Neogen Chemicals Ltd

NSE:NEOGEN

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, good day and welcome to Neogen chemicals Q2 FY '23 earnings conference call. [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 audio Mr. Solanki.

[Nishid Solanki]

Thank you. Good afternoon, everyone and welcome to Neogen Chemicals' Q2 FY '23 earnings conference call for analysts and investors. Today we are joined by 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 costs from the management team, post which we shall open the forum for question and answer, where the management will be addressing queries of the participants.

Before the commence, I would like to share our standard disclaimer. Certain statements made or discussed on the call today may be forward-looking statements. The actual results may vary from these forward-looking statements. A detailed disclaimer in this regard is available in Neogen Chemicals' Q2 FY '23 earnings presentation, which has been shared earlier.

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

[Harin Kanani, executive]

Thank you, Nishid. Good afternoon, everyone, and welcome to our Q2 FY '23 earnings conference call. I hope everyone is keeping safe and healthy. We have reported our second quarter numbers on Saturday 5th, November 2022, and I hope you had an opportunity to go through them. I will be sharing the key insights and updates on expansion initiatives, while Mr. Ketan Vyas our CFO, will take us through the financial performance for the quarter under review.

We demonstrated healthy overall performance during the first half of the fiscal year 2023, notwithstanding the challenges posed by inflationary trends in key raw materials, elevated utility costs as well as continued volatility in the foreign exchange rates. Our revenue grew by 50%, while EBITDA improved by 35% and post -- profit after tax increased by 13%, respectively.

Recently, we have witnessed some cooling effect in raw materials, barring lithium, which continued its upward trajectory, reaching its highest level; and bromine, which continues to remain steady with moderate increase. However, we were able to pass on this lithium related cost pressures to the customers, thereby protecting the absolute EBITDA. The EBITDA percentage margin considers the impact of higher revenues and higher RM costs with preserved absolute earnings. In H1 FY '23, we reported 19% growth in Organic Chemicals. Growth in Inorganic Chemicals stood at 176%, which was largely driven by realization gains across products. Steady demand momentum with incremental benefits from recently augmented capacity also contributed to the performance.

As planned earlier, we have started shifting our production to high-value customized products that enjoy better demand visibility. These are complex products that require expertise in key chemistry but are value accretive and lead to customer stickiness given the nature of offering. We have further strengthened our R&D team to accommodate such complex products and now have a 60-member dedicated R&D team to take advantage of these upcoming opportunities.

Our expansion plans are progressing well across both lithium and battery chemicals and existing business operations, including CSM management, and we are on track to deliver our stated revenue guidance for the next few years. In line with our CapEx trajectory, we are also ramping up our teams across business development, operations, ESS, among others, to increase the management bandwidth.

We have bolstered our in-house capabilities and process expertise in CSM and Advanced Intermediates segment to accommodate complex products that require multiple steps. We have added 5 customers in last quarter, in Europe and Japan, across agrochemical flavors and fragrance and engineering segment, where projects have moved from pilot to first commercial operation with combined revenue potential of more than INR 200 crores. We are now working with more than 15 customers actively and have started initial working with U.S. and European agrochemical companies to understand their requirements and identify projects, where Neogen facilities and expertise can add value to their requirements.

Our own fixed advanced intermediates targeted towards pharma and agro end use have completed their pilots and our first commercial brands, which have a revenue potential of around INR 150 crores and will start contributing to our revenue in second half and will allow us to reach peak by FY '25. We have also extended and demonstrated our capabilities of doing organometallic chemistry from carrying out Grignard chemistry to now being able to perform organolithium chemistry at commercial scale, further extending the commercialized technologies in our toolbox available for our domestic and global clients.

On lithium battery material front, we continue to work with future lithium cell producers in India to test our electrolyte samples internally or with their global partners and discussions around long-term contracts and with several of them have been initiated and in progress. In addition, we have received positive feedback from global customers for lithium electrolyte salts and additives and sample testing and approval processes has been initiated by these customers. We have also seen keen interest from several global technology providers to partner or share technology with Neogen and we continue to evaluate these options.

I will now share some of the updates on expansion initiative announced till now. Based on time lines from the customers, we have prioritized our lithium electrolyte salts and additives manufacturing setup in Dahej SEZ. We expect commissioning to start by Q4 and trial production to start by Q1 next year. The electrolyte pilot facility will, in parallel, continue a smaller capacity for electrolyte trial needed for our customers' immediate demand has already been installed and can support hundreds of kg requirements from trials to our customers.

In the existing business, work on increasing capacity for existing lithium business has been initiated and new streamline facility will be ready by Q4 of this year. So additional capacity will be available for the next financial year. Work on increasing Organic Chemical production capacity also continues and expect to be completed by Q1 or maximum Q2 of next financial year. We have been in active discussions with key customers in lithium battery materials and have received positive response from them. Larger CapEx plans will depend on how the final discussions progress for the lithium-ion battery material space and will accordingly be announced towards the second half of the current fiscal year. Overall, this plant expansion will put us on a strong growth footing within the chosen areas of our expertise and help us leverage the positive demand opportunity in the Indian chemical landscape.

Our FY '24 revenue guidance stands at INR 700 crores to INR 725 crores, as was stated earlier, while by FY '25 FY '26, we will add another INR 250 crores to INR 300 crores at full utilization levels.

All these estimates are based on stable lithium prices and any large CapEx that we do in lithium and battery materials will be in addition to that. Our inventory stood higher as of September 2022 due to change in product business mix and planned customer supply schedule for the forthcoming quarters. This will improve as new capacity gets added as well as some of these inventories are liquidated and converted into sales in the second half of this year where we see additional demand.

Looking ahead, I'm enthused with the abundant opportunities that are emerging for India and Neogen, more specifically, driven by greater focus from the global business. This, along with gains from our planned upcoming projects will steer the momentum for the next few years. We will maintain financial discipline while accelerating our performance traction through prudent capital allocation.

That ends my opening thoughts. I would now request our CFO, Mr. Ketan Vyas, to share the financial highlights for the period under review. Over to you, Ketan.

[Ketan Vyas, executive]

Thank you, Dr. Harin. Good afternoon, everyone, and welcome to our Q2 FY '20 earnings call. I will now take you through the key financial highlights. Please note that these are on stand-alone basis and are raised on year-on-year comparison.

During the half year ended FY '23, revenue increased 50% to INR 296 crores as compared to INR 197.8 crores in H1 FY '22. We witnessed global demand momentum and saw gains from augmented capacities as compared to the same period of last year. We have been refreshing our product mix to offer products that bring you a better demand, thereby driving higher value. We saw 35% increase in EBITDA, which came in at INR 48.9 crores. This was all delivered despite continued inflation-related cost pressure in the prices of raw materials and key utilities, further aggravated by foreign exchange fluctuations, favorable product mix as well as higher utilization levels at various plant level fueled by [indiscernible].

Moving to PAT performance, it increased by 13% at INR 21 crores in H1 FY '23. The performance was in line given the impact of higher depreciation and finance costs, due to new plant addition and increase in the interest rate.

Now let me take you through the quarterly numbers. Revenue in Q2 FY '23 increased by 31% to INR 148.1 crores. EBITDA was higher by 18% to INR 24.3 crores and adds to that INR 48.9 crores.

I will also share the revenues based on segment wise and geography wise. Organic Chemicals saw growth of 9% year-on-year, at INR 91 crores in Q2 FY '23, Inorganic Chemicals jumped 122% from INR 22 crores in Q2 FY '22 to INR 49 crores in Q2 FY '23. Domestic and export mix for Q2 FY '23 to both 50%. So that these were the key financial highlights.

I will now request the moderator to open the floor for Q&A session. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Ranvir Singh from Edelweiss Wealth.

[Ranvir Singh;Edelweiss Wealth, analyst]

Sir, just on growth side, what has been the volume growth during the quarter in Organic Chemical segment?

[Harin Kanani, executive]

Yes. So in our existing quarter, I think in both -- for both the segments, there is a volume growth as compared to the previous year Q2. In case of Organic, there is a volume growth in case -- as compared to even Q1 of the current financial year, our Organic revenue was also almost up by 10% as compared to the INR 10 crores as compared to previous quarter. In case of Inorganic, we reached the highest lithium prices in the current quarter. So the peak lithium price impact was in the current quarter based on which there were some customers whose volumes were a bit down. And like there was a resistance to accept this high lithium prices.

Also, some of them knew that the peak is coming. So in Q1, they had like prebooked the material and were working of inventory. So therefore, in terms of volume as compared to last year Q2, there was a growth. But as compared to Q1 of the current financial year, there was a slight decrease in the volumes. However, like most of the customers have now accepted the new price. And we feel also lithium prices have now stabilized. So earlier, the expectation was that maybe this high price is not sustainable and prices will be crash.

But the high prices are more or less sustaining after about 10% kind of a correction. So now more and more customers are like open towards accepting this price. And of course, there are a few customers who are just not able to afford the high lithium prices. But as I mentioned in my earlier calls, we are adding more international customers to basically make up for the little bit lesser volumes in the whole year. So overall, what we were expecting that in the current financial year, like on a stable lithium price about INR 100 crores plus kind of revenue from lithium. So that we are on track to achieve. And also like our new capacity for lithium will also come online so that next year, we can end up doing better.

[Ranvir Singh;Edelweiss Wealth, analyst]

Sir, precisely, can you quantify what is on the average realization in Organic Chemicals segment and Inorganic separately?

[Harin Kanani, executive]

So in case of Organic and Inorganic, the biggest challenge is that the product mix has changed significantly. So because of the product -- I mean it keeps changing almost every year. So it's very difficult to say so much quantity is more or so much quantity is less, right? So that's why it becomes difficult for us to say, okay, in terms of tonnage, what has happened. But like qualitatively, what we can say is that, yes, like if you just look at trade difference, how much did it contribute to, okay? And when you look at from that point of view, you can say that there is an increase or there is a decrease. So this is what I shared with you.

[Ranvir Singh;Edelweiss Wealth, analyst]

Now, because if you just take the total revenue and divide it by the volume, which I assume on that particular capacity utilization basis the average per liter price coming exorbitantly high during this quarter. So just I wanted to connect the dots that I'm calculating right or wrong. So in terms of capacity utilization, can you indicate something that of the total 407,000 liters total capacity we have? So what has been the sold volumes during this quarter?

[Harin Kanani, executive]

Okay. So like Mahape and Karakhadi continue to work at around 80% utilization levels. And the Dahej side was at around 60% utilization levels. But again, 70% is also not fully optimized yet because some of the new molecules were getting launched. And again, some of the materials, which was made but was not sold yet. So this is the utilization levels of site. Some of them, like the profit will be generated when we make the final sale of the material or the revenue will be generated when we do the fee. But if you were talking of utilization level, like again, Mahape and Karakhadi are around 80%, 85% and Dahej is around 60%, 65% for this.

[Ranvir Singh;Edelweiss Wealth, analyst]

And secondly, on INR 250 crores additional revenue, you indicated in FY '25. So that will come from Inorganic side or Organic side or this is solely related to that new CapEx we are going up in that INR 250 crores CapEx we are doing in lithium side.

[Harin Kanani, executive]

You mean that INR 250 crores additional revenue from around INR 150 crores CapEx, which we are currently doing, right?

[Ranvir Singh;Edelweiss Wealth, analyst]

Yes. You indicated in commentary that in FY '24 guidance of INR 700 crores and INR 725 crores and further in FY '25, that INR 250 crores additional revenue may come. So that INR 250 crores revenue or INR 250 crores revenue is related to that Inorganic side, I mean that lithium side where the expansion is currently going on, or there is contribution from Organic side also.

[Harin Kanani, executive]

Yes. So there are 3 contributing factors for the additional INR 250 crores to INR 300 crores revenue, which are coming. One is the additional lithium capacity, which we are adding, which will be somewhere around, let's say, INR 50 crores kind of revenue. The second is we are adding 600 kl of additional reactor volume. So that will be a second contributing factor. And the third one will be the lithium and battery material salts, which we are doing. So the together, 3 of them are likely to contribute between INR 250 crores to INR 300 crores of revenue. And this we have targeted for FY '25 and FY '26. So like once we are in FY '24, we'll have an exact clear guidance, how much in FY '25, but somewhere between FY '25 and '26, we can reach the full utilization.

[Operator]

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

[Archit Joshi, analyst]

Sir, just needed some clarification that I am a little confused of from reading from the presentation, we have mentioned that 50 MT of capacity will be operational in FY '23. And the 400 MTs line, which also be available for additional capacity going ahead. Sir, so if you can just share the timeline of how these capacities will be commissioned? And also, since you mentioned that some bit of revenues will be derived from the new electrolyte plant of -- that we are expecting to commission by the end of FY '23. So if you can also share the quantum in the beginning, how much we can expect and going ahead, what could be the size of this once 400 metric tons of plant is operational and available for us?

[Harin Kanani, executive]

Sure. So as I just said in my opening remarks, we have given priority to the 400 metric ton plant for the salts, the lithium salts and additive products. Because we see that the demand from the customers is present today. So most of the -- because this is basically targeted at lithium salts derivative requirement. And the electrolyzed requirement is going a bit slower on our Indian customer side. So we are giving priority to the lithium salt derivatives -- lithium salt for battery materials electrolyte, which is targeted for the international material. Also, once this is available. So when we start our electrolyte plant, we have an ability to use our own lithium salt.

So we don't have to depend on external sources. So because of this, we prioritize that first. So as I explained in my opening remarks, we are expecting that in Q4 of this year, we will start the commissioning of the plant. So like final installation of all the equipment, not -- I mean installation and there is the initial trial. And by Q1 next year, we are targeting that trial production can start. This is for the 400 metric ton lithium salt derivative plant. And for the electrolyte, we are working in parallel, and we expect that it should be ready by Q1 or Q2 of next year. So sorry, if it still FY '23 in the investor presentation, we need to correct that, but it will be ready a little bit later in Q1 or Q2 of FY '24.

And in terms of the revenue from the 400 metric ton plant, again, that is part of the INR 250 crores to INR 300 crores additional revenue which we have projected. It should be -- like at peak utilization, it will be somewhere close to around INR 100-odd crores. Again, it will depend also on the final product mix, what -- how it gets sold, but this is approximately the idea. So out of that INR 250 crores, about INR 50-odd crores will come from traditional lithium, about INR 100-odd crores will come from like our additional organo organic capacity, which we are adding and around INR 100-odd crores will come from this lithium salt derivatives unit, again, on full utilization. Now I think lithium salts and organic derivatives and like -- might get done sooner. But because of the new -- like we want to first wait for approvals, et cetera, to give a guidance that by FY '25 or FY '26 by when we can fully utilize this.

[Archit Joshi, analyst]

Sir, just one follow-up on this. Since you mentioned that there is a fair bit of visibility more on the salts front, which is the electrolyte salts than that of electrolytes, which is a -- we are focusing at this point in time. Sir, is there -- shouldn't it be in my understanding shouldn't it be the other way around that someone would be looking for a more packaged material, which comes in the form of an electrolyte per se than buying the salts because electrolytes can be readily installed in a battery. So is there something that we are missing? Or is there an insight that you'd like to share us to why there is more demand for salt than that of the final product yourself?

[Harin Kanani, executive]

Okay. So I'm glad you asked this question, so I could clarify. Yes. So in terms of overall interest, especially when it comes to India, the interest remains electrolyte, okay? And electrolyte, as you rightly said, customers would like to buy electrolyte. And when it comes to India, our focus is also to sell the electrolyte only. However, this electrolyte and Indian demand is likely to start somewhere in 2024, okay? So there's still a lot of time. But in terms of the lithium salts, the international customers are currently who are making electrolyte or who are making other electrolytes. For them, the requirement is today because it is being consumed even today. So from that point of view, what I wanted to say was that there are customers who are ready to test the sample.

And let's say, if my plant starts in the month of April or May, they can start buying. Whereas for electrolyte, the customers are still taking time for the -- I mean, the Indian customers are still taking time to basically start consuming the electrolyte. They want right now only very small quantity, which, as I mentioned, we have a small setup, which can do 200 kgs per month, and that requirement can be met with my small plant. So in terms of timing, like we tell that the electrolyte salt is needed first and electrolyte plant can be slightly delayed, still it would be open.

[Operator]

[Operator Instructions] The next question is from the line of Ankur Periwal from Axis Capital.

[Ankur Periwal, analyst]

Just continuing with the earlier question. So lithium salt initially will be addressing the international market and given that Indian demand is expected to start picking up from here only for probably this will be shifted back to India? Or there could be another round of CapEx wherein you can expand the lithium salt capacity as well so that the international market and the domestic market both could be addressed.

[Harin Kanani, executive]

Yes. So you know what we are basically planning to do is that right now, with this trial plan of 250, 400 tonnes, the 400 metric ton of salts which we made, we will supply this to the international customers. And in parallel, we are also working out that what is the amount of CapEx, I mean, what is the size of the electrolyte plant for India. See, as I've said in my in my earlier calls, electrolyte is mostly a local business. So in India, we have an advantage because we are locally situated and our target is to solve the electrolyte market within India. And internationally, we want to do lithium salt. So the other idea of preforming the salt is that once I have sold the salt and I know what is the international interest.

So when I'm planning my India electrolyte and electrolyte salt demand, if I have a feedback also of the international demand, accordingly, I can go for a larger capacity for the salt, which will take care of India as well as the international demand and electrolyte, which will be mainly for the India demand. So that's how we see it happening. So if we can get this done quickly, we can do our planning more efficiently, go for a bigger capacity for the salt, both for India, considering both India and the international demand and the electrolyte plant capacity we will plan based on what is the India demand.

[Ankur Periwal, analyst]

And just a clarification, this salt will be based on our own technology, right?

[Harin Kanani, executive]

Yes. I mean the technology which we have -- so we have our own technology, and we also keep talking to international customers, I mean, international technology providers or people who have technology to see if there is an interest in partnering with Neogen. Because what it does is that if there are companies or if we have people who have technologies, which basically which have a proven track record, having supplied to, let's say, cell manufacturers globally. So then this gives even further -- it gives us even further credibility to Neogen. So we keep exploring both the options. Our own -- we are working based on our own technology, but there are also international companies which have a interest, which are working with us.

[Ankur Periwal, analyst]

Secondly, in your initial remarks, you did mention a new client addition as well as the inquiries that have been rising across Europe and Japan. If you can probably touch or maybe put some more light there? What sort of inquiries these are more short-term sort of a requirement for structure, longer-term contracts that you're working on?

[Harin Kanani, executive]

So these are, again, mostly with innovator or like innovator kind of like basically it is global leaders in their areas in Europe and in Japan. And as I mentioned -- so yes, and these will be long-term requirements. However, each one like the size of each molecule is, let's say, between INR 15 crores to INR 50 crores kind of a demand. So I don't know whether we'll get into ultimately a long-term supply contract. But yes, it will be definitely long term. And it will be long-term demand because mostly, we are working with global leaders in their particular areas or who have a global strong position in their final molecules. So yes, and like especially in flavor and fragrance, it's mostly euro. And in agrochemicals, it's mostly Japan, and some in Europe. And like we have just started working with the bigger agrochemical companies. As we have said, once we have a Dahej site ready, we have started approaching them, and we have seen good response during our initial presentations. So now we are identifying potential projects on which we can work together.

[Ankur Periwal, analyst]

Just one -- another question on the margin front. The gross margin pressure that we had seen some bit of it earlier, and there is an improvement in this quarter. Would it be fair to say that most of the benefit is already there or probably there could be further improvement there?

[Harin Kanani, executive]

You mean in the gross margins?

[Ankur Periwal, analyst]

On the margin front, yes.

[Harin Kanani, executive]

Yes. So overall margins right now, I think the biggest impact is like when you look at the percentage margin, this is a higher lithium prices. So what I can see is that the worst we have now seen. At least, now we feel that the lithium prices reached its peak and what we are is now at a new stable price, at least for next 1 or 2 years, it may eventually decrease a bit. But for now, I think, at least for the next 1 or 2 years, the price should remain more or less close to where it is. So slowly, my customers are also accepting this. I'm very happy to say that our team worked really well with right procurement at the right time and getting into back to back contract, where we ensured that in spite of a historical 4x, 5x increase in lithium prices.

Still, we were able to pass on all the lithium prices to our customers and basically protecting our absolute EBITDA margins -- absolute EBITDA margin. So like overall, in this year, we had targeted a INR 600 crores revenue with around 18%, 18.5% EBITDA, which is around INR 100 crores, INR 110 crores. So in the first 6 months, we've already done INR 300 crores, and we have done EBITDA close to around INR 49 crores, INR 50 crores. So we are on track to basically achieve like our target in this year. Overall, the way we look at it, our final revenue will be somewhere between, let's say, INR 650 crores to INR 700 crores, depending on how lithium behaves in the remaining 6 months.

So we'll be somewhere between INR 650 crores to INR 700 crores, and the EBITDA should be closer to INR 100 crores, INR 110 crores what we had targeted. So I think more or less, yes, there is a very strong lithium price, which we passed on to our customers. And like whatever was absolute EBITDA that we are protecting. And then as lithium prices stabilized with our new customers and lithium coming in, we will try to work that even with a higher lithium price, how our EBITDA margins or the percentage margins also can improve going forward in the future days.

[Operator]

The next question is from the line of Mihir Damania from Ambit Asset Management.

[Mihir Damania, analyst]

I have one question. So my first question is we've seen elevated levels of working capital, which has resulted in almost INR 93 crores of negative cash flow from operation in the first half. How do we see it panning out for the second half and maybe going for FY '24?

[Harin Kanani, executive]

So I think in second half, our working capital cycle will improve and what we are -- because we are basically ramping up from, let's say, INR 80 crores to INR 150 crores plus kind of revenue. As I mentioned earlier, we will end the year with a top line of somewhere between INR 650 crores to INR 700 crores. So ultimately, with the elevated lithium price, we are talking of revenues in the range of INR 175 crores to INR 200 crores, INR 225 crores kind of a revenue target that we need to reach. So when we are doing this ramp-up, there is some like addition to working capital requirements as debtors as well as our stock levels have to basically increase to support this business levels.

However, in this particular quarter or like last 6 months, it was a bit higher because we are ramping up, and we are preparing for some of the molecules. So we make the molecules, we keep it. So this was one reason. And second reason was that some of our pharma molecules, we see like abnormally low demand as compared to what we had seen. So like, we basically -- these were our regular products which we are making for many years.

The demand was a bit lower. So like we still continued our production. We have some inventory. Now this inventory will be sold off because like the demand is now improving. And we've now planned our production in such a way that, okay, since we have this inventory, there are other molecules which are in the pipeline. So use the facility for meeting that and again, control our inventory. So I think in the second half, like by end of March, we will see like improvement in our inventory levels. They should be lower than what they are today.

And also, overall, it will be better, like the 6 months from a working capital point of view, as opposed to the 6 months now. Also, as we get into FY '24, as I stated earlier, like our goal is to first reach around 110, 120 days of like no stock inventory levels, on a net sales basis by FY '24. And then going forward, once the new molecules, which are more dedicated -- coming from more dedicated facility to improve it gradually as we get into FY '25 and FY '26. So I think we continue to maintain that.

[Mihir Damania, analyst]

Just another question I have, which, how are we looking to fund additional CapEx requirements, which will be announced in H2 of this year?

[Harin Kanani, executive]

So first, we need to figure out what is the total -- what is the total CapEx requirement going to be. Based on whatever we had estimated earlier, if we are going for the same capacity, then we already had some debt, some equity portion, which is raised. And then the remaining, we will -- we were basically planning to fund using debt, as well as our internal accruals. Of course, if the demand exceeds what we have currently planned, then we'll have to relook at it. But currently, the plan is a mix of equity, which we've already raised. Our own internal accruals as well as the additional debt, which we'll be taking so that our debt equity ratio will still remain around 1:1, maximum 1.25 for a short period of time. But otherwise, it stays below 1:1 is what we are targeting.

[Operator]

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

[Sabyasachi Mukerji, analyst]

Just continuing on the last participant's question on funding the next CapEx. So if I look at your balance sheet and cash flow, so cash has almost been consumed. We are sitting at almost, I think, almost INR 250 crores of net debt. And given the huge increase in inventory, cash flow from operations has also been negative. So what kind of -- are we looking at fundraising plan as well apart from taking on debt?

[Harin Kanani, executive]

So we feel that, again, so there's like a certain level of investment can still be managed with our own funds that we have. I mean, as I mentioned, the working capital will also improve. And while we have not yet fully even utilized our working capital facilities. So we still have a room available there. So we feel that like up to a reasonable amount of investment when we are making, we should be able to -- like we should be able to raise our own funds just with debt as well as company's own operations. But again, the final decision we can take once we have the exact size of the electrolyte business and the lithium salt additives, which will come with that finalized.

[Sabyasachi Mukerji, analyst]

So the next CapEx division will entail one, the electrolyte CapEx? And if at all, we need a larger salt and additive capacity, right, both the CapEx decision will be taken?

[Harin Kanani, executive]

Yes, it will definitely need -- yes, it will definitely lead the salt capacity, but whether the salt capacity will be only to the tune of what is required for our own consumption or also to take care of international. So that's the decision which we still need to make.

[Sabyasachi Mukerji, analyst]

And you will take this decision, hopefully, by next earnings call that you will be hosting?

[Harin Kanani, executive]

So again, there are 2 -- the thing which is pending is, once we have the final confirmations from our customers. So most of my customers are right now just about to finalize their final equipment purchase contracts. Some of them are finalizing their technology provider partners. So once like we get the final clarification, so our expectation is that by March, like before March, we should get a maximum clarity from them. So in the second half, we should get a clarity from them. And based on that, any time between, let's say, now and March, we should be deciding on the CapEx. So whether it will be before the earnings call or just after I don't know. It depends on how the customers finalize.

[Sabyasachi Mukerji, analyst]

Second question, if I look at other players in terms of competition, in electrolyte CapEx. I see many players setting up their electrolyte CapEx, Gujarat Ferro is one such name. So what is your view on competition, especially in the domestic market?

[Harin Kanani, executive]

So I think, as I said, in international, in my previous calls that, yes, there will be some competition where the customers can say, "Okay, I would like to buy this internationally, even though there are some challenges." Or there can be like some international company coming to India and setting up a shop here. But nobody has announced or nobody has even started work on that. Or the product can be domestic competition. So like between all of these, like we will divide the market share. And then based on whatever we have done so far or the work we have done, we will -- like we will get a certain market share of that because the business is big enough where like the final market will be divided in these 3 ways, 3 or 4 ways.

So how much market share Neogen is getting, 25%, 40%, 50%, 60%, will decide the final capacity of the plant that we need to make because how much India is going to make -- there's a good degree of certainty. When they will start meeting, there's a bit uncertain, but what market share Neogen gets is what is going to determine the plant size that we are. So I'm fairly hopeful, with the work we've done, with our track record in lithium that we have. We are expecting a decent market share. But exactly how much it is, I don't know yet. Once I know, I will have my plant size and then the investment.

[Sabyasachi Mukerji, analyst]

And any other chemistry other than lithium ion, we are exploring, like sodium ion or any other chemistry?

[Harin Kanani, executive]

Yes. So sodium ion chemistry follows all the equipments required all the facilities required are very similar to lithium ion. So we -- like right now, our focus is on lithium, but yes, at our R&D stage, we also have started looking at sodium to take care of some of the companies in India who have already announced their plants to work on sodium. But again, our main focus remains on lithium and the same facilities can with some modifications, we also use for sodium [indiscernible].

[Sabyasachi Mukerji, analyst]

Last question from my side, with, on the chemistry process. I hear many companies talking about continuous flow chemistry, moving on to continuous flow chemistry from a batch process kind of a thing. Do you see any merit for our case? And do we intend to move to continuous chemistry?

[Harin Kanani, executive]

So we have an R&D team, which has been working on continuous chemistry for like some time. Like generally, our experience is that molecules, which are like large volumes. So you have maybe 1 or 2 steps, but you have a large volume kind of a requirement. That is where continuous chemistry is more useful. So we do have some bromine derivatives, where we feel that, which are our like normal bromine derivatives, which we've been making for a long period of time, where the volumes are a couple of hundreds of metric tons. So that is where we are currently trying the flow chemistry options. Although like bromine being corrosive, the toolboxes for continuous chemistry remains a bit more challenging for bromine as compared to others, but we are learning that, and we have a team which is working on that. But as of [Technical Difficulty] concrete commercial on which we can plan.

[Operator]

The next question is from the line of Nitin Tiwari from Yes Securities.

[Nitin Tiwari, analyst]

My first question is with respect to the lithium salt business that we are discussing. So one, I just wanted to understand that -- and correct me if I'm wrong, so lithium salts typically would be about 10% to 15% of the basically volume and cost of the electrolyte asset right? So today, like the lithium products that we are manufacturing. So what percentage does lithium form as a percentage of those products. So I'll tell you the motivation behind this question is that today, lithium prices are fairly high, I mean, 4 to 5x increase we have seen, but we have been able to pass on that increase because my sense is that like the percentage of lithium being used as a raw material in the final product is a very small cost proportion and therefore, the cost passed on is therefore easier.

So would that be the case, in case of lithium salts as well? And then secondly, I wanted to understand that what is a perspective around the market for lithium salts currently in India and globally and like what kind of manufacturing facilities do we already have in India? And what's coming up? If you can give us some sense around that?

[Harin Kanani, executive]

Okay. So I think 2 parts of the question, the way I understood is, the first our existing lithium molecules and how much lithium contributes in that. Correct? So in our existing molecules, which we make, the lithium -- now when I say lithium consumption, it's lithium, like globally comes out as lithium carbonate equivalent, as lithium carbonate and all the lithium is measured as lithium carbonate equivalent. So I will also say so in terms of lithium carbonate, we have a product where the lowest side, it would require like 0.15 kg per kg of lithium carbonate. And on the higher side, 1 kg lithium carbonate is needed to make 1 kg of the molecule. So we have the full range.

And like it's irrespective of that we've been able to pass on the increase. The main reason why we could pass on the increase is that yes, there are some customers for whom this price is a challenge. But the fact that we are still able to source lithium at a competitive, as compared to our competitors. Okay? This is what is allowing us to be able to pass on the increase. And like wherever our existing customers are not able to take the increase, we are finding new customers who are interested in like capability because there are many of our competitors who are just not able to get enough lithium.

So the fact that Neogen is able to get this lithium and make these products and has been making for the last 30 years is what is allowing us to basically either with our existing client or with, let's say, finding alternate customers to whom we can sell the product in such a way that we don't have to take a hit because of the lithium price increase, and we are able to pass on the business.

I think your second part of the question, also you wanted to know what are the capacities, which are existing for such kind of existing lithium salt production. So as I've shared in my previous calls, there's a company in Korea, there's a company in Japan. There are 2 companies in China, and there's one company in Europe. So these 4 or 5 companies do similar work as what Neogen is doing. And there are some companies in India, which like bromine, like sometimes lithium also comes off as a byproduct in some other reactions in pharma or like at the end of the life of the machine.

So there are some companies which basically collect this lithium material and then from that, they try to make molecules similar to our existing molecules. However, most of the OEMs don't like to work with them because the quality is uncertain and even the pricing and the demand availability is uncertain because they can only make so much as what they can get from the byproduct or a waste product. So this is when it comes to our existing lithium business.

Now when it comes to, let's say, the electrolyte business, the lithium electrolyte salts, like, as you mentioned, they are between 15% to 25% by weight. But you said weight and value. So by weight, 15% to 25% is correct. But by value, the contribution can be much higher, and that will depend on what is the lithium prices and what are the other raw material prices at that time. If I were to say today, it would be much higher as compared to 15% to 25%, what you are mentioning; the value of the salt, which is present in the final electrolyte in the electrolyte side. So I hope this answers your question.

[Nitin Tiwari, analyst]

It does clarify it to a large extent. What I was trying to understand is that, has the increase in lithium prices anyway impacted the lithium electrolyte salt market has impacted the demand in any way? What is the sense that you're getting on ground in your conversation? If you can help us understand that? And what would be a potential size of the market for the salts specifically in India. So you have only given an indication of maybe the electrolyte market size that you're looking at, given the battery capacity that you've been looking at by 2030. But any sense on the salt market size as well globally and within India.

[Harin Kanani, executive]

Yes. So if you were to basically look at the -- so like let's first say the India demand. First of all, your question that, has the lithium, high lithium prices affected the demand of the electrolyte. So to answer that, the electrolyte salt requirement or electrolyte requirement will be driven largely by EV and to some extent, by the energy storage requirements, which are there. And at least when it comes to EV, it's very clear that the demand and the projection still continues.

I would -- like long term, we would worry or, let's say, sometimes you would worry that like, especially when you are talking globally, almost all the countries, wherever EVs are getting made, there is a waiting between 4 months to 12 months, 14 months, pre-booking is required to get the EV. So I think the demand still remains strong. I have not heard of anybody kind of getting down on the demand on the EV.

So as long as that is remaining and like the desire to move to nonconventional energy, which basically generates the energy storage requirement, also continues. So more and more countries want to move to solar, wind, et cetera, and especially in Europe with what is happening with the existing problems of gas, it's even more like more they want to move to the renewable energy, which requires more energy storage. So therefore, I don't see the demand for lithium and battery is going down.

And hence, the demand worldwide for the electrolytes remain same or similarly, like when we are even talking of India, the projections which we have given for 2030, which was made by IESA, which is what we have used as a basis, continues to remain. I don't see any delay in the plans or the demand kind of going down from where it was. So therefore, the demand which you mentioned of around 150,000 metric ton of electrolyte continues to remain. In terms of electrolyte salt, it will be between 15% to 25%. So you can just multiply that number by 15% to 25%. And you have the range of what is the electrolyte salt, which will be required for India, let's say, by 2000.

[Nitin Tiwari, analyst]

So staying on that topic. So if I understand it right, there are a number of electrolyte salts, which are used in an lithium ion battery. So are we planning to produce any particular salt or there will be a range of salts that we'll be producing assets?

[Harin Kanani, executive]

Yes. So we are planning to ultimately make the range of salts required.

[Nitin Tiwari, analyst]

And lastly, if I may question one more. You, in your presentation, you had indicated that CSM opportunity is also looking very attractive. So if you can just like throw some more light on making the CSM opportunity that's coming our way and how we are looking at that segment evolving over the next couple of quarters?

[Harin Kanani, executive]

Sure. So CSM opportunities, we had like basically 2 targets. First is, once the Dahej site started, our idea was that the CSM should increase from 10% of our revenue to 20%, let's say, by FY '24. So if I looked at the first 6 months, we are already at 15%. So we are moving in that direction. And as I also mentioned in my opening call, now that the Dahej site and the capacity was available, we could go to customer, take POs. And like there are 4 to 5 molecules, which are now moved from pilot to a first commercial production across like 3 different industries agro, as well as flavor and fragrance, as well as specialty chemical application and engineering. So these molecules have now moved again.

And on top of that, so this will allow us that at least by FY '24, we are meeting our target of 20% of INR 750 crores, we are getting by, let's say, the CSM opportunity. In addition, for growth beyond FY '24, we said that you start now once the Dahej site is available, we'll start working with global innovator companies in Europe, which have Europe and U.S., which have a much larger requirement. So we have made our presentations. Many of them have really appreciated about the Dahej site. Some of them have started visiting. Some of them have just made the initial presentation and evaluating based on our chemistry expertise, what is the -- which kind of projects which we can do.

Also, as I mentioned in my opening remarks, we also were working in organometallic we were working with Grignard reagents, which are magnesium based organometallic, whereas now we were able to also make use organolithium molecules, which are even more difficult to handle, and the reactions happen at even lower temperature. So with this increase in our expertise, there's a good interest. And we hope that by the time we work with our existing 15 customers in the CSM space to meet our, like short-term goals, we would have a pipeline of bigger molecules coming in from global majors and hopefully, that will fuel the growth for FY '25, FY '26 and beyond.

[Operator]

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

[Yash Shah, analyst]

Sir, my question was in continuation to the previous participant's question, which was about our competitors in electrolytes and you mentioned that will be splitting market share. What I actually wanted to understand is, as you've mentioned, that we've been pioneers in the lithium chemistry for the last 30 years and our ability to procure lithium sets us apart to our competitors, which are not many in the Indian space at least. So what I really wanted to understand is having such kind of an edge should we not be the market leader? And why would we split the market share with our competitors when it comes to the electrolyte?

[Harin Kanani, executive]

So I said there are 3 things. One is that the customer can say I'm going to buy this directly from someone who's already meeting and supplying it to like battery manufacturers now. So that's one sense of competition. The second sense of competition is some of the global companies coming to India and saying, "Hey, I will set up a shop in India and supply." And these companies also are making electrolyte and selling electrolyte, right, which has not happened. And third is other than Neogen, some other company also like basically setting up electrolyte.

So no, I would be very happy if I have 100% market share, but I know my customers are considering all these options. And maybe each customer, even if they go with Neogen, they might want to keep the second option. They might say, okay, split it between 80, 20 or something like that. So I guess it depends on my customers. But like I would expect that there will be some competition looking at the size of the molecule and size of the market. Of course, how it's going to get split, how much market share I will get, again, my effort will be to try to get maximum market share considering our abilities.

But ultimately, I can say more concretely only as things develop. So like we -- in our internal projection, we have like a minimum case, we have a maximum case. So we have an idea that the capacity will be somewhere between here and in a particular range. But it's better that like once I have more stronger confirmation or some contracts with my customers, where we can like give a more precise number of where the market share will lie.

[Yash Shah, analyst]

Sir, my second question was regarding employee cost and the tax rate. Regarding employee cost, sir, is there any one-off this quarter because it has been at historically highest level, at about 8% of the revenue. And on the tax front, sir, like for H1, the tax rate has been significantly high at about 29%, approximately. I was assuming, sir, that with the Dahej revenues ramping up our tax rate will decrease. So any comments on these 2 factors?

[Harin Kanani, executive]

So I think on the first one, yes, so basically, we have reached our peak employee count already before we have reached our peak turnover from the Dahej and other sites. So as utilization improves like as our revenues because we're not -- like, let's say, we say we have a capacity of INR 750 crores. So that's roughly around INR 175 crores on an average. And with today's lithium prices somewhere around INR 200 crores, INR 225 crores. So as we reach around that kind of number between INR 175 crores to INR 200 crores. As a percentage, you will see that our revenue will come up. So our revenue -- as a percentage, the employee costs will kind of moderate. And yes, this is relatively on the higher side, but I feel it will improve as compared to this, as our utilization levels improve.

On your second question about tax, we've been a bit more conservative so the Dahej operations are still ramping up. So we are kind of projecting on a higher side. But like as we get closer to the year, as you are very right that with the Dahej contributing more, our overall tax rate should improve and it should be like at least 25%, 26% or below. Otherwise, you always have an option to go to a second basin. So this is our expectation. So this has been a provision done up till now based on guidance from our auditors and our internal working, but like it's more conservative and we hope that by the end of the year, it will be closer to 25% or so.

[Operator]

The next question is from the line of Pallavi Deshpande, she is an individual investor.

[Unknown Attendee]

Sir, on the electrolyte salts, just wanted to understand what's the number of customers we are talking to and where they would be located which region.

[Harin Kanani, executive]

Thanks for the question, Ms. Pallavi. So we are talking to maybe 12 -- around 10 to 12 customers in India for electrolytes and about 2 customers internationally for electrolyte. And for electrolyte salts, we are talking to several customers in like Japan, Europe and Korea.

[Unknown Attendee]

And sir, you mentioned -- about my last question. You mentioned about the pharma demand being low on some molecules. So are those large molecules that you are speaking about, and you also said that demand is coming back to normal. So any insight into that part?

[Harin Kanani, executive]

Yes. So I think we've seen that some of the APIs, which are very large volumes, which are used in bulk quantities like which are -- which also the derivatives of that also for Neogen on a higher price. Our highest molecule is also, let's say, about 10%, 15% of our revenue. So these are -- some of these molecules had seen a bit lower demand. I think we are generally seeing pharma either people are saying inventory correction or because people are working from home and less travel, so people have become healthier.

But we are seeing a little bit lower demand on the pharma side for last 2 quarters. We have seen that like my sense is it's more inventory correction, which is happening that during COVID, because pharma was essential, everybody kind of -- like the entire supply chain had like basically built up inventory. And now like people are doing that correction. Historically, we've seen that such corrections come within 1 year's time. We've already seen some improvement in these molecules. So in the existing quarter, there is more interest than in like the molecules where the demand was low as compared to Q2, and Q2 was slightly better than Q1.

So I think that trend is continuing. And hopefully, I feel by next year, the demand should return to normal. Having said that, historically, as Neogen, we are used to such kind of demand like going down for a particular API for various reasons. And that's where the number of molecules that we have kind of come to our help. So we already -- like the regular one, we've kind of made and kept some inventory. And now in current quarter and the next quarter until the demand comes back fully, we have -- we are now using the facility to make some other intermediates. So overall, that will help us increase our Organic revenue.

[Unknown Attendee]

Would you say that this quarter and next -- I mean, maybe the next quarter, we should be -- it should be cleaned up and next -- fourth quarter should be normal?

[Harin Kanani, executive]

Yes. So again, demand, let's hope by at least Q4 or Q1, it becomes normal. You see usually sometimes when these kind of slowdown comes in pharma, inventory correction takes somewhere between 1, 1.5 years. I think you've seen already 6 months of that. So between next 6 to 9 months, things should start -- I mean things will start improving better, but for it to be fully normal, it will take around, let's say, between 6 months to a year from now. But Neogen would like to utilize this facility for other molecules. And from our side, our performance will start improving using other molecules.

[Unknown Attendee]

And the agrochemical demand has been fine on that side. The other chemical molecules?

[Harin Kanani, executive]

Yes. We're not seen any decrease in demand in agrochemicals. Yes. However, one thing which is there across is that we've seen that China -- like with the demand going slow and Chinese having overcapacities, they are becoming more and more aggressive, when it comes to both pharma as well as agro. So sometimes, we have seen prices from China, which are really difficult to believe or like historically low. Sometimes we even believe that this is like a very good case for antidumping because they are basically selling at a very, very low price, which even raw material doesn't make sense.

So this is a business typically of China that, when there is a capacity constraint, they sometimes -- like overcapacity, they go to sometimes very low prices. And there are times when the demand is shortage, they try to maximize the potential. So we've seen a bit of that. But I think more and more customers are aware of these kind of Chinese practices. And they are still sticking. But yes, there's a very strong competition in general from China because of the overall low demand from them.

[Unknown Attendee]

Is the Chinese competition more in the agrochemical than the pharma, would it be fair to say?

[Harin Kanani, executive]

It will be there for both, but like in pharma, it's a little bit more difficult because they need to have a prior approval. So it can be only with the people who have been approved. When it comes to agro, there's a bit more flexibility for customers to change over because there's no registration or U.S. FDA approval or anything like that required. So in a non-regulated, pharma, and agro a little bit, it becomes more easier. And in case of -- in terms of regulated pharma, it's not so much.

[Operator]

As there are no further questions, I now hand the conference over to management for closing comments.

[Harin Kanani, executive]

Thank you all the participants for joining the call. I hope we were able to address your queries. 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]

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