Fairchem Organics Limited (FAIRCHEMOR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 and H1 FY '26 Conference Call of Fairchem Organics Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Purvangi Jain from Valorem Advisors. Thank you, and over to you, ma'am.

Good afternoon, everyone, and a very warm welcome to you all. My name is Purvangi Jain from Valorem Advisors. We represent the Investor Relations of Fairchem Organics Limited. On behalf of the company, I would like to thank you all for participating in the company's earnings call for the second quarter and the first half of the financial year 2026. Before we begin, a quick cautionary statement. Some of the statements made in today's con call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's belief as well as assumptions made by and information currently available to the management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's earnings conference call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. Now let me introduce you to the management participating with us in today's earnings call and hand it over to them for their opening remarks. We have with us Mr. Rajen Jhaveri, CFO of the company. Without any delay, I request Mr. Rajen Jhaveri to start with his opening remarks. Thank you, and over to you, sir.

Thank you, Ms. Purvangi. Thank you, Ms. Purvangi, and good afternoon, everyone. Welcome to our earnings call for the second quarter and first half of financial year 2026. Let me first start off by giving you some of the key financial highlights. For the quarter under review, the revenue from operations stood at INR 112 crores, which declined by 20% year-on-year. EBITDA for the quarter was INR 4 crores, which declined by 52% year-on-year with an EBITDA margin of 3.77%. The net profit after tax for the quarter stood at approximately INR 80 lakhs, translating into a PAT margin of 0.72%. For the first half of the financial year 2026, the revenue from operations stood at INR 243 crores, a decline of around 20% year-on-year. EBITDA for the period was INR 9 crores, reflecting a decline of around 69% year-on-year with EBITDA margins at 3.87%. The net profit after tax for the first half stood at INR 2 crores, which declined by around 89% year-on-year with PAT margin at 0.78% for the period. During the quarter, domestic sales accounted for 91.22% of total revenue, while exports contributed 8.78%. Operationally, we processed 11,492 metric tons and sold 10,062 metric tons of material during the quarter. The quarter under -- now the operational highlights. The quarter under review continued to be challenging due to global trade disruptions, raw material cost pressure and competitive intensity in the market. Our performance was directly affected by the imposition of a 50% U.S. tariff on certain Indian chemical products, which includes some of our key offerings. This development has temporarily impacted our export business to the U.S. and created near-term uncertainty in international trade flows. At the same time, the domestic paint sector witnessed weaker demand, leading to lower off-take from one of our major customers. On the raw material front, even after the partial rollback of the additional custom duty imposed earlier, prices remain largely firm due to elevated global vegetable oil market. Consequently, our Dimer Acid segment continued to experience margin pressure due to aggressive price competition from Chinese suppliers and no corresponding relief in raw material costs. The basic custom duty on imported Dimer Acid continues to remain at 7.5%. On the strategic front, our value-added product Isostearic Acid remains a key area of focus. The expected ramp-up in exports to non-U.S. market has been delayed as we work through regulatory compliance processes mandated by 2 major European producers. Once these registrations are completed, we expect export volumes of Isostearic Acid to grow steadily in a phased manner. While the operating environment remains challenging due to external headwinds and continued dumping by Chinese players, we remain focused on improving operational efficiency, optimizing cost structures and strengthening our value-added product portfolio. We believe that once the trade and pricing environment stabilizes, our consistent efforts in value creation will help restore growth momentum. Now before I put this floor open for a question-and-answer session, I would like to make one announcement. Some of you might have read this outcome, Board meeting outcome after our meeting of November 7. And accordingly, I will be relinquishing this position of CFO and Company Secretary with effect from closing hours of Friday, 14th of November. And in my place, Mr. Bhavesh Shah, who is a chartered accountant and cost accountant and who comes from Arvind Limited, will be taking over as Chief Financial Officer from November 15, 2025. Similarly, Mr. Jatin Jain, who has been working with us as Deputy Company Secretary since last more than 2.5 years, will be elevated to the position of Company Secretary to fill both the KMP positions. Both of them are present in this room as of now. With this, I now open the floor for a question-and-answer session.

[Operator Instructions] The first question is from the line of Nirag Shah from Exemplar Investment.

In presentation, it is mentioned that demand for our products is suffering because of entry of new player affecting our largest customer, that is, I think Asian Paints market share. So my question was, are we having any restriction from Asian Paints side that we can't sell our products to rival company Opus? And if it is not -- there is no such restriction, then why are we getting affected as overall paints market has not shrinked and only market share has changed?

No. But then the pricing offered by this competitor also has to match with our costing, et cetera. If the pricing offered by them is not attractive enough for us, then we will not go for that.

Sir, the pricing which are given by them is not lucrative for us to supply to them?

Yes, yes. Lucrative it's a super word, but it is not competitive for us.

Sir, got it. And what is the status of our project with respect to that new raw material and new products that we were talking about?

One particular -- that new product that we were talking about since we have been talking about since last about 1 year, that is progressing well and you will see some light during the quarter of maybe by March 2026 or latest during the quarter of April to June 2026. In the meantime, we are trying for something else also about which also we are working and maybe during December, January, December 2025 or January 2026, we may be taking some trial runs, but it is again for animal feed. And the -- again, meant for exports to Europe and USA. So maybe it may take further some time to get the approval being the animal phase.

So -- but the commercial quantities of whatever that new product that is going to start from April, June or December, January, the commercial quantities, when they are expected to start?

All commercial quantities can go, but then further commercial quantity can go only after receiving the approval. The first [indiscernible] they may take.

So approximate by what time it is expected such approvals as per your experience?

See, we -- as per our experience only, we are not trying to make any solid commitment on that because in case of Isostearic Acid also, we were hoping that we will be -- by this time, we would have been in place with substantial quantity of Isostearic Acid export, but it has not happened that way because the regulatory compliance and product approval at several stages because our product is used by someone else for Isostearic Acid and it again goes to cosmetic manufacturers, then from cosmetic manufacturer, it goes to shops or malls and then the customers use that, then they receive the customer feedback, et cetera. So that is taking too long a time. So in case of this animal feed product also, it is difficult for us to predict as of now that within 3 months only, it will get the approval, et cetera. We are hoping that it should take maximum 1 quarter once we give them the supply, either during January 2026 or something. By April 2026 quarter onwards, we should start supplying -- regularly exporting this product. But as I said earlier, since it is Europe and USA, we are keeping our fingers partly crossed on that.

And the margin profile for such products will be same to as Isostearic or it will be lower?

No, not as good as Isostearic Acid because it is a commodity and the demand is in several thousands of tonnes, but it is a commodity. And Isostearic Acid is a specialized product and only 2 European companies manufacture this product. So margin in Isostearic Acid is comparatively higher compared to this animal feed product.

Got it. And what is the breakup of contribution from each of our major products, Linoleic, Soya Fatty Acid, Dimer Acid and Isostearic for the quarter?

Yes. For the quarter, see, between Linoleic Acid and Dimer Acid, if you have been the regular participant in this, you know that generally 65% has been the aggregate contribution of Linoleic Acid and Dimer Acid put together. During Q1 also, this percentages was 65% only between Linoleic Acid and Dimer Acid. But the only change in Q2 is the total aggregate percent has remained 65% only, but the share of Linoleic has decreased from 40% to 33% and share of Dimer Acid has increased from 27% to 33%. So total has remained 65%, 66%, but there is a internal gap between Dimer Acid and Linoleic Acid because as we said earlier and as is mentioned in the presentation, this demand from paint sector is somewhat weaker and that is why this Linoleic sale is somewhat -- was somewhat weaker.

Got it. Got it. And just last question. As per your experience, still, how much more time such uncertainty can last? And each quarter, we are hopeful of recovery. But in actual terms, it is not happening and for the year, the revenue side, but even margin, it is not getting back to double digits. So what steps we are taking to improve our margins at this?

That is what we have been planning. We are switching over to the animal feed because -- animal feed product because of this only because Linoleic Acid since last couple of quarters, we have been saying that even though we can sell, the margin is under pressure. So we are trying to reduce our dependence on Linoleic Acid to some extent. As far as Dimer Acid is concerned, we are quite hopeful once this U.S. tariff issue settles, we are quite hopeful that we will be substantially exporting Dimer Acid to USA. So that we are, as of now, dependent on U.S. tariff issue. And as far as animal feed is concerned, I already briefed as to what is the status as far as that is concerned.

Got it. Got it. And all the best [indiscernible]. It was great time interacting with you for so many quarters.

The next question is from the line of Madhur Rathi from Counter Cyclical Investments.

Sir, I wanted to understand the raw material that is waste generated for us. Sir, are we currently only using for the ones that is a byproduct of vegetable oil refining or even soya and other products we are currently using?

They are also vegetable only. See acid oil from soya or from rice, both are from vegetable oil source only. We are using both the raw materials. We are using byproduct of or waste product generated from soya sunflower also and we are using this rice-based raw material also. Since last 6 years or so, we have been using both. Earlier, we were using soya sunflower-based byproduct only. But since 2020, 2019-'20, we have been using both.

Sir, no, when we say that we are using soya and sunflower, sir, soya prices are at a all-time low. They're trading at below MSP. And sir, why aren't we able to get raw materials at a favorable rates?

See, we are using -- we are taking or using the byproduct generated from the soya vegetable oil refinery. So soya prime product pricing is not necessarily related and will behave in the same manner as the soya because, see, soya oil, vegetable oil price would behave or will vary depending upon the international prices. But as far as this byproduct is concerned, it will have its own demand-supply economics rule because this being a cheaper thing, it cannot be exported also and we cannot import also from other countries because of freight considerations. So these manufacturers, these refineries also know that the soya acid oil, if there are more -- there is more than one buyer, they can always keep the prices at an artificially elevated level compared to what was prevailing in the earlier years or earlier quarters.

Sir, I'm trying to understand, sir, this oil refining industry is so fragmented and we are the only manufacturer of Dimer Acid in India. So then why -- so I'm just trying to understand then 30 lakh metric tons of byproduct waste is generated in India and our processing capacity is only 1.2 lakhs. So sir, that is less than 10%. So then why R&D -- sir, it seems that even though we are the only -- one of the only buyers for this product, then still we are facing raw material pricing issue. I'm not trying to understand the link between of this 2.

Yes, there are 2 things in this. 30 lakhs which dropped that is for all oils put together. And we are not touching the byproduct generated from palm, mainly from -- mainly palm. And palm is having a substantial share of that. So that is ruled out. Second thing is you said that -- second thing what you said that -- what was the second one?

Sir, we are the only manufacturer of Dimer Acid and whoever -- so only the off-taker of these byproducts. So then why are we facing pressure when the oil industry is so fragmented?

See, we are the only manufacturer of Dimer Acid, but we are not the only manufacturer of a Linoleic Acid kind of a thing. We are the only manufacturer of the Linoleic Acid of the kind we make, but there is an inferior product, slightly inferior product, not an inferior product per se, slightly inferior product Soya Fatty Acid and there are already 3, 4 other manufacturers of the Soya Fatty Acid. So they also compete in taking the acid oil from the market along with us. So as far as sunflower soya acid oil byproduct is concerned, they are competing with us in both, in taking the raw material also and in supplying to paint company also. As far as Dimer Acid is concerned, you are right, we are the only manufacturer, but we are facing direct competition from China because the basic custom duty remains at 7.5% only. And we do not know how much export rebate, et cetera, these Chinese suppliers are getting from their government and how they are in a position to sell at this price, even after bearing the ocean freight cost.

Got it. Sir, last quarter, we mentioned that we are trying some new raw material for us as a feedstock. Sir, so any update on that?

That is this animal feed about which I talked to -- just now I talked for this previous speaker.

Sir, this would be the final product, right? I was asking regarding we were trying some different raw material for our...

That is still in pipeline. That -- one more thing is still in pipeline. That I said it should be in place -- the first commercial production trial should be in place by March 2026 or at the most during April, June 2026 quarter.

Got it. Sir, so is it fair to assume that till the time raw material issues don't subside, the 65%, 70% -- the 30%, 35% gross margins we used to do earlier will stay in the 20% range for the period going forward?

No, that will not be the only issue. That is not the only issue. Raw material price is not the only issue for the reduction in margins. This U.S. tariff is also an important issue along with that. And this competition from China in Dimer Acid is also important because we are forced to sell Dimer Acid at somewhat reduced prices, which naturally on a pro rata basis will increase our raw material cost as a percentage to sales.

[Operator Instructions] We'll take the next question from the line of Aashish Upganlawar from InvesQ PMS.

Sir, what is the differential in the pricing of ours and the Chinese that are dumping? Are we less or more -- I mean, obviously, we will be more. So what is the differential? And how much have we suffered in terms of contraction of margin because of this realization? How are they -- how much are they down between -- in the last maybe 2 years that we are suffering?

I will explain. Historically only, ever since Chinese started exporting the Dimer Acid to India more than 10 years back, historically, what we have been doing is we have been pricing our Dimer Acid at marginally lower price than what is the landed cost of Chinese Dimer Acid plus the nonconvertible custom duty. So if that works out to say X rupees, our price would be X minus INR 2 or something like that. So that is -- because we have to sell like that only. Otherwise, there is enough quantity in the entire Indian demand can be met by Chinese supplier. That is the kind of Dimer Acid they are producing. So if we want to sell our Dimer Acid and retain our market share of about 65%, we have to necessarily motivate these Indian manufacturers by keeping -- by telling them that our prices would be INR 2 or 1% or 2% lesser than whatever they are importing -- directly importing from China. So that is our pricing.

Okay. Okay. And the overall pricing from the Chinese has come down by how much in terms of percentage [indiscernible]?

If you say over a period of last 24 months, it has come down substantially. According to me, it has come down by more than 25%. If you compare...

Yes, sir. So that is a major challenge that our company has been facing.

Yes, yes.

So sir, any sort of representation to the government?

We had made the representation to the government when they levied this additional import duty on vegetable oils and partial rollback also. But being the only manufacturer, we haven't heard from the government and we are unlikely to get any because we are the only manufacturer of Dimer Acid in India. But to prevent this only because we have been experiencing these now for almost close to 2 years. So prevent this only, we gradually develop the U.S. market. And last year, during this quarter of July, September, we made substantial exports of Dimer Acid to USA also. But because of this tariff thing, this quarter we could not. That is where the thing that stopped. So once -- if India closes the deal with U.S., closes the deal in the sense, closes with a minimum possible tariff only, closes not with 40% or 50% tariff, closes the deal with, say, rational tariff of, say, 10% or 15% with the U.S. government, then we are again back in game as far as Dimer Acid is concerned.

Okay. Okay. But that market we have already developed and we expect that once this tariff issue is sorted, our P&L can recover, which is redemption for you?

Yes, yes. Because U.S. manufacturers, they do need Dimer Acid. So they have to take either from us or from China because we are the only 2 major economies who are making Dimer Acid in U.S., so there was one plant of making Dimer Acid, we understand is already closed. So they will now be dependent on India and China.

Okay. And what...

As of now we have completed...

At maybe sir, say 15% tariff, how does the economics work for our business then?

15%...

We will be back to double digit margin because of that EBITDA or maybe gross margin...

With only one thing, our margin will not be back to double digit. All those things will have to fall in place simultaneously.

Raw material side, realization side, both?

Yes, raw material -- easing of some raw material prices, Dimer Acid export -- U.S. export revival of both Dimer Acid and Isostearic Acid and this our animal feed thing, which we are planning. All these things should fall in line. And that would surely then be our EBITDA margin would be in double digits, 100%. If these things fall in line, it will be in double digits, surely.

So sir, animal feed thing, you are saying that at base by Q1 of FY '27, we are going to...

Yes. The animal feed things should fall in place. The commercial things should fall in place. Trial products can go, but then commercial things should fall in place during April, June 2026 quarter.

Okay. But that would be the start. So the entire next year is going to be...

Yes. And gradually it can ramp up. Gradually it can ramp because it is a commodity. So gradually we will ramp up it.

Because of the supply chain you are saying or the adjustment to the plants that you need to do, what is the...

No, no, no. Because this animal feed, this compliance part I talked about earlier being an animal feed. Yes.

Okay. So any light of the day can be -- I mean, all these 2, 3 things, probably we have some good news maybe coming in the next 6 months from here?

Yes, yes. Next financial year onwards, we still remain optimistic on our...

It's been really a torturous kind of thing for the last 2 years with our [indiscernible] financial. We have expanded capacity and from then after expanded capacity, we have seen all the negatives that have come in. So the double whammy has happened for us.

Yes, yes, yes. It is more unfortunate. It is more torturous for us than for you. We understand that it is torturous for all the investors, but you will also appreciate that it will be double the thing for us because we remain committed on that and we need to deliver on this. So the onus is more on us as of now.

The next question is from the line of Nishita Shanklesha from Sapphire Capital.

So I just wanted to understand the total export contribution is 9% of the revenue. So you mentioned that the USA tariff situation is hampering our margins, but the export overall is 9% only. So ideally, the impact shouldn't be a lot, right?

No, this 9% -- 9% export share is mainly Isostearic export to countries other than USA, mainly Europe. Apart from Europe, the Isostearic export happened to some other countries also, but main was to Europe. And U.S., we could not make any Isostearic Acid export or Dimer Acid as good as nil during this quarter to U.S.

Okay. Okay. So once the tariff situation settles down, what will be the revenue contribution from U.S. that you are expecting?

U.S. contribution could be substantial for Dimer Acid exports. For Isostearic export, it would gradually increase, but Isostearic, we are exporting to the entire world.

Okay. Understood. And Dimer Acid we are only exporting to U.S., right?