NGL Fine-Chem Limited (524774) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '22 Earnings Conference Call of NGL Fine-Chem Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rishav Das from Pareto Capital. Thank you, and over to you, sir.

Good morning, everyone. This is Rishav Das from Pareto Capital. We represent Investor Relations for NGL Fine-Chem Limited. On behalf of NGL Fine-Chem, I welcome you all to our Q3 FY '22 earnings conference call. I have with me from the management, Mr. Rahul Nachane, Managing Director; and Mr. Rajesh Lawande, Whole Time Director and CFO. We will have brief opening remarks from the management, followed by the Q&A session. Please note that certain statements made during this call may be forward-looking in nature. Such forward-looking statements are subject to certain risks and uncertainties that could cause our actual results or projections to differ materially from these statements. NGL Fine-Chem Limited will not be in any way responsible for any action taken based on such statements and undertakes no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances. I would now hand over the call to Mr. Rahul Nachane for his opening remarks. Over to you, sir.

Hi. Good morning to all of you. Thank you for joining us on this call. Let me open with a few remarks on our performance for the quarter and strategy going ahead. Strong volumes plus an increasing market penetration of our major products contributed to a revenue growth of 12% year-on-year for the quarter to INR 81 crores, and 21% (sic) [ 28% ] year-on-year for the 9-month period to 3 -- INR 235 crores. Our veterinary API business reported robust growth of 25% year-on-year in quarter 3 FY '22 and 37% year-on-year for the 9 months ended December. For our 9 months ended '22, Vet API revenues stood at almost INR 194 crores, reaching the full year previous amount of INR 199 crores, which was recorded in FY '21. We continue to have strong presence in APAC, which remains the largest market for us, with over 30% revenue contribution. Revenue from this region grew at 35% -- 37% year-on-year for Q3 '22 and 16% for 9 months for FY [ '22 ]. During the quarter, we faced a challenging macroenvironment with all our costs being impacted. Chemical commodity prices stood at an all-time high, while we also faced rising power and fuel costs and elevated freight cost. We have taken very limited price hikes so far, leading to our margins and profit being affected. For Q3 FY '22, EBITDA stood at INR 12 crores with a margin of 15.4%. What I would like to mention here is that there has been no change in our product mix. We continue to maintain the optimal mix. Margins have been solely impacted by the macroeconomic factors stated above. Profit after tax for the quarter was INR 10 crores with a margin of 12.3%. There has been a correction in commodity prices -- though there has been a correction, we expect the situation to be completely under control by Q1 FY '23, leading to subsequent normalization of our margins and profitability. Coming to our plans going ahead, we are pleased to announce the completion of our Macrotech expansion in the month of December. We have received all the approvals and have started [indiscernible] the facility. We expect to start commercial production from Q1 FY '23. Our plans to increase outsourced production is also on track. We have tested and considered multiple facilities, and we expect to attain 15% outsourced production by the end of FY '23. Additionally, our ongoing efforts and process improvements and debottlenecking activities are underway to help drive near-term growth. Our planned greenfield expansion at Tarapur is on course. We have recently started civil construction in the month of December, and the work is progressing well. The estimated CapEx for this project will be about INR 100 crores, which will bring in a 50% capacity addition and will be funded through a mix of debt and internal accruals. We expect to complete construction and start production in about 18 months. We aim to continue on growing our business by leveraging our robust balance sheet with a net debt free position and continue investing in maintaining our market position by remaining cost effective, reliable and offer high-quality solutions to all our customers. That's it from my side. We can now open the floor for discussions.

[Operator Instructions] First question is from the line of Rahul Jain from Credence Wealth.

In your opening remarks, you did allude to the rising commodity prices, the input prices? And also you mentioned in the presentation. So just to understand from initial numbers, I do understand that we haven't taken the price hikes or we haven't passed on the price hikes. So 2 parts related to this. One is, sir, our gross margins in last around 5 years have hovered around -- somewhere around 55% to 57%. And below 50% margins, probably we are seeing it for the first time after almost a gap of 5 or 6 years or maybe around 20, 25 -- 24 quarters. So we do understand that we are into a challenging environment. So firstly, do you envisage now taking some price hikes going ahead, passing on these hikes? Or is the strategy being to gain market share, which we have been continuously gaining for last 3, 4 quarters now or more? So what kind of strategy do we envisage, and what time do you feel our margins -- gross margins, I'm talking about, not EBITDA -- gross margins can be back in the range of around 55% from the current 48%, 49%? That is my first question.

Yes. Mr. Rahul, what we have for -- the strategy which we have formed is that currently, to a large extent, commodity prices being so high -- commodity and metal prices -- the factors controlling these prices are more or less out of our [ control ] because it's something which is affecting all the economies. In the short run, API prices, unfortunately, are pretty inelastic. They don't tend to go up as the chemical prices go up. So there is always a lag -- time lag in transferring price hikes to customers. Though we try our level best, then there is a solid resistance which comes in from customers to hold on to the price hike. [ The studies we have found ] is very clear that we will gain market share. Margins will normalize as and when these capital prices will start coming down. So we have already seen a trend by which the chemical prices have peaked around October, November. And we see that they are now coming down. So there's already been a reduction from the peak, which was, I think, during October, November. And we are fairly sure that by mid of this year, we should see the commodity prices normalizing and the margin will also start coming back around that time. During this period, we plan to hang onto our market share and expand market share as much as possible.

Sure. One thing I'd also like to add to what Raul said, so the price hike from the suppliers has been so quick, and it's been an all-time high. So we've not seen such a price hike on the raw material input costs before. So we hope that it will peter out, and it's already -- we are seeing a trend where it reduces. So it's been such a quick price hike that we're hoping that it peters out faster than before.

Hopefully, we should be back to our normal gross margins somewhere around quarter 1 of FY '23 or maybe maximum by quarter 2 FY '23. Is that a fair assumption?

Yes, that's what we are fairly confident of, yes.

Sure. And my last question, sir. On the split of sales, geographical split. So my observation has been that, well, we have done very well on the Asia Pacific, Rest of World and U.S. markets. Of course, the world and U.S. markets are still quite smaller compared to the other 3 markets. So out of the other 3 large markets, Asia Pac has done exceedingly well, but Europe and India, both these markets right from quarter 2 of the current year and even in this quarter, either have degrown, or we have had just a flattish kind of quarters. In your last quarter con call, you had mentioned about Europe being comparatively slower than the other markets. So if you could share some insights on how these markets are doing now? Is it that the kind of product which we are doing has somewhere reached the mature stage? Or overall the market is slow? Or how do we try to get back to some better growth numbers in Europe and India markets?

Yes. Europe is slowing down for sure. So we don't see a very large growth coming in from there in the short term. But as the pandemic effect starts lessening on the economies, we are fairly sure that Europe will start coming back towards the later part of this year. So we hope to see some pricing coming in from Europe post July in the current year. The Indian market is probably again because when Omicron came in, there was a little bit of, again, [ supply-based disruption. ] But it's something which is -- one shouldn't look at it at quarter-on-quarter because there is a certain bit of seasonality also in products. Year-on-year is a much larger period, which gives us a better result on various markets. And if we are looking at the 9 month performance, then we are already looking at a fairly large growth in most of our markets.

Sure, sir. Sir, basically, I wanted to understand directionally, there is no issue in both these market. It's just mostly [indiscernible]. Is that correct?

Yes, remember, we don't expect it to grow much again for the first calendar half of this year. We think it will start moving only in the second half of calendar year 2022.

Our next question is from Dhwanil Desai from Turtle Capital.

Sir, the first question is on our revenue. So I think we did around INR 80 crore quarterly revenue this quarter. As you mentioned in the presentation, Macrotech commercial production will start from first half of next year. And also we are trying to work on the outsourcing part and debottlenecking. So all that put together, is it -- is there a room to add INR 60 crores, INR 70 crores of revenue before the greenfield plant come on stream? Is that a fair assumption to make?

Yes, we expect Macrotech to contribute roughly about INR 50 crores to our revenues once it reaches capacity utilization -- 100%. It might take a little longer than a year. So probably it will optimize maybe in '23, '24. But it's -- along with outsourcing, yes, we would look at around INR 50 crores of our growth coming next year, yes.

Okay. Great, sir. My second question is on the poultry products that we have launched, if you can talk a bit about the traction there. And I think 2 of the products were still not commercialized and at the validation stage. So any update on that would be...

I don't know -- all products which we have introduced, save for 1, all are in commercial production now. So we have 22 molecules in commercial production. We have about 3 molecules right now, which are in pilot plant trials. And 2 more which are in R&D development stage. So we have got a further 5 products in our product line up, which will get commercialized in the current year.

Okay. And this, I think I probably you mentioned this but our current product basket is sufficient to occupy the capacity of the new CapEx, greenfield CapEx that we are planning? That is the road map with which we are moving, right?

No, we will definitely need to add new products because existing products only will not help us occupy it. It will create capacity which we are creating. We will definitely need to keep having products as we go along.

Okay. So in addition to this 27, 28 products that we have, there will be further new products which will be added, which will be commercialized in the new plant that we are putting up?

That is right, yes.

Our next question is from [ Ankit ] from [ Bamboo Capital. ]

Sir, if you can dig a little bit deeper on our strategy of capturing more market share and retaining our market share and not increasing prices? Because last year also, we did capture quite a bit of market share by -- because of -- during the COVID wave, and we grew our top line quite well. And even in this year, despite margin pressure, the top line has been able to -- has, in fact, grown on a Y-o-Y basis. So if you can dig a bit deeper on this capture market share strategy? And secondly, what if the prices of raw material remain elevated for a longer time? Let's say, if we are assuming them to come down over the next few months, but like what will be your strategy to pass on the prices if raw material prices and commodity prices still remain elevated for a longer period of time?

Okay. So you are saying what is our strategy for markets going forward?

Sir, our strategy on retaining or gaining market share by not increasing prices of APIs despite such raw material pressure?

Yes, okay. So not increasing prices does not work because we have to react to the market. A number of products where we are -- which we are manufacturing, we are increasing prices and passing on price increases to customers. As Rajesh mentioned earlier, the price increase in raw materials has been very abrupt and very fast. So our ability to pass on price increases quickly to customers was hampered. So as a result, now for example, we have, even in small business, we have [indiscernible] for customers. Now the commitments which are already made, we cannot changes prices of those. But whenever we are buying in the current commodity market, we are taking higher prices. So that ability to pass on in the short term is impacted. But in the long term, we have to pass on price increases to customers. Otherwise, there's no way that we can survive in this market. So we will definitely be passing on price increases. That is not within question at all. But whether we pass on the full price increase or we pass on part of the price increase and absorb a part, it becomes a [ parity ] of how we want to play in each market and looking at what kind of customers we want to retain.

Sure, sure. And let's say, if the prices remain elevated for a long time, eventually, over the next 1 or 2 quarters, we will largely pass on the price hike to our customers?

Definitely, yes.

Sure sir. And sir, on this in -- our strategy on expansion. So post the [ downstream ] completion of the Macrotech expansion and the new Tarapur plant that is coming, the greenfield CapEx facility that is coming in and expected to be completed by [ March ] [indiscernible] FY '22. So apart from that, any other new land that we have acquired or we are planning to acquire and apply for EC approvals? I know we have had challenges in getting EC approvals. And [ we had ] taken Tarapur EC approval almost 2, 3 years [ back. ] So any such strategy for the new land acquisition and getting EC approval well in advance?

What is the last part, strategy for?

For new land acquisition for plant and getting EC approvals for that as well?

So we hold land in Mahad and in Ambernath. We have progress towards applying for EC for those because there's still time now and we are doing a very large investment in Tarapur right now. But yes, when we have our budget for the next 5 years to set, [indiscernible] we will definitely be looking at ensuring that prior [indiscernible] periods are issued well in advance of initiating the CapEx work.

Sure, sure. And it's actually great position in the company now thinking about 5 -- 4, 5 years. Earlier, you used to tell us that we think of a year or 2 in the future but not beyond that. So it is a great thing that we have started -- are starting to plan ahead by 4, 5 years at least.

[Operator Instructions] The next question is from [ Venkat ] from [ Three Signal Financial. ]

Thanks for the opportunity and for the good set of numbers in difficult times. Sir, one question I have is -- you know Macrotech is going to start producing intermediates. So would the pressure that we are seeing in raw material, would that subside? So would Macrotech actually use key starting material to produce those intermediates and APIs -- or the APIs?

No. What we are doing in Macrotech, sir, we are adding volume. We have already been manufacturing these intermediate ourselves in NGL. But now, we are -- as the [indiscernible] products starts going up, we need to manufacture more qualities of these intermediates. So that is the aspect that Macrotech is helping us to do.

Sir, it is not backwards integration?

No, we are already fairly backwards integrated. So we don't want to backward integrate further, but we want to add greater volume to our existing products. So there, let's say, we were producing 20 tons, the idea is that we should be able to produce 50 tons of their product themselves where we gain greater market share of those products also.

Sir, I have 1 more question. So for instance, if the raw material cost, whatever we are buying, if it is at some stage, not [indiscernible]. So would it be cheaper to probably outsource some of those [indiscernible] into whatever stage that we are buying? Will that actually improve the cost? Just a hypothetical question.

So what we do is that we do outsource a lot also. And our idea is that, as we have said, over a clear period, we would like to increase our outsourced production from 5% to 15%. So there, technology is not surprising. There, technology can be repeatable. And there, [ full converter ] has lots of expertise in that particular type of chemistry. Yes, we outsource in those type of areas. But where the technology is proprietary and it is something we have developed and we do not want the market to know, then we will finish those intermediates and not have them manufactured somewhere else.

Okay. Sir, my next question is on the steel prices have gone up and some of the commodity prices have gone up. [indiscernible] cost overrun for the subsequent project. So what is the percentage of the overrun? And how are we going to cover this overrun? Because we have budgeted some amount, 100 crores, of loan plus the accrual factor, internal accruals. And internal accruals is coming down, so would there be any additional fund requirement?

So we had budgeted based on the cost pivoting probably around mid of 2021. And since then, the costs have gone up. So we are right now in the direct drive of finding out what the new prices are. And this will get done around mid -- around end of March or mid-April, we will arrive at exactly whether -- what will be the extent of the cost overrun. But we hope that it should not be more than a 10% sort of situation at this juncture.

Next question is from Balakrishnan from ithought PMS.

Am I audible?

Yes, you are.

So Rahul, just a couple of questions on this new Tarapur facility that we are doing, the INR 100 crores CapEx. So just wanted two clarifications. One, by when will this be operational? Based on your presentation, it seems H1 '24. So just wanted to clarify that. And second thing was that historically, we have seen that our asset turns have been around 2, 2.5x. So will this also see the same kind of asset turn? So that was my first question.

So you are right in terms of timing, it will roughly take us between 18 and 20 months to set up the plant. We started in December. So mid '23 is what we expect the plant to be ready and operational -- August, September. There are -- EHS requirement is required going up drastically right now. And EHS is falling almost 20% of project cost, which was not so probably about 5 years ago. So asset turns may not be going up to about 2.5x, but might end up more in the range of 1.75 to 2x going forward.

Understood, understood. And in terms of -- I mean till this acquisition comes in place -- so we are doing Macrotech, which should come from the next first quarter of next year -- and also outsourcing. So till the interim of that time, can we continue to grow at 20%, 25% that we have been growing at over the last 3, 4 years with all the initiatives that we have been doing? So we are already doing INR 80 crores kind of run rate, INR 75 crores, INR [ 50 ] crores kind of run rate consistently over the last 3, 4 quarters. So can we probably add around INR 60 crores, INR 70 crores on top of it and then also grow? I mean, 20%, 25% kind of growth is feasible before the start up of the facility comes? That's it.

Yes. That sort of growth rate will be definitely throughout the year before this facility comes out.

Our next question is from the line of Aman Vij from Astute Investment Management.

My first question is, basically, 1 clarification first. You had mentioned that 15% outsourcing will happen in FY '23 itself versus earlier target of in the next 3 years.

No, it's a 3-year plan. We started this in 2021, and it will take us 3 years to meet that target of 15%. So in the current year, we have already added 5 different vendors with whom we have stabilized relationship now and quite a bit of production is being outsourced to them. We hope to add probably another 5 or more vendors. And then transfer technologies for additional products that we have -- products developed between the companies.

Sure, sir. My next set of questions is on the commodity price increase, fuel cost increase and freight cost increase. So if you can talk about what is it currently? So last quarter, we had like 25%-plus kind of commodity price increase. You mentioned it has come down a little bit, but what is it currently, these 3 metrics?

So it's been actually widespread, and it's been different for different chemicals unfortunately. There are some chemicals, which had gone up almost 3x as compared to what we were paying, let's say, in January this year. And some have gone up a little lesser. One which has gone up 3x are probably now down to about 2x. So they already retraced part of the increase which has taken place, but they are still high because they're still close to twice the price which we obtained last year, which is still better than what [ the prices was ] around October, November. There are some chemicals where prices are still not coming down. So it's overall mix which is affecting us. Freight has already started reducing. So freight had gone up almost about 8x to 9x. And from that peak, they retraced now to probably about 5x now. But we are slowly changing most of our contracts to FOB to pass on the freight element to customers. So as and when prices go up or come down, benefit is that we are not trying to do everything in that. Oil is still at a high. We are using gas in some of our plants and the gas prices are still at 2x. There is no softening in those prices yet.

Sure, sir. And the final set of question is on the product growth. So if you can talk about top 5 products, then 5 to 10 products and 10 to 20 products. So this is the kind of -- what kind of growth are we seeing in these 3 categories of products?

So in the top 5 products, we have seen a 21% growth. And in our top 10 products, we have seen a 26% growth. The next 5 products are now accounting for a larger cushion in our growth.

Yes. And the remaining sir, because we were talking about the product number 10 to 20 where there is maximum opportunity for taking market share since our market share is much lower there.

In our remaining products, we are seeing an 18% growth.

And this number is for 9 months or Q3 versus Q3 last year.

9 months. 9 months. I'm not talking about Q3. We are talking about the 9-month period.

Sure. And you expect similar kind of growth rate going forward like product number 5 to 10 growing faster than the top 5 product?

5 to 10 are definitely going faster because the top 5 is about 20% growth. And 5 to -- and the top 10 products are growing at almost 26%.

Yes. I'm talking about going forward the next couple of quarters, similar trend?

Yes, we see traction coming from the smaller and newer products quite a bit. So those are growing at a very healthy case right now.

Sure, sir. And 1 final question. On rest of ROW markets. So what is driving this big growth? Is it more geographies opening up for us? Or is it suddenly, those customers asking for much more volume?

Geographies are more or less the same. We are in 45 markets right now for the last 2 years roughly. If there is a new geography, and it is probably 1 or 2 here and there. But it's -- now the customer base is also growing a little bit. And at the same time, the existing customers are buying more because we are able to offer a wider range of our products to them.

Our next question is from the line of Rajat from ithought.

Sir, just 1 clarification to the previous participant, you said that we can grow by 50%, 60% before Tarapur plant comes up. So are we saying that from INR 80 crores revenue run rate on a quarterly basis, you can go to INR 120 crores before Tarapur comes up. Is that understanding correct?

Can you repeat that? What is the amount you are speaking about?

So from quarterly revenue run rate of INR 80 crores today, can we go to INR 120 crores quarterly run rate?

No. No, 50% growth, I think it was more in terms of absolute numbers, not. The 20% growth is what we are talking about 20%, 25% growth.

So broadly, you are saying INR 100 crores, INR 110 crores -- INR 100 crores, INR 105 crores before Tarapur comes up?

Yes.

Understood. And that would mean almost INR 100 crores of annual increments. So I assume...

In terms of 35%, I think almost which you are speaking about. So it's not going to be that high. The 20% growth rate is more like -- likely to take place.

Okay, okay. So broadly, that 20% would mean INR 65 crores kind of annual run rate. So I assume that you suggested INR 50 crores will be coming from Macrotech and rest would probably because of increased outsourcing. Is that correct?

I would not put down specific numbers from me because some would come from the increase capacity by Macrotech, some will come from outsourcing, some comes from making -- continue to see our existing plants, so it's -- some total of different things which we do.

Okay. Sure, sir. And sir, on the Macrotech, basically, it is not just the backward integration and not just the production, so production there is not going to be used only for captive purposes, but we are also selling the produce from there in the market, correct?

As of now, til now, Macrotech has been used completely as captive manufacturer. We haven't yet explored sales directly from Macrotech. But as and when as we keep on adding more products, that is something which we'll definitely look at.

Okay. All right. And sir, last question, how has been the traction so far for new products that we have launched in the last, let's say, 2 years?

Fairly good because the smaller products are growing much faster right now. So they almost double every year because the base is very small. So we are seeing a fairly good traction coming in from those products.

And they are largely selling in which geography?

It depends. So there are a couple of products which we have manufactured now, which are India centric. So the bases are more in India. But most of them are for different markets. Asia Pacific, rest of the world those kind of things.

Next question is from Sonal Minhas from Prescient Capital.

This is Sonal. I have 1 question. Just wanted to understand the customers with whom you gained market share. Just want to understand the pricing gap you have with these customers vis-à-vis your competition. Is the pricing gap still being maintained? That's one. And the second part, which is a follow-on to this one is the availability of the products from you as well as your competition? Why your competition finding it difficult to supply the products to your customers? And is that going to change over time, given the raw material supply eases off over the next 6, 9 months?

Yes. So pricing, in terms of pricing gap, pricing gap is something which actually maintained at any point of time because in a B2B business, customers will switch very fast if they find that prices are higher. Given nice prices are almost at every step. So there's no significant gaps. The gaps are more like 0.5%, 1% here and there. We can afford to work with 5% gap whoever the competitors are coming on that sell. The gaps are pretty narrow.

Okay. They have remained the same, even with these raw material prices going forward?

Yes, yes, yes. Every competitor has to react quickly to the market because if you don't, then you lose market share. First due to react will obviously have trouble.

Understand. And from a supply perspective, so were you able to gain the market share because of supply? And is that sustainable? I'm just trying to understand that part.

So market share is not the gain because of pricing all the vibe. Market share has also been because of other ineligible factors which go into servicing a customer in terms of documentation, quality systems and reliability of supply, ensuring product lines are operating at all points of time. So we have been able to deliver among those other funds also to our customers.

Understand. Got it. Okay. So the last bit of it was just to understand, your competition is not feeling or rather they are not short on supply of the products compared to you as we speak right now.

No, no, no. There are no monopoly sources, which we -- no, no, sources, which we can monopolize, sorry. So the same sources are available to everybody. So no, it's not -- there's no special supply chain benefit, which we enjoy as such.

Got it. So the differentiation in the markets or the gain in the market share is -- basis, what you just mentioned before that largely on documentation, servicing and...?

The liability, quality of product, pricing all that go together, yes.

Understand, that. Okay, that's it from my side. Okay.

I'd just like to add 1 thing here. Some gain, we gained market share only with someone else who do. What has also happened is the demand has increased, right, for -- and that's happened over the last couple of years. But we're selling a lot more because the market demand has increased. It's not just a zero-sum game that we play on.

Our next question is from the line of Ankit from Bamboo Capital.

Sir, it is really, I think you know that top 5 and even our top 10 products where we have substantial market share are also growing at 20%, 25%. So if you can broadly explain what is driving this growth for us? And how sustainable is this growth in top 10 molecules.

So growth is coming in, in the same way as I said earlier. It's that we are just able to penetrate those those in a better way. At the same time, there is a growth in the market also the demand for these products. So most of these are fueling the growth...

Sorry, it seems we have lost the line of Ankit. We will move on to -- with the next question that is from the line of Varun from [ Siana ] Capital.

So I want to know whether we have products supplying to the companionship in the segment? Or are you planning anything in that segment?

Yes. Currently, Varun, we have this 1 product we're going to companionship manuals, but it also goes into livestock, so it's a product which go into market. But right now, we are planning for 2 products, which will be exclusively for companionship manuals, which will -- we hope to -- one will be launched in the current year, in fact that private land drive just got completed very successfully. So we will start manufacturing that later part of this year. Second is where the R&D work is going on, but that will come only in FY '24.

And how are the margins in companionship? Is it significantly better than the livestock segment?

What was that question?

Can we expect better margins in companionship segment compared to livestock segment? Or are you still on the same line?

If it is being sold in the rest of the world, the time taken is not very different. But the larger market for companion animals is in Europe and U.S. So that is increase in our freight rates in market in order to explore.

And my second question, the Tarapur capacity, you mentioned that it is a 50% expansion on the existing capacity. So the 50% is -- will be on the expansion which we've done in Macrotech and the outsourcing part it is 50%? Or is it 50% before the... event before the Matrec numbers.

50% before the Macrotech numbers.

Our next question is from Richa from Equitymaster.

I have 2 questions. The first is, does the regional mix have any implication on our margin? And second is the new products that we are introducing 3 in the pilot trials and 2 in R&D, what kind of market opportunity is there? And would the margin profile be any difference than what we have in the current, today?

Can you repeat the first question, again?

Does the regional mix, sir, will have any implication on the margins? For example, the higher profit increases, would it result into better margins now?

Okay. So there is an impact of regional mix, so okay. So the sales into Europe or U.S. right now currently over 95% are of products which are -- as one can say for sale into regulated markets. These are being products which are sold over there for purchase and retail in other markets. So we don't enjoy any specific higher profitability based on a particular region whereas profitability is more or less the same across all regions. And in terms of margins of new products which we are introducing, typically, we undertake products, which are multiple stages of sensitive, and that is the only way to safeguard your -- the margin in this business because 1 or 2 step products are something which almost everybody can replicate. So we take products which are 5 to 7 stages of synthesis. And that is the only way that we are able to maintain the margins for our company.

Okay. And sir, what would be the market opportunity or size for these 5 products that are under development right now?

So these are products which with a fairly large market worldwide. But at the current juncture, I am unable to put numbers for as to how much we will be able to tap into those.

Next question is from Ankit from Bamboo Capital.

Sorry, I got disconnected. And last question from my end. Post this new 5 molecules that we will be introducing over the next 1 year, our basket will be around -- will be of around 27, 28 products. So for utilizing the Tarapur facility, how many new -- other new molecules do we need to add in our basket?

That's a little difficult question to answer because that will depend on basically 2 factors. Number 1 is how quickly we are able to scale up the new products and obtain greater market share because a few of those products have got potential to be probably even INR 50 crore products. But let's say, we are able to penetrate only INR 10 crores of the market over a 2-year period that we need to add -- keep on adding new products. So it's something which is a little difficult to answer at this juncture. It will be a combination of factors in commercializing the product which we put it in the market, and how quickly we're able to scale up our presence in the market.

Sure. Because our top 5, top 10 products are also doing well, we might also -- as per our strategy, we might also be trying to gain more market share in 20, 22 to next 10, 20 -- 11 to 20 molecules. So that also would be contributing to our growth.

Well, let me put it this way that over the next 3-year period, we plan to increase our product mix from the current 20, 22 to about 30 different products. And with that, we are confident of filling capacity for all the new capacity which we have planned right now.

Next question is from Ayush Mittal from Mittal Analytics.

It's really good to hear that a lot of work on new product development has been happening. So I have a few questions. So first thing that if I go by the previous interactions, I think you have always mentioned that the prices in the animal API have been very stable, and they have not increased largely over last 1 or 2 years. And the growth we have hired actually a volume growth that we have done. Is that right?

That is correct, yes.

Yes. So in this environment where we are seeing commodity prices rise a lot across the board, and they do for them, then they come back again, they start rising again. And given that in at least 3, 4, 5 products, we have more than 50% market share. Don't you think the price increase has to be more from our side wherein if you are good in routing, when we have to take that seed and go the price increase? And how will that play out? Can you give some sense on that?

Yes. So there is no way that we can work without passing on price increases. What we were saying is that there is a time lag between passing the price increase to customer and especially when commodity prices went up so fast in the short run, it was difficult to pass it out to customers immediately because earlier price used to the CIF now we are committed to FOB basis. So when you see your contract and freight goes up high, it's virtually impossible to do anything here -- over there. So for existing contracts, it's difficult to go, and we don't like to break any contracts.

Yes. So -- but have we started this process of price increase? Or where are we -- or by when do you expect that we'll be able to do something on this?

This process has started almost 4 months ago, actually more than 4 months ago. They started around July or August. But every time we are to the price increase with the customer, the prices have gone up even more. So we are struggling to keep up with that. And after a certain amount of time, there's a resistance which comes in from customers because then they have to start evaluating whether there are people substitute to be available in the market for that particular medicine. So that becomes a threat to the product. So then at that resistance point, we have to absorb a larger part of the price increase. But as I said, this is a temporary passing phenomenon, we will have to break it out. There is no magic stick to be waived over here. To keep our head down for early mid of this year, we should see that things are back to normal.

And this increase should be ideally 15%, 20% or less than that, the price increase?

It varies from product to product. So there are some products are iodine based where we have had to increase the size by [ 120% ].

No. But overall, for the company level or for the total basket that you are actively having?

It would be a very thumb of rule this thing, because it's different for each products. There are some products where we have increased prices by 15%, some where it's gone up as high as 120%. So to give you an overall average is very difficult at this juncture.

Okay. Okay. Got it. Sir, second, you also talked about some debottlenecking that you keep doing from time to time. Any thing that you can share what kind of CapEx or investments you will have to do on these things going forward to have more capacity at existing locations?

So normal CapEx is in the range of about INR 6 crores to INR 8 crores. That is what we do in debottlenecking today, some part of it is also for replacement.

Okay, okay. And sir, when we -- when we interact with a lot of other companies in the chemical API sector. What we are seeing is that there is a huge global demand especially for companies which have been very strong on the export side. There are so many bigger companies globally who are wanting to scale up more from India. Are you seeing more of this thing or any plans to accelerate your expansion plans on a bit longer-term period? Are you also seeing those kind of things happened for your company or sector?

That's the whole -- combined with the growth increase has been on for us. And as I said earlier, we are now concentrating more on getting market share and increasing our footprint in the market. Because as and when commodity prices start correcting themselves the margins will comeback. So our focus right now to ensure that we keep on increasing market share.

Yes. But what I was trying to perhaps ask was that are you trying to even accelerate your capacity buildup or something because outsourcing and those things have their own limitations while many of them, what we are seeing that globally, when you get a large customer, then the requirement of growth requirement is very large, and you have to have capacities to catch up with them.

Right now, we have just 1 project on the cards right now, and that is already under implementation. We are working to see how quickly we can do it, but quite a few equipments are on long order right now, 6 months, 8 months, 10 months delivery. So we will accelerate it as much as we can do. But it's not something, which is going to come down from 18 months to 10 months or something of that sort.

Our next question is from Anand Jain, as an Individual Investor.

My first question is that since you are talking of price normalization in the RM side, are we carrying -- I mean, what is the amount of high-priced inventory that we are carrying and because of that we could see another quarter of lower gross margins, are we carrying significant amount of high-priced inventory?

Can you repeat what are we carrying? I have not understood what that part.

I'm saying that are we carrying high-priced inventory even today, despite the price normalizations, which could impact our gross margins going ahead?

No, in fact, we are correct curtailing our inventory levels now because as the prices start going down. So early part of the year, we increased inventory levels quite a big -- quite significantly during the period from June to September. And going forward from October onwards, we are now cutting down inventory. The inventory has actually been flat for this quarter, though sales has gone up another 6% to 8%.

Sir, the other question that I have in terms of I just want to continue on the question that Ayush had asked. Like we have like 50%, 55% market share in like 3 to 4 molecules, like, are we, like, the price setters in those molecules? And like the junior, the guided smaller market share kind of follow our prices?

Well, we do set the price, but at the same time, there are customers who will never buy completely from us, they will always have 2 to 3 suppliers for all their products. So which means that it's not some -- a situation where we -- which we can take undue advantage of. So we have to be responsible for competitors and suppliers at any point of time.

My third question is, sir, we have 400 clients and almost like, the revenue run rate of INR 300 crores to INR 320 crores, which would mean that on an average of clients are like around INR 1 crore, roughly INR 80 lakh to INR 1 crore. I just want to understand what is the size of our top 3 or top 5 or 1 client? The reason I'm asking that is I want to understand that once we have these newer products coming in, are we going to search for newer clients or the current clients itself would be kind of able to pick up higher quantities and newer products from a out base from whatever we have right now?

Yes. Just give me a second, I'll just look at the number. Top 5 customers today contribute roughly about 21.5% to our sales. And top 10 customers is about 1/3 of our sales.

Okay. And I don't want you to name, but do we also have clients like not for the regulated market, but because we are not there, but like companies like Merck and other such companies that do also have portfolios in the nonregulated market. So do we have any clients of similar repute or really large MLPs as our clients that's the question I have?

Yes. So the top animal health companies in the world, we have supplied to 5 of them.

Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Das for closing comments. Thank you, and over to you.

Yes. Thank you all for joining the Q3 FY '22 Earnings Call. For any further queries, please feel free to get in touch with us at Pareto Capital. Thank you.

Thank you very much. Ladies and gentlemen, on behalf of NGL Fine-Chem Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.