Chemplast Sanmar Limited (CHEMPLASTS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Chemplast Sanmar Limited Q3 FY '24 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to management of Chemplast Sanmar Limited. Thank you, and over to you.

Thank you very much. Good morning, everybody. This is Ramkumar Shankar. On behalf of Chemplast Sanmar Limited, I extend a very warm welcome to everyone joining us on our call today. On this call, we are joined by our CFO, N. Muralidharan; and Dr. Krishna Kumar Rangachari, the Deputy Managing Director, Custom Manufactured Chemicals division; and SGA, our Investor Relations Adviser. I hope everyone has had an opportunity to go through the investor presentation and financial results which have been uploaded on the stock exchange website and on our company's website. In line with our earlier guidance, Q3 of FY '24 performance was adversely affected due to the continuing challenging environment. We faced further correction in PVC prices on account of dumping at lower prices from China and other countries, slowdown in other chemicals comprising of caustic soda, chloromethanes, hydrogen peroxide, and refrigerant gases business due to the oversupply situation in India, the increase in key feedstock prices, and adverse impact of the lag effect in correction of VCM prices. We recorded a top line of INR 888 crores, down 10% quarter-on-quarter, with an EBITDA loss of INR 7 crores. The silver lining, however, is that there is a strong demand growth in PVC, led by an increase in activity in infrastructure and real estate. We expect this healthy demand to drive the recovery in prices and margins over the next 2 to 3 quarters with serious efforts also being taken by the industry to address the issue of dumping. During the quarter, prices of both Suspension and Paste PVC were lower by 8% and 6%, respectively, on a quarter-on-quarter basis. EDC prices witnessed a 12.5% increase during the third quarter compared to the second quarter, while VCM prices remained flat during the quarter. Sales volumes of Suspension and Paste PVC were also slightly down compared to the previous quarter. The lower volume of Suspension PVC was mainly due to reduced production on account of weather-impacted delays in feedstock arrivals, while Paste PVC volume drop was more due to inventory movement. All of these factors resulted in compression of margins during the third quarter. Subsequently though, both Suspension and Paste PVC prices have moved up in February. While the prices of caustic soda and chloromethanes were stable during the quarter, the excess supply situation continues, which is sustaining the pressure on prices and margins. The other chemicals business witnessed a 14% quarter-on-quarter increase in the top line because of steady prices and 10% volume growth. In our Custom Manufactured Chemicals division, the pipeline is healthy. We commercialized 3 new products this year and a number of products are under various stages of development. Despite the challenges on account of the downturn in the global agrochemicals industry and the consequent inventory rationalization internationally, we expect this business to deliver a reasonable growth during the year. While commercial production from Phase 1 of the expansion project has commenced, Phase 2 is expected to be completed in Q1 of FY '25. The 41,000 tonnes per annum Paste PVC project is expected to start commercial production in the fourth quarter of the current year. This will further cement our position as the leading Paste PVC producer in India, taking up our capacity to around 110,000 tonnes per annum. Despite the recent uncertainty in the industry, we are confident of the long-term potential of all our businesses and are strengthening our capabilities and relationships to grow in a sustainable manner. I now request our CFO, Murali, to share the financial highlights for the quarter and 9 months of the year.

Thank you, Ramkumar, and a very good morning to all the participants on the call. Talking about the quarterly performance in Q3 FY '24, the revenue from operations stood at INR 888 crores versus INR 988 crores in Q2 of FY '24. During the quarter, our gross margin dropped by 200 bps to 32% compared to the previous quarter, mainly driven by contraction in spreads as highlighted earlier. Employee expenses increased marginally, whereas other expenses remained on track on a sequential basis. We reported an EBITDA loss of INR 7 crores as against an EBITDA profit of INR 46 crores during Q2 FY '24. Our finance cost for the quarter stood at INR 47 crores as against INR 39 crores in Q2, mainly on account of higher interest on term loan post capitalization of Phase 1 expansion project in the Custom Manufactured Chemicals division. The net loss for the quarter was INR 89 crores as against net profit of INR 26 crores in the previous quarter. For the 9 months FY '24, we recorded revenue from operations of INR 2,872 crores, a decline of 24% on a year-on-year basis. Other expenses dropped by around INR 88 crores on a year-on-year basis, primarily due to the reduction in power and fuel costs. We reported an EBITDA of INR 5 crores and a PAT loss of INR 127 crores for the 9 months FY '24. While the year results are subdued given the current market condition, with the ramping up of Custom Manufactured business as per plan; and the incremental volumes that are expected from the Paste PVC project, which is getting sanctioned this quarter; and the margin expansion that is expected from our products on account of the various initiatives that we are working on, the outlook for the business continues to remain strong. With this, we conclude the presentation and open the floor for further discussions.

[Operator Instructions] The first question is from the line of Kirtan Mehta from BOB Capital Markets.

In terms of the results show the quite significant pressure on the margins this quarter, the way you elaborated, it's primarily from the price decreases as well as the delayed lag impact. So how much of the lag impact will reverse in the next quarter? While I do understand that the margins could remain muted over the next 2, 3 quarters, but how much of this lag effect could at least reverse during the next quarter?

This is Ramkumar. The next quarter, directionally, we expect that the next quarter will be definitely better than Q3. We have, like I mentioned in my opening comments, seen an increase in PVC prices in February. But in absolute terms, it might not be very significant. We expect a significant recovery more from Q1 of next year, which is when we will start seeing the impact of this current uptrend if it holds. The bigger question that we need to address is the question of dumping and to ensure that this dumping is arrested, and this is something that, as I mentioned, as an industry we are working on.

So in terms of the dumping, could you indicate the sort of the level of imports that we are seeing in both Suspension PVC and Paste PVC? How was the trend sort of last quarter in relation to the earlier trend? And how are you seeing that evolving in this current quarter?

So let me make one thing clear right up front that we are not against the imports coming in, because India is a market where the demand is well in excess of supply. So we do need imports till such time the domestic capacity is better. What we are objecting to really is the dumping of very, very low-cost artificially-priced imports. And that is what as an industry we are objecting to. If you look at the imports that have come in, in the last 9 months alone, we have seen around 2 million tonnes of imports coming in into the country. A lot of it, around 30-odd percent of that comes in from China, another 17% is from Japan, and 15% is from Taiwan. Korea accounts for another 12%, and the U.S. accounts for around 8%. So if you take the top 5 countries, we are seeing around 85% of our imports accounted for by just these 5 countries. And some of these countries, like, for instance, China, has significantly gone up in exports to India. In 2019-'20, they were just at 30,000 tonnes for the year as a whole. In 2021, that was only around 70,000 tonnes. In '22-'23, they grew to around 780,000 tonnes. And this year, they're expected to be close to 1 million tonnes. And that is where the issue is because that is where the prices are coming in at far lower prices, which are not subscribing to any economic rationale. As far as Paste situation is concerned, the exports in '22-'23 have been at around 86,000 tonnes, and this year, in the first 9 months -- the imports, I'm sorry, have been at 86,000 tonnes. And in the first 9 months, it is around 62,000 tonnes. Largely here, it is a little bit more widely spread in terms of arrival. We see imports coming in from Taiwan, Korea, Thailand, and China, and to some extent, Malaysia as well. And if you take Europe as a block, then you have a significant import coming in from Europe.

Just one more question on the custom manufacturing side. You alluded to the fact that the global agrochemical is seeing a downturn in terms of the inventory rationalization. So what is -- could you sort of highlight the impact of that on our revenue during the first 9 months? And what is the level of growth that we envisage during FY '24?

This is Krishna Kumar. In our last call itself, we highlighted that there was some impact even on our existing business. But that is largely mitigated by the growth in the pipeline products that we were working on and that we were commercializing. So we continue to see the same sort of trend. What we are noticing is that there is a deferment of volume or orders from one quarter to another. So we're not seeing a drop in the volumes itself, but just a postponement in terms of moving the orders between quarters from a rationalization standpoint. Many of the products that we are working on, that we've commercialized, they're all new molecules, new pipeline molecules. So the impact has been largely muted in general.

Just one follow-up in terms of how far we are here from the restocking in the global chain? How many quarters of pressure that you see under because of this destocking?

So it's tough for us to answer that question because it's linked to how much of our business is existing molecules and how much is newly launched molecules. The benefit for us is a majority of our growth in our sales is going to come from pipeline molecules or even molecules which they are in the launch phase. So the overall impact is as much as a longer-term established player would face. So that's all I can sort of answer for the time being.

[Operator Instructions] The next question is from the line of Raj Mehta from Wisdom Advisors.

So I wanted to know that currently, how are end-user industries like infrastructure, pipes, leather industries, et cetera, are doing? And are they facing any challenges due to a price rise of a commodity or logistic cost?

Sorry, could you repeat that question? It was not very clear. The end-user industry, for which line of products are you talking about?

Like infrastructure, pipes, leather industries are doing?

See, they are actually doing quite well in the sense that, we believe, like I mentioned, there has been actually a 20% growth on Suspension PVC demand within the country, if you look at the apparent consumption in the 9-month period. So there is significant growth. There is a lot of latent demand, both in infrastructure and in construction that we see. And we believe that these end-user sectors are quite healthy and they will be growing. Of course, there will be one particular government project that could be coming to an end, but then further projects have been announced. The vote on account that was announced recently also laid special emphasis -- continuing emphasis on providing housing and all of that will need the PVC consumption. So I believe that the outlook is quite healthy, and our per capita consumption as a country of PVC resin is way below even regional averages, leave alone global averages. We are below 3 kilos per person. That is if you take China, it is above 12 kilos, and even Southeast Asia and comparable countries, in Latin America, et cetera, it is anywhere from 6.5 kilos to 8 kilos. So I believe that demand in India is still nascent and there's a lot of room for further growth.

Got it, sir. But are they facing any challenges due to a price rise of the commodity or logistic cost?

There is not much of a challenge that I see in that sense. I think as you can see, PVC prices have been inordinately pressured and they have come down. So our end-use industries would not have any need to complain about any high prices as such. They have been enjoying the benefit of these low prices. So I do not believe that there is any great challenge there.

Got it, sir. And my last question was how has agrochemical industry put pressure on our business? Like do we expect similar pressure on our custom business?

Krishna, would you like to take that?

Yes, I didn't understand the question. You said agrochemical putting pressure...

On our business, yes.

Can you please repeat the question?

Yes. How has agrochemical industry put pressure on our business? Do we expect similar pressure on our custom business?

So Krishna, the impact of the agrochemical slowdown on our Custom Manufactured Chemicals business. I think that's the question. Krishna, are you on the line? I'm sorry, Dr. Krishna Kumar Rangachari is taking this call from Europe, and I think he just dropped off. We'll try to connect him again. My apologies for that.

The next question is from the line of Rajesh Jain from NB Investments. Participant has left the queue. We'll move to the next. [Operator Instructions] The next question is from the line of Rajiv Shah from Opal Securities.

I have a few questions. My first question is how we see the impact due to the Red Sea crisis? I mean, how much have our exports been impacted by that?

Like the Red Sea crisis, have our exports to Europe, have they been affected?

No, not really. We have not seen any challenges in terms of the -- on account of the Red Sea crisis in terms of our exports. As far as the imports are concerned, we don't have any immediate shipments coming through that side and to that extent we are extremely protected.

But just to give you some color on that. We do have, in some of our other businesses that are outside of the listed company, there are shipments going that side, and we haven't seen any great impact there. The attack seemed to be a bit targeted and sporadic and not really very widespread.

Understood. My next question would be what would be our revenue target in the next 3 years? And like what kind of growth are we targeting? And just to follow up on that would be what would be our sustainable margins we are targeting for the next few years?

I got the first part of your question, which is about the revenue target for the next 2 quarters. The second part was not clear.

Sustainable margins going forward, sustainable EBITDA margins.

Sustainable EBITDA margins, okay. On the revenue growth target, broadly, the way we are looking at it is there are two parts to it. One is as the PVC business sort of turns around and then we expect the prices to move up, that will add to the revenues going forward. Apart from that, we are also bringing in two new projects, which is the Paste PVC project, which is adding to the volumes, and we are also adding the Custom Manufacturing business. The Custom Manufacturing business, we have already guided that we expect to reach around INR 1,000 crores in the next 2 to 3 years. So in the Paste PVC, we are investing around INR 360 crores, and that will give an asset turn of roughly around 1.2, 1.25. So that, again, will add to the volume. So it will be three-pronged. While I'd be sort of refraining from commenting on the growth from prices currently, these 2 will certainly add around INR 1,500 crores of turnover in the immediate -- in the next couple of years. And the second question on the sustainable EBITDA margins level. Again, we can split that into 2 parts. Chemplast Sanmar actually historically has been reporting somewhere around 45% above its EBITDA margins historically. The last 2 years have been one-off. The margins -- Chemplast Sanmar stand-alone entity, last 2 years have been one-off. And we believe that this is temporary and it will get corrected because of the mix of products it has and the complementarity of those products as well as the focus on the customer manufacturing, which by itself is a high-margin business. We believe we will be able to sustain this 25% EBITDA margins in the coming year, may not be in the immediate year, but going forward that could be a sustainable EBITDA margin. As far as the subsidiary Suspension PVC business is concerned, somewhere around 12%, 15% would be the EBITDA margin levels, because there we are in the last leg of conversion. It's basically an asset-light model where we import VCM and convert to PVC. So the asset turn is quite high. It's almost 5x. And even at a 15% EBITDA margin, our return on capital employed would be quite high in that business.

[Operator Instructions] The next question is from the line of Rohit Nagraj from Centrum Broking.

Sir, my first question is on Custom Manufacturing. So in terms of composition between agro and pharma, what would be the current composition in terms of number of products, and if you can give some sense about the revenues from both these two?

There's a lot of disturbance. What we could gather was that you wanted to know the breakup of the contribution to Custom Manufacturing from agro and pharma, right?

Right, sir.

Currently, it's significantly skewed towards the agrochemical business. Almost 80% to 85% of the volume is from the agrochemical. And the rest of it is spread among pharma and we also have some performance regulators contributing to the rest of the volumes.

Right. Got that. And sir, one allied question to that. In terms of our incremental pipeline, how this composition is spread? I mean, are we now going more towards the smaller part of the current basket, that is pharma and other performance chemicals, or whether it is still skewed more towards agrochem?

I can answer that. Murali. So in the near term, we will continue to be skewed towards ag-chem. But we do have a number of projects in the pipeline, which are other than agrochemicals, but those would take some time before they materialize into commercial orders. So again, near term, we will be significantly in the agrochemical space.

Got that, sir. Sir, second question, again, on the custom manufacturing front. So we had signed the LOIs for 3 molecules. So where are we currently in terms of the progress?

Okay. So yes, we signed three letter of intents, two of them were for intermediates and 1, the most recent one was for an active ingredient. The first two are already commercial. We are actually in the process of making and selling commercial quantities and that is happening from our new production block. The third one, the LOI that we recently signed for an active ingredient. So that will go through a development stage in terms of you'll have to work on lab and pilot -- generate materials in the lab and pilot quantity, then qualify them at the customer place. So those would take a little bit more time in terms of commercialization.

Sure, sir. Just one last if I can squeeze in. Generally, when we are signing such LOIs, what is the kind of revenue potential we look? I mean is there any minimum threshold that we look at a 2- to 3-year perspective that the molecule will reach maybe INR 50 crores, INR 100 crores, and based on that, it is signed?

No. So we don't look at it that way. I mean, we look at these molecules much more on a strategic level. For example, the third one that we just signed, it's a pipeline molecule and it's an active ingredient. So generally, something like an active ingredient is something that most folks in this business, they die for, because a customer coming to you to make an active ingredient by itself is a significant step in terms of the relationship. It reflects the confidence of the customer that he has in your ability to be a long-term partner. So our criteria when we work with our customers on such projects is what is the long-term potential? What is the stickiness with respect to the molecule? Whether it's a pipeline or whether it's an established? And not just necessarily, let's say, volume or revenue -- or any fixed volume or revenue targets per se.

The next question is from the line of Rajesh Jain from NB Investments.

I'm extremely sorry, last time the line got disconnected. So I have these questions for Custom Manufacturing business. You had mentioned that we would be achieving around 25% growth in this business during the current year. So in the changed scenario, are you still confident of achieving this growth?

So this is Krishna here. Yes, there is some moderation. I mean, again, it's sort of an evolving situation. And the moderation will not be because the volume is going away, but more there would be movement of volume from one quarter to another or a postponement of off-take from one quarter to another. I mean, we went through that depending on where our customers are, what sort of financial year they practice. There was initially some request to move from last calendar year to next calendar year. And slowly, we are seeing some requests in terms of moving from this financial year into next financial year. So we are not very clear of the net impact of that, but I believe there will be some moderation when compared to our previous guidance.

Fair enough. Sir, my second question is, you had mentioned that the three LOIs that we have signed will be able to take up the new capacity that has come up in the Phase 1. So my question is, how much time that it would take to ramp up to full capacity under the current scenario? And if you could guide us how much revenue we can expect from this Phase 1 capacity?

So I didn't understand the first half of the question.

I'll repeat that. Yes. Sir, you had mentioned in the earlier calls that the three LOIs that we have signed up would take up the new capacities that has come up in the Phase 1. So what I wanted to know was, in the current scenario, how much time would it take to ramp up to full capacity utilization? And as and when it is done, how much revenues we can expect from this Phase 1 capacity?

Yes. Okay. Got it. So no changes from what we had indicated in prior calls, and I think Murali mentioned this also in today's call. The two LOIs that we signed -- out of the three, two are linked to Phase 1 capacity, the first two that we've talked about in the past. And we are still confident that those two will ramp up, and steady state within the next 2 to 3 years, we will sort of fully utilize our Phase 1 capacity. And our thinking, again, is that this would get us to close to INR 1,000 crore turnover over the next 2 to 3 years. So that is where we are. Phase 2 is going to be commissioned. I mean, it's progressively being handed over. The assets are being handed over. So we expect completion of Phase 2 sometime in the first quarter. And we have products in the pipeline that we are working on that would be housed in Phase 2 capacity. So we will have more updates on that when we have clarity on when that pipeline moves towards commercialization.

Sir, a small follow-up. You mentioned that INR 1,000 crores turnover in the next 2 to 3 years. So is it that you're saying for the entire custom manufacturing business? Or is it from the Phase 1 capacity only?

What we are referring to as INR 1,000 crores is broadly from the Custom Manufacturing business. For the next 2 to 3 years, we'll be hitting a revenue of at least around INR 1,000 crores in the Custom Manufacturing business.

Okay. Fair enough. So now after completing this Phase 2 expansion, do we have any more space at the current location to expand in future?

Yes. We have enough fast space available in the existing site to put up additional production blocks. No concerns about that.

So like one what we have done Phase I and Phase 2, to that extent, we can add more capacities?

All I can tell you is at least more than that.

Okay. Sir, my last question is now that you've given an indication that maybe in 2, 3 years, this Custom Manufacturing business itself can reach INR 1,000 crores of turnover, is there any thinking in the management to demerge this business and separately list it out?

Those are more strategic questions. We will address them. Right now, there is no such plan.

The next question is from the line of Ashwini Agarwal from Demeter Advisors.

The question I had was on CapEx. Once this Phase 2 CapEx gets over on the Custom Manufacturing and your Paste PVC CapEx split, how are you thinking about the next 2 to 3 years from a CapEx perspective? And linked to that is what is the debt position of the company on a gross and net basis as of 31st December?

As far as the CapEx is concerned, I think these projects will get executed in the next quarter or so by Q1 of this year. And as we had indicated earlier, we are evaluating a number of projects, one on the PVC side as well as the Customer Manufacturing growth. And as we had mentioned earlier, our first preference for capital allocation would be towards Custom Manufacturing. And that is an area for growth. So once we have visibility for almost 60% of the Phase 2 capacity, we will sort of go ahead and announce next phase of expansion. So that will happen in due course. And we do see continuous growth in the Custom Manufacturing business in the coming years. And as far as the PVC is concerned, as we had indicated earlier as well, we are in discussions with various strategic players for tying up the required feedstock. And once we have comfort around that feedstock, we'll look at the expansion opportunities in that business.

And sir, gross debt and net debt position as of 31st December?

Gross debt position as of December is INR 1,400 crores -- INR 1,405 crores. And the net debt position is around INR 650 crores.

And one more question I had. So when you look at the Custom Manufacturing business, I mean, I was just thinking about what is the potential EBITDA margin? I mean, because some of these services, especially in the early stage, will be FTE equivalent. But when they go into LOIs and production, they're probably on a cost-plus basis. So how should we think about the margin on this INR 1,000 crore revenue, which you're hoping to achieve in the next 2 to 3 years? I mean, will it be somewhere in the ballpark of 30%, which is what we've seen in several other companies? Is there a number that you would like us to think about?

On the Custom Manufacturing business, normally on a contribution basis, I'm not getting the EBITDA margin, on the contribution basis, we generally work on a 40% contribution level. I'm not talking -- just the variable cost, conversion cost associated with manufacturing the product, excluding the employee cost and maintenance and other expenses, which are the fixed cost. If you exclude that, broadly on a contribution basis, we look at 40% as the number.

Then, I mean, that will be much lower than what we typically see in CSM, in the pharma, and the alchem space, where contribution margins are somewhere in the ballpark of 50%. Would that be correct, so the EBITDA margin will be somewhere in the region of 18% to 20%.

Generally, the agrochemical space, the EBITDA margins have been in the range of 23% to 25% level, and contribution margins close to 40%. I think broadly, we'll be there in the industry as far as that.

The next question is from the line of Archit Joshi from B&K Securities.

Sir, I just was seeking for some clarification, especially in the CSM business. You've mentioned that maybe over the next 2, 3 years, we might be able to clock close to INR 1,000-odd crores of sales. Is it fair to assume, sir, a clarification, that the three LOIs we have signed mostly cover this INR 1,000 crores that we might be expecting over the next 2, 3 years? Or that because we are planning for some few more molecules, as we have mentioned in the press release, that are in the pipeline, that also will eventually contribute towards INR 1,000 crores? Or can we look at it in this way that the next few molecules that we launch might take the INR 1,000 crore number to a slightly higher sales potential?

Yes, this is Krishna. So I think, as we again indicated, with the three letter of intents and what we have in the pipeline, we are reasonably confident of getting to that INR 1,000 crores. I think we would like to leave it at that point rather than break it up between the letter of intents and the pipeline. So we have a healthy pipeline and we have reasonable visibility from these three letter of intents, so that forms the basis of our projection and confidence in getting to that number.

Right, sir. So for now, we are just the three LOIs, which can potentially contribute. That's [Technical Difficulty].

No, I think what we said was with the letter of intents and the status of the pipeline that we have, we are reasonably confident about that INR 1,000 crore number.

Understood. Sir, just one more. If you can explain the competitive intensity around the global PVC industry, because I can see from your comments and from the press release also that the dumping from China is rather prevailing even in the current scenario, and we have seen this happen over the last maybe 12, 14 months. What is the sense that you are getting? And what might be the lead indicators according to you for this level of dumping that is happening in PVC from China to alleviate a bit, which also might reflect into some positive pricing scenario going ahead?

Okay. So you're right in the sense that the Chinese situation has impacted this entire industry globally. In fact, China accounts for around 40% of the global capacity of PVC. And they also account for an equal percentage of proportion of the global demand of PVC as well. Unfortunately, their property sector, which accounts for around 1/4 of their GDP, has not been doing too well as we all know over the last 1.5 years. And that is really what has pulled down their own domestic market for PVC. This has led to a lot of production of PVC out of China, which is coming out and hitting global markets and pulling down prices significantly. Now there are 3 things that can happen. One is, of course, recovery within China itself, which is something that is always around the corner. That is the government there has been working on stimulus measures to reincentivize the property sector, which is very crucial for them. Nothing seems to have worked very well so far, but there are some kind of recent measures that have been announced seem to be a bit more positive than usual. So we are waiting to see the impact of that. The second, of course, is the fact that 80% of the Chinese PVC capacity is based on coal, and it has obviously a much higher carbon footprint than the rest of the PVC industry worldwide. As also the fact that they are bound by the Minamata Convention to reduce the consumption of Mercury into the industry. Now that is expected to have some kind of an impact on the capacities in China itself. The timing, unfortunately, is not very clear as to how soon that rationalization, the expected rationalization of capacity in China will happen, though it does seem likely that it will happen at some point in time. Now we're not able to put a date to that. The third, of course, is what we spoke about. We are not waiting for all of this to happen as an industry. We need to ensure that the economic interest of producers within India are protected, because that is only good for further capacity addition and employment generation within the country. The industry has filed for antidumping duties to be levied on this excessive dumping into India, not just by China, but also by other countries. And we are pretty confident that this will start bearing fruit sooner than later. And here, it should happen within a quarter at worst speed.

Sure, sir. Sir, another way maybe to put this entire scenario. Will it be again like safe to assume that the concentration of Chinese capacities in PVC like you mentioned is more towards a carbide-based capacity, if the cost arbitrage in terms of manufacturing PVC through that route is far better than the petrochemical route that Indian companies are largely a party to. It's probably one of the reason why the level of production in China compared to maybe the rest of the world is higher because the costs over there are lower. Maybe is that one reason that one can allude to?

That used to be the case. You are right in when they take it up between 2005 and '15, that used to be the case, but not any longer. Today, coal prices have also gone up and environmental needs within China have also become much more stringent. And therefore, it is not as easy as it used to be to produce carbide-based PVC without mitigating measures, which cost money. Therefore, I believe that the economic advantage that carbide PVC used to have over ethylene-based PVC, while at some point in time, depending upon the relative prices of, say, crude oil and coal, while that might still be a reality, but it is not a permanent reality, it keeps changing with the relative changes in prices of coal and crude. And one thing we should not lose sight of is that 25% of the carbide PVC manufacturing capacity in China is based on bottled carbide. And they are the ones who are most susceptible to movements in the prices of coal and therefore, carbide. So it is not a very cast in stone kind of an economic advantage that they have.

Sure, sir. Sir, one last question. The general premium that we used to enjoy of Paste PVC over Suspension PVC, in terms of contribution margin, as you used to mention on the calls previously, has that sustained in this quarter also? Or there is some weakness on that front also, maybe the $150, $200 premium, has that compressed? Or what are your thoughts, sir?

Paste PVC usually is around $200, $250 more than suspension PVC, and that differential is still there. These are different products going into different end uses. So while the base you may say is that they are both polyvinyl chloride, but they are actually -- the last stages of finishing are very different. They go into very different end uses as well. And the pricing is different. For instance, today, you're talking about Suspension PVC being around $780, Paste PVC is around $1,025, $$1,050. So there is a difference.

The next question is from the line of Madhav Marda from Fidelity.

My question is just on the previous one actually on the Chinese carbide base prices. Could you give us some sense in terms of how these prices have moved in the last 6 months? If my understanding is right some of these prices have come down a little bit. Is that understanding right, which has probably enabled little bit extra aggressive dumping by the Chinese players? Or have you seen these spreads for the carbide-based capacities coming down a little bit? If you could give some sense there, that would be great. And my second was just on the profitability for some of the Asia-based PVC players in the Eastern Hemisphere. We also seem to be struggling a little bit. So some sense on when you think margins could recover for the sector?

See, as far as PVC prices are concerned, the peak, of course, was reached in October '21 when we saw PVC prices go all the way up to almost $1,900 or $1,700, we had that. But since then, they have corrected. From Jan '23 to Jan '24, prices have gone down by around $100, from $895 to $790. But in between, they had gone up to $970 as well and now they have come down to $790. Large part of this drop in price has been driven by China. China is leading it, and then the rest of the producers in the region are following, largely because China has the volumes, and therefore, the clout to set the prices. So this is really why we are, as an industry, concerned about this dumping from China and why we are working on measures, we are working on ways and means in which we can stem this. As far as margin improvement is concerned, so long as we have stable prices, the margins will fall into place, because VCM, as I've often said on these calls, is really a one-trick pony. It goes largely into the manufacture of PVC, and therefore, it will not stay out of step with PVC for too long. It is only a lag period of maybe 4 to 6 weeks. And once it stabilizes, and then even if it starts going up, we will start seeing the benefit. So we have started to see some upturn in February, but we need to really wait and watch and see if it lasts and it becomes a trend, because we have in the past also seen some uptrends and then very quickly, that again, corrects. But we do believe that some kind of a bottom has been reached in prices. I think the bottom is really set by the cost position of carbide PVC producers. And I do not think that even they can go down any further. So from here on, we should see stability first and then an upward movement. So I think that we are at an inflection point. But it will take a quarter or 2.

The next question is from the line of [ Rolene ], an individual Investor.

So a lot of questions have been answered on the CMO part. My questions are more pertaining to your core PVC business. I'm taking the question of previous participant a little bit forward. What we have seen in other industries is that because of this fall or this Chinese dumping, there are some capacities which are facing existential issue maybe on a temporary basis or on a full-time kind of basis because of their balance sheet not strong enough, their cost of production being very high. So are we seeing any instances of such kind of things happening either in terms of some of the domestic competition that we face or in terms of even the international competition that we face? And just a link to that, what we are also seeing in the industry is that in China, after COVID, there has been a lot of new capacities of chemicals which has come up. Is that the case also for PVC? Or it is just incremental quantity which they have not been able to supply, or the domestic market is not capable enough to take that is dumped? Or there is an incremental supply which has also come up because of the additional capacity? So first would be these 2 questions.

Okay. So as I see it, there are two parts to what you've asked. One is on the operating rates of existing plant, and as a subset, whether there are any closures that are there? And the second part is on capacity additions in the last 2 years across the industry globally. So as far as operating rates are concerned, you're right, in countries like China, which have excess supply as compared to their own domestic demand, the operating rates have come down to some extent, not all the plants are running at 90% or 95%. This is true of not just China, but also equally of countries like the United States where there is significant overcapacity. By contrast, in India, plants in India are running at full tilt, except where some have some technical issues, but no plant has reduced operating rates because of inability to sell. All of us, in fact, our inventory is less than half a day's production. Given the extreme undersupply in India, selling PVC is not a problem. So we do not have any reduced operating rates in India. So that is...

Sir, just one more question -- sorry, just to add to that, not just operating rates, I was talking about the profitability as well. I mean, do you see that because of profitability impacting some of these competitive capacity, can there be some closures going forward, just to add to that question?

Going forward, I do not think there will be closures in India, because India, like I said, has only 1.5 million tonnes of capacity against a demand of 4 million tonnes. So I don't see any closure in India. What is going on is really temporary. We believe that it will recover. And hopefully, if the dumping is arrested, then we will start seeing a very different story in India itself. Obviously, if you have this much excess demand, that should augur well for the domestic industry. It is only a question of this dumping that is holding us back. As far as permanent closures are concerned, we've not seen any major permanent closures anywhere. One or 2 are being spoken of, but not in India, outside of India. We need to wait and see whether they actually pan out that way. As far as new capacity in China is concerned, there is no new carbide-based capacity that's coming up. There have been, in the last couple of years, some new ethylene PVC capacities that have been put up. But even that building was all what was announced 4 years back or 5 years back. We believe that, that current cycle of building is coming to an end by the current FY '25. And after that, there is nothing really new that has been announced here. The only new capacity that has been announced are within India.

Great, sir. The second question would be, again, how you define your Speciality Chemical, and there are two segments there, one is the Paste PVC and the second is the CMO part. And you have answered adequately on the CMO part. My question to you would be on the Paste PVC and our definition of that as a Speciality Chemical. So is it only realization due to which -- or margins due to which we call it Speciality Chemical? So what I wanted to understand was that how difficult is it for our customer to switch from we being a supplier to a competitor who is offering at a lower price?

It is quite difficult. I would not say anything is impossible, but it is quite difficult. In fact, these are all products that are specced into the formulae of the customers' product. And having dominated this industry in India for the last 55 years, we are part of that product's spec sheet for most of our customers. And that is one reason why even today we command a premium over import parity with every customer that we have. And that is something that is the quality of the product, the proven quality as well as the fact that this fits their requirement that way. It is not that easy to change.

Sure. And this would be for this Paste PVC or also for Suspension PVC?

This is only for Paste. Suspension is a commodity. Suspension is a commodity polymer and there it is no such speccing in, et cetera.

Understood. And you mentioned that in Suspension, you have an asset-light model, margins are low, but asset turns are high, right? I mean, and that's why you make ROCEs which are decent. So does that mean that we don't take any commodity risk there? Or that's not how it works? I mean what I was trying to understand is that even in an environment where there is dumping happening in the overall PVC industry, because of our being an asset-light model, do we still make decent ROCEs in our suspension PVC business?

See, we will make decent ROCEs there once price is settled down. The volatility is really what is hurting us. If there is an increase in 1 month and then a decrease in the next 2 months, every time it decreases, then whatever we have in stock of the feedstock, as also what is on ships coming in here to India, we tend to lose out on those. So that is really what has been hurting us a lot over the last 18 months or so. The minute we have stability and even a minor uptick, I think we will start to see our returns come back. But yes, the asset turn, because it's an asset-light model, the margins per se would be lower, but the relative margins would definitely -- the return on investment would be higher.

Understood. So just to conclude, what I understand is that for Suspension PVC to be profitable, we need a stability of prices. Even if they are stable for -- next 1 year at the current level, we would be making profits there? And for our Paste PVC, it's the upside or some upward movement in prices that we are expecting for us to improve the profitability. Is that a fair summary of your answer?

That's a fair summary, and of course, the arresting of dumping would help us in terms of the overall margins.

The next question is from the line of Rahil Shah from Crown Capital.

Just one question. So out of these 2 major investments, 1 is Speciality Paste PVC and 1 is Custom Manufacturing. So the investment outlook which you've given. Now out of that, you've explained on Custom Manufacturing and how you have an estimate that you will reach INR 1,000 crores in 2 to 3 years. So similarly, what kind of an asset turn you're expecting from the Speciality Paste PVC investment, let's say, similarly, 2 to 3 years down the line? So how will be the growth trajectory over there?

So we would normally have, like Murali said, around 1.2 here as far as an asset turn on this is concerned. And our timing is, in a sense, we are turning in at an inflection point. Hopefully, in the near future, we would start to see the entire move changing once the dumping again is addressed, and we would have the additional volumes coming in at exactly that right moment in time. So we should see a decent increase there. At these prices, we are talking about a 1.2. If prices correct to the normal levels where we've seen it in the past, that could be even more.

Okay. So when do you expect to reach like peak utilization then, so that it still gives us revenue potential at the highest?

By the second half of FY '25, we expect to be at 100% utilization of new capacity.

All right. For the Speciality Paste PVC. Okay.

As there are no further questions, I would now like to hand the conference over to management for closing comments.

Thank you, everyone, for joining us today on this earnings call. We really appreciate your interest in Chemplast. And if you have any further queries, please do contact SGA, our Investor Relations Adviser. Thank you once again, and have a pleasant day. Thank you.

Thank you. On behalf of Chemplast Sanmar Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.