Epigral Limited (EPIGRAL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Epigral Limited's conference call hosted by Emkay Global Financial Services. [Operator Instructions] I now hand the conference over to Mr. Meet Vora, Emkay Global Financial Services. Thank you, and over to you, sir.

Thank you. Good evening, everyone. Thank you for joining us on Epigral Limited's Q3 and FY '25 Results Conference Call. We would like to thank the management for giving us this opportunity to host them. On this call, we are joined with Epigral's management represented by: Mr. Maulik Patel, Chairman and Managing Director; Mr. Kaushal Soparkar, Executive Director; Mr. Sanjay Jain, Chief Financial Officer; and Mr. Milind Kotecha, Investor Relations. I would like to invite Mr. Maulik Patel to initiate the proceedings with his opening remarks, post which we will have an interactive Q&A session. Thank you, and over to you, sir.

Thank you, Meet. Good afternoon, everyone, and welcome to the call to discuss Epigral's quarter 3 FY '25 performance. I believe you had an opportunity to view the earnings presentation that was released earlier today. If we talk about the overall chemical industry, we have witnessed improvement in the scenario, but pace of the growth in demand is slow. However, we expect that to improve on a continuous basis. We have witnessed domestic demand scenario to be better than the global market scenario. In this volatile environment, we were able to deliver 37% revenue growth for 9 months FY '25 on account of volume growth of 15%, which is majorly coming from Derivatives business. New projects we have commissioned in recent past and also our strategy to have diversified revenue model has helped us to have consistent growth. In line with our strategy, the revenue contribution from Derivatives business has reached to 54% for 9 months of FY '25 compared to 44% for the similar period in FY '24. We have witnessed volume growth on account of various expansion projects we commissioned in previous years. These expansions will further contribute in FY '26 as well, along with our chlorotoluenes value chain project, which is the final stage, and we expect to commission the same in this quarter. Further, the way India is growing, we see the domestic demand for various chemicals to increase over coming times. We see growth potential both in CPVC resin and epichlorohydrin demand. And hence, we have announced to expand and double both the capacities. In CPVC resin, we will expand our capacity from existing 75,000 tonnes per annum to 150,000 tonnes per annum. And in epichloridine, we will expand current capacity to 50,000 tonnes per annum to 100,000 tonnes per annum. We expect both the projects to commission in first half of FY '27. Hence, it will start contributing from FY '27 onwards. We are a growth-oriented company and our strategy to diversify into value-added import substitute products, strengthening our integrated, complex and continuous CapEx for growth is playing well for us to grow more efficiently and creating value for all our stakeholders. I now hand over the call to Mr. Sanjay Jain, our CFO, who will take us through the financials.

Thank you, Maulik. Let me take you through the quarterly number first. The capacity utilization of the plant stood at 81% in quarter 3 FY '25, similar to what we -- it was in quarter 3 FY '24. Revenue for quarter 3 FY '25 increased by 37% to INR 649 crore against INR 474 crores in quarter 3 FY '24. This is backed by volume growth and better product mix. On year-on-year basis, sales volume grew by 11% with volume growth usually coming from the Derivatives & Specialty business. EBITDA grew by 49% to INR 183 crores against INR 123 crores in quarter 3 '24. Higher production volumes, which led to better absorption overhead, volume contribution from Derivatives & Specialty business and improvement in realization, resulted to increase absolute EBITDA in quarter 3 FY '25. EBITDA margin stood at 28% in quarter 3 FY '25 against 26% in quarter 3 of last year. PAT jumped by 110% to INR 104 crores in quarter 3 FY '25 against INR 49 crores in quarter 3 FY '24. PAT margin stood at 16% against 10% in quarter 3 FY '24. Return on capital employed for the trailing 12 months improved to 25% compared to 18% as on 31 December 2024 on account better volume growth from optimum revenue mix, resulting in growth in absolute EBIT. This ROCE is including capital work in progress. If we exclude capital work in progress, then ROCE stands at 31%. Our net debt to EBITDA has significantly improved to 0.8x at the end of December 2024 against 2x at the end of December '23. The ratios improved in line, increase in EBITDA backed by volume growth and reduction of debt. The company has paid INR 380 crores in the period of 9 months ended 31 December 2024. Let me take you the 9-month numbers for FY '25. Capacity utilization of the plant for 9 months stood at 82% against 76% of last year. Revenue grew by 37% to INR 1,934 crores. This is majorly driven on account of 15% sales volume growth, majorly coming from Derivatives & Specialty business and improvement in ECU realization. The company has achieved revenue of FY '24, that is 12 months revenue of FY '24, in the period of 9 months ended 31 December 2024. Derivatives & Specialty business contributed for 54% of the revenue in 9 months period of time compared to 44% in 9 months of last year. As a result of volume growth and better realizations, the EBITDA grew by 65% to INR 537 crores. The EBITDA margin increased to 28% compared to 23% of 9-month year. PAT jumped by 127% to INR 270 crores compared to INR 119 crores as on 9-month FY '24. With this, we can now open the floor for Q&A.

[Operator Instructions] The first question is from the line of Parth Mehta from Vallum Capital.

Just wanted to know, our caustic revenue has increased by about 25% Q-on-Q, whereas -- which is mainly driven by the pricing growth. So has this led to an increase of the gross margins, over 50 bps?

Yes, Parth, if you see that we -- yes, to an extent, the gross margin has improved. And one of the factor for that is the improving the realizations of the caustic soda.

Right. And -- okay, great. And what is the reason for an increase in the other expenses, which is leading to a flat EBITDA margin?

The other expenses increased substantially from INR 56 crores to INR 70 crores in quarter 3. This is certain direct expenses, which is attributable to production, like water lever, which has increased with overall operation has also gone up and the production volume, which is up by 8%. Along with this, the higher logistic costs has also led this increase in the other expenses.

Okay. So I mean, what I understand is that the prices of caustic have increased, whereas ECU has not increased much Q-on-Q. So this negative chlorine carry, how do we record it? Do we record it in the Derivatives revenue? Or do we record it in other expenses or in caustic?

True, the negative price of chlorine is a part of the ECU realization, which has improved from Q-on-Q as well as on Y-o-Y basis.

Sorry, actually, your voice is not clear.

The negative price of chlorine is not a part of the other expenses. It is part of the ECU realization, which has increased both on quarter-on-quarter and year-on-year basis.

So basically, Parth, just to add to what Sanjay, sir, is saying, the chlorine negative is already factored in the ECU of the caustic soda. So that is not part of any other thing, but it's a part of the ECU that we have already set.

That is recorded in part of the caustic's revenue, right?

Yes, that's true.

Okay. And the last is we have paid around [ INR 250 crores ] of debt this quarter. So our total debt would be standing at around INR 600 crores. But our interest cost reported for this quarter is 0. If you could just help me understand that.

Actually, the interest expenses have gone down with the decrease of the debt, which we have paid over a period of 9 months. Further, the interest expenses, which is reduced to 0 or negligible amount, this is on account of the positive impact of ForEx on derivatives instrument.

The next question is from the line of Nirav Jimudia from Anvil Research.

I have a few questions to ask. So first one is on the utilization of caustic soda plan for Q3 FY '25. In the last quarter, you mentioned that it was close to around 75%. So if you can share the numbers for this quarter, sir?

So for this quarter, the caustic soda capacity has been utilized around 80%, utilization we have achieved in Q3 FY '25.

Got it. And last time, you mentioned that our ECU was close to around INR 26,000 with the chlorine being negative at around INR 6,000, INR 7,000. So if you can share the similar numbers for Q3 of FY '25 and how we are seeing. Because most recently, we have seen some trending in the prices of caustic soda in the Chinese market, too, plus some shipment issues and the freight cost also going up. So if you can share the numbers for Q3 of FY '25 both in terms of ECU and the chlorine negative? And how are the trends currently looking?

So on the caustic soda side, the realizations for the caustic soda had been in the range of around INR 43,000 per tonne kind of thing and chlorine negative, around INR 9,000 kind of thing. And that's where the ECU has evolved around INR 31,000, INR 32,000 kind of thing. And considering the current situation, it has been in the same range as of now also. In between, it hasn't been peaked to a level, but I mean, it has controlled the levels where the ECU is again around INR 31,000. So I guess we believe that it should be in the same range in the coming months.

Got it. Sir, just one question here. So let's say, we have 4 lakhs in terms of capacity and 80% utilization, so close to we have produced around 80,000 tonnes of volumes of caustic. What you said is that ECU has improved by close to INR 5,000. So if we just multiply 80,000 tonnes and INR 5,000 of improved realization, the number comes close to around INR 40 crores, INR 17 crores is what you explained that there were increase in the other expenditures due to the freight rates going up because probably on the export side. So was the difference of that, INR 40 crores minus INR 17 crores, INR 23 crores, is because of the lower realizations on the other products or the margins on the other products were slightly suppressed this quarter? Or if you can share those differentials, that would be very helpful.

So if you put it, I mean, in terms of the chlor-alkali and the Derivatives segment, in both the cases, the margin has been around to the similar levels of what we generally guide, that is around 25%. But if you see the ECU has gone up to around INR 32,000. So that definitely helps us to sustain the margin. So in terms of -- in fact, in terms of the Derivatives side, then there is -- the marginal price is up and down in each product, it's not drastic up and down. Some might be maybe low by 3%, 4% and some maybe increase by 3%, 4%. But overall, the capacity over there, I mean, in terms of the capacity utilization, has been almost stagnant or a bit lower compared to the Q2. So that's where the chlor-alkali percentage in terms of total contribution has reached around 50%.

Got it. So just to add slightly here is -- just to reconfirm, Milind bhai, that...

And one more thing, the coal and salt price is also not constant per quarter-on-quarter basis.

Okay. So there was no -- there were no increases on the coal side also for us or the salt cost also for us in this quarter, right?

Yes, yes, yes.

Got it. Sir, second question is on the peroxide side. So I think we have a 60,000-tonne peroxide plant and we utilize our own hydrogen here. So are we working on some special grades of hydrogen peroxide, which are like generally the wet chemicals, which are generally used for all those surface cleaning and everything? Because now we have been producing this peroxide for quite a longer period of time, so are we trying to do some value addition here through our own R&D? If you can share your thought process here, it would be very helpful.

So hydrogen peroxide right now, we are selling almost most of the applications. Some of the high quality, which is like the food grade which is used and which is required, that market is very small. So still, we are evaluating whether we will make such kind of grades because market of that particular grades are very small. So definitely, it is going to improve in the future, but that is not what we are looking right now. But in the future, once the market will be enough, then definitely, we are going to set up and we will make that particular grade also. At least we are not making those grades right now. We know how to make those grades, we can make those grades, but currently, we are not interested because of volume.

Got it. And sir, last clarification, our total requirement of power put together for all the integrated complex is close to 140 megawatts, or it is slightly higher than this?

Close to entire campus, we have a 134 megawatt captive power plant and we are also using government power also. So close combined, you can say around -- yes, it's around close to 140 megawatt is our requirement, yes.

The next question is from the line of Rohit Nagraj from B&K Securities.

So the first question is regarding your chlorotoluenes that we have now the first segment or first phase has been commissioned and will be commissioned in the next two phases in this quarter. What is the strategy in terms of seeding the market? Have we already seeded the market? And given that part of the project has been commissioned, how has been the plant behaving in terms of initial operations, if you can just comment on that and the strategy to seed and expand the market in FY '26?

So yes, the chlorotoluene project is almost the last phase of CapEx, I think, we have done in this last couple of months, almost done. And then I think we are going to do the commissioning in end of -- it's already going on in phases manner. The entire CapEx will be over probably in this month and probably next or probably maximum in March, we will commission the project. And the project -- this project is having 10 to 11 products differently. So every product, we are taking a trial right now. And once it is given to the customers, after sampling, we will get a trial order. And then we will start doing -- so already, we started doing it. But right now, that activity will speed up in this quarter as well as in the beginning of the first quarter of next year also. And we are expecting we will reach -- revenue generation will come maximum from the second half of next year because this entire cycle of sample approval and the trial orders to the export market as well as the domestic market will take a little bit time. It is not going to generate like other products. It will start operating at the optimum level from the beginning. Because it is 10 to 12 products, it is not one particular product and each campaign will take little time to establish with the customers as well as to give a confidence to the customers that we can supply their quality as well as the quantity also. So we are expecting the revenue generation will start from the second half of FY '26, but commission of the project will be done by -- in next 1 month or next 45 days' time.

Sure. That's helpful. Just one clarification here. So second half would be the revenue-generating phase. Can we take, say, 2, 2.5 years to reach the optimal utilization level?

So yes, not 2 and 2.5 years. I would say to optimum level, I think we will reach by end of FY '26 only.

Okay, fair enough. So the full impact should start coming in from FY '27?

Full impact, yes.

Second, a similar question on ECH. Now given that we will be again expanding the capacity and we've already tapped partially the exports market, what is the strategy going forward in terms of utilizing this particular project, given that domestically, another player will also be coming in for competition, so we'll have to look out for exports market? So what is the strategy that we are looking when we will probably commission the project sometimes in first half of FY '27?

So currently, our plant is running at the full capacity. But going forward, we have expanded this capacity. And the reason behind, once we focus on the first project, when we commission the first project when we establish and when we decide the first project, that time, India's capacity was 80,000 tonnes of ECH. But that capacity has increased in today's time. And probably by next first half, another big player is also coming into the epoxy resin market and it will reach to almost 150,000 tonnes in Indian market. So Indian market is also growing along with we are also expanding. So yes, there may be a timing difference, plus or minus. But eventually, I think the Indian market will absorb the quantity which we are going to produce in the long term. And meanwhile, we are also exporting to European countries and that will also continue going forward also.

The next question is from the line of Pujan Shah from Molecule Ventures.

My first question would be on CPVC. So what could be the current realization? And what are the expectation on the sustainable margins in the CPVC forward?

So current realizations for the CPVC is around 1,35,000. And we -- I mean, considering the current situation, we -- into the margins that we have in this also is around the same thing, 25%, that the company as a whole. So we tend to believe that we will be able to continue that sort of margins as well in the coming times.

Okay. So assuming the incremental capacity coming in, in FY '27 and we are also -- we also commissioned the new capacity of 75,000 in H1 FY '27, so at that point of time, assuming the global scenario remains the same as of now, so do you think there would be any dumping impact on the CPVC and there could be impact on our realization, which could ultimately lead to margin [ deterioration ] in FY '27? What are your views on this, sir?

See, currently, also, if you see the CPVC market itself is growing double-digit percentage. Barring few quarters, it can be that it might -- it is subdued. But otherwise, on a longer horizon, over a 5-year period, we expect the CPVC demand to reach around 5 lakh tonnes by FY 2029 or FY 2030. So considering that the India demand is there, even the new capacities that are supposed to come, that will absorb the capacity that we are putting. So even today, like as of today also, considering the India demand, still more than 50%, 60% is something which is met through imports. So once we come with our capacity of additional 75,000 and the domestic other capacity, India will be still importing the CPVC resin. So there is a good demand for India. And CPVC resin, considering there is a good focus and the demand is majorly in India, it is not global market-driven, it's majorly Indian market-driven, and that's where we are positive for this segment to grow. And along with that, even we will grow in our CPVC business.

Okay. And sir, what could be the difference between -- so assuming if a person has been setting up a brownfield project versus a greenfield project, so on our total cost of per KPTA, it's around 60,000, 70,000, so do you think it remains the same for the expanding capacity, which has been coming in by 75,000. So will it be in the same range or it would be impacting because of any other reason?

See, currently, what we have announced so far, the CPVC expansion, what we are doing is almost in the same range what we have done in the past. I would not know about the others, but it would have been -- it has been remaining in the same range of what we have done in the CapEx in the past.

Okay. So we have a sufficient land over there and we have been able to expand in the same plant?

Yes. So currently, what we have 75,000 in the complex, we are expanding another 75,000. So the additional 75,000 expansion is happening in the current complex itself. So the land that we have, there is a space for the expansion of additional of CPVC as well as the epichlorohydrin.

And last question would be on the CPVC manufacturing. Why it has been difficult, I understand the technology, a few of our competitors have also been building and having associated with a technological partner. So why it becomes a very difficult thing to manufacture? And what could be -- and why it takes 2 years to ramp, up understanding the approvals of the customer? But is there any technologies or advantage? Or is there any other reason out there?

No, it is not because of the technology. But majorly, it is because of the customer approval and it is a little longer process compared to other products in the CPVC. And that's why it's taking a little more time.

Okay. So potentially, our approval would be on the line, whenever we started and we commission the new capacity, we can reach capacity utilization to 80% to 100% in the same time frame due to we hold all the approvals as well as the technology, right?

Yes. Again, we need to take approval of the customer, definitely, but we have experience already of last couple of years. I think now we can speed up the -- and to reach the optimization of the new facility, which we are setting up compared to the past.

So optimal utilization of that new capacity will be recognized in FY '27 or it would be reflecting in FY '28, the whole capacity of the 75,000?

The optimum level, probably we might reach by end of '27 or beginning of '28, yes, because it's a large capacity, yes.

But the full benefit of like full year benefit will be visible in FY '28.

Yes, that's right.

The next question is from the line of Aditya Sen from RoboCapital.

Sir, can you please share how much revenue are we expecting from our CapEx of INR 780 crores in CPVC plus ECH?

We are expecting close to INR 1,000 crores to INR 1,200 crores once it reach to optimum level, yes.

Yes, optimum level. And what is the present realization of ECH, if you can share that?

So realization is currently around INR 1,05,000 to INR 1,10,000 in that range.

Okay. And going forward, is it going to stay within this thing? Or is it also volatile?

So the price of the raw materials are increasing globally. The logistics costs are increasing. So definitely, it will -- the epichlorohydrin price also will increase going forward.

Okay. And how much revenue are you expecting this chlorotoluene to contribute once it runs at optimum capacity?

The turnover -- the optimal capacity when the plant is at optimal capacity, we expect INR 350 crores of top line from the chlorotoluene project.

The next question is from the line of Meet Bhatt from Alembic Pharmaceuticals.

So I wanted to understand the antidumping scenario, like how -- antidumping on PVC, so how it is going to impact us and whether we will shift our purchase of PVC from importing from other countries to Indian manufacturers. And if yes, how will it impact our margin and -- yes.

Yes. So India is having a capacity of 1.5 million only PVC and rest, 2.5 million PVC, is coming from import already right now in India. So in respect to antidumping duty, international price will increase, domestic price will increase, I think we need to pass on to the customers eventually, the CPVC. So eventually, the CPVC resin price will go up. And that is the impact is going to be for the PVC antidumping duty going forward as well as BIS also. So things are coming in PVC, BIS as well as antidumping in next year.

Okay. Understood. And sir, second question was regarding the competitive scenario, like many big players like DCW are coming up with CPVC capacities. And some of them might have also in-house PVC capacity. So will it -- will they have a better gross margin than us? And will the demand in the future is enough to absorb the whole supply?

So as Milind has mentioned, India's capacity of CPVC demand is going up to 5 lakh tonne by 2029 and '30. So definitely, everybody is ramping up. Like we are ramping up the capacity, others will also come up the capacity of this. And definitely, we are going to buy PVC from the import as import right now. So yes, it is going to -- definitely, there is a change in the -- but I think people are operating -- even though we are manufacturing caustic soda and other derivatives also, but we have an independent profit center in the products and derivatives. So CPVC is going to be the independent profit center, whoever is coming in the future, yes.

Okay. And lastly, just a bookkeeping question, what is the volume growth for Q3, overall volume growth?

Volume growth for Q3 is around 11%.

Okay. So it's Q-o-Q, right, not Y-o-Y?

It's Y-o-Y.

I'm asking Q-o-Q.

Q-o-Q, it's around 1%.

Okay. And what are the capacity utilization for CPVC and ECH?

So capacity utilization, as we said earlier, it is around 80%, 85% capacity utilization. And for CPVC, it is around 50%, 55% capacity utilization.

The next question is from the line of Naitik Mohata from Sequent Investments.

Most of my questions have been answered. I just wanted to clarify again, like why -- how has our interest costs reduced to almost negligible in this quarter?

The interest cost, which was there in the quarter 2, has become negligible in quarter 3. The major reason is that the company has made a substantial payment of debt in this quarter. And along with that, there has also been a positive impact on the -- positive effect of derivative contract on the mark-to-market provisions. So that is the reason the interest costs reflect negligible in the quarter 3.

Okay, sir, this is because our debt was in foreign currency?

No, that's not foreign currency, but we have one structure as a reverse. So we have a positive impact on -- in this quarter against that.

Okay. So from next quarter, can we expect that the finance cost should return back to like INR 15 crores, INR 16 crores level on a INR 600 crore debt?

Yes, around INR 15 crores, INR 14 crores, INR 15 crores in this quarter, quarter 4, that is.

The next question is from the line of Harsh Mehta from Qode Advisors.

I just had a question regarding the revenue margins and costs. So is it possible if you could give us a breakdown, a rough breakdown of the margins from the Caustic Soda segment and the Derivatives segment, gross and EBITDA margins?

So we actually do not share product-wise gross and EBITDA margin. But as we had stated earlier, I mean, whenever we enter into any kind of a project on a normalized situation, even the chlor-alkali and even the Derivatives gives us a margin of around 25%. In any specific year, one-time, the Derivatives will be on a higher side, the other times, the chlor-alkali will be on higher side. But overall, put together, it's 25%. But it will be difficult to share the -- I mean, the chlor-alkali and the Derivatives margins separately.

Got it. The second part of the question was regarding the cost incurred. So the total cost of the raw materials which are required, could you just -- is it possible to give a breakdown how much of the costs are associated with chlor-alkali and how much are associated with the Derivatives segment?

I doubt we have that number as of now in hand. We can take this offline as well.

[Operator Instructions] Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments.

Good evening, everyone. I'd like to convey that we are moving in line with our strategy through our expansion plans and diversification in terms of multiproduct catering various industries. We are targeting consistent growth. I would like to thank you, all of you, for joining us here today. Please feel free to reach our IR if there are still any unanswered questions. Thank you, everyone, for your participation.

Thank you.

Thank you. On behalf of Emkay Global Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.