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

The conference is now being recorded.

Yes, thanks, [indiscernible]. Hello, everyone. On behalf of Nirmal Bang Institutional Equities, I welcome all the participants to the Q1 FY '22 Earnings Conference Call of Camlin Fine Sciences Limited. We have with us today Mr. Ashish Dandekar, Chairman and Managing Director; Mr. Nirmal Momaya, Managing Director; and Mr. Santosh Parab, CFO of the company. Without further ado, I would request Ashish, sir, to start with his opening remarks. Afterward, he will open the floor for Q-and-A. Thank you and over to you, sir.

Thank you. Thank you very much. Welcome to our earnings conference call. [ We will begin ], as is our usual convention, we will start by having our CFO, Santosh Parab, give you the quarter's performance and the salient points, operational and financial. Afterwards, we will, in the system that has been explained to you, open the floor for questions and answers, which as usual, will be answered by Nirmal Momaya, General Managing Director. Thank you very much for joining us and over to you, Santosh.

Thanks, Ashish. Good evening, everybody. Welcome, again, to the investor and analyst call. Hope all are keeping safe and healthy. I hope that you have had a chance to review the financial statements which we have already uploaded on our website and stock exchanges. We have also uploaded the earnings presentation which has more granular detail. As you know, the second wave of the COVID-19 pandemic threatened to dislodge the improving economic quarter parameters. However, we are very happy to inform that CFS has been able to tide over the challenge -- this challenging situation with a resilient performance. The company clocked a marginal growth in the revenues of [ INR 330.83 crores ] as compared to the previous quarter. [indiscernible] has seen unprecedented pressure of increasing raw material prices by almost 20% and logistical costs also increasing by around 2% to 3%. This has had an adverse impact on the margins of the company. The gross margins eventually declined by 451 basis points as compared to the sequential quarter. The company is usually able to pass on this increase in the cost to its customers with a lag of around a quarter. We are assessing the trend of increasing raw material prices and the global supply chain challenges cautiously and we'll be charting the way accordingly. The lower gross margins also impacted the EBITDA margins, which were further impacted by onetime costs incurred in CFS Wanglong, our Chinese subsidiary, which produces annually amounting to around INR 3.50 crores, primarily on account of disposal of raw materials, since the plant is closed, and some nonoperating costs. The resultant operating EBITDA for the quarter was 13.8% as compared to 15.7% in the sequential quarter. Despite the pandemic situation, the demand for our products globally has remained robust. Our company is also working on various new initiatives to enhance the basket of downstream products. Coming to our diphenol plant, the diphenol plant today has achieved 63% capacity utilization during the quarter. With the utilization will be reaching above 75% at the back end of this quarter. The optimum capacity utilization of more than 90% is expected to be reached by the end of second quarter. The positive impact of diphenol plant is visible in the stand-alone results, where the gross margins have increased by 434 basis points to 41.8%, which was despite the rising raw material prices and logistic costs. Though the lower margins had a negative impact, gain in foreign exchange helped the profitability to improve by 237 basis points quarter-on-quarter. The profit after tax stood at INR 23.78 crores as compared to INR 15.72 crores in the sequential quarter. We were also able to protect the liquidity of the group despite the elongated working capital cycles and increased costs. The gross debt stood at INR 535.75 crores as on June 30, 2021, as compared to INR 537.89 crores in the end of last quarter. Cash equivalent as on June 30, 2021, were around INR 94.93 crores. We are also glad to inform that there was an improvement in our credit rating from BBB+ stable to A- stable. Our [ Wanglong ] vanillin manufacturing plant in China remained closed during the quarter due to the order of Supreme Court of China regarding the infringement of technology by our partner. The renewed petition against the order is pending hearing and is expected to be heard in the very near future. Construction of the vanillin plant in Dahej is in full swing, with almost 35% of the project implementation [indiscernible]. Despite some delays due to the pandemic situation and cyclones, company is still confident of meeting the expected completion time line. The company has been always focusing on the health of its employees during the pandemic. CFS India, during the month of June, carried out a vaccination drive for its employees, vendors and also some of its service providers, where more than 800 people were inoculated free of cost. Planning is also in progress to fully vaccinate all the employees in the coming future. In conclusion, we are confident of continuing the positive trend in the growth of the business. Thank you and now we can open the floor for question-and-answer session.

[Operator Instructions] The first question is from the line of Shikha Mehta from Equitree Capital.

Congratulations on a great set of numbers in a challenging time. I just had a couple of questions. If you could give some guidance on the tax rate for FY '22? If you could also give some guidance on how we see our business playing out over the next 2 to 5 years? And any CapEx number for this year and for next year?

Yes. So the tax rate, we expect a tax rate...

Can I answer, Nirmal?

Yes, go ahead.

The tax rate as on a full-fledged basis, and really, say, synergy of all business are in line, the tax rate should be in the range of 25% to 27%. At present, it has been a bit high because there are some geographies which are making losses and then inter-company, so [ already ] losses cannot be adjusted, so there is. But on a full-fledged basis, it should be in the range of 25% to 27%. Nirmal, you can answer the next part?

Yes. In terms of the business for the next few years, we've kind of laid out the path forward with Dahej facility coming onstream and now also the vanillin -- ethyl vanillin plant under construction. And going forward, expanding our business in the Blends business as well as in the Performance Chemicals, downstream products from hydroquinone chemicals, expanding capacities on those, we are on track for the growth that we've been guiding for the last -- from the last few quarters.

If you could also give some update on Wanglong?

On Wanglong, Santosh gave update that the Supreme Court review petition is going to be heard very soon. In the next couple of months, we should have clarity on the way forward in China.

All right. And on Mexico?

On Mexico, I mean, it's going onstream and we're constantly growing that business. And this year, we should grow the business by 15% to 20%.

All right. And CapEx figures for FY '22 and '23, if you have any guidance?

Yes. So I think the CapEx for the Dahej vanillin facility will be about INR 175 crores. And next year, our CapEx plan between all the projects that we will undertake for the downstream products, should be in the region of about INR 75 crores or so.

The next question is from the line of Ravi Mehta from Deep Financial.

Santosh clarified in his opening remarks on the gross margin. So I just wanted to understand more from the price hike that is already taken with the lag, so should the gross margins be reversing back to the normal run rate?

Yes. There are 2 or 3 factors here, which have impacted the gross margin. One is, of course, the raw material price and second is the logistics cost. The logistics cost, there are 2 things, the first one is availability and second is costs. Availability has been a challenge in terms of containers to even shipping lines, to getting product on a ship with limited availability. So that remains the challenge, availability. And cost, of course, has more than doubled on logistics, so which is again a challenge in terms of what typically is to be 2%, a little fixed cost, which will be about 2% of our sales has gone up to almost in excess of 4%. So that has impacted the gross margin. And the second, of course, is the raw material and the lag in which we can pass on. So yes, we expect that both the logistics cost as well as the raw material price increase that has happened, we should be able to pass on those in the next quarter and the following quarter. Also, we expect some of the raw material prices to also ease off in Q4. So our target is, and I think it's achievable, is to be in that region of 49% to 50% gross margin in the next coming quarters.

Okay, okay. That's helpful. Also, probably this one-off, the expense we had in China, as -- so if all those going away, probably the EBITDA also normalizes.

Yes, correct. See...

I mean I don't expect any other one-offs in coming quarters. I guess this was it? Or?

Yes, so basically -- so looking on material in process and raw materials, which we have to then sell at a cost below cost because of the process. So basically, those kind of rates, which is onetime, was expected, but there would be some impact. But other than that, there is no other impact which is expected. So yes, in terms of improvement in EBITDA margin, that will be impacted by almost 2% or a little more than 1%.

[Operator Instructions] The next question is from the line of [ Dhimant Shah ] from [ Oneup Finance ].

One quick question. Sorry, just a clarification before that. The gross margin you shared, that would stabilize around 45% mark, right?

No, it's about 45% right now. What we expect is it should stabilize around 47%, 48%.

On a consolidated basis?

Yes.

Great. And how much would the value-added products or the downstream products, as you call it, what would be the proportion of sales coming from that on a normalized basis as we move forward?

Sorry, I didn't -- what was your question?

The value-added products or the new downstream products, what would be -- what would that be as a proportion of total sales?

Right now, our sales is, I would say, almost INR 230 crores, about INR 230 crores would be value-added downstream products and INR 100 crores would be basic hydroquinone, catechol, roughly. Going forward, that would change also because we will do more value-added production, especially with the ethyl vanillin coming up. I think that, in itself, will add another -- once we can work the whole thing into at least about 4x of that to INR 400 crores and the balance tonnage, about 35% capacity, would be another INR 200 crores, so at INR 600 crores or so will be added with full downstream products when all the capacities are running.

And INR 200 crores would be the normal category. So INR 800 crores in total, that is what you are saying?

No, INR 600 crores more. I'm saying what we are selling is hydroquinone, catechol, will get promoted into the downstream.

Okay. Okay. Okay. And one intriguing question is we have one listed competition who claims far superior margins and all of that and we roughly have an overlap of 40%, 45%, if I'm not mistaken. So can you...

Yes, the overlap is only INR 100 crores right now, INR 130 crores of INR 1,200 crores or 10%.

About 10%, okay. But do you see any meaningful change in the equation as they introduce more products? Or there is no likelihood of major bid on competition or whatsoever or even impact on margins as far as we know?

As far as we are concerned, we are entering the MEHQ market where they are the leaders and which will scale up as we go along. So we don't see much of an issue in terms of margin on the MEHQ because that's a business which we don't have today. And we have a good cost position in MEHQ with our Dahej facilities. So as we ramp up Dahej, we'll increase our MEHQ production as well as sales in the market. So that will add to the margin, actually, for that.

Yes, but they kind of claim that their cost is far superior to anybody else even close by. So would you kind of delve a little bit on this?

Yes. So our cost is higher because -- or was higher in the past, it was only because of our raw material source coming from Italy. With Dahej, we are on an even keel on MEHQ. So like I said, I think as we do scale up MEHQ, which will happen in the next few months, our margins will improve on that.

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

First of all, I would say a strong set of sales number, what you have reported in the [indiscernible] quarter, that is the highest-ever sales. So this is a kind of a strong kind of number that we are seeing for the first quarter. So is it fair to believe, sir, this is setting a stronger tone for the entire year in terms of sales growth?

Yes, that's right. Typically, the first quarter is slightly subdued. And going by that and also on the development of all these downstream products and new products, yes, it is -- that the following quarters, Q3, Q4, will be stronger than the first 2 quarters.

Okay. And then we have, in the recent past, also have entered into new businesses or talked about the new business, like through acquisition of this AlgalR nutraceutical company. And we have also indicated about our entry into MEHQ and the calcium propionate. So if you can just share some sense what is the kind of sequential progression that we would be seeing or whether we have started seeing any kind of incremental number out of these? Or when would that clearly be flowing in, some sense on that part?

Yes. So in terms of MEHQ, we are -- as we scale up Dahej from the 65% odd to the 100% mark, which will happen in the next couple of months, we would start scaling up our MEHQ business. So incrementally, in the next 6 to 7 months, we should have some sales coming in for MEHQ. As far as calcium propionate is concerned also, we've launched the product and we've got encouraging feedback from the market. And that also will start slowly scaling up during the year, in the next 6 to 12 -- in the next 7 months. And the AlgalR, we just took control of the plant, we are understanding the production cycle and fine-tuning what we need to do in terms of scaling up capacity. So the revenue really will start coming in from October onwards, which also we will scale up with some small debottlenecking in the pipeline in the next couple of months and the revenues should start flowing in, like I mentioned, from October onward.

Okay. But is it fair to believe something like around 10% of the sales can be contributed from all this new effort? And the base business can see its own natural growth progression? Is that a fair number, sir?

Yes. I think all these businesses, the new businesses put together, I mean contribution over INR 100 crores, yes, it would be fair in that region.

Okay. Then I think given the kind of -- so even if we annualize the first quarter number and the incremental trend, what we generally see in the second half versus first half which will further be complemented by this, then kind of a strong, over 20% kind of a growth is a certain visibility, given the 8% kind of Y-o-Y growth in the first quarter, what we are seeing?

Yes, that's right. Like we just mentioned that we are targeting between INR 1,400 crores to INR 1,500 crores would be the top line.

Sure, sir. Okay. The next question is on the margin trend, sir, if you can just clarify this INR 3.5 crores one-off number that you have mentioned. It was relating to materials. So you said it's something operational also. So in which line item that is there?

So around INR 1.5 crores is on -- is in consumption. So these were regarding the raw materials and [indiscernible]. And also certain one non-operating expenses happened on cleaning up the factory and other things, which was around INR 1.5 crores. So INR 2 crores. So INR 1.5 crores in the hit in the consumption and the balance, INR 2 crores is in the hit in the other expenses.

Okay. Then my next question from the -- is about margins. We have obviously maintained that, okay, this is a one-off adjustment that is there in the overall margin. And there are elevated cost, freight, as well as RM, part of which can be passed on in the subsequent quarter, which can be mitigated. But I'm just trying to understand whether the impact of cathecol is also there, because until the time that we will not be doing vanillin. So that would be coming as a kind of product and -- are we building inventory of that? Or is it sold in the market and hence, some impact at the margin and impact on the margin that would be seen, some sense on that?

So yes, so of course, the vanillin has been discontinued. We are selling cathecol in the market. What we did first anticipate was that whether we'll be able to liquidate all of that would be produced in the market, was a bit of a question mark. But fortunately, we've been able to kind of overcome that and be able to liquidate and we continue to liquidate the cathecol in the market. So yes, that has impacted the margin, because when you convert it to vanillin, [indiscernible] give you a better realization for cathecol than what we sell in the market there. So -- but of course, that gets corrected as soon as our Dahej vanillin facility starts, that gets corrected immediately.

Okay. Okay. Just if you can clarify about your commissioning of Dahej, the progress of the setting of -- the progress in terms of setting up the vanillin plant. Because we have seen a peak COVID phase recently. So whether that had impacted the implementation of that new project? And if that rate is incremented, even if we ignore for the time being in the China facility, which is uncertain, which is currently under [indiscernible] duty. So then what incremental business that we can get from the Dahej vanillin unit?

So the progress is good on the project. Of course, we did have some problems with COVID and especially on the oxygen side, in the second wave there, industrial oxygen was not available for a few months. And of course, the typhoons which hit them. So there's some problems. But really speaking, not much of a -- not a very big issue. We are looking at starting the plant by April, we should be ready to start commercial production. That's the estimate that we have. In terms of sales, I mean it's like our capacity will be 6,000 tons and as far as today's market prices of vanillin aren't that crazy, but [indiscernible] will remain, because when we come with supply, we will bring the price to normalized levels. We expect INR 300 crores, INR 400 crores turnover next year additional coming from the vanillin business.

The next question is from the line of [ Rohit Sinha ] from Sunidhi Securities.

So my first question is on the hydroquinone side. Since the hydroquinone prices are at almost all-time high, what kind of advantage or disadvantage it provides to us in terms of sourcing it from outside or selling it in the open market? And how much we are in a position to pass it on and maybe kind of tying that into that?

Yes. So hydroquinone pricing has gone up and you're right, I mean they are at all-time high in the last 2 months. So yes, of course, it is a bit of an advantage. But I mean really speaking, raw material prices have hit all-time high. So in that sense, it's kind of offset by that.

Okay. So nothing incremental kind of benefit we should expect from this?

I mean not really, no.

Okay. And on the U.S. business side and we have done exceptionally well in this quarter. So is it because of some new contract or new approval clearance? Or it's pent-up demand amid this pandemic situation?

It's not really a new business contract that we've signed for our Blends business, it's more on the hydroquinone. We started establishing a small market in the U.S. for hydroquinone, where they're doing local stock and sales. And that is what has given us a bit of higher sales in the U.S.

I mean we are selling our hydroquinone from U.S.?

Yes. That's right.

Okay. And that would -- that is supplied from our Italy plant? Or is it from the...?

Yes, from Italy. So it is only captured, you see these downstream products in India. We don't sell big hydroquinone or catechol in the market right now.

Okay. Okay. And lastly, on this Infinity Holdings side, and have we procured anything from Infinity Holdings funding during this quarter? And thirdly, how much is remaining? And maybe, I mean where we should be expecting our debt profile could look like in by the end of [ FY '20 ], considering this Infinity Holdings money into account?

Santosh?

Yes. So as far as the Infinity money is concerned, they have to invest before 15th of March 2022. We have been calling the money as and when required. But it's highly likelihood that would rather not have to return that entire share, balance remaining shares, a balance of around INR 2.94 crores will be issued to Infinity on or before 18th (sic) [ 15th ] of March '22. At present, as you know, around [ 61 lakh ] shares that is around [ 4% ]. They are already invested and shares have been issued. The balance in the coming year, drawing the money as and when required. As far as loans are concerned, ECB from IFC, we have already done 5 million, drawn 5 million for our [ ethyl vanillin ] project last year. The balance, 10 million, will be drawn in this year. So that would be an addition and that is going to be utilized for ethyl vanillin. We are also contemplating an increase of around INR 30 crores to INR 35 crores on our working capital borrowings because of the increase in business. So at this moment of time, that is what is the expected increase in loans by the year-end.

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

So I just wanted to touch a bit on the Blends business. I think -- I guess due to COVID and the disruptions, we've kind of not seen growth in FY '21. But it's tough for us to figure out the Blends revenue in the quarter. If you could just share the number for that? And also, give us an outlook, because I think that's the part of our business that's not well-appreciated because that's the branded part of our business. And kind of gives us a lot of stickiness in our revenues. So could you kind of give some outlook in the medium term on Blends? And maybe if you could also touch on some of the key markets and the development that you're seeing there?

Yes. So in the Blends business, in this quarter, I think it's about INR 80 crores odd is the Blends?

INR 81 crores.

Yes, INR 81 crores. And yes, so because of the whole situation from last March onwards, there was a lot of restriction on movement, visiting customers who're starting new projects or keeping new projects on hold. In the Blends business, a lot of interaction is required, which is a little the nature of the customers. I think with the vaccination drive across the world, what we are seeing is that slowly, things are opening up, people are allowed in, people who are double vaxed, to come in and start interacting with their staff and into their plants. And so a lot of new products that we have developed which we have a lot of potential in terms of market. But of course, we couldn't do much work in the last 15 months that has now started. So we are already seeing that all our salespeople are now on the ground, running -- leading customers. And what we have estimated as growth to be in the region of in excess of 20%. I think we start clocking that from Q3 onwards because all these projects which were kind of kept on the back burner have now started opening up again. So in terms of geography, our strength really is in the Americas, more in the Central and South and now North America as well. So those markets are kind of, more or less, have kind of opened up and our people are visiting customers. And so we'll see that growth that we anticipated in these markets [ without issue ]. We're also now putting a lot of focus on developing the Asian market. We started -- we have a JV with a Malaysian company, so we've started now doing business in Malaysia. We've kind of brought some new customers in and those are looking promising. Similarly, we are introducing our products in Indonesia and other parts of Southeast Asia, where those registrations also should come through in the next few quarters. And we'll be in the market with the Blends in countries like Vietnam, Philippines, in the next 2 or 3 quarters. So a lot of work going on in East Europe also to establish and do that registration there, as well as in the Baltics. And so we're focusing on different markets and developing a [indiscernible] and registration base in the next 3 quarters that in the midterm, we are well-established in new markets to grow the Blends business by 19% to 25% a year.

So given the lag in your sort of sales team interacting with the customers and -- but also the pressing need for many of the customers to kind of reduce their cost given the inflationary scenario across the world, as and when the interactions begin again and you regain traction, shouldn't the growth in FY '23 be much stronger than 25%, given that we come with a much lower cost base as well as the lag that we've seen over the last 2 years?

Yes. So yes, I mean there could be -- if conditions improve as we hope they do and [ other things ] do improve yes, I mean it's very much possible to grow it further than that. Also, what we see is that in many countries, there are tariff restrictions where blending, which tends to be more localized because of the tariff -- import tariffs. So going forward, the business model will certainly be small blending units in different parts of the world to service markets which have free import tariffs within a block of countries. And that seems to be working well like we see in most in South America, where we supply to Chile and I think in 2 other countries, developing countries, without significant tariff issues. Similarly, Mexico can do in Central America. Southeast Asia, Malaysia can do Southeast Asia because they're a part of the ASEAN countries, where they have a tariff advantage. So yes, I mean potentially much more than 25%. But given the uncertainties that are there right now, difficult to say. If things do get normalized, surely, I mean the opportunity is much greater than that for us.

Sure, sure. That's helpful. And on the downstream side and just connecting to an earlier comment you made on your margins in a product such as MEHQ, with the [ raised ] cost structure. So if your cost structure starts to align with your competitor that has a much healthier margin. And you also alluded to the fact that your value added to your downstream products will kind of amount to another INR 600 crores once vanillin and the other products come in. So the margin swing in my estimate could be quite dramatic. So any more color on what steady-state margins could kind of look like once the downstream is kind of built out in an FY '23 scenario?

Yes. So I mean that's what we're saying, that surely, it will be significantly better than where we are. Where will it go and end up at will depend a lot on what the competitive landscape will be in terms of market share as well as pricing. So -- but yes, but it's safe to assume that we should be close to like we what already mentioned, high teens to 20%. I mean we should certainly be exceeding that in the FY '23 year.

Sure. And just a last one on the downstream. So on a run rate basis, when would we expect the contribution to come in from vanillin and some of the other new products?

Yes. So like MEHQ, I mentioned MEHQ, catechol, the others, the downstream that we have right now. So from October onwards, we will start seeing contribution. Vanillin will start from April next year, as well as there are certain other products like HQEE and other downstream products where we are seeing, winning some new contracts in those businesses. So yes, from October onwards, the contribution will start and the bigger one will start from April onwards when the vanillin starts.

The next question is from the line of Niranjan [ Gajanan ] Sakhalkar from Acuitas Capital Advisors.

I had a couple of questions. The first one is on the Performance Chemicals segment. Could you give me a sense of [indiscernible] what are the chemicals to drive the growth? Or are there any other main thrust in this category which would drive the growth? And what would is the growth rate on the segment?

I couldn't understand the...

On this Performance Chemicals segment, which are the main key chemicals that will drive the growth? One is MEHQ and the other one?

Yes. So we have several products. We have MEHQ, we have HQEE, then we have [ PVM ] and now we're getting into forward integration of that into [indiscernible]. We have guaethol. We have guaiacol, TBC. So there are at least about 8 to 9 products which are in the downstream, which will contribute to the growth.

Okay. And what growth do you expect in the segment over the next, say, 3, 4 years, in Performance Chemicals?

Yes. So in Performance Chemicals, I mean in the downstream part, as you said, Aroma and Performance go hand in hand in that way. Between all of these, about INR 600 crores is what we are saying.

INR 600 crores. Incremental, right, over the next [indiscernible]?

Yes, incremental. Incremental over the next 2 to 3 years.