Motilal Oswal Asset Management.

So on ethyl vanillin, you said by first quarter of FY '23, the plant will go operational. Sir, any color you could provide on what capacity utilization you'd be working on in the first year of operations?