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

Ladies and gentlemen, good day, and welcome to Sudarshan Chemical Industries Limited Q3 and 9 Months FY '25 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjesh Jain from ICICI Securities. Thank you, and over to you, sir.

Thanks, Manav. Good afternoon, everyone. Thank you for joining on Sudarshan Chemical Industries Limited Q3 and 9 Months FY '25 Results Conference Call. We have Sudarshan Chemical management on call represented by Mr. Rajesh Rathi, Managing Director; Mr. Nilkanth Natu, Chief Financial Officer; Mr. Amey Athalye, General Manager, Finance. I would like to invite Mr. Nilkanth Natu to initiate with the opening remarks, post which we will have a Q&A session. Over to you, Nilkanthji.

Thank you. thank you, ICICI Securities and Sanjesh Jain for hosting our earnings call. Good afternoon, ladies and gentlemen. Welcome to Sudarshan's Q3 FY '25 Earnings Conference Call. Our investor presentation has been uploaded on the stock exchange for your ready reference. During the call, we could make forward-looking statements. These statements consider the environment as we see as of today and carry risks and uncertainties that could cause our actual results to differ from those expressed in today's call. We do not undertake to update you -- update you any forward-looking statements made on this call. Now taking you to the financial highlights on the quarterly performance. On a consolidated basis for the quarter, total income from operations stood at INR 666 crores as compared to INR 566 crores for the same period last year, the growth of 18%. EBITDA for the quarter stood at INR 79 crores as compared to INR 62 crores in quarter 3 FY '24. EBITDA margin stood at 11.9% as compared to 10.9% over the same period last year. On the 9 months performance, the total income from operations for the 9 months ended December '24 stood at INR 1,996 crores versus INR 1,775 crores in the same period last year, reflecting a healthy growth of 12%. EBITDA for the period at INR 254 crores versus INR 197 crores last year, and EBITDA margin is at 12.7% versus 11.1% over same period last year. Now going into the details of our Pigment business. For the quarter 3 FY '25, income from operations stood at INR 601 crores as compared to INR 521 crores for the same period last year, growth of 15% year-on-year. This is the eighth consecutive quarter of sales growth on year-on-year basis. Seasonally, Q2 is always a strong quarter, while post-festive India demand and the calendar year-end at the international geographies has translated into the softer Q3. The EBITDA from the Pigment business has been INR 79 crores as INR 69 crores in quarter 3 FY '24. During the quarter, the export sales stood at INR 315 crores as compared to INR 244 crores, higher by around 29% year-on-year. During the quarter, we have seen healthy growth from the couple of large regions in the market. The export market continues to grow with the share of pie increased at 52% in quarter 3 FY '25 versus 47% in the previous year. India sales for the quarter is at INR 286 crores, higher by 3% as compared to INR 278 crores in the same period last year, due to the muted demand from the Coatings segment. Specialty segment sales stood at INR 416 crores as compared to INR 358 crores for the previous year same quarter, 16% year-on-year higher. Non-Specialty sales for the quarter stood at INR 186 crores, which was higher by 14% as compared to the same period last year. Gross margin of the Pigment business for the quarter has remained flat to 45.2% as against 45.5% for the same period last year. In YTD FY '25, the total income from operation for the Pigment business stood at INR 1,850 crores versus INR 1,579 crores in the same period last year, a growth of 17%. EBITDA for the 9 months at INR 274 crores versus INR 200 crores last year, and EBITDA margin is at 14.8% versus 12.7% over the same period last year, thereby increase of 210 bps. The export have grown from INR 765 crores to INR 977 crores with a growth of 28%, while the domestic sales have grown from INR 816 crores to INR 873 crores, the growth of 7%. Now coming to the balance sheet. The balance sheet of the company continues to remain healthy. The net debt of the company has reduced to INR 362 crores in Q3 FY '25 compared to INR 434 crores of the last year Q3. The reduction in debt has resulted in improving leverage ratio to 0.3x in quarter 3 as compared to 0.4x in quarter 3 of the last year. The working capital cycle continues to be managed efficiently. Cash conversion cycle is lower by 4 days to 80 days in quarter 3 FY '25 and remain in the same range during the year. Now coming to the engineering business. RIECO performance for the quarter compared to H1 FY '25 have shown improvement due to the execution excellence and control on the cost. The revenue for the quarter is at INR 65 crores compared to INR 45 crores last year, increase of 44%. EBITDA for the quarter 3 FY '25 is at breakeven compared to the negative EBITDA of INR 7 crores same period last year. We have initiated the transformation project to turn around RIECO business into sustainable profitable business, and we expect this turnaround will be visible and will benefit of the same is expected over next 18 to 24 months. I would also like to update you on the status of the acquisition transaction. Post Q3 FY '25, we have completed equity fundraising via qualified institutional placement and the preferential allotments. Despite challenging secondary market, the QIP order book demand was healthy. And we take this opportunity to thank our investors for their confidence in Sudarshan growth story. Equity financing raised along with the debt financing will be used towards the proposed acquisition of Heubach Global Pigment business. We have received all the antitrust approvals, and we are making constructive progress to consummate this transaction by March '25. The company has incurred the acquisition and integration-related cost of INR 41.9 crores in the current year, and the same is being presented as an exceptional cost in the profitability statement. To summarize, we are confident in our growth journey and are committed to deliver long-term value to our stakeholders. With this, we now open the floor for question-and-answer session. In this Q&A session, we request everyone to restrict the questions related to Q3 FY '25 financial performance. Thank you.

[Operator Instructions] The first question is from the line of Rohit Nagraj from B&K Securities.

First question is on the financials. So if I look at the Pigment segment sequential EBIT as well as other engineering, RIECO segment EBIT, both have improved Q-o-Q. However, we have seen that the EBITDA and EBIT, which is on the reported consolidated numbers, it has declined sequentially by about 15% and 27%. Could you just help us with why this anomaly is there?

Rohit, can you please repeat your question once again?

Yes. In the segmental revenues, if I look at the EBIT of Pigment as well as the other segment, sequentially, that is Q-o-Q from 2Q to 3Q, it has improved. The Pigment segment EBIT has improved by almost 27%, while the other segment losses have reduced. But if I look at the EBITDA for Q2 and Q3, there is a decline. So just wanted a little more understanding why it has happened or even the EBIT has also declined. And if I consider the exceptional item, eventually it is below EBIT.

Rohit, if I see the segmental revenue, which is given as a part of our note, correct? Now if I break this down between the Pigment and the Engineering business, yes, you are correct. The engineering business, the revenue sequentially has grown to INR 65 crores from INR 36 crores. And as far as the EBIT is concerned, it is negative INR 1 crore compared to negative INR 11 crores in Q2. So there is a sequential, there is an improvement. As far as the Pigment results are concerned in terms of the EBIT, the revenue, as we mentioned, has come down to INR 601 crores, and this has been reflected in our EBIT segment results, which is at around INR 48 crores compared to INR 74 crores. And everything is translated into EBITDA, Rohit.

EBIT, which was Pigment segment EBIT was INR 38 crores, if I'm not wrong in Q2. And this quarter, it is INR 48 crores, if I remember correct. However, if you look at the EBIT on the consolidated reported numbers, it has come down sequentially, even the EBITDA has also come down sequentially. And just in terms of the EBIT, considering on a Q-o-Q basis in the segmental reporting, it has improved but on the consolidated basis, it has declined. So I just wanted to have your perspective.

Rohit, you are comparing stand-alone results versus consolidated results?

I think it is consolidated only. Maybe otherwise, I'll take it offline. The second question in terms of individual consumer or user segments, how has been the demand during this quarter? Whether we have seen improvement or deceleration just some from Coatings, Polymers, Inks et cetera.

I think if you look at the 2 markets in India. In India, we've seen Q3 is generally a softer quarter in general for the whole business. In terms of Q3, especially on the Coatings side, we've seen softer demand. Also demand inventory destocking has taken place. That's why Q3, I think Coatings, we saw a weaker demand. In terms of overseas, I think our new products are getting good traction, and we are able to gain good share there. That's been the general.

Yes. And other Polymers as well as the Ink et cetera, segment?

I think those have been fairly good. We've been doing okay.

And both in domestic as well as international markets?

Yes.

We have our next question from the line of Ankur Periwal from Axis Capital.

First question on the Pigments business. So if I look at our gross margin, and I'm referring to your Slide #12 -- sorry, Slide #11 on the presentation. So if I look at Pigment business, the gross margin has sort of dipped on a quarter-on-quarter basis, and there is a decline in the EBITDA margin as well. While I understand that one should not look at this business on a sequential basis but the trajectory -- the upward trajectory in margins that we are seeing in the first half, in the second half, we are largely flattish on a year-on-year basis in terms of gross margin. Any specific reason to highlight here?

Ankurji, generally, our business has taken an upswing where the product mix change has helped us improve our gross margins, which used to be probably in the 43% range, right, and below, which is now moving north of 45%, right? And I think we should be now in the range of 45% plus in the coming -- in the times ahead due to our product mix change. Obviously, quarter-on-quarter, things will keep changing depending on what's the product mix, which customers have bought, et cetera, and how this has panned out, right? So I wouldn't be too concerned on the gross margin area. On the EBITDA bit, of course, a few things. We had to add in some extra resources to plan for the new growth, which is coming up and also a few expenses, which we had to incur also on the extra bit. And generally, December is also annual plant maintenance, which we look at -- which there is an extra -- we had some extra costs. And last year, the annual kind of shutdown came into January, right? So that's a little bit of a difference.

Sure, Rajesh. That's helpful. Just on the revenue breakup, and you rightly -- when you mentioned that gross margin now is should be more 45% plus versus 43% plus historically. This is largely led by the product mix, higher proportion of specialty revenue versus the nonspecialty.

Yes, sir. Yes, absolutely. And the new molecules which we've launched, our whole strategy was to change the product mix, right? So from that perspective.

So this ramp-up is led by the new products that we -- the new CapEx, the new products that we had commissioned?

Yes, sir.

Okay. Sir, in the first half, we were seeing deflationary trend and hence, volumetric growth was higher than the Pigment revenue growth. Is that trend continuing in Q3 as well? Or we have largely caught up and now volumetric growth will be lower or at par to the revenue growth?

So I think we've caught up, and I think they are in line now.

Okay. Fair enough. And just lastly, if you may highlight some initiatives that we have taken from Heubach side, more at Sudarshan's end in terms of ramping up the softer aspects, the manpower, the distribution network, et cetera, especially in European market.

Ankur, can you please repeat the question?

Yes. So Natuji, just wanted your thoughts on the investments that we would have done in the company more on the softer aspects, which is, let's say, from a technical manpower perspective, marketing, distribution strength and how do you plan to ramp it up?

So, obviously, sir, given the current scenario, I think today, we are still operating on an arm's strength basis as -- and once we close the target. But we have been doing preparation for an integrated structure. So when we've looked at -- we've rehired some of the technical area folks. And we are preparing post day 1 to really have a customer-centric technocrat organization. So a lot of preparation and investments have gone into that. So -- but of course, post day 1, we can activate this.

Sure, Natuji. Just one follow-up. As I see, you have highlighted that by March, we should be able to consummate this transaction. By what time frame can we look at you ramping up Heubach's business? They are into operational losses right now. So how quickly we can see a recovery there? Any broad timelines will be great.

Sir, it will be very -- it's very difficult to talk about it now because of the antitrust issues, even we don't have full transparency on the business, right? So I think we will at least require -- once everything is closed, we will need some time to introspect and kind of come up. We have very high level, but we need to go into depth, look at final numbers, et cetera, to kind of come up with the detailed turnaround strategy. But I'm quite confident that year 1 itself, we should be able to kind of at least deliver positive results.

[Operator Instructions] We have our next question from the line of Yash Bhandari from Neo Wealth and Asset Management.

A question on open offer. What are the approvals...

We are not able to hear you. Can you please slightly louder?

Am I audible now?

No, no.

Mr. Yash is disconnected. We'll move on to the next question from the line of Mr. Sanjesh from ICICI Securities.

First question on the mix and margin. The impression was that as the export grows, that will have a positive impact on the gross profit margin in the Pigment business. In this quarter, exports have done well versus the domestic. But we see gross margin slightly deteriorating. Any particular reason you want to use -- I know you said that there is some product mix changes and sequentially, it's difficult to call out. But just broader understanding from a trend perspective, as the export grows, the margin should improve, right?

No, I think, absolutely, like we said, with the product mix change, we should be north of 45%, right? And that's the area where we want to kind of focus our area. And that's where we will continue to deliver the growth.

Got it. Got it. Got it. From the new product perspective, can you help us understand in the current scenario with the ramp-up in the CapEx, which we completed last year, how have we seen the contribution of new product growing in the overall business for Sudarshan?

So Sanjesh, Nilkanth here. As we mentioned earlier, the revenue ramp-up from CapEx projects, which were commissioned till FY '23 is progressing as expected. We had earlier guided the market that the entire ramp-up, revenue ramp-up from this particular projects will take 3 to 4 years' time. We are at the midpoint of this particular projection period. Whatever the target, which we have set in for this particular new CapEx utilization and currently what ramp-up we are getting are in line. And that is also, if you can see that there's slight tilt, which is also happening between specialty and non-specialty pigment revenue due to that ramp-up, which is happening. So we see a good progress, good acceptance from the customer, and we are on target, as we mentioned earlier, to take this ramp up between 3 to 4 years period. We are just in the mid of this projection period. Thank you.

No, that's very clear. But from a new product, which got introduced with these new plants, where are the contributions today?

So I think -- that's what we -- I think that's what Mr. Natu tried to describe. I think we are right on track on delivering those products, which we had said that 3 to 4 years, we should be able to fully utilize the capacity, and we are right on track on delivering those numbers, and that's where you see the margin -- material margin change coming into.

Got it. Got it. Next on the CapEx front. Any CapEx guidance you want to share for FY '26?

No. Right now, I don't think we will have any major CapEx. Right now, the Board is not -- as an integrated company, we will present sometime once the day one happens, the new budgets, et cetera, to the Board, but we don't see any major CapEx is happening in the next year.

Got it. Got it. And now that RIECO is showing the benefit of the transformation what we have been speaking in the last 2, 3 quarters, how do you see RIECO performance going into FY '26?

Full benefit of the -- this should look -- we should -- it should be at least 18 months where you see the benefit. I think as a stand-alone unit, we want to see good growth and a sustainable EBITDA of 10% plus in that business, right? And that's what we want to deliver through this transformation.

Got it. And when we see good growth, do we mean 20% plus or...

Like I said, sir, it's -- we don't give forward-looking statements, but I think the transformation will entail that, right? So we want to see how we could grow that business healthily. I think more important is the EBITDA growth, the ROCE, right, working capital kind of control. And then, of course, some strategic initiatives on the top line growth, too, right? So all this is getting executed together now, right?

Right, right. Last question on the domestic Pigment business. This quarter appears to be unusually soft. You did mention that Coating had a drag. But if I look at the paint company's results from the volume perspective? They're still doing better because I think for us, plastics are doing growth as usual. I assume means 8% to 10%. And just plus 3% growth in overall domestic business, means that in Coating business on a Y-o-Y basis, we have declined. I don't think paint companies' numbers, whatever they have been reported, they are declining. Where are we missing?

So I think there were 2 points. I think like I said, there was a destocking effect because they had taken a lot of -- in Q2, they have taken in more inventories and which were lying at inventories at that, and that's where we saw the destocking effect. Already in this quarter, we are seeing a good gain back, right? So I don't think there's any business loss. I think quarter-on-quarter, these adjustments are happening on the basis.

And we are supplying...

And general answer to you, we are not losing any market share, right? We are not losing any market share but that's what I think is looking at, right? Yes.

Very clear. Very clear. Just one last question. Are we also a supplier for the new entrant in the Pigment business so that we maintain the market share?

Absolutely, sir. Absolutely, yes.

We have our next question from the line of [ Rajakumar Vaidyanathan ] from RK Investments.

Can you hear me?

Yes, sir.

Sir, the first question, with this government push for this mono material flexible packaging, like the recyclable plastics, there is also a push to reduce usage of carbon black and not using strong pigments, strong color pigments because the recyclability will improve when you don't use colored pigments. I mean you are more...

Sorry, Mr. Rajakumar, please go ahead again.

Yes. Can you hear me now?

Yes.

Hello. Can you hear me?

Yes, sir, we can hear you. Please go ahead with the question.

Sir, the question is on the government push for this mono material flexible packaging, particularly when it comes to plastics to make the plastics recyclable. There are some guidelines given in terms of reduced usage of carbon black and also usage of -- I mean, we should not use the strong colored pigments and so on and so forth. So I just want to know what is the long-term impact of these initiatives on our business.

So we are studying the regulation and the impact. But our preliminary analysis shows that we should not have much impact because the segment we serve is not very strong, and we are coming up with some solutions there. So -- but our complete plan is not in place, and we will share our plan as soon as we are ready, sir. But we don't see a major impact on us.

Okay. Okay. And second thing, sir, what is the scenario on the raw material inflation with the rupee depreciating, are we seeing escalation in costs or the material costs are still benign?

As you know, we are net exporters. So I think it doesn't -- it's not -- it is not highly recommend. So as Mr. Rathi said that we are the net exporter. And with this rupee depreciation, we had done the simulation analysis, the current impact of this depreciation is not that material.

Okay. And sir, lastly, this with respect to this Heubach acquisition, I just want to know will we get the benefit of their whatever brought forward losses? Or are only just acquiring the businesses?

Sir, your last line was not very clear. Can you please repeat?

So the question is, will we get the tax benefit of whatever losses this Heubach group has incurred in the past? Because when we turn around and make profit, will we be able to leverage their tax losses?

So sir, as we mentioned that this particular deal is a combination of asset deal as well as the share purchase deal. So wherever there is an asset purchase deal, those losses will not be available to the purchaser. So that will not be the significant for us.

We have our next question from the line of Vishesh Dhoka from Nuvama Wealth.

This is Archit Joshi from Nuvama. Sir, I just wish to get some clarification regarding the capital structure. I think beyond the INR 1,180 crores of acquisition cost, you are also expecting roughly INR 900 crores to INR 1000 crores of refurbishments and legal costs, maybe some revamps required in the assets of buyback. All put together, I think that number was coming somewhere between INR 2,000 crores to INR 2,200-odd crores. And since you have closed the QIP at roughly INR 800 crores, the balance INR 1,600-odd crores will be fully funded through debt is the only question that I had. Rather, what kind of debt levels will we be settling at over the next maybe 2, 3 years?

So I think we also have some preference shares issued. So the equity raise is about INR 1,100 crores, and the balance will be raised through debt.

Okay. So with existing roughly INR 350-odd crores of debt, another INR 1,000-odd incrementally. So INR 1,300 crores, INR 1,400 crores would be a good number just for modeling purpose. Would that be a right assumption?

Yes. So we are hoping that we don't need all the money right now immediately but we are keeping all the lines open. But directionally, you're right, sir.

[Operator Instructions] The next question is from the line of Rohit Nagraj from B&K Securities.

Apologies for the previous question on the segmental front. I think there was some calculation error. So first question is on Heubach. If all the approvals are in place by March, when do we see the consolidation happening in our financials from Heubach numbers?

Rohit, so as we mentioned that all the regulatory approvals and the antitrust approvals have been received. As far as the consolidation is concerned, the financials will get incorporated into Sudarshan India financials after day 1.

So technically speaking, the day 1 could be April 1?

So as we've indicated, day 1, we are hoping in March. Exact date will be informed as soon as we are able to conclude on that.

Sure. Sure. Second question is again on the Heubach front. So we have -- in the exceptional items, we have incorporated the legal or consulting charges. But beyond that, in stand-alone or consolidated the Indian entity, have we taken any new manpower in terms of spearheading the business? Is it already in place? Or once the consolidation is done, then we will try to look at it given that hopefully, the business on a broader front will be managed from India although it may be having the individual subsidiaries in individual countries. So just on a manpower front or from the management front, any costs, which we have incurred till now? Or will there be incremental costs, which will come post the day 1?

So it's a process, which is in process. So I think our core manpower is in place, which we've already hired or are in the process of getting hired. And as we go through, we'll be building the organization, but I don't see any substantial costs coming into play.

[Operator Instructions] The next question is from the line of Devansh Jain from Neo Wealth and Asset Management.

I just wanted to -- I have a few queries regarding the Heubach open offer. So what are the approvals required in the open offer? And what is the expected timeline? Hello, am I audible?

Yes. Yes, just a second, please. Yes. So basically, this open offer process will trigger in post-closing of the transaction, and the draft letter of offer will be subject to SEBI's approval.

And what are the approvals required? Are there any other approvals other than SEBI?

No, I think it is SEBI only, stock exchanges and SEBI.

Okay. So we are expecting the transaction to be closed in March '25, and post then that, there will -- DRF will be published?

Yes, yes.

[Operator Instructions] We have our next question from the line of Nitesh Dhoot from Dolat Capital.

So I have -- my question is on the declining promoter stake or you can consider the declassification. So with this, is there a plan to transition the company towards a professionally managed entity? And any changes in leadership, Board composition or decision-making processes due to the reduced promoter environment?

So I think as we go ahead, we are getting professionally managed. And also, we are strategic holders of our stock. And that should continue. And I think we have a strong foothold. Going forward, of course, the Board will look at how it should get reconstituted. Currently, there is no such thought right now but I think they will actively consider this in the next few Board meetings.

[Operator Instructions] The next question is a follow-up question from the line of Rohit Nagraj from B&K Securities.

Just one clarification for the open offer for Heubach colorants. Once it goes through to fund the open offer, will we need additional debt funding at the group level beyond what we had currently considered in terms of the acquisition cost and the refurbishment or working capital expenses?

In our cash infusion, that was already taken into account.

Thank you. Ladies and gentlemen, that would be the last question for today. And I now hand the conference over to the management for closing comments. Over to you, sir.

Thank you. Thank you, Mr. Sanjesh Jain and ICICI Securities. And thank you participants for your time and interest in Sudarshan Chemicals. We remain confident in the long-term prospect of our business, and we look forward seeing you again in future. Thank you.

Thank you so much, sir. On behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.