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

Ladies and gentlemen, good day, and welcome to the Camlin Fine Sciences Q4 and FY '21 Results Conference Call hosted by PhillipCapital India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Surya Narayan Patra from PhillipCapital India Private Limited. Thank you, and over to you, sir.

Yes. Thanks, Rajan. Hi, friends. Good morning. On behalf of PhillipCapital, I am inviting you all to the Q4 and FY '21 earnings call of Camlin Fine Sciences Limited. Today, we have with us Mr. Ashish Dandekar, Managing Director; and Mr. Nirmal Momaya, who has also been promoted as the Managing Director; and Mr. Santosh Parab, Chief Financial Officer. So now I'll be handing over the line to you, sir, for your opening remarks. And subsequently, we can start the Q&A. Over to you, Ashish, sir.

Thank you, Surya. Ladies and gentlemen, welcome to the fourth quarter and the year's conference call -- earnings conference call. I'm happy to report to you that we are in line with the planning and the expectation that were part of our strategy. And we are well on our way now to a very good situation in the near future. But let me not brief you before the summary by Santosh. So I hand over the proceedings to Santosh, who will give you a brief summary, and then your questions and answers will be answered by Nirmal. Thank you very much for being there. Santosh, over to you.

Yes. Thanks, Ashish. Good morning, everybody. Welcome again to the call. We have already uploaded our earnings presentation on our website, and I presume that all of you had a chance to have a look at it. Now before getting into the financial, I would like to say that this -- that it has been a tough year for everyone. But thanks to the resolve and the perseverance of CFS' entire team, we have emerged stronger and more resilient than ever before. Of course, focus was also on keeping our employees safe during this second surge. Coming to the financials. Operating revenues of the group have grown by 9.6% quarter-on-quarter. This has resulted in the highest-ever revenues in a single quarter, that is INR 326 crores, in the history of the company. Increase is laudable despite vanillin facility in China we temporarily shut down for 2 months owing to a court order on IP improvement by our JV partner, the supply chain issues, and of course, the Evergreen fiasco in the Suez Canal at the second of the year. Annually, revenues grew by 13.2%, clocking INR 1,187 crores. It is a robust and all-around growth in all the product lines. Diphenol plant at Dahej achieved 65% capacity utilization in quarter 4. Plan is to balance the output to suit the business needs with a goal to maximize the yields from the plant. A steady scaling-up of capacity to optimum level is expected to be achieved in quarter 2 FY '22. Quarter-on-quarter gross margins dipped by 578 basis points, mainly due to increase in cost of raw materials and the supply chain cost. This cost increase contributed to around 450 basis points, and the balance was a result of a slight change in the product mix. In terms of passing of these increased costs, we have been alluding to the investors that there is a general lag of 1 quarter. The above increase has been negated due to saving of around INR 10.41 crores in other expenses. In third quarter, CFS Europe had incurred interest expenses of INR 2.7 crores during the annual maintenance shutdown in quarter 3. Due to temporary shutdown in China also, there is a saving of INR 2 crore as there is no effluent treatment cost because the plant was closed in this quarter. There was also onetime saving in selling cost of INR 1.5 crore in all the -- if all the geographies are taken together. Further, there was also a reduction in foreign exchange loss of around INR 1.04 crores. We expect that the annual trend of other expenses as compared to operating revenues is likely to be continued in the future. For the year, other expenses include foreign exchange loss of INR 14.89 crores. Other than that, the expenses have been controlled vigilantly. Needless to say, there has been savings due to the pandemic where the travel is restricted and the related expenses are also curtailed. Annually, employee cost has increased on account of ESOP amortization in the current year of around [ INR 4.25 crores ]. Employee cost of diphenol plant at Dahej since the commercialization and capitalization in September 2020 contributed to an increase of INR 2.71 crores, and there was a general rise of 10% in the salaries over the last financial year where the company supported their employees for doing excellent work during the COVID times. Resultantly, the adjusted EBITDA margin for Q4 was 15.71% as compared to 16.35% in the last quarter. As you know, we consider -- the company considers operational EBITDA after existing foreign exchange gain/loss and other income. A [ deep one ] on account of impact of gross margins I've explained earlier. The annual operational EBITDA jumped by 412 basis points to 16.58%. In real term, the EBITDA was at INR 196.8 crores as against INR 130.7 crores last year. We expect a positive movement in EBITDA margins with scaling-up of diphenol plant at Dahej and stabilization of raw material input costs in the future. Increase in depreciation on account of commercialization of diphenol plant in Dahej in the month of September, the annual charge is INR 7.67 crores. Interest costs after removing the impact of foreign exchange gain/loss has increased by around INR 9.88 crores. The increase is mainly due to the interest on FCCB borrowed on diphenol plant, which was capitalized in last year has been remitted to P&L on commercialization. That accounts for INR 8.8 crores, and the balance is due to the increase in the operations of the company. Profit before taxes increased from INR 58 crores to INR 105 crores, an increase of 80.6% annually. The cash tax rate has improved to 26%. The total tax rate after existing earlier impact was 37.81% against 48.75% last year. The tax rate should progressively fall as all geographies drop taxable profits. On March '21 -- 31st of March '21, our subsidiary in Italy has revalued its assets by around INR 100 crores to avail the tax benefit on depreciation of revalued assets. This benefit will flow from next financial year. The owner's profit, the total profit after reducing the portion of noncontrolling interest, has increased to INR 50.96 crores from INR 30.32 crores, which is indeed an encouraging sign. This will further boost in the next financial year after completion of administration of balance, 25% minority stake of Dresen Quimica, our subsidiary in Mexico. Now coming to the balance sheet. 29.35 million preferential warrants are yet to be fully subscribed, where company has received 33% of subscription price of INR 47.89 per share. So warrants will be subscribed and converted during the current year. The total borrowings were pegged at INR 539 crores, this in spite of withdrawal of USD 5 million, that is around INR 32 crores ECB from IFC in the month of February '21. This borrowing also include around INR 65 crores of nonfund-based LC and bill discounting amount. Company has refinanced high-cost loans in its subsidiaries with lower -- low rates. The impact of this reduction we expect in full in the next year. Company is likely to draw the balance USD 10million from IFC in quarter 1 FY '22. Additional working capital support of around INR 40 crores is expected to service the growing revenues. As you are aware, the total borrowings also include INR 112 crores of ECB from IFC, which is convertible into equity shares at a current option price of 1.25 per equity share. Further, the company will also repay the long-term debt to the tune of INR 47.7 crore during the next financial year. Over the last few years, poor debt-to-EBITDA ratio has been a concern. With strengthening of EBITDA, the net debt-to-EBITDA ratio in the current year has improved to 2.03 from 3.53. Similarly, gross debt-to-EBITDA ratio has also improved to 2.73 from 4.02. Now coming to our main manufacturing joint venture in China. As you are all aware and has been informed to the stock exchange, Supreme Court of People of China had leveled a penalty of RMB 159 million around -- that is around USD 25 million on our JV partner for alleged infringement of IP for manufacturing of vanillin. Our partner is in the process of filing a retrial application before the Supreme Court of China to reconsider the judgment. Our partner is confident of a favorable decision. The process of retrial is expected to be completed in 6, 7 months. Company does not envision any adverse impact on the affairs of the company. Our auditors also have emphasized this matter and have concurred with the view of the management that there is no impairment in the investment value of the assets or other receivers on account thereof. The successful commercialization of Dahej diphenol plant and its steady scale-up will be the stepping stone for the second phase of growth. Company is bracing for this exciting growth phase by focusing on downstream products, derisking the current verticals, developing natural ingredients as a parallel product line, realizing the management, and of course, empowering and incentivizing the employees. Company -- in this whole growth phase, company recently acquired omega fatty acid manufacturing company last month. This is the first step towards the exciting technology of fermentation. Company in due course will expand this business. Capital investment program ethyl vanillin in Dahej is on track. Moderate dealers are expected due to the second wave of pandemic and the Cyclone Tauktae. However, management is confident of completing the erection by the end of quarter 4 FY '22. As a realignment of the management, as you are aware, Nirmal Momaya has been now appointed as Managing Director of the company, which effects from June 1, 2021. You will agree with me that experience and management prowess of Nirmal will certainly help in growing the business further. With the business expanding exponentially, its complexity and increasing geographical spread, it is imperative that Ashish deserves an able partner. We are also incentivizing the top-tier employees with performance-based ESOP. This ESOP will vest after 4 years and will be allowed to exercise the options on achieving predecided target on defined financial metrics mainly related to revenue, EBITDA and ROCE, et cetera. It's indeed an exciting future ahead. With this, I will hand over to Surya to open the question-and-answer session. And of course, stay safe, stay healthy and also get vaccinated. Thanks.

[Operator Instructions] The first question is from the line of Ankur Periwal from Axis Capital.

Yes. Congratulations, Mr. Nirmal, for the additional responsibilities.

I'm sorry to interrupt you, Mr. Periwal. [Operator Instructions] The audio is not coming clear.

Sorry. Yes, I hope it's better now.

Thank you, sir. Yes.

Yes. Congratulations, Mr. Nirmal, for the additional responsibilities here. So 2, 3 questions from my side. First, if you can comment on the gross margin front, the Q-on-Q decline. While I take your comments in terms of the higher raw material pricing and given the way the commodities have been behaving globally, your comments on by when we should see the normalization of that -- these margins going ahead and whether the entire hike has been passed through across the commodities -- across our product line.

Yes. So basically, the lag generally is typically about a quarter to pass on the price increases on the raw material. And I would say at least about 70% of our business, 60% to 70%, the pass-through will happen in this quarter itself. And additionally, with Dahej scaling up and we're increasing our production there, the margin, the 5%, which it has gone up by, we expect by the year-end to recover that and bring it down by at least 3% or so. And also, of course, the commodity cycle, which we saw was basically have been the chemicals because of certain problems in the U.S. and Europe, I think all that is now slowly getting settled. So capacities are coming back onstream for vanillin, which was a real price increase for us as well cost due to increase in vanillin prices, which led to phenol prices going up. That seems to be -- by Q2, it's still down. This is the indication we are getting. So I think for the whole year, the impact would be considerably lower than what we saw in the last quarter.

Sure. And sir, just one clarification on that. Now presuming the prices, as you are suggesting, you may start seeing some decline in Q2 onwards, so the pass-through of the lower prices, whenever they happen, that will also happen with a similar lag. Will that be a fair understanding?

That is right, Ankur.

Sure. That's helpful. Sir, secondly, on the Dahej plant there. Now as we mentioned, we are already at 65% of utilization. How do you see the ramp-up there? And parallelly, since the other raw materials that we were importing earlier from Italy, how is the pace status there in terms of the new product innovation, the new launches, which we have planned? so any time lines there?

So Dahej, we expect in Q2 to take it up to at least [ 90% ] of capacity. What we have actually done is to take advantage of the hydroquinone downstream market being strong right now. We are actually, in fact, changing the ratio of hydroquinone to catechol to give us more hydroquinone. And so typically, in Italy, we get about 55% of catechol and 45% hydroquinone, whereas in Dahej, the modifications that we have made will give us 60% hydroquinone and 40% catechol. So essentially, that means we will have more hydroquinone for the downstream products, right? And Dahej is significantly more competitive than our Italian facility for basic production of hydroquinone and catechol. So that gives us a very strong position on the downstream products. So in the downstream products, the time line, I'll tell you. So there is TBHQ, BHA, which we already have capacity. And we've done some debottlenecking there as well. So if there is any demand to take market share, we are well positioned. MEHQ is another product where we've been in the market for the last 3, 4 years. We lost significant business in that because we didn't have a competitive cost platform, which has now come with the Dahej plant coming onstream. So there we have a capacity of 2,000 metric tons, which we will, in this year, at least utilize -- take it to at least a 70% utilization. So you will see revenues coming from MEHQ increase substantially during this year. The other products on hydroquinone downstream is HQEE, which also we have commercialized and -- but that's a very small specialty product and the market is -- it's not a very large market. But yes, we have a capacity of about 600 tonnes. And I think this year, we should do at least about half of that, about 200 to 300 tonnes of HQEE. So in that sense, we have several other products, which are in development or in launch phase. So the idea is as we've maintained that in the next 2 years, we want to be completely integrated where we actually don't sell any hydroquinone or catechol in the market.

Sure, sir. That's encouraging. And I'm presuming here the pricing here for the newer products, MEHQ as well as the other one which you mentioned, will be obviously considering the revised pricing after all this inflation in the raw material prices there.

Yes. Of course.

Sure. And sir, just one clarification small. On the China bit. You mentioned $25 million-odd penalty. As I understand, the company will not be liable to pay any of that. It will be only on the JV partner. And from an operations perspective, what are the time lines you are looking at when we can start again?

Yes. So the penalty is levied on our JV partner. On the JV company, there's a very small penalty. About 7% of the amount is on the JV company. However, we have an indemnity from our JV partner. So essentially, there is no impact to us as a company due to this order in terms of penalties. In terms of restart, we expect, as we understand from our partner and with the legal system in China, his expectation was that by August, September, we should have the results coming in. So assuming it comes by September, from October, so you get about 6 months of time. But this -- again, it's conjecture and we don't really know because it's ultimately a matter in court.

The next question is from the line of Rohit Sinha from Emkay Global.

Congratulations for good set of numbers. And congratulations, Nirmal, for the new responsibility. Sir, firstly, my question would be on the China plant. I mean as you mentioned that the plant was closed for almost 2 months. Despite that, our revenue was higher on Y-on-Y basis. So how we should see this? Is that the 1-month sale for this month? Or is it that production was down, but we continued the sale for the whole quarter?

Yes. So as far as China is concerned, in the quarter, of course, the sale was lower than what it was in the previous quarters because we produced only for 1 month. And of course, the sale -- there would be some stock carryover. So there would be a sale, which would have come. So going forward, till it restarts, the vanillin sale will not reflect. But of course, we are yet selling guaiacol and catechol in the market. So a part of that is recovered through the sales in catechol and guaiacol. And of course, the additional -- the total turnover and basically the volume is going up purely because of Dahej. So as Dahej scales up, the revenue from either the downstream or even selling hydroquinone or catechol will add to this year. That's the reason why the turnover and the top line will grow.

Okay. Okay. And as you say that, I mean, maybe by September, October, we will be starting this hoping on the positive side of that outcome of -- from the court, do we -- I mean from then, do we need something to ramp up -- I mean, for time will take to ramp up the production? Or from straight away, we'll be back to that kind of production level or utilization level for the China plant?

Generally, it takes 30, 45 days. If it is a long shutdown, it will take 30 to 45 days to restart and reconfigure and get people back and all of that. So yes, I mean it's not that it will start on day 1. It would take that time.

Okay, okay. And secondly, on this Infinity Holding fund, just wanted to know till now how much we have received from there and how we are utilizing that.

So basically, as Santosh mentioned, we've seen 1/3 of the money. And the utilization is going for -- essentially for acquisition of AlgaIR and [ architectures ] that we are planning are in progress right now. So it's essentially most of the money, or I would say, a large substantial portion of the money which has -- will come, will be towards only for growth capital.

I'll just add the number of add the -- as I have mentioned, around 29.35 million preferential warrants have been subscribed at INR 47.89, we have received 33%. That is around INR 47 crores against those. And still, we have to get around some INR 80 crores to INR 90 crores from them.

Okay. Okay. And sir, lastly, on the Dahej side, as we reached 65% of inflation, so how much of, we can say, if at all, able to disclose that -- how much it was -- contributed to the EBITDA for the company?

It's difficult to split that number because it's all integrated. So we consume the raw materials from Dahej into our downstream products. So to give a split of that EBITDA is not so easy.

Or rather we say what sort of margin improvement we have witnessed because of this Dahej. Otherwise, I mean it was not there, then what kind of EBITDA margin would we have ended up with?

That's what I said. I mean I don't have the numbers offhand to tell you that. We've not made [ split ], yes.

The next question is from the line of [ Dhimant Shah ] from One up Financial Consultants.

Yes. There is just one question. On the full contribution of Dahej, you think next year Dahej will be in a position to contribute to a large extent of the rated capacity? That's question one. And question number two, if we have a competitor coming up who claims possibly superiority of the process and hence possibly having an edge in terms of either cost or ability to market competing products, can you just comment on both these, please?

So firstly, on the competitor, I don't know which competitor you mean and on which products because we have competitors -- several competitors in each of the products. So I don't know which one you're referring to.

The Clean Science in this case.

Clean Science. Clean Science makes MEHQ, which is a product that we've just started making. We've been in the market for the last 5 years. So really speaking, we are competing with -- he's not competing with us, yes? So it's a new product for us. So we are well positioned in terms of cost to be able to compete and take market share. His other product is BHA. Again, there also -- with Dahej, we are well positioned to compete. And there, of course, we've been competing with them for the last 5 years in BHA. We both have our market shares, and there's always -- the competition is to increase the market share. And we are well positioned there. So that's basically where we have 2 competing products.

As an associated question. Do you think the processes give them some advantage over our processes in terms of either cost or volume?

Not really. I mean both are phenol-products. These products are made -- they're phenol derivatives. They make it in one way. We make it in the other way. At the end, it's more or less the same cost. I mean there's -- nobody has a very significant advantage in cost, either of us or them.

I see. Okay, okay. That was helpful. And on the Dahej, please.

So on Dahej, yes, so we expect that Dahej should contribute totally, in this year. It won't be directly because we are not selling anything from Dahej. We're consuming it internally, but then, of course, that much quantity from Italy will be sold. But -- so indirectly, it will contribute roughly about INR 250 crores to INR 300 crores.

That is next year.

In current year, FY '22.

Okay, okay. But once Phase 2 is over in Dahej, which you are saying Q4 next year, so...

That's additional INR 400 crores, INR 500 crores.

That is additional INR 400 crores?

Yes. That is ethyl vanillin facility, which is a 6,000-tonne facility. That's another INR 500 crores it will add in FY -- INR 400 crores to INR 500 crores will be added in FY '23.

The next question is from the line of Susmit Patodia from Motilal Oswal AMC.

Yes. Congratulations also, Nirmal, on the responsibility. My first question is if you could tell us what is the contribution of China JV in FY '21 to the profit.

Santosh, can you answer that?

Yes. China contributed -- the total turnover for the year for China was INR 192 crores and -- INR 182 crores and total EBITDA of existing partnership is around INR 1.6 crores. That is INR 0.9 [indiscernible]

Okay. Got it. Great. Sir, just to finish my China part, was that -- there was some plans of doing some -- a few other JVs, either taking control or not. Now is it fair to say that it's completely on the back burner?

Yes. Absolutely. Till this matter is resolved, that will be on the back burner.

My second question is on the tax rate. Our average 3-year tax rate has been 56%. And last year, FY '21 is also 38%. Is there something that can be done in the way these entities are set up? Or can you give some guidance on this, please?

Yes. So basically, taxes -- we have different geographies and businesses at different stages in those geographies. So typically, no geography has a tax rate of more than 30%, okay? But if you have losses in one country, they cannot be offset. We can't offset our profits [ in another country ], yes. So that is the reason why it looks bloated because if there are losses in 2 or 3 countries, those remain there. So over a period of time, as each of the subsidiaries have started becoming profitable, we expect that the tax rate effectively should be -- shouldn't to exceed 30%.

Okay. I think...

I think that [indiscernible] slowly it will go down to that 30% level.

Sir, on a longer term, sir -- I just interrupt here. On a longer term, the tax rate should be in the range of 25% to 26% and [ Dahej is risen ] and you have a substantial tax benefit in India. And since the losses, the losses is just subsidiary [ of them ], we have not made an input tax on those losses. So naturally, when the subsidiaries are turning into positive income, there may be no tax paid in those geographies. So progressively, the rates should come into the range of 25% to 26% as all subsidiaries get in the corporate zone and the business established.

Yes. Actually, that's what I was wondering that continuing on what Mr. Nirmal pointed out over the next 2 years, Dahej itself can churn out about INR 700 crores, INR 800 crores of additional top line. So the stand-alone itself will then account for 78% of the profit or maybe even more. And hence, the tax rate should more be like 25% by FY '23.

Even though there's a tax exemption, we'll have a math because we are not shifting to 25% because our average rate is -- because there's a math, it will be lower than 25%. So India should reach somewhere below 25%, between 20% and 25% going forward, and as you said, Dahej starts on producing. But as Nirmal said, generally, the tax rates are between 27% to 30% in all the geographies around the world. That's why we said that it should be in the 25%, 26% zone. As we go ahead, it will stabilize. But next 3 to 4 years, we expect it will be in the range of 25% to 26%.

Okay. Got it. And my last question is, is there -- would there be any update on the Lockheed part of the business?

The Lockheed key part of the business, it's in public domain. They have announced commercialization of the battery, which means they're going to start taking commercial orders for which we've started to work along with them to set up a facility. So that is progressing. And we expect that the delivery schedule will be in the calendar year '23. Towards the second half of calendar year '23 is what they're taking orders for. So we have to have the facility ready and start producing material by then.

Okay. So if you have to produce material in FY '23 second half, so at some point in this year, there should be announcement of the CapEx in this and the future plans, correct? Is that correct?

Yes. That's correct. Yes.

The next question is from the line of [ Jigar Shah ] from [ RSPL Investment Advisers ].

I wanted to ask whether we have additional CapEx plans after Dahej vanillin project. And what is our debt target in the next 2 to 3 years?

So basically, CapEx, there is the Lockheed martin -- the next big CapEx will be Lockheed Martin one. But there, of course, the investment -- upfront investment will not be from our end. It will be from the customer end. So that would be one CapEx. The others are, I would say, in the region of about INR 40 crores, INR 50 crores a year is what we typically will have as maintenance CapEx. And as far as the debt goes, I think we should be -- by the end of this year, the FCCB fee hopefully will get converted and another payment of INR 50 crores repayment. We should be down to under INR 400 crores on net debt level.

Okay. Do we have a net debt-to-EBITDA target for the next year?

So see, look, the target is to keep it under INR 500 crores.

Okay. Okay.

The net debt -- EBITDA-to-net debt ratio, our target is -- should be in the region -- should not exceed 1.5, 1.6 as we go along.

The next question is from the line of Deep Master from One up Financial Consultants.

Yes. I just wanted to touch base on the margin. So despite having a 5% impact on your gross margins, you've kind of delivered pretty decent EBITDA margin performance. So as we look at the margin kind of progressing towards the end of the year, and like you said, you'd be able to pass on most of the input price increases plus you get some operating leverage from Dahej, so could we look at a pretty healthy margin for the year, like almost, say, touching 20%?

Yes. So our estimate is that we should be in the high teens during -- the 20%, in that region, for the whole year on 2 or 3 things. One, of course, is the operating leverage, as you mentioned correctly. And the second is raw materials. We see raw material prices also softening in the next half of the year as well as certain pass-on that we are doing -- the pass-throughs that we are doing. And also, we have some other, like the downstream products, which have a healthy gross margin. So it's fair to say that this should be hinting towards that number.

Okay. And just an extension to that question. So I noticed that CFS Europe had increased sales in the quarter. So could that have also led to a lower gross margin, given that our cost would be slightly higher there?

So there, earlier, we used to bring all that material to India, correct, for our internal consumption. Now since Dahej has contributed certain volume, that surplus volume, which was there was sold in the market. So to say, in the end, the margins don't get impacted by that because even if it's for internal consumption, the cost remains the same.

Sure. Understood, understood. So basically, the main driver would be the input price pass-on and then the downstream followed by Dahej.

Yes.

The next question is from the line of Nishid Shah from Ambika Fincap Consultants.

Yes. Congratulations, Nirmal, for a much deserved elevation. At the same time, congratulations for a very good acquisition in the fermentation technology. My question is on -- relating to one of your competitors, Clean Science. In the DRHP that they have filed, they talked about substantially higher amount of operating margin at more than 45%. And so if -- in the earlier question, you said that there is no cost related or process-related inefficiencies between the process to which you manufacture MEHQ and they manufacture. Then over a period of time, should I assume that your margins in MEHQ would be similar or better if you have a more scale compared to a competitor?

Yes. So to answer that, on a gross margin level, clearly, there is no significant advantage or disadvantage that we have. So from that level, there's absolutely no difference. As far as all other expenses are concerned, it's only an incremental product for us. So for us, really speaking, there is no other cost other than what is in the manufacturing side. So yes, it is fair to assume that -- but of course, competition will increase because the size of the market is limited for MEHQ. And it's about 5,500 tonnes -- the global market is between 5,500 to 6,000 tonnes. So therefore, any new capacity of our size comes in, there will be a competitive pressure on price, for sure, to get market share. So it would be fair to assume that there will be some correction in price because we will be looking at taking some market share. So from that level, the operating margin, which today stands at maybe 45% or 50% or whatever that those are, would get impacted.

Understood. And what about BHA?

So BHA, also, see, our cost position was not as good as what they were doing purely because of our high cost of production in Italy. Now with Dahej coming in and our hydroquinone -- basically, BHA again is made from hydroquinone by us, it's similar what they make and we make is not significantly different, the process. I would say that we would have a fairly competitive position now in BHA. So again, there, it's a question of gaining market share because we had lost some market share due to our high cost of raw material, which we are in a much improved position now. So yes, there will be some market share gain we expect also in BHA.

And Nirmal, in most of the products that you are leaders in the market, I would expect that even in MEHQ, where I understand you have a 2,000-tonne plant, you would aspire to be a leader in the market on both MEHQ as well as BHA.

Yes. So I'll explain to you how the MEHQ market works is that MEHQ is -- basically goes into stabilizing acrylic acids, yes, and acrylics. Another key component is also hydroquinone, which goes into that for stabilizing. So it's a -- what we are doing is we are creating a whole basket and a product range, which a customer then has -- can buy. In one stop, they can buy hydroquinone and MEHQ from us, okay? So the idea is really to position ourselves, and of course, we want to take market leadership in many products. We have competed versus Solvay in the past, with other producers also in the past. And the idea is, of course, we aspire to always take the market leadership position. So it's no different in MEHQ because it's a very complementary product to our hydroquinone that we sell.

Yes. That's what I also thought so. Yes. So...

And in BHA, of course -- that is for MEHQ. And in BHA, of course, BHA, the large part of BHA goes into preserving oils in fact. And where we are extremely strong in the downstreaming, we are extremely strong in the blends business. In many markets, we are leaders there. So it's a question of time before we take leadership back in BHA.

And so that's very useful to know that both you are competitive and you will be able to achieve the same level of margin that the other player would be able to endure. On one of the other products that you recently launched, which I think Fine Organics is already making, would you want to elaborate how big is the market and how are we positioning ourselves? And...

Basically, I mean it's -- calcium propionate is a preservative. We are in the business of shelf life extension, that's how antioxidants in our portfolio is that. And this is in addition to that portfolio for the bakery market. We do many products in the bakery market. And calcium propionate is a basic preservative. Substantial, it's almost a INR 500 crores -- INR 400 crores to INR 500 crores market in India. And of course, the market leader is Fine Organics. They are dominant in that. And we're just taking a position there for -- in our bakery portfolio to add these products. As we see they are complementary products to what we sell to the bakery market.

That's useful. And on the omega-3, the fermentation technology, actually you can do a lot more with fermentation. Can you elaborate a little bit how you want to plan out on fermentation, and over the next 2, 3 years how you want to go about it?

Yes. So the fermentation business is very exciting for us. The omega-3 starting with -- now omega-3 shelf is a $4 billion-plus market. A large portion of that comes -- substantial portion of which about 70% to 80% comes from fish source, which is not sustainable. So it's not an environment friendly and it's not a sustainable supply of omega-3 fatty acids. So the originator of omega-3 fatty acids through algae route was -- is a company called DSM, which is a large multinational. So they have their strain. And the company we acquired has a unique strain where we get very good yields on the crop. So the idea really is that as we see the world shifting towards more and more of the algae-based omega-3 fatty acid, there's a massive opportunity for us in that. So of course, we've taken a small step by acquiring a small company with small capacity. But the idea then is to ramp it up, first, in the location itself where we are. And then, of course, there are better parts of the world where we can set up these units because the basic raw material is sugar. So there are many parts of the world where sugar is very competitive. So we're looking -- the whole idea is in the next 2 to 3 years we should be able to scale this up and take it to a significant level. That's the idea on fermentation. That's -- it's not only omega-3. We have other products also, which are in the pipeline.

[Operator Instructions] The next question is from the line of Nagraj Chandrasekar from Laburnum Capital.

Just -- sorry, but to push on one of the earlier questioning. Just want to understand the exact method by which we get to MEHQ versus the competitor mentioned. If you make the anisole using [ base ] methanol process, that should be the same for everybody. Technology is available off the shelf. Is the difference in the catalyst that both of you have access to in the anisole to MEHQ and guaiacol process, and their claim that they are a cleaner manufacturer of this.

Sorry, we don't make MEHQ from anisole. We make it from hydroquinone. So the process is they take phenol, they make anisole. And from anisole, they make MEHQ. We make -- from phenol, we make hydroquinone. And from hydroquinone, we make MEHQ. So it is a different -- both are unique in its own way.

Understood. Is the difference the amount of waste products produced, which is...

No. No.

To get rid of. Is there any disadvantage at all?

No. There is no difference. No. No, there is no difference. It's both our hydroxylation and methylation. So there is no difference.

Got it, got it. And what's the catalyst required to make these the proprietary? Would they be freely available technologies to source? How really is this -- how...

Yes. So we have our proprietary. We -- when we acquired Borregaard, which was in Italy, it was a patent -- it's off-patent now, that catalyst. But that's our own catalyst for hydroxylation. And for methylation, there are very common catalysts which are available off the shelf. There's nothing unique in those catalysts. Yes.

Secondly, just can you once again maybe quantify the Lockheed Martin, the custom manufacturing deal that it ramps up end of '23. Any sense of quantification or the CapEx that the customer will put in and how that -- their volumes might ramp up over the years would be great.

I think we'll be in a better position to give the CapEx number later this year because that's under design and under -- so the plant is being designed because we finally -- the process is finalized. So -- and it's a fully integrated process. So it's a very complex chemistry. So -- which is done now. So the designing of the plant is on. So once I think -- that's about 4, 5 months away till we get an estimate on what investment would be made. Potentially, I mean the business potential is large because if the battery is successful, which we assume that it will be successful because we put very significant amounts of money behind this project. Yes, I mean it's just one market like United States can be potentially 100,000-tonne opportunity for us, which even it's a, whatever, it's like $800 million is your potential supply in the next 15 years, you can reach that level. So it's -- the market is humongous. I mean it's large storage for renewables, which is going to increase. And they will take a market leadership position. They're starting in the United States, but their ambition, of course, will be to go all across the world. It's difficult to say. I mean it's large.

Understood, understood. And just one final question. The CFS Europe business revenues have gone up from INR 70 crores, roughly INR 100 crores this quarter Q-o-Q. Was that due to pricing? Or will that be to the product being sold at market pricing to the outside market now versus us maybe getting it at lower pricing internally through our India downstream business earlier? So what clearly drove the Q-o-Q increase?

So that's a combination of both factors. One is, of course, the transfer pricing between India and there, there would be small advantage that we get. It's not significant because tax authorities on both sides will not permit it, either which was in favor of any country. So you have to be judicious about that, and we always try and calibrate that. So you don't get slapped anywhere with any further taxes. So it's always close to market, for sure. But having said that, we were buying bulk -- large quantities. So we would always get a quantity discount when you bring it in here. So their turnover would always get discounted by that 5% or 7% of quantity discounts. So that was one contributor. Second contributor was I think they had some stock also, which was sold -- I mean a little bit of stock. And third was that in this quarter in -- they had record production as well in the 3 months. So all 3 factors led to this.

[Operator Instructions] The next question is from the line of Surya Narayan Patra from PhillipCapital.

Okay. Yes. A couple of questions from myself, sir, I think. So obviously, there are multiple value figures that we are witnessing. So if you can just update a bit more on those points like with, obviously, this algae-based acquisition, AlgaIR, that you have just talked about, so I think this being in the omega-3, particularly the DHA or EPA kind of thing, seems a kind of very valuable nutraceutical product opportunity with very limited global competition. And similarly, the consolidation in the Mexico business also that we have been talking about, what is the update on that? And thirdly, on the recent addition of global leaders into the Board, how this all 3 is likely to complement our food additives business in going ahead? I think on these 3 are the significant value drivers to our ultimate high-value business.

Yes. So on the algal technology, like I mentioned earlier, that's -- it's a technology platform where there are several products one can -- we have access to now, which we can make apart from just the DHA and EPA. But the focus, to start with, is on DHA and EPA because that is at a much more advanced stage where we've already sold product in the market and it's of accepted quality and yields are good. And so on the other products, we are yet in development stage, which, in the next few months, we will be able to then come to an arrangement -- come to a decision on which are the products that we will -- after DHA, EPA, which other products that we will focus on. But yes, it's a good, long-term value creation for us. We look at it as our first step into the fermentation business. Ultimately, all companies globally, if you look at it, everybody is looking at trying to replace a chemical -- any molecule from chemical synthesis to a fermentation synthesis. And so you need to have a position there. Unfortunately, in India, apart from -- in the pharma space, we have some fermentation expertise. There's not much that has been done in India on the food side and the chemical side. So that's -- our idea is to focus on the additives of food and flavor, fragrance and all the other molecules, which are in the food ingredient space and to develop those products. So with that in mind, we also had now on our Board a gentleman, who was the CEO of Novozymes. Novozymes is one of the largest enzyme companies. It's the global leader. It's the largest enzyme company in the world, which gives us a very experienced Board member on fermentation because ultimately these are all -- the products that we are going into are all fermentation based. So the addition really is -- from that perspective is because we look at ourselves just focusing on that business and the required global vision on what's going on in the world where and -- where are we going to be competitive and what should we focus on. So that's the value-add that we get from a Board member who comes from the fermentation side. Mexico consolidation. Mexico consolidation in this year, most of it will be done. It's -- we've done it over a period of 2 years. So we'll complete it in 2 years. So we're not buying out everything in one shot. So the idea is to also use local cash flows to buy back. So that is even that in the pipeline.

Okay. So sir, in fact, if we see the size of the food additives business in the global market, obviously, this is a large enough end market with the animal food and human food all put together, it's something you can get about $80-odd billion whereas our blends operation would be just INR 300 crores to INR 350-odd crores. And this -- similarly, the algae-based products also, if I consider, this is also seems to be like over $4 billion and the large companies are also trying to enter into this segment. So given all these developments, so the cumulative impact on your -- or benefit to your food additives business, let's say, over next 2 year -- 4 to 5 years -- 3 to 5 year also, longer-term outlook, if you can just share on the blends business or food additives business, which -- that we are...

Additives, so the INR 350 crores that we have, I mean the idea is in the next 3 to 5 years, I mean if you say 5 years out, we should be at least INR 1,000 crores-plus on that at a very minimum. That's our -- I mean I'm saying with all this fermentation, all of that coming in, we are potentially -- I mean we can grow more, but then it requires large CapEx. It depends on how much CapEx we can do. But given our size and given what our ability for CapEx would be, it is fair to say we can reach INR 1,000 crore mark very quickly.

Okay. So what is the critical capabilities? And whether it is a commercial capability or it is the manufacturing or the technology that is critical here in this business.

So it is, of course, 2 things. One is the product development. So if you're in a fermentation business, it's technology driven and what is -- what is your technological advantage or you should not have a disadvantage to what others are doing. And second, of course, the most important is these are all CapEx-driven businesses, yes. So I mean the ability for us to do x -- I mean we have a vision to do INR 5,000 crores in this business. But the point is we'll require large CapEx-es for that. Now the size that we are at, we can only do x amount of CapEx, yes? So it's really prioritizing which is the most high value and most long term, which makes the most sense for the company, and you do your investment based on that, yes.

Okay, okay Sir, my next question is on the -- this vanilla business. Although you have said what is your likely revenue contribution from the integrated plant in Dahej for vanilla from -- starting from FY '23. But if you can share some strategic positioning that you can achieve. Why? Because we are obviously very excited about the integrated operation, what we have been having from phenol to vanilla altogether under your control. But the true benefit of this integration never was visible because of the fact of 2-, 3-country operations. So now with one single site end-to-end integration and possibly with such a large capacity, what business dynamics that you are anticipating for the equilibrated kind of vanilla global market and advantage to your business going ahead profitably.

So basically, the market is waiting for capacity to come up in India because the capacity right now, currently, most of them are in China. And as country risk, all of that, everybody wants to derisk their position. Of course, they're not going to pay you a premium for the derisking. They'll tell you what the market price is. But having said that, at least all the large flavor and fragrance houses who are our customers or who we've been in touch with are very excited that it's -- they get a non-China source. They would share -- the share of wallet, they would probably give us will be 30%, 40%. So which is good enough for us. It's a 30,000-tonne market globally, total entire vanillin put together. We have a capacity of 6,000 tonnes, which is 20% -- which is about roughly 20% of global demand. And we are looking for quality customers and share of wallet of theirs. I mean even if it's 30%, 40%, they are happy with that.

Okay. Just one clarification. Sir, you mentioned that, okay, you achieved 65% kind of utilization for your Dahej, whether it is exit rate or the average utilization for the fourth quarter.

Whether it is what? Sorry, I didn't hear you.

The Dahej facility utilization, you mentioned that you achieved a 65% during fourth quarter. Whether that is the exit rate or it is average utilization for the full quarter.

It is an average utilization. It's average utilization.

Okay, okay, okay. Yes, yes. A couple more questions are there in the pipeline. So we'll take that.

The next question is from the line of Alisha Mahawla from Envision Capital.

A clarification. One, if you could say what is your current capacity for ethyl vanillin in China. And secondly, when you said that the Phase 2 that you're doing at Dahej for ethyl vanillin, would you say that this will contribute an incremental INR 400 crores? And does this include the INR 180 crores? Because I believe you will shut down the plant in China. So this includes the INR 180 crores that is already happening there. So incremental revenue will be about INR 200 crores, INR 250 crores. Is this correct?

So in the current year, the incremental -- if China does not restart, it will be 0. It was -- last year, it was INR 200 crores. The 6,000-tonne capacity that we have for vanillin -- ethyl vanillin potentially is about a $75 million top line.

And what is the capacity that you have in China currently?

In China, we have a capacity of 4,000.

And this will be shut down once you start the Dahej capacity.

Not necessarily. It depends on what happens with the court matter. It is not 100% that we would shut it down. There is this -- the ASEAN country, India does not have a trade agreement with all the Asian countries. We didn't participate in that trade agreement. So there is an advantage to be producing in China and selling in this country. So we will divide the market between where China is more competitive in terms of trade barriers and where India is. So it will really depend on what happens in the court case and how best we can utilize the asset.

The next question is from the line of Abhishek from Nirmal Bang.

Yes. Actually, most of my questions have been answered. Just one last one. So could you please share the subsidiary-wide EBITDA numbers for full year FY '21, Europe, Mexico, Brazil and U.S.A.?

Santosh?

Actually, there are a lot of estimation. So it doesn't give a good idea, but I can give you the general numbers because there are even companies share, unfortunate. So we generally issue an estimation, but I can give you an overall number. We had INR 376 crores turnover in Europe with a INR 60 crore EBITDA. [indiscernible] was INR 72 crores with INR 7.5 crores EBITDA. Americas, INR 33 crores with minus INR 6 crores of EBITDA. Mexico is INR 275 crores with INR 69 crores of EBITDA. China was INR 192 crores with INR 1.6 crores of EBITDA.

The next question is from the line of Deep Master from One Up Financial Consultants.

Yes. So I just wanted to go back to your comment on when you said that you want to eventually consume all of the HQ and catechol internally. So is it possible to kind of give a rough time line by when you would achieve that and some sense on what are the -- how the incremental capacity that's remaining in HQ and catechol, how that will be taken up by our downstream products just on a medium-term perspective?

So about catechol first. The vanillin itself, potentially, if we keep China and India both running at the INR 10,000 crores. Our capacity is today 10,000, 10,500 tonnes of catechol. So that will get quickly filled up. The hydroquinone is at about capacity -- I mean our production will be 10,000 tonnes, of which roughly about 3,000 of those will go for TBHQ. 1,000 -- sorry, 1,500 will go for BHA and MEHQ is another 2,000. And then we have some other downstream products from hydroquinone like naphthol, which would be another 1,200. Then we have HQEE. We have para-benzoquinone. So the idea is in the next -- by 3 years, we will consume the entire 10,000 tonnes. So it's a matter of building capacities. And some of you already have -- it's gaining market share; and in some, it is building capacity.

Great. So given that the vanillin CapEx is on track to be completed by the end of the year, so in that sense, FY '23 could be a phenomenal year for your own consumption of HQ and catechol. It would be a step-up in that sense.

Yes. It would be. From -- clearly, catechol, we will consume everything next year. And hydroquinone also by then, we would be at least at about 70%, 75% internal consumption.

Great. And just one last question for me. Your competitor talks of a very large market for glycol, 60,000-tonne level market. So just from my understanding, why -- given that you make glycol ourselves, why have we not explored this opportunity further?

Well, my understanding of the glycol market is that from ethyl vanillin, which is about 22,000, 23,000 tonnes is -- the glycol is for 2 uses. One, it goes into making vanillin, and second, it goes in pharma areas, yes? So the vanillin is about 22,000, 23,000 tonnes. And the pharma is -- all put together, it's about between 4,000 to 5,000 tonnes. So we are looking at the pharma market. Vanillin, of course, we will be present in. But the total market size is not 60,000. According to us, it's about 25,000, 26,000 tonnes total glycol market, of which most players are integrated. So it's always integrated. They make their own glycol and they consume it for vanillin. We are integrated. Only one Chinese producer, he buys catechol from Solvay as a long-term arrangement and then he converts it. So really speaking, there is no vanillin -- glycol required really for vanillin because everybody is integrated. So free sale glycol is anything between 4,000 tonnes -- roughly 4,000 tonnes, which, due to the pandemic, has come down because it goes into specific oxide [ types ], yes, and people have been at home and not falling sick. And so those -- some of those drugs are actually reduced in consumption, yes, which, of course, it became...

[indiscernible] a last part of the glycol. Sorry.

Yes. That is the last part of the glycol. And there, again, it's competitive because there is Solvay, which sells the glycol. There is us, which sells. There is Clean Science, they've come to sell glycol now. So roughly 4 players making and selling glycol to those guys, yes.

Right. So we're already, in a sense, tapping a large part of the addressable glycol market.

Yes, yes, yes. I mean out of the 27,000 -- I mean, our idea is that vanillin itself can potentially be 10,000. So that's huge.

Right. Right. And sorry, just one last question, if I can squeeze it in. So we've tried to scale up vanillin in the past and there have been some hiccups along the way. So what are the learnings that we're implementing this time around in our vanillin that make us so confident of putting such a large capacity?

So there are 2 or 3 things that I would say, which hampered us. One was, of course, the logistics turnaround time and just the whole structure. And second was, of course, our cost structure also. In China, the cost structure is more expensive. So there were times when the competitors were really tightening and swinging down the price and actually selling at no profit, no loss. And that was the time when we said, look, it doesn't make sense just keep producing and selling when you're not making anything. But with India, we know our cost structure is completely different. It's -- we are saving a huge amount of money in raw materials moving from one place to the other and transportation and just the whole cycle. So -- and of course, being in the SEZ, we get power which is very, very competitive. It is cheaper than China -- much cheaper than China. All our -- the basic raw materials are all available in Dahej at 4, 5 kilometers distance literally. So there is no -- I mean there's just a sheer cost advantage of being in Dahej, yes.

So given that we're one of the lowest cost producers of diphenol globally, would be also now be one of the lowest cost producers of ethyl vanillin.

Yes. Absolutely. Vanillin, ethyl vanillin. That's really what we are aiming to do here.

Ladies and gentlemen, due to time constraint, we will take that as a last question. I now hand the conference over to Mr. Surya Narayan Patra for closing comments.

Yes. Thank you. Thanks a lot. So if you want to make any last final comment on the outlook or anything.

Yes. So basically, I mean I think we've covered everything in terms of what the next -- this year and the next few years are going to look like. Really speaking, our focus is, of course, to really maximize what we are doing in Dahej in the next couple of years with the new plant of vanillin coming -- or ethyl vanillin coming up and focus on fermentation to expand our portfolio as well as look at the food ingredients basket and keep increasing product lines, which are complementary in that market where we do have -- in most parts of the world where we do have our own distribution network. So that's really our focus area. Surya?

So that means, in fact, over -- or about 80% or over 80% of our business would be food-oriented, either ingredients or it could be a kind of a food additive element. Is that right.

That is right. Absolutely, absolutely.

Thank you, sir. Thanks a lot for giving this opportunity. And thanks to all participants for participating in the call. Thank you.

Thank you.

Thank you very much.

Thank you.

Ladies and gentlemen, on behalf of PhillipCapital India Pvt. Ltd., that concludes this conference. Thank you for joining us, and you may now disconnect your lines.