Laxmi Organic Industries Limited (LXCHEM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Laxmi Organic Industries Limited Q4 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kanav Khanna from EY. Thank you, and over to you, sir.

Thank you, Inba. Good afternoon to all the participants on this call. Before we proceed to the call, let me remind you that the discussion may contain forward-looking statements that may involve known or unknown risks, uncertainties and other factors. It must be viewed in conjunction with our businesses that could cause future results, performance or achievement to differ significantly from what is expressed or implied by such statements. Please note that we have mailed the results and the presentation and the same are also available on the company's website and on BSE. In case you have not received them, you can write to us, we'll be happy to send it over. Now, to take us through the results and answer all your queries today, we have the top management of Laxmi Organic Industries Limited represented by Mr. Ravi Goenka, Chairman and Managing Director; Mr. Satej Nabar, Executive Director and Chief Executive Officer; Mr. Harshvardhan Goenka, Executive Director, Business Development and Strategy; and Mr. Partha Roy Chowdhury, Chief Financial Officer. We will start the call with a brief overview of the quarter gone past and the financial year 2022, and then conduct Q&A. Now, with that said, I will now hand over the call to Mr. Goenka. Over to you, sir.

Thank you very much. Very good afternoon, ladies and gentlemen, and welcome to our earnings call of our company. This is the first full year after the listing of our company in March 2021, and I'm happy to share with you my sentiments and views on the annual performance of our company. With me on the call, I have Satej, our CEO; Harsh, our Executive Director; Partha, our President and CFO; and Ms. Tanushree Bagrodia, our new CFO. The year ended on a strong note. Our consol revenues crossed INR 3,000 crores, a milestone and we clocked a consolidated PAT of INR 257 crores. Cash flows from operations crossed INR 300 crores, a large part of which got deployed in the ongoing CapExes after taking care of our working capital needs. We also completed the repayment of the long-term debts as envisaged in the IPO. I'm particularly happy that we could return a strong performance despite the headwinds on many fronts. Both our businesses did well, of course, at different points in time during the year. Our AI or the Acetyl Intermediates business did very well in the first half and the Specialty Intermediates business has been continuing its good performance in the second half of the year. And this resulted in recovering part of our losses that we incurred during the 50-day plant shutdown on account of the unprecedented floods at our factory in July last year. Through the year, raw material prices remained volatile, energy costs and international freights escalated to unprecedented heights, other logistic uncertainties compounded the challenges. The results this year, however, testify the resilience and tenacity of our businesses, both AI and SI and speaks about the ability of our teams to deal with diversified business realities. Our performance this quarter was largely driven by the SI business, which performed strongly on both fronts, volume and product mix. The volumes in this quarter mirrored our last quarter performance with an improved product mix. One of the high points of our Specialty Intermediates basket this year has been our ability to enter strongly into the international markets. Our SI revenue grew by 74% on an annualized basis. One of our CapExes in SI got commissioned and shall start generating revenues from the current quarter itself. Another major CapEx will get commissioned and start generating revenues from the next quarter. On the AI front, this quarter, while our volume showed some growth, as anticipated, margins were impacted due to price corrections. However, our European subsidiary's performance remained robust and it is expected to return similar performance in the near future. AI revenue grew by almost 98% in FY '22 from FY '21 on the back of both volumes and prices. Our fluorochemicals CapEx is going ahead in the right momentum. Our civil construction, infrastructure and utilities at Lote Parshuram is nearly completed, 60% and more of the Italian equipments have been dispatched and received. While the work is going on at the site, samples from the R&D and Kilo Lab getting approved by domestic and international customers. The project is expected to start up in Q3 of this year in a phased manner. Going forward, we will continue to drive operational efficiencies and maintain our leadership in AI through enhance capacities and periodic debottlenecking. For our SI segment, we are confident that new capacities will further improve our product mix while we focus on increasing the share of contractual sales and expand geographical presence. The opportunity in our FI segment is robust, and we're preparing for a phased growth beginning with agrochemicals and progressing to pharmaceuticals and industrial applications over time. The strategy of creating a strong foundation has worked for us in our SI segment and we are confident that we can replicate that success in our FI area as well. Just to give you heads up on all the numbers that we have reported in the media as well as on our websites, our stand-alone financial highlights, we had operating revenues of INR 2,996 crores as compared to INR 1,606 crores in FY '21, which is a growth of about 87% year-on-year. Our EBITDA at INR 319 crores, compared to INR 202 crores shows a growth of 58% year-on-year. Our PAT at INR 231 crores compared to INR 123 crores in FY '21 is a growth of more than 89% year-on-year. Our consol results are mirroring our stand-alone, our operating revenues at INR 3,084 crores as compared to INR 1,768 crores in '21, a growth of 74%. Our EBITDA at INR 368 crores in this year compared to INR 217 crores in FY '21, a growth of 70% and a profit after tax of INR 257 crores, compared to INR 127 crores in FY '21, which is a growth of 102% year-on-year. So all-in-all, a good year, a good beginning and many more miles to walk, many more milestones to achieve. And with this, I take the opportunity to thank all Laxmi-ites, our business associates, our investors, well-wishers for their unflinching support through this journey. I now leave the floor open to the question-and-answer session.

[Operator Instructions] Our first question is from the line of [ Ritesh from RKS Equity Solution. ]

Sir, thanks for sharing all the details and future forecasts. So for the next year, how you see the demand and supply side? And how you are going to manage your cost part? Because we're seeing lot of cost [ inflation ] are actually hampering our operating margins. So do you see how we can improve our margins in the operation side?

Ritesh, I am Partha Roy Chowdhury. There are -- as far as the costs are concerned, if you observe, our material costs are of the order of about 70%. So that is the block, which needs to be managed. And our major raw material -- in fact, both the major raw materials are commodities where the prices are published and are available in the public domain. Therefore, the way we look at operating the business is not to really get a reduction or a cap on the costs, which we continuously and consistently do. It is all a matter of managing the cost and how we are able to pass them on through the selling prices. So the phenomenon, which you have noticed over the last, say, 5 quarters, there has been a lot of volatility, and therefore, there has been a lot of volatility in the margin profile as well. But on a consistent basis, if you have to run a model then my personal position on this is an EBITDA margin of about 13-odd-percent should be good enough to give the necessary indication, Ritesh. Yes?

Yes. So I have one more question on the same part. So in the P&L I can see we have purchase of stock in trade, which is very high in numbers compared to 3x to the previous quarter. So, can you elaborate on this item, means why it is so high?

See, compared to the previous quarters, if you have observed, there is a note in the published results, which says that we have initiated the merger of Yellowstone, YCPL. So in post October, we are operating YCPL as a converter. Therefore, we are actually supplying the raw materials to them and buying them back -- buying back the finished from them, which because of the accounting treatments which we give to these transactions, the traded portion looks bloated. Going into next year, our expectation is that the merger process should come through within Q1 of the current financial year and then the numbers would get moderated. Yes?

Okay. And the demand side, means how you see the demand from the market in each region?

The demand side remains robust, Ritesh.

So we can expect, I mean, how you see, means what is your guidance which we can see for the year, how you see -- how much the growth you are expecting in the revenue -- in terms of your revenue for the year as well as for the next quarter?

See, we shall abstain from giving any guidance, Ritesh. Okay?

Okay.

That's point number 1. Point number 2, a substantial portion or part of our top line, the revenue line also depends on the prices of the products, both the finished product, as well as the raw materials. Right? So if the prices soften, then the revenue could get soften. But if you ask me for the year as a whole, we are looking at some growth, but that growth may not be as robust as we have experienced in the year, which has gone by.

Okay. So any tentative numbers because last year was fabulous year and we have done very good job there. So do you think any 10, 20, any projection, if you can give us?

No, we would not like to give you any projections as such, but we can assure you we shall work harder than what we have worked this year as well.

Okay. And as our Chairman also said that this new plant capacity is fully utilized. So are they -- will it be operational in this quarter or the exact revenues will be coming from there or still we need to wait from the operation point of view?

So, Ritesh, Harsh here. I think as it was told, we have got CapExes coming on stream for the next 3 quarters. As they come on stream, these are chemical plants, they ramp-up, they have got immediate demand offtake, but you will see maybe with a little bit of lag, these things coming up, some within the quarter, but full stream might take another quarter to achieve.

Okay. Wish you best of luck for the year and the quarter.

[Operator Instructions] Our next question is from the line of Nitesh Dhoot from Prabhudas Lilladher.

So my first question is that, we had 48% contribution from new products in FY '21. What would be that number for FY '22? Actually, I'm asking this as the graph in the PPT on Slide 14 mentioning about new products, I think, has a incorrect number over there. So basically mentioning the total SI revenue instead of the new products revenue. So if you could just give me that number?

So we will just come back to you on that error, if at all. But we will not give up a number exactly. We will just state that our new product that we have launched in the last year and expected to grow has grown as per our expectation and little bit exceeded that. And this sort of trajectory that you've seen us deliver in the past is what we're looking to duplicate going ahead.

So this is one number, which you've have been giving out, so any specific reason why you are not willing to kind of disclose that number?

Just competitive reasons, it's part of our strategy, because that will just let out some of the things that we are trying to do. But we can assure -- we can -- and if you'd like a deeper conversation on this, maybe we can take this in one-on-one session, where we can explain to you this in far more detail.

Sure. That should be fine. So moving onto my next question. So when did we add this 32,000 metric tons capacity on the AI side? And what was the capital outgo on the same?

I'm Partha Roy Chowdhury. These CapEx -- these capacity additions are results of debottlenecking through the year. Ye? And the capacity that we have enhanced, capacity that we have reported is the capacity that we have at the end of the year. So you can probably take half-half.

So what would have been the overall capacity utilization number including YCPL and this debottlenecking that you've done? So what would be the overall utilization number if you can give us?

Very similar to what we have reported in the past. The capacity utilization would remain between 80% to 90% at all points in time.

Sure. And what would be the value and volume growth? I mean, would it be possible to give out that number? I mean, of 98%, 100% jump in AI revenues that you reported. Would it be like more of pricing that is around 75% all the pricing growth and the balance from volumes?

So, I don't think we would be in a position to give out any value and capacity utilization indication. Having said that, you have to keep in mind that even the fourth quarter of that financial year which has gone by, in the Acetyl segment, prices remained at a very elevated level. The raw material prices have started correcting, but the finished product prices have corrected for just about a quarter, right, so we need to keep that in mind. And again, for your modeling purpose, you will get these price indications in the public domain.

Sure. So, can I ask you, I mean, what would be the EBITDA contribution of SI and AI in FY '22 alone? Not clear why you don't report the segment-wise EBITDA breakup given that product profiles are very different and for that matter even our closest peer is giving out a clear breakup between the segments, so.

So 2 reasons, essentially -- 3 reasons. The first reason is, we consider ourselves operating one business. The way these 2 businesses operate, they are actually connected at the starting point and at the end point. So we have common raw materials and we have common customers. It is only in the middle that they are divergent. Therefore, we continue to operate this business as one chemical business. That's number one . Number two, we don't want to give out these numbers for obvious competitive reasons. Number three, we would like everyone to look at us as one and not really as some of parts. Yes? So that's the principle that we follow. And we shall consistently continue to follow this.

Okay. So next question is on the CapEx outflow. So I think you said INR 290 crores is the number that's there for FY '22. If you could give the breakup again between AI, SI and how much would be towards fluorochemicals? I mean, any ballpark indication would -- any ballpark number would also be helpful.

See, fluorochemicals is of the order of about a INR 150 crores. Yes?

Okay.

FI is of the order of about INR 175-odd crores. And the balance investment has gone into AI. Lot of these investments in SI are also infrastructure-related, which are not directly revenue-generating investments. Yes?

Okay. But this number totals up to more than INR 325 crores. I mean, I'm talking about the cash outflow on CapEx, which as per your balance sheet is INR 290 crores.

That is in -- you are referring to the cash flows?

Yes.

Don't do that because there are capital advances and all those splits, these are constructed as per the accounting standards, right?

Sure. Okay. So this is the INR 325 crores, slightly more than INR 325 crores total CapEx...

Approximately, yes.

All right. Okay. And one more question -- sorry?

No, there are also compensating entries in consolidation. So...

Yes. That should be okay.

And I'm talking about ballpark numbers, not exact numbers. Exact numbers, you will see once the annual report is published.

Yes, that's fine. So, one more question on a cash flow item, whereby there is a purchase of investment of around INR 1,035 crores, and a sale of INR 1,034 crores. So what do these investments pertain to?

These are actually deployment of surplus funds in mutual funds and other similar instruments, which are classified as investments under the Ind AS and GAAP and all that. Yes?

But the figure is pretty significant, INR 1,035 crores number, I mean [indiscernible] multiple times of...

Sorry, my mistake. Can you come again, please?

Hello?

Yes, so can you come again with the question?

What I meant is that, this number appears to be quite significant. I think last year, this number was around INR 170 crores. Is it like there has been multiple rounds of investment of kind of trading and which is why this number is kind of pretty large?

No, it is a NO, with capital N and capital O. See, these are all mutual fund investments for 3 days, 5 days, 7 days, sometimes maybe 2 weeks, 3 weeks. Right?

Understood. And one last if I may. So on the effective tax rate, I mean, what is the kind of number that we should work with going forward? I mean, Q4 tax was negligible. So is there any write-off or any, I mean, write-back or a one-off or anything?

No. So if you have to work on that, you can work on a weighted average tax rate of about 20%, 21%. Basically the math you can continue to apply. Yes?

Understood. And sorry, one last, I mean, if you can give out the total R&D spend for the year?

So what is the question? Sorry, I missed that once again. I'm extremely sorry.

The R&D spend for FY '22 and a breakup if possible between the capital and recurring?

Which we shall provide in the Directors' Report when we publish the annual report. But it should be of the order of about INR 15-odd crores. Yes? And leaving aside, of course, the administrative expenses and the salaries -- employment cost of R&D. But you will get that number in the annual report.

Mr. Dhoot, I'm sorry to interrupt. May we request you to return to the queue, there are several participants waiting for their turn?

Yes.

We'll take our next question from the line of Saurabh from Asian Market Securities.

Sir, you mentioned about the margins in AI, but if you can talk about the margins in SI and outlook on the same?

SI margins, see, we'll not be able to give you a number, okay? But if you look at the other chemical companies, who are in this space, the EBITDA margins are of the order of anywhere between 21%, 22% to, say, 25%, 26%. We operate within that range as a basket. Yes?

No, sir, my question was broadly on the -- how the -- whether there was some margin pressure or what kind of margin pressure was in Q4 and how should we look in Q1?

Saurabh, the volatility that is there in the SI is not to the same extent in the Acetyl business. The businesses have different principles of operating. So while you saw that extensively in AI, SI wasn't as impacted. And SI continues with the margin expansion growth as we optimize the product mix and continue to launch new products.

Okay. Coming to the CapEx, sir, if you can give CapEx number for '23, what could be that number?

We have not made this forward-looking statement on our CapEx plan for the future, but maybe if we have a deeper conversation, we can come back to you on that.

But largely CapEx will be now on the FI and SI?

Correct. So you will have -- I mean, as a strategy as the company goes, it remains quite similar, a large chunk of our CapExes will always be going towards SI and FI. AI continues the debottlenecking route, and we've got adequate headroom at our existing sites to debottleneck adequately for the several years ahead.

Okay. So should we assume this kind of 8 to 10 kind of percent incremental capacity addition in AI for debottlenecking happening every year?

More or less, we are looking to go in line with the market. So as you find the end consumer demands increasing, we'll try to match that.

Okay. And just lastly on the -- your customer profile, so for FI, your customer -- like, how many -- or is there the overlap in terms of customer with SI or for your FI business?

Of course, and that was the primary reason to get into this business or this new vertical, as there's a lot of customer pull, and request to get into these kinds of molecules.

[Operator Instructions] We will take our next question from the line of [ Kunal M from Jaguar Investment Managers ].

I wanted to understand for FY '22, what was total tonnage, if you could mention for the entire company combined, AI plus SI? And with the new capacity coming on board, how much capacity are we going to add this year?

So, again, let us split the businesses, while we have declared the numbers on the AI part and you've seen that, and we've spoken about that earlier. SI, we have always maintained is not about volume, volume does not give you the value that we are all looking to drive. And therefore, it's more about the kind of products, and the new products in the portfolio optimization that actually drives profitability over there. Yes. I hope that answers the question.

Got it. And just a continuation on that. In the SI business, could we mention what portion of the business will come from acetic anhydride, if you just give a rough ballpark number, what portion will come from that?

We don't give product-wise splits.

Got it. And just regarding the [ fluoro ] initiative, I wanted to understand that at the end of FY '23 once we get the facility and once commercial coming out to get the facility operational, if you could give us a rough figure as to what sort of capacity in terms of metric tons and what is the size of the gross block, if you could quantify those 2 numbers that would be very helpful.

So, I'm Partha Roy Chowdhury. So the top line that we are looking at, at full capacity should be of the order of about INR 300-odd crores. Yes?

Sure.

And the block is going to be of the order of INR 450-odd crores, may be slightly lower than that. It's not important -- the tonnage is not important. Again, as Harsh had mentioned, the product mix here is important. So therefore, we don't really would like to sort of discuss the tonnage.

And we start from the -- as you mentioned, we start from the base products in agrochemical and then as we move along, we'll make it more and more, I would say, value-added product mix as we move along in spite of to pharmaceuticals and agriculture, that's the way we should look at it. So the margins will start up from -- margins, it is comparatively lower than probably what the peer set is making and then gradually it will ramp up. Is that the right way to look at?

Yes. So principally, I would say, yes and that's the sort of story we have been able to achieve in the SI segment. And looking to duplicate that model with the FI.

Okay. Last question from my end, I wanted to understand the way -- our pricing policies of the volatility in acetic acid and all the underlying raw materials and indeed it's fairly high. So I want to understand personally how much quantity of inventory do you carry on the books at any given point of time? Of course, right now, with where we are in surplus we may carry more. But on an average how much inventory would you carry? And is the pricing -- I mean, does the pricing change every fortnight, and how does the pricing adjust to the volatility in acetic acid prices? And you also mentioned that -- in one of the comments you mentioned that the raw material prices have gone down and the final product prices have not gone down to that extent -- I mean, to the -- in accordance with the raw material prices next quarter at least on the gross margin side can we expect some improvement for next 1, 2 quarters?

There are actually several questions in what you just now said. To answer your first question, you see, we deal with liquids and liquid cargo. Therefore, we have a physical limitation of stocking. Right? That's number one. At any point in time, on an averaged out basis, I don't think we carry inventory more than, say, 2, 3 weeks because we don't have a physical carrying capacity. Having said that, the prices gets locked in for supplies of about 60 to 75 days. Yes? Depending on our view on the prices. Now, with regard to the next part of the question, where you said that the finished product prices are holding up and the raw materials have declined. In the AI business, when the raw material prices soften up, the finished product prices immediately soften up. Okay? So therefore, there is a margin correction, which takes place. Whereas in SI, it is somewhat reverse because in SI, we have longer-term contracts. On an average, every contract is for 2 to 3 months, the shortest ones. We, of course, have annual contracts and multi-year contracts as well. So therefore, the margin profiles behave differently at different points in time. As a result, you will observe that, even if the raw material prices get halved between 2 periods, our margins don't get halved. The average margin sort of travels within a bandwidth of maybe a couple of percentage points here and there. Yes?

We'll take our next question from the line of Meet Vora from Axis Capital.

Sir, just wanted little bit more clarification on the AI segment. As you said that once the raw material prices correct, the finished goods prices correct immediately. So is it reverse when the prices are increasing? Because acetic acid prices were somewhere around -- hovering around [ INR 90, INR 95 ] in Q3. And in Q4, they were around somewhere [ INR 60, INR 65 ] bandwidth. So have ethyl acetate or a similar kind of product prices jumped by a similar margin and that is what is being able to see on our margins as a pressure? So how do we pass through? Or there is no pass through?

So when you have observed these prices of acetic acid, what is the price of ethyl acetate that you have observed? [ I can't disclose you ] my prices.

Yes. So these are like GNFC basic prices that I've observed.

So you have some GNFC margin, right? And then you would do a bit of markup and give us a few points, say, for our efficiencies. So, you know the margin.

Okay. So typically when the prices of raw materials are rising for the AI segment, we will see that the margins are improving. And similarly a downward trend is seen when the prices are going down?

Okay. Let's take the modular side, right? If prices of raw materials and finished goods are constantly moving, the business model that we are into is managing that and ensuring that we're able to constantly expand on that spread, that's there in this business, which is how we grow this business and manage it. At any point in time, there'll be a 30 to 45-day lag at best. And through cycles, which we have seen, this normalizes and constantly operates within a [ bank ].

Okay. So can we hear that number like AI business or margin by any chance, so that we are able to understand how it moves?

See, the AI business operates on a long-term basis at an EBITDA margin of, say, low double-digit. Yes?

Sure.

And in this business, we operate on per kilo margin, we don't operate on percentage margins.

Sure, sir. The second question was regarding the FI segment that we are in everything in our portfolio. Sir, just wanted to understand more on the product side. So will these products be totally import substitution products? What is the market size that we are looking at? And whether it will be a complete capture of market immediately ones we -- or are we at pilot stage, or have we got approvals for our products? Any rough idea on that?

Yes. So I think the FI addressable market for us remains fairly large. If you see fluorinated derivatives that the Indian industry serving is, what, more than $4 billion. That's the broader market sense. India does import a lot of fluorinated derivatives, and as the buzzword is going on, a lot of new assets are being setup in India to either serve import substitutes and some international customers that require these products in different geographies. So I don't think it's one or the other, but combination of both that will feed our growth.

We'll take our next question from the line of Rohit Nagraj from Emkay Global.

My apologies if this question has been answered, I was dropped off in between. Sir, the first question is in terms of the dynamics of the acetic acid, if you could just give us what has changed over the last few months that the pricing has come off drastically? And are there -- I mean, what are our expectations given -- is there any demand side issues which we are currently facing or we are expected to face because of the -- maybe non-availability of raw material or probably some demand decline from the user segments?

Sure. So first on the acetic acid, like we mentioned earlier, raw material prices constantly fluctuate for various factors. This is a large global commodity. So we're not in the business of predicting what the price will be. We are in the business of managing spread and risk and ensuring we are able to expand on that. So we're fairly agnostic to where the raw materials are. Now, on the -- sorry, what was your second question again?

Yes. So is there any demand side issue for acetic acid, which we have experienced or how the things are moving from that perspective?

Acetic acid is not our sale product. Therefore, I wouldn't be able to comment on that.

Sure. Got it. Sir, the second question is, Partha sir indicated that we expect this year to be better than last year. So -- and given that the commodity prices have come down, what gives us confidence that we'll be able to do better? So if you could just give subjective assessment in terms of future of the business segments where we see traction in terms of the new products in terms of the volume growth? And obviously, there'll be contribution from SI segment as well. So just your assessment how the growth is likely to come during the FY '23?

Sure. So if you look at -- if you take a step back and look at our model, right, there are 3 businesses sitting within us which are all connected in some way. The Acetyl business continues to have and operate within a band as mentioned and have fairly high asset turns. The Specialty is growing via CapExes and the FI is a brand-new platform that sets us up in a very exciting, a new space which will also grow by CapEx. You've seen our CapEx numbers that we've been putting into the business year-on-year not only right now and CapExes have delivered. And we've constantly grown our business in steps, which is what you will continue to see as our strategy going ahead as well. So irrespective of where our Acetyl's business margin profile lies at the higher end or at the lower end of the curve, our CapEx and growth projections are towards our SI and FI businesses.

Right, sir. Got it. Just one request since the year is over and probably from a modeling perspective we need the CapEx number. And as you rightly pointed out just now that is going to drive our growth. If it is possible for us to share that number, on a, at least on a yearly basis that would be really helpful. And best of luck.

Our next question is from the line of Dhruv Muchhal from HDFC Asset Management.

Sir, just one clarification for the AI business, the capacity last year was 1.6 lakh tons. With the Yellowstone, I was building about 2 lakh tons, but the presentation is 2.33 lakh tons. So the incremental has come because of the debottlenecking that you mentioned earlier. That's right, sir?

Yes, it is.

Okay. Sir, this Yellowstone acquisition, is that part of our numbers? I mean, is that consolidated or not yet?

It is part of the consol numbers for half year.

For half year. Okay. Got it. Sir, the second is a bit related to the earlier question is on the demand. So we are seeing significant price increases across commodities or across products. So just trying to understand, just trying to get your sense, are you seeing some implications on demand at a broader level? Are you seeing some implications on demand or customers getting a bit back? Also, you have Europe as a decent exposure as in terms of exports. We are seeing a lot of price increases, the fuel price increases and some capacity closures or temporary closures there because of unviability themes. So, any thoughts on what's happening in terms of your products, any implication on demands that you see at least from a 6 months, 1 year, or probably relatively near-term -- medium-term basis?

Sure. So, first on the demand front, I think we are past the high watermark if you look at it on a general basis. And even at the previous high watermarks, we have not seen demand contracting because we find our products being essential to several applications and substitutes have tried to come in, but not been successful. So we've seen a fairly robust demand throughout last year, irrespective of the cycle. Regarding Europe, this is -- we find that it to be a larger opportunity as local producers over there have a significant increase in the energy costs, which might give us some opportunities to play.

Okay. But from a demand perspective, that does not have any implication because I was actually coming from demand, but you mentioned interesting point in supply that opens an opportunity, but from a demand angle, does it have any implication, some of the chemical producers shutting there temporarily or something?

So, we have not seen that in our segments. Yes, there has been shutdowns or trimming of capacities as far as possible in the overall industry, but our segments have been fairly unaffected.

Sure. And on the second point that you mentioned the supply that benefits us because for us the cost of the fuel or others will not increase as much as probably for the Europeans and hence that puts us in a better position.

That's right.

Our next question is from the line of Rohan Gupta from Edelweiss Financial Services Limited.

Sir, couple of questions. Sir, first is on your SI business, we have seen that in the current quarter, the exports growth has been pretty decent and roughly 39% of the business in the Q4 has come from exports, which is much higher than the 29% contribution came in Q3 and definitely much higher than 19% in last year. I just wanted to understand that, is there any competitive pressure you are seeing in the domestic market? Because it seems that in Q3 versus Q4, you have lost probably some business in domestic market, while the growth has been coming mainly from the exports. So just wanted to understand that what can be the possible reason for that, that losing domestic market in SI business?

So we had stated our strategy of going into exports almost a year ago. So I think this has been very strategically driven over a long period of time and this is a resultant of that. Losing domestic share to another competitor coming up or another import substitute, you will have some changes happening quarter-on-quarter but our trajectory for export has been strategically driven.

So, sir, you are saying that this is intentional and I understand that we are in a hunger to grab more market in exports, but that doesn't mean that we may lose the domestic market until and unless we have some capacity constraint, which I think that is in the case of our company. We still have some surplus capacities available. So, I was not able to comprehend that whether it's the competitive pressure, which is driving the domestic market. Or as you did mention that your focus is more on exports, but I just wanted to understand that focus on export should not be coming on the cost of domestic markets, isn't it?

I mean, I don't have much of a comment to add on that, but I'll just say that we are operating our business strategically where we value both markets and we are serving customers everywhere.

Right, sir. Sir, going forward once again in SI business, so now fairly almost closer to 40% of the business coming from export. So just want to understand more strategically that what kind of margin difference is there in exports versus domestic? And does this exports market gives us more comfort in terms of any kind of volatility or easily passing on of the raw material volatility versus domestic? I just wanted to understand what are the key differentiating factors between the domestic market and export market?

The margin profiles between the domestic market and the export markets are similar. That's number 1. Yes? In specific product ranges. But it is not that every product is sold in the domestic market and the same product is sold in the export market. We have a large basket of products. Yes? Now, if Harsh, you want to add something?

No, that's fair enough.

Okay. Sir, second is on our fluorination. So I believe that our plant, as your presentation already mentioned that we are on track to commission this by end of Q3 FY '23. However, we have definitely did have some Kilo Lab trial runs which you have done on your lab. Just wanted to understand how we are progressing in terms of reaching out to the customers in Fluorospeciality? Because this is a new business for us and new more complex chemistry for us. So how we have approached to the customers in terms of trial runs and sampling? And how do you see that the customer acceptance has been there towards the Fluorospeciality business?

So we -- in Italy, we have luckily been able to get a company with a fairly rich history of more than 50 years of producing some of these products. So customers we have seen have generally been very receptive and happy to see the company get a new life in India and get the advantage with Laxmi since we share existing relationships with a lot of the same customers. The sampling plan is going off fairly well. And there is a whole way that we have set forth with customers of how we are going about it and that remains on track.

Sir, just last one, if I'm allowed to ask, otherwise, I can come back very well in the queue. On this diketene, as you know that one of our closest competitor have entered into diketene and have commissioned the plant. So do you see that the product basket which they are developing as a compete with your product basket in diketene? And is there any kind of pricing-related competitive pressure you are seeing in the diketene derivatives? Or are they have a completely different set of product basket, which is not competing with yours?

So I think competition has not just been there today, but been there from international sources since we existed in this business in the same product basket. So competition has always existed. And we've been able to perform and consistently grow across products and new products throughout the decade, which we'll see continue to grow. We've explained some of the competitive advantages that we have as Laxmi in this business, and we think that will keep us in good stead for the times ahead.

Mr. Gupta, may we request you to return to the queue, please?

Sure.

We'll take our next question from the line of Tarang from Old Bridge Capital.

Couple of questions from my side. The one, has there been a change in your trade policies with your customers or with your suppliers in terms of taking credit or giving credit?

No, not really.

Okay. Got it. Second, just from a reconciliation standpoint, if I look at your inventories as on March '21, and compare it to March '22, inventories have moved up by about INR 170 crores from INR 203 crores to INR 373 crores. But when I go back to your cash flow statement, the delta on inventory or the working capital squeeze on inventory is about INR 123 crores. So if you could just help me understand that better? That's # 1. Number 2, how much of the delta on inventory that we are seeing is on account of prices? And how much of it is on account of holding on to additional volumes?

Can you -- Tarang, I think it is a very, very, very specific, if you wouldn't mind, we can take this question offline and we'll be happy to answer. This is fairly technical, we may have to refer to some of our notes.

Our next question is from the line of Rohit Sinha from Sunidhi Securities.

Some of my questions are already answered. I just wanted to understand the outlook on this Fluorospeciality business. So we have in the process of 14,000 capacity in this business and you have mentioned that INR 300 crore kind of order revenue would be there from at the peak utilization, I think. So, first of all, what would be the progression in this business once it is commissioned? And secondly, what are our plans to basically invest more on this? Or how we are looking to add capacity on this Fluorospeciality going forward?

Sure. So, again, we spoke about this, we're happy to speak again. The size of the opportunity that is available that was opened up to us with the SI business is fairly large. What we achieved with the SI business in a fairly -- in a much smaller market was we took a few years to establish the base very strongly and then allowed us to multiply and get into either downstreams or find our own niches in the market. McKinney had a very strong base in which they were operating in Europe and they could operate in Europe in a healthy manner and we're looking to extend that over here and possibly do it much faster than what we did with the SI business.

Okay. So maybe you are mentioning that all those customers who are with McKinney would be -- I mean, our initial customer would be in the similar profile, right?

Exactly. So the existing customers of McKinney [Foreign Language] they're fairly similar, which gives us a good starting point.

Great. So, just that is what -- I mean, going forward, how we are looking to scale the capacity, I mean, from this current starting in -- I mean, next maybe 3 years, would it be possible or would it be 100% utilized and would be looking to add another -- putting up CapEx in that?

That's exactly in the vision where we've bought this platform because we see the larger, much larger addressable market available. And this is really just the first phase and we are just allowing ourselves some time to establish the platform and absorb the technology safely and successfully, which then allows us to invest more and grow this business significantly.

Okay. And the margins in this Fluorospeciality would be how much in the northward of what we are currently experiencing, if at all you can mention?

We benchmark ourselves with other peers in the industry. So you can think of it like that.

Thank you. That was the last question. I would now like to hand the conference back to the management for closing comments. Over to you, sir.

Thank you very much. I hope we've been able to answer most of your questions. And if there is anything that still remains to be answered, please feel free to send us a mail, and we will talk to you or discuss and send you the relevant answers as soon as possible. Thank you for your patience. Thank you for your time. Thank you for your support and thank you for being with us. Thank you, everybody.

Thank you, members of the management. On behalf of Laxmi Organic Industries Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.