Vishnu Chemicals Limited (516072) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 and 9 months FY '24 Earnings Conference Call of Vishnu Chemicals Limited, hosted by Emkay Global Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. Some of the statements made in today's call may be forward-looking in nature and may involve risks and uncertainties. For more details, kindly refer to the earnings release and other filings that can be found on the company's website. I would now like to hand the conference over to Mr. Meet Vora from Emkay Global Financial Services. Thank you, and over to you, sir.

Thank you. Good evening, everyone. We have with us from management, Mr. Cherukuri Siddartha, Joint Managing Director; and Mr. Hanumant Bhansali, VP, Finance. We thank them for giving us this opportunity to host them. I shall now hand over the call to the management for their opening remarks. Thank you, and over to you, sir.

Good evening, everyone. My name is Hanumant and I'm the Vice President Finance of Vishnu Chemicals Limited. I'm pleased to present to you a comprehensive overview of our company performance in the past quarter. I would like to highlight the key achievements, challenges and strategic initiatives that will shape our path forward. Let me start with the financial performance at least during the third quarter of this financial year. First, the consolidated performance. The company achieved a total income of INR 308 crores in Q3 FY '24 compared to INR 311 crores in Q2 FY '24. The consolidated EBITDA for Q3 FY '24 INR 35 crores compared to INR 49 crores in Q2 FY '24, a decline of 8% on a quarter-on-quarter basis. The consolidated PAT of the company was INR 21 crores compared to INR 24 crores in Q2 FY '24, a decline of 13% on a quarter-on-quarter basis. Now the stand-alone performance of the company. The company registered a total income of INR 258 crores in Q3 FY '24 compared to INR 269 crores in Q2 FY '24, a decline of 3% on a quarter-on-quarter basis. The gross margins at stand-alone level increased from 42.3% in Q2 FY '24 to 43.1% in Q3 FY '24, an overall increase of 75 basis points. The absolute EBITDA of the company declined marginally by 3% at INR 37 crores in Q3 FY '24 compared to INR 40 crores in Q2 FY '24. The stand-alone PAT of the company was INR 22 crores compared to INR 24 crores in Q2 FY '24, a decline of 6% on a sequential basis. Now I will share our views on the various aspects of our Chromium Chemicals business. In the quarter gone by, our domestic market demonstrated robust demand, contributing to a sales mix favoring domestic sales at 53% compared to 47% in export sale. Despite the challenges posed by the current business environment, both volume offtake and prices remain the same mirroring the stability in the previous quarter. Our focus on improving efficiencies and optimizing processes resulted in a remarkable 10% reduction in average consumption of key raw materials compared to FY '23. This has helped us mitigate the impact of higher raw material prices. Cost of consumables as a percentage of operating revenues was 13.8% in Q3 FY '24 compared to 16.3% in Q2 FY '24. Power cost also reduced as a percentage of operating revenues from 5.2% in Q2 FY '24 to 4.7% in Q3 FY '24. Now talking about Barium Chemicals, the capacity utilization in Barium chemistry was similar to that in Q2 -- but emphasis on reduction in inventory of finished goods resulted in better sales volume on a quarter-on-quarter basis. Our depreciation has surged by 89% on a year-on-year basis, exerting a short-term impact on profitability. The company is expected to see better traction in volumes as we progress. Our upgradation of equipment and infrastructure completed in the newly acquired baryte beneficiation plant. The plant has stabilized in February and tangible benefits and cost savings are expected to flow from Q1 FY '25. Now I will request the Joint Managing Director of Vishnu Chemicals Limited, Mr. Cherukuri Siddartha to share his views on the business. Over to you, sir.

Thank you very much, Hanumant, and very good evening, everyone. I would like to start off by sharing highlights in the Chromium Chemistry. Our company is set to recoup its entire investment in the backward integration project at Visakhapatnam by Q1 FY '25. This is marking it as a significant success. The cost of our primary raw material, Chrome Ore continues upward trend in quarter 3 FY '24. This is marking a consistent quarterly increase of nearly 10% over the past 3 quarters. On the same lines, we intend to secure and reduce the dependency of procurement of Chrome Ore. Therefore, our proposal to acquire a strategic Chrome Ore beneficiation plant with a sizable reserve is progressing well, and our offer has been accepted. Further details will be shared upon conclusion of negotiations and execution of documentation. This is demonstrating our commitment to secure our raw material supply chain in the years to come. In June 2023, we commissioned a new capacity of manufacturing Precipitated Barium Sulphate. 100% of the raw materials used in production are sourced from within India, which is close to our plan. The quality of our product is at par with other international peers, and we have got already approval from some of the major multinational paint companies who are in India and outside India. Good volumes of PBS was sold during the quarter, leading to an improvement in the market share. However, we are witnessing some pricing pressure, specifically from China. The CapEx for the next financial year, FY '25 will be prioritized focusing on vertical or backward integration and volume expansion. While various micro and macro factors led to an overall tough quarter, we can see things improving in the chemistries we operate. With the completion of stabilization by Q4 FY '24 for our new projects, we are confident of achieving an improved performance in the quarters to follow. Thank you. Now I request we start and keep the floor open for Q&A.

[Operator Instructions]. First question is from Rikin Shah from Omkara Capital.

So I just wanted to ask on the breakdown and correlation between the Sodium Dichromate prices and Chrome ore prices. So again, it's another quarter where both the prices have been moving in different directions. And I was just trying to understand what maybe could be at prolonging this effect because generally, these things have been moving in tandem historically and at the moment, it is very difficult to gauge when things will revert back. So if you could help with that.

Well, that's a good question. I would say that both are not moving in a different direction. So what we are seeing is the chrome prices have increased by another 10% during the quarter on account of increase in sea freight rates globally that has made an impact. And our finished good prices have remained stable for this quarter. But what we are witnessing now is we have already started discussing with some of the potential end users. And we have already announced a price increase among all our products. So we are expecting a price increase from quarter 1 FY '25.

Next question on Barium end. So it's, I think, been 4 quarters since -- perhaps you can say sort of a slowdown in the Barium segment. and we have perhaps not reached a respectable enough profitability in Barium segment and due to many challenges from supply side, some demand softness on Barium Carbonate in Europe. So in terms of thinking going forward, when do we see this getting back to a very healthy level?

Yes. There are many factors which is causing this stress on the P&L, especially on the Barium side, one is demand slowdown in the construction industry, a, and also, our precipitated Barium Sulphate, the product approval is taking slightly longer than anticipated, but it's progressing quite well. As we speak, this quarter, we are operating at 60%, and we are seeing a good order pipeline for this quarter. And hopefully, by Q1 FY '25, we are expecting an operating level of over 70% in the Precipitated Barium Sulphate that will definitely build the overall product mix and improve the spreads for our Barium portfolio.

No, that's fair. Okay. So we do have a road map for Barium Sulphate but considering Barium carbonate seems to be stuck with the demand challenges in Europe, are we sort of trying to navigate that in other geographies because maybe the issues in Europe could be much more prolonged than people anticipate.

So in a few quarters ago, we acquired this Beneficiation plant called Ramadas Mineral. The primary reason for us to acquire the facility is to bring down our raw material costs, and we are witnessing a good progress in that project made by a key raw material, which is baryte, the cost is going to come down significantly by March, April. And currently, the plant is under stabilization phase. By April, we are expecting it to be fully operational. By virtue of that, our key raw material costs will come down, that will definitely give us more leverage in terms of pricing and in terms of demand, yes, it is sluggish, but it's not fully off. And also it's been clubbed with the Red Sea issue because majority of our business is in Europe. The customers are slowly picking up, and they have accepted the fact that the prices are going to continue to remain elevated, not just for shipments coming out of India, but also from China. So we are seeing steadily the orders are picking up and customers are coming back and confirming the volumes overall.

The next question is from Rohit Sinha from Sunidhi Securities.

Just on continuation of your answer on last question about this Red Sea issue. So how we are seeing this as of now? And I mean how much it has impacted as you can say in Q3 for us? I mean what kind of volume has been impacted because of this?

So you pointed out from a very pertinent issue with respect to freight. Red Sea is known to be one of the world's busiest straits. Nearly 30% of global containment freight passes through the Suez Canal alone. And it was an issue that was not in control of anyone, either the suppliers or the procurer and it immediately increased the shipping costs in certain routes, let's say, from Asia to Europe by nearly 5x in a period of less than 30 days. There is no respite right now in this, but the changes are now being accepted globally by both exporters as well as importers because this change has not just led to increasing prices, but also it has increased the transit time by nearly 30% to 40% in most of the routes. Talking about the [indiscernible] we saw, nearly 145 basis points increase in freight cost on a quarter-on-quarter basis. And we are already in conversation with our customers as this freight cost increase will be transitory in nature and it will [indiscernible]

But anything -- any volume to quantify that because of which we have lost some volume or anything to...

Well, we have not lost, but there has been a delay in the shipments. I mean -- but customers have come back and they have started moving now. Well, their idea was they were anticipating that the sea freights will cool off in a few months from now, and they are picking up on the need basis. So that they don't run out of stock. And they are also mindful of the fact that if they delay their decision-making to access shipments, given the longer transit time, they might even run out of stock. They're cognizant on this fact that -- in general, the transit time has gone up so they have to place their order now. Otherwise, it will be a stock of situation for them.

Secondly, on the subsidiary side and on Barium side, from last quarter, Q2, I think we have increased some revenue in Q3 but on EBITDA, there was a decline. So is there a product mix change or how to see this thing on a quarter-on-quarter basis for subsidiary?

Yes, the revenues in Vishnu Barium increased on a quarter-on-quarter basis. And this was mainly because of the increase in realization of Barium Carbonate prices that we undertook to pass the increase in the raw material trend. So at a gross profit level, the company made absolutely the same spreads that we made in Q2, but because the realization per kg were higher, the gross margins look a little lower. But overall, we maintained our gross profitability on a unit level.

The next question is from Rakesh Davera from 4R Investments.

My first question is regarding Barium compound. We are facing all competition and demand -- my first question is related to Barium compound, we are facing tough competition and also a slowdown in growth. So can you throw some light?

I would say that yes, we are seeing a slowdown in demand, but it doesn't mean that our growth is coming down because if you see sequentially, the volumes have been increasing quarter-on-quarter basis, and that will bound to continue as we are focusing more on precipitated Barium Sulphate. We are witnessing good volume growth in the quarters to come. And also on the Barium Carbonate side also on a -- even on a Y-o-Y basis, we are going to see close to 14% increase in the volume. However, that will not reflect in the revenues in general because of the general adjustment in the prices. But otherwise, we are growing in terms of volumes on both Barium Carbonate and Barium Sulphate. Generally speaking, there has been about a 12% to 13% decrease in the product realization. That is actually playing an impact on overall revenues and profitability...

Okay. Strong hit on EBITDA due to higher fixed cost -- due to the baryte beneficiation plant earlier? Or what exactly is hitting EBITDA?

If you, see, our EBITDAs have actually increased on a year-on-year basis, which means that our operating leverage has kicked in overall. But in terms of profitability, we have faced an impact on account of close to 80% increase in the depreciation on a Y-on-Y basis and also increase in the interest cost. And also, there is a one-off thing which we had during last quarter because already the project has commenced and we cannot capitalize it anymore. So there has been an incidental expense to improve on a certain process where some cost has been incurred in general.

Earlier in Q2, we've seen that breakeven achieved in Barium, but it was not exactly on the realized guidance. So how can we understand this? Can we understand like the Barium compound growth is getting slowed down due to pressures on the overseas market also?

Well, I think what we are seeing, the volumes are increasing and as we tend to reach 80% operating level, which we are confident on achieving by Q1 FY '25, we are targeting an EBITDA of 18% to 20% in Barium vertical itself, and we are quite positive about it. And although there would be an impact on higher depreciation, still there will be an increase in the profitability in FY '25.

Coming to Barium precipitate capacity utilization, at what level currently we are operating?

Currently, we are operating at 60%. From FY '25, we are targeting to operate over 70%.

Yes. And the other question is regarding Bhilai plant. What -- can you throw some light on Bhilai plant what exactly operational there?

Well, we are mostly operating value-added derivatives there like Chromic Acid, also produce Sodium Dichromate, Potassium Dichromate and basic Chrome Sulphate, that's what we produce at Bhilai facility.

So what were the measures taken generally to avoid incurring heavy cost? So in last Q2, we have spoken that regarding reducing cost expenditure. So are we say maintaining same thing?

Yes. So we have taken multiple steps to reduce our overall cost [indiscernible] number one was that we reduced our consumption of the raw materials. So on a per kg basis, the amount of raw materials that we consumed in FY '23, that has come down by nearly 10% over the last 9 months. And this is across the raw material that we are consuming in Chromium Chemical. So that includes chrome, soda ash, sulphuric acid, et cetera. What this has led to is an improvement in gross margin that is already visible in our Q3 FY '22 results. It has improved by nearly 75 basis points. Apart from this, we have also done a lot of upgradation in our equipment and processes, which has reduced our overall cost of consumables that generate energy and reduced our cost of electricity, which was earlier about 5.2% and has come down to 4.7% in Q3 FY '24 with the same volumes. Most important thing I'd like to highlight was that we completed our backward integration in Visakhapatnam in Sodium Carbonate. In January 2022 we started this plant, and we are now all set to recoup our entire investment to the tune of nearly INR 140 crores spent on this project by Q1 FY '25. So these are some of the significant achievements that we have done on the efficiency as well as reduction of cost.

And final question regarding Chromium Compound, we have acquired -- actually approved for the acquisition of Chrome Ore reserve and when will we see that in the results?

So we have taken a board approval in the last quarter. And now talking about the progress that we have made, we have identified the assets that we would like to acquire and are also has been accepted by the seller. We are in process of completing the documentation. And over the next few months, we'll be spending time to [indiscernible].

So how much margins can we expect after completion of this Chrome Ore acquisition? And how much improvement we can expect?

We'd like to reserve our comments on the exact cost benefit due to Chrome Ore acquisition because of confidentially clauses that we have entered with the seller. But please note that Chrome Ore is a very, very important production raw material for production of Chromium samples. And till now, we are procuring 100% of it from external sourcing. Through this acquisition, we will be mitigating the risk of volatility in the raw material prices. And that would give us further strength to keep on expanding in the forward integration without worrying anything about the raw material.

And what will be the guidance for the Q4?

So we are making significant improvements in barium vertical. So we are hoping that the overall improvement that we have shared with all of you today. This would come into effect in Q4. And [indiscernible] next financial year.

Next question is from Aditya Bharat Chheda from InCred Asset Management.

So first is, can you highlight the gross debt and net debt number for December 30?

Our gross debt on a consolidated level is around INR 320 crores as of 31st December. And our net debt is nearly INR 250 crores. Our gross debt to equity 0.5x. And by the end of this financial year, we'll be standing at nearly 0.4 to 0.45x.

And one clarification on employee cost, the bump up has to do with the PBS plant? Or is there any other relevant to the quarter-on-quarter 10% jump in employee cost on consol basis to INR 15 crores.

Typically, in Q3, we have a onetime impact of annual bonuses that we roll out across the company. So this is something that -- every year in the Q3 quarter, it's a onetime increase...

And last question is on PBS. Right now, the revenue contribution from PBS would be how much? On the consol number?

PBS is right now operating at lower level. So the contribution overall would increase only from Q4 and -- subsequently. So right now at the overall level, it could be about less than...

The next question is from the line of [ Ayush Bansal ], who is an individual investor.

So my question was regarding the individual capacity utilization of Barium Carbonate and Barium Sulphate and how we see it improving up to Q1 FY '23? What is [indiscernible]. My question was on the individual capacity utilizations of Barium carbonate and Barium Sulphate and how we see it improving over Q1 FY '25 next 2 quarters.

The current operating level of Barium Carbonate is at 75% and Barium Sulphate, we are operating at 55% to 60% level. And as we progress towards next financial year, our endeavor would be to increase the Barium Sulphate operating levels to over 80%. We are confident because we are witnessing a good order book and customer approvals are flowing in. And Barium Carbonate also as we see some improvement in the construction industry in Europe and Latin America, we are confident to operate it at over 90% during FY '25.

The next question is from Gunit from Counter Cyclical PMS.

So our revenues have more or less been range bound from the last around 8 to 10 quarters between INR 300 crores to INR 350 crores and if I'm not wrong, we made some capacity enhancements until brownfield projects as well during this time frame and also certain backward integration programs. So I just would like to understand when can we expect a bump up in volume and a bump up in the revenues, I mean, going forward? Because if I remember correctly, we had also given a guidance of INR 1,500 crores over FY '23 or FY '24. And we still are at a run rate of about INR 300 crores per quarter. So I would like to understand your views on this.

We are expecting upgrading chemicals capacity utilization to improve Q4 onwards. And entering into financial year, we are very confident of delivering 70-plus utilization level. And that would overall increase our profitability. And that would overall increase our revenues and also the profitability of the company. At the same time, the improvements that we have done [indiscernible] of both chromium and barium chemicals will help us [indiscernible]. Some of them [indiscernible], which is already operating at a higher utilization levels compared to previous and it will further [indiscernible] as we enter into the month of March. Secondly it's [indiscernible] raw material. And that is also going to [indiscernible] so with the business cycles expected to change in a few quarters, we are hoping that these improvements would be sustained and [Technical Difficulty] few better margins [indiscernible] given the prices of raw material...

Do we have any internal estimates based on the kind of pipeline that we see and the kind of growth that we're doing or the kind of growth we should expect in FY '25? And the credit rate margins that you're looking at the realistic steady state margins for FY '25, considering all the work that has been done.

So we won't be able to share internal [Technical Difficulty] more than 16% EBITDA margin.

[indiscernible] it's not audible.

Coming back to the question. We can't give a revenue or profitability guidance for FY '25. But the first thing that we would like to do is achieve our EBITDA and margins to the level of 16% to 17%, which is right now at about 14.6% at a consolidated level. And overall, the revenues also would increase next year because of our overall increased offtake from variant counters. So that would be the key driver of profitability.

And sir, are we looking at any other CapEx or any other expansion plans for the coming years to add more volumes?

Yes, [indiscernible] we are looking at adding chromium metal to our portfolio. The work is under progress now. So we're expecting a commercial launch of this product by FY '26. And this will be a good value effective product for our Chromium portfolio. So for that, the CapEx is currently on. We are in the process of expanding our Chrome Oxide green production at our Visakhapatnam plant, which will be the key raw material for producing high-purity chromium...

The next question is from the line of Dhruv Shah from Ambika Fincap.

Sir, my first question is on the chromium side. In last con call, you mentioned that there was an opportunity for green oxide. How are we shaping there? Have we got any approval for that?

Yes. I mean with respect to chrome oxide, we did give an update that given that one of the producer in Germany is in the process of shutting down the facility, we are witnessing a good inquiries from Europe and U.S. Currently, where we stand today is our product -- our samples are under testing phase. So we're looking forward to hear from the clients in the quarter to come from now. But as such, for this particular product, the order book is looking quite solid. And our operating levels at our Hyderabad plant where we are producing Chrome Oxide green is operating over 90%. And as we move forward towards FY '25, we are already considering adding capacity since we have a furnace available to increase our oxide production at our Hyderabad facility where we can also use more sodium dichromate internally for our own production.

I had a more general question on your chromium side. With the chrome ore prices going up every quarter, do you think it's feasible for the players in Turkey and other European countries to continue production? Or they will say the same fit what the Germany producer saw because we are seeing our margin going down with our low cost of production with the backward integration we have in soda ash. So how are other players surviving this?

Well, what is definitely helping us to sustain to get through this headwind is definitely a [indiscernible] is helping us in a very big way. And it's still more to come in terms of -- because currently our CO2 expectation is operating at 75% level. And we are expecting it to go to 90% level by FY '25 that will definitely give us a lot more leverage in terms of pricing and overall costing in general. And in terms of, yes, Chrome ore pricing, it's not just for Vishnu chemicals but across the industry. All our peers are bound to source this raw material from Asia from South Africa or Kazakhstan. Like it's -- what we are seeing like talking about the Turkish peer who's having an advantage with respect to currency, we see them leveraging that to some extent which gives them a little bit of pricing power over others. And the South African producers who is in South Africa, they have some logistical advantage because Chrome Ore is in South Africa. But as Vishnu chemicals, what we see, we have a very strong footing in India, which is primarily a growing market compared to other parts of the world. And as you can see, over the last few years, our domestic share continues to increase. We were at 60%, 65%. Today, we are at 75%. And the market seems to grow in India at 6% to 7% levels.

But can you pinpoint any particular reason why the chrome ore prices are going up? Is it because of the electricity cost in South Africa, primarily?

That is one of the factors, but not the major one. It's primarily because of logistical issues in general and some consolidation, which has happened in the mining industry over the last 4 to 5 years, especially during COVID, there are very few suppliers out there. And especially for our particular grade, which is chemical grade, there are very few suppliers who are able to produce this particular grade product. What is really helping us in this situation is because we have an agreement with one of a very big producer. So our volumes are taken care of. What issues we are facing is with the pricing in general because we tend to buy at what the market price is in general.

Coming to your Barium side, did I hear that right, are we seeing some competition in our PBS segment from Chinese films in India?

Yes, to some extent because they realized that there is a domestic supply, which was not there in the past. I think part of their effort is to secure their position in India because it's their main market outside China. Currently, given the import stats and all, the market today is about 30,000 tonnes. It's grown 14% on a Y-on-Y basis. But I think we do differentiate, and we do position ourselves as a quality supplier because we are able to demonstrate there's a quality of difference between what Chinese are offering versus what we are supplying. But as you know, it takes some time for customers to really get to that point. But our technical team and the sales team are working around the clock to make them realize what they're using and what they're getting now versus what they are having in.

But in pricing, what was the difference between what we are offering and what they are offering?

It depends on the customer, it depends on the grade. There'll always be a 5% to 8% delta.

They would be cheaper, 5% to 8%, right?

Yes.

And my last question, we aren't seeing any full benefits of baryte acquisition, right? Should we see that in Q4?

Yes, definitely. As we speak, we are witnessing a good improvement because it's a new facility, as people are gearing up, trying to get used to that process and everything. And this month itself we are seeing a good progress in terms of yields and volumes what we have envisaged, the acquisition has happened in the month of September, and we have started operating from October. So this is what we are planning. It takes about 5 to 6 months to stabilize everything and achieve the desired...

What will be the utilization level there right now?

Right now, well, the utilization level is about up to 60% as we speak. But what we are trying to focus is to improve on the yields, which overall helps to -- help the cost impact as we improve on the yield on the processing plants.

The next question is from Bhavya Sonawala from Samaasa Capital.

Most of my questions have been answered, just two. I missed out on the initial remarks on terms of [indiscernible] any kind of volume growth this quarter? And second question was similar to the previous participant on the competitive landscape in the chromium segment. If we are seeing any kind of increased inquiries considering any problems with our competitors? If you can throw some light on that.

On the volume front, the volume and the [indiscernible] compared to Q2 FY '24. And on the -- can you repeat your second question, please?

Basically, I just wanted to know the competitive landscape in the chromium segment? And are we seeing any kind of increased inquiry in terms of being -- on the cost front or any kind of issues on the competitor that we have seen some increased inquiry for the Chromium segment in our business.

On the coming segment, I'd like to highlight that we have exhausted our full installed capacity. And now we are in the process of investing in both the primary chemical as well as [indiscernible] in the next financial year. So that could further give us more range of products to penetrate into newer markets. As I'm speaking to you, we have already gained a lot [indiscernible] European as well as American market. And with our new products coming up, they will further strengthen our position in these markets.

We'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.

Thank you very much. We appreciate your continued support as we are working together towards a future of sustained growth. I'd like to thank all the participants, team of Emkay and Chorus Call for our time today. If there are any further questions, please feel free to reach out to us on [email protected]. Thank you and have a good day.

Thank you very much. On behalf of Emkay Global Financial Services Limited, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.