SRF Limited (503806) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 and H1 FY '22 Earnings Conference Call of SRF Limited hosted by Kotak Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ritesh Gupta from Kotak Institutional Equities. Thank you, and over to you, sir.

Good afternoon, everyone. Thank you for joining us on SRF Limited Q2 and H1 FY '22 Results Conference Call. Today, we have with us Mr. Rahul Jain, President and CFO, SRF Limited. I would like to invite Ms. Nitika Dhawan, Head of Corporate Communications at SRF, to initiated proceedings for results con call. Thank you very much. Over to you Nitika.

Good afternoon, everyone, and thank you for joining us in SRF Limited Quarter 2 and H1 FY '22 Results Conference Call. We will begin the call with brief opening remarks from our President and CFO, Mr.Rahul Jain, following which we will open the forum to a question and answer session. Before we begin the call, I would like to point out that some statements made in this call may be forward looking, and a disclaimer to this effect has been included in the earnings presentation shared with you earlier. I would now request Mr. Jain to make his opening speech.

Good afternoon, everyone, and I extend a warm welcome to all of you, and thank you for joining us today on SRF's Q2 and H1 FY '22 Earnings Conference Call. I trust you, your family and colleagues are keeping safe and are in good health. I will initiate the call by briefly taking you through the key financial and operational highlights for the period under review, following which we will open the forum to have a Q&A session. SRF has delivered a healthy overall performance during the period under review despite several operational challenges in the domestic and the international environment. The growth was fueled by a strong performance as discussed in the chemicals business and a steady improvement in our Technical Textile and other business. During the quarter, on a consolidated basis, revenue grew by 35% to INR 2,843 crores. Earnings before interest and tax, EBIT grew above by 19% to INR 570 crores. Profit after tax came in at INR 383 crores in Q2 FY '22, higher by 21% when compared with corresponding period last year. Coming to our segmental performance. In Q2 FY '22, our Chemicals business delivered a robust performance despite various COVID-19 linked challenges and continued disruptions in the supply chain. We reported a notable revenue growth of 28% at INR 1,126 crores over corresponding period last year. Within the Chemicals segment, the specialty Chemicals business continues to register a healthy performance due to increasing sales in both exports and domestic markets. Overall performance was boosted on account of increased demand of existing and new products. However, we believe the external environment remain a cause of concern. As we have been sharing, we are facing adverse impact of rising costs of certain key raw materials, logistics issues, higher shipping costs and congestion at ports. I would like to highlight that there were some operational challenges seen in the quarter, which resulted in temporary production of the hedge where one of our plants and its downstream products. However, we were able to bring the situation under control in [indiscernible]. During the quarter, I am pleased to report that Board approved the debottlenecking projects at range for a CapEx of INR 27.5 crores, enhancing production capacity of a key product catering to the agrochemical industry. This is scheduled to be completed in around 8 months. If the completion of this debottlenecking project, the production capacity of the products will increase and the demand for the products remains robust. We remain confident of utilizing the increased capacity [Technical Difficulty]. Such efforts together with improved effectiveness and optimal capacity utilization will equip us to deliver even better operational efficiencies and results in the future. In our fluorochemical business, SRF delivered a positive performance during the quarter, owing to higher sales volume in refrigerants, [indiscernible] and chloromethane as well as enhanced realization. This might be impact of the second COVID wave in it. Furthermore, our pharma propellant, which is sold under the brand name, Dymel HFC 134a/P has witnessed significant increase in sales. In addition, our upcoming projects are well on track, although the CapEx costs are witnessing increases due to significant inflation in steel, cement and other key material. In our Packaging Films business, SRF reported an increase of 29% in its segment revenue, which stood at [Technical Difficulty] during the quarter over corresponding period last year. SRF has established itself as a global major in the Packaging Film industry. The business continues to be one of the largest exporters of BOPET films from India. We have witnessed improved traction from new capacities in Hungary and Thailand, enhancing sales value added products further aided growth. SRF has also added some new products to its portfolio in the first half of the fiscal. Operating profit, however, declined by 27% over corresponding period last year, as BOPET film margins were under pressure. We have indicated in the past of a likelihood of such a scenario playing out. However, this was partially offset with a sustained demand of BOPET films, BOPP films. In addition, availability and price of key raw material was a cause of concern. I am happy to share that SRF's new BOPP film line at Rayong, Thailand, was commissioned during the quarter, making us a one-stop shop for specialty packaging film offerings to our key customers. As indicated in the past, there are a number of new lines expected to be commissioned in this and the next fiscal. With focus on efficiency and improving demand scenario in the upcoming quarter. We believe that the business is well-positioned to take advantage of the same and delivering an improved performance. Moving on to our Technical Textiles business segment, SRF reported an increase of 68% in its segment revenue at INR 538 crores in Q2 FY '22. The business performed in line with expectations on account of the improved sales volumes in the nylon tire cord fabric business, melting fabrics and the polyester industry yarn sectors. SRF continues to focus on increasing operational efficiencies. Strong momentum was seen across the board in the domestic tire business, resulting in higher demand in the TCF sector. With the reopening of the mines, the melting fabric sector also saw a surge in demand. Serving the community has always been at the forefront of SRF's philosophy, and I am happy to share that we have been recognized for our community engagement initiatives. The technical Textiles business at Gummidipoondi was awarded the Corona Warrior Award 2021 for their philanthropic efforts during COVID-19 lockdowns. TTB volume, on the other hand, has been acknowledged for its flood relief efforts in Madhya Pradesh [indiscernible]. Lastly, in our other segment, SRF registered a revenue increase of 52%, that stood at INR 86 crores in Q2 FY '22 over corresponding period last year. In a challenging economic environment, both quoted and laminated fabric businesses did reasonably well. In the coated fabrics business, despite challenges in demand, SRF maintains its domestic market leadership as it is focused on value-added products, targeting newer markets and efforts to enhance operational initiatives. In the laminated fabrics business, segment maintained its leading position and the performance was in line with expectations despite several external channels. Margins continued to remain under pressure due to the ongoing oversupply issue. Further, the anti-dumping duty on Chinese PVC flex filling import has also been extended till January 31, 2022. Coming on to our balance sheet. In FY '22, SRF's sustained efforts towards interest optimization through betterment negotiations and excellent debt management led to reduction in interest costs by about INR 28 crores in H1 when compared to the corresponding period last year. As of September '21, our net debt position was lower by about INR 180 crores when compared with March '21 despite continued investments that we've been making in capital expenditures. SRF's prudent debt management strategy, along with excellent access to diverse source of liquidity continues to send them the liquidity position. SRF's Foundation, our CSR continues to drive innovative initiatives in the education space. Happy to share that SRF won the Rotary CSR Award 2021 for exemplary work in basic education and literacy during the quarter. In conclusion, I would like to state that despite several domestic and international challenges, SRF has delivered a resilient performance, and we remain cautiously optimistic for our H2 FY '22 performance. A multi-business strategy, along with a strong infrastructure in place and outstanding R&D capabilities have helped -- will help us in facing external uncertainties encountered by certain business. We are confident and will earnestly strive to deliver a superior performance and create value for all our stakeholders in the future. On that note, I conclude my remarks, and would be glad to discuss to any questions, comments or suggestions that you may have. I would now like to ask the moderator to open the line for Q&A session.

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

Congrats on good set of numbers despite the challenges in environment. Rahul sir, first question is on the refrigerant demand outlook. So given the chip shortages and the challenges, how are we seeing the demand, both in the domestic as well as the exports market maybe over the next couple of quarters?

Rohit, what you are saying right that the domestic and even the international OEM segment is facing challenges in terms of, let's say, production of vehicles that we've seen over a period of time. I believe that is something that will continue for some time. It is something that can't go away very quickly. But the point to make is that, let's say, a majority of the sales in the ref gases. And then when we say ref gases, specifically here you look at is the vehicle or the 134a that we do. I think there is a large amount that will get sold in the secondary market, which should actually keep us in good state when we look at it from an overall market and demand scenario perspective. I do believe that the demand scenario for 134a, both domestically and internationally, is a significant positive going forward. We believe we should be able to utilize all our available capacity for 134a going forward as well. So that's how we believe it will clear.

Right. Sir, the second question is on the packaging films segment. So we have seen a sharp drop on a Q-o-Q basis in margins. So is it possible to concur that the exit rate for margins were lower than what it is reported at around 17%? And incrementally, our focus will be to drive the growth predominantly through volumes as you explained that more capacities will come in and that will certainly exert pressure on the margins.

I would not say that the exit rate is even lower than what has been reported from a quarter-on-quarter perspective. We do believe that there is -- and again, I think we've been saying this for some time now. Each time we say this, everyone comes back to us and say that, that you again said that there will be, let's say, a lower margin or there will be a margin drop in the packaging film businesses. That was not happening for probably the last few quarters. As things have panned out, some of those new capacities have come in and have started to hit the market, and therefore, some of the margin, let's say, drop has happened. I don't believe that it was purely an exit margin when we look at from a September perspective would have been lower. It would have been probably remained similar in the overall range. I also do believe that given where, let's say, the festive season is in India and what we have seen from a demand perspective here, there will be some positives that can develop during H2, and we should probably do a better job than what has been reported in Q2. Again, there is a seasonality also in the business in that sense, and that should play out as we well. That would be my real comment, Rohit.

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

Couple of questions.

[Foreign Language]

[Foreign Language] Can you hear me?

[Foreign Language].

So first on the ref gas side, we have been reading about pricing going up as high as 70% in R134a. Can you just explain us how are the prices in each of the ref gases we are seeing the scenario today? And a related question is what kind of capacity utilization did we see in Q2? And we are talking of a full capacity utilization in R134a going forward. So just in that context, that would be helpful.

So in this, you are right when you say that the capacity utilization has gone up. There is the price or, let's say, the trends in prices in the ref gas segment have been a positive. And again, I'm here talking about HFCs and not HCFCs. So I'm not talking about 22. I'm only talking about HFCs. This is essentially, I think, been fueled by a large demand that is coming out of the U.S. There is also some pent-up demand in the domestic market that is going up. And therefore, the capacity utilization also has been in good shape. Whatever production ability that we have as of exit of September, all of that is being fully utilized. Like I said in the opening remarks as well, there were certain production challenges that we did face, and we've kind of sorted them out during Q2 also. When you look at it from a scenario perspective, going forward, I think the scenario should be a positive one. Price trend seems to have stabilized, and it is only going up as of now. How and where will it end, is something that nobody can say. Hopefully, it will remain a positive for us. I mean, some of the price increase also is a function of the fact that some of the raw material prices have also gone up. so While there is the price increase that has happened, there is also no denying the fact that fluorspar prices, logistic costs, dispatching the material to the customer, all of those have become even more costlier. So differentially, I would say margin has gone up, but costs, let's say, between sales price and cost, cost and sales price, both have gone up. Luckily, the net impact on margins is a positive one.

Fair enough. Fair enough. And when we say that in September, we have utilized all the capacities, we are talking of all the 3 HFCs 32, 125, and 134a?

Yes, please.

Yes. Yes. Second question is on the fluro specialty. Twofold: one, we have been talking about strong demand in domestic. This is part probably a comment which has come in for the first time. The impression was that predominantly it's an export business. So can you just explain us the domestic part of this business or our understanding? It's pharma, agrochemical?

It is all agrochemicals. There are 2 products that were produced in our multi-purpose plants and those have been shipped back to our domestic customers. One of the international players, Sanjesh, are also setting up their capacities in India from manufacture and sale of certain agrochemicals. As of now, some of these products were large processes, which have been supplied to the customer. And therefore, the comment on domestic market was there. You are absolutely right when you say that it is an export focus business as of now. But again, one of the key elements that we are also witnessing, Sanjesh, is that multiple, let's say, customers of us are now looking to tap into the Indian market as well on the agrochemical side. Again even if that happens and as and when that happens, I think it should be a positive for us, given that we are doing a lot of chemistry work for some of these major customers.

Got it. Got it. So basically, customer remains the same. Just it's the geography, which is changing. Is that the right understanding?

Perfect.

On the guidance part, now that the first half has been strong because both the quarters, we have made a very strong comment, are we looking at changing the guidance from 15% to 20%? This is also to be understood from the fact that there will be price increases because of the RM pressure? I hope you...

Let me stop you there, Sanjesh, because when we say 15% to 20%, that is something that we specifically and always commented on the specialty chemicals business. I have always said that in the fluorochemical business, what you are going to witness is volume-led growth and capacity led growth.

No, no, no. I was talking about specialty itself probably, Rahulji. Now that RM pressure [Foreign language]. We have seen all the commodity prices going up. So the RM pressure will also be witnessed in the fluoro specialty. On that, that drop, do you see an upside risk on the revenue for the fluoro specialty?

So upside [Foreign Language]. Upside is always a positive, right?

Yes, yes. Got the point -- right?

So I would say it this way, Sanjesh. As of H2, sitting in H2, we are confident that we will achieve the 15% to 20% number that we've talked about. I would really be -- I should really be talking about, let's say, the annualized number in December post December results. There are multiple challenges. There are multiple issues that are being faced. There are multiple logistical issues. There are multiple, let's say, issues with respect to being able to dispatch the material, availability of containers, port logistics, all of those are challenges today. Some of that -- those are actually, let's say, end of September, early October started to improve to a certain extent. If they do improve, I think we will do a good job. But let us stick to 15% to 20% as of now. You will probably get some positive or let's say a better actualized picture in December.

Got it. Got it. Bookkeeping question. I will not take more time. One on the power cost and other one on the CapEx. How much of our power cost is gas and coal because that has seen a huge inflation more so on the end of the quarter? So that cost will more be visible in the Q3. And on the CapEx, we have been guiding about INR 18 billion kind of CapEx, INR 15 billion to INR 18 billion on the range. First half looks slightly underwhelming at INR 6.6 billion. That means -- is there...

So I didn't get the last one. So I understood the power question, I didn't understand the second one.

Power question is the gas prices and coal prices.

And I'll answer that. What was the second question?

Second question is on the CapEx.

CapEx. Okay.

INR 15 billion to INR 18 billion guidance versus first half of only INR 6.6 billion.

So let me just clarify this. Yes, what we are saying is absolutely right, we witnessed a large -- so let's say, when we look at our power costs, our power costs is largely because of the thermal power plant that we operate as well as the cogen plant that we -- and all of these are cogen plants because these are also chemical processes where we need a lot of steam as well. So there is no doubt and that, that is something that has been visible even in our results where between Q1 and Q2, our power cost has gone up significantly, let's say, about INR 30 crores, INR 32 crores. When I also look at it from a Q-on-Q perspective, the power cost has gone up by almost INR 70 crores, INR 80 crores. [indiscernible] coal and some of this is higher operations also when I look at it from a CPLY perspective. But when I look at it Q-on-Q, most of it is price variance. Some of the price variance should also be playing out during H2 as well. Because again, coal prices have not really come down. They are on a trend up only. We will do mitigated measures. We will look at importing. We will do whatever is required to keep this under check. But I think some of the understanding that has also developed over a period of time is the fact that the coal cost or let's say, costs have increased and some of these have been passed on to the customers also. Again, like I said, costs have gone up, but the incremental margin seems to be a positive. The second question that you have asked was with respect to the CapEx. I think the overall CapEx guideline has been in the range of about INR 2,000 crores. Probably, again, the only element of change that has happened on that side, Sanjesh, is the inflation that has happened from a raw material or let's say, key CapEx item perspective. Steel, cement, other key raw materials have all significantly seen inflation volume. Some of the CapEx costs that we are currently incurring were probably based on a certain benchmark. At the point in time, they were conceptualized. Some of these costs are likely to go up. However, I don't see a change in the IRR for, let's say, majority of these CapExes. That still remains pretty robust. So that would be my answer, Sanjesh.

[Operator Instructions] The next question is from the line of Rohit Sinha from Sunidhi Securities.

Sir, my first question is on the specialties chemical side. As we have indicated in last quarter that some price revision in specialty chemical segment is expected. So just wanted to know, was there any price revision happened? Or we would see something in the coming quarter, as we are almost at the similar number as in Q1 FY '22?

I am unable to understand the question. I don't really comment on prices of any of the products individually. The list of products are probably at 60, 70. At any point in time, we are doing 15, 20 products, right? So it's very difficult to be able to comment on price of certain products, that's one. Second most of these products that we are doing are contracted in nature. And therefore, it is very difficult to pass on any increases of prices. Obviously, some of these do get renegotiated. Some get a positive response, some don't. So when you play out the game depending upon higher volumes for the future, depending on contracts for the future and in that manner. It is impossible to be able to comment on each product and its price variances as such.

Okay. Okay. Fair enough. Secondly on just wanted to know the update on chloromethane subsidy addition, which we announced earlier. So when are we expecting that to commission? Is there any delay or is it on track?

I think it's October '22. Let me just double check it for you. Just one second. March '22, not October, my apologies. Schedule is March. It is slightly later, let's say, a month or so here or there.

Okay, okay. And just last question from the packaging side only. Could you help us with the additional depreciation in the segment during the first half of this packaging segment if at all is possible? I am just considering the supply issue.

Difficult to answer a specific number on depreciation. Maybe you can connect with the team separately, and we will answer the depreciation question.

The next question is from the line of Nilesh Ghuge from HDFC Securities.

Can you hear me now?

Yes.

So my question is related to tax rate. If I look at the first half of FY '22 compared to FY '21, the tax rates have gone up. So any guidance on that front for FY '22?

Let me just try and answer it a bit differently. Look at -- when you look at tax rate, don't look at a consolidated tax rate because it has a, let's say, a rate of the entity that may be taxable or nontaxable. So when you look at tax rate, you should look at stand-alone numbers. And again, when I look at it, for September quarter corresponding period last year, we were at about 30.08%. For June ended, we were at 30.72%. And for September quarter ended, we were at 30.9%. So I don't see a very large, let's say, change in our tax positions. The only point to make is when you look at it on a consolidated perspective, there is a rate of the entity that is taxable or nontaxable. For example, how many today are completely nontaxable. If that entity is doing well, my tax rate is changing. Thailand is also nontaxable. But South Africa has a certain tax rate. So it really does play the weight game. So it's not possible to look at it on a consolidated perspective. Look at it from a stand-alone perspective and you will probably find stable numbers.

The next question is from the line of Ankur Periwal from Axis Capital.

First question on the Specialty Chemicals side, especially on the margin front. You did allude towards the RM cost inflation, power cost rising, logistics costs being higher. And obviously, the benefit of pricing led growth there in the ref gas side, it has aided the margins. Given the commentary that probably ref gas led price inflation may remain here and gradually over the coming quarters, we will be passing through these RM led inflations, your thoughts on the margin front. Should we consider H1 average at around 21-odd percent as a base case here? And things should be on an improving trend going ahead?

Ankur, it's a difficult question to answer because all of these things play out on product-by-product perspective. So let me try and say it from a product-by-product perspective or let's say ref gas, chloromethane and specialty chemicals each being separate. There will be a positive, from a ref gas perspective and specifically more on the HFC side, that is something as a trend we are seeing, we don't see that trend to abate, that seems to be a positive going forward. The prices of key raw materials are going up. But net-net, we do see a margin accretion that will happen. So that's one. On the specialty chemical side, again, utilization of products and positives on that side should come through over a period of time, and we should get some positives on that side also. We've recently capitalized some of our new dedicated plants. Those seem to be playing out well. We've also seen a new capacity expansion on -- that we announced in one of our products, which should take about 7 to 8 months to complete, which should also be a positive from an overall perspective, but that will probably take more time. So it's very difficult to say that this margin will remain here or will go up. It will really depend on each component of the business doing appropriately or playing out in a certain manner. So very difficult to comment.

Sure, sir. I got the answer. But just one clarification. When we say the pass-through of prices whenever the contract comes sort of renewal, typically what should be a lag here? 3 to 4 months odd?

Typically, contracts would be 6 to 12 months. It won't be 3 months.

Fair enough. Sir, second question on the...

Just let me complete. For more dedicated products. For those that are more campaigned, they are negotiated on the campaigned basis only.

Sir, second question on the TTB side. Now in the last call, we did mention the pricing led benefits, which have led to the sharp jump in margins. And our thought that these margins will more or less remain stable or probably have a positive rub off there. So Q-on-Q, while year-on-year, we are still higher, but Q-on-Q, there is a dip. Anything significant to read here?

Ankur, I have always said this that don't look at margin as percentages in the technical textile business. You will get never get the right picture. What I've always said and I'm repeating again is the fact that when we look at it, most of the costs are passed through, the renegotiations on the price were on the delta and those have come through, which is clearly visible when you look at Q-on-Q performance also, where, let's say, the INR 133 crore number in Q1 has remained similar to INR 133 crores. The capital at tonne has gone up from INR 1,500, INR 1,600 per tonne to INR 2,200 per tonne on an average. To that extent, there will be the sales that will be higher, and therefore, you will make a margin percentage drop.

Sure, sure. And lastly, if I may add. On the packaging side, so I'm slightly confused here because one comment mentioned that there are new capacities coming over the next maybe 9 to 12 months, and hence, probably there will be some uptick. But at the same time, you do mention that the downward trajectory is limited because there is some stability visible. Are we more or less guiding that these numbers may sustain for a few quarters before we see an uptick? Will that be a right hit through?

I would say it in the reverse, Ankur. What I've said is there are new capacities that are adding this fiscal and some in the next fiscal. While the demand uptick is a positive, that should play out well for, let's say, Q3 and Q4. Some of this will also start -- we will start to witness it as new capacities get added. So while we are positive from a Q3, Q4 or H2 perspective, as new capacities will get added some pressure will come back also. So I think that was the intent of the comment. Maybe it was a bit vague.

The next question is from the line of Naushad Chaudhary had from Systematix.

Just few clarifications. Sir, firstly, on the packaging business side. The correction in margin -- the normalization in margin was purely because of the spread decline? Or were there some other factors which impacted this quarter margin, which might not be there in the coming quarters? Let's say, this quarter, we had a BOPP quarter of operation, the new capacity that we have added or any other costs which we had experienced in this quarter?

Let's say this, Naushad, that I don't see any one times in the results that have been reported in Q1 -- Q2.

All right. Secondly...

One time, which will lead to -- let's say, which will not be there in the next quarter, which will push up the margin. I don't see that. What I am -- what we can only say is that there is a positive demand traction that we are seeing, and that is something that will develop over the next quarter.

Sure. So as we are adding capacity in packaging to, this would lead to volume growth. So would it be fair to assume in absolute term, will we be able to maintain INR 750 crores to INR 800 crores of EBIT run rate going forward in the packaging business?

Naushad, what I will say is that in view of all the capacities that we are currently working on, there is only 1 BOPP capacity in India that we are currently putting up. That capacity, I think, gets online in October '22, somewhere around it. September/October '22, or let's say, Q2 of FY '22 -- FY '23. That's the only new capacity that is available. So yes, capacity-led growth will come in from that quarter onwards. Other than that, all the capacities that we are working on other than probably BOPP in Thailand, which was commissioned in August, we will see a volume-led growth. Other than that, all is operating at full capacity today. We will lead to growth and margin expansion and probably it's something that we are looking to work on is to be able to do more value-added products in the lines that have already been commissioned. So BOPET in Thailand, BOPP in Thailand and BOPET in Hungary. So what should add to a positive going forward.

Understood. Lastly, on the TTB business, as you have just mentioned that quarterly run rate, we are maintaining at INR 120 crores to INR 130 crores of EBIT. Would it be -- do you think this number should be sustainable for us going forward? So that would lead to around INR 500 crores of EBIT from Technical Textile business annually?

Again, I'm not here to comment on the singular number. I've given you the trend, I've given you the position that we are in. I'm also telling you the fact that our capacity utilizations are well managed as of now. Hopefully, we should be able to do those similar utilizations in H2. Whatever the number comes, the number comes. I'm not willing to put INR 500 crores or INR 525 crores or INR 600 or for that matter INR 400 crores around it. So not able to comment on singularly the number.

The next question is from the line of Abhijit Akella from IIFL Securities.

Now we've seen some improvement in Chemical segment margins this quarter on a sequential basis by about 230 basis points or so. Just wanted to understand if this is largely attributable to higher prices in refrigerants? Or it's coming from the specialty side as well? And -- so just trying to get a handle on whether we should expect further improvement of this base also in the refrigerant business?

I would say, Abhijit, you've pointed it out well. The fact is that as of now, we believe that for H1 and for Q2 also the positive is also on account of likely positive margins that we've seen in the Fluorochemicals business or the ref gas side overall, that seems still continuing well going forward. But I would just like to kind of take in a manner where whenever we've looked at our Specialty Chemicals business, we've also seen a much larger positive in the Specialty Chemicals business in H2 when compared to H1. So there is some seasonality that have continued in the Specialty chemical business. Given that ATL IS now pass, maybe there is a father that can develop the new specialty chemical space also. Then the only warning here is that there are significant logistical challenges that have been faced, availability of containers, availability of shipment, availability of vessels, is currently a challenge. I can tell you that there were major materials that were on high teens from our perspective at the end of August, September. So that seems to be a trend that is continuing. Hopefully, things will come out a bit better going forward.

And the other one was just on the CapEx guidance for this year. We've done about INR 660 crores in 1H. Number one, is it possible to just give us a breakdown, rough breakdown even, segment-wise, how much is in chemicals? How much is in Packaging? And then second, since you are guiding to about INR 2,000 crores for the full year, it obviously implies...

I don't have the number right in front of me. Maybe you can connect separately with the team and they can give you some more details or some more color on this. I don't have the number separately available immediately, I'm sorry.

Okay, sure. But out of this INR 2,000 crores guidance, I believe Chemicals itself you were planning something like INR 1,000 crores or thereabouts, maybe a bit higher?

INR 1,100 crores INR 1,200 crores.

So is that still on track despite a slightly slow 1H?

I think so, absolutely.

The next question is from the line of Surya Patra from PhilipCapital.

So just on the Dymel sales, can you give some things like [indiscernible] long back that we had acquired...

Sir, your voice is a bit muffled. Could you be closer to the speaker?

Yes, sir. Yes, sir. So I was saying the saying the Dymel sales, see long time that we had acquired the brand, and we have created enough capacity now which is on stream and stabilized also. So could you give some sense on how big this business is now currently of the total refrigerant gas business?

So again, Surya, it was never intended to be a very large portion. It is also very niche business. It is expected to be a niche business. We do almost, let's say, from a capacity perspective, our overall HFC capacity, post all our product completions will be 50,000 tonnes, 60,000 tonnes. Dymel will remain 1,500 tonnes, 1,600 tonnes. So it will remain niche. It will remain highly profitable. But it will remain a small portion. It will never become a INR 1,000 crore stream in that sense.

Okay. Why because the growth on that segment is very, very peculiar and healthy. That is why I was trying to...

Obviously. One of the key things that has also happened that it was being used for the therapeutic uses. One of the medicines that was been prescribed was [indiscernible]. And therefore, that is something that was growing. And therefore, the Dymel sales or especially propellant sales have witnessed significant increases. Because it is therapeutic, it is also likely to continue.

Yes, sir. Sure. Sir, second point is that the freight cost element, how big is that in the overall RM cost for any specific nature? Or on blended basis, let's say, for SRF, this freight cost, is it likely to prevail like this for, let's say, a year or so. So how for -- I mean what are the kind of pressures that it can bring in or what is the pressure that we're currently seeing because of this? Is it a kind of a very marginal element in the overall cost structure?

No, no, it is not marginal at all. Whatever exports I do, freight is a very large element of it. And therefore, I don't think it is minor at all. The increases in freight cost have been phenomenal because we are sending -- getting a 40-foot container and sending it from Thailand to the U.S. has become obnoxiously high. Look at the index on it, and you will find the Baltic dry and other indexes on the shipping side, you will find those indexes have gone up haywire. So if you look at it, they have gone up 3x to 4x. There is no way that anyone in the industry can be, let's say, left insulated to the increase in freight costs. So freight costs will have an impact, are likely and continue to have an impact. The only positive that I have said earlier also is the fact that some of these have been well understood by the customers also and we've been able to pass on. Some of these freight costs, in some situations, which have been contracted, deliver duty paid or delivered to the customer whereas we've been unable to pass on. But those negotiations are going on and will continue deep into H2.

So there is kind of a comfort of passing on to the customer, so that is why that is not visible that way on the margin front? Is that right?

As I said, these are contracted, Surya.

Okay. Sir, just last question. On the overall revenue mix, sir, so the Chemical business, which has been consistently in the range of round around 45% of the total business, although the CapEx has been slightly heavy towards the chemical business, refrigerant and the specialty put together, but over the last few years, if I see the trends and it is around 45% because the execution level at the packaging side was quite faster compared to the chemicals side, so that's why say trending still towards that. So let's say, over 3 years down the line or 5 years down what is the kind of ultimate revenue mix that we are expecting out of the chemical business?

So Surya, I would say it in a different manner. When we look at it, the overall revenue growth in specialty and fluoro chemical given the CapEx that we are incurring over the next, let's say, 3 to 5 years could range between INR 4,500 crores to INR 5,000 crores. When that is the number, you should be adding, let's say, 1, 1.25x or in some situations, let's say, because there is an infra requirement here between 0.9 to 1.1x in terms of revenue. Given that the situation, I think in a 5-year time frame, we should see about 70%, 60% to 70% as chemicals. But it will all depend on the capital allocation going forward.

The next question is from the line of Tarang from Old Bridge Capital.

Just a couple of questions, sir. In your fluoro specialty business, are customers open to absorbing the cost push? I mean, how are your conversations happening there?

See the fact of the matter Tarang is that everyone knows the logistics. Everyone knows those costs have gone up. Now in some situations, the customers will be looking at -- and again, these are negotiations that will keep going on, as I said, late into H2. Given the fact that there will be logistic challenges, there will be costs that you are incurring, you are also committed to be able to deliver to them the product that you committed to. In some situations, you will need because given the fact that the margin positive that still comes through despite those costs is there. But you will negotiate it. I don't believe that there will be any customer who will not be willing to listen. The only point is you have contracted it, they will want to ensure that the contract is delivered. And when you are looking to renegotiate the contract for the future, you will talk to them about the fact that you probably, let's say, done business at a loss than what was estimated at the time you were contracting it. And therefore, you will probably come to a better state for the future. I think in some situations, you will actually end using, let's say, getting a larger share of their wallet or the pie is to be able to deliver larger value going forward. So these are various types of negotiations that will happen, can't be pinpointing around it.

And are you investing raw material escalation in your specialty business or it's largely a logistics issue?

No. So logistics issues, we're actually cascading into raw materials pricings also because of the availability and some of the raw materials not being available or being available at a certain price, which was -- which is much higher because of logistics. So issue is logistics. But raw material situation inflation is also being seen because of the fact that logistics have been high.

And sir, to an earlier participant's question on CapEx, right, I was just wondering, I mean, the prices have just zoomed for basic commodities. So I mean, you don't obviously seem to be recalibrating, but you passed a comment indicating that the IRRs won't change. Just a little flummoxed that the effect...

Because of the commodity inflation that has happened, we -- I have said that it seems to be a net margin accretive position that has come to. So while there is commodity inflation, even on the, let's say, price of your finished product, you've seen some inflation happen. And therefore, IRR has not changed because there is a margin appreciation that is happening.

Sir, but I mean, commodity prices are likely to -- you never know these are the kind of things that you can't predict, but once you have a plant put up at an elevated steel or cement price, how much of negotiating power would you have when you're eventually pricing your goods to your customers? Because in the future, for all you know, the prices would probably trickle down from the current levels?

If you look at both ways, Tarang, to be very frank about it, there will be -- there is without a doubt, some inflation on cost that has happened in terms of when we are putting up the CapExes. And largely, those CapExes that have been calibrated, let's say, 2 years prior to where we are sitting now. For example, PTFE for that matter. There will be, and I mean when I look at it, when we were calibrating the CapEx at the point in time, prices of PTFE were at a certain level, they are 40% higher than what we are calibrating the CapEx at. And therefore, we think the current prices, we don't see an IRR negative. But you are absolutely right. If the prices fall, I have put up a CapEx at a higher rate and therefore, there will be an impact, most certainly, no doubt in it.

Okay. But no recalibrations. I mean you are continuing with your plans, correct?

Let's say, I've incurred 50% of the cost. Now putting it on hold probably makes more sense than going ahead with it.

Opportunity cost, I understand.

The next question is from the line of Vishnu Kumar from Spark Capital.

Sir, if you could...

Just a little bit louder, please.

I hope to per -- just if you could explain, sir, whether on the international market when you're exporting, whether all these global suppliers are present in the market or there are some pockets where, let's say, China or some other company countries are not exporting that much, so we are finding a disproportionate pricing and volume benefit? Any thoughts on that?

What?

On the ref gas exports, sir?

So there are 3 or 4 large global manufacturers. The only good thing that I would say is the fact that not many are fully integrated in all 3 of the ref gases. And when I say ref gases, I really mean HFCs. We are the only one plus another company in China that as all the 3, have the integration to keep raw materials for all the 3. And therefore, we are in good shape. But yes, in global tenders, mostly all the large players in the world are present, but I don't see any singular player present across all 3 HFCs.

No. My question was, was there any disruption from supply from the other guys? Is that -- that's all the question.

Yes, there have been antidumping duties that have been imposed in the U.S. for Chinese products, and those have augured well.

Got it, sir. Sir, and just one more question on the ref gas, where are we on the utilization on HFCs and if you could just give us some color on how should we see the volumes -- volume growth over the next 2 years in this particular segment?

So exiting September, I think almost everything was fully utilized. Even 125, and 32 and 134a. 134a, there was a single train that was running as of now. We are looking to expand that out in the future. So there should be additional capacity that is available. 32, we are enhancing the capacity. I think that's the CapEx that we are currently doing, that is probably by December or January next year, we will probably be adding about 2,500 tonnes, all capacity on 32. So once they ramp up, we will be in better shape. We reached the 15,000 tonnes of capacity that we announced last quarter, which is probably about 2-year project.

Got it. So next 12 months, you are more or less running at full capacity. We won't have much of a volume upside?

Other than from the December one.

Yes, till December?

Yes.

Got it. And one final question, sir, you have seen this industry for quite a long time. In your best case, how is the demand likely to be for ref gas? And are these margins kind of sustainable? Because we are seeing elevated pricing. On that also, we are seeing elevated margins. Your best opinion, are we at the peak or you think this will continue for the next 2, 3 years? Some broad color on this.

I would say there seems to be a positive that is going ahead going on, at least, for the next 12 months or so. Again, we've lived in times of very low prices for the last 2 years. This is the first time we have seen a positive on this that is coming out. We hope it can continue for a long time, but again we will be in the [indiscernible] last year, we saw tonne of, let's say, Chinese capacity coming in given where the moderate protocol restrictions were. Some of those have come through. Some of those will come through over a period of time. No new capacities are being added, so that's a positive. Worldwide, I don't think that there will be additional capacities that will be added. So there seems to be a positive traction in terms of the current prices remaining. But again, no inflated prices can remain for a very long period of time. They will correct. By that time, I think what we should have done as SRF and as a company is get our costs under better control and be able to manage our plants even better than what we do today. So operational efficiencies should kick in.

So one question, if I may. How often does your TTB contracts get renegotiated? You mentioned that this...

Annually.

Annually. So this one at least a percent number, which should continue for the full financial year?

The delta is probably what gets negotiated the most.

Ladies and gentlemen, we will take one last question from the line of Yogesh Patil from Reliance PMS.

Sir, my question is related to, again, rising crude prices, which are at 7-year high. So how much raw material prices are already passed on? And how much do you expect to immediately pass on to maintain the EBITDA margin flows to 25% on overall level? So basically, in the last few days of second quarter FY '22, we have seen a sudden jump in accrued and other raw material costs. So we want to know how long it will take or how long it takes to pass on to consumers on each segment basis. So if you could give us ballpark numbers in terms of days or months? So that is the question from my side.

Unfortunately, if I start answering that question, I'll take another hour to be able to answer it because each product, each raw material will have a different dynamic that operates. It will have a different demand and supply situation that operates. For example, caprolactam, we have a defined demand and supply situation while it is still a derivative of crude and benzene. PTA, MEG again will have a different demand and supply situation. So while crude does have an impact, there is no direct correlation to crude in any of our key raw materials. There is some, let's say, some of the key raw materials to the raw materials that we use are petrochemical related, benzene, PTA and those types. But I don't see a direct correlation. Let's say, the beta of that will be probably 0.7 rather than being at 1. So that's how I would put it. It is impossible to answer how much time will it take for 1 month of crude price change to be able to pass on to the customer. That is impossible.

Thank you. I now hand the conference over to the management for their closing comments. Over to you, sir.

So thank you, everyone, for joining the call. We hope we have been able to answer some of your questions, not all probably, but happy to connect separately also and see if there are additional questions. Whatever is in the public domain, we will try and answer them. Thank you so much everyone. Bye-bye.

Ladies and gentlemen, on behalf of Kotak Institutional Equities, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.