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

Ladies and gentlemen, good day, and welcome to the Q2, H1 Earnings Conference Call of Camlin Fine Sciences Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjesh Jain from ICICI Securities. Thank you, and over to you, Mr. Jain.

Thanks, Roshal. Good afternoon, everyone. Thank you for joining with us on Camlin Fine Sciences Limited Q2, H1 FY '22 Results Conference Call. We have Camlin Fine Sciences Management; Mr. Ashish Dandekar, Chairman; Mr. Nirmal Momaya, Managing Director; and Mr. Santosh Parab, CFO. I would like to invite Mr. Ashish to initiate the proceeding with his opening remark, post which, we will have a Q&A session. Over to you, Ashish sir.

Thank you. Thank you. Welcome, ladies and gentlemen, to our second quarter earnings con call. At the outset, let me apologize for the delay in the posting the results. Our Board meeting was extended beyond what we thought it would take and then there were some technical issues in uploading. But once again, my apologies, we will try to be as clear in our explanation of the quarter. And we will, of course, answer all your questions to the best of your satisfaction. So right now, as our usual convention is, hand over for the brief to Santosh Parab, our CFO. And later on, questions and answers will be answered by Nirmal Momaya, Managing Director, as is our convention. So over to you, Santosh.

Thanks, Ashish. Good evening, and welcome. Yes, I would also like to apologize because there was some delay in closing of the Board meeting and then some technical issues. So for the benefit of the participants, I will just take you through the results in a perceived matter. Our consolidated turnover was INR 311 crores in quarter 2, which is around 5.9% lesser than it was in the earlier quarter, it was INR 330 crores. Our operational EBITDA after adjusting foreign exchange has reduced from INR 45 crores to INR 27 crores, which is a 486 basis point reduction. And obviously, the profit before tax and profit after tax has also got impacted because of lower EBITDA margins. As far as half year consolidated results are concerned, we had a 13.6% year-on-year increase in the revenue from INR 562 crores last year to INR 642 crores this year. Our adjusted EBITDA margins were INR 96.8 crores in last half year, which was INR 73.3 crores in current year. The EBITDA percentage is 11.42% in this current half year. As far as stand-alone is concerned, our revenues reduced by 5.2%. They were INR 138 crores in this quarter as against INR 145 crores in the last quarter and corresponding EBITDA was INR 3.9 crores compared to INR 19.2 crores in the last quarter. As far as half year is concerned on stand-alone, the revenues have increased by 6% from INR 267 crores to INR 283 crores. In the foreign exchange adjusted operational EBITDA was INR 30 crores last year, which was INR 23 crores this year, a 314 basis point reduction in the percentage EBITDA. As you can see from the numbers, the quarterly and half yearly results are not up to the mark. But the current situation highlights our consistent standard. Our business must be watched year-on-year basis rather than quarter-on-quarter. Obviously, the question we asked that whether this quarterly trend will continue in the future, I'll come to that a bit later. First, let me discuss the operational highlights of the quarter. Overall demand in all the segments of the company remain very strong as the old restrictions were progressively eased, which indeed is a good sign of the business -- for business of the company in the future. However, that's where there was a drop of around 5.9%, as I said, in the consolidated turnover. The results were impacted by some onetime nonrecurring events and also the current structural and economic situation globally, turnover was generally impacted due to the following reasons. As you know, economies are battling with disruptions in the logistics and supply chain, where not only the throughputs which are impacted, but the availability of raw material is also impacted. Further technical -- we face certain technical issues in our Dahej diphenol plant during the month of July and August, and we were trying -- we were in the process of scaling up the production to 100% utilization. This put pressure on our internal availability of throughput that we took in other categories. This reduced throughput consequently impacting the production of our high-volume, high-margin products such as TBHQ, BHA, MEHQ, PDMB as compared to quarter 1, and this led to reduction in sale of around INR 25 crores. And obviously, our gross margin also got impacted by around INR 12.5 crores. Of course, the reduction of these products effectively change the overall product mix also, which put further pressure on the margin. Of course, there was a silver lining to this as diphenol unit, as you are aware, has achieved 100% capacity utilization in the month of September '21 and is likely to continue with this trend of high capacity utilization in the future. Further, this quarter also saw a onetime expenditure of around INR 3.50 crore on some consortium -- bank consortium charges in India, a onetime supplier settlement in Europe and some trademark registration of some new names during the year -- during the quarter among other. Now we come to the impacts on account of structural and economic situation prevailing in India as well as globally. As you are aware, world is staring at an unprecedented increase in logistic cost. Company, as you know, is not able to pass on to this cost immediately, as there is a lag of a quarter for the passing it on. Our company is still working on a mitigation strategy here of changing the terms to FOB from October '21, the impact of which will be visible in the subsequent quarter. Further as you are aware, the increasing adverse trend continues to improve, and that is impacting the raw material cost even in the current quarter. As you would have seen, there is also an increase in employee costs quarter-on-quarter. The main component of INR 101.8 crores was on account of yearly increment and induction of Managing Director as well as new sales personnel and new businesses in the current quarter. After the benefits of new inductees, we'll start certifying in the subsequent quarter. Lastly, even though the gross margin remained stable quarter-on-quarter, which remains shy of expected 50%-plus margin, mainly due to the increase in selling prices, which we did as compared to last quarter. We're entirely undone by the inflationary conditions and the lag of order to pass on to the customer of the increases -- continuous increase of prices in the current quarter. Of course, there are some advantage also there, opening of the country's corridor post the COVID relaxations, but that has also brought in some costs as physical travel and sales promotion have now restarted. Further, the volatility in foreign currency, especially in Brazil, resulting in a foreign exchange loss of around INR 5 crores during the quarter. Consequently, the EBITDA was severely impacted and a reduction of 490 basis point happened. Now coming back to the question whether this negative adverse trend will continue. Now looking at the strengthening of global demand, our completion of stabilization of diphenol unit and to achieve its maximum capacity, results of -- unveiling of diphenol cost advantage. We are seeing robust growth also in segments of blends to continue and further increase in productivity, we are quite confident of achieving the yearly guidance and turnover. We are also confident of recouping the lost EBITDA margins. However, we will have to overcome the structural hurdles, which are in the global markets like the continuing inflationary trend in raw material prices. And of course, you would have also heard about the increasing cost power prices around the globe and still prevailing supply chain bottleneck. However, in a nutshell, this aberration in margin is unlikely to continue in the future. Now I'll come to the -- quickly to the foreign observations of the group. Our Chinese Wanglong subsidiary continues to be shut down owing to the Supreme Court order, which you are already aware of. The retrial application filed by our partner was heard in October '21. The verdict thereof is expected any time this month. So we'll be hearing the verdict and then based on that verdict, we will be taking the further course of action. Our European, Italy, which produces basically diphenol, continue to operate at full capacity and has posted a quarterly revenue of INR 111 crores. We have sold hydroquinone and some part of catechol in the open market from Europe. CFS Mexico also clocked healthy operating revenue of INR 76 crores, and both these subsidiaries will continue to grow in the future. South American markets were stable, where our subsidiary is stable in Brazil, posted a revenue of around INR 20 crores during this quarter. CFS North America, our U.S. subsidiary, is also slowly but certainly emerging out of the severe COVID impact in U.S. It clocked a turnover of INR 12 crores in this quarter. I come to the CapEx program, which have been undertaken and is under construction. So our construction of diphenol plant at Dahej is progressing satisfactorily and would meet the expected target of commercial production in quarter 1 FY '23. As you are aware, the company has completed the acquisition process of AlgalR NutraPharms by acquiring 80% stake yesterday, that is November 10, 2021. This foray in nutraceuticals segment with exciting products such as Omega 3 fatty acids, et cetera, will not only add to operational revenue, will scale up in the next 2 years but also contribute in improving the margins. All in all, the performance in the quarter is not a trend. We are more than likely to bounce back and achieve our target goals. Thank you very much. And now we will take your calls.

[Operator Instructions] Our first question is from the line of Rohit Sinha of Sunidhi Securities.

Am I audible?

Yes.

Yes. So I think everyone was expecting some margin impact because of the rising input costs for -- almost all consumers have seen in last some time. But that is where I was looking at, at how our volumes have been there for this quarter. What kind of growth was there? Because 20% on the control side, if you look at the top end growth, I think that kind of pricing environment is already there. Most of the prices are higher. So how much we have passed on the pricing increase? And I think what kind of volume growth was there? Because for the last 3 quarters, I think we are in a similar trajectory of INR 300 crores, 310 crores, INR 320 crores. So how we should see that thing going ahead?

Yes. So Rohit, to answer your question, as Santosh had explained earlier that we lost some volume because of supply chain and the diphenol scale-up, basically, the raw material hydroquinone was short for us in this quarter as compared to quarter 1, and that led to erosion of sales. What we would have achieved if we had achieved the same volume as quarter 1, our sales would have been higher by almost about INR 25 crores to INR 30 crores. But the price increase that we did affect brought this difference down by -- to about INR 10 crores or so. So we've been able to pass on the price increases, the cost increases of the previous quarter. However, certain raw materials have also gone up during this quarter, which the passing on of that cost increases will happen in the current quarter, which is this ongoing quarter.

Okay. And just on the wage impact. Could you just help us understand what was the issue, why kind of impact was there? And I mean because that was the main thing which everyone was talking about for some time, and this has mainly impacted our stand-alone business in this quarter. Margins have completely shrink to a single-digit percent. So how are we going to overcome it, 100%, I mean, completely? Or it's still...

No, no, we've completely overcome that, and we are running at 100% capacity from September. It was only in July, August. To scale it up to 100%, we had to make some technical changes, then some equipment had to be modified, which were done. And that is the reason why the production has slowed down during those 2 months. But now we're running at 100% in September. As well as in October, we ran at 100%, and we continue to run in November at 100%.

Okay. That's it. That's it. So rest, I mean, if -- I mean the hedge was some issue, wasn't possible for us to source it from our Italy plant and sort of that raw material availability here?

So raw material basically from Italy, which we normally would -- in the past, we were importing, we were selling and we are already precontracted to sell it in the European market. So there was no way to bring material, and this issue was not an anticipated issue. This was an ongoing modifications that we had to do and which there were certain problems that happened during that time, which we needed to fix to get to the 100%. That is the reason why keeping the supply chain in mind, this was a problem.

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

Just a couple of questions. First question is on the margin itself. So obviously, you have mentioned about a few reasons that has impacted our overall margin as well as the gross margin. So before coming to that point, if you can just give an indication about the product mix in terms of like the blends and all that, performance chemical and -- so that will be the kind of indicator. And subsequently, I'll have questions on that.

Okay. So the breakup is our trades business, which is the anti-oxidants trade business in the first quarter was 79 point -- one moment, sorry, was INR 79.7 crores, which has come down to INR 73.47 crores. Performance Chemicals from INR 145 crores came down to INR 131 crores. Blends increased from INR 81 crores to INR 84 crores. Aroma is whatever residual stock we had, it was disposed of. And nutraceuticals remain constant and others remain constant at about INR 17 crores. So that was a breakup of INR 329 crores of last quarter versus this quarter of INR 310 crores. So the ones which were impacted were high-value and high-margin businesses, which is our TBHQ, BHA, MEHQ and PDMB.

Okay, okay. And that was because of the stocking of the last year that you mentioned? Or what was the reason, sir?

No. The reason was that we did not have enough hydroquinone as compared to the first quarter. The reason for that shortage of hydroquinone basic raw material to make these 4 products, which are really the high-margin products for us, was that the supply of hydroquinone was coming from Dahej for our Tarapur unit. And Dahej in the month of July and more in August had -- like we said, we were making some modifications to scale up, which scale up, of course, we have demonstrated in September. So there was a shortage of hydroquinone during this period, which led to an erosion. I mean, what, we would have added at least INR 25 crores to INR 30 crores if we had followed even Q1, not even at 100%, but even at a lower capacity.

Okay. So that means was it to means considering that kind of trade issues, what in the world over that was witnessed about availability container and all that, whether that was a conscious plan that we had to focus more on the -- or depend more on the Dahej plant so that it would be reduced.

Yes. Absolutely because looking at the way supply chain issues one is facing in, all raw materials, which you have been importing, we're trying to localize as much as possible what we can do. And of course, Dahej was one of the reasons why we set up, Dahej was also to have a captive and material available in India. And essentially, our strategy has been that the products that we make in Italy, we are now selling in the market in Europe. And what we are making in Dahej, we are consuming ourselves. Still, of course, as we require more and more hydroquinone as we go along, as new products get scaled up, of course, we will bring in materials from Italy to India.

Okay. So what was the average utilization, sir? Although in the last month, we -- for the quarter, we have paid 100% utilization. So at 100% utilization, that would have met our entire hydroquinone requirement. But obviously, the average utilization would be much lower. So can you tell that?

Yes. The average capacity utilization was close to about 70-odd percent. And at 100%, we get -- actually, all our current requirements are taken care of.

Okay. So that means at least this availability of hydroquinone and -- or what has impacted the performance that would not be there at least next quarter or running quarter that I would say?

That's right. So in the current quarter, we have adequate hydroquinone available to us from Dahej for all our downstream products.

Okay. And so whether that is because of the kind of impact on the margins or trade challenges, whatever that we have witnessed in the current quarter or current time frame that we are witnessing, will that impact the new businesses what we had indicated that was supposed to start from the third quarter, like the Algal or AlgalR or the MEHQ or even the calcium propionate?

No. So basically, all the new businesses that we are starting now will not get impacted because of raw materials. And even the AlgalR acquisition that we completed now, so we are in charge from today and we are working on trying to scale that up as well. MEHQ as well is -- we've started scaling up our MEHQ production with adequate hydroquinone available from Dahej due to our growth in our Performance Chemicals business as well.

Okay, okay. So just last one question, sir. In terms of the China plant, so you mentioned obviously that there is a kind of update likely from the regulatory or the litigation that is going on, but whether we have decided about the new product that we are thinking of introducing there or we want to continue with that kind of vanilla business.

Yes. So we are more inclined to start the new product because our vanillin facility is now almost getting finished in Dahej. So what we are trying to see is if we can make the new product there for which we're making some environmental applications in the next month, and we hope to get the response and get the approvals in the next maybe 3 to 4 months and then start that other product.

Our next question is from the line of Ankur Periwal from Axis Capital.

My first question is on the margin front again. If I look at the stand-alone side and given the reasons which you highlighted in terms of pressure from raw material, coal cost, logistics, et cetera, visible in terms of margins declining on a quarter-on-quarter basis. But on a year-on-year basis, I think that was a low base effect, which was impacting stand-alone. On the consol side, the margins are still sort of holding on. I'm guessing more on the gross margin trend on a quarter-on-quarter basis. So anything specific happening in the international market, wherein the margins are better on consol?

Yes. So the margins are better on consol purely because hydroquinone, which was manufactured in Italy and sold in Europe, the prices of hydroquinone were high, and that's the reason why we got better margins in Europe. That is the major contributing factor.

Okay, sure. And these -- the selling of this HQ in the international and European market, is this on a -- what sort of duration is this? Is this a short-term contract, spot contracts or these are longer term contraction?

Currently, nobody's signing any long-term contracts because with the volatility, which is there in raw material prices and supply, especially in Europe now with the gas prices in Italy and electricity costs going up considerably, it's very difficult to sign any long-term contracts. So essentially, what we are doing is we are selling -- of course, it's customers who we build relationships with, but we're not signing any long-term contracts because, a, raw material availability prices, it's too much of a risk at this point of time.

Sure. So these will be largely spot contracts or probably a 2-month, 3-month or a 6-month contract service there?

So typically, we prebook for 3 to 6 months. So we are booked till -- now, right now, currently, we are booked until February. And then every 3 months -- we keep rolling that or a quarterly booking.

And just for my understanding, the pricing here, the contracts which we have till February, the pricing will be what will happen as of, let's say, next month? Or if these prices are also frozen?

Frozen. The price are frozen. That's why we take only quarterly. We don't take more than 3 months out.

Sure. So the benefit of this prices -- international prices being higher will continue in next quarter as well and maybe partly in Q4 also?

Yes. Right now, it looks like that.

Sure. That's helpful. Second question on the Dahej operations. You mentioned now we are operating at 100%. And given that the capacity at Dahej and Italy is largely similar. Going ahead, this should incrementally add to our overall profitability even on the stand-alone side. Will that be a fair assumption?

That is right. Absolutely correct.

Great. Sir, a related question to that. Now you did mention the initiatives that we are taking in terms of price hikes. If you can share what price hike had we taken across the product broad range, probably will be useful in the month -- in Q2, if at all, or otherwise starting Q3.

In Q2, it would have been about -- we've taken about close to 10% price rise. And now in the current quarter also, we further increased the prices because some of the raw material prices went up in Q2. Again, the price rise and pass through is for hydroquinone and its derivatives. For catechol, it's not so easy to pass on all the price hikes. So there, we've not been able to get those kind of price hikes. We've probably got 2%, 3%.

Okay. So HQ and derivatives, 10% hike in Q2 and further maybe 5% to 10%.

More than 10% rise in the current quarter.

More than 10% this quarter.

Yes, yes.

Great. And sir, lastly, if I may. Your comments on the CapEx plans as well as on the debt reduction side. In this quarter, I'm seeing there is an increase in net debt, but if you can share some thoughts there, both on CapEx as well as net debt.

So on the CapEx, we have our Italy vanillin plant, which is progressing, which is under construction, progressing well. It's about INR 150 crore investment, which is planned there. And we have completed about 65% of the project till date, and it's on track for completion by April.

Okay. And any other CapEx apart from this?

Currently, no major CapEx at this point of time. This is a major one. And we have some small CapEx, but those are not really significant.

Sure. And sir, lastly, on the debt side, if you can comment on how are we looking at debt side.

Yes, yes. So the debt, our gross debt has remained -- has actually come down in the last 6 months from March from INR 537 crores to INR 512 crores. Net debt, of course, has gone up slightly because we've started the CapEx cycle, and we've invested almost INR 80 crores, INR 90 crores in the vanillin facility in the last 6 months.

Sure. So my question more was like probably by the end of this year or maybe by FY '23, any targets there in terms of net debt reduction and where this INR 4.2 billion odd net?

So basically, I mean we are reducing our debt as it comes due on the long-term borrowings. As far as total debt, we have a FCCB which will get -- probably get converted very soon from IFC, which will, of course, reduce the debt by approximately INR 100 crores, INR 110 crores. So we'd probably be at about INR 500 crore debt after even our vanillin investment.

Our next question is from the line -- a follow-up from the line of Rohit Sinha from Sunidhi Securities.

So sir, just if you put the overall tender, what's the overall, I mean, exceptional item for this quarter, which has basically impacted our numbers at the EBITDA level? I mean the exceptional item for this quarter on the total basis?

Sorry, I didn't follow your question.

Rohit, can you speak a bit louder? Because we are not able to hear you.

It's not clear. Your voice was just stopping.

Hello? Am I audible now?

Yes.

Yes. So just wanted to know, overall, what was the amount for this quarter, which is basically a onetime item for us?

Yes. So what is nonrecurring, and that's what Santosh said in his opening statement was, yes, so that's INR 12.5 crores, roughly INR 12.5 crores was on the loss of margin because of no availability of raw material. Then there were some nonrecurring onetime expenses of INR 3.5 crores. And of course, the foreign exchange loss, which is again nonrecurring of INR 5 crores.

Okay, okay. So overall, that's INR 22 crore kind of figure is there, which has -- okay.

Yes, yes.

Our next question is from the line of Anish Jobalia of Banyan Capital Advisors.

I just want to check in terms of our guidance of achieving more than INR 40 crores, INR 50 crores of sales. So how is this looking like given for subdue quarter? So is there any change around that would be helpful to know. And also in terms of the margins, we were expecting to probably not recoup the entire gross margins, which we did in FY '21, but we were still looking at expanding the gross margins and also -- and operating leverage on our other expenses. So now given the situation explained by Santosh. So how do we think about the margin expansion possibilities in this year? Would be helpful to know, sir.

So basically -- sorry, can you start your question, the first part of your question? I lost...

Yes. So my first part of the question is you are looking at minimum INR 40 crores, INR 50 crores of sales in the last quarter, in Q1 itself for the full year. So now is there any change in the thinking about being able to achieve that numbers? Would be helpful to know what are your penciled out thoughts around this?

Yes. So achieving the turnover, we are on target for us. A question on margins, what the margin evolution will be, while gross margins have remained constant between these 2 first and the second, third, we are obviously working towards improving the gross margins and with a higher turnover, also leveraging on overheads being spread over a larger turnover. So improving the margins is what is expected in the next 2 quarters.

Sir, but what would be the extent of that improvement given that you are -- I mean last year, we had 15%. And because of base, we're going to reach close to 18% or so because of operating leverage...

It's very difficult to answer that question at this point of time because as you understand, the raw material prices are not under our control at this point of time. And there is a lot of volatility. And you see it across the board for, I would say, at least 90% of the chemicals that we deal in, there's a tremendous amount of volatility. So really difficult to give you a number on what that margin will be, but it is surely improved from where we were in the first 2 quarters.

Our next question is from the line of [ Prajal ] from ICICI.

Yes. Just wanted to ask all this -- if we quantify the Q1-Q2 loss, then what is due to the delay in the price implementation? And what is due to the other factors? And is this loss are one-off in nature? Or we will see some margin pressure in the next coming quarters?

So this is one time. We've been able to pass on the price increase for the -- what we had in Q1, the raw material prices that went up in Q1, we were able to pass it on in Q2. Again, raw material prices have gone up in Q2, which we are passing on in the Q3. So we don't expect that as an impact that continues to be a problem. As far as what impacted Q2 was more a onetime incident than really something which is going to be ongoing. Because with raw material availability and our plant running at 100% capacity, it evens out all the supply chain issues that we had in this quarter.

Okay. So this will be the one-off impact only. And next -- from next quarter onward, we will passing the full price increase also and there will be no such kind of continuous incurring any kind of cost at all, right?

Yes, that's the expectation, yes.

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

So when we just adjust the one-offs, also the Dahej impact if we adjust that, then probably your top line could be similar on a quarter-on-quarter basis, but your margins could be hitting those 20% mark. Just a fair understanding. Is that the track on which we would be going ahead? I'm not asking for an explicit guidance, but is that the way coming quarters can be?

Yes. That's true. The expectation is that we will utilize 100% of the capacity, and we will utilize all that hydroquinone that comes from Dahej for expanding our value-added product volumes. The market demand is very strong. The question is how much can we produce and supply to the market.

Sure. And also, this quarter is also halfway. So how are the raw material rises? Because we saw that the pass-on is happening with the lag. So are you seeing still pressure in this half of the quarter that has gone by? And can there be further snowballing of passing on in the next quarter and a similar pressure going ahead?

So what we've done is -- yes, we saw that raw material prices were going up in end of September and October. Some of the basic materials like dimethyl sulfate and methanol and everywhere you see, there's been a substantial increase in raw material costs. Phenol also has gone up slightly. So in anticipation, we did do some correction at the beginning of this quarter. However, there will be some lag again, but so the idea was that we should get to a 50% gross margin. I'm hoping that we'll be in between where we are and 50% in this quarter. And then hopefully, in the next quarter, we try and reach that 50% mark.

Our next question is a follow-up from the line of Surya Patra from PhillipCapital.

Yes. One question on the freight cost, sir. See, we have this quarter that, okay, we should be avoiding import of things from Italy because freight was one of the key cost components, concerning cost component. So in the subsequent quarter, if things will resume, then what is the share of this freight cost in the overall RM cost, sir, whether it is influential one?

So RM and sales, it's both. So freight costs in RM, we typically buy CIF. So of course, our suppliers, of course, increased some of the price increases due to freight, but we don't get a breakup as to how much is really a reason due to freight. But certainly, freight costs have increased considerably, and some geographies have gone up by 4 and 5x. So as far as our sales grow, we are trying to move our business to as much as we can on FOB because it's very difficult to -- if you've got a booking today for a supply in January, and if it's CIF and if the prices go up, there's nothing you can lose. So we're trying to move very quickly to an FOB kind of situation so that at least whatever the freight is, it's borne by the customer.

Okay. That is a system that has been implemented and it is expected the general is?

Yes, it is being accepted. I mean, I would say most customers will move to that. Of course, some may not. But our expectation is at least 70%, 80% of our business should move to FOB. Of course, we also have a lot of intercompany transfers and we move material around. I mean that, of course, is the cost that we have to bear in that sense. And ultimately, in the final product, which is then a blend which is sold, we need to pass that on to the ultimate consumer.

Okay. And another question on the cost again, sir. In fact, whether we are facing the challenge -- cost challenge because of the kind of catechol that we would be producing larger than our requirement at this current juncture?

Yes. So that's true. And we will have some stock pile up that we are planning purely because of our vanillin facility coming on stream. In April, we will require catechol. So what we are trying to do is balance out to have some security and some stock of catechol ready for our vanillin plant.

And that would be largely from -- that would be sufficient from our Dahej plant?

Only Dahej. Yes, yes, Dahej. So from China, we -- sorry, from Italy, we have presold all the catechol.

Okay. So then compared to last quarter, the swinging cost factors, if you consider going ahead for, let's say, Q3 and Q4, this phenol is not a kind of a driving -- or is not seeing any kind of variation. I think or it should be...

Phenol has gone up slightly. Phenol has gone up slightly in this quarter as compared to the last. Yes, slightly. Not much, but I don't think it's -- see, because in Europe, we are seeing that the prices are stabilizing and they're on their way down for phenol. So I mean my expectation is by -- maybe end of this quarter, it should again ease off.

Okay. And just of now whether the TBHQ, BHA, these are the products are still important contributor to our margin overall, consolidated margin because the blend side, it has not deviated from the trend. But it is okay, TBHQ, BHA that support is...

So TBHQ, BHA, MEHQ and PDMB, these are 4 hydroquinone-based products, which are the real margin drivers.

Okay, okay. So we should see a kind of meaningful kind of incremental business from MEHQ next quarter, sir? Is that so?

Yes. So the idea is that we will certainly scale up the MEHQ this quarter, in the next quarter. As hydroquinone -- so first priority we give is to TBHQ, BHA, and we've expanded some capacity there also so that we can service the market effectively from there. And then the next is in -- is MEHQ and PDMB, of course, is joined product along with MEHQ. So both those is next in queue, and so the focus is going to be really to scale up all of these.

Yes. Okay. Just last question, sir, about this vanilla new project, whether that is all on track to commission before March, sir?

Yes. So we are expecting it to be ready for commercial production in the first quarter, yes. Of course, right now, of course, the prices of vanillin have gone through the roof. I mean if you look at -- it's like $30, $35, I mean it's absolutely unheard of kind of prices. So in that sense, it's a good point of entry for us because a new supplier in this environment is more than welcome because prices didn't start easing off with a new supplier.

So that means the biggest margin swinging factor for next year if you consider them, it seems to vanilla followed by the Dahej utilization.

Yes, that's right.

Hopefully, something can come from the China side given the positive -- given some positive views.

Yes. Right. That's right.

Our next question is from the line of [ Dhimant Shah ] from OneUp Finance.

Two or three quick questions. Any raw material headwinds in the overseas facility in particular?

So not really. I mean phenol prices have remained pretty stable. Actually, they're on the way down in Europe, which is one of our main raw materials. But the headwind in Europe has been the gas prices because gas prices went up considerably in the last few months. But now we are seeing that the Russian gas has started going into Europe now and the prices are easing off. And our expectation is that by Jan, Feb, it should kind of go back to the levels where they were. I mean, of course, it will never be the same, but at more reasonable levels.

Secondly, most of our contracts predominantly, do they have a pass-through mechanism with a lag of a quarter or how does it work?

So we don't have any long-term contracts. Very limited small business is long-term contract business. And the others are all quarterly contracts or maybe 6 months. So which we took a quarterly contract, it typically means that the next quarter, there's a lag of a quarter.

Sorry, I couldn't quite catch that, please. So out of every INR 100 that you sell, how much is 3 monthly, how much is 6 monthly and how much...

I would say that 90% is 3 monthly and 10% would be either 6 monthly or annual.

So does it connote that 90% of the gross margin capture would happen in the next quarter?

Yes. For all the products there were, like I mentioned earlier in the call, for hydroquinone and hydroquinone-based products, the pass-through happens with a lag of one quarter. With catechol, the pass-through is not -- we can't pass through the entire cost increase because of it being in an oversupply situation. So there, of course, the pass-through is slightly lower. But yes, whatever happens does happen in the next quarter.

Which chain of catechol is in oversupply? Is it the glycol or...

No, catechol itself is in oversupply. So then everything below that starts becoming not oversupply situation, but your competitors also get a cheap source of catechol from our competitors for catechol. So Solvay makes catechol. But Solvay doesn't increase the price, we can't pass on. If they increase it, we can pass on. So it's really a game of market share versus passing on prices.

And lastly, which is the chain where you can have tremendous pricing power and which is the chain where you have 0 pricing power?

That's what so in hydroquinone and its derivatives, we have pricing power where we can pass on the kind of increases. In catechol, it is limited. And of course, now with vanillin -- coming up in vanillin, that remains that we can pass on.

Okay. So in the catechol category right now, we are bereft of for vanillin. We are doing glycol and veratrole.

Veratrole and TBC, yes, 3 products.

I see. Okay, okay. And lastly, you alluded to you reaching a certain amount of turnover. And with this kind of pass-through, would -- can you be upping that target? Or would you still want to maintain that target? Or how does it work?

Yes. So I think this target is what I think is achievable. Of course, if the prices go up 5%, 7%, 10% in the next quarter, maybe I mean, it will beat the target. But at this point of time, I'd say, yes, this target is very achievable.

So given a 4%, 5% drop in gross margins, would you want to kind of revise that INR 1,400 crores to INR 1,500 crores based on same percentages given the pass-through pending?

No. So I would say that since we lost about INR 40 crore -- INR 30 crores, INR 40 crores in this quarter, we'll make up that. And of course, we will do more than make up that. I would yet say it would be in the range of INR 1,400 crores to INR 1,500 crores.

Great. And with -- sorry for insisting on one more question. With the logistics kind of slowly easing out, would you say a fair bit would be coming back in terms of overall cost and margins? So you just alluded to that this corresponding sale would have a certain kind of gross margin trajectory and the corresponding EBITDA margin. So how would you want to kind of take it for the next year, given a slight ease and most of the be it raw material and be it logistics, which have been the pain point?

So logistics, I don't know whether in the next year, there will be any -- there's no sight of relief. In raw materials, also, what we see is that at least in this quarter, also, we've seen many raw materials where prices have gone up. And so it's very difficult to predict that. It's really beyond us to be able to give any guidance on that.

No, no, meaning, at some stage, you'll have to kind of at least have a proper pass-through mechanism, if nothing else.

So we have a pass-through mechanism for, like I mentioned earlier, for hydroquinone and its derivative. So catechol, we don't have. In catechol, for vanillin, we will have. So that's -- I mean I can't answer any other than that.

Yes. So great. And would you want to also comment on -- lastly, on the working capital cycle? How would you see that on a consol basis?

So we have been able to even with reduced cash flows in this quarter. We have been able to control the credit, work capital cycle and the its working capital itself. But looking at the logistic problems, I think the working capital cycle is going to remain in the range of around 100 days or till the logistics and every bottlenecks are released. So we don't foresee much of working capital cycle reduction by the end of this year. It is going to remain at 100 days.

Our last question is from the line of Dhruv Shah from Ambika Fincap.

Firstly, I want to ask on the Mexico subsidiary. When are we due to close the deals?

Next week.

Okay, next week.

Yes, Monday.

And my next question is on Lockheed Martin. Have we made any progress? Because what I understand is we were due to send at least samples by next year. So are we -- have we made any progress on that part?

Yes. So basically, it's a work in progress, project in process. In fact, after the pandemic, it's the first time that we've got a whole team of their people down here, the technical team for taking some production lots because they're changing some raw materials in some processes to reduce cost. So it's progressing well, and we have to supply them 600 tonnes of material in 2023, December -- by December of 2023. And so we are on track for that, yes.

But they have not given any indications on -- so we haven't received anything, any feedback or it's still work in progress?

Yes, it's in work in progress. I mean the first commercial order we've got for 600 tonnes, which we have to supply and -- which, of course, which is 2 years out, but we have to produce that within the facilities that we have. And then, of course, by end of '23, we will have to set up the next -- what we call the pilot plant or the small plant by December of '23 for which the design engineering work is going on.

Sir, we have one more question from [ Shivaji Mehta ] from -- an individual investor.

Hello? Am I audible?

Yes, you are.

Just had a question on the catechol, when you mentioned there is the supply issue. So just trying to understand by when can this situation ease out? Do we have any clarity on that?

Sorry, I didn't follow your question.

So you had mentioned there's an oversupply in the catechol industry. So I just want to understand, is this situation going to last for a long time? Or do you feel that at some point, this oversupply could ease out with the demand really catching up?

Yes. So there are many -- it's a good question. Of course, value-added product, vanillin is what -- for us, at least the oversupply situation, which we are facing is the least of considerably because we're setting up vanillin facility, which will consume almost everything that we make in Dahej. And we, of course, have other downstream products where we consume also some substantial amount of catechol. So even from Italy, what we produce, we'll be able to consume all of it with value-added products. So yes, it's in the next financial year, this oversupply position will get corrected, and the margins will improve from the catechol chain.

Sure. And also, I think -- so on the CapEx bit, so the last CapEx will come up, as you said, in next year, by April. So are we going to embark on another phase of CapEx? Any sort of clarity you could give on that?

So right now, we have some small projects in hand, which we'll be taking up. But there's nothing as of now, as we speak, there is nothing of a very material or substantial investment.

So is it fair to say next year, you would just probably try to stabilize the existing CapEx before we really embark on the next phase of growth?

Yes. That's right. And like I said, we do have some small projects, but those are not very -- they're not substantially large.

Right. And lastly, on the Lockheed Martin, you had mentioned that there is the 600 tonnes that you need to supply by FY '23. So in value terms, what would that be?

It's not FY '23, it's in FY '24, December of '23. In value terms, I mean, it's competitive, we can't -- no, I don't want to disclose that because I have a NDA with them. So I can't really -- without their approval, I can't disclose pricing.

Thank you very much. As there are no further questions, I would like to thank the management team for the presentation and the Q&A. Ladies and gentlemen, on behalf of the management of Camlin Fine Sciences and ICICI Securities, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.

Thank you very much.

Thank you.

Thank you.

Thank you.