PCBL Chemical Limited (PCBL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to PCBL Limited Q1 FY '24 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjesh Jain from ICICI Securities. Thank you, and over to you, Mr. Jain.

Thanks, Nirav. Good afternoon, everyone. Thank you for joining for PCBL Limited Q1 FY '24 Results Conference Call. We have PCBL management on the call represented by Mr. Raj Gupta, CFO; Mr. Saket Sah, Head, Investor Relations; and Mr. Pankaj Kedia, Vice President, Investor Relations. I would like to invite Mr. Raj Gupta to initiate the call with his opening remarks, post which we will have a Q&A session. Over to you, sir.

Thank you, Sanjesh. Thank you, Nirav. Good afternoon to all of you who are on the call, and thank you for taking your time to join the call. I would like to point that there would be some statements during the call which may be forward-looking and an appropriate disclaimer to this effect has been included in the investor update, which we have shared earlier. Let me start with the highlights of our performance in the first quarter. While during the quarter, a part of PCBL Tamil Nadu facility was commissioned. But for sake of easy understanding and comparison, we would discuss the subsidiary performance directly. The year has started on a good note. Despite the ongoing geopolitical and economic challenges. During the quarter, our stand-alone revenue from operations were INR 1,297 crores. The drop in revenue is on account of drop in crude prices from an average of $1.97 to $2.82 year-on-year. Standalone sales volumes were 118,000 tonnes, up around 8% year-on-year. EBITDA grew by around 4% year-on-year to INR 214 crores. And EBITDA margins translate into roughly 16.5%. This is highest ever EBITDA and PBT in our history. As you are aware, the first phase of greenfield facility in Tamil Nadu was commissioned around middle of April. During the quarter, we achieved a production volume of roughly 6,300 tonnes on this facility and a sales volume of around 5,000 tonnes. It's roughly 45% capacity utilization against the first line. We expect to ramp up production from this line further during this quarter with some approvals, which are expected from tyre customers during the quarter. We expect TN facility to achieve breakeven at around 45% capacity utilization, when all the other remaining lines and cogeneration power plants are commissioned. We expect to commission the balance capacity during the quarter. Consolidated sales volume during the quarter were 123,000 tonnes, this was backed by domestic sales volume of 82,000 tonnes and international sales volume of 41,000 tonnes. Moving on to the segmental performance. Tyre accounted for roughly 83,000 tonnes. Performance Chemicals sales volumes were 28,500 tonnes and specialty black volumes were 11,800 tonnes. We continue to expand our product portfolio and customer base. Consolidated revenue from operations during the quarter was INR 1,348 crores. Consolidated EBITDA per MT stood at 17,550, while consolidated PBT stood at INR 156 crores. Power generation also increased during the quarter from 144 million units in same quarter last year to 156 million units this quarter. And corresponding sales volume was 98 million units as against 86 million units in the same quarter last year. PCBL's average realization from Power sales stood at INR 3.79 per kilowatt hour. We are pleased to announce commissioning of 20,000 tonnes first phase brownfield expansion of specialty line at Mundra. Company's total specialty black capacity now stands at 92,000 tonnes. The newly commissioned state of art capacity would lead to further premiumization of product portfolio and cater to demand of our Indian and overseas customers. Initiatives are being undertaken to progressively ramp up production from this facility. Long-term prospects of specialty black segment looks very positive, and we believe there would be adequate business potential to sustain the growth momentum. Considering the changes in global supply chain and consumption patterns, demand and margins in this segment should continue to remain very strong. Structurally, we are increasing resource allocation to this segment. With regards to market scenario and outlook, domestic market demand is growing with continued strong momentum in OEM segment, and replacement market is also doing fairly well. We expect tyre demand to remain healthy going forward. In FY '22 and '23, Indian tyre industry volumes grew by around 10%. Going forward over next couple of years, we expect tyre industry growth to settle in high single-digit volume growth. Most of the research agencies also indicate around 9% to 10% kind of growth for this segment. This would help carbon black industry to increase capacity utilization. In terms of near-term outlook, we are a little cautious about the global demand momentum, continuing high inflation in developed economies might be on consumption. And we are continuing to work on strengthening our supply chain, improving in our -- improvement in our product mix and also cost optimization initiatives within the company. Moderation in oil price is also helping our customers to increase margins in their business, and it is also helping us release a part of our working capital requirements. In terms of mid- to long-term prospects, the changing cost structure in China and sanctions on Russia opened a big door of opportunity for Indian manufacturers, which is across industries. Our industry would also benefit from this structural change and we, therefore, will have to keep adding capacity over the next few years. We continue to work on fundamental building blocks of our business to achieve our long-term growth and profitability targets. But at the same time, we also remain conscious of volatility of global business environment and would remain judicious about our CapEx and ROC. So gentleman and ladies with this, I conclude my opening remarks, and I would be happy to take your questions now.

[Operator Instructions] The first question is from the line of Aditya Khetan from SMIFS Institution.

Sir, my first question was also the gross page. Sir, when we looked at the carbon black prices for the quarter has declined. So similarly, carbon black feedstock prices have also declined. So generally, sir, in declining price scenario, businesses face inventory loss. But despite this, sir, your spreads have came at an all-time high. So what is the reason like is there -- and considering the demand also like into the exports market was not that good. So what is the reason like this -- for these good numbers of spreads?

Okay. So I think there are 2 questions, Aditya, which you have asked. One, declining crude prices have not resulted into any inventory loss. And second is how we are able to increase our volumes despite market conditions, right? Now answer to your first question is time and again, we have said that we don't speculate on crude prices or inventory levels. So we only maintain the inventory level for which there is a pass-through in our pricing arrangement with customers. And therefore, in changing crude scenario, whether it goes up or down, inventory-related impact on our business is, as such, not there unless there is a very steep movement in crude price over a very small period. So like tomorrow, suddenly from the current, say, $78, $80 level, if it drops to $40, would there be an impact on our business? Yes. But if it drops from $80 to say $70 would it also create an impact on business? No, right? So we do a dynamic calculation of our sales forecast in the proceeding next 3 months. And accordingly, we build up our inventory. With respect to the overall demand scenario in the market, and our performance, our volume performance. See, while overall global demand scenario, I would not say it is most conducive period from that perspective. But supply chain relations are changing globally. And Europe is now opening its door for Indian manufacturers. And historically, Europe was a very small market for India. Now gradually, that share is increasing. And it's a big potential. It's a large market, the whole of Western Europe. And we have, in last 6, 7 years, invested a lot of money on building up or -- and improving our supply chain in these markets. And even now, it is just the beginning. I mean, the real improvement in business in Europe has started happening in just last 2 years. I think gradually, it will unfold more and more in next 5 years. So we are seeing Western Europe as a large opportunity for Indian exports from our industry.

Okay. And sir, on to that spreads part on to the gross spreads, like we have reported highest ever spreads. So considering even if the specialty volumes, they come up in the coming quarters, but considering weakening of demand, export related uncertainty. So can we say that so this is the peak number, which we have done in this quarter, and we could be sliding down from hereon?

I would not say it will go down or move up. See, structurally, I mean, there are a lot of areas upon which we have been working since last 2 years. And gradually, that is helping us improve margins, blended margins from the business. So that is the structural change that we are trying to bring to business. Now of course in market, there would be pockets of opportunity as and when we see these opportunities or the pocket windows of opportunity, we will try to utilize them. So in some quarters, you might see some jump in the margins over the previous quarter. In other quarters, you might see some softening. But structurally if you look at year-on-year performance, I think there is still a significant scope for us to go up.

Okay. Okay. Sir, on to the specialty volume side, sir, for the last 4, 5 quarters, the numbers have been almost constant at around 11,000 to 12,000 tonnes. And we have not been able to ramp it up, plus we are adding another 40,000 tonnes capacity. So what is going wrong here? Like is there a demand issue or the weaker exports market is not helping you to ramp up the volumes for the last 4, 5 quarters?

No, Aditya, 4, 5 quarter numbers have gone up. You may not have noticed, but till last year, I mean, except for the last quarter, our numbers were in 4 digits. So we were doing about 9,000 tonnes, 8,000 tonnes those were the numbers. And last 2 quarters, we have been doing around 11,000 tonnes. So volumes are on an increase, in fact between the same quarter last year and this year, the volumes have gone up by 16%, 17%. Now while we are adding capacity. Our existing capacity can only support production up to maybe 47,000, 48,000 tonnes annually. And we see specialty segment as a large opportunity. Our aspiration is to take our annual volumes to 6 digits over a period of time, next few years. And that would require us to keep on adding capacity. So as per our existing plans, every year, we'll have to keep at least adding 1 line, 1 new line in this space. And it is not only capacity addition. There is a very strong R&D team. Currently, we have more than 50% working in that. They are launching newer and newer grades. Similarly, marketing team is working hard to create larger markets of our specialty customers across geographies. So there's a lot of effort, a lot of work which is going on in this area.

Got it. Got it. Sir, from the newly expanded line of Chennai, sir, that line was started in April. So considering a 2- to 3-month pull period for the quarter, the volume number still looks to be very low of around 6,900 tonnes, sir...

Aditya, that line if we were to utilize that line for the full quarter, it would give us roughly around 13,000 tonnes. Quarterly, I'm talking about the quarterly volume. And because it was commissioned during middle of April, so proportionate volume, we could have got 100% utilization level. It would have been around 11,000 tonnes. That was the total utilization if we were to give, right? Now against that 11,000 tonnes, we have produced more than 6,000 tonnes already in that quarter, right? So which is more than 50% of production. Now initially, when we produce on a new line, then it takes a little time to stabilize the qualities and the grade. And therefore, the approval from major customers take time to come. So in the first quarter, even that 5,000 tonnes of sales volume and 6,000 tonnes of production itself is a big feat to achieve. But we are confident that as we step into the current quarter and going forward, the capacity utilization would only increase.

Got it, got it. Sir, just 1 last question from my side. Sir, we are witnessing increase of imports from China. And so sir, into the carbon black space also so for the last 2 months, we have witnessed increase in import?

China at one point in time used to export about 700,000 to 800,000 tonnes in India. Last 2, 3 months, their average is 300 tonnes.

Okay. So sir, which are the countries which are exporting -- which are importing to India right now?

See, overall imports in India has come down from an average of about 2 lakh tonnes to less than 1 lakh tonnes in India. And part of this import is also because there are some grades which are still not produced in India, primarily in the specialty segment. Also because there are very few carbon black manufacturers in India, for tyre companies, it's a business risk. And therefore, they want to keep some relations lubricated from abroad so that if there is some disruption here in the carbon black industry. They still can get supply from overseas manufacturers. So the level of import as such is -- has come down significantly, and now India has become net-net exporter. So India is exporting around 200,000 tonnes and importing just about 100,000 tonnes. And among the countries which are exporting to India, it includes some of the Middle East countries like Iran, Saudi Arabia. Then there are some Southeast Asian countries like Thailand and South Korea. Russia also is exporting something to India, but it's a host of countries, but small, small quantities. And good part is that the landed price in India at which imports are happening is still higher than the price at which we are selling in India.

The next question is from the line of Jainam Ghelani from Svan Investments.

Congratulations for a good set of numbers. Sir, what would be the current spread between ours and the other Chinese products?

Jainam, could you please repeat your question?

Yes, I...

Sir, sorry to interrupt you, yes, Jainam can I request you to speak through the handset, please?

Can you hear me?

Yes, it is clear.

Yes. Yes. So what would be the current spread between our products and the Chinese products?

You're talking about the raw material side, right? The carbon black, oil and -- yes, so last quarter, the average difference was around $251, and for June, it was $269 seeing it being on the higher side.

Okay. And sir, what would be the max capacity utilization we can reach for our specialty black plants?

So now with this Mundra commissioning, Mundra possibly would give us around 15,000 to 16,000 tonnes with new line and the existing capacity that we had prior to this can give us around say 47,000, 48,000 tonnes. So in totality, we can go up to maybe 63,000, 64,000 tonnes against our existing line. Additionally, one more line currently is under implementation. That should be operational by around this time next year, maybe by May, June of FY '24.

Okay. And we expect mainly demand from Western Europe, as you mentioned. So we see that like if Russia is open like if Europe access products from Russia again in the near future or whenever. So that wouldn't affect our demand much, right? Because we've started gaining traction from European countries?

I did not understand your question. Are you saying that once Russia starts reproducing carbon black then whether that would have an impact on our -- is that the question?

Yes.

Okay. Okay. See, Russia is already producing, Jainam. It is not that Russia is not -- the sanctions on Russia are only from western countries, western Europe, European countries and U.S.A. But they have been selling in neighboring countries. I mean China and other -- some of the Asian countries. So that material is finding its way in the market. But the real benefit of this whole thing that we will get is Russia will stop adding capacity because the price at which they would be selling now, they would not be making margin in this business. Their logistics cost would increase, plus they will have to sell at a discount to the market price. So on both count, I mean the manufacturers would incur losses. And therefore, there is no case for them to invest in further capacity. And Russia prior to this Eastern Europe issue, they were adding capacity very aggressively. They have their own crude. It is cheaper for them logistically and therefore, they were adding capacity. Almost 70% of their capacity was available for sale. So that -- the real advantage we are going to get is because of they may be halting on to capacity addition, which is a structural change. So we don't see any further disruption from Russia because the material is already there in the market. Have I been able to answer the question, Jainam?

Sir, the line for the participant dropped. We move on to the next participant. The next question is from the line of Vikram Ramalingam from Quantum Advisors.

Raj-ji, congratulation on a good set of numbers. What I wanted to check was last year and even the year before that, our logistics cost very high because of generally those containers not being available and some new regulations in the shipping industry, can you give me an update as to what the situation is right now?

Sir, the freight rate -- container freight rates have come back to pre COVID level. No, they have come back to the previous level, pre COVID level. And the contracts that we -- under which we supply to our foreign customers overseas customer are annual contracts, which are typically signed around November, December for the calendar year. So the recovery also gets reset every year.

Yes. No, why I asked this because that had impacted our margins on the exports business because we were factoring in or we were taking in the higher freight rates. So that's what I wanted to check so if they have gone back to previous rates then automatically our margins from export business should have improved, correct?

Yes. I think -- I mean, the impact of freight rates had gone long away. It has been more than 2, 3 quarters.

Okay. Fair enough. My second question is regarding this Tamil Nadu plant. Will we be having a specialty chemical facility over there as well?

I mean, as per our current plans, no. So only in the next phase, we plan any capacity, we still have space there for brownfield expansion. So in next phase of expansion, we might plan but under the current phase of expansion, no.

Okay. And we already have capacity in the Palej plant, right? Any scope to increase that as well? Because specialty, if things go right, you're pretty close to again utilizing your full capacity almost, I mean, give or take a few thousand here and there. So if you want to increase the contribution of specialty to your total volumes to the tune of 25%, then we need to work on the capacity part right, because the lines are very different.

Yes, the lines are completely different. I mean the process of manufacturing and oil is also different. Now the Palej doesn't have any space available for expansion. But Mundra, we still have some space and where we might put in a third specialty line. So Mundra has a scope. And thereafter, we'll have to decide whether we put this capacity in Chennai or we identify a new location completely.

Okay. Any product-specific grade that we are -- that is contributing to this higher specialty sales, specialty chemical sales in the sense that raise in dollars and...

They are grades. There are -- see, currently, we have about close to 50-odd grades in specialty. And all of them are premium grades. Of course, I mean, some of them like Lumina, where the realization and margins are very high but the overall market size for those grades is also not as large. But specialty see it is a recent journey for us, we started it just 7, 8 years back. And there are a number of grades available in the market where the margins and realizations are extremely, extremely high, much higher than the rates that we have in our portfolio. So I think going forward, margin in this segment should improve further. I mean, as we keep on launching newer solutions in this space.

And this plan to increase exports to Western Europe or rather we believe that that's where the next wave of demand will be more from what I wanted to check is, we are talking about still the tyre carbon black we had because are we talking about specialty black when you say Western Europe. And -- because in the sense I'm not sure whether Western Europe has that kind of tyre manufacturers' capacity or facility over there. So I just wanted to check that.

So the opportunity is in both space, Vikram, in tyre as well as in specialty. Europe is a big specialty market. So the scope is across segments and already a good part of our specialty sales is happening in Europe. So we already have...

Because your R&D center is also in Belgium, Europe, right?

Yes, and that was one of the rationale behind setting the R&D center there. We can also provide technical support to the local customers.

Next question is from the line of Bharat Sheth from Quest Investment Advisors.

Congratulation Raj on good set of numbers. My question is first is on the specialty last year, we -- in annual report, we stated that we introduced new product under Energia brand, which is -- have a offer exceptional conductivity, superior dispersibility. Sir is that -- so can you give some color how big is the market? And again, whether this product is a higher superior among the whole among Lumina or not? And second thing, is this our journey toward this high conductivity area that we were always talking?

Sir, the -- yes, we entered into this conductive grades about 3, 4 years back -- my voice is echoing, hello? Can you hear me?

Bharat, may I request you to mute your line from your side, please?

Yes, sure.

Yes. So we entered into this conductive grades about -- there is some echo still okay?

So Bharat muted his line.

Yes. So I was talking about the recent initiative of ours, which we started 3, 4 years back. So there was a team of R&D professionals, which has been working on conductive grades and we have been successful in launching some grades in this segment. But having said that, the pure superconductive grades, which will be used in the high-end EV batteries, those graded still in the lab. We have had some success, initial success in that space, but we need to improve upon the purity level. And I mean, we are hopeful that we will be able to launch it soon once we have success with increasing the purity level. The current grades that we have, they are mostly used in the conventional battery and also in the internal coating of electric wires for better conductivity. But a very strong team is working on superconductive stuff, and we are hopeful that we will see these grades being launch soon in the market.

So Raj, this Energia brand, what is potential that we are really looking, I mean?

Sir, in the superconductive space, the demand -- actually the market just got created, and it is expanding exponentially. Like in India, 2 years back, the monthly average sales of electric cars was around 1,000 units. And in current year, it is about 8,000 units per month. So that's the way consumption of electrical vehicles is increasing and we are seeing similar kind of trend in Europe and China. So the market is expanding rapidly. And therefore, estimating the size of market, I think would not be appropriate. It is expanding. It is going to be a really big market. In next, I think 5 or 10 years that market will continue to expand. So there is adequate potential in the market for manufacturers to sell their products and market to absorb their volumes.

This product is more superior, I mean, premium product in our old categories?

The one that we are working in lab -- again, there is echo, Bharat-ji, can you please mute your speaker. Yes. So the one that currently we are working on, that is going to be the very high superconductive quality. But the ones that we have already launched under the Energia portfolio, those are mostly semiconductive graded of carbon black.

And Premium-wise, I mean?

Premium there is a very high premium. I mean some of the grades which gets sold in the market, the average realization is around $20,000 per tonne. And because we don't have those grades in our portfolio, we would not exactly know the kind of margins, but the realization itself is an indication that margins will be in a different trajectory altogether. .

And coming to this carbon, I mean, tyre grade carbon black the way I mean disruption is happening in China consumption side, so is there any probability of even at loss they dump carbon black for tyre grade carbon black unit to India?

Sir, the way we see the current market dynamics. The cost structure has changed significantly in China, and it may not make commercial sense for the manufacturers to continue to produce or add capacity. So over the next 4, 5, 6 years, whatever period, there will be further consolidation. And because now Russia will have lot of country in that sanction, what it is. So they will not be able to sell there. I think for them, it will make sense to sell to China, which is a bonding country for them. And between them, if they absorb each other's capacity, somewhere where I think at the global level, the market will be undersupplied and which should continue to support the recovery and margin even for the tyre grade carbon black.

Okay. And last question, with declining in this raw material price and how do we see now working capital change in absolute number of days may remain same.

Sir working capital has already come down. I mean, though we don't report our borrowing numbers quarterly, but borrowings have come down to about INR 50 crores in gross. So working capital requirement would go down this route.

Next question is from the line of Sanjesh Jain from ICICI Securities.

I got a few of them. First, talking about the export market. In your opening statement, you did caution on the demand from the export market. What do you see the challenge and we have seen one of your peers has issued a profit warning. Do you think the situation is stabilizing, worsening, how do you see the exports market because that's where we are getting the significant growth patch up.

So Sanjesh, so far, we have not witnessed any issue with our ability to sell in those markets. But having said that, we are seeing very high inflation numbers still coming from those countries and also interest rates continue to rise. So at what level those issues will impact the local demand. It is difficult for us to assess. But as of now, we don't see an impact. It might have to happen that the -- I mean, the overall demand of these countries might have got down. But maybe because they are now purchasing less from other countries. And therefore, it is not reflecting in our volume. So our volumes in this market are still on an increase. But we just put in a word of caution that I mean the market volatility still remain. I mean, it is not that market conditions have become better than what it was a couple of quarters back.

Second, on the export side, incrementally, where is our volumes going to because I understand last time you said that the largest pie for us was APAC and Europe was 20%. How is this mix changing incrementally with more volumes going in? And is it fair to assume that lot of the Chennai facility, initial volumes will be placed in the export market?

Till the time we get approval from domestic tyre companies, we will be selling a little more in international markets, but that will be only interim arrangement. Structurally because Chennai has lot of tyre manufacturing facilities. So again, a good part of the facility, Chennai facility will go towards catering to domestic demand only. I guess for us to increase our overall geographical distribution or export volumes in terms of percentage more, we will require beyond Chennai capacity. I think for export volumes to grow significantly beyond that 30%, 35%, Chennai will not be adequate for us to achieve that. Now in terms of geographical distribution outside India, Southeast Asian countries will remain a big market product, a big and important market for us. There are a number of countries which solely depend on imports. Which either doesn't have any capacity or which have very little capacity to cater to their requirements. So the countries like Indonesia or Vietnam. So these markets will continue to remain important and big for us. Having said that, Europe is assuming important. Europe at one point in time, it was around 2%, 3, 4 years back. Last year, we could do about 14%, 15% of our international volume. And this year, we feel that we should be able to cross 20% of volume coming from this market. So over a long term, maybe 4, 5 years, Europe possibly will assume more importance that it will become 25% to 30% of our overseas volumes. That's how we see it. But that will take further capacity addition by us because our existing capacity will not be able to cater to this change.

Just wanted to understand the Europe situation better. Russia has certain quota to export close to 750,000 this year which will expire in July '24. And from July '24, I guess Europe is looking at a complete ban. So there is 750,000 metric tons of additional demand which we will start seeing. Have you started discussions with any customer? Or are we looking to evaluate that opportunity where we can get more share out of that and we have Chennai facility to cater that?

So Sanjesh, the challenge before us is that the local tyre manufacturers are also expanding. And there is a very high level of interdependence between tyre industry and carbon black industry. So we can't afford to commit Chennai to -- Chennai entirely to -- or a large portion of Chennai to European customers. What we are doing is, while in the space of performance grades and specialty, we are adding customers. In tyre space, we are only adding those customers with which we already have relation in other geographies, right? Some of these customers to whom we were supplying in some countries but not in Europe. Now we are also supplying to them. But we are only committing a part of Chennai or our overall capacity, which we feel confident of continue to supplying to them. So that's how we are doing it. And like you said that the sanctions on Russia is going to create a massive impact on Europe. Yes, it is likely and it has already started happening. Because most of these customers will not wait till next June or July. They will want to tie up with other manufacturers much in advance, and that process has already started.

Sir are we looking to get some of those customers and stop spot sales or cut down on lower-margin spot sales in India and tie-up with this long-term European guys?

What we are doing is we are shifting part of our spot market volumes to the strategic customers in these geographies. That's how we are planning it. And that's what we are doing. We've already started doing it, Sanjesh. So I mean we have committed some volumes to customers, but it is more of a replacement of sport to the strategic customer. And of course, I mean, Chennai to some extent, of course, it led to the overall volumes, which will go to the workings market.

Do you think you will need to announce another CapEx very soon?

Yes. We will.

Okay. Last 2 questions. One on gross profit per KGV last time highlighted that we will maintain the last year's gross profit close to INR 32, and this quarter, we have done better than that. You see a reason to change that guidance?

No. On long-term guidance, we don't want to change, Sanjesh. And typically, like I said, that there are always some windows of opportunity in some quarters and wherever we see that we utilize that. Structurally, we continue to work on our own efficiencies and product portfolio changes, which will provide support to improvement of margin. But we will want to retain our guidance on the margin.

And last question on the tax rate. Last 2 quarters, tax rate has suddenly gone up to 31%, 29% from some 20%. Any change in the tax rate, why there is a sudden jump in the tax rate?

Yes. In fact during last quarter also, I mentioned, so our power business was enjoying tax community for 15 years under ATI of income tax -- section ATI of income tax. Now the 15-year period has lapsed. I mean it has got completed. And with that, now even the power profits have become taxable. So that puts our company in a 25% tax bracket. And last year, initial quarter actually I mean we were not sure whether the whole of the shield would expire, right, in the fourth quarter. And therefore, in the earlier 3 quarters, it was based on that exemption. And therefore, the rate was 21% against the 24%, 25%. So that impact was taken in the quarter 4. So that quarter, the tax rate was unusually high. Now for this year, we estimate our tax rate to be around 25%, 26%. And one, Chennai is fully operational. Then Chennai will be subject to a 13% tax rate. So then again, the blended tax rate for -- on a consolidated basis, would come down to around 22% to 23%. But that will take a year's time. In the interim, the tax rate will remain around 25%, 30%.

Okay. Okay. Fair enough. Just 1 question. We said the China facility is more efficient technologically as well. Have you seen any early signs of better yields, low cost any of those signs?

Yields we are getting to see that improvement. But it is still very early stage, Sanjesh, and it will take us, I think, at least 2 to 3 quarters more to see the real impact of the technology. I mean, once everything stabilizes because when we are running our plant at a lower rating, even that impacts the yield. And currently, we are operating only at -- until last quarter, we had been operating it at about 45% capacity utilization level. So once we cross that maybe 70% level, then we will get to see the real improvement. And it will not only the yield, it will also be the productivity, lower maintenance costs and most of other things.

Got it. Got it. That's it from my side.

Thank you, Sanjesh.

The next question is from the line of Dhiral from Philip Capital.

Thanks for the opportunity...

Sorry to interrupt you. There is a lot of background disturbance from your line.

Am I audible, sir?

Yes.

Sir, what kind of utilization we expect for the Phase 1 Chennai facility for the full year FY '24?

Sorry, what kind of utilization...

Yes. We expect for the full year for the Phase 1 of Chennai facility.

I I guess in the first year, we should be around 40% to 45% capacity utilization level.

Okay. So even at the current run rate, we are working at the 45% utilization, right?

Yes. But it is current utilization is only against 1 line, and there are 2 more lines which we are going to add in the current quarter. So when I say 45%, I'm talking about on the full base of line.

Okay. Okay. Understood, sir. And so on the gross spread side, so whatever gross margin per kg that we have delivered in Q1, so with the higher export and the improving specialty sales, do you expect this spread to sustain at least for the full year? .

Even they see, like I answered this question a couple of times in this call also that one part is the structural change in our own efficiency improvement, efficiency level and product portfolio. We will pull up the margins structurally going forward. And second is the changing market condition. Last couple of years with changes which has happened in the market on the demand supply side, also on the engine supply chain relation. That is supporting margin. Now that is something which is difficult for us to read. We are agile enough to gain from the pockets of opportunity -- wherever we see we try to utilize that.

Okay. Okay. And sir, lastly, sir, you're talking about adding capacity -- the invested tailwind that we are seeing right now. So what kind of capacity addition we are looking in coming years, like say, FY '25 or FY '26?

Yes. I believe my own sense is that forever growth to be properly supported, we will have to keep on adding between 80,000 tonnes to 100,000 tonnes every year. That's the kind of run rate internally we are chasing.

Okay. So probably from next year, we might add around INR 1 lakh.

80,000 to 100,000, yes.

And so what kind of CapEx this will require?

I I mean, it will also depend on the metal prices. But typically, on a brownfield expansion, we incur about roughly INR 50,000 to INR 60,000 a tonne.

Next question is from the line of Radha from BNK Securities. .

Sir, thank you for the opportunity. My first question was you spoke about for the spot market, you're committing to customers who you are already supplying in the tire segment, but could you give some light on the specialty side as we know that Europe is a large market for specialty. So who would be your top customer in terms of specialty? And also if you could give some light on performance chemicals.

Europe is a big market for specialty, but Europe is not the only market, not least is the big market. North America is a big market and even China is a big market for specialty. And we are focusing on all of these markets rather. So it is not only Europe. Europe primarily is getting impacted because of Russia. And Russia as such, did not have much specialty capacity. So the disruption in the specialty space is not much because of Russia, right, on the supply side. But specialty market itself is very large. It's more than a million tonne market, and the volumes currently that we are selling is a very small portion of this market. Last year, we did about 40,000 tonnes. Even our current run rate is about 50,000 tonnes, so which is not much. So there is a very big scope for us to improve just by adding customers across globe wherever we have market.

Sir, any color on the top customers that we are supplying in the Middle East region or the European region?

Yes, a number of them. So like Middle East, Borouge is our big customer. Europe, we have Borealis -- we have [indiscernible]. And there is MDI. These are all big customers in this field.

Okay, sir. And sir, you mentioned that this year, you will be having a 25% tax rate. Now, this is assuming that we are moving to new tax rate from FY '24 itself right?

Yes.

Okay. And sir, you mentioned that we'll be getting the benefit of 17% tax rate for Chennai, but that will kick in from FY '25. But sir, this year, you are expecting 45% utilization. So partly, we should get benefit of that as well in this year.

At Actually at 45% facility will just about breakeven. So unless the facility has progressed, it will not go to reduce our weighted average rate. So only one, the capacity utilization is at a higher level in the stagnating profit from Tamil Nadu, then only our [indiscernible] tax rate will go down.

Understood. Understood.

Thank you Radha.

Next question is from the line of Naushad from Editor Barla Sun Life Asset Management.

Few clarifications. Firstly, in terms of your spot business, typically what percentage of volumes comes from spot business currently? And how this percentage was 3, 4 years back?

Currently, it's about 30% volume that we are doing in international market. And going forward, structurally, we want to strike equal balance with domestic volumes and international volume. So maybe over a period of 5 to 6 years, we would want 50% of our volumes to come from overseas market.

Not export. I'm asking spot business.

Spot business, okay. Okay, sorry. So spot is also roughly around 30%. I mean, but that part will also include. So let me just give you a breakup of our segment-wise volume. Roughly about 65% of our volumes come from tires, which is kind of a committed volume to I mean, there's no hard written contracts, but there's a tacit understanding the tire customers. Now 25% to 26% is what comes from performance segment. And balance roughly 9% to 10% is what comes from specialty currently. Now this 25% volumes, which comes from performance, out of this, almost 90% is spot. And against the specialty of 10%, about 2% to 3% is spot.

Okay. Understood. Secondly, in terms of -- see, we see this Russia ban in Europe market is an opportunity. But if you look at other way, can this thing create a problem for us in the domestic or Asian market because they may start dumping here and there if we don't have European market to serve.

Russia, most of carbon black facilities are in landlocked location. And therefore, the logistics cost from supply from Russia to India would be very high. In fact, in the past, when we tried to bring oil from Russia, the thing did not work out because of logistics cost issues. And in the last 1, 1.5 years since this crisis started, while Russian material has started coming in India, but it is not coming at a significant landed price -- significantly lower landed size, so as to say. So from that perspective, we don't see as such any issue in India.

Okay. And typically, how much time it takes to build a greenfield and brownfield capacity in our industry of a commodity...

It See it doesn't take time. Brownfield takes about a year's time once the project is starting. And greenfield, assuming that all the clearances and land is available, then it will take around 1.5 years. But getting land and taking clearance is a line process that takes about another 1.5 years.

Okay. So broadly, within 1.5 years, our capacity should come in. So why there is so much gap we are talking about in industry of demand and supply, if there is a demand by others are not. Why industry is not able to match up the capacity which is required?

So The supply gap has happened primarily because of China and Russia. In China, the raw material cost has gone up, right? And because of that, there has been significant consolidation in the unorganized space there. Now the capacity that we have recreated is estimated at around 2 million tonnes. This is big capacity, and it will take time for that capacity to be rebuilt elsewhere in the world. But because of that, countries have started adding capacity, like in India, we have witnessed capacity addition in the same part. Indonesia also added a small capacity. So gradually, the capacity will come up. So this demand supply gap certainly will be filled up over a period of time. Our estimate is that it will take at least 6 to 7 years before this gap is bridged.

6 to 7 years.

Yes.

And what percentage of our commodity grade carbon black we export?

We do about 30% of our volumes in international markets.

And what would be the largest export market for us?

Southeast Asia. I mean it can just a number of countries. But like Vietnam is a big market, Indonesia is a big market, Sri Lanka, Bangladesh these are big markets. Some countries in Europe, they are becoming bigger for us.

Okay. So reasoning of Russia export to India because of the logistic cost, and here, we don't have much exposure in the European market, maybe because of the logistics cost issue. So even though that whatever Russia export to European market goes up, we may not be able to fetch a good amount of share from that market because of the logistics cost issue. So the local or nearby peers should get the maximum share. Is this understanding correct?

First of all, there is no nearby or local manufacturers there. I'm talking about Western Europe as a whole geography. And that's a supply deficit region. Last 10 years, they have not added capacity and primarily, they're dependent on China and Russia to fill the gap. Now, the logistics cost between India and Western Europe is not very high. Currently, it's about $70 a tonne, which converts into roughly INR 5,000. Now from our Durgapur facility when we are supplying to [indiscernible] facility in Tamil Nadu, we are incurring almost the same cost INR 5,000 a tonne, sometimes even more. So in terms of logistics costs, it is not much curve. [indiscernible] is not a very price-sensitive market. And from all these perspectives, we don't see any impact on margins and we sell in Europe.

Okay. One last, just in terms of -- you have answered this question, but just I wanted to touch this again in terms of your EBITDA per kg. In our business, do we at least get at least 2, 3 quarters visibility in terms of the confidence to get XYZ number of EBITDA per kg? Or is it very difficult for us to at least predict beyond 1 or 2 quarters?

So we have fairly good visibility around a year's performance. Unless something significant happens in the market, which is beyond our company action. On a steady-state scenario, we have good visibility for next 3 to 4 quarters.

All right. Thank you so much sir and all the best.

Thank you Naushad.

My request to all the participants. Please limit to 1 question per participant. The next question is from the line of Anupam from Lucky Investment Managers.

Yes, thank you for the opportunity and congratulations on good number. Firstly, Raj, if you could just on...

Anupam, sorry to interrupt you but the audio is not very clear.

Hello. Am I audible now

Yes.

Yes. Raj, if you can help us understand, so we've done about 12,000 tonnes of specialty in the first quarter. Given the run rate of 48,000, are we looking to hit 52,000 ,53,000 tonnes kind of a number for the full year?

Yes, we are hopeful of achieving that. And Mundra's new line is going to support that volume.

So of the 20,000 tonnes of new line, how much are we looking to hit on that line?

I think in a couple of quarters' time, we will be reaching full utilization level. That's how we see.

By full utilization you mean, 16,000 tonnes. That will be exit quarter kind of run rate, right?

Yes roughly. I mean we are going to gain about 4,000 tonnes a quarter from the line. And it will take some time to stabilize the quality in the way, so maybe a couple of quarters from now. It is not that we will not be doing any volume in the interim. But I'm talking about the full utilization, we expect to achieve that towards last quarter of this year.

Understood. Couple of years back, the difference in EBITDA per kg between our normal grade and specialty grade was about 2.5, 3x. How has that changed in your assessment? Currently at this kind of demand scenario?

Around 2x. Currently, we are getting about 2x in specialty, not that specialty contribution has gone down, it is that even the base volumes are yielding better margins.

Understood. Understood. One question on your current quarter spreads, 32 we've been able to maintain. Was there some sort of one-off kind of opportunistic gain like we had in the last same quarter last year?

There is no specific one-off event in this quarter. Last year same quarter was impacted because of Russia disruption, right? But in this quarter, there was nothing of that sort. But market dynamic itself is changing very rapidly. And therefore, for all we know, I mean, this kind of pricing and margins would be there. But we refrain from commenting on that because we only trust our own doing. But when we give guidance, it is based on what we are doing internally in the company and not on the demand supply condition. Because that's really very short lasting. So honestly, we don't have visibility around this thing that -- how these conditions are going to change. For all we know, these are going to remain as in. But structurally, a lot of things that we are doing and our margins are going to improve from here. Anupam, just to point you, we can only talk about the volumes and how the overall performance could be anything on the pricing maybe [indiscernible].

Fair enough. Fair enough. Just wanted to check on the local supply that was coming up by about 0.5 million tonne. Has both our peer started production? Or is there some sort of time line delay or some product...

Yes. Those lines have been there now for more than a year. So this 0.5 million tonnes did not come a quarter back. I mean it came for a period last 7, 8 quarters, and the buyings are being utilized.

And they have been able to ramp it up as quickly as the industry usually does?

They are in unlisted space. And therefore, we would not know. We would not have the clear picture. But based on market conditions, it is likely that they are utilizing the capacity.

Okay. Lastly, if you can. Yes. Go ahead.

See some of the capacity maybe unutilized depending on the quality of the output. That could be one thing. But again, export market is a good avenue for most of them.

Right . Last question, if you can just call out your net debt number for the quarter?

Which number? Net debt? Yes, we don't report it. So anything that we have not reported to stock exchanges, I can't mention here. But I can give you an indication. The net debt has gone down by roughly INR 50 crores.

Okay, okay. And you mentioned INR 50,000 per tonne [indiscernible] brownfield CapEx is announced? I believe in the interim until we exhaust our pace in Tamil Nadu and Mundra, we won't be announcing a new greenfield. Is that a fair understanding?

No, we'll have to announce it sooner than that because we can't wait for the capacity to be exhausted, then we will be compromising on growth.

No, no, not capacity, I mean space-wise . So until we utilize the space that is remaining in Tamil Nadu and Mundra, we will be going ahead with...

Yes. We have space in Tamil Nadu, we also have some space in Mundra.

Fair enough. Fair enough. Thank you so much, team, wish you all the best.

Thank you Anupam.

The next question is from the line of Madhav from Fidelity International.

I just wanted to understand, it seems like there are 2 things which are changing. One is more of our volumes are becoming more contracted in nature versus selling more on spot? Is that the right understanding for the business that is becoming more of a contracted...

Yes, Madhav. You're right.

Which obviously would mean more stability in our pricing and margins versus volume?

The margins also in this segment are good. I mean in the new arrangements when we are selling more to tire customers in new geographies, margins are relatively better comparable with the spot market.

Okay. And just the second question from my side was in the specialty blacks which we are selling, is it fair understanding that the competitive landscape is much better than a number of people who are competing in that market would be very limited globally, like maybe like single digits, like 5, 6 years? Or is that like a lot of players who supply these? Because for us also it's taken like 8 years, right? To ramp up so it's a long gestation business.

Industry itself has a very consolidated structure. So most of the countries will have only 2, 3 large players. So as such, I mean, it is not very highly competitive from that perspective. But there are some local manufacturers like Orion also there, which are big.

So let me ask it this way, like when we look at our tire blacks versus our specialty blacks, is the number of players in the specialty blacks lower versus the number of competitors we have in the regular grade?

So number of specialty black players are much higher because these are all small-small [indiscernible] lot of them.

I request all the participants. Please restrict to one question per participants. Next question is from the line of Anik Mitra from [indiscernible] Research. Due to no response, we move onto the next participant. The next question is from the line of Vignesh from [indiscernible] Wealth.

I just want to check on the pricing differences between the performance chemical segment on the normal black. [indiscernible] number like compared to the specialty business.

I Your voice is not clear Vignesh, I can't hear you properly.

Is it better now? .

Please continue, it is let better.

Okay. Okay. Just I want to understand the pricing differential between the performance chemical grade and the normal grade?

Pricing differences, not much pricing difference is just about 5%, 6%. But typically, we make about 20% to 25% more margin in this segment.

Okay. Okay. And other thing is, I just want to understand how about volumes, I mean, in the next 5 to 6 years going forward? The mix between performance chemicals and specialty glass would be compared to now.

Would you please repeat your question? .

The volume mix, as of now, we see Performance Chemicals and Specialty Black to be around 30%. Going forward down the line, 5 to 6 years how would you estimate this figure to be at?

Currently, I mean, if you look at last year, it was 30%. This quarter, it has been around 33%. I think somewhere it will remain around 35%, 36%, at least in next 2, 3 years.

Okay. Okay. Thank you. That's it from my side.

Thank you.

Next question is from the line of Rahul Shah from Crown Capital.

Most of the questions have been answered. Just -- I just wanted to have an outlook on overall volumes over in FY '24 over FY '23 numbers. If you just want to share something about that?

We expect about 10% to 12% kind of a volume growth this year over last year.

Ladies and gentlemen, that was the last question for today. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us. You may now disconnect your lines

Thank you.