Yasho Industries Limited (541167) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '26 Earnings Conference Call for Yasho Industries Limited hosted by MUFG. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Nikunj Seth. Thank you, and over to you, sir.

Thank you, Heena. Welcome to Yasho Industries Q2 FY '26 Earnings Conference Call. From the management today, we have Mr. Parag Jhaveri, Managing Director and CEO; and Mr. Chirag Shah, CFO. Before we proceed with the call, I would like to give a small disclaimer that the call may contain certain forward-looking statements, which are based on the business opinions and expectations of the company as on today. A detailed disclaimer has been given in the company's investor presentation, which was uploaded on the stock exchange. Now I would like to hand over the call to Mr. Parag Jhaveri. Over to you, sir.

Thank you, Nikunj. Good afternoon, and thank you, everyone, for joining us for Yasho Industries results conference call for the quarter and half year ended 30th September 2025. We sincerely appreciate your continued support and interest in the company's performance. As we review our financial and operational performance for the quarter, I would like to emphasize our unwavering commitment to maximizing value for all our stakeholders. Today's call is also joined by our Chief Financial Officer, Mr. Chirag Shah. I hope all of you had an opportunity to go through the financial results and investor presentation for Q2 FY '26, which are available on the stock exchange and our company's website. Q2 and H1 FY '26 were defined by complex external environment, including tariff pressures and the slow demand across several key markets due to the tariff. Despite these challenges, we demonstrated operational excellence by safeguarding profitability and progressing on our strategic growth road map. Revenue for half year stood at INR 382.6 crores, a 11.8% year-on-year growth, supported by strong 30% volume growth. Sequentially, revenue were marginally lower due to pricing pressure and deferred export orders linked to tariff on certain items. Importantly, profitability improved sequentially, reflecting operating discipline, improved mix and cost efficiency. Our Pakhajan facility operated below optimal utilization level during the quarter due to trade restrictions in key export market. However, through cost control and operational discipline, we were able to protect our margins. With improving demand conditions, stable input availability and renewed customer inquiries, we expect utilization level to steadily improve over the coming quarters. We also recorded 2 important strategic milestones during the quarter. One, signing of 15-year long-term supply agreement with the global MNC for lubricant derivatives, which is expected to contribute approximately INR 150 crores in annual revenue from FY '27 end with plant becoming operational by Q4 FY '27. Second, successfully commissioning our new R&D laboratory on 29th October 2025 with an investment of INR 23 crores, positioning us to drive innovation-led growth and strengthen our industrial segment through development of higher value-added products and process efficiency, supporting our long-term goal of value creation through operational excellence. Also, I would like to give you insight on an ongoing CapEx where we are expanding capacity. We expect to start part of the production by Jan or February '26. In summary, despite external turbulence, our strategic focus, operational agility and discipline have helped us deliver a stable performance. With diversification initiative, long-term partnership and innovation capabilities now firmly in place, we are entering the next phase of growth with greater confidence. We remain committed to creating consistent value for all stakeholders. Now I hand over the call to Mr. Chirag Shah for sharing the financial performance. Chirag?

Good afternoon, everyone. From the financial standpoint, Q2 reflects resilience and prudence. Revenue for Q2 stood at INR 183.6 crores, showing a 9.6% year-on-year growth. EBITDA margin stood at 18.2% and PAT margins were 2.65%. Working capital and gross debt levels saw a temporary increase due to inventory buildup triggered by tariff-related export delays. However, corrective measures are already initiated to normalize cash flows, optimize inventory cycles and strengthen collections. Our balance sheet remains fundamentally strong. We remain focused on reducing leveraging and aim to bring down our debt-to-EBITDA multiple in a phased manner, subject to market conditions, visibility of demand and execution on ongoing projects. Looking ahead, our financial priorities are enhancing operating cash flows, maintaining a tight working capital discipline and gradual reduction in leverage. Going forward, our focus remains on financial discipline, efficient capital deployment and strengthening liquidity. With improved demand visibility, long-term contracts and sustained margin focus, we believe we are well equipped to deliver profitable and sustainable growth. Over to you, Parag.

Thank you. We are now happy to take any questions.

[Operator Instructions] The first question is from the line of Pujan Shah Molecule Ventures.

But just starting with the recent order which we have received for INR 1,500 crores with MNC. So just wanted to understand further aspect. So is the funding will be done by the global MNC. If yes, what is their primary incentive to do this type of CapEx with us? If you can elaborate broadly on that part?

Yes. For that project, the CapEx will be funded by the company, that is by that MNC customer. Why they want to do it, I don't have answer on their behalf that they only can answer why they want to fund us and to have this.

Okay, sir. I just wanted to understand what is our current utilization for our key products like ZBEC and ZDDP?

Sorry?

So what is our current utilization for our products like ZBEC and ZDDP?

Both are different product. So ZDDPs running something about more than an optimal level, while ZBEC is running at an optimal level.

So sir what is our base case to understand the optimal level? Is it 40%, 50% or beyond that?

Beyond that. Anything beyond 40% is better than optimal. 50% is optimal.

Okay. And to understand this global MNC which is planning to fund us. So just wanted to understand, is it already established product which we have done in R&D and altogether or it is extremely a new product which will be introduced by us once we ramp up the capacity [Foreign Language] we do the trial run?

Well this is our existing product with some tweak in chemistry and in the process.

Okay. Got it. My third question would be as we have seen that we have grown 10% Y-o-Y and volume growth was 26%. So is it a good way to understand that we have witnessed a 15% price erosion on Y-o-Y basis? If yes, which segment has been severely impacted? Is it due to Chinese competition? I just wanted to understand the competition intensity right now in the position of our -- under the current environment?

Okay. When you're looking at the growth of Y-o-Y 11% in the revenue and the growth of 30% in the volume, there is a little disconnect here, mainly because we have a degrowth in a consumer, which has a high selling price, while the industrial segment, which is growing rapidly, which product comes from Pakhajan more has a low price per tonnage, which is growing. So the revenue is dropping, but the numbers are growing purely because of this mismatch as our focus is more for industrial, which is a low price realization product and high price realization products are consumer, which is not focus point to grow. So when you see that dip in top line, but in reality, the growth is happening in the company, and we always measure our growth with the volume we sell rather than the top line what we achieve. Second question of your competition, yes, there is an intense competition coming out from China. And nobody can say that we are not affected. We are affected, and that do put a pressure on a certain chemistry.

So sir Q3 still our guidance of achieving a 70% utilization in Pakhajan plant and doing a top line of INR 950 crores to INR 1,000 crores still remain achievable do you think considering the recent impact of the dumping and assuming the industry challenges remain the same?

No. I think our guidance between INR 900 crores to INR 1,000 crores, which is looking to be a difficult target looking at the current situation of tariff. So we should be happy if we achieve INR 800 crores to INR 850 crores of revenue in current scenario.

The next question comes from the line of Yash Naik from KamayaKya Wealth Management Private Limited.

So sir, could you quantify the utilization at Pakhajan. So if I'm not wrong, previously you mentioned we are at around 50%. So are we still at around that level or there is some improvement?

No. In quarter 2, the utilization has a little bit dipped below 50%. So we have mentioned that it is done at a little oversight. Also in our presentation, we have said that it is below the optimal condition.

And sir my second question is regarding the U.S. contribution in this quarter. And if you could comment on the demand scenario over there and the tariff situation and how the customers are currently having -- you worked with them. So what are the expectation going ahead?

Well, U.S. sales has took a hit, particularly that part of the world in Q2. We are mitigating some steps. We are talking with the customers. And I think we are able to realize some part of the business beginning of this last month and also this month, we see some flow of order coming back to us. We cannot elaborate what we did here, but we are able to start getting back the business.

So revenue would be around 25%, if I'm not wrong, in the last quarter. So it would be the same in the similar quarter or there is some changes?

Well, in the last quarter, it was lower than the 25% from U.S.A. But we hope that we will be able to regain that same in this quarter and also the next quarter.

[Operator Instructions] The next question comes from the line of [ Dhvaneet Savla from Savla Family Office ].

Firstly, I had a question with regards to the optimum capacity. So I had -- I was wondering what could be our top line when both of our units are working at the optimum capacity, right? What is...

The optimal should be in the range of about INR 1,200 crores.

Okay. That's it. And secondly, on the U.S., currently, how much percentage of our business is actually facing genuine tariff issues? And is there any other part of the world where we are trying to mitigate the same risk by?

Absolutely. As we have informed in the past also that almost 25% of our business come from U.S.A. And of that 25%, at least 40% has been affected due to the tariff. And we are working with a different region to grow more. And even in the last month or in this quarter, we have seen the growth in the volume. So we are confident that we'll be able to mitigate the shortfall. And that's why we are still giving a guidance of a growth here.

But this even affects our working capital cycle, right? So is this because of this that we were going to face a longer working capital cycle?

No. We had certain business committed to us in end of Q1, early Q2. And because of that, we have built up some inventory. Suddenly, due to the tariff, the business has got affected. For the finished goods, so inventory has gone up and the incoming raw material, which has kept on coming in, that has increased the stock level. So in this quarter, we have done a reduction in the purchase. So we hope that we'll be able to bring down our inventory.

[Operator Instructions] The next question comes from the line of [ Yamang ] from Findoc.

In the last con call, you have given guidance of 40% growth, which comes somewhere around to INR 900-odd crores. So given our quarter result for Q2, are we still following that growth trajectory?

I did say that before -- a few minutes before that, yes, we have given a con call of INR 900 crores, but at that time, this tariff issue was not there. Now the tariff issue has impacted, and we expect to have a growth of between INR 800 crores to INR 850 crores revenue for full year.

Okay. Okay. Also, sir, like I just wanted to know that you also gave a guidance for the asset turnover ratio to be reaching somewhere around 3%. So despite this lower utilization in Pakhajan facility and the tariffs coming into picture the volume has decreased somewhere around. So are we still calling the asset turnover to be 3% in the coming year for FY '25?

Well it will happen down the line 3 to 4 years for asset turnover of 3%. Currently, with the Pakhajan not running at the peak level, it will be difficult. We need to invest much more into the Pakhajan to achieve that asset turnover of 3% or more.

Okay. Got it, sir. Sir, one more -- last question. So I wanted to know that are we just like -- is it possible to reduce our margins somehow and we can improve -- increase our volume?

That is not the step we are willing to take because once you drop the pricing, difficult to regain. So we want to maintain our margins and to work rather than getting the -- end of the day, the results should be same. So why to drop the price. We don't find the necessity.

Okay. So we will be maintaining the margin of 17% to 19%?

Yes, we want to very much adhere to the margin bracket of 17% to 19% bracket.

The next question comes from the line of Swaraj Mehta from Perpetual Capital Advisors.

My first question was the impact of tariffs. And at what tariff range do we continue to stay competitive?

Well, that I can't say. But the impact of tariff is already we are feeling it. That's why our -- what we are expecting a growth has not come in Q2, okay? And that was a significant loss of business we had in Q2. And -- but we are trying to mitigate that by different ways, talking with the customers and make them understand this is a temporary phenomena and how we both can compromise somewhere. So that's the way we're trying to mitigate the current situation. And always the tariff on the lower side is helpful for the growth of business. So let's see. Yes. Next question.

What tariff rates do we continue to stay competitive within?

We had a 6.5% tariff in past. We hope for that. We don't know where we'll end up.

Okay. And what are we doing to diversify from the U.S. for the lubricant additives to enjoy higher capacity utilization? And is the plant fungible for other items?

No. Pakhajan is not fungible. Pakhajan is a dedicated plant, but we do have a different market open up in a different geography, and we see the results coming in. And we hope that we'll be able to utilize the plant on a better run rate. Yes.

Okay. And sorry...

No, no, go ahead. You still have question?

The inventory -- what was the inventory buildup for? So is there -- is it for a particular client or just to keep the plant running? And do we see that coming back to a normalized level?

Well, we do expect the inventory to come down significantly in the coming quarters by March, and we have an aim to bring between 160 to 175 days inventory, which is right now at 210. So we do have plan to do that.

By when you said it will come down, by March?

By March.

Okay. How much is the finished goods and how much is the raw materials?

I don't have exact number of finished but if you want, we can send you that information. I don't have that -- the value of the stocks. I have number of days.

And lubricants, we set up one large plant, and it's been live since the year, but the ramp-up isn't like it should have been like because the main market is the U.S. So what are we doing to ensure the plant is ramped up?

I said that we are looking for an alternate geography to expand our sales there.

[Operator Instructions] The next question comes from the line of Aman Thadani from Solidarity Investment Managers.

Parag, I have 3 questions. The first is, when I look at your recent performance, that is like sales is up 10%, but the volumes are up 26% in a tough environment and the gross margins are healthy at 42%. So my question is that given the sales can fluctuate maybe due to product mix or realizations, sir, what would you consider as the most relevant metric to track Yasho's progress and the rationale behind it?

Okay. As you said -- pointed out correctly, we measure our growth in terms of volume and number two, the quantum of EBITDA growth in the company. On that basis, one can track the company in a much better way rather than a top line. Top line, we don't generally look at the top line, but we want to maintain a healthy EBITDA margin. And we will -- and the growth in EBITDA margin and the growth in the quantum of volume, what we sell will measure the progress of the company.

And sir, my second question is the 15-year long-term contract, sir. We have not seen many instances where a customer would fund the vendor CapEx. So just wanted to understand what is the strategic importance that Yasho will play as a supplier to this vendor longer term?

Well, number one, our capability on a technical side, that has given a confidence to our customer that we can deliver the product what we are looking at, which is very complex and critical for their application. And because of that, I think they must have decided to give a funding also because funding is not a small funding INR 2 crores, INR 5 crores, which we can do. But here, we need commitment. So we requested for fund. So they have committed here to recover the cost, their cost.

Got it. And sir, my third question is since you are putting a lot of effort on R&D, like the new setup that has come on stream, the team size has increased. Maybe can you talk a bit more about the new talent that you have hired and the efforts that the company is making for new product development?

Yes. We have increased our strength in R&D. We have a lot of senior scientists who has come on board in the last 6 months' time. And things have finally come live before last -- before 15 days. We are looking not only into the existing our line -- application line, but we are also looking for diversified portfolio more into the specialty or performance chemistry where we feel that there is still scope for the Indian manufacturers to come up where there are not single Indian manufacturer. And we are looking for those chemistries. And we are confident that we'll be able to develop that with our track record of past.

And sir, can you just broadly explain maybe the basic crits that you would look at to maybe double down on a new chemistry in terms of maybe margins you're targeting on the industry structure or the size of the product, just broadly, sir?

Well, for minimum -- for us to have any new product develop at minimum to minimum sales value, we look at INR 50 crores to INR 100 crores, then only we start getting into that chemistry and then we develop it. Otherwise, it doesn't make sense when you are talking about a multiple growth, 40%, 50% growth. And you cannot come with the products life of about INR 4 crores, INR 5 crores a year revenue. So that was in the past, which we used to do. We had so much of product because of that reason. Today, we are looking for a revenue of anything between INR 50 crores to INR 100 crores minimum and EBITDA margin of 18% to 20-plus percent, which can generate for the company.

[Operator Instructions] The next question comes from the line of [ Vansh Sayani ] an individual investor.

I'm slightly new to the company, sir. I have seen in your presentation that you spend very much heavily towards R&D. So sir, going ahead, what is the R&D expense we plan to incur as relative to sales, if you can give a ballpark?

Sorry, I didn't understand your question. If you come slowly.

Yes sir. So going ahead, what is the R&D expense we plan to incur as related to sales?

I won't able to give related to sales, but this year, our OpEx on R&D will be in the range of about INR 5 crores, which was in the past about INR 1 crores OpEx. And '27 OpEx should be in the range of about INR 8 crores to INR 10 crores.

'27 INR 8 crores to INR 10 crores.

Yes.

And sir, what is the products on which side we have the products on this R&D side like on the...

We cannot divulge you on what products, but we are looking for industrial applications, which is may be varied into the different applications across the industrial segment.

Okay. And sir, second question is, what is the pricing environment you are seeing across the globe, especially Europe, if you can comment some on it.

Europe is a key market. Still there are specialty chemistries are being used there extensively U.S., Europe and U.S.A. both. So it's a key market, and that is one of the reasons why we are investing into the REACH registration, which is essential for -- to sell in European market. We have increased our number of products for REACH from more than 40 to almost 50 products today and are spending money on the REACH. So for us, Europe is also one of the key market for the growth.

And is the pricing environment subdued there or what...