DMCC Speciality Chemicals Limited (506405) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q2 and H1 FY '26 Earnings Conference Call of DMCC Speciality Chemicals Limited, hosted by TIL Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Mehra from TIL Advisors. Thank you, and over to you, sir.

Good afternoon. Welcome, everyone, and thanks for joining this Q2 and H1 FY '26 Earnings Conference call of DMCC Specialty Chemicals Limited. The investor updates have already been uploaded on the stock exchanges and on the company website. In case you do not have a copy of the same, please feel free to reach out to us. To take us through the discussion, we have with us from the management team, Mr. Bimal Goculdas, Managing Director and CEO; Mr. Sunil Goyal, Chief Financial Officer; Mr. Dilip Gokhale, Senior Executive Vice President; and Ms. Sonal Naik, Company Secretary and Compliance Officer. We'll be starting the call with a brief overview of the business and the financial performance, which will be followed by the Q&A session. I would like to remind you that everything said in this call reflecting any outlook for the future, which can be construed as a forward-looking statement, must be viewed in conjunction with the risks and uncertainties that the company faces. These risks and uncertainties have been mentioned in our annual report. With that said, I'll now hand over the call to Mr. Bimal Goculdas for the opening comments. Over to you, sir.

Thank you, Abhishek, and thank you to TIL Advisors for setting this up. Good afternoon, ladies and gentlemen. Thank you for attending this call. I'd like to start by giving an overview of Q2 for our company. As you have seen the presentation put up on our website, we had a top line of INR 126 crores, which is flat compared to the previous quarter and about 25% higher compared to the same quarter of the previous year. In terms of profitability, the profit before tax was INR 8.28 crores compared to INR 11 crores in the previous quarter and about INR 8.6 crores in the same quarter of the previous year. If you look at the 6 months results, we've crossed INR 250 crores top line and INR 19 crores is the profit before tax as compared to about INR 188 crores top line and INR 10.4 crores profit before tax for the same first half of the previous financial year. So it's been a difficult quarter, mainly on account of 2 areas. In the first instance, as I mentioned, logistical challenges on the boron business. You see there was a change of distributor by the main supplier of the boron raw materials and the previous supplier used to keep stock in India. Now we have to buy [ ex Turkey ] and pay advance before the material is shipped. So that changes the time for arrival of the vessel by nearly 90 days to 100 days. And the new distributor took some time to set up the logistics. They still don't have any stock and no immediate plans to have stock in India. So in fact, until April, they didn't get their organization set up at all. So that resulted in some delay in the shipments. And it's only now in the month of November that we've had sufficient material to operate the plant at capacity. So we've lost those sales and that profitability as well. And so therefore, in spite of the previous quarter having a planned shutdown and this quarter not having a planned shutdown, the top line hasn't increased. The other reason, and this is also clearly mentioned in our presentation is that exports, particularly to Europe have come down. On the positive side, and that's not because of competition or anything, but it's more because the consumption in Europe has come down. We haven't lost business to competition, but because of internal issues within Europe, including their energy policy and things like that, they have reduced their consumption. And in fact, a lot of the plants are shutting down. In terms of new -- what are we going to do about looking at new markets. So we've explored particularly the Latin American markets and happy to inform you that even the Chinese markets, and both those are shaping up well. While it will take time to replace the specialty chemical business of Europe with other geographies, we've made a reasonably good start. We've also commissioned at the end of the quarter a solar power plant. The full effect of that, of course, will be seen in this quarter, current quarter onwards. But we expect to reduce not only our electricity cost, but our carbon footprint even further with this. And more than 80% of our requirement at Roha will be covered by renewables and not by fossil fuels. So with that, I'd just like to sum up, a difficult quarter, but we've done the best we could under the circumstances. And we look forward to the boron business recovering from the second half of the current quarter onwards. And with that, I'd like to open up for questions.

[Operator Instructions] The first question is from the line of Sanjay Ladha from Bastion Research.

Sir, my first question is on boron business. So from what we understand is from you guys are facing slight problem in Q1 regarding the raw material supply and to almost Q2, it's a plant shutdown for the entire quarter. So could you please elaborate on what exactly happened and what caused this? And it would be really helpful if you could quantify the loss of this business in terms of revenue and whether this business is a high-margin business or not? Or how should we think upon that on?

Any other question you have?

Yes, sir. So my second question is regarding on Kutch smelter. So you had -- in the previous year, you were cautious that because of the facility, new facility coming up, the realization of the commodity business would have a negative impact. So now we are witnessing post this capacity coming up, the prices are inching higher to that, what we understand. So could you possibly explain what is happening and what are the other factors at play here? Are the prices are expected to remain higher for a while? And how should we think on that line?

Okay. Please complete your questions, then I'll answer all of them.

So it would be -- so the other business would be on -- related to -- my other question would be on related to export and so on and so forth. So if you can -- if we can come one by one, so I can ask you on that specific questions, if at all.

Okay. On the boron business, I explained a little bit in the introduction. Basically, the new distributor didn't have any setup or any experience in the business. So they had to start from zero. And not having -- there was no smooth transition from the old distributor to the new distributor. There was a complete lack of communication from the side of the suppliers, very slow communication from the side of the distributors. And the stocks that we used to buy from stock in India. So the lead time was like a matter of days, like a couple of days. And now we suddenly had to start with a lead time of 100 days. And that too with a new company, which didn't have any financial setup, they didn't have proper banking arrangements. They couldn't accept LCs, a lot of issues for a typical -- it's typical new business issues. And therefore -- in fact, there were 2 companies. They said you pay the money into one company, shipment will happen from another company. We said, we can't do that. And it took them time to set up their whole logistics and financial arrangements. Now it's done, and things are -- have started running smoothly. As I mentioned, only from the month of November, are we seeing reasonably good volumes. So I've mentioned in earlier calls that the boron business would be around INR 10 crores per month. And that's what we have lost in terms of top line. And it's again a mix of commodity boron and specialty boron. So we don't discuss exact margins, but these are typical margins that we would see for those businesses. In terms of the Kutch smelter, it has started operations. Sulfur costs have gone up, not only for us, but for all consumers of sulfur and producers of sulfur-based sulfuric acid. So far, we have been able to pass on the price increase to the customers. So the top line growth is really a price growth, not a volume growth. And we expect that once the smelter is fully operational, there will be some impact on the domestic market. Domestic market is also growing because the main end use of sulfuric acid is fertilizers. And the policy right now by the government is to increase the domestic production of fertilizers. So that is on one side, there's increased output of sulfuric acid, but also increased consumption. At the moment, we are in a stable position from the market side. But I had cautioned because this would be a big disruption when it would come on stream, at least for some time until the consumption fully catches up with the new availability of material. So that caution statement continues. And so far, it has not affected the bottom line, but we shall see how it goes in the future.

Sir, to follow up for the first one, as you mentioned about the boron business. Just trying to understand, is the situation fully operational enough? Or is our shipment and all that process has been gone by and Q3 -- from the Q3 onwards, you will see things are going and up and running so far, so to say -- is the right thing to say? Or it will take a quarter from here on as well?

From the second half of Q3, we will be in normal operation.

And sir, on the Kutch side, you said that sulfur as the prices are going up and therefore, you are able to pass on the prices. And you also mentioned the cautious sign of that because you are mentioning that India plant, once the operational things will not get right. I couldn't understand. Could you highlight it more in detail on that aspect, if possible?

So I'm not privy to the actual operation status of the Kutch smelter. They have started supplying sulfuric acid into the market. And as they fully scale up, it will put a large quantity of material into the market, which is bound to disrupt the pricing. We don't know when it will happen. We don't know the extent of -- but I'm just giving a [ consultation ] as a matter of good governance.

Understood, sir. Sir, my next question would be on export business. So if possible, could you please quantify your exposure to European and the U.S. market? It's been a while that the European market has been sluggish. Though you have stated to moving to newer geographies, as you highlighted in the commentary that Latin America and China, you are moving up. And what are your plans to further diversify on that or increase that market in Latin America and China or any other market apart from U.S. or Europe?

Yes. So we are putting efforts to replace Europe. As I mentioned, looking at Latin American as well as Far East markets. And there is always a curve, time line, which is required for entering new markets. Europe, we have been established for many years. We were doing -- I don't have the exact numbers, but we were doing -- our total exports were about INR 100 crores at one time, INR 120 crores even. And out of that, at least INR 40 crores or so would be to Europe. So that has practically disappeared. And that is what we are looking to replace. Of course, we don't just want to replace. We want to grow also. But that's the quantum of the loss that we are facing. And it's all specialty chemicals. So that was a good contribution to the bottom line.

Sir, you also mentioned that in the Europe plant has been shut down. Does that mean that going forward, let's say, for assuming a year-end -- from a 2 quarter onwards, so all that we are not -- will be not able to supply on the Europe market? Or is there any problem specific to the country, specific to the problem? Or are we seeing any revival on that terms?

So honestly, until they change their energy policy and industrial policy, I personally, in my personal opinion, I don't think the European chemical industry will revive in Europe. The big companies, of course, may set up plants in other countries. So I'm not talking company specific, but I'm talking about the European manufacturing is going to be very difficult. So a revival under current policy scenario to me looks difficult, but I'm certainly no expert on European chemical industry.

Sir, my -- another question would be on R&D and the new product development front. It's been a while that we have heard that you are on the new products that we are working on. So can you please share any new product pipeline or any new names of the product, if you could help us understand the industry size, the product size and the application on that front, if you are looking to, I mean.

So yes, we have currently not added any new products. We are working on process development. We are looking at expanding our applications and -- within the same chemistry areas. So for example, if we are doing thiophenols, we are looking at different types of thiophenols. In the specialty borates, we are looking at some newer specialty borates. But we are not -- for the sake of confidentiality, we are not specifying which product until we are at a different commercial stage.

But sir, any specific product or any industry you are looking at or if you can share any thought on that?

Not at this time.

The next question is from the line of Kalyan, an individual investor.

Am I audible, sir?

Yes, you are audible. Please go ahead.

First of all, I would congratulate the management for making the business in a genuine manner. You are one of the top class management, I think, in sharing the information in very, very genuine manner. So broadly, I will ask only one question, sir. So being a small cap company, what are your targets or what are your goals that you have set for upcoming years so that the small cap company can become big. So we have completed so much of CapEx already. But because of the industry dynamics, so the top line or bottom line were not increased as much as I expected rather. But in future, is there any chance for that rerating of the top line and bottom line? As per your understanding, is there any possibility for going for big CapEx, sir?

Okay. Thank you for your kind words. I can just say -- I don't want to give any futuristic projections, but I can just say that we are working within our areas of expertise, particularly boron chemistry and sulfur chemistry to come out with new products. We are not currently looking at any large CapEx. We are looking at incremental projects, which will sort of not have a big impact on our borrowings as well. We've reduced our debt, as you can probably see from the balance sheet, and we'll continue to do so. We'll be using some incremental CapEx we'll be doing using our existing cash flows as well as some borrowings. But the idea is not at this time to do any large CapEx. We will do incremental things only for at least the current scenario. If any opportunity comes up or if we believe that any of the products we are working on could grow to a level where we would need more than just the existing facilities and we would need to rethink our plants or anything like that, we are more than happy to do it. We are not averse to doing that. But we'll wait for the right opportunity because currently, the opinion, not only my opinion, but that of the Board and the management is that it's better to be cautious under such an uncertain scenario. Main customers in Europe going down, a lot of production is shifting to China, a market which we know very little about as yet although we have started some business there. But their scale of operation, their efficiencies, the government support they get is tremendous. And we need to be sure that we can compete in the long term before we take on any additional capital risk.

Okay, sir. Just a follow-up question to my initial question. Sir, actually, in chemical business, there are so many companies that are going for hydrogen, hydrocarbons and fluorochemicals like that. So is there any plan for -- why? Because my question is related with the chemicals, those who are having the much demand. Is there any possibility that management can think on that aspect?

Thank you. At the moment, we are not considering it. But we are open to ideas, and we will certainly look at any opportunities if we believe it is long-term sustainable.

The next question is from the line of Riya Patel as an individual investor. Sorry to interrupt, Riya, your voice is coming muffled. Yes, it is loud and clear now.

Hello.

Yes, it is loud and clear now. Please go ahead.