Chemplast Sanmar Limited (CHEMPLASTS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Chemplast Sanmar Limited Q4 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 date of this call. These statements are not the 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 Mr. Ramkumar Shankar, Managing Director. Thank you, and over to you, Mr. Shankar.

Thank you very much, Nirav, and good morning, everybody. On behalf of Chemplast Sanmar Limited, I extend a very warm welcome to everyone joining us on our call today. On this call, we have our Chief Financial Officer, N. Muralidharan; Dr. Krishna Kumar Rangachari, the Deputy Managing Director of our Custom Manufactured Chemicals division; and SGA, our Investor Relations Advisor. I hope everyone has had an opportunity to go through the financial results and investor presentation, which have been uploaded on the stock exchange website and on our company's website. FY '24 has been one of the toughest years for the company in recent times with the year being marked with challenges on all fronts. The PVC industry bore the brunt of excessive dumping of low-price vessels by China and other countries, resulting in pressure on domestic prices and compression of margins. Though the Paste PVC import volumes in FY '24 witnessed a marginal drop compared to FY '23, domestic prices were impacted due to low-priced imports from the European Union, China, Malaysia and Thailand. Suspension PVC imports were up 16% during FY '24 compared to FY '23. India was China's top export destination for Suspension PVC during the year with around 860,000 tonnes of Suspension PVC coming into India from China. This was a 1/3 of all the Suspension PVC imports into India during the year '23-'24. Prices of both Suspension PVC and Paste PVC were lower by 19% and 12%, respectively, in FY '24 as compared to the earlier year. Some signs of revival have, however, been witnessed on a quarter-on-quarter basis with a marginal increase in prices in Q4 of FY '24. There are, however, a number of positive factors which bode well for the future. These include the continuing strong demand for PVC resin resulting from a boom in real estate and infrastructure sectors; the issue of a quality control order on PVC resin which, when it comes into effect, would ensure that substandard quality product is not imported into India; and the third significant progress in the investigation for imposition of antidumping duty on PVC imports. Collectively, these are likely to lead to a correction in PVC prices over the next 2 to 3 quarters. We believe that the period of strife for the PVC industry is coming to an end, and we expect to turn the corner with a better performance from this year onwards. The Other Chemicals business comprising of caustic soda, chloromethanes, hydrogen peroxide and refrigerant gas continues to be adversely affected due to the oversupply situation in the country. Chloromethanes and caustic soda prices in FY '24 have been the lowest over the last 3 years. This [ risks ] further correction on a quarter-on-quarter basis. This business is likely to stabilize over the next 3 to 4 quarters. The global agrochemicals industry faced significant challenges during the year, including slowing global demand and crop-related issues due to erratic weather conditions affecting the whole agrochemicals sector and the dumping of Chinese chemicals in the market, which led to reduced price realizations. Our custom manufactured chemicals business was adversely impacted during the year due to these factors. The impact, however, was partly offset by commencement of supplies of new products under the first 2 LOIs signed in the last 12 to 15 months. CMC division's revenues, therefore, lower by around 13% compared to the last fiscal. On a positive note, the CMC division has recently signed the fourth LOI with an agrochemical innovator for an advanced intermediate for a new active ingredient. The LOI covers a period of 5 years, and commercial supplies are expected to begin from calendar 2025. This will be manufactured in Phase 2 of a new multipurpose production block, which is expected to be commissioned soon. The division is expected to see the positive impact of the new products in the upcoming quarters. Amidst all these headwinds, we closed FY '24 with the top line of INR 3,923 crores and an EBITDA of INR 26 crores. During this difficult period, the company has been resilient and focused on setting up capacities and capabilities which are likely to bear fruit with the expected improvement in market conditions. We commissioned the 41,000 tonne Paste PVC expansion project during Q4 of the last year. We are happy to inform you that the products from this new plant has met the quality expectations of our customers, and it is expected that we will ramp up to 100% operating rate by the end of Q1 of the current year. This capacity is aimed at fulfilling domestic demand through import substitution and will further strengthen our leadership position in Paste PVC in India. Further, the construction of Phase 2 of the CMC expansion project is underway, and we expect to complete this by the end of the first quarter of the current year. Now I would request our CFO, Muralidharan to share the financial highlights for the quarter and full year. Murali?

Thank you, Ramkumar, and a very good morning to all the participants on the call. Talking about quarterly performance. This quarter saw some improvement in performance on a Q-on-Q basis. While the revenue from operations declined by 8% on an Y-on-Y basis, largely on account of lower realizations per tonne for all the products. On a Q-o-Q basis, the revenues increased to 18% primarily on account of better realizations for both Suspension PVC and Paste PVC. During the quarter, our gross margin on a Q-on-Q basis remained almost flat at 31% level. On the expenses side, employee expenses increased by 22% on a sequential basis, primarily due to higher [ back ] over in the CMC business and the new Paste PVC facility. Other expenses remained flat at around INR 255 crores on a year-on-year basis as well as Q-on-Q basis. EBITDA for the quarter stood at INR 21 crores as compared to the EBITDA loss of INR 7 crores in the previous quarter. Our finance costs for the quarter increased to INR 51 crores compared to INR 47 crores in the previous quarter, primarily due to the impact of project loans. The net loss for the quarter was INR 31 crores as against net loss of INR 89 crores in Q3 FY '24. Coming to the full year numbers, as indicated earlier from a financial performance perspective, this was one of the most challenging fiscal years in the recent past. The revenue from operations declined by 21% as compared to the last fiscal, mainly due to a significant reduction in prices of all the products. While the sales volume of PVC resins were marginally higher compared to the previous year, the other chemicals sales volume witnessed a drop in the current year as compared to FY '23, mainly due to lower volumes of caustic soda and chloromethanes. On the expenses side, Other expenses decreased from INR 1,114 crores in FY '23 to INR 1,019 crores in FY '24. This decrease is primarily due to the reduction in power and fuel costs by INR 71 crores and freight and handling costs by around INR 23 crores. EBITDA for the year stood at INR 26 crores. The finance cost increased from INR 154 crores to INR 181 crores during the year, mainly due to the project loans availed for the Paste PVC and the CMC division expansion projects. Net loss for the year was INR 158 crores. Like Ramkumar mentioned earlier, we have started seeing signs of improvement in the PVC prices now. With the measures that Ramkumar mentioned, we expect peaks to turn around gradually on the PVC front. This, combined with the higher volumes from Paste PVC and CMC projects, will add to the profitability of the company in FY '24-'25. With this, we conclude the presentation and open the floor for further discussion.

[Operator Instructions] The first question is from the line of Sanjesh Jain from ICICI Securities.

First question on the stand-alone business. Again, if I see the gross spread for SPVC has gone up from INR 10 to INR 15 in this quarter sequentially. I hope the same thing would be visible in the Paste PVC as well and custom manufactured generally the higher gross margin business. Despite all this, our stand-alone gross profit margin sequentially has declined now to almost only 40%. What explains the lower gross profit margin in the stand-alone business, which is largely Paste PVC and bulk and custom manufacturing -- the sequential decline of 600 basis points in the gross profit margin?

Sanjesh, this is Murali. While we will see improvement in the Suspension PVC margins in the last quarter, on a sequential basis. It is [indiscernible] more or less flat. And we did see some softening in the chloromethanes and caustic soda as well. These 2 resulted in the gross margins being slightly lower. Also on the CMC front as well, we are coming -- these are new products that are being developed. Like we had indicated earlier, these new products take some time to stabilize and reach the [indiscernible] contribution level. So in the initial phases, the margin levels are slightly lower. So a combination of this Past PVC more or less remain flat. There was some softening of chloromethanes and caustic soda. And CMC, we are in the sort of a ramp-up curve in terms of new products. Part of this resulted in the gross margins falling down on a sequential basis.

This also means that as the things stabilize, there will be a significant improvement in gross margin, say, in FY '25? Will that be a fair assumption?

Sanjay, this is Ramkumar here. FY '25, we do expect it to definitely be a better year than FY '24 was. Like we said, FY '24 was a difficult year with a lot of challenges that were thrown at us. But we believe that we have -- the things that stabilized, especially in the PVC business, both on Paste and Suspension. A large part of the problems were created largely by the dumping that the Paste from -- especially from China, and that is being arrested through a variety of measures. The first measure that has actually been announced is the quality control order, but that will take a little longer for it to actually come into effect. The second one is the antidumping duty on Paste PVC. The project findings have been announced, and it is awaiting the final gazette. Once that happens, we believe that some kind of discipline will come back into pricing and the dumping problem will be arrested. So we do believe that the intrinsic strength of the PVC business in India still continue to be as strong as they were. The demand is still very strong. The demand growth is there. It has always been, especially in the last 1 to 1.5 years, the problem has only been to do with the dumping, the indiscriminate dumping at very low prices. The industry is okay with the actual arrival of imports, but what it is not okay with is the discounting of the imports at such kind of unreasonable prices. And I believe that, that is getting corrected this year.

Super helpful. But a follow-up there, now that we have an expanded capacity in Paste PVC, we have quality measures and probably listing of ADD on the Paste PVC. Do you expect this new capacity to consume fast and margins to also improve in an overall Paste PVC business?

We would hope so. We are ramping up a new capacity. We commissioned it towards the end of February, and we believe that by end of June, we would be at 100%. The products, we are happy to inform you that the product has been received very well by our customers, and it has met all the expectations if not surpassed the quality expectations. So this is something that, we believe, selling this product in the market would not be a challenge. The price improvement with all of these measures coming in should logically improve our margins, and we are confident of that.

Just one bit on it. Now that it is a VCM to Paste PVC versus earlier EDC to Paste PVC, what will be the differential in the contribution margin for both businesses?

The differential could possibly be around INR 7,000 to INR 10,000. I think it's dependent on the price of VCM, et cetera, around that time. But that's what it will be.

Got it. Sorry, I'm stretching this a little bit, the last bit one on the custom manufacturing. Now we have fourth LOI in the place. Now with all this fourth LOI, what is the capacity utilization? Are we looking up say in '25 and '26? And what is the product pipeline looking like?

Sanjesh, I'm Krishna. So actually, we are reviewing the capacity utilization of the new production block in light of this new Letter of Intent. And hopefully, within the next quarter, we will have a better clarity on this, but fairly confident about the steady state capacity utilization reaching our targeted levels sooner rather than later. That's where we are on because of the new Letter of Intent. We have some commercial trials for that next year sometime during calendar year '25, and we are also looking at the projection the customers given and then mapping it within the asset that we have to get a better understanding of that. So that's a work in progress as we speak.

And new products pipeline, how does it look like beyond this four?

No, quite strong, quite strong. We commercialized -- or sorry, we are running our third campaign, third product in the new production block. The first Letter of Intent, that's an ongoing business that we continue to manufacture, continue to ramp up in the Phase 1 capacity. And in the Phase 1, the balance capacity, we've already commercialized one product. The customer has validated. And so we are actually going to start on a repeat campaign of that same sometime towards the end of this next quarter of this year. And we are currently making a third product in the Phase 1 asset as we speak, right?

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

Just continuing with the CMC part. The Phase 2, as I understand, you mentioned will be getting commissioned by the end of this quarter. And Phase 1 was around INR 3 billion CapEx. Phase 2 was give and take around INR 4 billion CapEx. The LOIs that we have signed till now, which is LOI 1, 2 and 3, they will be fully utilizing Phase 1? Or there will be some capacity which will be left?

The LOI 1 and 2 will -- we use majority of Phase 1. We would still be able to make other small campaigns. And I'm talking about steady state capacity, not to date, let's say, steady state is 3 years from now approximately. So the LOI 1 and 2, the plan was to make it in Phase 1. And the third LOI and the fourth one that we have, we are now mapping both of them against the Phase 2 capacity. That will be available. And again, the Phase 2 is in the process of being handed over. It's -- Phase 2 is within the existing structure of the total capacity. And so there are reactors and vessels that are in the process of being handed over to operations as we speak. So it will be a continuous process over the next few months before it's completely finished.

Sure. And Phase 3 and 4, and let's say, all these 4 LOIs will utilize the full capacity for Phase 1 plus Phase 2, will that be a fair understanding?

We are reviewing that. I mean, I don't -- because the -- we just announced the last one. And again, the third LOI, we are actually going through lab and pilot trials as we speak right now. And so when that will be brought into a commercial campaign, it's still being worked out. And similarly, we have the fourth new LOI. We have indications of what we need to make next year, but the exact timing of that is still being worked out. And so based on this, we will have much better clarity on the utilization of the Phase 2 capacity. So my hope is by next quarter, we'll have an update on this.

Sure, sure. That's healthy. And accordingly, there will be, whatever, third phase expansion over here in the CSM business basis the new molecule and the LOIs that we signed?

Yes. So we've indicated that that's our plan. As and when we have significant visibility of steady-state capacity of existing assets, we would start looking at the next phase of the investment.

Sure. Sir, secondly, on the R&D side, you had highlighted earlier pretty excessive work going over there in terms of new molecule launches, et cetera. If you can you shed some light there? Any new progress or maybe expansion in terms of the core [indiscernible]?

Yes, sure. That's a good question. We actually, last quarter, we commissioned our second phase of our R&D expansion. So we have been committing ourselves to keep expanding both our R&D and pilot resources on a -- pilot assets and capabilities on an ongoing basis. So the second phase of our R&D labs and assets were commissioned last quarter. And similarly, we are actually going through an expansion in our pilot scale capabilities as well. And again, the second phase of our pilot plant expansion will be coming on stream sometime later part of next month. And again, our intent here should be a little bit proactive rather than be reactive because the pipeline continues to be strong. And so from a number of products in the pipeline standpoint, and I mentioned that we commercialized 3 new products last year above our current ones, and the pipeline where we have on the pre-commercial and developmental stages, we have over 15 products that we are working on right now.

Great to hear that. Shifting gears to the PVC business here. Ramkumar, if you can share some highlights in terms of how you are seeing the global recovery on the pricing front as well as on the backward side? Any issue that the industry was facing on the EDC availability earlier? Is that all settled or how things are ramping up there?

Ankur, this is on your first question, which was about what is playing out on the PVC. One is that demand is very strong, let me take the Suspension PVC first. Demand is very strong in India. The issue has only been the availability or the excess availability from China. In China, the property sector has been under stress. And therefore, there's been a lot of PVC that was exported out of China. In fact, in the last financial year, that is FY '24, the imports from China were around 860,000 tonnes of the total import into India of around 2.6 million tonnes. So that is a 33% share. A few things are happening. One is that even within China, the earlier pricing that was there is proving to be unsustainable and therefore, we are seeing an increase in the price quotes emerging from China in the last couple of weeks. The futures market in China has also shot up significantly. And there are no quotes now that are available at -- even at the higher levels, there are not much quotes available from China. You would have read about the Chinese government having announced something like [ $135 billion ] stimulus package for reviving the property sector in China. And that seems to be driving a lot of the demand. The revival, so to speak, it will play out over the next few months, but already, we can see some green shoots emerging. And ocean freights have also gone up significantly. What used to be around $40, $50 from Northeast Asia to India, it's now at $80, $90, and more importantly, containers are not available. So all of this is resulting in both delayed arrival of material. There's also an increase in the cost and prices that are being quoted into India. So that is on the Suspension PVC part. Paste PVC as well is having -- the demand is pretty strong as far as India is concerned. We have, of course, commissioned our new plant, and therefore, we are well positioned. Provisional finding has been issued by the authorities on antidumping duty. This will -- we are hoping that this will get gazetted soon. And once that happens, then this irrational pricing will be stopped. So I think we are set for a decent revival in prices and margins.

Next question is from the line of Siddharth Singh from Green Portfolio.

Am I audible?

Yes.

Yes. Sir, firstly, as you mentioned, we are seeing price improvement for Suspension and Paste PVC in recent quarters. Sir, so how confident you are in sustaining this upward trend? And sir, also, what is the current price for Paste PVC and Suspension PVC and also for VCM right now?

All right. So basically, if you look at the price that is coming in, there has been an improvement. But we do need all these measures because this dumping that we have witnessed over the last 18 months is something that needs to be addressed. And therefore, that needs -- those measures are important for the industry to actually sustain and further invest because a lot of new investment is also being planned in India, and we need these measures to come in and be put in place so that these large investments can start making commercial sense. That is on one side. But that is, yes, there has been a good trend, and we hope that this trend will continue. As far as the current prices of Suspension, I think the Suspension prices right now are at around $830 to $850. VCM is at around $600 to $620. Paste PVC is anywhere from $1,050 to $1,100. These are all very dynamic and they keep changing with newer offers coming in.

Okay, sir. And has there been any recent progress on addressing this issue whatever China is dumping in the chemicals and all, what is the progress in the industry for this?

You are talking about the antidumping?

Yes, yes. Antidumping, sir.

As far as -- we had already -- as an industry, we had filed for antidumping action on both Paste and Suspension. Paste was filed towards the end of September last year, and Suspension was filed a little bit later. Paste actually has come up, but we have had the project findings have been announced. Antidumping duties have been announced on China, Malaysia, Taiwan, Thailand and Norway at a range of around $150 to $600. This is awaiting gazetting before it comes into effect. And Finance Ministry will need to review and gazette it. And we are hopeful that, that will happen soon. As far as Suspension is concerned, the investigation has been initiated, and it is being looked at. We are hopeful that we will see some action there as well.

Okay. Sir, and my last question is about the fourth LOI that we have signed. Sir, any rough idea how much revenue potential -- does the product possess in near future, what we can expect from it?

This -- it's LOI, which covers a period of around 5 years. Over a period of 5 years, it is expected to generate around INR 500 crores of revenue. That's based on the initial volume commitments that we have got. That ramps up over a period of time, steadily over a period of time, roughly we can consider it at around INR 500 crores of revenue.

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

In terms of you indicated the current prices for Suspension PVC as well as Paste PVC. Would you be also able to indicate the current level of the gross margin? And how does it compare with the mid-cycle level?

Ram is talking about a price of around $830. All of these are pre-duty prices, with $830 for PVC, somewhere around $830 to $850, and VCM around $610. So which, on a pre-duty level gives us around $220 per tonne, which is sort of on a reasonable margin level. Effectively, somewhere around $240 level should be a good margin. We are not too far away from that. As long as the prices hold and they don't fall and we don't see any inventory impact, I think these margins will start giving us a reasonable contribution on the Suspension PVC side. On the Paste PVC, it's more driven by -- because we make a significant part of our EDC now. So there it's not so much driven by the Paste PVC EDC prices. It's more in-house margins. There, I think the prices are steadily moving up. It may take maybe, once the ADD notification comes through and we see the impact of that, we can see a significant improvement in the margins in the Paste PVC as well.

In terms of the ADD notifications, we had one 5-year period where this ADD was applicable. So from the WTO rules, is there any limitation in terms of the number of years the ADD can run? And are there any buffer period required before the second ADD can -- duty is actually put in place?

No, not really, Kirtan. So long as you're able to prove the presence of both dumping and injury, you can have continuing ADDs going through. You just need to do -- there is usually a midterm review, then there is a sunset review, and this at the time of these reviews, it is established that the injury continues to exist and the threat of dumping still continues to exist. Then there will continue to be this action. It is only 1 of the 2, either injury or dumping is absent that there will be a break in this.

Right. And in terms of Paste PVC, we had the historical precedence where [indiscernible]. Were there similar precedents also for the Suspension PVC as well?

Yes, both Suspension and Paste has been the duties -- the antidumping duties have been levied in the past and a few times in the past.

Right. One last question on the customs manufacturing, you narrated about the Phase 1 and Phase 2 blocks in terms of the pipeline. What is the current utilization level at the current block? Are we still sort of witnessing a lower utilization in the old block as well because of the global agrochem slowdown?

So the -- again the Phase 1 got commissioned last year in August-September time period, and we have been ramping up on the 3 different products in that asset. And so we expect the steady-state capacity utilization to continue to keep increasing over the next couple of years. And in terms of the impacts of the global agrochemical demand, it's impacted more our existing products in our old blocks rather than it has not had any impact on our -- on the new production block and the new products that we have commercialized.

Right, sir. In terms of -- just a follow-up. In terms of the impact on the existing products in the old blocks that we are taking, how much is the utilization, which has come down? And when do we expect that to normalize how much time would it take to normalize that part of utilization? .