Sudarshan Chemical Industries Limited (506655) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Sudarshan Chemical Industries Q2 FY '22 Earnings Conference Call. [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, Rochel. Good afternoon, everyone. Thank you for joining with us on Sudarshan Chemical Industries Limited, Q2 FY '22 results conference call. We have Sudarshan Chemicals Management with us, Mr. Rajesh Rathi, Managing Director; Mr. Nilkanth Natu, Chief Financial Officer; Mr. Vivek Thakur, General Manager Finance; Mr. Amey Athalye, Deputy General Manager, Finance; and Mr. Mandar Velankar, Company Secretary. I would like to invite Mr. Rajesh Rathi to initiate the proceeding with his opening remarks, post which we will have Q&A session. Over to you Rajeshji.

Thank you so much Sanjeshji for hosting this call. We are privileged to be associated with you. I think the Q2 quarter was one of our very tough quarter for us within terms of demand softening, which we saw post the wave 2 in India and globally having a lot of logistic issue. A lot of volatility, which caused a lot of margin pressures. However, the good news is that we are recovering well out of Q2 and for a more detailed discussion, I am going to request our Chief Financial Officer, Mr. Natu, to kind of give us -- over to you, Natu sir.

Thank you, Mr. Rathi for opening remark. Thank you, Sanjesh for hosting our conference call -- earnings call. Good evening, ladies and gentlemen. Welcome to Sudarshan's quarter 2 FY '22 earnings conference call. Our investor presentation has been uploaded on the stock exchanges for your ready reference. I would like to take you through the financial highlights for this quarter. There is lot of background noise. Yes. Thank you. I would like to take you through the financial highlights for this quarter. On a consolidated basis, total income from operations stood at INR 498 crore as compared to INR 429 crore for the same period last year, reporting a growth of 16% year-on-year. EBITDA for the quarter stood at INR 56 crore as compared to INR 68 crore in Q2 FY '21. EBITDA margin stood at 10.6% as compared to 15.8% over the same period last year. Profit after tax stood at INR 23 crore as compared to INR 30 crore for the same period last year. On half yearly basis, total income from operation stood at INR 972 crore versus INR 781 crore in the same period last year, a growth of 24%. EBITDA for insurance at INR 115 crore versus INR 121 crore for last year. EBITDA margin stood at 11.8% versus 15.4% over the same period last year. PAT is at similar level of INR 49 crore in both the periods. Now going into the details of our pigment. Further quarter income from operation stood at INR 448 crore, a growth of 12% year-on-year. EBITDA for the quarter stood at INR 50 crore as compared to INR 56 crore in Q2 FY '21. EBITDA margin stood at 11.2% as compared to 16.3% over the same period last year. Demand in the domestic market had been stopped until July due to COVID wave 2 disruption. Demand started picking up gradually from August onwards. Due to steep polymer prices increases, the plastic industry demand was affected. Coating segment continued to grow, however, sales in the [ ink ] segment were soft. Domestic sales stood at INR 239 crore as compared to INR 202 crore with growth of 18%. Export for the quarter were at INR 209 crore as compared to INR 200 crore last year, growth of 5% year-on-year. Subdued demand and availability of containers in Q2 were the main challenges. We also experienced aggressive pricing approach by some competitors for short-term gain. We are now seeing cost increases are getting passed on by the competitors. Specialty sales stood at INR 302 crore as compared to INR 271 crore for the previous year same quarter, up 11% year-on-year. Non-specialty sales for the quarter stood at INR 146 crore as compared to INR 131 crore for the same period last year, up by 11% year-on-year. Gross margin for the quarter stood at 43.5% compared to 44% for the same period last year. All basic chemical and intermediate prices have been going up since April. In addition to this, the China energy policy has escalated the prices to the unprecedented level. Our endeavor is to pass majority of the cost increases to the customer. However, continuous and sharp input cost increase inevitably creates a large effect in passing it on to the customer. Apart from raw material cost increases, we also saw energy and logistic cost are also rising continuously. Coal price is now increased to 250% of Q4 FY '21 level. This is pushing up the manufacturing cost. To counter this external cost pressure, our plant team is focusing on process improvements and reducing our manufacturing costs. We are seeing significant improvements getting implemented, which will help us optimize cost further. The challenges in the logistic areas are continuing and leading to freight cost escalation of 3 to 4x. With direct as well as indirect material cost pressure lingering, we will have to continue with selling price increases, taking calibrated approach to balance on the volume growth. Government has notified a RoDTEP scheme raised in August. Pigment qualified for 0.8% benefit under this scheme as against 2% MEIS benefit available until last year. We have accrued INR 2.5 crores over this in this quarter. However, rate as well as coverage of exports, both are low under RoDTEP. All these factors together have led to EBITDA margin declining to 11.2% for the quarter. Now coming to the CapEx project, which is our trust for future. Our yellow pigment products are now stabilized, and we have started commercial sales. We expect to ramp up sales from Q3 onwards with more customer approvals coming in. Another new product under high-performance pigment is in plant trials and is on track for commercialization by end of Q3. We expect to launch products during Q4 FY '22. Our CapEx project to launch products in the inorganic high-performance pigment is also in the planned trial phase, and we expect commercialization during Q4 FY '22. Capacity expansion towards existing pigment rates has reached product stabilization space for new lines. Looking at the project update, we are glad to share with you all that the significant progress is made on our CapEx installation and major CapEx projects are on track for commercialization in H2. Our total CapEx plan of INR 750 crores is on trial. Total capitalization is at INR 293 crore and balance we expect to capitalize by end of this fiscal year. Happy to share with you that Sudarshan has won Mahatma Award 2021 in CSR Excellence August '21. Mahatma Award recognizes and celebrates impact leaders and change makers across the globe, who are making a social impact and leading the way to a sustainable future. As a part of employee welfare initiatives, Sudarshan have initiated vaccination drive and a majority of our employees at all locations have now been fully vaccinated. We also extended vaccination drive to nearby communities in Roha and Mahad region as a part of CSR initiative. Our manufacturing plants continue to operate in line with various directories of the government during the last quarter, and we continue to deploy and practice necessary festive precautions regularly to ensure continuity and uninterrupted functioning of our plant, with safety and welfare of our employees being of utmost importance. We look forward to continuing our growth journey and delivering value to all our stakeholders. With this, now we open the floor for a Question-and-Answer Session. Thank you.

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

Sir, the first question is in terms of the impact because of the floods in Mahad. So how much was the impact during this quarter? And whether we will be able to recover part of it in subsequent quarters?

We had lost almost 15 days of production. However, thereafter also, there have been several issues month-on-month, where about 15% to 20% production because of some breakdowns in the CTP pipeline, et cetera, which has been happening, either there has been in-water source, there has been some effect due to that. However, we do feel there are a lot of actions which the government and they are taking to correct that. And going forward, we should not see such a large issue.

Can you quantify how much we lost and whether part of it is recoverable during the current quarter or subsequent quarters? Or is it a loss for the time being?

Yes. That would be loss. I mean, in terms of 15% production and round about 15 days of production earlier and then almost 15% each month, that was the kind of loss every month thereafter. It's not recoverable because those lines to run full in coming quarters, but we will see a good gain once we standardize on that.

So now it has stabilized. We don't have any issues, right?

Yes. Yes.

Sir, the second question is in terms of the specialty chemicals revenue. So now we see that about 1/3 is non-specialty and 2/3 is specialty. After the entire CapEx of INR 750 crores is over, do we see a shift in terms of the revenue profile more skewed towards specialty? Or how is it?

It will be skewed towards specialty, more skewed towards specialty.

Right. And just one small clarification. We have mentioned in our presentation that industry consolidation trend continued. So this is -- we are talking about the domestic or global? And what has been the new consolidation trends that we have seen?

The consolidation are twofold. One is Clariant -- Clariant's -- Heubach and SK Capital taking over Clariant. And the second is the DIC Group taking over BSF.

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

Sir, in your opening remarks, you did mention a certain pressure due to aggressive pricing by some of the competition. Just opposing this with the global consolidation that we are seeing, is this competition more local or it is more international, wherein we are seeing some aggressive pricing?

Sir, it's more global. It's more global, and it is short-term driven. However, given the increase in the amount of cost and inflation, I don't think it's kind of -- we are already able to see a lot of pass-on happening. And because of this, some of the price acceptance in the market was very difficult to cost escalation because few players were not completely willing to pass on the increase.

Okay. So if I got you right, starting this quarter, we are seeing some normalization there, and the prices are getting passed through?

Yes, sir, absolutely.

Sure. Just continuing on that. So on the margin side, now we did see the compression on the gross margin side, which in a way was expected as well, given the sharp RM price hike, the coal prices, et cetera. By when do you think we should be able to pass through a large part of this inflation, whether it is logistics costs, coal cost or the RM inflation?

So I think a good question, sir. So first of all, if you see the gross margin part, if you compare the last quarter to Q2 to Q2, the drop has not been significant in spite of a very large increase in raw material costs, right? Where the challenge was that a lot of increase in coal logistics, part which could not -- could not completely get passed on, right? And some of the international players have not seen this impact as much as we have seen. Some of them don't use coal, right? And so the impact does not mean as much for them. But having said that, I think we are already seeing a good pass-through acceptance in the market as -- given the addition energy policy of China, we do see next -- ability in the next quarter of some of the pigments kind of we sharpen that's where we will be -- we are able to see a good pass-through.

Sure. And sir, lastly, if I got you, you said, a quarter for the RM pass-through to happen?

What is the challenge has been that the increases has not happened once, right? The increases is continuous. And the last big bullet was the energy policy of China, right? So it's not been a steady state, right? So we have increased costs. As you can see, Q2 to Q2, if you see the gross margin raw material pass-through happened very well. But the pass-through on the other items of coal and logistics could not be passed through enough, right? So we are making every effort now to get -- make sure that we are able to pass on online. Yes. So answering your question and summarizing, we -- margin recovery, volume recovery you will see in this quarter.

Great, sir. And just lastly, because of this power shortage, you have outage there in China, the production cuts, et cetera. Is there any specific impact from an RN availability perspective there for us? Maybe both on the RM availability as well as the sharp RM inflation side?

Yes. The price increases has been quite sharp -- sharp increases. So that's been on this, but we are ensuring that the pass-through happens properly.

Our next question is from the line of Madhav Marda from FIL.

I just wanted to understand a couple of things. Firstly, in Q2, could you help us with how much was the volume growth and the price growth separately?

So I would say that the demand and volume growth was very soft. We don't break up currently the breakup. But it was a very soft quarter, sir, as we were not -- we were hell-bent on passing off the increases, and we did lose some volumes.

Okay. Understood. Okay. And then in the presentation, you have mentioned that we can get additional INR 1,500 crore revenue from the new CapEx in the next 3 years. So just wanted to understand that additional INR 1,500 crore is on the base of FY '21 revenues of around INR 18 crores, INR 19 crores, and then you can get extra INR 1,500 crore on that -- or, yes, just wanted to get some -- it's on the basis of FY '20?

It's almost -- I would say you could use FY '21 as the base.

FY '21 as the base. Okay. And then as mentioned in the presentation, you are targeting like a 3-year period to ramp up INR 1,500 crores of revenue? Is that the right way to read the presentation?

Yes, absolutely.

Okay. Okay. That's good to know. And the last question from my side would be that our margins to come back to levels that they were in FY '21, given that the price action has already started, sort of by end of like Q4 or something of FY '22, we should be back to our old margin that we saw last year?

There is a big volatility and flux, right, what is going on. And secondly, as you're aware, there is a absolute pass on which happens, right? So the percentage pass-on doesn't happen. So you do see some contraction in the percentages, if you are referring to the percentage.

Got it. Yes. Yes. Okay. Okay. But on an absolute EBITDA basis, we should be back to our old levels, right? I understand the percent margins will come down as the price goes up.

Yes, so -- absolutely. And like I said, we are getting back the volumes which we had missed out on. And at the same time, it's a balancing act, right? You protect your margin, you get back your volumes. Last quarter, we probably were too aggressive in protecting margins, right? So there's a balance which kind of we are playing well with this revenue.

And then also you mentioned that consolidation is playing out in the global market, with Clariant and BSF. So are we seeing some benefit or tailwinds from that now on the ground in terms of maybe customers looking for another supplier, et cetera. Are we seeing any tailwinds from that playing out?

Tailwinds were there. But unfortunately, there were some other issues, right, logistics issues. So -- and the logistics cost increase, right? So we lost some of our competitiveness there, right? The second is the volatility because they have local bases to pay on, right? So these were some of the disadvantages which we faced very sharply. And their supply chain opportunity that unfortunately for us, our supply chain wasn't as long as their supply chain, so they could withhold some of the pass-ons.

Our next question is from the line of Viral Shah of ENAM Holdings.

So my first question was again on the gross margin. So what we've seen is that the input cost started to rise most aggressively from September onwards. So do you foresee that gross margins from here on will further deteriorate? Or do you think that this is the base and from here on, we should see an increase in gross margin since we've started to take price hikes?

There were -- gross margins, gross margin, as you would have seen, Q2 to Q2, the gross margins have not drastically fallen, right, but we were able to pass on increase, right, 44% to 43.5%. Right? So we've been able to hold. Where the challenge is there's a drop in EBITDA because of other cost increases, right? Coal, logistics cost, right? And we were also -- a lot of our CapEx is required planning, but they are not still leading revenue as we're going through commercialization. So these 3 factors have increased our cost base, which we've not been able to kind of -- and in the coming quarter, we definitely expect EBITDA margins to improve.

So would it be possible to share what is the quantum of price increase that you would have taken in the last 1, 2 or 3 months?

That's a little bit of a competitive information, sir. So little concern on that. But I think we will look at what we can share definitely.

Sir, my second question is on CapEx. I think in the presentation, we said that our CapEx for FY '22 will be around INR 400 crores. So this number is the capitalization number, if I get it right. So what would be the cash outflow that will happen in FY '22?

So we expect around INR 250 crore of CapEx for financial year.

Okay. And going ahead, FY '23-'24, how do you look at CapEx, sir? Would it be bare minimum to INR 100 crores and below? Or that would -- FY '23-'24 also, we should expect INR 150 crore, INR 200 crores of CapEx?

So I think, as we said, most of our new products will get introduced by this year, right? So whatever CapEx we would do is on backward integration now going forward, right, after this 750 completions. So it should be -- we still need to go to the Board, get on this, but it will be at a minimal level.

Sure. Sir, my third question would be on the land sale. Are we looking at land sale on the Pune -- at Pune? And are there any time lines or something that we've thought about the same?

So the Board is actively looking at what we should do with the land, et cetera. There are some legal compliance issues, et cetera, which the Board is looking at. Right now, there is no view in the coming years as to what could be the next steps. As soon as we have some clarity, we will definitely share that.

Sure. And my last one, if you could provide some clarity on the promoter selling that has been taking place for the last few couple of quarters. The problem is that every quarter, we are seeing incremental sales happening from the promoter group or the entity, which has now been reclassified as promoter. So it is not helping build confidence. So if you could just share your thoughts on the same, that would be helpful.

So I understand that. The company was going through a transition to a more professionally managed company and some of the promoters had stepped down from active management growth and they wanted to set up their -- they wanted to set up their own noncompeting businesses for which they required some funds, and that's where very partial percentages was sold off. The promoters are fully committed to the growth of Sudarshan and are full confident in building the business.

Mr. Shah, do you have any further questions?

No. I'm done.

Our next question is from the line of Mr. Sanjesh Jain from ICICI Securities.

Few of them. First on the inventory and the export sales. Export sales has been quite weak. On the other hand, we have inventory increase by close to INR 70 crores versus...

Can you repeat? Sir, can you repeat? We could not hear you.

So I was looking at the export sales, which have been sluggish versus domestic, and there is an increase in the inventory by INR 70 crore. And we have been talking about the logistical issue, is that we are keeping the final inventory, which wasn't able to ship and revenue couldn't be recognized, is that the reason why there is a sharp jump in the inventory? Or it is because of the increase in the raw material prices, which is leading to the increase in the inventory?

So I think, sir, about -- one is obviously having logistics issues has caused some inventory increase. But we were also -- we had our finished goods ready, but we could not get some of our price increases, right? And that's where we were not shipping our goods even to the Indian -- some of our Indian customers. So that's where in order to ensure margin protection, we had to keep that inventory.

And liquidation has started as we speak in the Q3?

Absolutely, sir. Absolutely.

Oh, okay. The benefit of this should be available in the next quarter as we see?

Yes.

The second question is on the China. Now that China, there is a curtailment in the capacity and China being one of the largest manufacturer of ASO pigment, and we have also mentioned that the increase of competitive pressure. Do you think that with lower capacity available at the China because of the power shortage, we should be able to ramp up this facility faster than what we had thought earlier or the current guidance of 3 year could be achieved sooner than what we expect? Can we envisage that kind of a situation?

First of all, I think we're getting to several pigments, which are non-ASO, right? I think I would still -- these are new products into coatings and other applications, which does take some time for approval, and the ramp-up is a little slow. We'll obviously be hoping that we do this in slightly less than 3 years. But I think 3 years is a good amount to drop this. Having said this, sir, there may be short-term gains as we have also expanded our ASO capacities. There could be some short-term gains if China does have issue of supplies, et cetera. We've seen a lot of chemicals and intermediate spreads are affected. So far, there is no intelligence on the pigment capacities being quoted, right? And it's on the ASO side, right, so we've come across some other areas which has been quoted, right?

Okay. Just one clarification here on the competition side. We have seen, in general, the chemical prices have gone up significantly. Some of commodity chemicals have actually gone up by more than 2x. What is causing the competition in the pigment industry, while there is a constraint in terms of the capacity production in the most competitive market, there is a RM pressure. What is causing this increase in the competitive intensity? Were the people sitting with a big inventory and they wanted to liquidate? Or what -- can you just help us understand this competitive dynamics a little bit more well?

I think as I said, some of -- there were 3, 4 issues, which were kind of dynamic, right? So the logistic cost increase kind of gave -- led to the Europeans also becoming competitive and more better ability and service locally because they have local production units, right? That was one. The second is there is a -- in terms of consolidation, some short-term gains to be kind of gotten. And as I mentioned, their supply chain was more secure, more longer-term secured than some of us. And that's where we saw each competitive pressure. Fortunately, that is over now, and we are able to -- that we are able to kind of pass on some increases and also get the volumes back.

Got it. Got it. Got it. One question on the product pipeline we just spoke about in our opening remarks. Yellow pigment looks like we are fully commercializing in Q3. And we are talking of another 2 HPP getting commercialized in Q3 and Q4. Can you just tell us what is the total addressable market, all these 3 new products put together give us with the complete commercialization?

Just one second. One second. Sir, if you look at the entire CapExs which we expect to commercialize in the next half, the potential of that is about INR 1,500 crores in the next 3 years.

No, no, no. I'm just looking at the new product launches, which we are doing, which were not existence in our portfolio earlier, now out of this $8 billion of the pigment market, which we told, we won't be servicing all of them, right? So there is an increase in the total addressable market for us. Or to put it simple, these 3 products put together today, how much will be the industry size for the 3 product yellow and the 2 new HPP products which we are launching?

Just one second.

Sir, this is the operator. Just checking, you've muted your line, right?

Yes. Just a sec. I think we don't have this answer readily available. We'll come back to you.

Sure, sir, sure, sure. That's it from my side. And best of luck for coming quarters.

Thank you.

Our next question is from the line of Amar Mourya from AlfAccurate Advisors.

Two questions from my side. Number one is, now as you indicated that yellow pigment commercial quantities got approved. So from here on, can we see a faster pickup? I believe we had invested around INR 350 crores in the yellow pigment, right?

Obviously, we are not -- all the CapExs we are not giving breakups as confidential information. But I think we do expect a quicker payback and since the qualities have got started approving, in the next 3 years, we should be able to see the complete capacity utilization of this plant.

Okay. Okay. And secondly, sir, now this INR 1,500 crores of full potential of the INR 750 crores revenue, so largely kind of 2x kind of a start-up that ratio we are expecting now. So just wanted to understand, like last quarter, there was some confusion that we were indicating that INR 135 crores is a kind of an infrastructure CapEx for which the potential revenue may be get delayed. So I'm just -- I wanted to confirm that this INR 1,500 crores include that or exclude that?

Sir, the INR 750 crore includes that investment and the entire potential, we've given a full potential of the entire INR 750 crores. To make it very simple so that there are no breakups.

Okay. And secondly, sir, this INR 1,500 crores, let's say, when we are targeting 3 years, so can we say like it will be equally divided in 3 years or kind of like how the scale-up will happen for this INR 1,500 crores?

Sir, the first year would be slightly slower, and then it should ramp up some.

So like first year, let's say, 20% at least or 30%?

No. So I would say 20%.

Okay. Okay. And then you are saying equally divided between the 2 years?

Yes. And third would be slightly higher. Second would be slightly -- I mean, the ramp-up would happen, sir.

[Operator Instructions] Our next question is from the line of Aditya Mehta from GK Capital.

Sir, in last quarter con call, we mentioned that INR 120 crores of CapEx will get completed by the September end, and the balance was to be completed by Q3. So has it been delayed? Or any reason behind for the delay?

Sir, what has happened is because of the phase 2, some of our equipments had got delayed. And the installation now is completed, right? And now the commercialization is in progress, and we do expect by the year-end, gradually, the entire CapEx would get completed by the year-end.

Okay. By Q4, all the CapEx will be commercialized?

Sorry?

By Q4, all the CapEx will be commercialized which we have done this year.

Absolutely.

Okay. And sir, currently, utilization levels are around 60%. So what is the highest utilization level which we can see over a period of time?

80% to 85%, sir.

80% to 85%. And sir, my last question on industry structure. Just want your understanding that we see the total [ decibal ] market size available to us is $8.6 billion. And despite the fact that we've been top 2, top 3 or 4 player in the industry, we only hold around 3% market share. So is the industry comprised of so many diverse players that it's difficult to increase our market share? Or what is the realistic market share one can achieve over a period of time?

So I think if you see the first -- in the old structure, the first 3 players -- the first 3 players almost had a $2.50 billion to $3 billion market, right? So -- and after that, there was a big gap. And then they were smaller players. These 3 players, obviously, have been global, very broad portfolio. Some players like us have this expanded our portfolio to that level. So it will take some time for us to ramp up -- to ramp up our sales. They have a first-mover advantage. They have the network, which is well set and products which have been there for several years. But I think with our completion of product portfolio, we feel quite bullish on how -- on our growth perspectives in the future.

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

Sir, in your presentation, in the current presentation, the slide on the CapEx, which is Slide #9, you have said the CapEx plan of INR 750 crores and approximate revenue of about INR 1,500 crores -- INR 15,000 crores -- sorry, INR 1,500 crores. And sir, a similar slide you had in March presentation, where you had given a CapEx of about INR 600 crores and a revenue potential of about INR 1,000 crore to INR 1,200 crore. So I understand the CapEx increase, if I'm not wrong, from INR 600 crore to INR 750 crore is the utility CapEx which you had recently announced. But at that time, the understanding was that this is not a revenue CapEx. This is only a utility CapEx. So sir, what is driving this change in your revenue guidance on this CapEx from INR 1,000 crore, INR 1,200 crore, to INR 1,500 crores?

So the -- some of the CapExs, we've delayed some of the utility and the effluent treatment, and we had some opportunities on the revenue side, which we've completed. We have -- we've been able to kind of debottleneck some of our purity and intermediate, and that's why we're giving you a complete mix now so that there is no ambiguity on the split, and this is what the master plan looks like.

Okay. So the utility CapEx that you had, I believe, in the quarter before that you had announced is delayed a bit. Instead of that, you have done some revenue-generating CapExs?

Yes. So we have reduced -- the earlier we thought we would need that INR 135 crore, INR 40 crores, INR 50 crores. That has been considerably reduced, and that has been used towards some revenue generating.

Okay. Okay. And the revenue-generating CapEx is broadly in line with the existing products that we have. It's more of a brownfield of some existing capacities?

Yes.

It is not the HPP categories?

It's a combination of some HPP and our traditional pigments.

Okay. Got it. Sir, that's helpful. And sir, the second question was in one of the earlier comments, you did mention about some of your competitors not facing similar logistics or not facing the cost impact, and you were referring to these competitors. So when you say these category of competitors, which competitors are you referring to? Are these the European competitors or somebody -- are the players from China?

So I meant European, obviously, the main market is Europe, right? Europe, U.S. and we -- so basically, when you compete with them, they have local plants there. So the shipping cost, logistics issues, they do not face, right, what we face.

Okay. Got it. And sir, in terms of outward freight for average category of a product that we export largely will be focusing on exports. What would be the outward freight be as a percentage of current spot pricing -- spot value of freight? As a percentage of your sale value? I'm just trying to understand how has it changed? How does -- I mean, was it, say, 5% earlier, now it has become 10%? So that 5% differential is something which is impacting?

No. I think there are 2 factors to it here. One is obviously the cost. And second is the availability, right, that you're -- and in lead times to reach that plant. So with all these uncertainties, sometimes the local competition gets more benefit. That's what I meant.

Got it. Got it. Sure. But sir, just to understand the cost angle, if it is possible to share some broader sense on that, how big is this cost now versus, say, what it was pre-COVID or pre -- when the freight rates were normal?

The cost increase is about 3x of freight.

3x. And as percentage of sales, how much that would be? I mean, the outward trade would be?

Right now, we don't have that number, sir.

Sure, sir. And sir, the last thing was on the -- just to understand a bit on the nature of the -- so the incremental growth, large part is coming from your HPP products, the one of the yellows one that you mentioned. So is the nature of business there a bit different than the new existing set of products? What I'm trying to understand, is it more linked -- very well aligned with the customer that the cost pass-through happens at a very faster pace? It is more smoother. Is that kind of a structure? Or it's almost similar to what you currently have?

So the cost increase is similar. In fact, some of the other high-performance pigments have a very steep cost increase -- cost increase as some of them are in yellow phosphorus-based chemicals are used, which have seen a very sharp increase because of the energy policy of China.

Our next question is from the line of Ritesh Poladia of Girik Capital.

I might have missed out this. What's the volume growth in this 12% revenue growth?

So currently, we don't kind of break up the volume and this growth.

Our next question is from the line of Abhijit Sinha of Pi Square Investments.

Could you just highlight a bit on the increase in debt that we have in the working capital debt this quarter?

Could you repeat your question? It was -- your voice broke up.

So I just want to clarify on the debt, sir, the working capital debt that we have has increased this quarter. So what will be the reason for that?

The increase in debt was mainly the CapEx outlet and some inventory increases, it has to be one of those. So the increase in debt is predominantly on account of the CapEx. So we had taken the CapEx soon as a part of our CapEx implementation program. And as Mr. Rathi spoke about on the inventory part, which is on the inventory side, which has led to the working capital loan increase also.

So sir, as your colleague mentioned that about INR 250 crores were going to spend in the next half of the year, right, to meet our INR 400 crore plan. So again, that will be taken in as debt because our debt-to-equity becomes massive. It's much more than 1 right now.

So sir, what we said, INR 250 crore is for the total year, okay? So the debt level will be at around INR 750 crores. I don't expect it to go further up.

Okay. And sir, since it's working capital on, I assume that the debt interest rate won't be that much, right?

Correct, sir. So currently, we are taking the advantage of low interest rate, and we are exploring all the available options to lower the cost. So it should be in the same range.

What kind of debt equity ratio are you comfortable with, with this CapEx plan that we have?

We expect this debt equity ratio to remain at the current rate, okay? So we will be monitoring that, and we will be comfortable with it.

I had another question. Another of my colleagues, they just mentioned about the yellow dye that you have. I was just wondering about the turnover or what's the plan for that since it's already begun commercialization. So what is the revenue plan and all that? So do we have anything right now? Or should that be taken later on?

So this is a individual product, right? And we would not like -- it's competitive information to give out in the public domain. I think the point was that this is part of the -- part of the INR 750 crore, this was the earliest, which was launch. And the point of maybe the point is we are already seeing a sale of this product coming through commercially, right, to several customers. So that's a very positive indication of the product getting accepted in the market. That's only one…

So is one of the revenues from the INR 1,500 crores that has helped in the CapEx, right?

Correct.

And sir, my last question was regarding the market share. We just spoke about it briefly right now, but you mentioned that since our Mahad plant was closed and everything, others had a better chain at that time, a supply chain. So a couple of orders they were able to service. We held back a couple of inventories because of the margins that we weren't getting. So has that affected our market share in the last 6 months?

We've definitely lost some volumes, as I mentioned. We are a choice to protect margins. So we didn't want to further erode that. And that's the area where we product -- we lost some volume. And I'm glad to tell you that we're already recovering those volumes now and ensuring that margins are protected.

Perfect, sir. So since you guys are like have a plan in terms of the margins that we have, so in FY '22, do we expect to be about in the range of 12% to 13%? Or should it be about 10% to 11% EBITDA margin?

We should mention, we should recover from years, sir. So the margins from here should definitely recover.

All right, sir. So obviously, it won't be as good as last year, but somewhere a bit close to that, right?

It's better than what it is today, so definitely.

Our next question is from the line of Viral Shah of ENAM Holdings.

Sir, can you throw some light on the demand side in terms of segment wise, how are you seeing demand from plastic paints, coatings and others?

So sir, if you look at coatings, the demand in Q2 was good. However, we are seeing a softening in demand now, right? As they are increasing prices - they are increasing batches and this covered some raw materials as they were expecting price increases, right? In terms of plastics, coming out of COVID Q2, we did see some issues because polymer prices had increased, and they were uncertain about whether they would be able to pass through, right, pass through that. However, now plastic demand we see recovering now, right? Inks was sluggish, both newsprint and the [ FMBC ], the food packaging industry. We do see the food packaging industry kind of picking up to a certain extent.

Okay. And sir, on the exports, I think this quarter we were at around INR 210 crores of export. So how do you see this planning out over the next couple of quarters? When do we achieve INR 250 crores and then INR 300 crores on a quarterly run rate basis?

So as I mentioned, this quarter was the weakest, and we do expect good recovery to happen now on.

Our next question is from the line of Amar Mourya from AlfAccurate.

Sir, my question was like in first half, despite a lower volume and better pricing, we had been able to get like 24% kind of a first half versus first half growth. Now given that we are looking to pass on the prices further and obviously the volumes are going to be better than the -- what it was there in the first half, so can we see that the second half revenue growth would be much, much higher than the first half kind of a growth?

Sir, as I mentioned, and I could give directional answer to that, sir. We did see a lot of -- we did not see good growth. And as we see Q3 onwards, we are focused on -- we are really focused on volume growth. We insured some of our margins are protected, which was a good strategy that time. And a difficult decision, but we took those decisions, but it was more of a midterm, long-term kind of play. And we do see good volume growth coming now and was until some unprecedented event happened, et cetera. But otherwise, we should see a good growth coming in.

Okay. Okay. So meaning you're saying volume led growth and followed by that, the margin protected or margin improving. So obviously, we have to take a price increase also, right? So that part will also get included into your revenue. So that was my question that do by a good volume growth and a better pricing, the growth in the second half should be much, much better than the first half kind of a growth number, right?

Yes, sir.

Our next question is from the line of Rohit Nagraj of Emkay Global.

Sir, the capacity utilization that we have mentioned in Q2 is 60%. Is this considering the CapEx of INR 293 crore, which is already put to use?

Yes. Yes, sir. Including that and because part of -- some of that INR 293 crore was a small part was utilities and infrastructure, right? But yes.

Right. And I just do the math in terms of 60% capacity is giving us, say, close to INR 500 crores quarterly run rate, probably at 100% or maybe 90%, we need to have something like INR 750 crores of quarterly run rate. Is that the right way of understanding it?

On an excess capacity, yes, sir, but in the real market and real events, it is completely different.

Our next question is from the line of Paras Nagda from ENAM.

Yes, sir, my question is, is it fair to assume that in the quarter gone by, the quarter for which we are reporting the results, there was little or no price increase which was taken in the export market, and most of the price increases are starting to come in, in the current quarter. Is that a fair assumption or an inference that we can make from the results?

No. No, sir, I don't think that would be a fair. There was some pass-throughs, which were happening.

Our last question is from the line of Aditya Mehta from GK Capital.

Sir, as you mentioned that the European players are not facing cost increase on the logistics front. So since this phenomena doesn't seem to be abating in the near term, so how are you planning to tackle this situation?

So I think what I meant is the -- there are 3 fronts of cost increase. Major one is raw materials. The second is indirect like coal or gas, right? We are affected by coal, they are affected by gas. And the third is logistic costs, right? When I meant by logistic competitiveness, it has 2 components, as I explained. One is the cost part. But the second part is the certainty of delivery, right? Earlier, our customers could be assured of lead times of supplies, et cetera. That's a little bit of a concern somewhere that advantage for a local player. That's what I meant.

Okay. So now whether the availability has increased, improved or we are still at the same level?

So the availability is still a challenge. However, we are ensuring that our warehouses there carry a little more shot, et cetera, which you can serve customers.

Okay. So there's no issue on our capacity front or our capability front, the issue is on the logistics part, delivery and commitment part?

Yes.

Ladies and gentlemen, that was the last question. As there are no further questions, I now hand the conference over to Mr. Nilkanth Natu, CFO, for closing comments. Please go ahead, sir.

Thank you. Thank you, all participants, for your time and interest in Sudarshan Chemicals. We remain confident in the long-term prospect of our business, and we look forward to engaging with you again. Thank you. Stay safe.

Thank you very much. Ladies and gentlemen, on behalf of Sudarshan Chemical Industries, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.