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

Ladies and gentlemen, good day, and welcome to Sudarshan Chemical Industries Limited Q3 FY '22 Earnings Conference Call hosted by Dolat Capital Markets Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Archit Joshi from Dolat Capital Markets. Thank you, and over to you, Mr. Joshi.

Thanks, Nirav, and good evening, one and all. On behalf of Dolat Capital, I welcome you all to the Q2 FY '22 Earnings Conference Call of Sudarshan Chemical Industries Limited. I would like to thank the management for this opportunity to host this call. From the management, we have with us today Mr. Rajesh Rathi, Managing Director; Mr. Nilkanth Natu, the Chief Financial Officer; Mr. Vivek Thakur, GM Finance; Amey Athalye, DGM Finance; and Mr. Mandar Velankar, Company Secretary. Without further ado, I would like to hand over the floor to Mr. Rajesh Rathi, Managing Director of Sudarshan Chemical Industries Limited, for his opening remarks, after which we can have the floor open for a Q&A round. Over to you, sir, and thank you.

Thank you so much Architji and Dolat for hosting this call. I'm glad to inform you that we view this quarter as a good comeback quarter for us. We could regain some of our revenues and in these uncertain difficult time, our team has done a great job in regaining some of our margins. Also on the CapEx area, we progressed well. And so all in all, a very -- on a positive note, I said that somewhere around the [ 20 ] looks be great. For more details, I do request my colleague Natu, our CFO has to take in follow.

Thank you Mr. Rathi for opening remarks. Archit, is this clear?

Yes, sir. You're audible, sir. Nirav can you please confirm [indiscernible].

Yes.

Thank you, Mr. Rathi for the opening remarks. Thank you, Archit and Dolat Capital for hosting our earnings call. Good evening, ladies and gentlemen. Welcome to Sudarshan Quarter 3 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. On a consolidated basis, total income from operations stood at INR 602 crores as compared to INR 506 crores for the same period last year, reporting a growth of 19% year-on-year. This was the highest quarterly sales where we crossed INR 600 crore mark for the first time. EBITDA for the quarter, stood at [ INR 74 crores ] as compared to INR 80 crores in Q3 FY '21. EBITDA margin stood at 12.3% as compared to 15.7% over the same period last year. Profit after tax stood at [ INR 36 crores ] as compared to INR 43 crores for the same period last year. On a 9-month basis, total income from operations is at INR 1,574 crore versus INR 1,288 crores in the same period last year, a growth of 22%. EBITDA for the 9 months is at INR 189 crores versus INR 200 crores last year. EBITDA margin is at 12% versus 15.6% over the same period last year. PAT for the 9 months is actually INR 85 crores versus INR 92 crores in the last year. Now going into the details of our pigment picture. For the quarter, income from operations stood at INR 550 crores, a growth of 17% year-on-year. EBITDA for the quarter is at [ INR 71 crores ] as compared to INR 78 crores in Q3 FY '21. EBITDA margin stood at 13.7% as compared to 16.3% over the same period last year. However, on a sequential basis, EBITDA margins have improved by 2.5%. Price [indiscernible] volume growth and overhead cost optimization has helped in sequential improvement for this quarter 3 FY '22. Demand momentum in the domestic market continues, which we have seen from the middle of Q2. Domestic sales for the quarter stood at INR 306 crores as compared to INR 261 crores in the same period last year, growth of 17% year-on-year. Sales in the coating segment continues to do well, and we saw higher demand coming in the [ ink ] segment, which was softer given [indiscernible]. We did also see improvement in the demand from last 6 segment. Export for the quarter is at [ INR 254 crores ] as compared to INR 216 crores last year, a growth of 17%. Exports have grown 22% sequentially over Q2 FY '22. We gained volume in the international geographies with easing of pressure due to aggressive pricing approach by some of the competitors. Speciality segments sales stood at INR 375 crores as compared to the INR 329 crores for the previous year same quarter, up by 14% year-on-year. Non-specialty sales for the quarter is at INR 185 crores as compared to INR 148 crores for the same period, growth of 25% year-on-year. Gross margin for the quarter stood at [ INR 41.6 percent ] as compared to [ 43.2% ] for the same period last year, with the input cost pressure continues in the basic chemicals and intermediate prices. Our endeavor is to pass majority of the cost increases to the customer. However, we didn't calibrate pricing decisions selectively to gain volume. Input cost increases normally have a lag effect of a quarter in full pass through to the customer. Apart from raw material cost increases, we continue to see energy and logistic costs at an elevated level. Coal prices are still above 200% of the level seen in the last year quarter 4 FY '21. This is pushing up the manufacturing cost. The challenges in the logistics area are continuing and leading to stage cost escalation of 3x to 4x. With the direct as well as indirect material cost pressure lingering, we will have to continue with the selling price increases, taking calibrated approach to balance on volume growth. Now coming to our CapEx projects, which is answer for the future growth. We completed commercialization of CapEx project was INR 150 crores from ongoing CapEx plan of INR 750 crores in the year YTD December. We expect total capitalization during FY '22 will be at INR 300 crores. This will include CapEx projects in the new molecules as well as capacity additions in the existing segment as well as the infrastructure related CapEx. We continue to see gradual ramp-up for our real pigment products. CapEx projects to launch new products under high-performance pigment and in the inorganic high-performing pigment are progressed well. And we expect commercialization during Q4 FY '22. Our manufacturing plant continues to operate in line with various directives of development during the last quarter. We remain watchful of actions taken at various state levels following third wave of COVID-19. We continue to deploy and practice necessary festive precautions regularly to ensure continuity and uninterrupted functioning of our plan, with and 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, we now open the floor for question and answers. Thank you.

[Operator Instructions] The first question is from the line of Sanjesh Jain from ICICI Securities.

A few questions from my side. First, Natu in your opening statement, you spoke about aggressive pricing in the international market. Can you help us elaborate to understand is it China, which is doing [indiscernible] aggression? We thought that the logistic issue has significantly come down the competitive intensity, but your opening remarks actually indicate a very different scenario.

Hello.

Sir can you hear us.

Yes, 1 second. Yes.

Sanjesh may I request u [indiscernible] from your side, please?

Sure.

Yes. This is Rajesh. I think what Mr. [indiscernible], -- what Natuji was referring to saying that as we saw volume -- a little bit of volume shrinkage in the market because of COVID the market scenario, we saw competitors to be very more aggressive in the quarter -- in that quarter and on. And as the consolidation on some of the M&As were going on. We saw some activities, which were a little more aggressive. I think that's the only context [indiscernible].

So we don't see any risk to passing on the inflation that is that the line to be read from that statement?

We will see the [indiscernible] -- like as I mentioned that we are taking -- we are passing on this raw material price increase and which has been also evident. So we will continue to do that.

The second thing we spoke about an acceleration in the high-performance pigment starting Q4 from the new product launches and their acceptance. What are we seeing? And where are the areas we are now getting that kind of an encouraging result to see that the Q4 will be much, much better.

Yes. As we are progressing -- as we said, we are progressing well on the CapExs. We are gradually putting to use all the CapExs, which we were able to do. One major molecule, we've been put to use now, and we expect the other CapExs to get completed either by Q4 and some [indiscernible] to Q1. So that's a great -- that's where we look at also from progress on some of the products, which we've launched previously. We are seeing a good, good progress and response on that. So we should be good to ramp up.

Got it. Got it. A couple of questions on the current results. If we see your result revenue growth looks solid over 27% Y-o-Y. How much of it is because of the price increase which was taken from the RM inflation? And if we were to adjust for that, what is that adjusted normalized growth we are looking at?

Hello? So as we also mentioned in the earlier call, we are also looking at the kind of disclosure, which we can do as a part of our IR. Currently, what we are reporting is the value crore. I think your question is more from also volume. So that number ....

I am not specifically because we would have sold high-performance products. We -- our specialty mix has gone up. So I don't think I meant volume. I meant if we were to remove the inflation, which was purely on account of raw material. Should the growth be upwards of 20% for us?

Sir, I think there has been -- like you are indicating, the mix for us has been better. I mean we're having more high-performance pigments, we are selling more effects, et cetera. So the mix change has -- mix change has been -- mix change has been positive and there's been a volume growth too. So all in all, I think both these effects have had -- both these effects have had a good result for us. On more specific details, we will look at how to disclose this in more detail. Right?

Got it. Got it. Just on the new revenue, which we have disclosed that the new capacity which we are adding could potentially bring in an additional revenue of INR 15 billion. Can you help us understand how much of it will be new products? How much of it is from the existing product? Some color on that?

So 1,500 will be the full potential in the next 3 years. That's what we are saying, right?

Right, right, right. I understand that. I just wanted to understand out of that 1500 how is the mix be?

So the mix -- just back of the envelope calculation, just give us a second.

Yes, yes.

Approximately INR 600 crores will be new products. Rest will be enhancing our not completely blockbuster new products, but enhancing the range, right? Some is volume expansion mixes, blockbuster new products would be above 600 so that will be.

And the remaining will be the normal launches or a facelift or some variation or a modification with existing products.

And also, obviously, volume, we've gained substantial volumes on some molecules, et cetera, right?

Correct. So capacity announcement. One last bit of answer the question, and then I'll get back to the queue. What is the margin difference? Or first, let me understand, when we see specialty, so what does that improve when we see specialty in our presentation?

I think the presentation to include. Ameyji can you.

[indiscernible] -- so the speciality pigment consist of blue pigment, high-performance pigment, cosmetic and [indiscernible].

Okay. Okay. Got it. Got it. Just wanted to understand from the margin perspective, okay? I know we don't disclose margin independently, and I'm not looking for that information. I just wanted to understand what is the margin difference between the non-specialty and specialty pigment say, say, if we do, say, 100% margin in another 120, what is the ratio of a non-specialty pigment and a specialty pigment. I'm not looking at the absolute margin. I just wanted to see what does the premiumization means from the margin perspective? Ratio will do?

So supposing your normal classical nonspecialized would be at, then the margins on this would be about 1.5x.

So it's a 50% higher margin business for us.

The margin is 50% higher. Right?

Yes, that's it. So if I say 10% margin in another is around 15% margin, right? That's what you are telling.

Exactly.

Oh, that's quite a meaningful margin accretion if we are able to pull that up.

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

First question on the RM inflation and the gross margin front. Your comment in terms of by when do you expect a full pass-through. As I understand and as you mentioned that there is some before pass-through, which we have already done in this quarter. But then there was a comment on the overall competitive intensity, et cetera, which would have restricted some of this pass-through? So just wanted to understand from your perspective, there's 40% of gross margin that we are looking at currently versus maybe 43%, 44% when we can see a normalization of these numbers?

Good evening, Rajesh here. So there are 2 parts to the challenge, there are 2 challenges, I think 1 challenge is that there has been a continuous increase, right? So we do a passed -- we do an increase and there has been more increase -- in fact, Q4, we've seen some more increases, right, which we are passing it on. The second piece here is, sir, we are trying for -- we are trying to get an absolute -- we're passing on the absolute increases, right? So in the absolute increases, sometimes you are not going to see the same percentage changes, right? So we are -- so we are hoping that as soon as the [indiscernible] market kind of starts reducing we should see percentages going to normal. However, during the current -- given the current scenario, we don't see the current raw material prices kind of moving at least for Q4 and also Q4 definitely not sure about Q1 yet, but Q4, we are waiting for China to also start and look at all the [indiscernible].

Sure, sir. That's helpful. And you have also mentioned the cost inflation across the energy cost, the power logistics et cetera. So when you are saying you are passing through the inflation apart from Rm, are we also [indiscernible] on these energy costs, et cetera or this will be eventually going by SMB?

Sir, we, of course, can pass on the energy cost also but it's a little difficult to pass on the full energy cost increases, right? Because it's an indirect cost, right? So it becomes a little tougher on those passing on those increases. So our endeavor is to pass that on, right? So I would say the success rate would be -- and that's where we are seeing some success rate would be not passing on the 100% energy price increases but somewhere to the tune of not we would say 70% or so unit [indiscernible] .

Okay. Fair enough. Sir, another thing on the new product launches, we were expecting large of the CapEx to be completed within this quarter, probably some sales during Q1. What sort of time frame will you really look at when you see the incremental revenue contribution coming from the new CapEx -- new products. Where I'm coming from is there will be some the possible delays or not exactly delay but time lag for product [indiscernible] et cetera. So do we see an [indiscernible] jump here considering that we would have piloted or seeded the newer products for customer receivable already? Or it will take some time and maybe after a few quarters [indiscernible] should be.

I would say a few quarters, sir, because there are 2 challenges in this. One is while we have stabilized as we stabilize our the raw material costs, which we have bought are on a peak, right? Whereas the market, since we have been new in this product line, we have to buy the market products now, but at the peak, whereas some of our competitors would have covered these raw materials are much earlier. So we are looking at a point where we are at a high. So that's the reason where we think that it's getting the full benefit, not in the revenue, but at the EBITDA level would take some time.

Sure, sir. And we will be largely replacing who [indiscernible] the European players or the Chinese players within these products.

So mostly European. It's a mix European, Indian, Chinese right? But mostly European.

Sure, sir. And last question, if I may please. You had earlier mentioned some initiatives on the backward integration as well, which transfer [indiscernible] to restrict the current issues for us in the near future. Any plan for this given that large part of our product ] expansion, the CapEx plan should largely be behind the next couple of quarters. So any thoughts on the backward integration.

There are on backward integration, the board would finally take a call in March when we approve the budget for next year. From a technology perspective, we are ready. Even [indiscernible] plant, we've done several trials, right? It's a question of as you're aware, due to COVID and several other reasons, these other CapExs were delayed. So that's the reason why we've been holding on to some of these other CapExs. But the board would take a view -- the Board will take a view when we present the final budget in March then.

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

Just a couple of clarifications. One is on the Omicron impact, we've seen some signs of a slowdown in India's activity across various sectors because of the third wave. So any impact that is visible to you across your key end use segments for the fourth quarter of FY '22?

I think India, we saw India, we were seeing a good pickup as quarter. January, we are -- January have seen a slight slowdown especially in the plastics area, we've seen a little bit of a slowdown. But we are hoping that February, March, things will bounce back.

Got it. And the other thing I just wanted to clarify is the CapEx slide in the presentation this time talks about INR 300 crores of target for FY '22. Last quarter, it was about INR 400 crores in the presentation. So just wondering if about INR 100 crores is being pushed back to FY '23 now?

Yes. Yes, sir. So we expect a few CapExs to roll into Q1, and that's where the estimate of INR 300 crores.

Understood. And one last question. On the tax rate, we've been clocking about 25% on the P&L effective tax rate. Is that the rate we should expect to continue, sir, going forward?

Yes. We expect to continue the [ 25% ] in tax rate. We have shifted to the new taxation last year. So we expect that this rate should continue.

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

Congrats on a sequential growth. Sir, first question, again, in terms of the pricing environment. So if I'm right, last quarter, we had indicated that there had been an aggressive pricing by competition because of the advantage of raw material inventory that the European players had. Now supposedly that advantage would have been vanished. So are the European players are also increasing the prices? And will that make sure that we also take accordingly, the prices -- price increases in Q4 and going forward?

So we are waiting to see how the reaction takes place on some of the pricing, et cetera, but we are hoping that the pricing would increase. But we have been going ahead with some of the price increases we have been passing on those increases.

Right. But are we seeing the price increases by the competitors as well, given the probably environment where the input cost inflation is still high?

Yes. So we are seeing some increases. We are seeing some increases, yes.

Right. Sir, second question is, we have mentioned capacity utilization at 80% . And last quarter, we had mentioned the same number at 60%. So is this 80% based on the 9-month CapEx of [ INR 150 crores ]? Or is it excluding the CapEx for probably the last couple of quarters?

Okay. [indiscernible] Capacity, what we have reported is excluding the configuration [indiscernible] has been majorly got capitalized in the [indiscernible] .

Right. Got it. And one just last clarification. I understand that we have induced a few consultants for various initiators. If you can bifurcate how much is the recurring cost probably from this consultancy fees on a yearly basis or probably onetime costs, which are currently embedded and probably to subside going forward?

Mr. Rathi can you hear us?.

Yes, yes. Sir, I mean, obviously, it's a little bit -- we have legal confidentially agreements to talk about this fees. But we see these costs tapering down and tapering down now.

Our next question is from the line of Dhavan Shah from ICICI Securities.

So I have a question related to the volume and realization growth. So based on the Q2 presentation, I think it was mentioned that 60% utilization. And right now, it's been moved up to around 80-odd percent. So it means that the volume growth should be around 33-odd percent on quarter-on-quarter, whereas if I look at the pigment revenue growth, it is around 25%. So -- and also if I look at the specialty non-specialty revenue mix, it is almost the same on quarter-on-quarter basis. So was there any price decline, I think it should not be just because of the changes in product mix. So is that the understanding correct, if you can share thoughts on that? And the pricing decline comes to around 8-odd percent on quarter-on-quarter basis.

So there has not been a price decline in terms of realization. If you are comparing the Q2 and Q3 numbers, there is a certain portion, which were our inventory in the [indiscernible], the fast moving the skill and our demand projection. So that's the real number what you are looking at is on the production.

But sir, if I look at the product mix between specialty and non-specialty, I think specialty was contributing around 67% in Q2, the same is the contribution in Q3 as well, right? So there should not be the product mix changes, variance in the realization growth or the growth. So I'm unable to understand the mix because I think if the utilization has been improved, it means that the volume should have grown by around 30-odd percent on quarter-on-quarter. Plus, if we look at the gross margin, it is by around 180 basis points on quarter-on-quarter. So -- because if I look at the most of the raw materials may have been -- remained stable in the last quarter because the crude was almost in the range, right? So I think it should not be the cost inflation, but -- and we also have passed on some price during this quarter. So I think that should be reflected in the gross margins for Q3, but it is not the case.

Well, it's a little difficult to understand your question. Is it okay to take it offline with you because we're not able to understand your calculation. So we could discuss this because it will take up too much everyone's time.

The next question is from the line of Kunal from Vallum Capital Advisors.

I wanted to understand, firstly, when I look at the slide in your presentation where you mentioned in the progress of the CapEx and how much revenue you expect for the next 3 to 4 years? I observed that we have mentioned this at this quarter in the business as you have mentioned INR 1500 crores revenue to be realized from the new CapEx over 3 years. And in the [indiscernible] when I look at the fee side, it is mentioned around [ INR 1,200 crores ] revenue over 3 to 4 years. So maybe are you be wrong interpreting business I mean there is a slight bit of positive, I would say, improvement in what we are expecting on listening CapEx. So I just wanted to understand, is there any change in the outlook?

There are 2 [indiscernible] sir. In our original when we had shown 1 year ago, the INR 1,200 crores included some backward integration and also some more infrastructure projects. And also some of the prices have increased and that's where we were giving a fair presentation of this. So 2 reasons for the INR 1,500 crores changes. One is the mix of our investments has changed and some prices have improved. That's how we.

Understood, sir. And sir, I wanted to understand regarding the project, which you commissioned in FY '20 and FY '21. So are the products associated with all those projects now at least -- I mean, are all the products in that basket really commercial. So I just want to understand the status on that. So is there a certain quarter?

Yes, sir. And most of these projects -- products were either -- we were not 1 or 2 were completely new products, otherwise, there were extension of the same line.

Okay. So if you say that all the products right now, Is there -- they are ramped up to a good extent or they are using a portion of it being ramped up to the required capacity that is the right way to look at it? Regarding [indiscernible].

Like we said, sir, it would take 3 years for the full capacity ramp up. So we are at the planned rate.

And just lastly, regarding the projects, you commissioned this year in FY '22, the [ INR 150 crore ] capitalized this in the first 2 quarters. Could you tell me the status on that one also regarding the ramp-up and everything?

Can you repeat your question, sir?

Yes, regarding the projects which are commissioned this year, in the first 2 quarters, could you tell you where those products are? Are these products commercially launched or is it still there in the project? I mean as you did it in Q4.

So until their commercially launch, we don't put to use. So all products which get commercially launched only then we put the CapEx to use.

[indiscernible] On the ramp-up. As we already mentioned in our earlier call, so we expect this to ramp-up in 3 years period to the full capacity.

Understood. Just one small question. Last year, for the same quarter, Could you tell me what was the aggregate company level utilization capacity wise? I mean what is the same around 80% or was it different?

We have to check sir, we have to check these.

The next question is from the line of Rajesh Kothari from AlfAccurate Advisors.

Sir, my first question is with reference to Slide #13, 13. If I refer to that slide, second quarter revenue was [ INR 448 ], third quarter revenue is [ INR 560 ]. So revenues increased. At the same time, you mentioned that your second quarter

[indiscernible]

Yes. So your revenue has increased. Your capacity utilization therefore has improved. That these operating leverage also kicks in. The product mix, there is no change. If I look at the below side, the specialty versus non-specialty. There is no changes in product mix. You also mentioned at the end of second quarter that you are in the process of passing on the higher raw material cost inflation. So it means there is some price increase as well. But if I look at your gross margins, your gross margins have reduced from 43.5% to 41.6%. And I think anybody is trying to figure it out what -- why it is reduction in gross margin even in the previous participants questions. May I request you to please throw some light on a little bit more detail to understand what exactly is happening? Is it that the competitor has basically -- pricing environment is so aggressive that you had to take price cut or is it something else? Can you please explain.

As I mentioned, sir, that we have been focusing on passing on the absolute increases. And when you pass on the absolute increases, the percentage does not get increased to the same level right?

Yes.

That's the reason.

So are you trying to say that when you are doing the change percentage increase requirement was different, whereas what you passed on was lesser than even compared to 2Q? Because at the end 2Q presentation conference call, which happened probably July, you mentioned that from here, the environment is likely to improve because you mentioned that you are in the process of taking the price hikes. Higher the price hikes, it means your gross margins probably would improve rather than decline. But your gross margins are decline and that.

Yes. So that's what I'm saying. You're supposing you have to pass on INR 15, right? So INR 15. So generally, in percentage terms, if you have to do [ 115 ] if your base price is [ 100 ] and if you want to pass on 15, you have to increase more than 15% to maintain your percentage, right? So we have -- the whole industry has been focusing on passing on the absolute increases because passing on the percentage increases would mean that we would have to put on INR 20, INR 22, right? So that's the reason, which was that was one reason. And as I mentioned, we have been seeing increases even after that. Our prediction was that the cost increase will not happen anymore, but we have been seeing increases even after that. But the main reason where you're seeing the percentage is mainly the absolute passing.

Understood. So as you move forward, you mentioned that Specialty Chemicals has 50% higher profitability compared to non-specialty However, if I look at your 2 years trend, 3 years trend, of course, our EBITDA margins have not demonstrated to see. It means probably the non-specialty margins has reduced significantly because your specialty is now already 33% of your 67% compete non-specialty is only 33%. So as you move forward, and as your new CapEx comes on stream, do you see -- because the CapEx takes time to get the peak utilization, as you rightly mentioned, it takes 3 to 4 years. Do you see further cost pressure because CapEx comes on stream, but it takes time for utilizing a ramp-up? So that is the first question. Second question is, considering that you might be entering into the number of new products where competitors are already present to take market share in the initial stages, would you be a little bit more aggressive maybe for 1, 2, 2.5 years? And therefore, final impact of this, therefore, in EBITDA margin, we may not see much improvement. That's what we are trying to probably interpret?

I think, firstly let me clarify what I said on the margin difference, right? Where what I'm saying is with my margins on the non-specialty product is, let's say, 10%, when my margins on the specialty would be 15%. That's the delta, right? So secondly, sir, I would not draw long-term conclusions based on a very highly volatile incremental market, right? Given the current conditions, these are not normal conditions where anyone in the chemical industry would have seen, where almost all raw materials are at a high you are dealing with COVID situations, whether your cycles, which cycles where the demand is fluctuating you have logistics issues, et cetera. So from that perspective, I would not draw any long-term conclusion saying that our EBITDA is going to change, et cetera. Our product mix is -- would be gradually changing towards a good mix, good healthy mix. And we do expect a gradual improvement in our gross.

[Operator Instructions] The next participant is Dhruv from HDFC Asset Management.

Sir, this question is broadly a bit related to the earlier one. So we have seen this margin volatility largely in the gross margin level, a bit understandable given the RM fluctuations that you mentioned. But sir, from a broader structural level, I was just trying to understand the people that you consider as a good competitors to you. Would they be very different versus in terms of the structure that you have probably in terms of backward integration or something else? But if, say, for instance, or the inflation environment remains high, they get to benefit out of this inflation environment versus, say, for example, you. So the point is, today, what we are seeing is because probably some people have the old stock inventory, low-cost inventory and they are able to price their product better, probably as you probably are indicating, probably we are not able to do that because probably we have the higher cost inventory. So but once everything normalizes and stabilize it even at a higher level, do we have a disadvantage versus probably some of the people that you consider as with competitors to you?

No, sir. I don't consider any.

I mean in terms of the structure that they are -- probably they are more backward integrated, we are less. I'm just trying to understand because historically, our margins have been that 15% to 16% or probably about 15% to 17%. So I'm just wondering once everything normalizes, should we be considering something differently?

[indiscernible] Intend to us. So when we are talking about margin 15/17, it is EBITDA correct. We in our EBITDA ending at 16% last year and here [indiscernible] around 15. So while we see that this has been a kind of abnormal period this year where the raw material volatility and overall cost inflation is high. Our endeavor is to -- one is to protect the volumes, second is improve on the margin to the extent given the price cost increases and pass on. We expect that once this particular -- the disruption period is normalized and we see the normalization coming back. We expect that we're going to be coming back to this particular margin, which we had seen in the past year. And once the scale up of the new CapEx will start directionally, it should take a couple of business higher. So this is what we look at.

Got it. So basically, just this also means that in terms of restructuring, there is not much difference. So there's no reason to think that the margins will be different versus what in a normal scenario there should be.

I don't know. Yes, Dhruv and second point is, as Mr. Rathi has mentioned about there was a question on the backward integration, and we mentioned that there are a couple of pilot completed the portfolio and we are in the process. Once, if we get the approval and we get into that backward integration, then it will give us structurally slightly more advantage, but that is in the future. As of now, there is no [indiscernible]. The current structure we see once the normalization is there directionally, we should get [indiscernible].

All right, that's helpful. And sir, one small question is we have seen the debt has increased on a Y-o-Y basis, but the interest cost remains largely flat and back to, I mean, from a quarter-on-quarter last year basis. Is that because of the capitalization that is happening in hence and once that also -- that there should be an increase there?

So Dhruv yes [indiscernible]. So on the interest cost to 2 factors. One is for the long-term loans, we have been borrowing in the [indiscernible] and till the time we put to use the project in terms of the capitalization, we capitalize. Second part to it is in terms of the working capital loan, wherein [indiscernible] done a great job in terms of getting the better pricing in the market wherein the pricing was we've got a very aggressive prices and we are able to get that limit. We continue to monitor the [indiscernible].

All right. All right. So the interest capitalization is remaining only for that remaining CapEx of, say, about INR 140 crores, otherwise, that INR 160 crores is already capitalized.

So going forward, we could do call back. And as we mentioned, the majority of this part of the capitalization had upgrades [indiscernible]. Slight kind of couple of last incremental cost will come in the next quarter for the projects, which we have put to use in the quarter.

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

Just wanted to understand, we were looking at about a INR 400 crore CapEx and now we've reduced that to about INR 300 crores. So what would be the reason I think you mentioned about COVID, but exactly what was the disruption in the plan?

As we mentioned, we put to use only after the products of fully commercialize. So a couple of products we expect commercialization slightly to be delayed, which will run into Q1. Some of our equipments, which we were also received for this was expected.

So would that remain INR 100 crore CapEx? Or like what do you -- what do we have in mind sir for the '23? Because I know you just mentioned that it depends on when the entire team more decides what the FY '23 plan is. But if I look into just the Q1 spillage, what will that be?

The spillage, as we said, spillage is about INR 100 crores. So we don't expect this on whatever we have mentioned, I got to know [indiscernible] we will be able to complete to that.

Okay, sir. Sir, you also mentioned that INR 600 crores out of the INR 1,500 crores from the super product that we have made and the rest would be the ones which are already there or you have some innovation in those segments. So would that be included in that INR 600 crores, would it be included in the FY '20 and the FY '21 CapEx that we have already done? Or is it still in the one which is due like about INR 140 crores is due this year and then another INR 100 crores in next quarter?

Majority would be coming now, sir.

Okay. So, sir, also, I understand completely that because the whole logistics have increased in the cost savings substantially. So if it was a normal situation in terms of the logistics how much money would we have saved comparatively according to you guys? Because I think in the last quarter with the plant being shut down also due to the flood. I think that was one of our worst quarters, but this quarter, it's still hurting our profitability as [indiscernible]?

So I think this quarter, our EBITDA has been back almost to [indiscernible]

Correct. It's about 12%. But sir, in Q1, we still had a 13%. So it's still impacted by 100 basis points.

Yes.

It is a great effort to come back.

Yes. So from a cost perspective, it's not just a logistic cost, the energy cost has gone up substantially, as we mentioned, the logistics cost, and of course, other than that, raw material cost. These other cost factors, which are obviously being very heavily especially the energy cost also going heavily on the EBITDA.

Sir, can you quantify that how much you might have had, like compared to a normal scenario how much we had to pay extra in terms of the energy in terms of the logistics in terms of all these things?

So as we mentioned earlier that in terms of the toll price inflation, we have seen 150% increase in the full price [indiscernible]. As well as in the logistics costs, we are seeing 2x to 3x increase and that has been that have [indiscernible].

The next question is from the line of Johan Gupta from Edelweiss Financial Service.

A couple of questions. First is on this rising input costs. You have mentioned that the logistics challenges continues and raw material prices are still rising. Though you have taken some absolute price increases, but may not be sufficient enough. So you see that even for the current environment and the current quarter also, there is likely to the margin pressure. And then what happens when the raw material prices will start declining. So you have to, once again, immediately reduce the pricing to the customers or a large part of the benefit would have been able to retain?

Generally, there is a -- this is a cycle like there is a lag in passing on increases. There's a little bit of lag on that. But that's a very short-term gain.

So you think that as soon as the round prices will start softening immediately that this benefit also has to be passed on to the customers and even with a faster impact. So the lag even will be -- there will hardly any lag when the prices are declining?

So like we say that there's a quarter, we take a quarter lag in the increases, there will be a similar quarter lag.

Okay. This is change. But you won't be able to retain the price increase you have to pass it on.

Yes. That's true.

Okay. Sir, out of the INR 750 crore CapEx hardly INR 100 crores has been in over, I mean, probably through the next year and all the CapEx is almost completed now where you have mentioned roughly INR 1,500 crores kind of turnover potential. What is after that? I mean, over next 2 years, the focus is more on digesting this CapEx or you have further growth plan and are going to increase. I'm going to spend some more money in the CapEx over next 2 to 3 years. So what is next 2-3 years CapEx [indiscernible].

On like it was saying, by this financial year, most of our CapEx, there will be some spill over into Q1. I think with this, I think we have sufficient room for our growth to kind of into grow. The only thing like I said, the Board would be closely looking at is any backward integration CapExs, which we do, but those will be small, in a small number.

So annual CapEx for -- I mean, over the next 2 to 3 years would be more than probably INR 50 crores to INR 100 crores, right?

Yes. Normally on the CapEx that we mentioned. So as Mr. Rathi mentioned he's talking about new CapExs, He's not talking about the runover, right? I think you're referring to the.

Yes. Yes, exactly.

At the Board approves in -- So I would not be able to tell you, but it would not be major CapExs. And I can tell you that.

So the cash flow generation will be used for the debt reduction going forward over the next 2 to 3 years?

Yes. So [indiscernible] will get submitted over the next 2, 3 years, the [indiscernible] capacity ramp-up in the -- due to the new projects will be used for the request for all the [indiscernible].

The next question is from the line of Amar Mourya from Alpha Advisors.

This is Amar here from AlfAccurate. A couple of questions from my side. Sir, firstly, can you just give us some understanding about this new revenue of INR 1,500 crores to say in 3 years, how the mix would be for the specialty versus non-specialty into this part of the revenue? Hello? Am I audible.

Yes, yes. Just a second.

Yes.

Before majority will be specialized, sir.

So like, sir, current mix of your specialty is, let's say [ 70-30 ]. Will it be same or it would be like [ 90/10 ] or kind of thing?

I think we look at the projection of the -- like I said, this -- the incremental CapEx -- incremental CapEx will be majorly, I would say, 80% towards specialize.

Okay. And secondly, sir, we have seen around about 150 basis point expansion in the margin sequential margin improvement in third quarter. And you broadly done majority of the price hike and many of your year-end client negotiation would be completed in December? So should we see a similar kind of margin expansion in Q4 as well, something around 150 basis points. Hello?

What we expect is as trying [indiscernible] like normally, we do the price and normally, there is a part of the research which happened in January. So we -- is what we are expecting that we will be able to better it provided there are no further shocks in the raw materials. So we are continuing to watch this particular scenario. We expect that percentage what they have reported in Q3, which was able to do it before.

Sir, actually yes. And sir, in terms of your RM like -- If you can give us 2, 3 RMs, which is basically haunting you in terms of your margin

Right now, every RM is haunting us, sir.

No. But broadly, sir, like 40%, 50% of your contribution would be.

Right from caustic soda to nitric acid, everything is haunting the [indiscernible]. So sir, if you really see this kind of inflation this raw material has been across all the categories. Like we have seen this kind of inflation across it is like a [indiscernible] entire raw material [indiscernible]. So like right now, we are monitoring this, and this has been extraordinary for us to work on.

Thank you very much. I now hand the conference over to Mr. Archit Joshi for closing comments.

Thanks a lot, Rajeshji for giving us the opportunity again and you have any closing comments to make, please do so thanks once again.

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

Thank you very much. On behalf of Dolat Capital Markets Private Limited, that concludes today's conference. Thank you for joining us. You may now disconnect your lines. Thank you.

Thank you.