Neogen Chemicals Ltd

NSE:NEOGEN

Earnings Call Transcript 2023-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the Q1 FY '23 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 afternoon, everyone, and welcome to Neogen Chemicals Q1 FY '20 earnings conference call. Joining us today on the call 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 shall open the forum for Q&A, where the management will be glad to address your questions.

Let me leave with a standard disclaimer here. Certain 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 detailed disclaimer in this regard is available in Neogen Chemicals Q1 FY '23 earnings PPT, which has been circulated earlier.

I would now like to invite Dr. Harin Kanani to share his perspective. Thank you, and over to you, sir.

[Harin Kanani, executive]

Thank you, Nishid. Good afternoon, everyone, and welcome to our Q1 FY '23 earnings conference call. We have shared our results document, and I hope you had an opportunity to go through them. I will begin by sharing the performance highlights and growth initiatives. While Mr. Ketan Vyas, our CFO, will take us through the financial insights for the first quarter ended FY '23. We have commenced the year on a strong note despite unprecedented challenges witnessed in the past few months in the form of high input and utility costs, logistical disruption as well as severe volatility in exchange rates.

Just to share the key financial trends. Revenue increased by 75%, while EBITDA improved by 58% and profit after tax grew by 51%. This time, again, again, we witnessed significant increase in the prices of raw materials linked to lithium, which the company was able to pass on to the customers, resultantly protecting the absolute EBITDA.

The EBITDA percentage margin decline is optical as it considers higher revenues and higher RM costs, which with preserved absolute earnings. During the quarter under review, our Organic Chemicals segment revenue enhanced by 32% year-on-year, while growth in Inorganic Chemicals stood at 243%. This was in line with our internal expectations and was supported by incremental gains from the capacity expansion initiatives undertaken across both the business segments. The demand profile of products that we manufacture remains update, and we are confident in maintaining this growth momentum going forward.

We have several CapEx initiatives lined up this year and next year that will boost our performance trajectory in the existing as well as new business of lithium and battery chemical space. These initiatives are getting executed as per earlier stated time lines. Let me share some updates here. Discussions with both domestic and global customers are advancing as expected, and there is continued interest in robust demand. As a process, we have started submitting samples for technical approvals and evaluations are underway to approve Neogen as a vendor at our customer end. Once we get some comfort on that, we will align our large CapEx plan with lithium and battery chemical space in H2 of the current financial year.

In the CSM and Advanced Intermediates business, we are excited with the current momentum as we have started witnessing traction from even other sectors that are non-agro and non-pharma, including the traditional pharma and agro segments. Our focus is to increase the revenue contribution from these segments, which is in line with our efforts to expanding the portfolio of value-added products. Separately, post our Board approval last quarter, we have started initial work at the Dahej plant to deploy up to INR 150 crore CapEx in this financial year.

This will be used for following initiatives: Increasing the manufacturing capacity of specialty organic chemicals by 60,000 liter reactor capacity, expanding manufacturing capacity of inorganic salts from 1,200 metric tons to 2,400 metric ton, setting up new capacity in existing inorganic MPP for 400 metric tons per annum for manufacturing, specialty lithium salts and editors for electrolyte used in lithium and battery advanced chemistry cells and overall site development at Dahej as well. All this expansion will come on stream by June 2023 and will help significantly elevate our revenue trajectory from the current levels.

Our FY '24 revenue guidance remains unchanged at INR 700 crore to INR 725 crore, while by FY '25, '26, we will be able to add another INR 250 crores to INR 300 crores at full utilization level, resulting in a revenue potential of approximately INR 1,000 crores. Let me clarify that here the incremental revenues as well as the revenue guidance for FY '24 is estimated based on stable lithium prices. The growth prospects for us are encouraging, and we are very well poised to capitalize on the emerging opportunities unfolding in the Indian chemical space. This, along with India's growing position in global chemicals value chain will drive incremental gains. Our focus will be to deliver sustained growth with healthy acceleration to profitability, thereby creating value for all stakeholders.

With that, I would now request our CFO, Mr. Ketan Vyas, to share the financial highlights for the quarter and the results.

[Ketan Vyas, executive]

Thank you, Dr. Hari. Good afternoon, and warm welcome to everyone. Today, I will cover the financial performance of the company for the first quarter ended the 30th June of 2022. Please note that all comparisons are on a year-on-year basis and refer to stand-alone financial performance.

In Q1 FY '23, our revenue stood at INR 147.9 crores, representing a robust growth of 75%, driven by incremental benefits accruing from the expanded capacity and guided by positive demand environment. The company has been able to leverage its expertise in process chemistries to focus on high-value products with multistate processes. We saw an EBITDA of INR 34.7 crores, growing by 58% in Q1 FY '23. EBITDA margin came in at 16.7% in Q1 FY '23. The EBITDA performance was supported by operating leverage gains on account of increased capacity available. Favorable product mix also steered the momentum. The improvement came in, despite various pressures seen in the form of higher input and utility costs with added exchange rate volatility.

During the quarter, we reported a strong double-digit growth in profit after tax at INR 11.1 crores, higher by 51% in Q1 FY '23. This was bolstered by a strong operating performance. During the Q1 FY '23, our domestic export mix stood at 56% and 44%, respectively. That ends my opening remarks.

I will now request the moderator to open the forum for the discussion with the participants. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Saurabh from Asian Markets Securities.

[Saurabh Kapadia, analyst]

So first question is on the organic chemicals. So if you look at the revenue for organic chemicals from Q3 to Q4 to Q1, there has been no slight decline over the last 2 quarters. So is this -- this is because of seasonality or what is the reason behind this?

[Harin Kanani, executive]

This is mostly driven by seasonality and slightly tough demand from pharma customers in some specific molecules or APIs, where there is regular inventory correction, which is going on, where some of the APIs that was large inventory worldwide and now the correction is happening. But more, I would say, is because of the seasonality that generally Q1 demand is a bit lower.

[Saurabh Kapadia, analyst]

So are these APIs related to ARV segment?

[Harin Kanani, executive]

No. There are some non-ARV API. Okay.

[Saurabh Kapadia, analyst]

Sir, second is on, if you can provide some color of the cash flow from operations or working capital situation at the end of Q1?

[Harin Kanani, executive]

So our working capital utilization was slightly higher in end of Q1 because again, we had planned for a higher production, and there's a little bit of inventory build up because our capacity utilization was much higher, although the organic revenue was a bit lower. So there is higher working capital utilization. But more or less in line with what we are expecting for the business increase that we are targeting for this year.

[Saurabh Kapadia, analyst]

And sir, the -- continuing with this working capital. So now we have seen the commodity price coming down. So should we expect the -- some working capital release from Q2 onwards?

[Harin Kanani, executive]

So we are constantly increasing and trying to increase our utilization levels. So as we have said that in this year, we are hoping by the end of the year because our idea is to ensure higher utilization of our facilities. So by end of this year, you would be at similar levels at about like net working capital in the range of around 120 to 130 in that. And by next year, we are hoping that by FY '24, as we had earlier also guided, our target is that we are somewhere at around [indiscernible] 100, 110 days of the net working capital cycle based upon net sales number of days.

[Saurabh Kapadia, analyst]

Sir, my last question on your commentary in the presentation you have mentioned it about the increase in traction from non-pharma or non-agro. So can you allocate more in terms of an industry or the size of the molecules or the client or the B material? Is it a bromine or lithium?

[Harin Kanani, executive]

So it's based upon our organic -- so both these are organic. Both these molecules, which we are thinking of are on the organic side. And one of them is for flavors and fragrance kind of segment. And so we have actually 3 or 4 molecules which are now in flavors and segments. And another is a very typical industry, which is like basically like a specialty chemical required for one of our customers in Japan.

[Operator]

[Operator Instructions] The next question is from the line of Manish Gupta from Solidarity Group.

[Manish Gupta, analyst]

Dr. Harin, I have 2 questions. The first one is that of all the lithium that is being imported in India right now -- report being imported into India for processing. What percentage of that would Neogen be importing?

[Harin Kanani, executive]

Okay. So all the lithium, which is currently being imported, like I would basically again, divide into 2 parts. One is lithium, which is used for making specialty intermediates like lithium bromide, lithium chloride, like the salts that we make. And a second big application is for making grease applications. So what is used for making like this grease, which companies like Indian Oil and others who make -- so that is a very large application, what I would consider as a bulk. Most of this is in the form of lithium hydroxide. And most of the intermediates that we make is in the form of lithium carbonate. So we had checked this some time ago. I have not checked the most recent numbers. But when we had checked, we were importing close to around 60% to 75% of the lithium carbonate, which was getting imported into India for like the specialty applications.

[Manish Gupta, analyst]

And my second question is that a lot of these chemistries, I would imagine there is some process knowledge that only comes with experience.

[Harin Kanani, executive]

Yes.

[Manish Gupta, analyst]

So how much of a time advantage would we have over a company that starts deciding they want to pursue lithium salts today? So how much -- and as they climb -- catch up, I guess, our knowledge would have further expanded. So how do we think of the advantage we have in terms of time or experience or cost vis-a-vis somebody else who attempts to do this today?

[Harin Kanani, executive]

So I think there are 3 things which help support our lithium. One is -- of course, the understanding, the second is like the credibility because most of the customers in lithium are basically -- other than some application in pharma, are nonchemical companies. So they rely on Neogen to not only provide the product as per the specifications, but they want Neogen -- like the reliability component is very high. Because sometimes they are not even able to test the specifications fully or the impurity profile. So -- and like from batch to batch, it has to be consistent. So that years of experience, which they have, the credibility and the knowledge, which you are providing them is also a critical factor here. And third is also the relationship with the lithium companies to be able to ensure that even in a tough time, your lithium supply continues and you are not going dry.

So I would say this is a combination of these 3. What we have seen so far in the last 25, 30 years, that some -- like 2 areas. So there are some noncritical or noncritical pharma application, where it is like generic or nonregulated market application as well as non-OEM lithium requirements. So it's not the people who are making the machines, but the user of the machine, suppose if they have a repair and maintenance activity and they want a replacement of these materials. So this is where, like other than non-Neogen companies are able to cater. But when it comes to OEMs, when it comes to regulated pharma, that's where this these 3 modes, which I told you earlier, we've been able to successfully manage and withstand. So the main competition that we see is like our Chinese, Korean, Japanese, and a European competitor who have a similar track record as Neogen, who have supply to OEM per year. So that credibility and the experience and have the ability to source lithium. So these are the main competitions in my view.

[Manish Gupta, analyst]

And just as a follow-on, that because for the EV vehicles, the batteries have to be made locally.

[Harin Kanani, executive]

Yes.

[Manish Gupta, analyst]

Have any of these foreign competitors set up shop in India, so far?

[Harin Kanani, executive]

No. And in fact, even the specific competitors who have been making lithium salts, also, even in their own countries have not moved to EV. There are some various challenges, which they have limitations, which they have. But I know at least why Japanese and Chinese competitors, they are still sticking to the traditional lithium application. The players in EV are completely different. So we do have competitions in EV mainly from China and a little bit from Japan. But and now maybe Korea also some new players are coming. But most of these are new players. They are not these existing players.

[Manish Gupta, analyst]

But then, Dr. Harin, if you don't have players who will be able to supply this locally, that means -- I mean, do you have a chance to almost get 70% to 100% of the overall market?

[Harin Kanani, executive]

So I think some other Indian companies, at least for electrolytes have already made some announcements. So we don't know. I mean, we can target a high market share. But like at least when we are doing our models, we are being considerate and not expecting like a very high market share. We kind of do 3 models like 30%, 50% and 70%. Like this is generally the market share range that we look whenever we look at worst case, best case and moderate kind of scenarios. But we'll see where it lands in. The other thing which can happen is that some of the materials for various reasons could be imported in the beginning. So like, for example, some of the battery producers may decide to import part of it. And eventually, some of the players may set up a shop in India. But so far, I have not heard of any announcement of international players setting up a shop in India, either to make electrolyte salts or for electrolyte.

[Operator]

The next question is from the line of Yash Shah from Investec India.

[Yash Shah, analyst]

My question was regarding lithium prices, sir. From the global channel checks, what we've done, lithium prices have started easing off. But we can -- as you mentioned in your commentary that the prices had increased. So just wanted to understand, is it similar to what you had mentioned in the previous quarter that there is some kind of a disconnect between the global lithium prices and domestic lithium prices and there is a lag basically when it comes till India. So just wanted to understand that first.

[Harin Kanani, executive]

Yes. So usually, what happens is that mostly what gets reported is the Chinese spot market prices, okay? We don't buy from the Chinese spot market. So therefore, most of the like commentary that you get is a Chinese spot market thing. What generally happens is that when we have this long-term relationship with our South America based suppliers, they will look at the Chinese spot market prices and they will base the contract around that. It can be a bit higher, it can be a bit lower depending on what is the forward outlook, et cetera. So what generally happens is that if I do a contract in this quarter, then by the time they take about 1 month, 1.5 months to start shipping, and then it takes 2 months for it to arrive.

So eventually, what happens is that we have, let's say, 1.5 to 2 quarter lag between what happens in the Chinese spot market and material when we receive here, okay? So we also try to work with our customers. And at least once we get a clarity on the prices, we start booking our next quarter volumes, et cetera. So that's how basically we have been working on this. So yes, the prices -- so we are -- like from India point of view from the material, which is arriving, the prices are still kind of on the increasing trend. So the Q1 prices of this quarter, what we accommodate -- we consume was higher than what was in Q4 of last year.

And what we will be consuming in Q2 is even higher. And the -- like the prices have like moderated a little bit. So it's not that they've gone down significantly, but they've stopped increasing and maybe correcting by a couple of dollars or something like that. So the impact of that will basically be in Q3. So internationally, if we look, Q1 and Q2 was a little bit stable at that peak price. And what we expect for Neogen, the Q2, Q3 will be more or less at that kind of peak prices, the visibility that we have so far.

[Yash Shah, analyst]

And sir, so basically, you also mentioned that you were able to pass on the prices. So till what extent have we been able to do that?

[Harin Kanani, executive]

So up to Q2, we have looked at ourselves and we have been able to pass on whatever price increase we had on the lithium that we had paid higher. To that extent, we have been able to do that. Now our real challenge is going to be Q2 and Q3 because this is where the peak price is going to hit us. So some of the challenge, which my customers are facing is that at that price, their final molecule is not viable. Some of the customers understand. I mean they don't have an option, and this is the global prices. And even if they buy globally, it's going to be the same price. And like where it is used as a catalyst application where there's not too much contribution in the final RMC, our customers are able to pass on -- I mean, we're able to pass on a little bit more easily, and we may still be able to pass on. But some customers, where this is a significant part of their final end use, like this will be the real test whether -- how their end customers are responding to this kind of a price increase.

So that's going to be the challenge in Q2 and Q3. But what is working for us is that we have found more such customers globally who -- for whom the price is not so critical, but the supply is really important. So like just even in last quarter, almost 25% of the revenue, which we had was from completely new customers, like that's been the trend for last 2 quarters. So we are actually adding new customers, new applications for which we've not worked in the last 30 years, but now we are able to do that. So our hope is that there might be slight lesser demand from our domestic customers, but the global demand, we are able to make up. And like still preserve our volumes and like being able to continue to pass on the price increase.

But again, whether we do that successfully, how well it works, we'll know like how Q2, Q3 goes. There's also a view that, is this temporary or is this long term. So there are many analysts internationally or the suppliers who think that this is going to be the new normal for at least a couple of quarters, then maybe some people feel that by 2023 or '24 is when prices will come more -- like will -- there will be more significant reduction in this. So anyway, we keep watching this. There's too much -- too many factors which are determining this price. What is going to be the EV demand, what is -- how is the new capacity expansions of the miners working. So it's a combination of all of that. And we wait and watch.

[Yash Shah, analyst]

But sir, we maintain inventory, right? Basically, we maintain such higher level of inventories only to mitigate such volatility in the prices. Now in this quarter, also, sir, we've seen pressure on the margins like we've had like the lowest pressure since -- lowest margins since Q4 of FY '19. So -- and as you mentioned that Q2 and Q3 is going to be further challenging. Do you think, sir, we will be able to maintain the broad level margins, which we -- broad level guidance which we provide for our margins, which is between 17.5% to 19.5% until FY '24, will we be able to maintain the same, sir, even for the current fiscal year?

[Harin Kanani, executive]

Yes. So I'm glad you asked this question, so I can explain a little bit more. So let's say, we have guided for a INR 600 crore revenue, and we have said that INR 600 crore revenue with about 18%, 18.5% kind of EBITDA, which basically comes somewhere around INR 100 crores to INR 110 crores kind of EBITDA. So we are fairly confident that we'll be able to get this INR 100 crores, INR 110 crores EBITDA number. But because of the rising lithium prices, we will overshoot our INR 600 crores. So instead of INR 600 crores, the way things are going now, looking at the lithium prices, we might be anywhere between INR 650 crores to INR 700 crores. So we will be able to protect our absolute EBITDA numbers, which is like INR 100 crores to INR 110 crores. But on a percentage basis, whatever this overshoot that happens in lithium, there we might not still be able to get that percentage. I mean we'll try to do as best as possible, which will then result in -- so I'm quite confident that the top line will definitely get the overshot.

So that INR 600 crores will be INR 650 crores or INR 700 crores, that's the range, which I'm currently looking at. But like again, it depends on how lithium behaves for the remaining quarters. But whether we'll be -- but like -- and so the absolute EBITDA also should be in the range of INR 100 crores, INR 110 crores. But as a percentage, it might not be -- it will most likely not be 18.5% because of this very high lithium prices. I mean lithium prices in our Q2 are going to be like 4x, 5x what is a stable lithium price. So at this point in time, if we not only pass on the benefit but expect customer to also give us a higher margin, which is at -- on the absolute terms is 5x. That's going to be very difficult for long-term customers' point.

Like even the numbers, which you've seen in last quarter and this quarter, like if there's additional lithium prices, when we correct, they fall in that same 18% to 19% range, what we are doing.

[Yash Shah, analyst]

And still will we not change our margins for FY '24 -- sorry, guidance for FY '24 in terms of revenue? Will we still maintain about INR 700 crores to INR 725 crores given that this year itself, we are on the verge of going around INR 700 crores. So for FY '24, no changes in the guidance in terms of revenue?

[Harin Kanani, executive]

So this is INR 700 crores to INR 725 crores is the revenue guidance on a stable lithium price, okay? So if by FY '24, lithium prices come back to stable lithium price then that will be the guidance. If they remain high, then similar situation that we will basically overshoot that number, okay? But again, I'm sure that at EBITDA level, we are at 18%, 19% of INR 700 crores to INR 725 crore.

[Yash Shah, analyst]

One last bookkeeping question, which I had was tax rate, sir, for this quarter has been significantly higher. But for the whole year, we should be around 25%, 26%, right? That is all I wanted to confirm.

[Harin Kanani, executive]

Yes. So -- okay, so on the call, I'll ask Ketan to answer.

[Ketan Vyas, executive]

Yes. On the tax rate, we should be about 26% plus something because previous had a higher depreciation and math this year, we should be around 26% less. Approximately.

[Yash Shah, analyst]

Last one question, sir, which I had was, if we can share employee costs and other expenses have also increased. So is it primarily because of the ongoing CapEx, which we have undertaken, the 4 new projects, which will basically with the increase in the revenue, we will get operating leverage, say, in FY '25 onwards.

[Harin Kanani, executive]

So I think no, the revenue cost which we are seeing is just even to support like for full utilization of Dahej because we had also staggered our employee base coming that way. This doesn't keep into account like what additional people, which we will require for INR 150 crores. And we've not started hiring them as yet. But yes, as we get to full utilization level, as a percentage, these numbers will kind of taper off.

[Operator]

[Operator Instructions] The next question is from the line of Archit Joshi from B&K Securities.

[Archit Joshi, analyst]

And congrats on a good set of numbers. Sir, my question was largely regarding the prices that you are seeing in Europe and in both the businesses.

[Operator]

I am sorry to interrupt, Mr. Joshi, we are not able to hear you properly. I would request you to use your handset.

[Archit Joshi, analyst]

Sir, my question was largely to understand the situation that you are seeing in Europe. And then both the businesses that we have, the organic or the inorganic side, sir, being a larger proxy to the pharmaceutical and agrochemical market and just picking up cues from what we saw during COVID that health care and food security were given the highest importance and that is why a lot of contract manufacturing players in India benefited not just in agri but in pharma also now that the European companies or the multi-nationals that you might be catering to. Would you, in your organic business say that they might have a confusion or a dilemma with respect to making something on their own or outsourcing more because of the higher costs. This is largely to -- on the organic side of the business.

At the same time, because the power and fuel costs are going through the roof. And on the inorganic side, we are catering to the HVAC market. And we are looking at the second half of FY '23 to be a stronger half in terms of revenue and growth. Do you see any ramification of this entire regime turning out to be negative for the European economy? And if you can bifurcate this for both our businesses? If this is an opportunity for organic chemicals, organic bromine -- bromides or the advanced intermediates for the CSM business that we have and on the inorganic side as well.

[Harin Kanani, executive]

So for the organic chemicals, when it comes to -- like you asked specifically Europe, but what I've seen in general, not only Europe, Japan, as well as U.S. customers, they are trying to still find reliable manufacturers in India. And they are still -- there is a strong interest to keep finding alternates to China, as well as if there are some new molecules happening, sometimes their preference is that right from the beginning, let's work with a non-Chinese customer/supplier. There is also a trend that they wanted to look at in Europe. But the general feeling is that in Europe, there is a lot of -- like there's a very under capacity.

So if Europe wanted to make a lot of things in-house. They still don't have capacity, and it takes a very long time for European companies to set up CapEx. So I think still India and other non-Chinese companies remain the place where they want to go for. So I believe the trend for interest into India for like as a manufacturing for advanced intermediates for CSM continues. As I mentioned earlier, that not only agro and pharma, but other specialty chemical companies also more and more are approaching us if we can do molecules for them. So I think that is on the organic side. As I mentioned in lithium, more than this HVAC and energy prices, the bigger driver is what is happening is the lithium availability. So companies which are able to get lithium, the prices of lithium and how they will impact supply and demand.

So again, so far, what -- as I mentioned earlier in my call that we found more customers who like are able to make up for slightly reduced demand in India and instead are able to still buy at the higher prices. But next 2 quarters will tell us whether either in absolute terms or like whether we'll be able to keep increasing our capacity with the lithium prices, which they are. So like I know Q2 and Q3, there might be some time because some customers, the prices, which we will have in Q3 are like historically highest. They are 3x, 4x what we had. So therefore, we'll have to check which customers can still continue to buy at this price. So I think that is going to be a bigger driver as compared to energy prices and other factors, which you mentioned on the lithium side of it.

[Archit Joshi, analyst]

The number of previous -- the same question actually. So would it be okay to assume that because there's a [indiscernible] environment going around and even the European...

[Operator]

Mr. Joshi, we cannot hear you.

[Archit Joshi, analyst]

Sir, I was asking in this environment where European companies are facing problems on the energy side and the fact that we still haven't got a clear indication as to how they are working their things around in terms of their own manufacturing capability. And we know that the trend on China plus 1 story is pretty strong. But my question was largely to understand if this presents another leg of opportunity from the supply chain diversification perspective that European companies already were grappling with higher costs on this labor or power or environmental or environmental fronts. Now that things are snowballing on manufacturing things because of unavailability of gas and power costs going up. Does that present a significant opportunity for Indian companies or Neogen also because we have also ventured into contract manufacturing per se. So that was a broader thing that I wanted to understand from you.

[Harin Kanani, executive]

Okay. So like if you think hypothetically, then you can say that, yes, when they wanted an alternate to China, they can either go to Europe and -- or go to India, like 1 of the 2 options. And since power costs and like outlook there is a bit vague or higher costs, maybe they would prefer and India would get preferred. So yes, if we talk hypothetically, it looks like that this can be an opportunity. But so far, I have not seen any customer making a call that because the energy cost in Europe is very high and we want to shift this production to India. So I have not actually seen any discussion around that. So I think still Europe is basically figuring out that, how they will ensure that enough fuel is available for most of their needs. And I don't see so far a very strong trend, at least in our business, where customers are shifting because of higher energy prices in Europe.

[Archit Joshi, analyst]

So just one last question. I think we were having some issues with respect to managing our inventory and our production planning was also done in a way which was reflecting a higher working capital. And now you are talking about some of the new products, we might get an approval into these flavors and trigger and these are specialty chemicals. Now does that become a part of an elevated pressure on our working capital given that some of the earlier molecules themselves have not scaled up enough from our multipurpose plants to garner volumes so that they can have plant of their own, where the volumes could be significantly higher. So just to understand from the product addition perspective, how would you look at the organic chemicals business going for us individually from the new products that you are adding and from the ones that you were doing business for some of our customers earlier?

[Harin Kanani, executive]

So Mr. Joshi, the dynamics of any new product is that while they are getting scaled up, there will be lower volumes and then eventually, they will increase. But the main point, the improvement which we are expecting from FY '24 onwards, is saying that on an average, Neogen's average molecules are like of a larger size, so there are less changeovers as well as going forward from FY '24 onwards, we'll have more molecules, which are on the dedicated as compared to what we had earlier, which is what should give us the improvement. So whether it is a pharma new molecules versus, let's say, a non-pharma new molecule the dynamics remain more or less similar. But yes, overall, Neogen's average, like average molecule size will increase or more number of molecules will be dedicated, which we are hoping will start from FY '24 once all our new molecules start stabilizing. And then FY '24 onwards, we can start seeing benefits of that.

[Archit Joshi, analyst]

Sir, just one clarification, something that I couldn't understand from one of the comments that you made earlier. We buy around 60%, 70% of India's total imported volumes of lithium carbonate. I'm sorry if I heard that wrong, but just something that I was curious to know was, is it more economical or makes more sense -- makes more viable sense to import lithium carbonate directly? Or is there any way where the crude lithium can be brought in India and then it can be persistent to lithium carbonate by converter. Is that also an option or it's just easy enough to buy the lithium carbonate from...

[Harin Kanani, executive]

So even at that high percentage of imports, we are importing like, let's say, between 500 to 1,000 metric tons of the lithium carbonate hydroxide kind of molecules, whereas internationally, the plant which does this conversion from crude from the mine are usually of the capacity of 20,000 tonnes. So it would not make sense for us because the scale difference will be so huge. And also most of the companies like -- countries like Chile and Argentina, say you can only ship finished products. So they don't want them to become just a mining place where things are mined, crude is sent out. Australia still has that option where they just sent concentrated ore, let's say, to China and China processes that. Or maybe in future U.S. will also do that. But in India, like maybe once the battery volumes pick up really large, like maybe by 2026, '27. By that time, it will make sense. But today's India's demand, it wouldn't make sense to set up a processing plant for the immediate need. For the future, you can consider.

[Operator]

[Operator Instructions] The next question is from the line of Mihir Damania from Ambit Asset Management.

[Unknown Analyst]

So I have just one question. So you have revenue EBITDA targets for FY '23 and FY '24. Do you also have cash flow from operations target for the company? So is it on an EBITDA of around INR 100 crores for FY '23 and INR 130 crores of FY '24. Where do you see Neogen generating cash flow from operations, what is the broad-based amount or any internal targets you have for -- be able to do EBITDA conversion?

[Harin Kanani, executive]

Yes. So I think, I mentioned the cash flow targets in terms of net working capital limits that we want to have. So for FY '23, as I mentioned, the target is to be between 120 to 130 days of net sales. And let's say, to improve this more closer to 110 by FY '22. I have not done the math, but I think we can do the math and see what it translates into operating margins based on the numbers which I just mentioned.

[Unknown Analyst]

And actually on a long-term basis, let's say 5 years out, where do you see the networking capital? Do you see any material improvement to the 110 days number for FY '24, which you mentioned? Or do you see that just because of the more structured back, it will be very difficult to get incremental benefit out from 110 days.

[Harin Kanani, executive]

So I think my understanding or let's say, wish list whenever we have discussed 5 years down or what -- where we should ultimately be in the most efficient sense. But again, it requires a lot of changes in business models, where we deal with the customers, et cetera. I would say maybe between 90 to 100. But like with a lot of dependency on imports with so many multi-products and like having molecules which are very long, sometimes processes, like I see very difficult going below 90 days.

[Operator]

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

[Dhavan Shah, analyst]

I have a question on the organic chemical side? So given that you mentioned that in Q3 con call that the phase 1 and phase 2, both will be optimum utilized maybe by September '22. So given that the -- if I look at the last 3 quarters run rate, it is around INR 100-odd crores. And I think we did somewhat INR 60 crores plus INR 55 crores of the INR 115 crores CapEx for both phase 1, phase 2 and if we [ calculate ] should be roughly INR 250-odd crores. So the -- including this phase 1, phase 2 organic chemicals should reach to roughly INR 500-odd crores, which itself gives you INR 120 crores, INR 130 crores quarterly run rate. So my question is on that front. I mean, by when do you foresee that this organic chemical run rate can inch up to around INR 120 crores to INR 130-odd crores.

[Harin Kanani, executive]

So let's say, by Q3, Q4, we should be there. That's the only way we can achieve our next year target -- because next year, we have to almost run at that full utilization levels throughout to be able to reach that INR 700 crores, INR 725 crores.

[Dhavan Shah, analyst]

And you mentioned that because of some seasonal factor and some higher inventories for a particular one molecule, there was some lower revenue. So can you give some numbers? I mean, how much revenue is contributed by that particular molecule in the organic chemicals front? And what do you foresee maybe 2, 3 quarters down the line? I mean, is there a major concern in terms of the organic chemical growth or not?

[Harin Kanani, executive]

So in pharma, basically, this molecule is going down for a while happens many a times. This time, it's been a bit longer. And what happens is when we see that if this is going to be a more permanent trend. So our current reading of this is that this is just an inventory buildup. So once we know and we have a better clarity on that, we start planning some other molecules in that place. So we already have plans around that. So it will not be a concern. So we have a plan B that, okay, if this continues and if there is no correction, then by Q3 or Q4, there will be some other molecules which will start replacing that.

[Dhavan Shah, analyst]

And my second question is on -- given that this INR 150-odd crores this new CapEx at Dahej will be completed by next year around June '23. So after this CapEx, how much excess land will be available at Dahej? And we -- when we acquired the Baroda plant, I think we were having some approvals in place for a few of the molecules. So what are the plans at the Baroda plant?

[Harin Kanani, executive]

So I think our right now, so I think Dahej we will still have space for 2 MPPs, at least. So 2 MPPs meaning, let's say, a revenue of additional around INR 500 crores -- like let's say, around INR 500 crores, INR 750 crores depending on like the product mix, et cetera, is something that we can still get out of Dahej site. And in addition to that, yes, Dahej in Karakhadi, the idea is that right now, since we have SEZ and benefits, which is like for the 10-year period and many of the demand which we are having is related to deemed export or export region. So therefore, our focus of the investment will be in Baroda in Dahej. When we have the domestic business, that will be -- basically will be focusing on using the Baroda lab.

[Dhavan Shah, analyst]

And the last one is on the other expenditure. So we have seen some higher cost during this.

[Operator]

I would request you to rejoin the queue.

[Dhavan Shah, analyst]

Sure.

[Operator]

The next question is from the line of [indiscernible] from White Oak Capital.

[Unknown Analyst]

Just on this the electrolyte salt, lithium salt, nitrite and retail. I just want to understand this 250 metric ton is operational by FY '23. This relates to the salt capacity or the electrolyte capacity? Or is it a combination? Can you just explain that and the balance 400 metric ton, which you said, can you just explain the capacity that you've put up? And how much have you spent on this capacity?

[Harin Kanani, executive]

Sure. So I think the 250 metric tons per annum was basically the electrolyte. So the formulation plant, which we are going to make. This was a pilot facility, which we want to do with which we can start supplying to our customers. We have even a smaller facility, which can like produce a couple of metric ton. I mean, per -- let's say, less than 5 to 10 metric tons per annum. So that has already been made operational. And from that, we have started giving samples to our customers. And what we are targeting that by FY '23, that 250 metric ton will happen. So that will be more like an industrial scale to give like our customers, the higher confidence and also the intention is to -- for us also to experience that, okay, what we made at a 5-liter 10-liter scale, how does it get made at a 1,000-liter scale. So that's the main idea behind that 250 metric tons per annum, more like a trial plan for us.

[Unknown Analyst]

So in that, you are making the salt LiPF6, you're buying the solvent and you're making the electrolyte?

[Harin Kanani, executive]

So when we said that 250 metric ton per annum is the electrolyte, the formulation capacity, okay? The 400 metric tons per annum, which we have mentioned is where we are going to make the salt, which can be like LiF, LIPF6, LiFSi or other salt additives, which we are planning to make there. So that is a salt additive capacity. So generally, like about 400 metric tons, I mean, again, will be -- so this is where the salt will be made, and that is -- that can support a much larger electrolyte production as well.

[Unknown Analyst]

8x, right? So its ratio is 1:8 something like that, right? So you're making 400 tonnes of salt then you can make like 3,200 tonnes of...

[Harin Kanani, executive]

It depends on each customer's formulation, okay? And part of it is also intermediate. So I would not like to put exactly how much it will support electrolyte. But this is basically salt and our intention here is to basically also use this to explore international market for this because as we stated in our previous calls, international market exists for Neogen for the salts because this is a market which is already existing and the current electrolyte producer, or let's say, even the salt producers would like Neogen to support with some lithium salt, the basic lithium salt or LiPF6 or other such electrolyte salts. So that is what we are targeting with this. And yes, initial requirement of India also, we can -- like internally, we can support. But the main purpose of this is to test the international market and be ready for the initial India demand. And again, like the same logic as the 250 metric tons per annum. There's the facility so that when we are setting up a much bigger facility, we are more confident on the design, and we can further optimize it based on the experience we have.

[Unknown Analyst]

What I really wanted to understand was the vertical integration. So I just -- my understanding, and correct me if this is wrong, is that the edge is really making the salt, which is LiPF6. In order to make LiPF6, how backward integrated are we like the PS5 gas, are we going to make that also or like just trying to understand the level of vertical integration because when you say we made the electrolyte. But my understanding is the edge is in making the salt because solvent we will probably buy from outside. And in making the salt, let's say, right now is LiPF6, there could be other salts later on. In that LiPF6, how vertically integrated would we be?

[Harin Kanani, executive]

So we will be only importing lithium carbonate, which comes out of mine. And then the remaining chemistry will be done by me.

[Unknown Analyst]

And solvent we'll be buying from outside. This is current understanding, or you'll be making the electrolyte?

[Harin Kanani, executive]

Yes. Solvent and non-lithium additives also we may buy it from outside. So there are some additives which are lithium-based additives and there are some non-lithium based additives. So these additives we will buy from outside, but the sold will be made in house. And that salt can be sold outside also or it can be used for internally to make their own electrolyte also.

[Unknown Analyst]

Second question, sir, is that this market is -- LiPF6 finding they are very cyclical. They were $10 a kg, then they went up to $40, $60, they corrected again, is my understanding. And market seems to be, if you look at the other players, which seems to be heavily oversupplied in terms of capacity that has been coming up. So like what is the confidence that LIPF-6 will not be oversupplied and will make reasonable spreads?

[Harin Kanani, executive]

So it was oversupplied for a while. And today, if you ask, most of the people think it is undersupplied. And one of the indications for us also was that when the lithium prices corrected or changed, LiPF6 corrected much higher than what the lithium prices corrected. This is based on our understanding, okay? The second thing is non-Chinese LiPF6 is definitely under supply because 90%, 95% of LiPF6 is produced in China and for various reasons, I mean, in India, partly it is driven by the PLI scheme. But let's say, where it's not driven by PLI schemes also countries are very like worried that dependency, which they have it on China.

So worldwide, the way the demand is expected to grow. When we look at that number, there's a lot of new capacity, which needs to get added over next 5 to 7 years. And a lot of -- like most of the countries outside China is trying to make sure that, that capacity gets added outside of China. So people are trying in Japan, they are trying in Korea. We are trying in India. And ultimately, what our feeling also is that, let's say, if we are able to make it efficiently, we can partake in the global business, right, and supply lithium salt there. If not, and if we feel Chinese is still very competitive and we are not able to match because the scale is very higher or China, there is overcapacity.

We are quite confident that at least when it comes to India, it will be part of the overall package of our formulation and the lithium LiPF6 contribution into that will be relatively lower. So the knowledge, the comfort, the benefit of local transport, the PLI scheme benefits will basically trump and at least at our electrolyte selling level, we will not have a challenge even if it's like oversupplied in China. So this is our understanding of reading of things. Also, unless you make the LiPF6, I mean, for the electrolyte, you make it from scratch, lithium carbonate starting from lithium carbonate. It will be very difficult to meet the PLI guidelines also. So I think that will also be one of the factors which will support production of LiPF6.

[Operator]

The next question is from the line of Sabyasachi Mukerji from Centrum PMS.

[Sabyasachi Mukerji, analyst]

Firstly, 2 clarifications. The INR 700 crores, INR 725 crores revenue guidance for FY '24 and the INR 1,000 crores revenue guidance by FY '25, '26, does not consider the incremental revenue that will flow from lithium salts and electrolytes, right?

[Harin Kanani, executive]

Yes. So it does consider the lithium salt because it's part of the INR 150 crores CapEx. So we said that the journey from INR 700 crores, INR 725 crores to INR 1,000 crores is based upon the INR 150 crores CapEx which we are doing, and that INR 150 crores CapEx has 3 parts. One is traditional lithium salt. Second is a lithium salt for electrolyte. And third is the organic. So therefore, there is that whatever revenue we get out of that 400 metric tons is part of that INR 1,000 crores. But what it is not part is the bigger electrolyte business, which we are targeting in India. So that is still being discussed and determined. So that is independent of this.

[Sabyasachi Mukerji, analyst]

But this lithium salt CapEx, which is part of that INR 150 crores, that will get completed by June '23, right? So some portion will show in FY '24 as well.

[Harin Kanani, executive]

But would be limited. I mean I'm right now not confident enough to say, okay, it starts in June '23 then how much revenue we will get in that. But yes, we've not yet like revised that contribution of this -- like technically, everything will be ready by June '23, so will contribute to some extent, let's say, higher in FY '24. But so far, we've not accounted exactly how much additional we will get in FY '24.

By FY '24 -- sorry, maybe by Q4 of this year, once we have -- like we are closer to the completion of the time line of the CapEx, and we start committing to our customer based on that capacity. So then we can give a higher response. I mean we can give you more clarification on what will be FY '24 upward guidance we have based on this INR 150 crore investment.

[Sabyasachi Mukerji, analyst]

And by then, by probably Q3 or Q4, when you have a better clarity on the electrolyte CapEx as well, you will be able to probably guide for a much better clarity on the FY '25 or '26 revenue as well, the incremental one.

[Harin Kanani, executive]

Yes. So yes, so that you are right that whatever -- so the electrolyte business, the large electrolyte business in India, see, as per the PLI guidance, the Indian companies have to start in 2024. Now if they are starting -- I mean they have 2 years time and maybe government can give them some extension. But if you think they stick to that, then in 2024, the production of battery cells have to happen. So like we will have to like make the decision by the second half, set up the plant so that the plant -- the bigger plant becomes ready by 2024. So they will start contributing in FY '25 a bit. Most of the customers are also likely going step by step. So their first plant would be, let's say, a 1 gigawatt hour, then they will increase it to 5 or 10, et cetera. So FY '25 will be their initial trials for which we will start supplying but commercial level trials and then FY '26 where the major ramp-up will come from the India electrolyze demand.

[Sabyasachi Mukerji, analyst]

Next question is on the volume growth in Organic and Inorganic. I understand that the absolute EBITDA per tonne you have kind of maintained and due to the high revenue base, the margins look particularly lower. But what has been the volume growth in Organic and Inorganic, if you can just throw some light on that?

[Harin Kanani, executive]

I think in case of Organic -- other than a slight increase in bromine, there is no major price increase-driven factor, which has given us an increase. So what you see basically is like the higher utilization levels, which are allowing. And like I said, we were also able to make a little bit more organic, which we've kept it as an inventory. But because of our customer demand being low, like I mentioned in pharma and Q1 always is a case where Q1, Q2, we generally always build up inventory and Q3, Q4, unless due capacity comes online, we basically pare down that inventory. So it's more that's the trend we've seen. So utilization levels have also improved in terms of volume. And then I think Q3, Q4, you will see like more closer to the INR 100-plus crore of quarterly run rate on the Organic side.

In case of lithium, I think I had like the number which we had was approximately -- I mean, again, if you are comparing with the same quarter, like which was INR 17 crores versus like what we did around this quarter, it was significantly higher because like I said, there was this non-Indian demand also which drove us, which itself contributed to almost 25%. And the Indian demand also was significant. I'm sorry, I don't have the exact number. But I would say like the -- we see the difference between 51%, 58% is the EBITDA or PAT growth and the revenue growth is around 75%. So like there's a difference between that 50% and 75%, which is basically largely coming from the lithium price increase.

[Sabyasachi Mukerji, analyst]

No, right. I mean -- so you have been doing this INR 58 crores for the last 2 quarters...

[Operator]

I am sorry to interrupt, please rejoin queue.

[Sabyasachi Mukerji, analyst]

Just last follow-on on that question.

[Harin Kanani, executive]

So yes, last year, INR 58 crores last quarter, INR 58 crores and this year, INR 58 crores. So between last Q4 and Q1, Q1 volumes were lower because the prices of lithium have increased. So as compared to Q4 of last year, we have done lower volumes. But as compared to Q1 of last year, we have done significantly higher on.

[Operator]

The next question is from the line of Rohit Nagraj from Centrum Broking.

[Rohit Nagraj;Centrum Broking Limited;Analyst, analyst]

My apologies if the question is repetitive. But what is the scenario for bromine in terms of availability and pricing currently?

[Harin Kanani, executive]

I think there is no major change in the bromine availability scenarios. I mean there are seasonal factors that during monsoon season, sometimes the bromine availability goes down in India a little bit. But we always prepare for that, and that's why we also import part of our bromine internationally. But overall, like yes, I mean, if we are talking of 2-year, 3-year trends, less and less bromine is available from China. And India and like Israel and Jordan are basically making up for it. So that trend continues to remain. And no major change from what we have seen in last 1 or 2 years.

[Rohit Nagraj;Centrum Broking Limited;Analyst, analyst]

Second question is any update on the pharma [indiscernible] grams segment that we are targeting, particularly from the Japanese market perspective?

[Harin Kanani, executive]

So CSM business or what we call CSM business, we are targeting both pharma and agro, and as we said recently, we also added some nonpharma, non-agro customers in that also. We continue to -- so we have some traditional pharma CSM business with Europe, which has been going for quite some time. That continues. Similarly, our other CSM business with traditional customers continue and we are ramping up also. As well as every quarter like some molecules move from pilot to first commercial then from first commercial to main commercial. So that trend also continues. So there's no major update on that, except maybe post-COVID, some of the new customers we were targeting from U.S., from Japan, from Europe, were able to visit the site. And they got a better understanding. And now based on that our discussions are going forward, of which new molecules or projects, which Neogen can do.

[Operator]

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments.

[Harin Kanani, executive]

Thank you all the participants for joining the call. I hope we were able to respond to all your questions. If you have any further questions, please feel free to reach out to our Investor Relations team, and we will address them. Thank you once again. Stay safe, and we look forward to connecting with you again in the next quarter.

[Operator]

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