Neogen Chemicals Limited (NEOGEN) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 and FY '23 Earnings Conference Call of Neogen Chemicals Limited. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Nishid Solanki from CDR India. Thank you, and over to you. Thank you.

Good evening, everyone, and welcome to Neogen Chemicals' Q4 and FY '23 Earnings Conference Call for analysts and investors. Today, we are joined by senior members of the management team, including Dr. Harin Kanani, Managing Director; Mr. Anurag Surana, Director; and Mr. Ketan Vyas, Chief Financial Officer. We will commence the call with opening thoughts from the management, post which we shall open the forum for Q&A where the management will be addressing queries of the participants. Before we comment I would like to share our standard disclaimer. Certain statements made or discussed on the conference call today may be forward-looking statements. The actual results may vary from these forward-looking statements. A detailed disclaimer in this regard is available in Neogen Chemicals Q4 FY '23 earnings presentation, which has been shared earlier. I would now like to invite Dr. Harin Kanani to share his perspectives. Thank you, and over to you, sir.

Thank you, Nishid. A very good evening to everyone, and thank you for taking time out to join us on Neogen Chemicals' Q4 and FY '23 Earnings Conference Call. Hope everyone is keeping safe and in good health. We reported our financial performance on Saturday, 13th May 2023 and subsequently circulated the results documents. I hope you had a chance to glance through them, I will take you through the performance highlights update on expansion initiatives and several developments that occurred during the period under review. FY '23 was a landmark year for us. Not only did we report a solid financial performance, but also relentlessly brought towards executing several critical opportunities that would lay a strong foundation for our ambitious growth plans. We entered the year on a challenging note mainly influenced by Russia and Ukraine conflict that disrupted the global supply chain has resulted in steep inflation in RM cost, utilities and adverse movement in foreign exchange rate. I'm glad that we stayed nimble and navigated through these pressures to report a healthy performance in a difficult operating environment. I would like to thank all our employees who displayed resilience and supported us in this endeavor. Let me quickly summarize some of the key financial highlights for the year. Revenues grew by 41% to INR 686 crores as guided earlier, while EBITDA came in at INR 112 crores, higher by 29%, profit stood at profit after tax stood at INR 50 crores, an increase of 12% year-on-year. Performance was feared by incremental contributions from expanded activities and demand for strong lithium derivatives, favorable product mix change towards value-added products as well as lithium prices. We continue to witness [ sharp ] volatility in input and logistic costs, volatility in pharma demand and lithium prices which we were able to pass on to our customers with some time lag, thereby protecting the absolute earnings. For FY '23, we reported 28% increase in organic chemical revenue which was largely volume driven, while inorganic chemical revenue grew by 90%, a large part of which was on account of significant increase in the prices of lithium raw materials and the balance of contribution by new customers that we added during the year. Having said that, RM prices linked to lithium have pulled off post Q4 and in part of which will be visible in the current year. I will now share some crucial developments that occurred in this quarter, which will see our performance momentum going ahead. Firstly, we acquired 100% stake in BuLi Chemicals India, which owns and own the technology to manufacture and N Butyl lithium and other organolithium products using lithium metal. This acquisition was completed on third May 2023 pursuant to which BuLi Chemicals has become a wholly-owned subsidiary of Neogen Chemicals. The acquisition is expected to significantly boost Neogen's portfolio by offering Lithiation reaction to existing customers as well as new pharma and agrochemical customer. In addition to this, we will further strengthen and help scale up the advanced intermediate and CFM manufacturing business. Secondly, in the major development, we signed a landmark agreement with MU Ionic Solutions Corporation in Japan, MUIS a Mitsubishi Chemical Group Company to acquire technology license for manufacturing electrolytes in India. This is a historical development for us as MUIS, a global leader in electrolyte manufacturing has issued its first ever license to anyone in the world, and they have chosen Neogen Chemicals. This will bolster our growth initiative in the battery chemical space. It will ensure that our electrolyte plant meets the stringent global standards for quality, reliability and efficiency. While helping greatly in reducing the approval time for lithium-ion battery makers. Both these developments are a testament to our promise and commitment towards building a solid foundation for the future. I believe this will significantly strengthen our competitive position in the market as we expand our R&D progress across several chemistries to offer deep value to our customers. Moving to our expansion plan. Our CapEx initiatives are underway and well on track. We have increased our reactor capacity for specialty organic chemicals by 31-meter cube in Q3 and Q4 FY '23 and additional 29-meter cube will be added by September 23, as per earlier plan. Within inorganic chemicals, we completed the expansion of our lithium salts to install up to 2,400 metric tons, which is coming from 30-meter cube of reactor volumes by March 2023, 1 quarter ahead of schedule. For battery chemicals, the new capacity for 400 metric tonnes per annum for manufacturing, speciality electrolyte salt and additives will be commissioned by June or July 2023 as per earlier guidance, while manufacturing plant for 1,000 metric tonnes of electrolyte at Dahej, is also expected to be ready by September 2023 as per our earlier guidance. Further to this, we have started basic engineering work for the expansion project announced in the previous quarter. And the [ phases ] being plants in a phased manner. However, post our announcement with MUIS some of these projections around battery chemicals, including the capacities and revenues will change, and we will come back to you in a couple of quarters to share further details around that. Our planned efforts to increasing the contribution of advanced intermediate and custom synthesis and manufacturing is on right track, and we are witnessing higher contribution from value-added products that require multiple steps. In line with this, we are strengthening our R&D competencies, during the year, we added 82 new customers, which contributed 7% to our revenue, both within India and globally. Taking our total customer tally to almost close to 1,550 customers, in advanced intermediates, 1,500 customers. Currently, we have totally 245 products in portfolio and additionally working on 25 new products in our R&D which has a potential future demand potential of almost close to around INR 2,000 crores. Let me conclude by saying that we are prepared to embark on the next phase of expansion, showcasing our proficiency in multiple intricate chemistries and manufacturing capabilities at a larger scale. The demand situation remains favorable, and our goal is to sustain this profitable part of growth. That ends my opening thoughts. I would now request our CFO, Mr. Ketan Vyas to share financial highlights for the period under review.

Thank you, Dr. Harin. Good evening, everyone, and welcome to our Q4 and FY '23 earnings call. I will take you through the key financial highlights. Please note that these are on a stand-alone basis and based on year-on-year comparison. In Q4 FY '23, revenues grew by 30% year-on-year to INR 203.9 crores in FY '23, they grew by 41% year-on-year to INR 686.2 crores. The company achieved its highest level revenues driven by higher contribution from expanded capacity, consistent demand situation and a positive shift in the business mix towards value-added products. Organic chemicals stock revenue growth of 39% year-on-year at least INR 138 crores in Q4 FY '23, whereas inorganic chemicals revenue increased by 14% year-on-year at INR 66 crores. In FY '23, organic chemicals saw a growth of 28% year-on-year at INR 463 crores, whereas inorganic chemicals grew by 80% year-on-year to INR 223 crores. The domestic and export mix for Q4 FY '23 stood at 55% and 45%, respectively. EBITDA increased by 22% year-on-year at INR 32.6 crores in Q4 FY '23 and 29% year-on-year at INR 111.6 crores in FY '23. The company managed to achieve better EBITDA performance, even though there were considerable fluctuations in input prices, utility costs and adverse ForEx movements. This can be contributed to a positive shift in the product mix. Although there was an increase in cost components, it was broadly in line with expansion of revenue and when viewed as a percentage of overall revenue, the costs remain stable. Coming to the PAT performance for Q4 FY '23, it stood at INR 14.3 crores. And in FY '23, it increased by 12% year-on-year to INR 50.1 crores. The company's PAT performance remained robust despite several challenges. The finance costs were higher due to ongoing expansion initiatives and higher interest rate compared to the base year. Moreover, the depreciation was highly related to incremental reactors added during the year, which was not -- which has not yet reached full utilization yet. Net debt after including current maturities of long-term debt stood at INR 265 crores in FY '23. Remind on strong performance during the year, the Board of Directors has recommended a final dividend of INR 3 per share for FY '23, subject to shareholders' approval. Those were the key financial highlights. I will now request the moderator to open the floor for Q&A session.

[Operator Instructions] We have a first question from the line of Saurabh Kapadia from Sundaram Mutual Fund.

First question on the BuLi Chemical. So is there any seasonality in the business or the revenues will be equally distributed in the quarters?

So whatever we have seen for [ post that ], this should be more or less uniform because it goes to pharma customer. However, the BuLi Chem people were actually focusing only in the India market. whereas we have an opportunity to also sell this internationally in markets such as Japan, Korea and Europe. So we are still not yet aware if there is a seasonality or like if the revenues in the international market would be a bit lump depending on our business development activity. But at present, we can estimate that, let's say, maybe this quarter, we just completed the acquisition and now getting ready to start operations importing the raw material and other things on our own. But from Q2, Q3, Q4, you should see uniform -- more or less uniform revenues coming in.

So what is the litigation level for other plant? And how -- what could be the peak -- a [ peaker ] any work we can achieve from this current capacity?

So this N Butyl lithium is heavily dependent also on lithium prices. So subject to lithium prices, it will be somewhere between INR 50 crores to INR 125 crores kind of a revenue potential, depending on how much lithium prices move forward. For the current year, I expect now lithium prices have cooled down a bit. So I expect somewhere around INR 50 crores to INR 75 crores revenue contribution coming in additionally from this business.

Okay. Sir, coming to our business, so what's the utilization levels for the organic capacity by when we should reach out [ optimal level ]?

So at our peak utilization with our existing installed reactor capacity was somewhere around INR 150 crores, and INR 150 crores per annum, and we are at around INR 130 crores, INR 135 crores kind of revenues, as you've seen from our results. In addition to that, our new reactor capacity is coming online. So with these new capacities coming online, we should be somewhere around like the total peak revenue potential would be INR 175 or INR 180 crores per quarter kind of a organic revenue potential. However, I think our capacity is coming online by September and maybe sometime in FY '25, we can reach this peak revenue potential of, let's say, close to around INR 175 crores, INR 180 crore crores sometime in FY '25.

Okay. So lastly, on the working capital. So if you look at the working capital that has further deteriorated compared to last year. So how we should look at the improvement by then that improvement will come through?

So basically, as we have stated in our last 2 calls, that like we were going through a significant change and increase in our capacity increase in product mix. And due to that, there was a higher working capital requirements, especially when we are getting the capacity to full utilization levels. So if you see, for example, our inventory increased drastically from almost INR 189 crores in March '22 to INR 282 crores by September 2020. And in that first 6 months, we did a revenue of around INR 300-odd crores. Now in the second half, we did -- like we increased it further from INR 300 crores to INR 400 crores, but the inventory has remained more or less stable. So basically to sustain the current level of business, we need somewhere around INR 280 crores to INR 300 crores kind of inventory. But as the utilization improves and as we reach our peak revenue potential, in terms of number of days we would improve. It's our target at like -- so if you look from even September to March, we have improved almost by 25 days and by, let's say, by FY '24, our target was to reach inventory levels of around 120 days on net sales. So we will again target the same that by FY '24, we will reach peak utilization in our Dahej and other facilities, and we hope to reach about 120, 125 days of net -- on a net sales basis, inventory levels more or less similar to what we had in FY '21.

We have a next question from the line of Nilesh Ghuge from HDFC Securities.

Yes. So my question is on the tax rate. So in our earlier conversation, you guided that for FY '23 will be in the range of 25% plus, plus or minus. But if I look at FY '23 number, the tax rate is about 29% plus. So can you guide us on how the tax rate will be in the coming years?

Yes. So with higher -- so we have completed majority of our CapEx in Dahej. And when we do like higher CapEx, it creates that additional depreciation, et cetera, which does not give us a tax level, significant profit, which is basically contributing to a higher tax rate. So since we have now completed majority of the CapEx is Dahej in Neogen chemicals and now we have only limited CapEx remaining. Our expectation and with Dahej now reaching full utilization levels. Over the next 2 years, we expect to like first start around 22% to 25% and then later on move to 20%, 22% tax rate over, let's say, next 2 financial years. This is our estimate based on our current projections for Dahej.

Okay. And on the guidance, whether on the top line guidance, you -- I know that you continuously are guiding us on FY '24 top line. But with the recent acquisition of this BuLi Lithium 100% acquisition. So can you just guide us on the FY '24 and then FY '25 top line number?

Sure. So I think originally, if you remember, our FY '23 guidance was around INR 600 crores. And like we have done INR 686 crore, but that was mainly driven by historically very high lithium prices, which is what we basically passed on to our customers. So if I were to do a correction of that, we would be somewhere closer to INR 600 crores, INR 615 crores in that range. Now in the current year, we have currently seen the prices have like reduced drastically and come down very close to what the original prices were, although they are still higher than the original prices. So therefore, like we estimate. So previously, we had given around FY '24 target of around INR 750-odd crores of revenue. So with the acquisition of BuLi Chem, what we estimate is at least INR 800 crores, INR 825 crores kind of revenue coming in on the stable lithium prices. And depending on how the lithium prices fluctuate above, it might be somewhere closer to around INR 850, INR 875 crores in that range. Basically, what we are looking like if we remove the like lithium price correction, we are looking at a 25% to 30% growth in our regular business, including the BuLi lithium business. And similarly, on our EBITDA also, we expect around 25% to 30% increase over our current year revenue. Our current year EBITDA performance. The exact top line will depend upon how much lithium fluctuate during the year.

Correct. Absolutely. So this one is my understanding. Just correct me if I'm wrong. So the current -- as you mentioned in your initial comment. You commented that lithium prices are already -- they corrected but still on an elevated level. So with that current lithium prices, you are guiding INR 850 to INR 860 for your base business, should we expect lithium?

No. I was saying -- see, our base business was supposed to be around INR 750 crores on stable lithium prices. Okay. So with BuLi Chem and with some slightly elevated levels of lithium will give you somewhere in the INR 800 crores to INR 825 crores range, okay? And again, if the lithium starts moving up significantly, then it might reach somewhere around INR 850 crores, INR 875 crores in that range. Basically, like on a stable lithium prices, we would estimate like the 25% to 30% increase and on both on the base prices on the base revenue of around INR 600 crores as well as 25% to 30% increase on our EBITDA levels. That is for FY '24. And for FY '25, like again, as we reach full utilization levels by FY '25, '26 as we have given a guidance depending on the price of lithium, we should be somewhere between INR 900 crores to INR 1,050 crores. And of course, this is based on the CapEx, which we have committed till now for our regular business and BuLi Chem. We consider BuLi Chem as a part of -- like very similar to our existing business because the end user industry is pharma agro and similar to that.

Okay. And just one clarification. I see, you mentioned that you will again revise your CapEx for your electrolyte maybe after 2 quarters. Is it correct?

Yes. I think maximum within 2 quarters, we should have a clear idea on the CapEx, how like whether -- how we are going to face to the 30,000.

Okay. And after that, you'll require minimum 18 to 24 months to put up the plant steady up and ready.

So after that, we would require somewhere around 15 to 18 months.

[Operator Instructions]. We have a next question from the line of Sabyasachi Mukerji from Bajaj Finserv AMC.

Sir, my first question is on the gross margins. So if I look at the gross margins for the current quarter, you have been doing 43%, 44% gross margins in Q1, Q2, Q3, but it dropped to 40% levels. The inflated prices were there in Q1 to Q3 as well. I understand that the math. But what is the exact reason for this dip, and how should we look at gross margins going ahead?

Sure. So one is as the main contributor for this is the peak lithium prices because lithium has its peak in December, Jan, which is what the inventory that we consumed by March. So that was one of the factors driving that. And historically, as we have said that previously, we had we used to always share our gross margin was 40%, plus or minus 2%. And in the last call, what we had said we see now more like 42%, plus or minus 2%. So it's kind of moved that 2%. So depending on a year-on-year or quarter-on-quarter. And again, gross margin and the advance and the manufacturing cost goes hand in hand because depending on the product mix, some products require have slightly better gross margin but then the processing cost could be higher. So overall, like we had such there is a 2% shift on that, and we maintain that. It will be like 42%, plus/minus 2% in that range, in a normal case, bearing some large movements in lithium prices or other raw mix price.

Okay. So there is a comment on the press release as well as in the presentation that you have seen a noticeable shift in the share of value-added products. And if I just adjust the revenue of [indiscernible] [ CapEx to ], let's say, INR 600 crores or INR 650 crores that we have been saying, just eliminating the inflationary inflated part because of the lithium prices, gross margins of -- the gross profit of INR 298 crores on the base of 650 crores translates to a gross margin of 48% and EBITDA margin, of again, INR 112 crores upon INR 650 is around 18%. So on INR 650 crores, this gross margin looks very elevated. And the shift of value-added products with CSM business if you can guide whether this is sustainable and 45%, 48% gross margin, are we looking at those margins in the near term?

Well, there are a few molecules which give us that. And ultimately, we'll see a -- I feel this lithium, high lithium prices is going to be like maybe 1 or 2 years more, then it will kind of stabilize. But based on whatever I see now, I look at around 42% -- like my guidance would be 42%, plus/minus 2% would be the gross margin we should look at in the near term. Until we have a fatality of a gross margin better than that, we'll let you know.

Okay. My next question is on the lithium, salt and electrolyte, just wanted to know about the manufacturing process. I understand that we will start with lithium carbonate that will import. But if I look at LiPF6, what are the other key raw materials -- and if fluorine is the raw material, then how are we -- how is the readiness in terms of having fluorine or [ HF plant? ] Are we getting an [ HF plan ]? What's the process on that?

We have to bought out there on the raw materials also they are domestically and we like work with some of the domestic producers, sometimes multiple of them and like basically have basic understanding in place or a long-term supply contract or supply security with them. We can get into the final contract just like we can do with lithium. Once our customers start signing up like a long-term contracts, but we have already reached an understanding with the suppliers of other raw materials of HF and offer us raw materials required for making LiPF6.

Okay. Lastly, my question on the BuLi Chemicals. So if you can please explain this nedd of this Lithiation reaction and the use case because one, if it is one of the few plants just outside China, and we don't have an access to it. While the revenue is so low, just INR 82 crores, and that's outside, I believe, because of the inflated lithium prices, what is the kind of revenue potential you see next 2 to 3 years from this?

So you have to basically remember that the existing plan, which was set up by Livent, and Livent has its own plant in U.S., they had a plant in U.K., they had a plant in China, and this was their fourth plant. And originally, there is a plant in India as a trial facility with a plan that they will expand it in the future, but like as India demand fits us. But currently, they basically kept it at the level. So like when it was Livent, they had like multiple locations worldwide, which are taking care of the world demand, and this was only based upon India demand. So currently, when we start with this plan with the existing capacity, as I said, depending on the price of the lithium, it can be somewhere between INR 50 crores to INR 125 crores, kind of a revenue potential. Now we are trying to do things to be bottleneck to get additional production permissions or like other -- like maybe also in future consider expansion if needed. But at present, with the capacities which are in place, this is the revenue potential.

And what is the margin profile of this asset?

Again, in -- so it goes more a little bit on absolute terms just because, like I said, price of lithium is one of the key contributors. So lithium metal is even more expensive than with lithium carbonate. So like what in a percentage point of view, like in a percentage point of view, the percentage varies quite a bit depending on the lithium sizes. However, we feel -- I think we should be able to get existing EBITDA levels or better in that -- and also, as we operate this more, we should be able to give you a better guidance on what is the future revenue potential. We are also excluding, as I said, international markets, not just domestic market. So we'll also see like it's again a complex commodity to ship worldwide. So let's do some more trials understand and then we can give you further better guidance on that. However, the main interest that we also have is, if we can use this for making more complex or more value-added advanced intermediate. So basically, we also hope that a significant portion of this is consume in-house by our Dahej unit for the lithiation reaction, and that will allow us to increase the contribution of either CSM or advanced intermediate, and basically be the stepstone on which or be it the foundation on which we can plan our future growth. So just as, we have been using our expertise in bromination and grignard with this, we are becoming better expert of lithiation and then that will allow us to attract more projects related to lithiation and therefore, have a more long-term growth, one more long-term growth area where we can base our future expansion and growth in our regular pharma and agro business.

We have the next question from the line of Sudarshan Padmanabhan from JM Financial PMS.

My question is to understand a little bit more on the organic segment of the business. If you can talk a little bit more on -- you talked about the supply/demand scenario, seeing a little challenging for the China issue and Russia issue. So on this side specifically, if you're going through subsegments of pharma and non-pharma, are you seeing any kind of weakness in terms of demand, in the subsegments. Just on the supply-demand scenario, we have actually seen a kind of a fair amount of volatility in terms of end prices as well as raw material prices. I mean if I'm just taking the kind of guidance of either Albermarle and ICL. I mean they have called out for near-term weakness on. It might not be apple to apple, but believing that the near-term inventory plan would be allowed from a near-term perspective. So just wanted your thought process on the raw material prices as well as your end products.

So we've seen lithium prices, as I mentioned, like reached the peak in December and then even January was a bit uncertain, but from February, March onwards, we have seen a step-by-step decrease. And like we feel -- we even saw -- achieve a near-term bottom in April and then now again, we are seeing lithium prices and other prices again pick up. But again, we don't know whether that will sustain. And if it again goes back beacuse it's very difficult to predict, like mainly what we feel is that just as India worries lot about all its imports and especially oil has import. Lithium at gross price levels and with the contribution with the amount of business, which happens for lithium and batteries in China. China's import bill was going very high because of the high lithium prices. And I think the country as a whole seems to have done collective inventory correction to put pressure on lithium markets and we believe that is not corrected the price. But whether they can sustain that because the demand for the EV, the demand in the U.S. for electrification for energy storage continues to remain high. So ultimately, I feel, again, in near term, the prices should again move up for the next 2 years and like I said that the next 2 years is going to be volatile. And after that, it should stabilize on a long-term new lithium average price. So this is my view on lithium.

On the Bromine side, I was referring more on the Bromine side, you've already commented on.

Okay. On the Bromine side, what we've seen is that worldwide, like the flame retardant market, especially in China, has become weak. So as we said earlier in our call, 90% of the bromine we used for the [ bulk bromine ] usage. So at least from what we can tell or what you got in the feedback, the flame retardant market in China, the demand of flame retardant has reduced significantly. Part of it is because ICL and Albemarle have increased the capacity. And part of it is just a lower demand because less exports are happening in the international market with the weak climate worldwide. So because of this high FR inventories and low FR demand, the bromine prices have corrected significantly. So that's been the major reason, in my view, for the correction in the bromine prices.

And I mean, would we be able to take advantage and lap it up? I mean because if the inventory correction happens, and the demand picks up, it could go up. So I would assume a part of the working capital would be towards this as well.

Yes. So our aim always is to basically pass on the benefits as well as the pains to the customer. So in this case also, we'll not look at benefiting from it. And historically also, we've been able to pass on if we have some inventory majority of this like we are able to pass it on to the customer and make sure we average it out or something. So you might have some Q1, Q2, you may see some fluctuations. But overall, when I look at the whole year, it should be more or less okay.

And on the demand side, I mean, should -- I mean, on the organic side, given that, again, on the non-pharma side, we are seeing some kind of mixed commentary that it could be dual [indiscernible], et cetera, I think that is something that's going around. How do we see the demand for pharma and the non-pharma part for the year?