Camlin Fine Sciences Ltd

NSE:CAMLINFINE

Earnings Call Analysis

Earnings Call Transcript 2025-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Camlin Fine Sciences Limited Q1 FY '25 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call.

These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Ashish Dandekar, Chairman and Managing Director. Thank you, and over to you, sir.

[Ashish Dandekar, executive]

Thank you. Welcome, ladies and gentlemen, to this quarterly earnings call of our company. As is our usual practice, our CFO, Santosh Parab will be first giving you a brief synopsis of the quarter's performance, following which our MD, Nirmal Momaya, will be there to answer your questions.

Over to you, Santosh.

[Santosh Parab, executive]

Thanks, Ashish. Good afternoon, everyone. Let me start with a brief on the current business environment, which we experienced during this quarter before diving into the performance. The supply-demand and dynamics during the quarter have remained largely unchanged in the sectors in which our company is operating.

Global industrial growth was stable but remain hampered by weaker global demands in many of our markets. Regional demand remains resilient in U.S.A. China seems to be stagnant and struggling with its local economic weakness. Softness in Europe is more than evident as you know. We are observing past retuning the normalcy in Latin and South American markets, which is reflecting in our performance, while the Asian and Middle Asian markets look a bit of a mixed bag.

Traditionally, as you know, quarter 1 is soft in our case, and it has panned out as expected. Though the demand seems to be recovering, there are strong pricing headwinds and despite all these issues, the top line revenues have been quite stable. The gross margins have improved with better product mix, even though increase in cost of some of our important raw materials have an adverse impact on the margins.

Consolidated revenue was reported at INR 395 crores, which is slightly lower by 1.5% as compared to quarter 4 FY '24, and around 5.7% lower with respect to first quarter of last year. The last year's quarter, as you are aware, included the running operations of diphenol facility in Europe and that revenue is not there in this quarter.

Gross margins are at 44.9%, which is stable when we compare it to quarter 4's FY '24's adjusted margins of 44%. The margins have remained steadfast due to sustained momentum in our Blends business. The revenue from Blends have grown at a rate of 13.4% as compared to last quarter. We expect that this momentum continues during the year, resulting in strengthening the overall revenues.

Revenue of Performance Chemicals remains muted due to pricing headwinds. Catechol remains at sub-$1 sale price, which not only impacts top line but also our margins.

Coming to Aroma business, that is vanillin, we have now liquidated almost entire inventory of vanillin. The revenues of Aroma were INR 13.42 crores in current quarter. The new campaign of ethyl vanillin was commenced as we had declared in the last investor call also by the end of May.

This new campaign is resulting -- has resulted in process stability as well as quality of the product. As you are aware, validation of this vanillin aroma products is an ongoing process and response -- we see that the response to our new product or the new production from all major customers are more than encouraging.

We are observing that the same price of vanillin are steadily moving up in the last few weeks. As well the initiation of anti-dumping action local manufacturers in U.S. and Europe against the dumping and predatory pricing by Chinese manufacturer is likely to have a positive impact on our business, whenever this anti-dumping regulation is promulgated by the U.S. and European governments.

Our European diphenol facility in Italy remains under shutdown. As you are aware, we had planned to report the facility, and we will apprise you of the development and the opportune time. Operating costs have been largely stable. The major impact increase has been due to the foreign exchange volatility in our Brazilian subsidiary. The resultant EBITDA stood at 7.2%, which is a significant improvement as compared to the last quarter.

Coming to the inorganic growth. As you are aware, we acquired Vitafor Invest NV, Belgium on June 11, 2024. This acquisition paves way to the group to extend its Blends and related businesses in Northern Africa and other East European markets through the Vitafor subsidiary network. Vitafor has manufacturing facility near Antwerp, Belgium.

It caters products mainly in animal feed, offers the complete range of [indiscernible], nutritional products, hygiene products and disinfectants. So these have a synergy with our existing Blends business. This offers an excellent avenue to the group for cross synergy geographically as well as with respect to products. We are excited and confident that Vitafor will mirror the growth of its holding company, CFS Mexico.

A bit on the future scenario. Our endeavor remains to successfully stabilize the performance and revenue and consequentially the margins. The economic cues are pointing towards enhanced demand and growth. We expect robust growth in Blends to sustain. The temporary weakness in Aroma would be overcome in second half of this year with improved quality and quantity of the course, which augurs well for us in this year.

Thank you. I will now revert to the conductor to open the floor for question-and-answer session.

[Operator]

[Operator Instructions] The first question is from the line of Tushar from KamayaKya Wealth Management.

[Tushar Raghatate, analyst]

Just wanted to know the EBITDA contribution from our Europe facility. And you're trying out some new products in that facility, any update on the same.

[Santosh Parab, executive]

So as we have disclosed in our results, the overall loss in Europe was around INR 15 crores for this quarter. And we had a negative operating EBITDA of INR 10 crores. We did have some revenue of INR 30 crores, which is mainly trading of some of our products and some Blends are sold there. Negative EBITDA was around INR 10 crores in this quarter in Europe and a loss of 15%.

[Tushar Raghatate, analyst]

Okay, sir. Fair enough. And sir, do you see that loss was added on going forward in H2 also?

[Santosh Parab, executive]

We are trying -- as we said, these are the fixed cost, because we are going to repurpose and we are working on the strategy to use this plant. It is likely that this negative EBITDA is going to continue in the -- at least for the next quarter.

[Tushar Raghatate, analyst]

Okay. And sir, any update on the new product, which you are now looking forward in the Europe facility?

[Santosh Parab, executive]

We are working on that as we told last time that it's a repurpose. There are a lot of works going on that. We're looking at avenues, looking at the market and we will come and revert. We'll be closing this in the next month or so, and then we'll come back and inform the stock exchange or the investors.

[Tushar Raghatate, analyst]

Sir, next one is my last question. So do you see from H2 onwards is it heading towards profitability?

[Santosh Parab, executive]

See it's too early because the repurpose activity itself is going to take 6 months. So we think that there will be a negative drag for a couple of more quarters from this company.

[Operator]

[Operator Instructions] The next question is from the line of Surya Narayan Patra from PhillipCapital.

[Surya Patra, analyst]

Sir, my first question is about the pricing situation, you also indicated. So -- in fact, let's say, for HU, hydroquinone value-chain products or our anti-oxidant value-chain based products. So till last quarter, we have been seeing a kind of a stable pricing situation. This quarter, whether the pricing scenario is meaningfully different than what we have been witnessing till last quarter?

[Nirmal Momaya, executive]

So it's come down slightly, but there's not a very major swing in terms of pricing on the hydroquinone downstream. The Blends business, of course, continues to have this same margin profile. The pricing really, as Santosh mentioned earlier, is that we are seeing in the last few weeks, especially on the vanillin side, there is some improvement in pricing.

[Santosh Parab, executive]

But other -- as you rightly asked the other HU chain, we are seeing a downward trend. And it's also -- the other parties that raw materials, maybe because crude is going up, the raw material prices are going up. But hydroquinone chain, the prices are in negative than in last 1 month.

[Surya Patra, analyst]

Okay. Is it broad-based? This is a China dumping kind of a trend again that market is witnessing that one should believe or it is just product specific? Because I think the aggression of the Chinese supplies have gone up in the recent times. So is it a broad-based trend for the chemical industry as a whole or it could be specific to certain segments?

[Nirmal Momaya, executive]

So I would say that the China onslaught yet continues. It's not that it has changed significantly. The softening of pricing is -- like we said, it's more. It's not like we've seen in the past 12 months. It's not been that rapid. And I think it's like kind of at its bottom now. Demand also is slowly coming back that we see in some of the products. So I would say that, yes, the Chinese impact continues, let us see now in the next quarter or 2 quarters, what and how that will pan out.

[Surya Patra, analyst]

Okay, okay. Regards to vanillin I think the initiatives what it has been taken by the Western world to have a dumping duty against the Chinese supplies? So possibly the time lines for U.S. and Europe would be different. But as per your understanding, when that we can think about or if we can see some kind of benefits for our product and supply opportunity on that front?

[Nirmal Momaya, executive]

So U.S. anti-dumping will probably come before the EU, typically that is what we understand. Time frames can be 2 months to 6 months for this to come. But any ways -- any which ways, since this is an open public information and action, we are already seeing that impact of that specifically also in U.S. and Europe where the buyers know that this is impending in down the corner so are wanting to develop us as a supplier in the long term. So that is kind of giving us a benefit already.

[Surya Patra, analyst]

Okay. because since we know that vanillin is largely 3/4 player in the market and Chinese used to have a kind of influential share also in the Western world. So if they will be curtailed, then that could definitely lead to a kind of significant volume opportunity considering the current situation that we will be having in terms of the volume that we would be doing. So should one think this as a kind of a big development changing the earning trajectory in the near term, post those events?

[Nirmal Momaya, executive]

Yes, that is right. The volumes would be -- in these markets are significant. So if the shift -- and we can see that slowly people are looking at that. And in the next few quarters, hopefully, that should give us some positive results there.

[Surya Patra, analyst]

My next point was about the acquisition -- Vitafor acquisition. So obviously, possibly that was the way it was acquired and the theoretical understanding whatever that is there when it is in the -- or it complements our Blends operation. But given the focus what we have in that space and the kind of defocused operation -- the acquired operation was in.

So considering all that, the synergetic benefit in terms of the numbers, how that one should think about over the next quarters? I think this acquisition will be implemented or effective starting this quarter, then how the numbers can be panned out post this integration?

[Nirmal Momaya, executive]

So basically, the Blends business, as you are aware, are predominantly in the countries where we have our own operations, as about 80% of our business comes from our subsidiaries. Keeping that in mind, the Vitafor acquisition is a good opportunity for us, not only in some of the markets where Vitafor has presence. But also their product portfolio opens up some new avenues and some new technologies for that. So there's a mix of reasons why we actually made that acquisition.

The idea is to use our existing distribution network and scale up the business, which Vitafor has in some of the markets, where -- in some of the markets where we are present, they are not present. So the synergistic effect of that, of course, it's not good to happen in 1 or 2 quarters, but since these are products, new products, which do take some time to establish in markets.

But we had, in fact, started this process in Mexico about a year ago of taking those products into the Mexico market, which has now started showing some results. So in terms of impact, I think currently, the run rate is about EUR 1 million a month top line and low EBITDA margin. I think that will improve as we go along in the next few quarters to more like what we're see in the other geographies.

[Surya Patra, analyst]

Okay. Okay. Just last one question, if I may, sir. See, in fact, there are so many things which is currently -- which are playing out currently, whether it is the Chinese pressure on certain basket of our product or it is the opportunity on the vanillin side or it is the acquisition which potentially could contribute? And also further fluctuating crude and all this war situation and all that.

So obviously, situation is dynamic and -- but is it possible to have a sense that okay, what is the likelihood of -- or what are the kind of guidance -- or is it possible to share some sort of a guidance about the business and the profitability for the full year?

[Nirmal Momaya, executive]

So profitability is -- I mean, very difficult to really say in terms of where this can go to. Because a lot depends on what happens in the market. But certainly, we should be going into the double digits for the EBITDA margin and growth of top line also will be healthy and substantial as we had guided for the year. So we are on target for that to go get to that around 2,000 mark.

[Operator]

The next question is from the line of [indiscernible] from Axis Securities.

[Unknown Analyst]

My question is around the increased finance costs. So just wanted to understand the reason behind this, in case you've explained it earlier. Will you repeat it? And also, the tax expense has been higher for this quarter. So what are your expectations for the year?

[Santosh Parab, executive]

First, the question is of interest. The interest rates have not -- the borrowing costs have not increased, but you see there have been final formations hit in some of our geographies and finance costs because depreciation of their currencies. The interest portion includes foreign exchange, and if you can go and see my results, you'll see that finance was increased on -- consolidated around INR 6.5 crores of foreign exchange. And that has moved the increases -- mainly because of that, the overall finance cost has not increased.

The second question was regarding -- I just missed your second part of the question.

[Unknown Analyst]

No, it was about tax.

[Santosh Parab, executive]

Okay. So in tax again, if you see on an overall basis, we also mentioned in the -- in our results. And there are some geographies where we have not done a deferred tax conservatively. For example, Europe has churned out INR 15 crores loss, but there is no deferred tax made. And there are profit ratings subsidiaries like Mexico and U.S., where there is a 30% tax. So the net effect -- because in some sovereignties, we don't -- we have lost, we have no -- we don't have a deferred tax, conservatively is done. The tax exchange looks at 47%. But overall tax exchange should be in the range of 25% to 30%.

[Operator]

[Operator Instructions] The next question is from the line of Shikhar Mundra from Vivog Commercial Limited.

[Shikhar Mundra, analyst]

So just wanted to understand, since you are facing pricing headwinds, and we have had a disappointing quarter in terms of margins. So I mean, how are we confident of still keeping our guidance intact for the full year FY '25? I mean are we seeing any green shoots in driving some increase in prices rebounding?

[Nirmal Momaya, executive]

Yes. In some of the products, we are seeing like in vanillin, as we mentioned earlier, that there is a green shoot in pricing and volumes. Also on the operating side, operating efficiencies, we are working on a program to improve the operating efficiencies, which should give us a few percentage points improvement. So a combination of some green shoots and operating efficiencies is what we are looking at to say that we'll probably end up at where we want it to be for the year.

[Shikhar Mundra, analyst]

So I mean, for last quarter, when we were targeting 10% to 12% margins for the whole year, were we anticipating quarter 1 to be this with?

[Nirmal Momaya, executive]

Yes. Quarter 1 was going to be soft.

[Santosh Parab, executive]

Additional years of quarter 1's are a bit softer.

[Operator]

[Operator Instructions] The next question is from the line of Shantanu Pawar, an Individual Investor.

[Shantanu Pawar]

So my first question is about our heliotropin business in China. Could you please provide an update on the required CapEx to repurpose the existing plan as well as the market size and margin profile of this business.

[Santosh Parab, executive]

So we are expecting cost between INR 20 crores to INR 30 crores on repurposing the plant. These costs had to be borne by our partner. This will not be to the company. He is working on it. So it will be INR 20 crores to INR 30 crores is the expectation. No cash flow to us. It's a fairly aromatic product of around 2,500 tonnes market. We are looking at 1,000 tonnes on this, and we expect a margin because it's a catechol derivative and looking at a margin of at least 10% at the current prices.

[Shantanu Pawar]

Okay. And my second question is about the Lockheed Martin. So can you give us any details on the current order book as well as the required -- sorry, expected time line of this business to materialize and its contribution to our top line over the next couple of years and margin profile sequentially.

[Nirmal Momaya, executive]

Look, Lockheed Martin is actually -- they're commissioning their first commercial battery, which will happen during this year. Thereafter, they will look at commercializing in a sense, try and scale it up. So I think -- it's too early in the day to estimate what that business will look like in the near future. There was 2 to 3 years out, the kind of numbers that are -- that could potentially be will be substantial. But at this point of time, it is difficult to pinpoint because they have to commercialize, they have to launch the battery, get success. So it's in the pipeline.

[Shantanu Pawar]

And my last question, before I head into the queue is about the projected loss from the Italy operations in FY '25 as well as what will be the CapEx requirement and time line to repurpose the [indiscernible] plant? And what are the revenue potential margins for the same as well?

[Santosh Parab, executive]

It's an anticipated cost of INR 2 million to INR 3 million on CapEx. It will take 6 to 9 months to complete the project and the revenues will start from the next year. The minimum expected EBITDA is around 10% to 12%, but the pricing and the current situation may change it.

[Operator]

[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to Mr. Ashish Dandekar, Chairman and Managing Director, for closing comments.

[Ashish Dandekar, executive]

Thank you. Thank you, ladies and gentlemen, for giving us your valuable time and interacting with us. We look forward to the communication with you again at the next quarterly review. Until then, I wish you safe journey wherever you are. Thank you.

[Operator]

Thank you. On behalf of Camlin Fine Sciences Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.