Gujarat Fluorochemicals Ltd

NSE:FLUOROCHEM

Earnings Call Transcript 2021-Q1

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

On behalf of Gujarat Fluorochemicals Limited, I would like to extend a very warm welcome to all of you who are participating on this call. Happy to inform you that the Board of Directors of Gujarat Fluorochemicals Limited has at its recently concluded board meeting approved both the audited financial results of the company for the quarter and the financial year ended March '20, and the unaudited financial results of the company for the quarter ended June '20. So what I intend to do is present to you both these results together. We also, in addition to the results uploaded on the websites of BSE and NSE, as well as the website of the company, an earnings presentation for FY 2020 Q4, and FY 2021 Q1, we have merged both this into the same presentation in order to ensure brevity. So I'll take you through this presentation as we go along. And then as Miloni said, we could open it for any questions that you might have. This presentation comprises essentially of about five parts. The first part concerns the financial results overview, and then we'll take a deeper dive into the segmental performance. We've also added this time in the presentation our qualitative description beyond just the numbers of the segment wise outlook. We will then take you through the company overview and then the outlook for the company as a whole. Starting with the financial performance or the financial results overview. Revenues for the quarter, Q4 FY '20 were INR 3 crores (sic) [ INR 633 crores ] which is 11% lower than the revenues for Q4 FY '19 which were at INR 710 crores. For the full year FY '20 revenue stood at INR 2,606 crores, which were 5% lower than revenues of INR 2,729 crores in FY '19. And for the recently concluded quarter, unaudited revenues were at INR 560 crores as compared to INR 740 crores, which is 24% lower. Now if you compare it with the immediately preceding quarter, which is INR 633 crores in Q4 FY '20, the fall is about 11%. Looking at the EBITDA numbers, EBITDA for Q4 FY '20 stood at INR 110 crores as compared to INR 207 crores in Q4 FY '19. For the full year EBITDA stood at INR 553 crores as compared to INR 854 crores in FY '19, and for the recently concluded quarter the EBITDA for Q1 FY '21 was INR 144 crores as compared to INR 190 crores in Q1 of FY '20. And as I mentioned, the EBITDA for the immediately preceding quarter Q4 FY '20 was INR 110 crore. So in relation to that quarter, EBITDA at this quarter in June '21 -- is June '20 is actually higher by 31%, INR 110 crore going up to INR 144 crore. Now as far as PAT is concerned. PAT for Q4 FY '20 was INR 26 crores, but this was after a one-off tax write-off of INR 21 crores. As a result of which the operating PAT was actually about INR 47 crores as compared to an operating PAT of INR 113 crores in Q4 FY '19. PAT for the full year FY '20 was INR 189 crores but this again as I mentioned was after a one-off write off of INR 26 crores because of the demerger expenses, and hence operating PAT was actually INR 204 crores as compared to INR 426 crores in the full year FY '19. For the quarter ended June 20, which is Q1 FY '21, PAT was at INR 70 crores as compared to an operating PAT of INR 80 crores in Q1 FY '20, which is 12% down, but if you compare it with the operating PAT of INR 47 crores in the immediately preceding quarter, PAT has actually gone up, as I mentioned INR 47 crores to INR 70 crores. So that's a brief financial overview of the company as a whole. Now if you look at the segmental performance, as you're probably aware the company actually now looks at six different product categories, which is caustic soda, chloromethanes, refrigerant gases. PTFE, new fluoropolymers and fluoro-specialty chemicals. Now in each of these segments for example, there have been fall. For example in caustic soda for Q4 FY '20 revenue stood at INR 80 crores as compared to INR 120 crores in Q4 FY '19. In chloromethane, it stood at INR 63 crores as compared to INR 84 crores. Refrigerants stood at INR 100 crores as compared to INR 133 crores. PTFE stood at INR 221 crores as compared to INR 274 crores, New fluoropolymers improved from INR 37 crores to INR 39 crores, fluoro-specialty chemicals from INR 32 crores to INR 50 crores. For the full year FY '19 -- full year FY '20 as compared to the full year FY '19, caustic soda fell from INR 494 crores to INR 386 crores, chloromethane INR 351 crores in FY '19 to INR 305 crores in FY '20, refrigerants INR 512 crores in FY '19, INR 469 crores in FY '20, PTFE INR 1,142 crores in FY '19, INR 942 crores in FY '20, new fluoropolymers INR 138 crores up to INR 174 crores, fluoro-specialty chemicals INR 81 crores up to INR 177 crores. For the recently concluded quarter which is Q1 FY '21 as compared to Q1 FY '20, caustic soda down from INR 121 crores to INR 63 crores, chloromethane INR 82 crores went down to INR 64 crores, refrigerants INR 144 crores in FY '20 Q1 to INR 93 crores in FY '21 Q1, PTFE from INR 286 crores to INR 199 crores, new fluoropolymers from INR 47 crores up to INR 64 crores, fluoro-specialty chemicals INR 46 crores up to INR 63 crores, as a result of which the total revenues for the Q1 FY '20, which stood at INR 740 crores went down to INR 560 crores in Q1 FY '21. Now this is the broad breakup. Within PTFE, we are giving you further breakups of regular-grade versus value-added grades. In Q4 FY '19 the regular grade was at INR 135 crores, in Q4 FY '20, it went down to INR 94 crores. In Q4 FY '19, value added grade of PTFE was INR 139 crores which went down to INR 127 crores in Q4 FY '20. As a result of which, on value terms the proportions on regular grade -- portion of regular grade to value grade improved from 49:51 to 42:58. For the full year, it was INR 598 crores of regular grade, which went down to INR 391 crores in FY '20, INR 544 crores of value-added grades which increased to INR 550 crores, as a result of which the proportion of regular grade to value-added grade FY '19 compared to FY '20 improved from 52:48 to 41:59. For the recently concluded quarter, which is Q1 of FY '21 compared to FY '20, regular grade went down from INR 128 crores to INR 84 crores, value added from INR 158 crores to INR 115 crores. There was a slight improvement in the mix from 45:55 to 42:58 in favor of the higher value-added grade. As far as the new fluoropolymers are concerned, as I mentioned earlier, increase in Q4 FY '20 from INR 37 crores to INR 39 crores, for the full year FY '20 from INR 138 crores to INR 174 crores and for the first quarter of this financial year from INR 47 crores to INR 64 crores. And as I mentioned in the immediately preceding quarters it was INR 39 crores. So the growth as compared to the immediately preceding quarter is 39 to 64, which is about 60%. As far as the fluoro-specialty chemicals are concerned, Q4 of FY '20 was INR 50 crores as compared to Q4 of FY '19 being INR 32 crores. The full year FY '20 was INR 177 crores as compared to INR 81 crores in the full year FY '19. And the first quarter of this year Q1 FY '21 was INR 63 crores as compared to INR 46 crores of Q1 FY '20. So, that's a growth of 37%. We have also given you the broad balance sheet breakup because this time we are also approving audited balance sheet as of 31st March '20. The balance sheet size remains at about INR 6,500 crores, about INR 3,600 crores of fixed assets, INR 373 crores of cash/financial assets, INR 813 crores of inventory, were INR 565 crores of receivables, a MAT credit entitlement of about 650 crores and an income tax refund receivable of about INR 303 crores. On the liability side, equity comprises of about INR 3,700 crores, borrowings of about INR 1,700 crores, financial liabilities and trade payables actually of about INR 550 crores, and about INR 413 crores worth of deferred tax liabilities. So that's the balance sheet breakup. Now as I mentioned, we've also in the presentation included a qualitative or a descriptive description of how each of these segments are performing. I'll very briefly take you through each of them. And of course we'll deal with this in more detail in the Q&A section. As far as the caustic soda is concerned, the plants are currently running at about 80% capacity utilization. Caustic soda prices continue to be adversely impacted, both because of the curtailed demand because of COVID and the surplus capacity, which has been set up off late. The future outlook is, that prices are expected to remain depressed for the next 2 to 3 quarters we believe. And our target is to reach full capacity utilization by the end of the current quarter. As far as chloromethanes are concerned, production was impacted in April and June due to the COVID lockdown. The plants are now running at full capacity and demand for MDC, which is mainly used in the pharma sector, remains quite strong. Prices and demand are expected to remain stable because of the increased requirements in the pharma sector. As far as our refrigerants are concerned R22, as you probably know is used as a feedstock to make fluoropolymers, pharma and agro products and as a refrigerant. There was a curtailment in demand is all these three segments and refrigerant demand therefore was impacted. Demand is expected to reach pre-COVID levels during this current quarter. With the opening up of the economy, refrigerant sales are inching back to normalcy. Production will continue to increase due to the rising feedstock requirements. And as far as prices are concerned, we expect prices of refrigerants to remain stable. On the PTFE side, PTFE sales again were adversely impacted as demand fell both in domestic and overseas markets because of COVID-related lockdowns. In June, domestic demand came back to about 80% and overseas demand to about 75% of pre-COVID levels. We have developed a wide range of PTFE grades and qualified by users across a wide range of industries. As a result, by end of this quarter, it is expected that domestic demand should reach about 100% of pre-COVID levels and overseas demand by around 90% of pre-COVID levels. With demand growth coming back, our target is to take current levels of capacity utilization, which are at about 75%, to full capacity utilization by early next financial year, and prices also we expect will remain stable going forward. On new fluoropolymers, we will set up capacity of about 700 tons on six new fluoropolymers which is FKM, PFA, FEP, PVDF, PPA and micropowders. Various grades under each of these have been established and are in the process of customer qualifications and commercial ramp up. There has been a delay in getting final customer approvals for a few of the grades, as many overseas customers were grappling with startup issues and limited manpower because of COVID. Sales of established products were also impacted because of COVID-related demand erosion. Current capacity utilization remained at about 30%. However, as most grades are now developed, our target is to reach 50% capacity utilization by end of this financial year and 100% by the end of next financial year. On fluoro-specialty chemicals, 7 products have been fully commercialized. Current capacity utilization remains at about 35%, the last quarter saw relatively low capacity utilization due to inadequate raw materials and manpower availability because of COVID-related lockdowns. Demand for all these products remained strong and we expect to achieve full capacity utilization by the end of this quarter. Plants for additional six products are under final stages of implementation, and will be fully commissioned by the end of this financial year. Because of increasing demand and also strategic needs of both domestic as well as overseas customers to de-risk from China, we are witnessing an increasing demand for new molecules by the agro and pharma industry. Several new products have been developed in-house by our R&D teams based on which additional CapEx of about INR 300 to INR 350 crores is planned for implementation. Besides there is a rich pipeline of additional products being developed based on chemistries which are already established. So that's a brief qualitative outlook on each of these segments. As far as the company is concerned, as you are all probably aware, the key strengths of this company have always been, and continue to be, 30 years experience in safely handling F molecule. We are one of the most cost competitive producers of fluoropolymers, because of our full integrated manufacturing operations. The in-house availability and adequate capacity of a host of key building blocks for F molecules. R&D and product development capabilities. We have cutting edge R&D center and analytical labs for new product development. Entry barriers for new competition due to the complexity of business, limited availability of feedstock, extremely stringent and time-consuming customer qualification and approval process continues to remain a significant entry barrier. The company is a category leader in most of the segments that it operates in. And our focus on higher value added products in each of these segments will reduce competitive concerns from China. On the next slide, of course, I have diagrammatically demonstrated the integrated operations and this we believe is unparalleled in the industry. As far as shareholding structure is concerned, our market cap currently is about INR 4,000 crores based on a share price of INR 355. This is as of 30 June. Our key investors include HDFC Mid-Cap Opportunities Fund, HDFC Small Cap Fund, FIL Investments, etc. We've given you a list of all the key investors. Promoters continue to own about 68.37% of the company. Domestic institutions own 5.75%, FIIs own 4.03% and the public/others own 21.85%. So that's the company shareholding structure. In terms of the outlook at the company level, very broadly speaking. I will first take you through some significant initiatives that the company has taken. First of all, R&D capabilities have been considerably strengthened in terms of manpower and developing state-of-the-art analytical and testing labs. Through our in-house expertise, we've been able to develop a wide range of fluoro-specialty chemicals for increasing agro and pharma applications. For fluoropolymers, we have developed new grades and products for meeting requirements in both existing as well as new applications. As far as existing applications are concerned, these are in the automotive, aerospace, semiconductors, electrical and electronics, pharma and chemicals and medical sectors. And as far as the new applications, high growth applications are concerned, these are in e-mobility, clean environment drive, high purity water, 5G data transmission, Internet of things, solar PV modules, lithium batteries, high temperature auto wires and fuel cells. All these we expect should ensure a robust global growth going forward. We've also have taken several initiatives in the cost savings area. We have actually launched a very focused and strong cost optimization drive across the company. Major cost areas have been identified and strategies have been developed to achieve sustained reduction in operational costs. Significant cost reductions have been achieved through tighter operational controls, waste reductions, improvement in energy efficiency and manpower productivity. We've identified the single largest cost center for the company to be energy, and in pursuance of the objective of reducing our energy cost, we are in the process of setting up a captive wind power capacity, which will substantially bring down our power cost across all our three manufacturing sites and results in significant cost savings. So broadly speaking, what we expect at a company level, is the company's performance in the coming quarters is expected to be driven by improved capacity utilization in the PTFE, new fluoropolymers and the fluoro-specialty chemicals segments. All growth is expected to come from products or segments that have a higher profit margin and hence the margin profile of the company also is expected to improve. Most of the CapEx required for the capacity is already incurred and hence no significant additional CapEx is expected for present product lines. And lastly, we expect our debt levels to come down significantly improving our leverage, essentially from three sources: operating cash flows, working capital optimization and the income tax refund that is expected, a large part of which has already been received in this quarter. So that, ladies and gentlemen, is a walk through the presentation. I would now like to open this up for any questions that you might have, that we will try and answer. Thank you.

[Operator]

[Operator Instructions] First question is from the line of Rohit Sinha from Emkay Global.

[Rohit Sinha, Research Analyst]

Thank you for this detailed presentation about the various segments. So just wanted to know, which are the industry we are serving through our new fluoropolymers and fluoro-specialty chemicals, and how is the traction you are observing in last maybe 6 to 8 months or in the recent time?

[Unknown Executive]

Well, I'll take this question. There's a diverse segment of industries in which our new fluoropolymers are used and that have been listed down in the presentation. And it has taken some time to develop the grades which are required by these various segments and get customer qualification. As has been pointed out a number of times in the past, this is a very painstaking task and the time it takes is something -- sometimes quite unpredictable. Things are now getting back on track. We have been able to get -- we have been able to develop most grades which are required under the different categories of fluoropolymers. Some of them have been -- most of them have been approved. Commercial sales have also started from some of the product categories. And qualifications is continuing for others. Unfortunately in the last 4 months because of COVID, the momentum which has been built in getting customer qualification got stalled. And, this is a process which has been initiated again. But at this point of time, many of the users are finding it difficult to start new qualifications because they have inadequate manpower in the labs. And while they are all very very keen to start the process -- continue on with their process of qualification, I think it will take another 1 or 2 months for further qualifications to happen. And at this point of time, actually, unfortunately, Europe for instance, also enters into a holiday season, and despite COVID, it seems that both in July and August, there are a lot of European companies who will be on vacation. So we expect further improvements to start happening from September onwards.

[Rohit Sinha, Research Analyst]

Okay. So, these all are largely domestic export or how we see the mix on these segments?

[Unknown Executive]

No most of these products will be for exports because they are used in very high end industries. The domestic market for one of the products would be almost about 33% to 40%. For the other products, it will probably be around 15%. Most of -- the balance quantity will be required for exports.

[Rohit Sinha, Research Analyst]

Okay, so largely it's from the export side, fair enough. Sir, next question would be on the PTFE side, what is the current price and share, what it was a year ago? And how you are seeing that -- maybe what are the major dynamics which will impact the prices of the PTFE?

[Unknown Executive]

Deepak would you have the prices now and then price?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

Yes, we locked in average price of about INR 6,71,000 per ton in Q1 of FY '21, and this was about INR 6,99,000 per ton in Q1 of FY '20. So, the prices are between 670 to 700. This is weighted average for both commodity grade and value added grade.

[Rohit Sinha, Research Analyst]

Okay. And what are the dynamics which will be basically impacting the pricing of these?

[Unknown Executive]

To some extent prices are a bit subdued just now because of the fact that there has been a slowdown in demand. And for instance, currently we are at about 70%, 75% capacity utilization, and we still have to go to 100% We were expecting that by now, we would have been in that 100% capacity utilization. But because of the slowdown which happened because of COVID. So our current estimation is that by beginning of next financial year, maybe of April, May, we should get back to full capacity utilization. And by that time demand from most sectors will also go up. So we expect that the prices will remain stable if not marginally improved.

[Rohit Sinha, Research Analyst]

Okay, fair enough. So, next would be on the chloromethane side. So as we see, what is the current demand in this segment and how this made in India or maybe AatmaNirbhar Bharat will be impacting the demand as we recently, today only, SRF has also announced the CapEx of INR 315 crores in this segment. So how would be the competition in this particular segment?

[Unknown Executive]

Well, it's very difficult to assess the situation 2 years from now, because there is some more capacity which is coming up. And while the demand is also growing, so I suppose there should be some room for additional capacity to come up.

[Rohit Sinha, Research Analyst]

So largely demand is from pharma side or from...

[Unknown Executive]

Largely from the pharma side.

[Rohit Sinha, Research Analyst]

Okay. And any number you can give to the kind of growth we are seeing in this chloromethane side.

[Unknown Executive]

See it's been growing by about 10% per annum.

[Rohit Sinha, Research Analyst]

Okay. Last question from my side on this R Gas side. So is there any of future plan to introduce new product in R gas or we will stick to this R32 and 125?

[Unknown Executive]

Sorry, I didn't get your question right?

[Rohit Sinha, Research Analyst]

So in refrigerant gas segment, what are the future plans for adding new refrigerant gas products maybe down the line?

[Unknown Executive]

See at this point of time we do not plan to put up any new CapEx on R Gas because we still want to watch and see how the demand for 1134YF, which is actually the future replacement is going to build up. We have not gone in for R32 because we think it's a commodity chemical, and there's no value which we'll be able to bring to the table. So it's largely be dependent upon what China does, and if China has got huge capacities. So we are watching and seeing. For 1134YF, we have an intermediate which we currently produce for a Japanese company, which is a product called 225. And depending upon the situation if we find that the future demand permits, we may forward integrate into 12Y from there.

[Operator]

The next question is from the line of Rohit Nagraj from Sunidhi Securities.

[Rohit R. Nagraj, Senior Research Analyst]

Sir, you have given a detailed presentation, a really good one in terms of what is the current situation and the outlook. In terms of margins if we were look at, how the segment stack up, so we have predominantly 6 segments. So which are all are they having in terms of higher margin to lower margin?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

I am sorry, we can't hear very clearly. Could you please perhaps speak a little bit louder.

[Rohit R. Nagraj, Senior Research Analyst]

We have 6 segments, and in terms of margins how do these segment stack up? Obviously currently caustic soda margins will be at the bottom of each segment, but otherwise for all the other segments, which is having the highest margin and how it percolates down?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

First of all, ours is an integrated value chain. So, the end product of one plant becomes the raw material for the other plant. And hence, we don't really measure margins for each segment individually for the reason that these margins could be influenced by transfer pricing policies. So it depends on what price you transfer finished product of one plant as a raw material to the other plant. And secondly, because it's a common manufacturing facility, a lot of overheads are common across all the plants, and hence, we don't really look at, and we never have looked at margins on a per plant basis. But suffice to say that as of now, most of our growth going forward is going to come from the value-added PTFE, from the new fluoropolymers and from the fluoro-specialty chemicals. And these 3 segments clearly have a margin profile which is better than the average margin of the company, and hence, there should be an improvement in the overall margin profile of the company because of the churn in the product mix or the segment mix in favor of the higher margin products.

[Rohit R. Nagraj, Senior Research Analyst]

Yes, that is quite useful. So in terms of margin trajectory, what would we look at as sustainable margins spend when everything stabilizes maybe over a period of 2 to 3 years?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

Well again, we tend not to give you quantitative kind of projections going forward. But historically, if you see FY '19, we ended it at an EBITDA margin, if I remember right of about 30%. We don't think it is inconceivable to reach those kinds of levels going forward.

[Rohit R. Nagraj, Senior Research Analyst]

Sir on the fluoro specialty side, you have mentioned that we have seven products. So could you just give us an understanding of which user industries are these catering to? And are these going into some patented product application or non-patented product applications?

[Unknown Executive]

Well, currently if you look at volume mix -- sales mix, 60% would be pharma, 40% will be agro.

[Rohit R. Nagraj, Senior Research Analyst]

Okay, and in terms of whether these products are going into patented product because probably in terms of growth the patented products may have higher growth than the generic products?

[Unknown Executive]

See it is difficult for me to answer that question.

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

Basically the products are going not as API's or as the end product. So they are intermediates, so there patenting is not there, patenting is normally for the end products.

[Rohit R. Nagraj, Senior Research Analyst]

In terms of CapEx plans what would be our CapEx plans for this year and next year, maybe we don't have any specific capacity expansion plans, then what would be the maintenance CapEx?

[Unknown Executive]

No, you see the point is we will have some additional capacity will be coming up in the fluoro specialty area from now till, if you look at 4 quarters, 4, 5 quarters from now, we have investment plans of maybe about INR 300 crores plus. There are several products which have been developed and they are just now evaluating the prospect of putting up CapEx behind those. Some of them seem to be very good opportunities. So maybe in the next 1 to 2 months, we will finalize our plan and then move forward with that capacity. And for the time being, as far as fluoropolymers, the new fluoropolymers is concerned, we have made all the CapEx which are required for current capacities and we don't intend to put in any further CapEx's at least for the next 1.5 years in fluoropolymers.

[Rohit R. Nagraj, Senior Research Analyst]

Sir last question on the chlorine front. So how have the prices behaved in the recent quarter? And how much do we consume captively?

[Unknown Executive]

Which product?

[Rohit R. Nagraj, Senior Research Analyst]

Chlorine.

[Unknown Executive]

We consume 100% of our chlorine captively. The pricing of chlorine in the external market really don't concern us because we captively utilize all the chlorine which we produce for chloromethane.

[Operator]

The next question is from the line of Pritesh Chheda from Lucky Investment.

[Pritesh Chheda, Analyst]

Sir, a few questions on your CapEx side. So the specialty fluoropolymers and the spec chem where we mentioned that it's a 30% and 35% utilization. What is the capital expenditure that we did? And what is the asset turn possible there?

[Unknown Executive]

I don't know -- I don't have those numbers readily.

[Pritesh Chheda, Analyst]

At full utilization what will be the revenues there?

[Unknown Executive]

Okay, maybe I can give you an idea about that, at full capacity utilization our new fluoropolymers will be about INR 750 crore, thereabout, but I could be a bit wrong. So broadly speaking it could be about INR 700 to INR 750 crores. And in the fluoro specialty for the investment which have been put up up-till now, it could be about INR 600 to INR 700-odd crores.

[Pritesh Chheda, Analyst]

And any educated guess on the asset turnover or the CapEx number you would have spent there both places?

[Unknown Executive]

I don't have the numbers readily with me.

[Pritesh Chheda, Analyst]

Okay. Second, but will it be more than 2 time asset turn?

[Unknown Executive]

It will probably be about two times in both these 2 segments. Mr. Soni, would I be right in saying that?

[Vijay Kumar Soni, Head of Projects and New Initiatives]

Yes, I think roughly about INR 400 crore would be in the spec chem. So it is about two times. And same is for fluoropolymers -- new fluoropolymers. The reason is that all the back-end integrations CapEx has already been set up and we are only adding the value add at the front ends. So the CapEx is much less.

[Pritesh Chheda, Analyst]

Okay. And second question, an observation. So when I look at your EBITDA across the three time periods which have been posted in the presentation, there's a significant drop versus the top line. So qualitatively is it to do with the pricing of PTFE and what happened in caustic soda pricing, the key reason for the drop, or do you want to highlight another reason?

[Unknown Executive]

Substantially that is what happened. Caustic soda pricing at that point of time, caustic soda was a relatively larger proportion of our sales. So that went down quite steeply. And as you mentioned, there was a decline both in PTFE prices also, as we mentioned from almost about INR 700 it went down to about INR 670, so there was a margin decline in PTFE prices also. And of course in the last quarter, which is January, February, March, last quarter of the previous financial year, almost about 15 days of sales were lost because of the lockdown in the second half of March.

[Pritesh Chheda, Analyst]

This price which you mentioned of INR 670 versus INR 700, that is for quarter 4 specifically or that also valid for the full year of FY '20?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

No, so the PTFE prices that I gave was for the last quarter. Q1 FY '21 compared to Q1 FY '20.

[Pritesh Chheda, Analyst]

Q1 FY '21 versus Q1 FY '20?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

No, it's actually Q1 for the financial year ending '21. So yes April to June '20.

[Pritesh Chheda, Analyst]

Yes, it is current quarter versus last quarter that you're saying?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

That's correct.

[Unknown Executive]

I just wanted to add one more thing, that last financial year, as you all know that there has been a huge erosion of demand in the automobile sector. And this was not only true for India but also, even US and Europe there was a big slump in the automobile industry. A lot of our products were going into the automobile industry, almost about 20%, 25%, if not more goes to the automobile industry. So because of the fact that sales went down because of the slack in the automobile industry, there was a pressure on prices also. So prices also went down to that extent.

[Pritesh Chheda, Analyst]

Lastly, I want to understand what would be your debt repayment over the next 2 years? What would be your maintenance CapEx and growth CapEx, if any?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

So as I mentioned we expect to pare down our debt levels considerably. They are at about INR 1,600 crores now. What we expect is a reduction because of the income tax credits that we expect. In fact, we as you might have noticed, we expected about INR 300 crores of income tax refunds to come in, of which we have already received INR 230 crores, another INR 70 crores is expected over the next fortnight or so. So INR 300 crore debt reduction will happen because of income tax refunds. We expect another about INR 300 crores to happen out of operating cash flows for the rest of the year -- financial year, and maybe another about INR 200 crores from optimization of working capital. So in essence about INR 800 to INR 900 crores of debt to be reduced from the current levels of about INR 1,600 crores, which will bring it down to about INR 800 crores versus we have about INR 370 crores, say INR 400 crores of cash or financial assets. So our net debt by the end of this financial year should be around INR 400 crores if things go as planned, and obviously by end of the financial year '22 we should certainly be a net zero debt company.

[Pritesh Chheda, Analyst]

And what will be your growth CapEx and maintenance CapEx over the next 2 years?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

As it was earlier mentioned also by Mr. Jain, I believe and I think I also covered it in my presentation, we expect CapEx of about INR 300 to INR 350 crores in terms of some of the fluoro-specialty chemical lines that we have identified. Most of the CapEx is for the existing product lines that have already been incurred, most of it. And maybe we'll incur some kind of nominal maintenance CapEx of about INR 50 crores to INR 100 crores going forward here.

[Pritesh Chheda, Analyst]

This INR 350 crores is for 2 years or this is a 1 year number?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

So over the next few quarters. I guess it will be over the next year or so.

[Pritesh Chheda, Analyst]

Next year. And lastly, on your INR 3,600 crore block that I see in the presentation across the net block, I don't know the gross block number as of now. But what kind of peak revenue is possible on that kind of asset that you have?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

So if you assume that all the plants were to run at full capacity, we could see a total top line of about INR 4,200 crores to INR 4,400 crores at current prices.

[Pritesh Chheda, Analyst]

Okay. On a gross block number, what would be the gross block number there?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

The gross block number would be what it is currently, which is, I think, about INR 3,600 crore, INR 3,700 crores. So again, just to further clarify on that you may not see a significant asset turnover, but that's because most of the plants are in an integrated manufacturing chain, which go in reducing costs rather than improving turnover. So our EBITDA margins, therefore, would be again at full capacity and at current prices, assuming a 30% EBITDA margin, there will be about INR 1,200 crores of EBITDA on a gross block of about of 3,500, which is almost like a 30% of gross block EBITDA.

[Pritesh Chheda, Analyst]

Okay. At peak. So INR 1,200 crores EBITDA.

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

That's right, yes.

[Pritesh Chheda, Analyst]

And your net working capital target, the networking or the cash conversion cycle that one should look at would be what in days or whichever way of the percentage?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

Yes. I mean, the target, of course, is to bring it down to 75 days, but to be conservative, one could look at about 90 days of working capital.

[Operator]

The next question is from the line of Aman Morya from Alpha Accurate Advisors.

[Aman Morya]

My first question is on the specialty chemicals side. Currently, we are already having a 35% of utilization level, and we are planning something around INR 350 crores, INR 400 crores kind of a CapEx into that. So I mean what is the rationale? Are we seeing so good traction into that? And how the revenue trajectory looks into this particular vertical?

[Unknown Executive]

Well, just now we are at 35%, as I've mentioned because there was -- because of the impact of April, May, June quarter where we got actually badly hit because of both manpower availability in that particular site in which we currently make fluoro-specialty. And also there were some supply chain issues also. But by September -- by the end of this quarter, by September, October, we intend to get to almost a 90% capacity utilization of our current products, for which capacities have already been set up. We are in the midst of putting up capacity for another 6 products, which get commissioned by October end. And the sales revenue from those have in -- almost full capacity by March of next year. So that is the reason why this investment, which is currently on will be taken care of. What we are talking about INR 300 crores, INR 350 crores is taking it beyond these 13 products, which have already been -- which are already work in process. So that will -- that investment will get fructified maybe about 12 to 15 months from now and which will then add further to our revenues.

[Aman Morya]

Okay. Sir, one clarification. I mean last participant, you had mentioned that even in the current gross block, you can reach to a INR 700 crores kind of a peak revenue in specialty chemical, correct? And on top of this, this INR 350 crores can bring additional INR 700 crores?

[Unknown Executive]

I don't have the numbers offline, but yes, there would probably be about in the region of between INR 400 crores to INR 500 crores. I don't have the numbers, but those -- because we are still in the process, in the midst of finalizing the exact plan for the INR 350 crores CapEx. Some of that will actually also get utilized as an intermediate in the products which we make. So it will be difficult for me to give you an exact number on the turnover it will generate.

[Aman Morya]

Okay. So INR 500 crores plus INR 700 crores is the fair number, right? I'm saying, I'm not considering 2x kind of a sweat asset ratio, but current CapEx in gross block and...

[Unknown Executive]

Of the cuff once the INR 350 crore turnover is -- INR 350 CapEx is also implemented, I would say, it could result into a turnover about INR 1,200 crores here.

[Aman Morya]

Sorry, sorry, how much?

[Unknown Executive]

INR 1,200 crores, INR 700 crores plus INR 500 crores, it could result into INR 1,200 crores.

[Aman Morya]

And this piece of your business would be, sir, like your average margin. I mean how much higher than your average company-level margin?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

And again, we do not want to get into specific margin for each of these segments going forward. But it would, as I mentioned, be materially higher than our current average margin.

[Aman Morya]

Okay. So like 300 basis points, 400 basis points -- this is the key segment which will drive your margin going forward. That is the reason I'm asking.

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

No, I understand. But as I said, we hesitate to make futuristic quantitative predictions, except just to say that it should be fairly strong, fairly healthy as compared to what our current profile is.

[Aman Morya]

Okay. And sir, second question is on the fluoropolymer. Fluoropolymer is also having 30% utilization currently. So first thing is this, is the fluoropolymer revenue drivers are same or they are different?

[Unknown Executive]

Sorry, which...

[Aman Morya]

Fluoropolymer. Currently, we are having 30% utilization for fluoropolymers. And we expect that even in that particular segment, we can reach to 700 kind of revenue. I'm trying to understand in that particular business, the revenue dynamics or the competitive dynamics are similar of the PTFE or it is different?

[Unknown Executive]

No, no, it could be different in different segments. It is because the end-use applications could be different for these products than for PTFE.

[Aman Morya]

Okay. So you are not saying like -- so in this particular segment, you're not competing with China or you're not competing with other Asian players?

[Unknown Executive]

See there are no other Asian players. There are Chinese, but they are at the lower end of those particular products. So when we are exporting it out in the U.S. and Europe, we are not really competing with China.

[Aman Morya]

Okay, okay. And sir, then in your PTFE, I mean, how the traction looks because, I mean, one that we are already having antidumping duty in India for the China-made PTFE. Followed by that U.S. have antidumping duty on China, which is pretty much heavy. So in that current dynamics, are we not benefiting from the China plus one strategy, both in Europe and U.S.?

[Unknown Executive]

Yes. We are to a certain extent. But as I mentioned, our exports to the U.S. are not great as the China is, where the Chinese are predominantly present in. So maybe about 10%, 15% of our exports to the U.S. actually directly compete with the Chinese. So in the U.S., we -- the imposition of duty on China helps us in certain segments, but not -- but the larger segment is more in the value-added product where the Chinese aren't present in any case.

[Operator]

Sorry to interrupt you, Mr. Morya. May we request that you return to the question queue for follow-up questions as there are several participants waiting for their turn. [Operator Instructions] The next question is from the line of Paras Nagda from Enam Holdings.

[Paras Nagda]

Yes, sir. Sir, I wanted to ask about the energy cost which you mentioned in the presentation that we are in the -- we are putting up captive wind power capacities. In that context, I wanted to ask you, sir, how much megawatt are you planning to put up? And what is the time frame that it will be installed in? And are we going for the old 2-megawatt machines or the new 3.3-megawatt machines?

[Operator]

Mr. Nagda, please repeat your question. Ladies and gentlemen, the line for the management is disconnected, please hold while we reconnect them.

[Paras Nagda]

Deepak sir, should I repeat my question?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

Yes, I couldn't hear you. I just heard the line coming over to you, and then I couldn't hear anything. I'm sorry.

[Paras Nagda]

Okay. So sir my question was on the energy cost. We are putting up captive wind power asset. Sir, I wanted to understand how much megawatt are we planning to install? And what is the time frame that it will be installed by? And is it going to be a 2 megawatt machine or a 3.3 megawatt machine, the new 3.3 one?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

Yes. So the total capacity is about 125 megawatts, 3.3 megawatt turbine. The time frame would be, they'll commence installation by next January, and hopefully complete the project by next June or so. In terms of the economics, if you look at our current cost of outside power, brought out power, is about INR 8 per unit. Even if you remove the standing charges out of it, it's about INR 7.5 per unit of variable costs and our internal cost of generation, along with depreciation would be less than INR 2 per unit. As a result of this, there will be a significant cost savings. In absolute terms, anywhere between INR 200 crores to INR 230 crores per annum.

[Paras Nagda]

Okay. And sir, how much are we paying for this 125 megawatts?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

Should be roughly about INR 800 crores to INR 850 crores. I mean I don't have the figures off hand, but around that.

[Paras Nagda]

Okay. And sir, what is the kind of payback that -- cash payback that you are expecting, if it is INR 6 differential that we are talking about?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

So as I said, it could be a period of about 4 years.

[Paras Nagda]

4 years payback, okay.

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

Apart from the fact, of course, that also gives you insulation against future cost escalations in power. All this is computed at current power tariffs, as you know power tariffs could possibly go up in the future. So it also gives you insulation against cost increases. Power, as you know, comprises about 20% of our costs, 20% of sales is power cost. So it's a significant cost reduction for us.

[Paras Nagda]

Correct. Got it. And sir...

[Operator]

This is the operator. May we request that you return to the question queue for follow-up questions. We have participants waiting. The next question is from the line of Dhruv from HDFC AMC.

[Unknown Analyst]

Sir, just a clarification to some of your previous points. Sir, the new polymer revenue potential you mentioned was about INR 700 crores to INR 750 crores. And if I'm correct, the current revenue is about INR 170-odd crores in FY '20. So that could go to about INR 700-odd crores, right?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

Yes.

[Unknown Analyst]

And similarly for the spec chem, it is -- currently, it is about INR 180-odd crores, which would go to about -- which would go to about INR 600-odd crores with the current capacity?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

Broadly, yes, yes.

[Unknown Analyst]

Sir and what time frame do you think that this could play out, I mean, 2 years, 3 years, just to reach the full potential?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

Possibly in the next 2 years.

[Unknown Analyst]

Okay. Okay. Two years at least. Okay. And sir, second question was on the polymer side. Now earlier, you mentioned that new polymers and also your PTFE basic value at grade also requires approvals from clients. Sir, I was just wondering how does the cycle -- how does this chain work? The customer approves you and then is it that you are the only supplier to the customer or probably the 1 or 2 suppliers and gives you volumes? Or then in open market and you are among, say, 5, 10 customers, suppliers to them and they choose based on pricing. So how does the chain work?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

So that, again, I'll defer to Mr. Jain. Is Mr. Jain on the call?

[Vijay Kumar Soni, Head of Projects and New Initiatives]

Let me answer. But Mr. Jain should be on call also.

[Operator]

Mr. Jain is connected.

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

Whoever is organizing this call, Mr. Jain has fallen off the call again. Could you please dial in? We could move on to the next question, and then we'll come back to this once Mr. Jain joins in.

[Unknown Analyst]

Yes, sir. So I had another question on the spec chem side. Now looking at your revenue growth, so we lost just comparing versus FY '19 to '20, '20 despite being a difficult year. You have a decent growth in spec chem, although of a lower base, and you expect in the next 2 years to reach a decent level, at least INR 600-odd crores. I also see some of your competitors are also quite excited about the spec chem business, particularly from agro and pharma. So anything you can highlight what is happening there? What kind of growth that we are seeing what is driving it? Any sense on that? Just to understand this to get more confidence on the growth cycle that we are in?

[Vijay Kumar Soni, Head of Projects and New Initiatives]

Yes. So Deepak shall I answer?

[Unknown Executive]

Okay. Let me do that. See one thing for sure is happening is that there is a move by -- not, of course, in India as well as globally also people are looking at derisking from China. So that itself is throwing some new opportunities for companies like us. And we are, at this point of time, only concentrating on the Fluorine chemistry point of view. Later on, there could be opportunity for us to go to other chemistries, which these are not Fluorine based because, frankly, seeing the building blocks are the same. And as we move forward, we will be looking at other chemicals which are beyond the Fluorine chain. So that's one which is happening is throwing up opportunities. Secondly, even big overseas companies also, especially in the agrochemical field, they are also looking at derisking from China. So they are looking at -- they realize that Indian companies have the capabilities. So you see some opportunities coming up from there also. And of course, in the pharma field, the presence of Fluorine increase the efficacy of medication. So you have seen increasing number of pharma products containing Fluorine. So I think for all these 3 reasons, you are seeing growth in demand. And elsewhere in the developing world, you don't see capabilities -- so wide capability in the specialty chemical field as it exists in India. So I think it's only natural much of the demand then will start coming into India. And so that's one of the primary reasons why this sector will perhaps continue to grow.

[Unknown Analyst]

So this derisking from China. So that effectively means that they are continuing to get it from China, the molecules, and also are looking at buying from India. That is the -- so they have 2 suppliers now. That is the strategy.

[Unknown Executive]

The derisking. So I would say that, that will be true for everybody. Unless and until for instance, India -- in India, there is a government restriction to import from China. Then of course, they will have to look at sourcing it or developing the sources within India itself. But even if that is not so, I think given the fact that there has been a lot of disruption which has been caused by China, people would look at derisking and having at least one leg in the Indian camp.

[Unknown Analyst]

Sure. So just one thing on this, just to getting your thoughts on this. So for example, current Chinese capacity, which are producing this will be suffering. And at some point in time, if they start selling under pressure and have a significant price correction versus the same product that we are producing or some of our other players are also producing. Can that be a big risk to the growth trajectory that we have?

[Unknown Executive]

Sorry, I didn't get your question right. I was not able to hear it.

[Unknown Analyst]

So sir, I was wondering, but say, for example, the Chinese are also supplying and you are supplying, and Chinese capacities will be underutilized because they have -- the buyers have shifted some of their consumption to say, India or some other countries. Now Chinese will also be under pressure because their capacity is underutilized and probably will start cutting on pricing. So can that be a big risk to the whole thing that we are looking for the -- particularly for us in terms of specialty chem, the price competition could be a risk in some...

[Unknown Executive]

It could happen. I mean Chinese if they want to sort of create a problem in any sector, they always can do it. So -- but at the same time, as we just mentioned that a lot of the companies would like to derisk. So even if the Chinese try to actually lower, there would be a certain proportion of demand which will come to Indian producers because it's not only about price differential, it is also about the security of supply.

[Unknown Analyst]

Got it. And sir, just one last clarification is you mentioned the debt numbers that the debt should decline significantly. But on the later comment, you mentioned that you're investing about INR 800 crores for the wind project. So that would come in the INR 800 crores CapEx will come in the next year I believe, right, in FY '21. So that will be an offset to the debt decline that we are looking at.

[Unknown Executive]

Deepak, are you there.

[Operator]

All the lines are connected, yes?

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

Yes. Yes, I'm there. But sorry, I couldn't hear what was said.

[Unknown Analyst]

So I was mentioning that you have mentioned that debt reduction should happen in this year and next year, too. But later in a comment, you mentioned that there will be a wind CapEx of about INR 800-odd crores to reduce your cost.

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

So already paid out. So there's no additional outflow because of that.

[Unknown Analyst]

Oh, great. Okay. So INR 800 crores is already -- the CapEx is already done. There's a cost saving that will come now.

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

That's already contributed. There's no cash outflow because of that.

[Operator]

Ladies and gentlemen, due to time constraint, we'll take that as the last question. I would now like to hand the conference over to the management for closing comments.

[Deepak Ranjit Asher, Former Group Head of Corporate Finance & Non]

Well, as always, I'd like to thank you for your interest in the company, and I look forward to your continued participation on these earnings update calls and look forward to your support as well. Thank you.

[Vijay Kumar Soni, Head of Projects and New Initiatives]

Thank you all.

[Unknown Executive]

Thank you very much.