Neogen Chemicals Ltd

NSE:NEOGEN

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Q1 FY '22 Earnings Conference Call of Neogen Chemicals Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nishid Solanki from CDR India. Thank you, and over to you, sir.

[Nishid Solanki]

Thank you. Good evening, everyone, and welcome to Neogen Chemicals Q1 FY '22 Earnings Conference Call for analysts and investors. Joining us on the call today are senior members of the management team, including Dr. Harin Kanani, Managing Director; Mr. Anurag Surana, Director; and Mr. Ketan Vyas, Chief Financial Officer. We will commence the call with opening thoughts from the management team, post which we will open the forum for Q&A session where the management will be glad to respond to any queries that you may have.At this point, I would like to add that some of the statements made or discussed on the conference call today may be forward looking in nature. The actual results may vary from these forward-looking statements. A disclaimer to this effect is available in Neogen Chemicals Q1 FY '22 earnings presentation, which has been shared earlier. I would now like to invite Dr. Harin Kanani to comment by sharing his thoughts on the performance and strategic progress made by the company. Thank you, and over to you, sir.

[Harin Haridas Kanani, MD & Director]

Thank you Nishid. Good evening, and a warm welcome to everyone on Neogen Chemicals Q1 FY '22 Earnings Conference Call. We have shared our results documents earlier. I hope you got a chance to glance through them. I will briefly share my views on the performance of the company and the trajectory going forward. In the first quarter of fiscal year 2021, as the country was getting back to normalcy post the first wave of COVID-19 pandemic, the intense second wave hit us in April and May. And as you know, this time, the surge was greater with significant rise in caseloads in a short span of time. Moreover, we witnessed challenges around higher logistic costs as well as some disruption in supply chain. In this backdrop, I believe our teams displayed tremendous agility to deliver a resilient performance during the first quarter of FY 2021 as we boldly navigated through this emerging threats. We reported 11% growth in revenues with 20% improvement in profit after tax. To further break down our revenues, growth in organic chemicals was at 3% to INR 68 crores in Q1 FY '22, while revenue from inorganic chemicals came in at INR 17 crores, higher by 52% year-on-year. Let me reiterate that the demand trend continues to be favorable across key end user industries, and we are using this lever to further strengthen our position in the market. Utilization levels across at our Mahape and Baroda plant remain at elevated levels, and we are making all efforts to enhance our contribution from the value-added product portfolio. This positive momentum is further supported by healthy recovery in economic activity across the country as well as steep decline in COVID caseloads.I will now share some updates on the organic chemicals facility at Dahej SEZ. Despite significant challenges and setbacks on the ground during Q1 FY '22, the trial commercial production has commenced and continued. We have now received approval from several international customers, including 2 CSM customers, who have approved Dahej SEZ organic MPP for delivery starting Q2 and more customer approvals are expected over the year once we complete the trial production of some of the pharma products and submit data for their approval during the course of the year.Further, we expect 75% of our Phase 2 reactor will come online sooner than planned by end of Q2, early Q3, and will further contribute to revenue partly in Q3 and more significantly in Q4. Lithium prices worldwide have also normalized as compared to historically low levels in the second half of last financial year. Based on this development, the revenue guidance of INR 450 crores for FY '22 remains unchanged. Once all reactors and support systems are fully commissioned in this year, this world-class, state-of-the-art facility will propel our performance as we will undertake assignments of complex multi-stage chemistries at this site.To conclude, let me share that the outlook is looking exciting for us. Our customers understand and appreciate the company's execution progress and focused product capabilities resulting in Neogen growing its market share and expanding its presence in both established as well as value-added product lines. We will continue to demonstrate profitable performance in the long-term through relentless focus on leveraging our knowledge in complex chemistries. Subsequent expansions will be modular, thereby limiting impact on our cash flows, and we will keep exploring novel opportunities to steer our momentum and maintain our leadership position in select chemistries. Now I would request our CFO, Mr. Ketan Vyas, to share his perspectives on the financial performance for Q1 FY '22. Ketan, over to you.

[Ketan Vyas, Chief Financial Officer]

Thank you, Dr. Harin. Good evening, everyone, and welcome on the call. I will briefly touch upon the key financial highlights of the company for the first quarter of fiscal year 2021 (sic) [ 2022 ]. All comparisons are on a year-on-year basis and stand-alone in nature.In Q1 FY '22, our revenues increased by 11% to INR 84.6 crores, which came in despite several challenges on ground. As explained by Dr. Harin, with respect to second wave of COVID-19 pandemic and other disruptions related to logistics and supply chain, scaling up of the new Dahej inorganic facility that was commenced in Q4 of FY '20 helped the support of revenue momentum. EBITDA improved by 15% to INR 15.6 crores, translating to EBITDA margin of 18.5%, an expansion of 80 basis points. High utilization levels at our plants helped maintain overall cost and drive operating leverage. Margins expanded also due to favorable product mix during the quarter. Profit after tax stood at INR 7.4 crores, higher by 20%, which was supported by overall stable performance across business verticals.In Q1 FY '22, our domestic and export mix stood at 54% and 46%, respectively. That concludes my opening remarks, and I would now request the moderator to open the forum for questions from participants.

[Operator]

[Operator Instructions] The first question is from the line of [ Manish Jain ] from Moneylife Advisory Services.

[Unknown Analyst]

My first question is, what is the number of customers we are working with under contract manufacturing presently?

[Harin Haridas Kanani, MD & Director]

So customers with whom we've already worked so far where we have supplied them or supplying them products that's more close to around 10-odd customers. And then there are additional, I would say, 8 to 10 customers with whom we are discussing several projects.

[Unknown Analyst]

Okay. And the second question is, what is the share of advanced intermediates with respect to the overall revenue in this quarter? And looking forward, how we are going to improve our share?

[Harin Haridas Kanani, MD & Director]

So I think as we have shared earlier, the advanced intermediates usually contribute roughly around 20% to 30% -- 25% to 30% range. And going forward, by FY '24, when we have full utilization of the Phase 1 and Phase 2 capacity, we expect this percentage to increase to 40%. So that's the target we have set ourselves.

[Operator]

The next question is from the line of Swarnabha Mukherjee from Edelweiss.

[Swarnabha Mukherjee, Research Analyst]

So a few questions from my side. First of all, in terms of -- if we speak in terms of volumes that you have done for this quarter, how is it looking vis-a-vis last quarter and also Q1 FY '21?

[Harin Haridas Kanani, MD & Director]

So when we compare with regards to Q1 FY '21, if we were -- basically Q1 FY '21 was the quarter in which we had lockdown. At the same time, we also had an overhang of Q4 FY '20. So some of the sales which we couldn't complete of Q4 FY '20 had kind of overlapped to Q1 FY '21. And I think the -- so we had more or less kind of covered that gap. And if you remember, Q1 FY '21 was already better as compared to Q1 FY '20 in spite of the lockdown situation.The segment which was significantly affected in that was basically the inorganic segment, the Lithium segment, which was going to engineering industry. So in this quarter, we did not have the same challenges. I mean, even though there was COVID situation, but there was not as strict lockdown as we had in Q1 FY '20. So therefore, you can see that the lithium demand this year was slightly higher, and that's why you see a big jump because it was mainly because of the lower base in the last Q1 FY '21 when there was a strong COVID impact.So basically, that strong COVID impact was not there in the Lithium segment. And when it comes to pharma and agro, that was more or less in line with our previous quarters and even either Q4 or Q1, so more or less in the line. Slight differential here was that as compared to -- specially as compared to Q1 FY '21 was that we had exports, which were slightly higher, which was basically contributed by the 2 contracts, the long-term contracts which we've already signed. So that is the additional revenue which we had as opposed to our regular traditional customers. And because of that, the export revenue also was slightly higher.

[Swarnabha Mukherjee, Research Analyst]

Right, sir. So the reason why I asked this question was, I think, in your presentation, you have also mentioned that the product mix has undergone a change and share of value-added products are going up. Now in the organic front, it is -- generally has been flattish over the last 4, 5 quarters barring Q4.So if we now look at it from the frame of reference of Q4 FY '21, the slight dip that has happened, has that been in -- I mean, due to any kind of fall in volumes because of the COVID circumstances this quarter? Or any realizations have gone down? And how do we look at it from the perspective of also the mix of value-added products? Because in my -- if I understand it correctly, then a higher value-added product would have a higher realization. So if you could throw some light on that.

[Harin Haridas Kanani, MD & Director]

Yes. So I think if you are comparing between Q4 and Q1, so last Q4 and this Q1, I think the only differential was that -- see it was basically like the impact which we had on our production capacities in April and May. So there was disruption, I mean, not as strong as last time, but there were some disruptions and that led to a slight reduction in what we could produce.Also, overall, in general, we've always seen that, in Q4 -- so Q3 and Q4, our European demand is always -- for the Pharma segment is always higher because they go into this -- in July and August, they have the summer breaks in Europe. So they always want to build up inventory, and therefore, our exports to Europe in pharma in Q3, Q4 are usually higher. And we see that demand also from our API customers who are basically serving Europe. So therefore, these are like just a traditional factor where we always say that our Q1 is slightly weaker as compared to Q4, but nothing very strong directionally, which will change or alter anything.

[Swarnabha Mukherjee, Research Analyst]

Okay. All right. Also, sir, in terms of your inventory, particularly finished goods side, was there anything that has been held up because of the shipping prices that is going on -- that has not been able to sold -- been sold and will probably shift to the next quarter, I mean to Q2?

[Harin Haridas Kanani, MD & Director]

So I think there was some impact in that, but I think the major contributor in terms of inventory what you are seeing is the hedge now starting to build up inventory to support the sales which it wants. So as we've mentioned, in Dahej already commercial production trials, then you make some quantity and send it to customers for approval. So all those activities have already started. So the major contributor for the change in the inventory is the Dahej production initiation that we've done.

[Swarnabha Mukherjee, Research Analyst]

Okay. All right. Now, sir, in terms of your geographical mix, with Dahej, I guess we should be seeing the export in export share basically going up going forward. So right now, we are like 55% domestic, 45% export some kind of -- I mean, this kind of range over the last few quarters. So do we see now export going up significantly over the next few quarters as Dahej ramps up?

[Harin Haridas Kanani, MD & Director]

So over a few years, yes. Some of the business, which will immediately be filled in Dahej would be, of course, some of the new contracts also will contribute. And some also will be molecules, which, historically, we were making maybe in Mahape or Karakhadi, those customers approve Dahej site. And then from Dahej site, we are supplying some of these products. But yes, over the next 2 to 3 years, we expect the export contribution to increase as more and more new customers get added at Dahej site.

[Swarnabha Mukherjee, Research Analyst]

Right. So any color on what that mix should eventually affect your tax rate?

[Harin Haridas Kanani, MD & Director]

So I think I would let Ketan answer that. We had done some simulations what the tax rate will go up to. So Ketan, would you like to answer that?

[Ketan Vyas, Chief Financial Officer]

Yes. I think the effective, for this year, if we look at the end of the year, we formulate approximately the tax rate could come down by 2% or 3% overall.

[Harin Haridas Kanani, MD & Director]

So maybe closer to around 25%.

[Ketan Vyas, Chief Financial Officer]

Closer to around 25%, we look at the rate basically.

[Harin Haridas Kanani, MD & Director]

And historically -- and I think previous simulation, we have seen that it can go down up to 20%.

[Ketan Vyas, Chief Financial Officer]

Yes, 20%, we have seen that simulation, but that we take it for the next...

[Harin Haridas Kanani, MD & Director]

'23 or '24?

[Ketan Vyas, Chief Financial Officer]

Yes.

[Swarnabha Mukherjee, Research Analyst]

So just to clarify, if we take FY '22 as a whole, then we will see for the whole year, a 2% to 3% reduction compared to FY '21, is that correct understanding?

[Ketan Vyas, Chief Financial Officer]

Yes.

[Swarnabha Mukherjee, Research Analyst]

Okay. Okay. That's very helpful. How are we positioned in terms of debt at the end of this quarter?

[Ketan Vyas, Chief Financial Officer]

Debt is in line with what we have formulated. We have the figures that -- just confirmation, our debt stays about 130 -- long-term debt stays about INR 130 crores. And that's what we look at currently.

[Swarnabha Mukherjee, Research Analyst]

Right. Okay. Okay. Got it. And -- in terms of -- so, Harin, sir in terms of the customer approvals, 1 question that I had was you mentioned 2 CSM customers have approved. So are those amongst the long-term contracts? And whether we should then, from Q2 onwards, see revenue for those long-term contracts trickling in?

[Harin Haridas Kanani, MD & Director]

So the 2 long-term contracts we have is one is the CSM and another is non-CSM, right? So the CSM -- long-term CSM customer, yes, he has already approved this site, and it was actually right from the beginning once that contract was confirmed, Dahej site was designed specifically. I mean, one part of Dahej was specifically designed for that. So yes, the revenue from that will start coming in from Q2. And another is our historical customer with whom we have relatively decent volumes. So they've also agreed to buy the product from Dahej. So even we are expecting in Q2 also initial trial production from Dahej, which they will accept, and then maybe in Q3 or Q4, there will be more volumes for these customers.And then some of our own bromine derivative molecule customers also have already accepted supplies from Dahej and have -- some of them have also placed POs. So these also will contribute in our Q2. And we are also working -- so some of the customers require us to prepare the final product, submit them the data on equivalency. And once they see this data, then, in future, they will give us -- but they conditionally agreed to buy from Dahej. But once we give them the satisfactory data, then some more customers will shift to Dahej.

[Swarnabha Mukherjee, Research Analyst]

Great. Got it. That's very helpful. Sir, 1 last question, if I may squeeze in. And this is a little bit big picture kind of thing that I wanted to take your view on. So we are seeing that several companies, particularly ones who are operating in the manufacturing of agro pharma intermediate space or specialty chemical intermediate space. There, everybody is building up competencies in multiple chemistries. And that includes halogenation as well as other ones like say nitration, hydrogenation, ammonolysis.So I think going forward, in 3, 4 years' time, we'll see several of the major players having capabilities in all these chemistries or multiple of these chemistries, maybe some of them might also have their capability in bromination. You will also have capabilities in other halogens or other chemistries. So then how do you see this competitive scenario change over a point of time where, right now, each of you are basically having 1 pivot chemistry and then incrementally, customers are looking for additional reactions based on the base product and giving the final product or 1 or 2 upstream from the final product you are sending to the customers. How is this going to evolve maybe 5 years down the line with everybody having a large overlap in the chemistry competencies?

[Harin Haridas Kanani, MD & Director]

Yes. So Swarnabha, I agree, and we've also shared this in previous calls that one of the expectations of majority of the customers is that they want to do as much -- so they want to basically try to do as much steps in 1 single place so that they don't have to keep moving materials from states like -- have 10 vendors for that. And especially when we are doing CSM. So even the existing molecule where we have a long-term contract, that is a 7-stage -- 6- to 7-stage reaction where we are doing multiple chemistries.So over a period of time, yes, we all will have to do certain chemistries. But there will be -- so one is, I think, 5 years down the line, it will be depending on: number one, who can do a particular chemistry well, will still be a criteria where, let's say, you want to do a molecule which has a very challenging bromination or very challenging fluorination or nitration is the most key step. So which is a key step that will be -- and who has the expertise or a bigger expertise in that. So that is one criteria.And the second thing will be who will execute the projects well. So it will be -- okay, if no key chemistry is required and chemistry is being equal and equal capabilities of multiple players, the customer is going to make a choice based on who is delivering to them on time, who is delivering or who is able to innovate further. So those -- and experience of the customer has with -- working with you historically. So those are the things which I guess would differentiate. I don't know Mr. Surana, would you like to add to this?

[Anurag Surana, Non Executive Director]

Yes. What I would like to say, I always maintain that there is nothing like a pivot chemistry and other chemistries cannot be done. So if you see already many companies like Neogen, they also do bromination. Where Neogen differentiates itself is that Neogen does a very large variety of bromination, Neogen has a very big strength in sourcing of bromine in entering into long-term contracts for bromine -- in bromine recovery and recycling of bromine and stuff like that.Similarly, companies like SRF and Navin, they have strengths in fluorine chemistry. Now in school or college or IIT, nobody teaches you bromination or fluorination or chlorination separately. You are taught synthetic organic chemistry. So any chemist which Neogen or for that matter, any of the companies when they employ a R&D chemist or a R&D manager or a Vice President of R&D, he knows all the chemistries. So all these companies are already doing. It's not that they will do in the future, all chemistries or multiple chemistries. They are already doing all chemistries. But in 1 or 2 chemistries, if they have some additional strong points, they like to showcase that as a matter of strategy, which also Neogen does. So I hope that answers your question.

[Operator]

The next question is from the line of Saurabh from AMSEC.

[Saurabh Kapadia, Research Analyst]

Sir, first on the employee cost. So there has been a sharp increase in the cost. So is there any one-off component? Or we should expect this rate going ahead?

[Harin Haridas Kanani, MD & Director]

Yes. Thank you for the question. So no, I mean, especially when you compare with Q1, the increase is more sharp and mostly because over last year, we have added a lot of team members for better management, so this is a reflection of that. As a percentage, we hope that once Dahej starts contributing, as a percentage of revenue, it will improve slightly, but also there will be more employees of Dahej which will also get added. So yes, there is no specific one-off which has increased this. This is more a trend. But yes, as a percentage, it should improve once -- but it will be higher as compared to last year.

[Saurabh Kapadia, Research Analyst]

Okay. And in export, is there any orders in hand which was not delivered in Q1 and they will be deferred to Q2 because of logistic issue or something?

[Harin Haridas Kanani, MD & Director]

Yes, there were a couple of orders, but not very large.

[Saurabh Kapadia, Research Analyst]

Okay. And sir, like because of this logistic and supply chain issue, are you witnessing better demand on the domestic side and better realization that you're fetching on domestic side?

[Harin Haridas Kanani, MD & Director]

So we've not yet seen because generally, we feel these pharma companies have a good inventories. So the domestic major customers are pharma. And the second is engineering. So when it comes to pharma, we've not seen like a better realization because of challenges in logistical constraints for them. So there are no certain orders that we want this at any cost kind of a situation because of the inventories, which pharma companies are carrying.

[Saurabh Kapadia, Research Analyst]

Okay. Sir, and if you can provide the utilization levels for the organic and inorganic segment for this quarter?

[Harin Haridas Kanani, MD & Director]

So organic products continue to run at about more than 80% in my Mahape and Karakhadi unit. And Dahej, we have not yet started to like kind of calculating percentage because the plant is stabilizing and currently, all the trial commercial productions are ongoing, et cetera. When it comes to inorganic, see, roughly, we say we have a capacity of around INR 25 crores per quarter. So at INR 17 crores, we are, let's say, at around 60%, 65% kind of utilization levels in inorganic.

[Saurabh Kapadia, Research Analyst]

Okay. And sir, how should we look at the Dahej plant ramp up, like I mean starting Q2. So whether it will be like in the last month of this quarter and how the ramp-up will happen over this full year?

[Harin Haridas Kanani, MD & Director]

So as I mentioned in my opening remarks, we are expecting that like in this quarter, we should have the Phase 1 capacity more or less working. And then by end of Q2 or early Q3, at least 75% of Phase 2 reactors also are likely to come online. So I would say that between Q2, Q3 and Q4, you will progressively see additional revenues kind of coming up where, at least by Q4, we hope 75% of the -- I mean the Q1 will be fully utilizable and 75% of Phase 2 also should be utilizable. So Q4 should be the best quarter from capacity point of view. Of course, this still being a new site, my Mahape and Karakhadi, even though normal standard capacity utilization levels are 80%, run above -- like go as high as sometimes 85% or 90% also. Whereas Dahej will take some time. So next year and the year after, let's say, we will be kind of hitting those kind of numbers. So overall, when we have kind of targeted INR 450-odd crores, our expectation is -- at least like our bare minimum expectation is to at least cross INR 100 crores in Q2 and then further ramp up in Q3 and Q4 beyond that.

[Saurabh Kapadia, Research Analyst]

Okay. And sir, my last question on the gross margin, EBITDA margin. So from last 2 quarters, we have seen gross margin improvement as well EBITDA margin has improved marginally compared to what we have seen in gross margin because of the value-added products addition as you mentioned in last quarter. So how should we look at in terms of gross margin going ahead? Is this 45% kind of a gross margin will be sustainable going ahead?

[Harin Haridas Kanani, MD & Director]

So that's something once kind of like our product mix stabilizes, we'll have a better answer. But the way it currently looks, at least in this year, we are expecting in the range of -- so 40% to 45%. I mean, we used to be between 38% to 42%, historically. But with these new products with longer processing times and that change -- those changes in the product mix, we currently -- instead of 38% to 42%, the range which I'm currently looking at is, let's say, 42% plus minus 2%. So 40 -- before it was 40% plus minus 2%. Now it is more like 42% plus minus 2%. But again, the processing costs are also higher. So we'll see, let us stabilize a bit because we are making a very big dramatic change in this year, then I'll be able to give you a more better clarity going forward.

[Saurabh Kapadia, Research Analyst]

Okay. And sir, just one bit on the working capital. So is there any material change compared to the last quarter or similar to the last quarter?

[Harin Haridas Kanani, MD & Director]

Yes, similar, except as I explained earlier, the inventories are a bit higher because we are now preparing for Dahej site. So like some of the raw materials, also some of whatever is in process, is all out there.

[Operator]

The next question is from the line of Nilesh Ghuge from HDFC Securities.

[Nilesh Ghuge, Research Analyst]

This is Nilesh here from HDFC. Sir, you always guided us that you are targeting top line of about INR 650 crores to INR 675 crores by FY '24. And out of that, you are expecting that 20% business should come from custom synthesis. That's your target. That means about INR 120 crores of top line will be coming from the custom synthesis. Correct, sir?

[Harin Haridas Kanani, MD & Director]

Yes.

[Nilesh Ghuge, Research Analyst]

Sir, just to clarify. See, that means when you say custom synthesis, does that mean that the business generated on the technology and the process developed by Neogen Chemicals. Is my understanding correct?

[Harin Haridas Kanani, MD & Director]

No. So when we say CSM business, we basically mean or at least we classify as a CSM business where we have a one-on-one exclusive relationship for a product for that customer, specifically for a geography. So that is what we mean as a custom synthesis business. Now in this, there are various cases. There are many cases where the customer gives me just the name. He has his name, and he says, this is what I want you to make, but it's a patented molecule, so you make it only for me. So it can be just that. Then sometimes, they have made it a few grams or a few kgs in lab and they say this is what I've done, use this as a starting point and make the final molecule. I mean, the scale up the molecule, develop the technology at the commercial scale and then you supply to me over few years.And we also have some customers who say, I've been making this for the last 10 years, 15 years, but I want to free up my capacity. So I even have a plant level data. Can you make this exclusively for me? So we can get technology anywhere from just the name to actual plant manufacturing technology. So the level of technology that we get and the level that we need to develop can change from 10% to 90%. But yes, when we are doing it specifically for 1 customer, we call it a CSM business.

[Nilesh Ghuge, Research Analyst]

Okay. So sir, then the 2 contracts, the long-term contracts I'm talking about you already signed and you already started dispatching products also. So does this long-term contract revenue will come under this CSM business?

[Harin Haridas Kanani, MD & Director]

So one of them is part of the CSM business and another is our own product business.

[Nilesh Ghuge, Research Analyst]

Okay. So in that case then, you said that about these 2 contracts that each contract will give you a revenue of about INR [ 30 ] crores to INR 50 crores on a lower side [Foreign Language] conservative business side. So still, you are going with this kind of a 20% margin or INR 120 crores of margin contribution from CSM business. Don't you think it is conservative guidance you are giving particularly for the custom synthesis business because already you have 1 contract in pocket with a INR 50 crore of revenue contribution on lower side. This may go up to INR 80 crores per annum.

[Harin Haridas Kanani, MD & Director]

Yes. So I'll be very happy if I'm proven conservative on this. But basically, a lot of this is also dependent on Dahej site, which is happening. And again, if you remember, I mean, from the time we gave that guidance, we had like COVID Phase 1, COVID Phase 2, no international travel like. So we've kind of gone through all of that. So yes, we can still say that because -- look, even before we signed this contract, we already had a CSM business of about 10% of INR 300 crores, about INR 20 crores, INR 30 crores we had.Then we are saying INR 30 crores to INR 50 crores. So we are somewhere between INR 60 crores to INR 80 crores already. Now depending on like what new business once I get it, I'm quite confident to reach at least INR 120 crores over the next 2 years. Especially once the Dahej site starts, we can arrange more customer visits or at least have a video shown to the customer or shown to the customer over video and get those approvals. And then we can see exactly whether it remains 20% or it becomes higher.

[Nilesh Ghuge, Research Analyst]

Okay. Okay. And sir, just 1 last question. Sir, molecules, which you are selling to this contract manufacturing -- through contract manufacturing, are these n minus 2 kind of molecules? Or there are just n minus 6, n minus 7 kind of molecules?

[Harin Haridas Kanani, MD & Director]

They range from n minus 4, n minus 5 to n minus 2.

[Operator]

The next question is from the line of Parth Adhiya from B&K Securities.

[Parth Adhiya, Research Analyst]

Sir, firstly, on the gross margin side, these are one of the best margins that you have delivered in the past couple of quarters. Wanted to understand any -- so basically, we have seen that lithium prices have been rising significantly sharply. So any benefit of the inventory gain that we had from the past low-cost lithium on these gross margins particularly on that side?

[Harin Haridas Kanani, MD & Director]

Yes. So that's one of the contributors specifically in this quarter. But like I think more of the trend is because of the change in the product mix.

[Parth Adhiya, Research Analyst]

Okay. And any benefit of what -- can you quantify the benefit from the lithium inventory gains in this particular quarter?

[Harin Haridas Kanani, MD & Director]

Not very significant. But yes, there was some benefit which we had.

[Parth Adhiya, Research Analyst]

Okay. And on the -- secondly, on the new capacity, once it has come up already and once it ramps up...hello?

[Harin Haridas Kanani, MD & Director]

Yes.

[Parth Adhiya, Research Analyst]

Yes. So basically, once the new capacity which has come up and once it gets stabilized, want to understand the way forward you tap even new customer acquisitions or new business areas that you intend to tap or something which you have not been able to do or not have done before. So wanted to understand what areas would you like to tap? Or how would you go ahead with the customer acquisition? And the new capacity ramp, specifically related to that.

[Harin Haridas Kanani, MD & Director]

So I think in some of our calls, historically, what we have said that, so far, we have worked with few innovator customers. We feel we were waiting for this plant which was right from scratch designed from us, and we had no constraints, so we could implement all the changes that we wanted to. So we feel once this is done, we can more aggressively and more confidently go to more wider range of innovator customers. One being, if they say show me the capacity, we can show the capacity. Then second is, if they want environmental clearance. So at least for next 5 years, we have 3 to 4 -- sorry, another 2.5 to 3 MPPs which we can add in Dahej, for which we already have an environmental clearance ready. The site is now developed.So we have infrastructure ready. And in fact, some of the utilities or some of the waste treatment facilities can even support one more MPP relatively easily. So I think with all that, we can get -- give more confidence to customers. Because If you look at last 1.5 years, like almost 2 years after we did the acquisition in Baroda, we were already working at full utilization levels. So if I had to go to some customers and they say, "Okay, do this project," but then where's the capacity or when the capacity is coming. So now that we have a unit, I think we can approach to wider range of customers, innovative customers. And over the next 1 or 2 years, get them to the site, get the site approved and then start new projects. So that will basically build the pipeline beyond FY '23 -- FY '24 for our growth with the new projects which we get from them.

[Operator]

The next question is from the line of Manish Gupta from Solidarity.

[Manish Gupta, Founder & Chief Investment Officer]

Dr. Harin, would it be possible for the company to share the gross margin for the organic and the lithium business separately, if it is not confidential?

[Harin Haridas Kanani, MD & Director]

So, Manish, sir, basically, at present, we have not done it. And again, in lithium, we have very few customers. So that's why if we start breaking them down, sometimes we can have challenges. So at present -- I mean, we will discuss this internally and we will take your suggestion. But at present, our policy is not to disclose that. But let me discuss internally and see if we would like to do that going forward.

[Manish Gupta, Founder & Chief Investment Officer]

Okay. My next question, sir, was that you mentioned that by FY '24, you expect your advanced intermediates business to be 25% to 40%. And you also -- the earlier participant also alluded to your earlier guidance of custom synthesis being about 20% of the business on a base of about INR 650 crores by fiscal year '24. So the gross margin band, which was essentially about 38% to 42%, say, 2 or 3 years down the line, what would that gross margin band be if your broad guidance is achieved?

[Harin Haridas Kanani, MD & Director]

So, Manish, sir, I think here, one of the questions which I'm still answering because when I look at the pipeline, let's say, even advanced intermediates as well as CSM -- sorry, as well as the CSM molecules, I'm not seeing one particular trend. So there are some where there is one of the raw materials, which is very high value, especially if we are going to n minus 2, where I am building the molecule from up. And when I'm going at n minus 3 or n minus 4, I'm combining it with another higher value RM. So that's the reason why I'm hesitating to give this is as we know more clearly what -- which molecules and which projects will be, I'll be having a better idea of that.So that's why I kind of hazard giving a number. So as a rule, yes. There, the processing cost is going to be higher and the raw material costs will be lower. So it should improve. To what level? Will depend upon -- like from a project to project, it keeps varying. So that's why I am requesting a little bit more time to kind of give a more long-term answer. But what we see today, at least for this year, what -- as I mentioned, we expect it to be in the range of 42% plus/minus 2% as opposed to 38% plus/minus 2% what we used to be before -- 40% plus minus 2% what we used to be before.

[Manish Gupta, Founder & Chief Investment Officer]

Okay. Third question is that we are at the cusp of a fairly high growth trajectory right now. How do you think about your -- I would imagine there would be a little bit of a talent issue also right now in specialty chemical. So my question was that, if, for example, by FY '24, we are looking at INR 650 crores to INR 675 crores revenue, have we hired all the talent we need to get to that or that will be a continuous process?

[Harin Haridas Kanani, MD & Director]

Have we had all the talent that we would require? So I think the answer would be, at least, we are fairly happy with the team, which we've assembled in the last 1.5 years to 2 years, where at least each functional head that we have is really in -- so we've also had most of them already joined and with us between, let's say, 6 months to 1.5 years. And I'm fairly confident that we already have that team.And yes, below the functional head, we will keep needing more people as volumes increase to kind of support volume. But I think, from a management point of view, we have the team ready. We will have more operational people join over a period of time. And I think they should see us for at least up to FY '24, which we are good. Of course, it will be a continuous process, and we will constantly be looking for new talent because by the time we are at FY '24, we will be looking at FY '25 and '26 and getting ready for that.

[Operator]

The next question is from the line of Dhavan Shah from ICICI Securities.

[Dhavan Shah, Research Analyst]

I have a question on the custom synthesis business only. So you mentioned that we are already working -- I mean, supplying molecules to around 10-odd customers presently. And if I look at the custom synthesis revenue right now, which is roughly INR 30-odd crores or INR 40-odd crores on annual basis. So per molecule size comes very low, and I understand that you already mentioned that we are working on n minus 3, n minus 4 molecule, so that size is smaller. But if I go -- if I would like to understand based on the end user industry demand or the end user on the product side, so how is the product size there? And how is that end -- that product growing, if you can share thoughts on that?

[Harin Haridas Kanani, MD & Director]

So thank you, Dhavan. I think, see, we have to understand that the CSM business, as a whole, started about 3, 3.5 years ago, where you can see even in our DRHP, there was a very small contribution of about 0.3 -- like INR 30 lakhs in the first year in which we kind of started this. So there are some molecules when we started, we were very small. And these were mostly my existing bromine derivative customers asking me to do something a little bit which they were doing and they said, can you do this for us? And we also wanted to kind of build confidence. So some of these molecules, yes, I agree are lower value. And sometimes, they don't repeat every year also. But at the same time, that basically gave other customers confidence to give us more challenging molecule. So we continue to do them. Whether you call it CSM or whether you call it advanced intermediates, it's basically one thing only with the restriction that we can't sell it to anybody else that particular molecule. As we say, like as an example, the long-term agreement, which we've signed, we said the revenue remains between INR 30 to INR 50 crores per annum on the lower side and can be higher in given years.So I think our hope is that once Dahej is set up, and once we are able to work more with our customers and show our capabilities in Dahej in the next 2 to 3 years, we will have more customers who will have contribution ranging from, let's say, INR 15 crore or INR 20 crore per molecule going up to, let's say, INR 50 crores or the target would be to even do higher. So again, our normal standard preferences, if I were to say, 10% to 15% as highest kind of revenue contribution from a single molecule, what Neogen thumb rule is, at INR 650 crores, that range comes to INR 60 crores to INR 100 crores. So that's the range we would like to be.And again, when you do contract and that too if there is a multiyear contract, we can even derive some comfort and take a higher risk or dependency on a single molecule. So let's see, that's the target. But again, it will take some time for Dahej to stabilize, get these customers to see and then get into contracts like this.

[Dhavan Shah, Research Analyst]

Right. And if I would like to understand based on the present customer profile in the custom synthesis business, so, I mean, the end user industry is more into the agrochem and pharma? Or is there any other industry also right now? And apart from that, do you foresee molecule which can become sizable in the next 3 to 5 years from the present business line?

[Harin Haridas Kanani, MD & Director]

Yes. So yes, I mean, it's agro, it is pharma and it's also non-agro, non-pharma customers. So all 3 segments are part of the CSM customer pool. Yes, there are a few customers which have a good revenue potential, which can become, let's say, I would say these are INR 25 crore plus kind of molecules and some of which are in that INR 60 crores to INR 100 crores kind of range. But we have to wait our time out. So the challenge with the CSM business is because some of these molecules are very new and also the customer decision and approval takes time, so we have to be patient on that.

[Dhavan Shah, Research Analyst]

Right. And you also mentioned that we are negotiating with 10 new customers for this custom synthesis. So here also the product basket remains the same or this will be a new -- newer molecules for new customers?

[Harin Haridas Kanani, MD & Director]

So when I mentioned like molecules INR 25 crore plus and between INR 60 crores to INR 100 crores, they also include this new customer. So I was just talking as a whole, okay? Some of the existing ones as well as some of the new customers with whom we are working, just to kind of clarify. And yes, when we say negotiating, we are not negotiating. This is a process where you demonstrate something at one stage.As I mentioned earlier, something we've got only a process of 50 grams. So then we do 1 kg level, then we do 100 kg level, then we do few metrics ton level. And each one we have to do, we have to show it to customers, then customer checks at his end, make the decision, then it goes further. And some of them may drop at that intermediate stage also. I mean it does happen. It's not uncommon that, that happens. So it's not a negotiation, but these are the customers with whom we are working through that process.

[Dhavan Shah, Research Analyst]

Okay. And my last question is on the revenue part. So I think you earlier mentioned also that these 2 new contracts, I mean, which can contribute roughly INR 60 crores to INR 80 crores for the initial first year. And based on our quarterly run rate and the spillover sales impact also, plus your Phase 2 will also come earlier than the expected line, so I mean, our INR 450 crores guidance, do you foresee that it is very conservative for this current year, and we can overachieve this INR 450 crores guidance?

[Harin Haridas Kanani, MD & Director]

I'll be happy if I can. But we are already -- let's say, if I were to look at the INR 85 crores kind of what we've been doing, more or less if you look at my 3 to 4 quarters, it's been INR 85 crores. So we are at INR 340-odd crores per annum, INR 340 crores, INR 350 crores. So we are already expecting a 33% jump. And I think, again, in Q2 also, not all reactors are coming online, et cetera. There are customer approvals involved, where sometimes we have to make -- get approved, especially on the pharma side of things. So I think INR 450 crores is a decent target. If we are able to overachieve, I think, the team will do really a good job.Also, there are still restrictions related to COVID even though like, okay, operations have streamlined, but there are many things which are still not happening. We are hoping in November, December, we've heard some of the international exhibitions are going to start. So we can have more closer interaction with our customers and the visa restrictions and things like that. So I think INR 450 crores is still in my mind quite decently good target. Let's stay with it for a while, and then we see what happens further.

[Operator]

The next question is from the line of Shanti Patel from Shanti Patel Investment Advisors.

[Shanti Patel]

Sir, I just wanted to know the first 5 big customers. And what is the concentration of our sales to them?

[Harin Haridas Kanani, MD & Director]

Sir, I have a top 10 number readily available.

[Shanti Patel]

Okay, that will do.

[Harin Haridas Kanani, MD & Director]

Yes. So generally, the top 10 customers, normally as a whole, contribute to about 40% to 55% range of the top 10 customers. And I think in this quarter also, it was more or less in the same line.

[Shanti Patel]

Will you be able to name a few of them?

[Harin Haridas Kanani, MD & Director]

I'm sorry, sir, I mean, we have -- during our DRHP and post that in our investor presentation also, some of the customers who had given us permission, their logos are mentioned. But because of confidentiality of the business as well as some customer confidentiality, we are not able to name them. But yes, I mean, if you look at our historical DRHP disclosures as well as some names which we have given in our PowerPoint presentation, that should give us an idea. Broadly speaking almost all the pharma companies in India are our customers. So we work with almost all bigger pharma companies in India as well as generic producers in Europe and Japan, both in pharma space and also in agro space.

[Shanti Patel]

Including multinationals, right?

[Harin Haridas Kanani, MD & Director]

Multinationals, yes. And like in India, engineering also, the names which we have there is like Thermax, Voltas and Kirloskar. So these are the main customers I have them. And a Japanese company, which is in the same line of business, which we shared earlier, are the customers on the engineering space.

[Operator]

The next question is from the line of Karthik Bhat, an Individual Investor.

[Unknown Attendee]

Most of my questions have been answered. That's the -- the only thing I wanted to ask is on this client concentration. So while you mentioned top 10 would be 40% to 45%, do you see this figure changing over the next 1 or 2 years, given the CSM business how it is panning out and all?

[Harin Haridas Kanani, MD & Director]

So I think even if we currently, let's say, look at -- so our focus usually has been on top customers, which are thought more precisely. But yes, let me see, I mean, if we, for example, get 2 or 3 customers, again, even existing CSM is quite spread out, as I answered earlier, it may increase slightly. But when it comes to CSM business, if we have a multiyear contracts with them and some kind of comfort that in case if they were to not have demand, we have some comfort. So I think there, if it increases slightly, I would be okay, principally speaking. But I still feel we will be -- because our overall top line is also growing, so I think we will still be in that 45% to 55% range for the top 10 customers.

[Operator]

Ladies and gentlemen that was the last question for today. I now hand the conference over to Dr. Harin Kanani for closing comments.

[Harin Haridas Kanani, MD & Director]

Thank you so much all the participants for joining the call. I hope we are able to satisfactorily respond to all your questions. It's always a pleasure to interact with you and get your queries and to answer them. If you have any more questions, please feel free to contact our Investor Relations team, CDR India, and we will address them. Thank you once again, and we look forward to connecting with all of you in the next quarter. We hope you and your family and your team members and colleagues remain safe in this challenging period. Thank you.

[Operator]

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