Chemplast Sanmar Limited (CHEMPLASTS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Chemplast Sanmar Limited Q1 FY '27 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. Please note that this conference is being recorded. I now hand the conference over to Mr. S. Ganesh Kumar, Managing Director from Chemplast Sanmar Limited. Thank you, and over to you, sir.

Thank you. Thank you so much, 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 are joined by our CFO, A.R. Balaji; Dr. Krishna Kumar Rangachari, heading our Custom Manufactured Chemicals Division; N. Muralidharan, Executive Director, Finance; and SGA, our Investor Relations Adviser. I hope everyone has had an opportunity to go through the financial results and investor presentation, which have been uploaded on the stock exchanges on our company's website. Q1 FY '26-'27 was shaped by a volatile global environment with geopolitical events influencing raw material availability, feedstock costs and demand across several of our businesses. We are seeing respite in the feedstock prices with supply conditions improving towards the end of the quarter. Against this backdrop, the company reported a consolidated revenue of INR 1,125 crores for the quarter. However, a sharp increase in input costs severely impacted profitability, resulting in EBITDA loss of INR 115 crores. Getting into the details. On the paste PVC side, the demand remained volatile throughout April and early May, primarily due to lower downstream operating rates caused by PNG LNG supply issues and elevated input costs. However, the market turned around in June as Middle East situation eased, providing better visibility on raw material availability and helping downstream operating rates to recover to 70% to 80%. We remain confident that this demand recovery will continue in the coming quarters. Pricing improved compared to the previous quarters. Supplies from Europe and Asia remained limited through much of the quarter before turning aggressive again from mid-June as market conditions normalized. On the regulatory front, the Ministry of Finance allowed the antidumping recommendation against imports from European Union and Japan to lapse, prolonging import pressure on the domestic industry. In response, we filed a writ of mandamus before the Madras High Court and obtained a favorable order directing provisional assessment of imports and execution of bonds by importers to facilitate retrospective recovery of ADD should it ultimately be imposed. The basic customs duty on paste PVC was waived off from 1st of April 2026 to 30th of June with the waiver extended until 15th of July 2026. This was reinstated with effect from 16th of July 2026. With the reinstatement of customs duty and the ongoing legal proceedings relating to ADD, we expect a moderation in low price dumping from Europe and Japan, which shall provide a more balanced competitive environment for domestic producers. Operationally, productivity improvement initiatives at the Cuddalore paste PVC facility is progressing well and the 7,000 tonnes debottlenecking project remains on track for commissioning in October '23, further strengthening our manufacturing capabilities. Coming to Custom Manufactured Chemicals Division. The segment delivered a much improved performance during the quarter, reflecting encouraging signs of recovery from the slowdown witnessed over the past few quarters. Backed by a healthy order book, accelerating customer engagements and robust product pipeline, we are confident that this positive momentum will continue through FY '25. On the execution front, MPB 3 Phase 2 and Pilot Phase 2 have been successfully commissioned and are on stream. Our business development initiatives are also yielding encouraging results. The appointment of a business development head for Europe and a representative in Japan have significantly strengthened customer engagement and new product opportunities. Our molecule pipeline has expanded close to 50 molecules with 14 being commercialized, reinforcing our confidence in the long-term growth prospects of the business. On our refrigerant gas business, following the commencement of commercial production of R32 in May '26 from our swing plant, customer engagement continues to progress. Feedback from customers on product specs has been positive. On the new plant, project commissioning is underway and progressing as per plan. Moving to our value-added chemicals business. Caustic soda and chloromethane continued to operate in a challenging market environment during the quarter with pricing remaining under pressure due to weak regional demand and excess supply. While demand for caustic soda remained stable across key end user industries, chloromethanes volumes were impacted by softer demand in select end-use segments. In hydrogen peroxide, volumes improved on a sequential basis as raw material availability normalized, although prices moderated from elevated levels seen at the beginning of the quarter. On 17th July, a rare fire incident occurred in our PVC plant in Karaikal, resulting in manual shutdown of the facility. There were no injuries to employees or contractors, neither was there any spillage and the fire was fully extinguished within 15 minutes. We are working closely with the concerned authorities and undertaking all necessary corrective actions to facilitate the safe and timely restoration of operations with the safety and well-being of our employees remaining our foremost priority. On suspension PVC business, market headwinds impacted the suspension PVC this quarter due to declining prices, particularly in April '22. The quarter was marked by significant volatility following the Middle East conflict, which disrupted feedstock availability and led to elevated VCM prices. To support the domestic economy and reduce import costs, the government exempted customs duty on PVC resin and reduced the duty on VCM to nil from 2nd April to 30th June 2026. This led to higher imports, particularly from China, putting pressure on domestic market. In addition, the demand softened towards the end of the quarter due to seasonal factors. Imposition of the customs duty and introduction of the minimum import price on low-price suspension PVC imports are expected to provide some pricing support. During the last quarter, we mentioned about formation of a committee comprising of 3 independent directors to examine the strategic priorities of the company with a view to enhance the long-term value creation for stakeholders. The committee is currently evaluating the various options available and have engaged advisers to assist them in the process. Once there is a definitive development or a concrete outcome to share, we will certainly provide an update. The improving outlook of our specialty business, coupled with a few positive developments in our PVC product portfolio gives us confidence in the future. The strong momentum in CMCD, together with our ongoing investments in capacity expansion in the specialty segment positions us well to drive profitable growth. We remain focused on disciplined execution, creating long-term value for our stakeholders. Now I request our CFO to talk about the financials.

Thanks, Ganesh. Good morning to all the participants on the call. Coming to our financial performance for quarter 1 FY '27. On a consolidated basis, the company reported revenues of INR 1,125 crores compared to INR 1,200 crores in the corresponding quarter last year. Reported a net loss of INR 17 crores for the quarter to segment. Specialty Chemicals segment reported revenues of INR 47 crores during the quarter with volumes registering a healthy 21% year-on-year growth. The Value-added Chemicals segment reported revenues of INR 129 crores compared to INR 138 crores in the corresponding quarter last year. The Suspension PVC segment reported revenues of INR 569 crores compared to INR 608 crores in the same quarter previous year. In terms of revenue mix, the Specialty Chemicals segment contributed 38% of the consolidated revenue. The Value-added Chemicals segment accounted for 11%, while the Suspension PVC business contributed the remaining 51%. On a stand-alone basis, the company reported revenue from operations of INR 592 crores, while EBITDA stood at INR 7 crores for the quarter. With this, we conclude the presentation and open the floor for Q&A.

The first question is from the line of Rohit Nagraj from 360 ONE Capital.

Sir, first question is in terms of VCM sourcing. So what is the current condition in terms of sourcing from different geographies? And given that the VCM prices have been largely similar to the product prices PVC, at any point in time, would we be taking a decision to partially shut down the facility because any which way it is not making money as of today?

Thank you, Rohit. The VCM high-priced inventory that we had booked, which was close to $1,000-plus that affected the first quarter, and we will consume everything by July and part of August. As of today, if I look at the replacement cost, the VCM is priced at about $700 delivered price. And we are selling PVC at about $900-plus. So there is a spread of $150 to $160 net of taxes, which is available for us to offer. We will continue to evaluate this situation. We are trying to look at alternate sources of VCM sourcing. But to give a perspective, the reason why the prices went up early in end of March, early April was primarily due to lack of the feedstock for the VCM plants, which used to come from Middle East. That has now eased out and plants have started going back to their 70%, 80%, 90% capacity. So we see that VCM prices will continue to soften as we go into the next quarter.

Sure, sir. Sir, second question is in terms of the margins for suspension as well as paste PVC. Now given that the ADD investigation did not go through for both the products, how are we foreseeing the margins for the next 1, 1.5 years? And have we done any additional -- I mean, you mentioned about the Madras High Court, we have appealed. But beyond that, from an ADD perspective, have we been going ahead with any incremental process so that, again, it can be taken up by the government?

So one is the ADD suspension, yes, suspension, we are relooking at taking it up as an industry in terms of -- we are working on the data to see what is in favor of an ADD proposal. On the paste side, I think this itself, this court directive itself is pretty strong and will be a deterrent to low price dumping into the country because it is against a provisional bond of retrospectively collecting duty in case if it is applicable. So it means that the prices will adjust in a normative approach as we go. For the next steps of application for paste, that is something which we always keep reviewing on a quarterly basis in terms of how are we with respect to the data and what is it that we need to do as an action. So that will continue to be a consistent process to represent with the government and see how to get an antidumping duty on paste PVC. The focus of antidumping duty is also only a level playing field. As long as we get a level playing field, we are competitive technically with the global players into the market.

Got that, sir. If I can squeeze in one more on the CMCD front. So in the commentary, you mentioned that this quarter has seen a good amount of pickup and good traction on the business. Is it because of any external factors? Or do we feel that this is going to be a case incrementally for the quarters and the pickup will continue? And where are we on the INR 1,000 crores target for CMCD as of now?

I will hand it over to Dr. Krishna Kumar Rangachari to respond to this.

So we are on track on the INR 1,000 crore target as we communicated in the last call. Going back to your first question, this is a reflection of the molecules that we have commercialized over the past few years starting to ramp up as we had expected them to. And so we expect to continue -- I mean, we expect the trend to continue in the coming quarters as well.

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

Continuing on the CSM, the CDMO side, we were working on 40-plus molecules earlier, and we're expecting commercialization of around 15, 17 of them this year. Any changes to that thought or any update on that? How are we looking at the product commercialization side? And this will be largely agchem, right? Or there are some other non-agchem molecules as well that we are looking to ramp...

Thank you. Good question. The pipeline continues to be healthy. Our number of molecules in the pipeline that we track continues to increase. We have close to around 50 molecules in various stages of development. We have currently 14 commercial, but we anticipate more commercialization in the coming months. We have also deployed resources both in Europe as well as in Japan to accelerate our business development efforts in these regions. The activities in terms of BD is not just restricted to agchem. So this pipeline that I'm talking about of close to 50 molecules includes markets in pharmaceutical as well as in other specialty chemical end markets. So we are trying to diversify beyond just agchem.

Sure, Dr. Krishna. So if you can just highlight maybe in percentage terms or whichever way it works, how do you see, let's say, this INR 1,000 crore revenue that we are looking at, right, maybe 3 years out, what could be the potential breakup of this between agchem and non-agchem? And secondly, from a client diversification or concentration perspective, you did mention BD efforts in Europe and Japan, but do we have visibility on revenue from incremental newer clients or the same client is adding more business to us?

So the INR 1,000 crores would continue to be pretty much agchem. So that number is reflective of what we have done till now. What we are doing now will reflect a little bit down the road, and it's not factored in that INR 1,000 crores. So we will continue to be in the near term, majorly dependent on agchem.

Sure, sir. And just a follow-up, the current discussions with clients, especially on the agchem side, are we seeing any signs of ramp-up? Because last quarter, we had highlighted that there is some deferral in demand. Is this status quo right now as well? Or there is some improvement or...

That deferral I was talking about and it sometimes happens quarter-to-quarter or, let's say, financial year to calendar year due to timing. The agchem overall market continues to be subdued and it's reviving, but there's still significant competition with respect to generics from China. But majority of our molecules that we have that we are commercialized, many of them are pipeline molecules. So those are more linked to long-term growth and things like that. So the growth for us is coming from what we have developed and commercialized, and they are going through the ramp-up phase that we had originally anticipated. Some of them could have been delayed by a quarter here and there, but overall, they continue to be on a healthy positive trend.

Sure, sir. That's helpful. And just one last bit on R32. We are looking at 14,000 tonnes of capacity. One, any time lines on that side in terms of commissioning? And secondly, how are you looking to sell this across? Is this largely going to be a domestic sale? Or are we looking at some global tie-ups, et cetera?

Rohit, the -- all the capacities will be online by end of this fiscal. That's per plan. It's not something which is changing as.

All right. End of this quarter?

Fiscal fiscal.

That has been the plan always, and that is how we are on track to deliver on that. Second is regarding the go-to-market strategy. The go-to-market will encompass both domestic and international sales. We are in active discussions with various partners. And by the time we get the capacity online, we would have tied up some of the partnerships.

The next question is from the line of Sajal Kapoor from Anti-fragile.

I've got 3 questions. I will put them across one by one with your permission. First one is you just disclosed and also in your annual report that you have 14 molecules in commercial production on the CMCD side. Without naming customers or products, how concentrated is that revenue? I mean, what share comes from, let's say, top 3 molecules and how broadly distributed the revenue base is across these 14 today?

As I said, it's concentrated mostly in agchem. But beyond that, we don't want to comment on both customer concentration as well as product concentration because many of them, we -- as you -- as I've indicated before, we have confidentiality obligations with the customers. But I can assure you that it's with multiple customers and across multiple innovators and multiple products.

Yes. So products, we know that it's 14, but you also just mentioned that you have got multiple innovators or customers across these 14 molecules.

Absolutely. Absolutely.

Okay. Yes. Sure, sure. I guess there is a slight delay in the line, but that's fine. And my second question is, you have expanded the CMCD capacity from roughly 1,100 to 5,400 tonnes. Excluding the uncontracted pipeline, what utilization does the current order book support today? And what utilization is required for CMCD to earn your targeted ROCE?

So I'll answer on the utilization side. As you are aware, we -- just this quarter, we commissioned the Phase 3 of the expansion of the MPB 3. So if I exclude that, our utilization would be maybe close to 60% to 70% on the assets that were already commissioned. So that's -- again, that's a fairly healthy utilization because if you also recall, these are multipurpose blocks. So can handle multiple products, but there are time required to change over from one campaign to another. And so utilization in that -- in these blocks can never be 95% or 100%, let's say. And question on ROCE.

Yes, absolutely. It will never be -- yes. I'll clarify the question. So for the blocks that are reasonably well utilized.

So we don't break it.

Sorry, if I can clarify very quickly, I think there is some delay in the line. So the...

If you can repeat the question, it's not clear.

Yes, sure, sure. I will repeat. So my question was that for the -- on the gross block that is reasonably well utilized, 60% to 70%, are you getting the desired ROCE based on your internal estimates on that part of the gross block, which is utilized? I'm just trying to understand the overall economics that at a certain utilization, yes, of course, we will never get 90%, 95% utilization on a sustainable basis because these are multipurpose plants and multipurpose plants the changeover, et cetera, will impact the utilization. These are not dedicated capacities, one molecule, continuous manufacturing, et cetera. So I completely understand that. But on the part that is reasonably well utilized, are we getting the desired ROCE? That's the question.

So thank you. I think like Krishna explained, one, the order book is healthy and the delivery in Q1 has been healthy. And the utilization has been at reasonable levels. Of course, it can sort of go up marginally. In terms of return expectations, I think earlier also we had indicated the new products, we gradually sort of the return -- the contribution margins gradually increase. I think we are now reaching a stage where we are more or less able to optimize the cost levels and then get to the industry levels of returns. That's where we are. I think we will get there this year.

Okay. Okay. Understood. And my last question is on the debt level, we have a positive operating cash flow. But with the interest cost now around INR 235 crores annually and free cash flow is still negative because of the growth CapEx. What level of sustainable operating cash flow do you need to service the interest and the debt repayments while completing the committed growth CapEx without requiring additional capital, be it dilution of equity or some external funding?

This is Balaji. So we have conserved cash over the years. That, along with the current accruals will take care of all the debt servicing obligations. We have enough liquidity in the system to take care. So it should not be a cost...

The next question is from the line of Sanjesh Jain from ICICI Securities.

A couple of questions. First on the PVC, sorry, I joined a little late in the call, but I want to understand how has been the spread starting this quarter? Because are we still carrying the high-cost inventory because there is a significant impact of high-cost inventory in Q1? How should we think about Q2 and Q3 considering the current prices if they sustain the way they are?

Question -- the high-cost VCM still continues. Part of it is still there, will be -- was there in July and will be there in part of August. And after that, we are getting into the normal price. So getting into September and getting into Q3, we should be in a better position if the same price levels continue on both sides, whether VCM or PVC. We are talking of a spread of around $160 between PVC and VCM.

Between PVC and VCM. And they are sustaining now?

They are sustaining now. See, now that the customs duty is back, the MIP is imposed for the next 6 months. So both of these things will ensure that prices will not go below this...

And when we say $160, it is India spread or we are talking about the global spread? Because if I take $160, then should I add the differential in the excise duty freight cost to come to an actual spread?

This is our spread.

Roughly around...

This is our spread. So it is an India spread.

Got it. Got it. Second, on the paste PVC, we have done a 7,000 metric ton of debottlenecking, which is a great thing. But how is the spread in the paste PVC business? Because your stand-alone has done reasonably well when we compare to your subsidiary. So is there a difference in the inventory carrying days for both the business? And how has been the spreads for the paste PVC?

So a, the paste PVC realization has been much better for us compared to the suspension PVC. There is always a positive spread between suspension and paste. That's one of the reasons why we are pushing for the paste debottlenecking. And that is what has helped us to put the stand-alone P&L in a good position.

And spreads there are -- what is the differential spread today in the paste versus suspension PVC?

That is roughly around $200 is the spread between paste and suspension.

Got it. And my next question on the value-added product. The production appears to be lower because we have bought more EDC from the market because of the ethylene shortage? Or is there anything else to read there?

See, we went through a membrane changeover because of which during the membrane changeover in caustic, the production is -- plant is shut down. So that is where we had lost the capacity. And knowingly, it was a well-planned initiative. And post membrane changeover, the productivity improves. So in the long term, it benefits us. So that is why you see that delta.

And what will be today our capacity in the caustic, we were at 120,000 still there or...

We are still at that. Capacity is that, but then different electrolyzers because of aging has different efficiencies. So 1,000 to 1,200 will always be the range in which we operate.

Got it. Got it. One on the custom manufacturing business. We were confident this year of a decent growth. Has the visibility improved? Or you still see there's a challenge in the underlying agrochemical market?