Galaxy Surfactants Limited (GALAXYSURF) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Galaxy Surfactants Limited Q2 FY'22 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. Unnathan Shekhar, Promoter, Managing Director, Galaxy Surfactants Limited. Thank you, and over to you, sir.

Thank you. A very good afternoon, ladies and gentlemen. Welcome once again to our earnings conference call. Before we get to business, hope all of you had a safe and healthy Diwali. On behalf of all of us at Galaxy, we wish you a very happy and prosperous year ahead. Ladies and gentlemen, this has been a challenging quarter for us. Since listing, we have never reported a decline, and therefore, it is critical, we understand the context within which the same has happened. As I have highlighted during the previous earnings call, the demands in our view continues to remain robust. While an inflationary scenario might push back purchases, we still now have not witnessed any permanent cutback in demand. The churning on hand is the supply-led volatility. It is important that we understand the supply chain dynamics as it has significantly impacted our performance for this quarter. Starting with our major raw material lauryl alcohol, which constitutes 50% to 55% of our raw material cost. As all of you might be aware, our lauryl alcohol is sourced from Southeast Asia. The onset of pandemic in Indonesia, Thailand and Malaysia in the quarter 2, impacted the raw material supply situation severely. Much of the impact was felt in August and September due to increased delivery times, unclear schedules and increased volatility in the lauryl alcohol prices. To give you all a perspective, the lauryl alcohol prices are corrected from the highs of $2,100 per metric ton in May to $1,800 per metric ton in July, August. And since then, have ramped up to $3,000 per metric ton in October. The pandemic not only disrupted the feedstocks value chain but also disrupted the entire supply chain. Freight costs from Southeast Asia to India have risen nearly 500% to 700% in the last 1 year and approximately 10% to 15% for this quarter. Increased supply led volatility impacted our production schedules, enhanced risk as well as impacted our cost of operations. This is clearly visible in our quarter 2 performance. One of our major critical raw materials is ethylene oxide. The same is used for manufacturing Performance Surfactants as well as our preservatives. While we had shared with you during our Q1 con call about the availability issues, the same continued in Q2. Rising crude prices, along with available issues, further impacted production and margins. So to give you an idea on the inflation scenario upon us, Ethylene Oxide prices have risen nearly 40% in the last 1 year. That is from July '20 to July '21. The lauryl alcohol prices have risen in the July-September quarter by 49% since July 2020 and zoomed to 2.5x, if we compare it to the prices -- to the prices as on date. What I mean is that the July '20 prices of lauryl alcohol were $1.2 as on date, that is in November, the prices of lauryl alcohol is about $3,000 per metric ton. Ladies and gentlemen, most of you might be aware of the disruption that has taken place in the shipping industry. Exports make up for nearly 2/3 of our business and raw material imports make up for nearly 70% to 75%. While freight as a component for us is a pass on and entirely recovered from our customers, the extreme volatility, which has resulted in freight rates rising 100% to 700% with month-on-month increase to the tune of 10% to 40%, also increased our cost of operations. It adversely impacted the margins of our long-term businesses, primarily the bid and contractual businesses. While customers are not oblivious of this, recovery of the same in this quarter was not partially. But given the strong relationships we share with our customers, we do expect that we will be able to recover some of these over the next 6 months. On availability of containers for long distance shipments impacted our specialty business as well as disrupted intermediate feedstock supply chain at our Egypt branch. This too had a major impact on our performance this quarter. The objective of highlighting the entire supply chain dynamics, ladies and statement is to help you understand the context of the quarterly numbers. At Galaxy, we have always believed in giving our best, and we do everything possible to ensure that we meet our customers' requirements, service to the best of our abilities and maximize value. While our volumes might have declined 7% on a year-on-year basis, supply led factors increased our ability to service the available demand. But in the midst of this challenging environment, I would like to highlight some of the key positives of this quarter as well as the first half. Our India volumes, though, remained flat on a year-on-year basis. Quarter-on-quarter, despite the feedstock's availability issue, have reported an increase of 1%. Having said that, for the past 1 year, we have now been clocking volumes of 22,000 to 24,000 metric tons for our domestic business, clearly validating the structural uptick. Till '19/'20, our volumes were in the band of 19,000 to 21,000 metric tons. Our proteins, preservatives and mild surfactants businesses after a slow 2020/'21 have started gaining traction. We remain confident that going ahead, the specialty volumes, barring the supply-driven constraints should see a healthy uptick in volumes. The Africa, Middle East, Turkey region, again, while on fare profit might show a decline, is witnessing a good traction given the improving economic prospects on the crude exporting countries. To summarize, ladies and gentlemen in terms of financial numbers, cumulatively, the supply led factors adversely impacted our EBITDA by INR 20 crores. Before we move on to outlook for the coming 6 months, I would like to share a few positive updates from you. Your company was awarded, the Indian Chemical Council's Acharya P. C. Ray Award for Development of Indigenous Technology 2020 in this quarter for indigenously developing Galguard LipoG, a patented non-toxic, antimicrobial preservative technology for personal care products. This is a new molecule, which is slowly gaining traction in the developed markets and should bear fruits in the coming 3 to 5 years. incidentally, we also backed the Golden Peacock award for Eco-Innovation in the last -- in this month -- in this or last month. The [ CapEx ] done for specialty products at Jhagadia, Tarapur are now being operationalized in phases and to be fully operational by January 2022. This will lay the foundation for our next leg of growth in the coming years. Moving on to the outlook, ladies and gentlemen, for the next 6 months. We retained EBITDA guidance of INR 16,000 to INR 18,000 per metric ton. Despite the extreme volatility and inflationary feedstock scenario, in H1, our EBITDA per metric stood at 15,917, which we believe should hold. While freight rates are now showing some signs of tapering, container availability issues persist. We only see this normalizing in the coming 6 to 9 months, managing supply chain and inflation of the feedstocks in this volatile scenario will be a critical success factor and Galaxy is geared up to manage it. As Southeast Asia gets back to normalcy, we do see the feedstock available scenario improving. With this, I would like to state that we retain our 6% to 8% volumes guidance. Having said this, it is also important that we understand the emerging risks, which can have a material bearing on our performance. One, sudden and significant downward correction in raw material prices can have an adverse impact. We do have a robust risk management system in place to manage this risk. The export support benefits realized in Egypt and recognized on receipt basis in the first half of last year, that is FY2021, is not expected to be received in H2 FY2022. To conclude, as it is said, we do not grow when things are easy. We grow when we face challenges. This was once a challenge and the experience acquired from this will surely help us in maintaining and enhancing our growth momentum. Thank you, ladies and gentlemen. Wish you all a very safe and happy coming year. Thank you.

[Operator Instructions] The first question is from the line of Rohit Nagraj from Emkay Global.

Thanks for explaining the situation from quarter 2. So the first question is on the your availability. So you mentioned that there was an increase in pricing as well as availability. How is the situation shaping up and what was the particular reason because of which this particular your availability was in question?

So first of all, the reason was because of the scheduled maintenance activities and my suppliers plans getting [ expelled ] because of the COVID situation that was there plus also some pending maintenance that they couldn't completely fulfill in the previous year because of COVID. So that was -- having said that, we do see that things are sort of normalizing over the last 45 days. And we expect things to be as I should be a supplier, that things will pretty much be normal. Our only objective is to see as to how we are able to ensure that we are able to catch up on whatever we lost in the previous 3 to 4 months.

Sir, the second question is, again, in the initial comment itself, you mentioned that there was no permanent cutback in demand. Now, given that the pricing on the raw material side have increased and probably at some or the other point in time, we will be passing it on to the customer. How do we foresee the demand side, whether it will get impacted or whether people will be able to absorb the increased prices and the demand will remain stable? What is your overall sense across the geographies and our product streams?

So what we are saying is the price increases were being done in a judicious manner by our customers since May, June this year, okay, in a very phased manner. And they are also cautiously optimistic that the demand should hold. And still probably now, we aren't seeing any significant issues on that front. But yes, you are right, we need to watch in terms of how the consumer demand is getting impacted with these price increases, whether the consumer demand still holds. That's -- and we think this across. Now yes, we do see that around certain high end on premium products. Typically, which are those high price SKUs, there can be some down-trading that can be done by the consumers. But yes, we need to probably wait and watch over the next 2 to 3 months to have a clear picture on this. But having said this, as of now, we do not see any significant impact on that front. We will probably know in the next 2 to 3 months.

[Operator Instructions] The next question is from the line of [ Bob ] from [ Falcon ].

If you could clarify a bit on how the pricing mechanism works with your buyers because you are a B2B supplier. So end consumer demand shouldn't be your concern. After all, you are supplying intermediates to the likes of Procter & Gamble and Unilever. If anyone should be taking a hit on their margins, it should be them who have much higher margins than you have. So how does this dynamic really work?

Yes. Based on, we have varied type of contracts that we do. So depending on the customers and the long-term nature of the contracts, you have partial contracts where the feedstock prices get passed on. And your various other cost variables that would be part of the price change mechanism. But we also have certain grid contracts that we do for a period of anywhere from 3 months to 1 year on some products and with some customers. There, obviously, you need to manage the risk in a way that once you tie up those contracts, you also back-to-back tie up the feedstock contracts as well. And obviously, there is some portion of the business that essentially gets done on a monthly basis in terms of pricing that gets sold out every month. So this is a combination of what we have. So as you rightly said, with customers where we have longer-term contracts, we have clear price chain mechanism in place to pass feedstock cost increases.

Right. Yes. I understand that. But the concern is you see lauryl alcohol and all our major products as companies like [ WilMark ]. And from their perspective, they keep it as high as possible. They don't care about your margins. So similarly, since you are an intermediate supplier, let us say, lauryl alcohol goes to 5,000. What would you do? How would your intermediate prices increase? Because after all, at some point, the consumers who have to take the hit and the multinationals would have to take that.

You are right. As we said, that's how we continue to maintain our EBITDA guidance of INR 16,000 to INR 18,000 per metric ton. What we have seen the impact in this quarter has been entirely due to the sudden volatility in the prices as well as the freight costs, which we have not been able to fully pass on during the last quarter. We will be able to recover that as we go forward.

So you are confident of recovering it?

As we go forward, we will recover it.

Okay. And your contracts with your suppliers for lauryl alcohol. Are they all in the spot market or do you have longer-term contracts?

No, we have a combination there, again, where we do longer-term contracts, we do 3 to 6 months buying. We also do spot buying. So that's one way that we manage the risk. So there's a combination of that that we do.

Yes. But when the lauryl alcohol prices started going up from last year from 1,800, why didn't you get into longer-term contracts when the trend was quite obvious?

Yes. If I had a crystal ball in front of me last year, I could have done that. But the fact here is that when you manage your risk, we are not supposed to be also taking long-term calls based on what we expect the prices to be 1 year down the line because the market is not going to -- market is only behaving. So we are very clear that when we have to take any long-term call, it needs to be not giving us an exposure...

And then clearly, we don't speculate on raw material prices. We have a gap. Yes. We don't speculate our raw material prices. We don't make our profits from speculation on raw materials. And if you have been, you couldn't have seen sourcing the scenario of COVID impacting plantation and then in Indonesia, Malaysia, Thailand and also Oleochemical producers and the reducing supply, both in terms of the vegetable oil as well as the Oleochemical derivatives. So these are all a lot of importable that we could have not known 1 year back.

I know. I completely agree with that. I mean, no way advocating speculation. What I was saying, just picking up on your point where you said you sometimes have longer-term contracts for lauryl alcohol. So suddenly, it's gone up to $3,000. But if you had a 3-month even contract, you would have used the contract pricing. That's what I meant.

Those are always -- yes, those long-term contracts are always back to back. And open to...

Yes, you don't keep open position.

You don't keep open positions.

If you have open positions, then the risk is going to be very significant.

In both ways.

[Operator Instructions] The next question is from the line of Bhargav Buddhadev from Kotak Mutual Fund.

My first question is on -- is there any loss in terms of customers, especially your international customers, given this is a must be that raw material intermediate them or is there any market share loss which you are witnessing amongst your international customers?

To see, obviously, the sort of relationship with customers, I can tell you very clearly, there have been no loss of customers. But yes, our ability to serve like certain customers always use the first right of refusal. So if our inability to reach the material to them on the time that they require, there so, obviously, they would end up going and buying it from others who can give it to them. Otherwise, in terms of our strategic income with customers and their long-term relationship that we have with them, and they are extremely positive way, way we have serviced them and supported them. Despite these challenges, also in [ Woodstar ] in terms of growing the business further with them.

So once these supply chain bottlenecks, especially on the raw material front, stabilized, are you confident that this strong gain market share loss with your international customers would be more than offset?

Very much, very much.

Secondly, sir, you mentioned that on the India side, despite a large base of last year due to pent-up demand, you have witnessed almost flattish volume growth. And you have mentioned in your presentation, there are some structural trends that you are witnessing, which have resulted in this uptick in revenue. Is it possible to elaborate a bit on this?

So what we are saying is that when we see such an uptick, the hygiene habits because of COVID, that changed in the -- from the second -- first quarter of last year continues to maintain the momentum. So people have become more conscious of hygiene. So it's ensuring that the volumes that grew last year, they maintained, the sort of momentum that was there. So last year, same quarter, last year same quarter, there was a huge pent-up demand that came up. Because the first quarter was obviously full of log price, totally locked down. So now despite that not being there in this quarter, if you look at H1 the volumes have grown pretty significantly as far as India is concerned. So that tells us that there's still uptick in demand.

Okay. And lastly, on this Jhagadia and Tarapur facility, which will likely be fully commissioned by January. Is it possible to share which kind of products will you be manufacturing there?

So as we already mentioned, in Tarapur as well as Jhagadia, the products that we are manufacturing are mild surfactants and non-toxic preservatives, which we know are new generation preservatives. So this is enhancing our capacities, which initially we had set it up in Tarapur, which we are expanding in Jhagadia. So this should hold us in good stead over a horizon of next maybe 5 years in terms of the requirements as far as the market is concerned. And so to sum up in Jhagadia as well as Tarapur, the capacities that are coming online are with respect to mild surfactants as well as non-toxic preservatives.

And would it be fair to say that some bit of this portfolio would also be fairly new as far as your customer is concerned?

Yes. Yes.

[Operator Instructions] The next question is from the line of Rohan Gupta from Edelweiss.

First question is from mild surfactants. Sir, please clarification on the lauryl alcohol you mentioned in -- October, it went up to 3,000 per metric ton?

Yes, correct.

Okay. And they are still at -- I mean at 3,000?

Yes, yes.

Okay. Sir, you also mentioned that we can recover some of the -- in the current quarter is we roughly -- because of this volatility, both in trade cost and also in the RM cost. You mentioned that probably second half, you can recover some of these losses in the second half, the nominal margin profile or you just mention that it can improve only from current level, but it still will demand bad?

What is important, Rohan, is that let me explain. With customers, if the raw material price increase was the only increase that happens. I think I know we could have been in a much better person to pass it down if I could service them on time. Guarantee deliveries to them and also have no freight cost increase. So if you see the last 4 to 5 months have a combination of package, everything that is loaded against in terms of both us and our customers and consumers. So it was important that as we preserve our strategy with customers and where we see this as continued to be defendable. It's important that we talk in language when we say what needs to be done, how they can support us, how we can support them and come to a way that we are able to go through the situation jointly. It is not about us and them separately. So that is how we engage with customers because that's what makes a strategy intent actually get demonstrated. As we move forward, our, like, for example, when the freight rates are moving up every week, like the situation was that the freight rate move in every week. And if you need to get a confirm booking, you need to pay extra. And if you need to be giving something that needs to be booked 1 month ahead, you need to be paying much higher. So that is how the freight market goes. I can't go back to the customer every week saying that by the time I am shipping it's gone up by so many dollars, please give it to me. We can't be transactional. So that is how the recovery keeps getting pushed. And now things seems to getting stabilized. So our ability to pass on is much higher because things are not going up every week as it was in the last 3 to 4 months.

Okay. So sir, in that way, if I start pulling what you are seeing. So sir, I mean the current quarter is the average of local prices somewhere at $850. Now in October, we are at $3,000 and a layman said that the sudden increase has happened from Q2 to Q3 will be from $1800 cents to $3,000 that really sharp increase in RM prices. And if you are not able to go to the customer again and again, and we are already seeing in Q2, there is already margin pressure. So are -- should you prepare that Q3 can be sort of disastrous in terms of margin because you may not able to...

So the point here is what you need to be looking at is in terms of -- if you see last quarter, the margin reduction was majorly on account of the production losses that we had because of the supply of the feedstocks, which is what we explained. The INR 20 crores that Shekhar mentioned in his con call demand was supply led in terms of the inability to even produce and serve our customers. So our ability to pass on in terms of this is very much intact, but it only comes to the lag. So the same thing will happen when non-core were 18,000 to 3,000. The reverse also will happen when it comes to 3,000 to 2009, due to which the -- market is going to go. It's all in terms of how well our business is constituted in terms of longer-term contracts, bid business and spot business. And that's how risk management framework gives us that strength to be able to tide over this sort of volatile market situations.

So you want to say that the loss in the current quarter or the margin pressure is more due to the unavailability of raw material and volume losses, not mainly because of the inability to pass it on?

Yes, yes, yes.

Okay. So should we assume that there's a large part of the $3,000 pricing, which is right now in month of October, you have already taken the subsequent increase to cost -- I mean, to match this $3,000 costing for the raw material?

Obviously.

Okay. So the price negotiation has already happened with the customer, the price increase has already happened. It seems it would have led to almost 100% or maybe 78%, 80% price revision to the end customer. Are we in position to absorb that much price increase sir?

Yes, yes, but that's the way it is because the increase is not something that is manageable by us. It's so significant. It obviously has to get passed on. So what the consumers, whether my customer take it or the consumer is going to take it, what the consumer will do is only after my customers take this increase of price and put it on the market shelf. That's what I have said, when I answered one of the questions earlier, we need to wait and watch. We will find it when the consumer decides. If the consumer is [ ready ] to take this, then certain alternatives have to be looked at. But as of now, we don't see that happening. So the important thing is how the consumer votes in terms of these price increases.

And sir, in your experience in the history, whether this kind of such a sharp increase in such a short period of time, like in just within 6 months, are increasing down almost $1000 to $3,000. Do you see that the customer downtrading is bound to happen or do you think that the customer can take this price increase. I mean, in the -- our shampoo prices and basic price goes up by almost 50%, 70%. Then do you see that there is chances of downtrading because you are not hearing that kind of commentary from the SMCG company like HUL, maybe P&G. But you can give some guidance that in the history, whether it can be absorbed in such short period of time or it won't be and people will see the downtrading?

First is, a word of caution and whatever I say, history is not something that is very dangerous to be depending on history because what happened 10 years back is not something that can be happening again in a similar situation, 2 months from now. What is important is that with what, say, our customers are saying is in terms of the sort of net -- I mean, when you say downtrading, it is probably in terms of someone who is able to make a product that is cheaper. And obviously, there are also going to be issues in terms of consumers being clear as which products they want to buy. Downtrading can be if someone is buying a shampoo, which is very high in say, sulfate free shampoo, which is costing say INR 500 a bottle. They may say, I buy a bottle that is sulfate base shampoo, which is say INR 300. That is what. But everything it was SLES is correct. Everything is as SLS. So it essentially means that you can make a sample without SLES. So question of downtrading...

And that becomes more important in our business because we are also doing business with a small regional players like WOW and -- company and all who have benefited a lot from the e-commerce trade. And but they are catering to high-end industry, like do that the ranges are the price range is from INR 500 to INR 700 per -- or maybe per packet. In that case, do you see the MNCs who have a larger basket like P&G and HUL. Definitely, they may probably gain the market share because they have larger basket and your dependency, which is on a tier or a regional players, they may lose the market share. Is there any risk to their business in such a short periods of?

I think this question cannot be answered now. I think we will have to wait and more because the way the consumers like my -- the multinational customers are going to respond to this situation and how they are going to take this on with the competition, the e-commerce is something that's a different subject. But point is, both of -- all the customers who wanted to see how they retain the consumers that they have already onboarded. So that's going to be interesting stuff that will pan out to the market. Probably we will know in the coming months as to how -- who is gaining at the expense of who, both of them are grown. So the consumer finally decides, so we will have to probably wait for some time to understand this.

But as of now, all the customers have accepted the price increase that you have taken?

Yes.

The next question is from the line of Soumeet Sarkar from Capitalmind.

I just wanted to have an understanding on why there has been increase in or trade receivables in the first half, any specific reason?

Can you be a bit louder?

I just -- thinking on why there has been a rise in receivables in the first half, any specific reason?

Rise in receivables, first is, the prices have gone up, raw material prices. So that gets passed on from your receivables position because the sale prices goes up. So that is one reason. Second is, we have been -- with the sort of raw material availability issues that we had, timely availability, we had to prioritize for our strategic customers who essentially were -- they have a higher credit period as compared to others. So this essentially means that on both these accounts, the receivables go up.

Next question is from the line of Vijay Karpe from Bryanston Investments.

My first question is what percentage of the top 5 products contribute to our revenues and what kind of market share do we have in SLS, SLES and phenoxyphenol in various markets as opposed like India and in the rest of the world?

Yes. The top 5 products will contribute approximately 60% to 65% of our turnover. And what is the next question? On the market shares, we don't disclose the market share information. For product-based market share information, we don't disclose.

Yes.

My last question pertains to the volume growth. In the past, we have grown somewhere close to 7% to 8%, and we are guiding for the same. And the market is growing and our size is also small. So why do we expect low volume growth?

See, if you see as far as the Indian market is concerned, it has grown in this year by approximately 4% or so. At a global level, the home and personal care industry grows at about anywhere from 1.5% to 2%. We have always grown ahead of the market, but the entire situation this year has been initiated by the supply chain issues and constraints and problems. So in spite of that, we would like to maintain our volume guidance of 6% to 8%. As far as this year is concerned. So if you look at in H1, this year, compared to H1 last year, our volumes in India have grown almost 14%. Which is much ahead of how the market has grown.

[Operator Instruction] The next question is from the line of Shanti Patel from Shanti Patel Investment Advisors.

My question is, what is the capacity utilization in this quarter?

Yes. In this capacity utilization in this quarter was 67%.

And the second question is, what I think approximately the return on equity as on March 31, '22, approximately, I don't say...

Approximately [ 20% ].

Return on equity?

For the first 6 months, it was about 20%, and we expect a better rate by the end of this year.

But approximately, can you say some?

So we cannot -- I think that may be guesswork. We don't want to be giving you any missing based on the guesswork because I think, finally, that is a derivative, but we need to be ensuring that we manage the challenges pretty well and enhance our performance. That will flow into the return on equity going up, and that is our endeavor. We do hope that our intention and capabilities are supported equally by the external environment and be hoping for the best. But our intention and capabilities are very much okay, in line to ensure that we are able to deliver better in terms of return on equity.

The next question is from the line of [ Nikesh Agarwal ] from Vital Capital.

So I just wanted to know how do you see the China plus 1 strategy panning out since most of our revenues are from exports. So any sense there, which you can give us?

So I think I have answered this earlier. See China plus 1 essence you look at China, in certain specialty incidents that we are supplying into China, we do see that as something that can be an uptick for us. But then we need to -- because the recent issues that are happening in China, we need to wait and work. But most importantly, we also need to be ensuring that the situation in India in terms of the way the logistics situation is that needs to get improved significantly. But whether someone who has been sourcing mildly from China wants to be sourcing those products from India, those are foreign as far as our industry is concerned.

And so -- and talking more about the specialty side. So I mean we are manufacturing it from India, U.S. and Egypt. So on a longer-term basis, let us say, down the line 3 to 5 years, how do you see the specialty chemical portfolio of our company growing as a whole? And what will be the key drivers for according to you?

It believe in growing. Our objective is that's why we are investing in capacities. And obviously, we want to ensure that we are going ahead of the market. The second is in terms of what will be the key drivers for that. The key drivers will be the consumer trends that are moving more towards sustainable products.

So the key drivers will be safety, wellness, sustainability and health. So health and wellbeing always comes on top. So these will be the primary drivers, which will drive the specialties and also factors. Of course, one another very trend, which we determine will be premiumization. So all this will be the drivers with respect to the specialty products that Galaxy is investing in terms of setting the various capacities.

Recently, we have -- we are trying to focus more of our portfolio into green products and towards sustainability, which is a very good move. So how do you see -- I mean, how is the demand now? And what's the percentage of revenue from between products as of now?

See, these are progressively growing, and we have continuously grown year-on-year on all these products. Today, as you know, the specialty portfolio constitutes almost 30% to 35% of our total turnover, and this ratio will only increase. See, one of the things on green is that right now, if you see the way everyone is looking at, they are looking at using it in certain specific high-end premium products. What the commitments that many of our customers have made is that how do they by 2030 and 2035, make their entire sourcing of products green. Now that is what we are working on, and we are positioned to be able to serve them, both in our capabilities and our ability to be able to churn out those products. So because as of now, we see green products or whatever are in the specific scales is high and that is how they are testing consumers and consumers are buying only green product. But how do we make it more democratic in terms of the way our consumers are committed to making their entire supply chain green. So that's what we are working on with them.

As you would have heard, almost all the major players of personal care and home care products across the world are committed to replace their tectum feedstocks with natural feedstocks. Yes, this is going to be a very, very important trend going forward, and we are very well placed to be able to service this particular opportunity or into that.

The next question is from the line of [ Shubh Joshi ] from -- an individual investor.

Sir, actually, -- we are taking our portfolio in any pipeline or anything or any kind of recessions...

Your line is not clear. We are not able to hear your question clearly. And please be a little slow.

Yes. Sir, what I am saying, so I am saying we are taking any price hike in our overall product portfolio. So we have our clients. So because we are getting from the inflationary price hike. So I know that is very short-term hike, but we are taking any price hike. So that will be?

Yes. So we are taking price hikes.

Okay. And so sir, you are planning any kind of CapEx or kind of any patents?

So that is already taking patents and planning capacity is the ongoing exercise. And yes, there are certain capacities that are already getting commissioned, as we have said, by January '22, and more capacity additions in line with what the market requires are already in the drawing boat. So we will announce that as and when the form of the plans.

So as of today, the total number of patents that we hold is about 80, and we have applied for another 50.

The next question is from the line of Rohit Nagraj from Emkay Global.

So sir, the question is pertaining to Dr. Nirmal who has now resigned. So how are we taking the R&D initiatives further? And any more substantial update on the R&D front?

Dr. Nirmal continues to lead our R&D. He has only retired from the Board of Directors. That is -- I know in terms of what is called internal rules with respect to the age limit, but he continues to lead R&D in Galaxy.

Okay. Sorry, my understanding was wrong. So the second question is in terms of the recent rise in lauryl alcohol prices. So I understand it is unprecedented and never seen before. Any structural changes which are driving these prices because we have also seen that from close to about 1,000 to 1,500-odd levels. Those prices have moved up beyond 2,000-odd levels. So from the availability perspective, are there any structural changes, which will keep the prices on a higher level. And given this particular event has occurred in the recent past, any particular areas where we have taken our risk mechanism from a -- working on a different perspective?

In your vegetable oil prices, as in any commodity, more so with agricultural produced is that the main determinant is a supply set because demand will be steady in terms of its growth. But then the supply led stuff is what is going to determine, how the prices go up and go down. So if you see the demand -- the supply side, there are challenges on the vegetable oil side. And this supply challenge has let lower production, lower inventories, and that has led to the price increase. So if you say structural, the [ subs ] in the last 1 year, the production has got impacted significantly for vegetable oils. So other than that, there's nothing structural change that has happened. Now as production starts improving in terms of the plantations working to their full capacity, this supply should improve, and that would start softening the prices. That's the way it is.

Right. And one just last clarification on [ VEO ] side. So for our incremental capacities, do we need incremental [ VEO ], given that there is only a single producer and constraint with increasing the capacity, if we need incremental EO, how are we going to tackle this particular subject?

First of all, the supplier of VEO is not a -- of a single supplier, there are 4 locations. And for them, there is a very strategic molecule. And we have used strategy engagement with them. We don't see that as a challenge. So our growth plans are very much intertwined with their growth plans in this particular molecule, and we don't see this as an issue at all. What has happened was something that was more situation specific in terms of the maintenance share reduction there because of COVID. But last year, where they couldn't do much of the maintenance properly and then they had to continue and complete that in this year. And we see it, again, when they started, they had COVID issues in the first quarter.

The next question is from the line of [ Bob ] from [ Falcon ].

Have you seen a similar situation historically, for example, in 2008?

Yes, we did. We have seen lauryl alcohol going up to $3,000.

And crashing to $900.

And how did you manage it? So it was -- I mean, you could have -- would have been hit both sides?

No. Also if we are to tell you the truth, at that time, we didn't have the ability to manage it that well because that is the first time that something -- so significant happened. Then we put in place a good risk management framework in place that has allowed us to manage subsequent situation like which again happened in 2012. And then it again happened in 2015, '16. So this is something that keeps happening every 18 to 24 months. So the volatility has only increased year after year. So that has enabled and hold our ability to manage this risk in a significantly better way.

That next question is from the line of Shanti Patel from Shanti Patel Investment Advisors.

I just wondered, what would be the incremental turnover from China are from January from which date we are going to have new plants in operation and what will approximate...

No, we cannot be -- our first thing is to commission the plant. Subsequently since it's our new products, how do we ensure that we are able to get those [ volumes ] to the customers. And we will not be able to make any statements in terms of what will the turnover or what will be the sort of profitability out of that.

The next question is from the line of Rohan Gupta from Edelweiss.

Sir, a couple of questions. Just one is on, sir, our employee costs. There is a quarter-on-quarter decline for the price cost. Any particular changes in that or it just was higher in Q1?

Can you repeat the question, Rohit?

I was saying that employee cost on quarter-on-quarter has come down. Any particular changes there?

The employee cost on -- Yes. See, the question comes is that in the employee cost last year and current year, last year, since we had a lockdown...

Sir, I was comparing more from the Q1 to Q2. Q1 it was INR 54 crores and...

Yes, we are talking about the second quarter -- Sequential has gone down because the performance for the second quarter was not up to the mark. That is why the reversal has been done.

The performance was not a mark -- it's not dealing with the [ skills ]?

So no, no. It is because Q1 to Q2, so the Q2 performance were our variable pay provisions, obviously, have been scaled down.

So there is a variable part of the employees, which has come down?

Very small -- for your senior management and top management, there's a good amount of variability comp.

I wish that it goes up significantly so that it's in-line with the improvement and the performance of the company.

Hopefully it goes up in the quarter.

Sir, second question is on the commission of the [ Efficiency Chemical ] plant, which will happen by end of this year. Sir, we have seen that we have been living in a COVID environment and there have been a lot of global travel restriction. And [ Efficiency Chemical ] plant is focusing more on the new product development and all. So even commission the plant, but how has been the poor absorbability has been the demonstration and offering of -- customers or will we see that the slow pickup in over efficiency chemical on because nothing is possible after the restrictions?

Every person including you and me are fed up of this COVID. So we want it out of our dictionary. And if you see travel plants are easing, customer organizations, including at Galaxy, we have started, many people coming back to work from office. So everything is improving for the best okay. So keeping our fingers crossed if -- and COVID is expected to get in the endemic zone as per WHO in the coming months. If that happens, then I think everything is falling well in place. Our capacity is coming up, the consumer demand looking up in terms of people mobility increasing. So that's good. So we don't see any further negative happening unless COVID has its own way of rearing its head back again, which looks to be low probability.

Any sense you can give on the commissioning of the chemical specialty plants, how much of this is the only on new product investment and how much we can be our existing product basket of the specialty chemicals?

That will be -- see, it's all a multipurpose plant that we put up. So it can be a new product also we can make plus existing also. So it will be difficult for me to give you that number because it's not that everything is -- they are mutually -- not mutually exclusive. So I can make 2 or 3 product. Some of it can be existing, some of it can be new product. So that's the way we configure our plants, continue our plan.

Even the pandemic, -- but it may still at least one 1.5 year for you to pull the customers, bring the demonstration. So do you see that for next 1.5 years of a new specialty chemical plant?

No, no, no. 1 minute, wait. Let me be clear. So all these new products now we are commissioning, our engagement customers continue through the virtual mode -- we actually did more meetings with customers last year than we ever did in the previous years because we could do more virtual meetings. So that market development efforts were never got -- intact, they got enhanced in the last year. So if things come back, it's only that it's going to accurate it further. It's not that we have to stop our market development activities for new products.

Total business as usual, you have been able to meet new customers -- after the commissioning of the plant...

Looking at it was, not in terms of our market development efforts with the customers that actually got enhanced last year, our customers if they are launching any new -- with our molecule, they are going to launch any new SKUs or new products, they would essentially would have waited for things to stabilize as far as COVID is concerned and consumers come back to the market and they start looking at it positively. So those things will only actualities with the COVID situation regressing.

Since you are also in [ ESPA ] in Egypt. So how much price increase has happened in [ EPSA ] product base compared to other lauryl alcohol product basket, in comparison?

Lauryl alcohol has -- much faster than [ ESPA ]. So they keep I think trying to compete with each other.

Because Egypt markets very active, if lauryl prices have gone much sharply, then there maybe the possibility that there may be a shift in that market maybe visible from clean -- product to lauryl alcohol -- sorry to [ ESPA ] product?

That's why it's largely used only in home care, fabric care largely and some amount of dish care. So -- and you cannot replace kg for kg, SLES in every single formulation, no.

That's why it's largely used only in home care, fabric care largely and some amount of dish care. So -- and you cannot replace kg for kg SLES in every single formulation, no.

Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to the management for closing comments.

Thank you, ladies and gentlemen. Thank you for attending this conference call. Have a great day, and have safe and a great year ahead. Thank you.

Thank you all of you.

Thank you. On behalf of Galaxy Surfactants Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.