Neogen Chemicals Ltd

NSE:NEOGEN

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Neogen Chemicals Limited's Q2 FY '24 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 over to you, sir.

[Nishid Solanki]

Thank you. Good evening, everyone, and welcome to Neogen Chemicals' Q2 FY '24 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 charts from the management team, post which we shall open the forum for Q&A where the management will be addressing queries of the participants.

Before we commence, I would like to share our standard disclaimer. Certain statements made or discussed on the conference 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 on Neogen Chemicals Q2 FY '24 earnings presentation, which has been shared 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 evening, everyone, and thank you for joining us on Neogen Chemicals Q2 FY '24 Earnings Conference Call.

Firstly, festive greetings to each 1 of you. Wishing you all a very happy Diwali and a prosperous new year. We announced our Q2 FY '24 financial results yesterday and subsequently circulated the results document. I trust you had an opportunity to review them. As always, I will begin by guiding you through the performance highlights, important updates and expansion initiatives. Following this, our CFO, Mr. Ketan Vyas will provide an overview of the financial performance.

I'm delighted to announce that we have sustained a steady performance even in the face of ongoing external challenges that have negatively affected the end user demand. These headwinds relate to persistent inventory reduction, continuous dumping by China, as well as deceleration in several developed markets. Furthermore, the ongoing conflict in the Middle East has had global ramifications resulting in increased price volatility of raw materials linked to crude oil. Although a significant portion of our revenues comes from nondiscretionary segments like agrochemicals and pharmaceuticals which experienced demand challenges, we are partially insulated thanks to the diverse product range and the expansion initiatives, which are already underway.

We have maintained a strong emphasis on value addition and have established long-term arrangements with our customers. While it is still early days, we have begun to see some kind of recovery and anticipate the situation to normalize towards the end of the current financial year. And that said, all our expansion projects are on schedule and advancing as expected.

Let me now give you an overview of our consolidated financial performance for Q2 FY '24. Revenue grew by 9% to INR 161.7 crores, while EBITDA came in at INR 25.9 crores higher by 7%. Profit after tax stood at INR 7.9 crore. Alongside the incremental gains from recent capacity expansion, the performance was bolstered by the contribution from Unichem, improvement in EBITDA was a result of a better product mix and rationalization of key inputs and RM costs.

In Q4 -- Q2 FY '22, we witnessed 24% growth in organic chemical revenue, whereas in inorganic chemicals reported a degrowth of 21%. This was mainly due to historically high lithium prices prevailing during the same period last year, which have now approached a more normalized level. Overall volumes remain unaffected and slightly improved.

I will now share an important update. As you may be aware, we successfully concluded the preferential allotment on November 1, 2023. Through this alltment, we have raised INR 253 crores from esteemed high equity institutional investors. I would like to convey my gratitude for the confidence shown in us and support provided for our future growth initiatives. We propose to utilize the net proceeds to establish a long-term presence in the Battery Materials space while maintaining the growth trajectory in the existing business segment or Specialty bromine Derivatives, Advanced Intermediate and Custom Synthesis and Manufacturing, including our recent acquisition in the organo lithium chemistry space.

In addition to this, we strategically deployed this fund to retire some of the existing debt to create enough leverage and quickly expand based on the evolving market situation.

Let me now give you an and expand -- our expansion plan. Within organic chemicals, we have totally expanded capacity to 463 meters cubed as on date and additional 29-meter cube is likely to be come closer to the end of financial year and year around that. For inorganic chemicals, we have totally installed 39 meter cube as on date, which includes 15 meter cube reactive capacity added until March 2023. And I'm happy to share that this has started contributing to the revenue.

With respect to the battery chemicals, I'm glad to share that trial production has commenced for 1 section of our 400 metric tonnes per annum lithium electrolyte salt and additive capacity. And final checks and tests are underway for the remaining section, which is just before commissioning.

For Electrolyte Salts, we are also now proposing to put 2,000 metric tonnes for the electrolytes. We are now proposing to put a plant of 2,000 metric tonnes instead of 1,000 metric tonne plant earlier and this will be operational by Q4 FY '24. Based on that evolving demand and capacity put up by the ACC cell manufacturer as well as international customers from Japan, Korea, Europe and U.S.A., so we have seen interest across the globe. We also proposed incremental expansion plans for battery chemicals, which are now under consideration. So the Electrolyte Salts capacity, which was -- which will be 1,000 metric tonnes -- will be increased to 1,000 metric tonnes and this will be operational by Q1, Q2 FY '25 and a greenfield expansion of Electrolyte Salts is now increased to 3,000 metric tonnes of Electrolyte Salts.

So the greenfield expansion will be at a new site, which will be dedicated for Battery Materials and new business opportunities. At the new site, we are planning additional 30,000 metric tonne of Electrolyte Salts and 3,000 metric tonnes of electro -- sorry, 30,000 metric tonne of electrolyte capacity and 3,000 metric tonnes of electrolyte salt capacity. So together, the plan is that from our original plan of 10,000 metric tonnes of electrolytes, we are increasing that to 30,000 plus 2,000, so 32,000 metric tonnes. And our earlier plan of electrolyte salts from 2,000 metrics tonnes total, we are increasing to 4,000 metric tonnes. So we are doubling this and the additional greenfield site also should be operational by 2025 calendar year. or Q2, Q3 FY '26.

All of these expansions, so Electrolyte Salts will utilize MUIS manufacturing technology, while the Electrolyte Salts will be based on our own technology.

Let me conclude by saying that we are excited on the next phase of the growth that lies ahead and are well poised to garner a significant share of battery chemicals, given our domain expertise, various initiatives undertaken in the past, which will bolster our offerings, strengthen our market position and relationships with our valued customers. Neogen will continue to leverage its expertise in complex chemistries and R&D to deliver sustained performance and enhance value for all the stakeholders.

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

[Ketan Vyas, executive]

Thank you, Dr. Harin. Good evening, everyone, and welcome to Q2 FY '24 earnings call. I will take you through the key financial highlights. Please note that these are on a consolidated basis and based on year-on-year comparisons.

We reported revenues at INR 161.7 crores, depicting a growth of 9% over last year. Whilst excellence pressures such as inventory destocking, slowdown in key export market and geopolitical uncertainties remain, the company maintained its revenue momentum, as business gains from recent capacity expansion, stable demand for key products and higher contribution from the like.

Organic chemicals revenue growth of 24% at INR 134 crores, whereas inorganic chemicals noted a decline in revenue by 21% at INR 39 crores. As highlighted by Dr. Harin, decline in revenues in organic chemicals was mainly due to historical high prices in the same period in the last year, which has now come closer to normalized levels. Domestic and export mix stood at 69% and 31%, respectively. EBITDA increased by 7% at INR 25.9 crores fueled by enhanced product mix and lower RM and input costs. PAT saw a decline of 20% at INR 7.9 crores. This was due to rise in finance costs and depreciation associated with the ongoing CapEx initiatives.

Our strategic debt repayment from recent funding will lead to a reduction in finance costs in the short term.

That concludes the financial highlights. I will now request the moderator to open the floor for Q&A session.

[Operator]

[Operator Instructions] The first question is from the line of Nayan Vaz from Union Assets.

[Unknown Analyst]

Yes, I just want to clarify a couple of things. So just to get some sense on the electrolyte and the salt business. The customer approvals are expected for salts in fourth quarter? Or are we expecting electrolyte contributions?

[Harin Kanani, executive]

Thanks for the question. So for both salts as well as the electrolytes, our customers have already approved our lab-base sample. So several customers have approved our lab-based campers. And for the salts in Q4, so our electrolyte salt Phase 1 has already like part of the section has already started some prime production and likely to stabilize by December. And similarly, the second phase also will be ready by end of December with some trial production.

So we expect by Q4, we will start getting approval for the ports. Similarly, in Q4, we are also expecting the electrolyte facility to be ready and some of the customers may want to audit such a facility. We already have some nonbinding MOUs also in place for some large quantity, which companies want to produce from us. And we expect by Q4 or Q1, our electrolyte phase also can start from the 2,000 metric tonnes electrolyte. Like before we were going to make 1,000 tonnenes, then 5,000 then 10,000, but looking at the current demand scenario, we have directly decided to instead of 1,000 to do 2,000 metric tonnes at our Dahej site.

And then from 2,000, we will directly go to 30,000, so this 2,000 metric tonnene per annum kind of a line will be installed in Q4 and either Q4 current financial year or Q1 next, we will start revenues coming in from there.

[Unknown Analyst]

Okay. And just kind of clarify on something else. Working capital, how much are we expecting it to raise a concern now starting on this new business, how should we see working capital close at the end of the financial year and what should the studies get going forward?

[Harin Kanani, executive]

So I think, again, our -- like this last 6 months have been very, very volatile with things like we had made some plans, but like the demand has been much lower as compared to what we had expected. So this is something which has affected our plans to improve working capital amount. So if you look at our last year performance. In the first 6 months, the working capital was significantly the operating cash flow was negative. In the second half, we were able to do a positive cash flow. And overall, for the year, while it was negative, there was an improvement.

So similarly, we will also aim in the current year also in the second half to improve operating cash flow. However, things are very volatile. Of course, our aim remains that as businesses stabilize, we would like to go to around 120, 130 days on net sales basis inventory, which we had. And let's say, the lettors between 60 to 90 days and creditors around 60 to 75 days what used to be near than normal working capital cycle. And then as we get full utilization levels and have bigger molecules improve upon that.

So again, we will try to achieve those numbers. But just with the amount of vulnerability, we have, we've been not able to execute our plans fully, but you would expect the improvement in the second half as compared to the first half, just as we had in last year.

[Operator]

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

[Nilesh Ghuge, analyst]

So my first question is on battery chemicals. Sir, good to hear you from that from 10,000, you are planning to raise your capacity to 30,000. And also in your indigenously developed electrolyte business, you are expanding capacity from 1,000 to 2,000. So what Gives you confidence? Is there any agreement signed between or there are chances that u believe that agreement will be signed for such a huge capacity?

[Harin Kanani, executive]

So let's take -- like there are 3 aspects. Let's talk of the -- our own electrolyte, which we have to start where we have increased from 1,000 to 2,000. So we have talked to almost 3 to 4 customers who are now quite certain that in 2024 calendar year, they are going to start there cell production, maybe at half a giga, 1 giga kind of a level. So we are seeing like a clarity of demand. And we have 1 international customer where the demand is not very large, but they even signed a MOU and they are just waiting for their production line to stabilize. So once that happens, they will basically be leading this.

So this gave us some clarity on 2024 with 3 to 4 customers very keen to start working with Neogen. So we are very sure that between then, let's say, 2,000 metric tonne is just 2 gigawatt hour. So we thought this is a bare minimal capacity 2 gigawatt hour we should have to basically take care of the initial demands of this customer. Now in the larger demand, which is basically what we are building with Mitsubishi Technology, we have again seen 2 or 3 large giga players make significant advance. So we keep talking to them about what is the status of their equipment, how they are doing.

So at least 2 of them are very confident to start in 2024 towards second half and ramp up in 2025. And the third 1 also has -- the third 1 also is likely to start sometime towards the end of '25 or early '26. So with these guys who are coming up with giga capacity and scaling up, and so far, whatever work has -- is going more or less as per their plans. So we are more confident that the demand for the electrolyte at a large giga scale is going to come to India and the demand will start.

Further, we are seeing many international players also wanting to come to India. So as we get into 2026, '27 like some of the international customers also may start having demand for their plans in India. So again, if we are ready with the 30 gigawatt hour, we can do a very seamless approval with a track record of these. The last consideration in this decision is that whatever initial design considerations and discussions we had from MUIS, we find that instead of 10,000 tonnenes when we go to 30,000, the CapEx doesn't become 3x, right? And there's a significant saving when we do further scale up.

So by doing that, like our CapEx efficiency might improve. And therefore, our ability to be more competitive becomes improved. So I think with all these considerations, we made a decision to go from -- directly go from 2,000 to 30,000 tonnenes. We see in the interim is the 2,000 is really needed. It depends on exactly when 30,000 starts and when the Giga factory scale up. We need the 2,000, we might scale up to year 3, 4, but we feel they should take care of the early demands of the customers and the 30,000 will come on time to take care of their larger requirements.

The last bit is on the salt side, where originally, we had said we will start with a 400 tonnenes, which is like maybe delayed by a couple of months, but it is starting. And we have seen tremendous interest in that facility. We had said that we will increase this to 1,000 metric tonnene in Dahej. So that plan remains on schedule. So there's not -- no change in that. The increase which we were going to do for -- in the greenfield, where we're going to add another 1,000 that we have now changed to 3,000. And this is largely depending on the demand that we saw from customers in Japan, Korea, Europe, U.S. Almost all geographies are very keen to have a non-China electrolyte salts supplier.

So what was our plan B is becoming almost like A plan. And especially U.S. requires let's say 2025 when they are not allowed to use electrolyte salts from China. So therefore, we have ramped up from this 1,000 to 4,000, which can take care of the initial demands of these international customers. And to be honest, this demand keeps evolving. We keep having customer visits even like every month, we are meeting new customers or new customers are visiting our demo facilities. And most of them have gotten confidence and are now discussing more concrete actions plan further. So this is what is giving us confidence to increase both the electrolyte salts and electrolyte capacity. So sorry, this may a little bit longer answer, but I hope it gives a clarification on the thought behind.

[Nilesh Ghuge, analyst]

No, Harin. Thanks for the detailed answer. But can you just throw light on the CapEx front, how much CapEx you will incur? Any ballpark number?

[Harin Kanani, executive]

So we have doubled our electrolyte fall from what we had said earlier. And our electrolyte capacity we have, we need 3 times, okay? So let's say, overall, like if you just go ballpark just from scale, it will be sometime 2.5 to 3x, between 2.5 to 3x when we are doing this, but like I said, because the efficiency is involved, so it has to be lower. So we are expecting somewhere between 2 to 2.5x of what we had said earlier, which was about INR 450 crores. The exact number, we will be able to tell you once Mitsubishi finishes their design.

And once we have the design to that especially in December. So hopefully, before February call, we'll have more clarity on that and we'll be able to give the exact CapEx number. But the current estimate is between 2 to 2.5x, so somewhere between, let's say, INR 450 cros around INR 900 crores to INR 1,100 crores sometime in that range, but the exact number will be able to you once we have the Mitsubishi design finalized.

[Nilesh Ghuge, analyst]

Okay. Okay. Okay. And as you said that for a huge capacity, as you mentioned that for 30 KPta, 2, 3 large significant players are coming, they are planning to ramp up in FY '25. What stage the accrual process with the large giga electrolyte battery manufacturers. I'm not talking about the small ones, the large ones.

[Harin Kanani, executive]

So for the large guys, we have been providing them factors. Like I said, some of them have been testing our for last almost more than a year. Some of them sometimes that struggled because they were dependent on their technology partner. But let's say now 2 of them have already evaluated our samples, and they are now working with their technology partners for their final approval. And 1 of them is still -- we are still working with them and their technology partners because the technology partner is not willing to share the recipe. So therefore, we are working somehow how we can you give the comfort to their technology partner to share the recipe with Neogen.

So once that happens, we can submit this. But I feel we have enough time. And 1 of the good things about it is that, it's just a question of recipe. Most of the customers are quite convinced that with the plant being coming made by Mitsubishi designs, so they don't have a question or worry about the quality of the electrolyte made. So they just feel that this is going to be a procedure for that. But like we are discussing more on the other aspects on the timing, on the size, meaning of volume commitment, what kind of a formula pricing we can have and stuff like that. So those are the major discussions.

And in some cases, how do we get like recipe from their technology partners, if they are not willing to say how Neogen can help them find a solution around that. All of them, fortunately, are such that they want localization, because they have all realized that electrolyte is going to be very complicated to directly import.

[Nilesh Ghuge, analyst]

Okay. So just 1 clarification. As you said that you already supplied that samples, you are working with those customers since last 1 year. We signed this contract with the MUIS just 6 months back. So I'm just confused.

[Harin Kanani, executive]

No, we were taking samples on our own and before the proposal was that in that 1,000, 5,000, 10,000 kind of plants. From that, we were going to supply them the electrolyte. But we are already making samples in our -- so we have a large facility where we can make 200 kg of electrolyte per month. So that facility is there. And from there, we keep submitting samples.

[Nilesh Ghuge, analyst]

Okay, okay. And what kind of involvement that Mitsubishi has while marketing these products? So are they completely involved, they are coming along with the Neogen Chemical while marketing these products or they are just a technology supplier as far as this whole process is concerned?

[Harin Kanani, executive]

No. So they also -- so 1 is, as I said, the agreement is 1 part is the electrolyte how to make electrolyte and the technology of the plant, which is what they are giving it to us. So that is basically, we are the end user of that, right? So there's no marketing of that. But like they are also approaching some of these customers to convince them to use Mitsubishi recipe. So that's the second is where like some customers whom we have contacted and there are some customers who are already in contact with Mitsubishi. So really together, we are making it like trying to convince this customer to basically use the Mitsubishi recipe and share the advantages of Mitsubishi recipe. But again, that's something which is ongoing process.

Some of them may start with their existing tech provider recipe and is over to Mitsubishi. But some of them right from the beginning may use Mitsubishi. So that's something we see the customers are evaluating.

[Nilesh Ghuge, analyst]

Okay. Okay. And Harin, let's say, as of now, there could be n number of recipes available with the Mitsubishi or maybe in the market. Its evolvement of the technology, suppose there could be some recipes come up over, let's say, 5, 10 years. So will Mitsubishi help us in -- or can Neogen go back to Mitsubishi and get those new recipes from them? Is there such a kind of a clause in your agreement?

[Harin Kanani, executive]

So we are already actively working in a way where if a customer has a particular cell design, we are gathering all the information going to Mitsubishi and then Mitsubishi will recommend us like which kind of an recipe would work best for the customer. So that's something which we are currently doing. And I guess there's a second bit on the recipe agreement, and that is something the final details and the clauses of these are still worked out. But like I said, that's a separate agreement about technical support and recipe, which is still we both are actively working on all the details and the conclusions of those will get worked out.

[Nilesh Ghuge, analyst]

Okay. Okay. And my second question is on our organic chemical business. So organic chemical business grew by about 25% Y-o-Y. However, if I break up between the or if I knock off the July revenue from this quarter. So 50% growth can be attributed to BuLi Chemicals. So does the traditional business, organic business grew just about 13%. So what percentage of this growth is volume driven? I'm talking about the traditional organic business ex BuLi chemicals.

[Harin Kanani, executive]

Yes. So the traditional business in volume terms have grown more. It's just that some of the rates like because of bromine have gone down. And we have seen even higher effect of this in Lithium, even though there's a volume increase, but the significant reduction in lithium prices, we have seen reduction. Because last time this business was lower.

But the main impact that we are having, see we have guided for, let's say, INR 800 crores to INR 900 crores kind of revenue. And in that if the lithium prices are softer, it will be more closer to INR 800 crores. And when we are thinking of the INR 800 crores, we have to think of last year revenue not as a INR 680 crores, but as INR 600, INR 610, which is what it would have been if the lithium prices would have remained stronger, right?

When we wanted to do that INR 800 crores, our organic should have been at INR 150 crores per quarter by now. But the fact that the bromine price have reduced that and the other raw material prices also have reduced. So the degrowth because of that and also the lower demand is why we are still not at a full utilization level. So this is the impact that we are having. I agree organic would have been -- let's say if the rates remain same, if the demand remains same, it was INR 150 crores plus you like them somewhere around 10%, 15%. So that's 160, 165, let's say, around 165-odd is max potential of the organic chemicals given that we have on INR 124 crores. That is where we are betting and we need to do a better job. And we are working very hard.

Of course, the market also needs to improve. But from our side, we are trying to work on more molecules. We started working a little bit more aggressively in the flavors and fragrance side and like trying to like go back to some of the molecules, which we have not done for quite a while, we can get from out of this business. So this is something we share buying. And let's see, like what best we can do with the demand that we have in the next 6 months.

[Operator]

Sorry to interrupt, sir. We request you to please rejoin the queue for follow-up questions. The next question is from the line of Abhi Akella from Kotak Securities.

[Unknown Analyst]

Just had a 2, 3 of them if you don't mind. One was, I really wanted to get your thoughts on this whole noise about solid-state batteries that's going around in the world markets in the recent past. Toyota has spoken about some technology that's very imminent apparently. So I mean, in that context, how do you see the technology adoption shaping up in this industry in EV batteries in the coming years? And in terms of power sort of marriage with a particular technology. I mean do we have the flexibility to change in case technology changes? Or how do you see this whole shaping up?

[Harin Kanani, executive]

Sure. So generally, most of the people who are working in batteries and on the EVs, 1 of the primary concern for them is testing. And especially when you are talking of EV testing in a real-world kind of an application and the safety of the battery. So the solid state batteries are still very nascent. There are many technologies, technologies are getting finalized. Yes, Toyota has done some higher and they are quite confident and they might do a lot. But most of the time, the way the technology is spread you launched is some 1 model in 1 particular geography, then you take it to more models when you take it to more geographies.

And then after the innovation start, everybody else starts. So most of the people, be it, be it industry veterans, none of them see solid state becoming a significant place before 2030. The other thing about the solid state is also going to be the cost of manufacturing and the technology for manufacturing. While you can make small, but large scale production of these is still a big challenge. So therefore, the 2030, some people say 10 years, some say 2030, solid state will not be very significant. If at all, we are saying it will be more or where you want like a higher range kind of a volume, where you want a higher range on a higher cost kind of model.

So we also have looked at what is required in solid state. Of course, right now, we just have our plate full just with the traditional one. But like in our R&D moment, some of our solid additives, which we are seeing strong demand for electrolytes side. We will also be ready whenever solid sate battery starts, but like on a large scale adoption, it is still time, 7 to 10 years.

[Unknown Analyst]

That's great to hear. Also 1 other thing just wanted to check was in Europe, for example, there are some concerns that EV adoption itself adoption maybe lagging behind original expectations because of various reasons. Maybe second year, it could even be because of absence of -- shortage of charging infrastructure, et cetera. So in that context, how do you see the adoption of shaping up in India in coming years?

[Harin Kanani, executive]

Look, what most people when they actually make, okay? They say 30% penetration, for example, in India and -- by 2030 and globally, like maybe between 35% to 40%, let's say, by 2030. This is the number which most of the people like lithium mining companies, like the other trade estimates, which have seen to the number which fairly everybody believes in, okay? If I actually add up the OEMs or the battery makers numbers, they are actually going much higher than this. So if I just add up, okay, I met like all the Indian battery guys and somebody says capacity [Foreign Language], somebody said why. If I add all of that, the number is actually 2x of that.

But even if we go with this, like, this is something which is what has been built for. And I think that's not a very difficult number. I don't know 3-wheelers, but 1 of the numbers which I recently saw in 3-wheelers that we are already in new car sales, new 3-wheeler phase, we are already at 80% plus kind of numbers which are estimated for the current year. So I personally still don't see this as a big challenge to that 30%. If the 30% become 25%, 27%, it would still not make a very big impact, because especially for India, we are starting from 0.

So like on a -- if we are at 30%, if we are at 150 gigawatt hours, the electrolyte demand is going to be like 150,000 metric tonnenes. So it will just basically change the decision that when we go from 30 to whatever, 50, 60, 70 next, what is the speed of that. So it's something which is what I need to consider when we are doing future CapEx beyond this 30.

[Unknown Analyst]

Okay. Just 1 other thing. On the quarter, the quarterly numbers. We've got some 20-odd percent growth in organic and 20-odd percent decline in inorganic. Would it be possible to just share the volume versus price break down in each of these roughly, if that's possible?

[Harin Kanani, executive]

With the product mix we have, it becomes very challenging. But like I can say both from our utilization levels as well as the volumes that I see, both we have a volume increase, but we are not able to give you exact percentage volume increases because the product mix keeps changing, especially so much. So it's very difficult to compare. Like if I'm selling 10 tonnes of 1-stage molecule versus like 2 tonnes of 8-stage, how do you compare that volume. So that's right a bit more challenging to do.

But overall, the way we see it like there was a significant decline like in the rates, so that is there. And in spite of that when we've given 24%. So if I were to kind of say, okay, like, if I look at the volume growth, actually, it's more than 24% in the organic. And just going on in case if this helps you, like what -- so this year, we basically have done around -- sorry, just 1 second. Yes, so we have done INR 39 crores against INR 49 crores. But just a year before, when the prices were normal, it was INR 22 crores.

So if you look at our FY '22 Q2 numbers, it was INR 22 crores when lithium price was more or less kind of normal. So we are almost double of that. Like if you removed last year where the prices were very, very high, we are still double of that. So that's a good growth, and we are seeing good interest in companies internationally, who want to have Neogen as a backup source.

[Unknown Analyst]

Okay. Perfect. That's helpful. Just 1 last thing...

[Operator]

Sorry to interrupt. We request you to please rejoin the question queue for follow-up questions. Thank you. [Operator Instructions] We have the next question from the line of Jason Soans from IDBI Capital.

[Jason Soans, analyst]

First of all, I just would want to confirm the capacity expansion, which you mentioned. So as you said you're expanding from 2,000 MT to 4,000 MT and electrolyte from 10,000 to 32,000 with the MUIS technology and alliance with your own technology, is that right?

[Harin Kanani, executive]

That's right. Just in that 32,000 just a clarification. The 2,000 will be our own and the 30,000 is with the MUIS.

[Jason Soans, analyst]

Okay. And alliance is from 2,000 to 4,000. Is that right?

[Harin Kanani, executive]

Right. Out of that, 1,000 will be in our existing site and 3,000 will be in the -- 3,000 will be in the side.

[Jason Soans, analyst]

Okay. And sir, you also mentioned about CapEx. Of course initially, we had a plan of INR 450 crores of CapEx before the MUIS agreement. Now you alluded to that the CapEx will be probably around INR 900 crores to INR 1,000 crores. And this will completely take care of the entire expansion. Is that right again? So INR 900 crores to INR 1,000 crores of CapEx for the 30,000 in...

[Harin Kanani, executive]

Yes. Look, it's right now, it's just an estimate because I'll not be able to give you like the exact number, but what we are seeing is like my expectation is between 2 to 2.5x on this. it's somewhere between INR 900 crores to INR 1,100 crores is what I said. So in that range is what we are expecting, more or less.

[Jason Soans, analyst]

But that's for the entire expansion, right?

[Harin Kanani, executive]

Everything, yes, yes.

[Jason Soans, analyst]

For every for everything. And just want to know, I mean you did speak about you are getting a lot of traction from a lot of customers, Japanese, Europe customers, Korean customers. Now again, you're in the current scenario, we are also seeing a lot of Chinese something for hosts of other chemicals. So I just wanted to -- of course, derisking is 1 theme and China plus 1 is a theme. But just when you look at it from a long term, do you see some competition coming in from China and pressures on electrolyt since you're adding a lot of capacity in that sense. And China probably will be 1 of the most cost competitive producers, that's a well-known fact. So how do you see this picture shaping up in the longterm?

[Harin Kanani, executive]

There are 2 parts, right? One is electrolytes for India and electrolyte salts for the world. So as when we're talking of electrolytes for India, we feel your localization has like 2 benefits. One is just the complexity of handling electrolyte isotanks internationally is very, very complicated. And sometimes the quality also get degraded. So worldwide, these electrolytes are always made locally. So let's say, if I take the biggest Japanese producers MUIS, they also went and set their plants in each and every continent. If I look at some of the Korean electrolyte producers, they are also setting up plants in all the parts of the continent rather than just have 1 large plant from where they will supply.

So therefore, the competition, if it all comes, they have to come to India and set up the plant. And right now, no one will come, yes, right? And now if anybody comes, there will be a little bit delayed. So right now, so that's the reason why like if a Chinese guy who has comes, set up a plant in India, that is why they will be able to really compete with us. I'm not saying they can't do it. But that's the way and with the today's scenario, it's very difficult even for them to come, set up a plant here, set up all the supply chain year. That's 1 part.

The second is because we are making starting just what is coming out of mine and we are doing all the value addition in India. Therefore, the companies who have the PLI beneficiaries for whom the local value addition is the key criteria. So we are able to take care of their requirements. So this PLI benefit, the need for localization. And third thing in electrolytes, basically, the customer wants a knowledge partner, because cost-wise, it is not that much. The criticality of this is very important. So having like a Mitsubishi technology, we're working with them for last 1, 1.5 years, hopefully also working to give them a kind of recipe which will improve their cell performance.

So I think all of these makes our electrolyte play very strong now. And we'll be able to take care of the Chinese competition. I'm not saying we will not be completely affected by that. They will be there. But what I am saying we'll have at least a significant market share, especially for India in electrolyte. Now the second it is Electrolyte Salts, which we are basically targeting the world. Now there, there are only 2 things which can support. One is derisk from China. And the second is the U.S. has put a very strong trade barrier in the form of IRA in which they have said that to ensure that supply chain is not concentrated, they have made sure that as per the IRA rules, there are foreign countries of concerns. And from these countries, your critical mineral cannot be processed and contained.

So therefore, most of the cell producers or electrolyte producers who are part of the U.S. value chain, they want to have a solid alternate or additive alternate with of China. Not only just by electrolyte salt, but even by raw materials would mined also have to be completely free of China all the way up to the mine. So I think this is a strong. These are the 2 things which is generating a lot of interest. So as long as this continues, like this is where Neogen can add value. What we also got in the feedback that why, of course, sometimes China prices are very low. But outside China, India has been 1 of the good destinations and very competitive destination where with our background, we can add capacity faster whereas other geographies where Korea and Japan, they take a little bit longer to add capacity.

I think this is a strong point, which is attracting most of the customers, and they are very, very keen to work with us.

[Operator]

We request you to please rejoin the queue. The next question is from the line of Sabyasachi Mukerji from Bajaj Finserv Asset Management.

[Sabyasachi Mukerji, analyst]

I have 2 questions. First is on the working capital situation and we are still not being able to kind of generate positive OCF. And the kind of CapEx burden that we are seeing close to you mentioned INR 900 crores to INR 1,100 crores. How do we plan to kind of fund such a huge CapEx? Will some of our partners kind of help us? Will they kind of partially fund? How are you looking at it? And what would be the time line of this CapEx amount of INR 900 crores to INR 1,100 crores?

[Harin Kanani, executive]

Yes. So this time line, like, as I said, it gets over like second half of FY '26, right? So it is -- whatever is remaining FY '24, '25 and let's say, maybe 2 or 3 quarters of FY '26. So it's going to be spread over 7 to 8 quarters. Like we hear you and 1 of the reasons what we've done is we have raised this additional INR 253 crore, which will like partly give us some breathing time till we can like say, regular business kind of stabilizes.

And we see -- and again, we are quite confident, like in this last 6 months have been very, very difficult with whatever we plan on 1 molecule, but the demand in that goes away. Like U.S. like them also when we started like that is also stabilizing. So there also some of the biggest customers who basically were the biggest customer for live end site, time we have bought they have 0 demand. So in spite of that, in the first quarter itself, we were able to add revenue. Like more or less in line of what can be good revenue like. And also, we were able to break even in the first quarter itself in spite of the top customers not being there. Our samples were getting approved. There are a lot of things happening. But in the second half, we'll try to improve on that.

But like over the next 7, 8 quarters, we keep evaluating. We are very sure about the business that we have again, very sure that we don't want to do any of this at undue risk. So it's like our target remains at 1.25 debt to equity ratio. So any time we need to raise more funds or we need to evaluate options with partners, who would like to fund this together, we will remain open to that. And we'll also keep watching how the pharma and agro will improve. Most of the feedback of we expect Pharma to improving from Q4 of the current financial year. And we've also seen signs of some of the customers interest, but we'll see whether that is sustained all the way end of next year. So how the whole next year pans out. But we'll keep evaluating options there and if needed to make sure that like our -- to make sure that our cash flows are basically being managed.

[Sabyasachi Mukerji, analyst]

Sorry, just a follow-up here. Entire 30,000 tonnenes of capacity in electrolyte and 4,000 tonnenes of salt capacity, we are aiming to be done with the end of, let's say, CY '25, are we gunning for that?

[Harin Kanani, executive]

Yes. So you meant calendar year '25.

[Sabyasachi Mukerji, analyst]

Yes, yes.

[Harin Kanani, executive]

Yes. So that's currently the target. Again, the 30,000, like we will basically see phase up some of the sections. So it will depend on the final, so by the time we get there, like we will see if the demand is still lower or if India in case there is any delay we can phase it out further. But currently, we are preparing ourselves to complete it by calendar year '25, basically, by second or third quarter of FY '26. Because we expect by FY '25, at least 3 to 4 giga -- sorry, by CY '25 at least 3 to 4 giga companies being getting ready for scale up. And we also see some of the international guys who would like to come in '26. So if we are ready in calendar year '25, then we can be their supplier from the beginning.

[Sabyasachi Mukerji, analyst]

Got it. My second question is, we have seen a sharp increase in employee expenses this quarter. I think the run rate was somewhere around INR 12 crores, INR 13 crores, it has gone to probably close to INR 18 crores. Have you done some -- done some top-level hirings in the battery chemicals business? And what would be the stable run rate going ahead?

[Harin Kanani, executive]

So it is 2, 3 things. One is the addition of BuLi Chem. So as you remember, we acquired BuLi Chem towards the end of May. So in the previous quarter, it was there only for 1 month, but there were around 50-odd employees, which got added like so there's some dump business because of that. And the increments which we did, these were also done in the second quarter. And there were some -- so we are now starting to get ready to also start building team for BuLi Chem. Of course, some of it is right now more project-related and capitalized at like other leadership teams also will start.

So we will do that I don't have an exact absolute number. But like, again, our sales target is around 7% to 8% of the revenue. What is right now working is that, like I said, we should have been doing our organic at around INR 150 crores, INR 160 crores if everything was going right as per our plan, so that's a little bit delayed like hitting the peak utilization level. So we'll keep planning our recruitment plans as much as possible to basically remain within reasonable run rate. But ultimately on a stable basis, we are looking at least for now whatever historic was 7%, 8% of the net sales as an employee expense.

[Sabyasachi Mukerji, analyst]

Sir, does it change the INR 140 crores, INR 145 crores of EBITDA number that we are probably targeting for FY '24? Or you still stick to that number?

[Harin Kanani, executive]

Out FY '24 was like INR 800 crores, let's say, at around 18%. Again, it looks a little bit difficult for us to do INR 800 crores at 18.5% today, just because if you look at the first 6 months, we have done hardly around INR 335 crores, right? And the run rate becomes very high for the remaining 2 quarters. And at Q3, I'm not expecting a very large jump. So Q3, we'll see slightly better contribution coming in from BuLi, Bhillai Chemical, because like other pharma customers are now coming and we're also expecting international approvals.

And Q4, we will have battery revenue which will kick in. But it looks a little bit difficult to get to that INR 800 crore kind of number. The number which we have on a stable lithium price. Right now, the way it goes somewhere in the range of INR 700 crores, INR 725 crores would be a good number unless we see a very sharp recovery in Q4. So like again, we still want to try our best to reach that. But the way last 6 months have gone, that INR 140 crores number looks a little bit of a challenge at present.

[Operator]

The next question is from the line of Anirudh Shetty from Solidarity Investment Managers.

[Anirudh Shetty, analyst]

So my first question is in our battery chemicals business. Typically given that lithium prices is so volatile, is it fair to assume that our profitability will largely be immune to this because whatever contract we enter into with our customers, we lock in the raw material price before and will -- is that a fair assumption to work with?

[Harin Kanani, executive]

Yes, with a slight correction, we will lock in the lithium price, but it will be basically some kind of an index based price and we'll have a back-to-back like price reset kind of clauses based on index prices.

[Anirudh Shetty, analyst]

Got it. And given that -- given prices can be volatile margin might be a misleading, of course, the sales realization also moves in tandem. So if 1 just looks at your business on a per tonne basis, then what is the right Electrolyte Salts business, definitely, what is the right gross profit for -- on the right turn EBITDA per turn that 1 should look at as the more steady state number?

[Harin Kanani, executive]

So there are 2 things. We were very right that the percentage will keep varying because of one is one, as you said, was lithium price and other raw material prices also can have bottlenecks and therefore, the price can fluctuate significantly. The other thing is as your volumes ramp up, as I explained earlier, when you increase capacity 3 times, your CapEx doesn't go like 3x, right? So as the volume grows, there's also going to be some price changes which has happened because of volumes.

So the way I am seeing at least this business is more going to be driven by like what are the ROCs that you are able to generate. Because ultimately, as you have CapEx efficiency, your competitor is also going to have CapEx efficiency and what any good businessman would go is to basically protect the ROCE and try to get as much maximum market share while protecting the ROCE. So I think this is a business where ROE and ROCE which are going to be the key factor. We would like ROCs to be upward of 20%. We like to model and try to get prices of ROCEs above 20%. But as I've said in the past for the electrolyte today, there is no buyer, there is no customer, like in this business.

And if you look globally, the way the electrolyte prices are in China, the way the prices are in Europe, Japan and U.S., the cheapest and the costliest, there is like 2 to 3x difference in the electrolyte price. Part of it is also the performance. So sometimes if you have a very high-performing battery, customers might give you a higher price depending on the additive. So that's why if we have a very good recipe from Mitsubishi which is benefiting our customer, it can really help us. So I think, we'll see where the market comes. But at least on the Neogen side, our intention would be to try to get a 20% plus kind of ROCE. Let's see, only once the market really stabilizes, we'll be able to save where exactly it is going. But I would say more than per tonnene or more than percentage, it's the ROCE, which is a drive this business. This is my own assumption.

[Anirudh Shetty, analyst]

Fair enough. And this is 20% post tax? Is that a fair understanding?

[Harin Kanani, executive]

No, I've thought of it as a pretax.

[Anirudh Shetty, analyst]

Okay. And just a follow-up to the earlier question around the solid-state batteries and everything my broader question is, what do you think is actually a technology risk to our business, our battery chemical business? Keeping in mind that there are certain changes that we can do in our formulation to keep in technologies like solid state battery. So under what situation do you see that there is a technology risk which we cannot adapt to, what would that really be?

[Harin Kanani, executive]

The only technology risk is I told you that, for example, solid-state batteries are going to take 7 years, 10 years and like this is what rest of the world is thinking. And again, the way it will work is, I mean there will be a new technology which can come -- but will it -- that technology will take away 100% market share of batteries within the next few years, that's not possible with the amount of investment, which is happening. So we are right now very safe other than solid-state batteries, okay? Whatever -- whenever you require liquid electrolyte, whether it is a sodium ion, whether it is a lithium ion, maybe tomorrow even flow chemistry, vanadium, all of those with life modification of my plant, the skill set that we have, how to remove metal, how to make it very pure, less than 1 ppm impurities, how do we control moisture, how do we back end transform this, how do we keep them stable?

How do we test the performance of this battery? So all of these assets that we have is always going to be useful. Now where we think of solid-state battery 6 or 7 years down the line, that is basically it is a scale question that you stop increasing capacity on the electrolyte -- liquid electrolyte and start putting more capacities on the solids. So the way I see it, like, let's say, if we are talking of a 10-year, 20-year period, we have to keep watching the market, keep adding electrolyte capacities beyond this 30K and like beyond the 30K and when we do that beyond the 30k, so whenever we re going from 30 to 50 from 50 to 70, et cetera. That's the time every time I'd like to ask myself that how long this is going to be sustainable. And parallel I'll have to start building also solid state battery. In fact, if you see in electrolytes, we are catching up. I mean Mitsubishi made liquid electrolytes 30 years ago, right? There are some other Korean companies who have made like 15 years ago, 20 years ago. As compared to that, we are just going to start making it.

So there's like a 1 decade, 2 decade. So with the knowledge that we have with the connections that we have solid state, we hope instead of decades, we are talking of a couple of years, right? So we'll be ready much in time. So, however, liquid electrolyte capacities at scale and how our solid state will be. So that's something which will depend on how the technology is at. And again, the amount of investment which we are doing even in a worst case scenario, there's going to be at least 30 gigawatt hour of electrolyte requirement, whether it's India or somewhere. So it's not something that you worry about. So I think in my view, it's more a question of is something which you'll consider when you are scaling up your plants, whether it's liquid and solid. And yes, as and when solid comes, we'll be ready for it.

[Operator]

Sorry to interrupt, we request you to please rejoin the queue for follow-up questions. The next question is from the line of Rohit Nagraj from Centrum Broking. Sir, you are not audible. Rohit, you have a bad connection.

[Rohit Nagraj, analyst]

Is it better?

[Operator]

This is better. Please go ahead.

[Rohit Nagraj, analyst]

Yes. So the first question is on the supply chain. So electrolyte salt to electrolyte formulation and the -- all the components or all the raw materials required for the same. So how are we placed for the entire supply chain? And given that you also alluded in U.S., the IRA regulation is changing. So when if we were supply these electrolytes to a U.S.-based company. So all the supply chain has to be completely away from China? Or given that they have the largest reserves of the rare earth materials plus other key starting materials. How are we going to tackle this? And from the capacity perspective, are we already in talks with the suppliers from slight continuity perspective, given that there may be other players who also would be looking at simultaneous putting up capacities?

[Harin Kanani, executive]

Sure. So for our -- so first of all, when you're thinking of IRA, we are not talking about electrolyte. We are only talking of electrolyte salts. So like electrolytes salts fortunately require like, because we are starting from scratch and doing things this requires 3 raw materials -- so like 3 or 4 raw materials. And again, depending on -- I'm talking of right now, multiple salts. So most of these salts like -- so like lithium is 1 of the key one in that.

This is like -- Neogen has been buying lithium China free for last 30 years. We have good relationships with these guys, and we've already talked. And because electrolytes takes relatively lesser number of lithium as compared to like material or something. The quantities of the volumes which we are talking about, our lithium suppliers are very happy. They are ready to get into long-term agreements even now. It is just that we need a customer who gives us a back-to-back assurance, because we would want a minimum quantity guarantees.

So if a customer give me a minimum quantity uptake, I can go and get a minimum uptake of lithium, and we can try and do that. The other raw material also required for the lithium salt, we have worked out with our existing suppliers with whom we've been working last 2, 3 years. We have multiple sources and they can be China free like right to the level of the mine. We can meet the international IRA requirements. When it comes to lithium salts, which is relevant from an IRA perspective.

When it comes to India's demand of electrolytes, again, most of the -- again, the salts, whatever we said remains true, we can be completely China free. And for the solvent and additives, most of the lithium additives 1 by one what we are making on our own. Because that's also something which is needed by the international community and required to be the IRA compliant. So there, we can have this and we don't have a challenge.

Some of the things which you mentioned, like rare earth. Thankfully, rare earths are not required for electrolytes any raw material anywhere. So we don't have that dependency on China. We do have dependency for solvents needed for electrolyte, because while we have European and Japanese and Korean sources for that, sometimes the capacity is not enough, and we have to rely on China. Although there are Indian companies who have already taken leads, so this is petrochemical kind of molecules, who have plans to basically put capacity in next, let's say, 2- to 3-year period. And what we have built the capacity that even if the Indian guys can make a technical grade, purefying this to battery grade is something which we can do on our own.

So that even if the Indian companies can make technical grade, we can again develop them very quickly. So this is where we are -- there is a dependency on the solvents of the electrolyte from China at present. But other than that, like most -- we also have a backup. But like you said, if there's a shortage, the backup capacity for the solvent is relatively lower. So that's why there's still more work is needed, and we are working with potential Indian partners for that already.

[Rohit Nagraj, analyst]

Right. Good. Good to hear that. Second question is on the competition in the domestic market. So unfortunately, maybe my knowledge is lesser. So we hear about the listed companies who are currently involved in the electrolyte and electrolyte salt opportunity and segment. But there could be -- from your understanding, there could be other analysts or other people who also would be working on the similar space. So do you see that there could be a greater amount of competition from the other people who are also working in a similar space and targeting the similar set of clients maybe domestically or internationally? I mean just your thought process on this, maybe my understanding from the industry perspective is relatively limited.

[Harin Kanani, executive]

So yes, so whatever we have seen and 1 of the reasons why we also increased capacity. So I think we've also not seen especially when we are talking of electrolyte, right? And you're also not seen any significant other players who are coming other than me and another few of the companies who have already announced like they are listed companies who have announced their electrolyte plant. We have so far not seen other companies come in for electrolytes. Again, we've already been supplying the electrolyte. So we already have a head start. We already have been working trying to work with these customers for the last 1, 1.5 years.

We are working also -- we also have now with Mitsubishi license. So I think we've done enough to at least make sure decent market share for Neogen. At present, other than like me and 1 more company, I don't see any other companies who have actively shown interest or are actively done something. Whoever comes now, will be a little bit late in my view, to take care of the initial demands of these customers. But this is my view. And I think even with that, at least we should be able to get a decent amount of market share, let's say, I would say, broad range anywhere between like 25% to 40%, at least in the initial years, is what I'm seeing. And that's being the basis for my judgment to this capacity.

[Operator]

Thank you. Ladies and gentlemen we will take that as the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

[Harin Kanani, executive]

Thank you all the participants for joining the call. I hope we were able to address your queries. I know because of some of my long answers and a little bit delayed start, some of the queries were less. 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, and we look forward to connecting with you again next quarter and wish you all a very happy Diwali with your family. Please take some time off and enjoy. Thank you, and have a great day ahead.

[Operator]

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