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Neogen Chemicals Ltd
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Ladies and gentlemen, good day, and welcome to Neogen Chemicals' Q3 FY '22 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 over to you.
Thank you. Good afternoon, everyone, and welcome to Neogen Chemicals' Q3 FY '22 Earnings Conference Call for Analysts and Investors. Joining us on the call today are senior members of the management team, including Dr. Harin Kanani, Managing Director; and Mr. Ketan Vyas, Chief Financial Officer. We will commence the call with opening thoughts from the management team, post which we shall open the session for Q&A, where the management will be addressing queries of the participants. Let me leave you with 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 in Neogen Chemicals' Q3 FY '22 earnings presentation, which has been shared earlier. I would now like to invite Dr. Harin Kanani to share his perspectives and performance and progress that the company has made. Thank you, and over to you, sir.
Thank you, Nishid. Good afternoon, and a warm welcome to everyone on our Q3 FY '22 earnings conference call. Our results documents have been shared earlier and available on stock exchange's website. I trust you would have got a chance to go through them. I will share my perspectives on the performance, key development and outlook going forward. Later, our CFO, Mr. Ketan Vyas, will take you through the financial highlights for the period under review. We reported strong all-round performance during third quarter of the financial year backed by higher contributions from the recently commissioned Phase 1 and 2 greenfield expansion at Dahej SEZ in Gujarat. More importantly, we registered by far our highest-ever quarterly revenue of INR 133 crores in Q3 of FY '22, which was in spite of a challenging macro situation. Let me reiterate that this is just the beginning, and we have exciting plans lined up to take Neogen to the next phase of growth. Let me share some financial metrics here for Q3 FY '22. Revenues expanded by 56% year-on-year while EBITDA increased 41%, translating to margin of 18% and profit after tax grew by 23%. Our organic chemicals business registered a gain of 53% while growing the -- while growth in inorganic chemicals stood at 70%. Overall, we witnessed favorable demand and strong realization trends across our segments. In a key development, we raised INR 225 crores through issuance of equity shares on preferential allotment basis at an issue price of INR 1,402.12 per equity share. We saw participation from some of the high-quality and marquee institutional investors. The main objective of the fund raise is to support the current growth momentum while capitalizing on the upcoming high-potential opportunities across advanced intermediates, custom synthesis and contract manufacturing and lithium-ion battery materials space. This fund raise will take us further ready -- will make us further ready and help us gain first-mover advantage in several emerging demand areas that hold great potential over the next few years, although the immediate plan is to deploy these funds to repay our debt and strengthen our balance sheet, which can then be leveraged as we invest into our expansion plans. Our new CapEx announced last year to manufacture electrolytes for lithium-ion batteries advanced chemistry cell is progressing well, and we remain on track to commercialize this by September 2023. Once commissioned, this initiative will help us test the market and reach out to all market players that consume electrolytes for lithium-ion batteries. With the experience of over 3 decades in the lithium chemical sector, we remain confident of delivering a successful initiative in this emerging space. Going forward, establishing our presence here will also put us in a sweet spot to capture substantially higher demand for electrolytes arising over the next few years. Post-commissioning both our Phase 1 and 2 greenfield expansion at Dahej SEZ are rapidly ramping up. The intention is to focus on niche and value-added products that require expertise in complex chemistry with multistage processes, and we are moving well in this direction. Having said that, we are also running our Mahape and Vadodara plants at high utilization levels. We believe all these initiatives will allow us to maintain our business momentum over the next few years. We will remain confident of surpassing our guidance of INR 450 crores in revenues this year while the aggregate revenue potential currently stands at INR 700 crores to INR 725 crores, including the expansion and initiatives around lithium-ion batteries, which we continue to target to deliver by FY '24. Overall, I am excited with the growth opportunities available for our chemicals as well as lithium-ion battery materials space. We will make the right moves at the right time to ensure that we capitalize on these high-potential opportunities to deliver sustainable and profitable growth for all our stakeholders. That concludes my initial thoughts. I would now request our CFO, Mr. Ketan Vyas, to share the financial highlights for Q3 FY '22. Over to you, Ketan.
Thank you, Dr. Harin. Good afternoon, everyone, and welcome to Neogen's Q3 FY '22 Earnings Call. I'm here to share the financial performance for the third quarter ended 31st December 2021. All comparisons are on a year-on-year basis and refer to stand-alone financial performance. In Q3 FY '22, our revenues stood at INR 133 crores, representing a strong growth of 56%, driven by higher contribution from recently commissioned Phase 1 and 2 expansions at Dahej SEZ. This was complemented by 41% growth in EBITDA to INR 24 crores, which is a performance that includes an element of transient cost impacts related to recently commissioned Phase 1 and 2 expansion. Once we run our new plant at optimal utilization levels, this is expected to neutralize. EBITDA also includes some impact of elevated utility costs and other operating expenses linked to COVID-19-related safety protocols. Our profit after tax stood at INR 10.5 crores, higher by 23%. PAT growth appears moderated due to higher finance costs and depreciation, which is in line with new capacities added during the year. Again, this will improve once the new plant operates at optimal utilization levels. In Q3 FY '22, our domestic and export mix stood at 55% and 45%, respectively. That ends my opening commentary. I will now request the moderator to open the forum for questions from participants.
[Operator Instructions] The first question is from the line of Dhavan Shah from ICICI Securities.
So I have a question on the range of Phase 1 and Phase 2 plan. So you already mentioned that we are seeing some ramp-up in both of these capacities. So can you please share the utilization? I think it may not be meaningful at this moment, but if you can share thoughts on that. And what would be your actual timeline by when we can see the peak utilization from both of these capacities, if you can share thoughts on this thing?
Thanks for your question, Dhavan. So I think both the Phase 1 part is now used more, and Phase 2, which came afterwards, in which we are also doing some pharma molecules. So this also requires some trial production, customer approval, et cetera. So it is ramping up a little bit slow. Going forward, like I want to consider, start thinking like, "Okay, if the CapEx was planned in a phase-wide manner, but it's going to be in the same manufacturing block." And going forward, in our communication also, I want to just think of Dahej capacity as a whole between Phase 1 and Phase 2. But yes, right now, the Phase 1, which -- in which we started making the molecule for agro innovator, so that's kind of already at like 50%, 60% kind of utilization levels. And the Phase 2, in which we did some bromine derivatives and pharma intermediates, is still overall ramping up. My guess is with all the approvals, and we had to do some customer audits, et cetera, for them to happen, so my guess is by, let's say, mid-next year, by, let's say, September [ max-to-max ], we should be in a position where we are at full utilization levels. So we will start getting peak revenues. So if you recall, without the new CapEx, we were at around INR 650 crores, INR 675 crores kind of a revenue estimate, which we had originally given before our last CapEx-related [indiscernible]. So that was major. So we are going to reach INR 650 crores, INR 675 crores based on Dahej Phase 1 and Phase 2, which makes roughly around INR 175-odd crores of INR 160 crores to INR 170 crores peak revenue. So I think we should reach those numbers by at least Q2 of next financial year is what I'm targeting.
Okay. So in your opening remarks, I think you mentioned that by FY '24, our revenue guidance would be INR 700 crores to INR 725 crores including this electrolyte. But if we are going to reach in this FY '23 itself, then I think FY '24 guidance, we have to revise to upwards, and maybe because I think we also did QIPs of INR 225 crores. So are we going to see CapEX announcement within some time? Because I think based on our order inquiries, if we are going to, I mean, utilize optimum by the next year, then I think we should come up with another CapEx also in the [indiscernible]. If you can share thoughts on that also.
Sure. So I think there are two CapExes or I would say, three CapExes which we can potentially consider. One is going to be the larger CapEx for the electrolyte that we are considering. Then second is some CapEx related to the lithium electrolyte salt requirement in the international market. So if you remember or if you look at our presentations, the opportunity is, one, is selling electrolytes in India and electrolyte salts in the international market. So that is the second potential CapEx, which will be in Dahej. Electrolyte ideally should be in Karakhadi because it's suited for the domestic industry. And the third will be the increase in the organic capacity. So these are the 3 CapEx which we -- which are under active consideration. And as we keep getting customer clarity and confirmation, like where we can get certainty of the business, then we will start basically considering that. Now if I -- so like at least the electrolyte, you might have seen news that the final PLI scheme, applications were all submitted, I think, by 15th of January, the extended deadline. And there are 10 applicants in the PLI scheme. Now the outcome of this is expected somewhere between March and June, by which time, we are also expecting a smaller capacity of electrolyte to start, like even like a kilo lab kind of facility to start. So we will also have approval. So I'm expecting somewhere between June to September. Once there is clarity on PLI, some approvals from customers, that's when we will have a clarity on, let's say, the electrolyte investment in India. So this is my expected current timeline based on today's situation. I personally would feel that, first, we would like to hit the full utilization level and then we should be able to see good order visibility of that. So somewhere in the second half between September to March, which we will be looking at the decision on the organic CapEx. So that will be more towards like end of FY '23. So either third or fourth quarter of FY '23, we'll take a decision on that. And international lithium salt, again maybe a little bit before like June or slightly afterwards, we will take a decision on the international -- to meet the international demand of lithium salts. So I think these are three CapExes, which we are currently considering. And I expect that the timing will be based on what I just informed you earlier.
Okay. And sir, this will cover entire INR 225 crores, these three CapEx, or it will be just part of that?
No. Again there, depending on -- so again, the reason why we are not doing it is because we don't know the exact size, we don't have the customer commitment. So whether it will be phased out or what -- how much -- so depending on the responses that we will get, we will decide. So the CapEx decision is going to be based on the market, like what is the market, where we see good visibility. Because these are very dynamic markets, there are many moving parts. So it will be based upon that. And that will take a decision of how much CapEx we are doing now. Normal case, each of these CapEx is like, in an MPP investment, if we are making is about INR 100 crores, right, so my expectation is this would be in the range of INR 50 crores to INR 100 crores individually, okay, in the first phase. So based on that, I don't think -- so we will also plan that. We're not going to do everything from the equity which we raised. I mean this is just adding to our equity. And considering the future potential, there will always be some debt component and some equity component. So while immediately, we are using this to reduce the debt and bring our debt/equity ratios down, but we are still going to keep some money aside, which will go towards margins of this project. So that will be like we'll be carrying cash for a while. And then we will take the optimum decision between using equity and like the debt over the next 2 to 3 years, depending on the best financial combination which we can come up with and financing. So I don't think -- I mean, whenever -- so again, I'm not saying all three may happen. Out of three, one may happen, two may happen, depends on how markets are going to develop, so -- and sorry, and you also mentioned about FY '24 guidance. So I think, again our policy has been that the CapEx that I have or what I've committed today is equal to INR 700 crores, INR 725 crores. So unless I have done additional CapEx and taken a decision of that, I can say that I will do a CapEx and then from that, additional revenue can come. So therefore, the guidance of FY '24 remains on that side. And when it comes to kind of FY '23, since we are not hitting the peak utilization, correct, until at least second quarter in the best case kind of a scenario. Also, electrolyte investment also gets fully utilized in the next year. So it will be not full for FY '23. So we'll have a better idea on this like somewhere in our May call, when we have the final year view and once we have a better clarity on some of the customer approvals on the pharma, advanced intermediate side. So we'll give a guidance on FY '23 there. But FY '24, that INR 700 crores, INR 725 crores looks doable. This year, based on the run rate, which we are doing, crossing INR 450 crores like seems easily doable. We will be crossing INR 450 crores. We expect somewhere between, let's say, INR 475 crores or slightly above that, so in that range is what we are expecting. But FY '23, it should be somewhere closer to INR 600 crores. But on this side of the INR 600 crores, I'll be able to tell you like by, let's say, May call.
All right. And sir, these three CapEx you highlighted, so how long will it take to commission? Will it be around 12 months something or it will be lower than that?
So I think the lithium salt and -- lithium salt, if we are enhancing, it will be in Dahej facility, where we already have a dedicated inorganic block. So that should be 1 year or slightly lesser than 1 year. The organic MPP, generally organic plants are more complex. So I would give like 12 to 15 months. Like a good case scenario will be, let's say, 9 months. But I think bare minimum, we should take 12 months, plus or minus 3 months. And electrolytes, because we are doing it for the first time, my guess would be like 15 to 18 months at least. So that's why we are targeting somewhere around September so that we are at least ready by December '23 or early '24, when India demand for the battery is likely to come based on the PLI scheme initiatives.
Right. And sir, my other question is on these two contracts which you got last year. You were, think, roughly INR 60 crores to INR 80 crores kind of revenue this fiscal. So can you please share how much of that is recognized until 9 months and particularly for the third quarter?
So because they're too -- I can't say that. But it's become too specific. But yes, whatever range we had given, that together, they are contributing in this year INR 60 crores to INR 80 crores, that guidance what we have given continues.
Okay. And my last question, if I may, is on the lithium carbonate prices. So we have seen increase in the lithium carbonate price. So have you seen any challenges in the inorganic chemical segment maybe for passing on the input price increase or maybe see demand headwinds on the particular -- this segment? If you can share the thoughts on that?
So I think the real answer of that, we will get into next financial year. Because as you know, last year, we had given that the prices were historically low, correct? Now they have come to -- like it's still not yet crossed or just crossed or just crossing in Q4 what has been a historical high. So historically, these prices have like gone up to -- at least for us, they've gone up to $18, $20 per kg. So up to Q3, it was within that. And we were able to pass that on. Of course, today, it's too much in shortage. And just because of our relationship, we are getting full quantities or sufficient quantities to meet all our customer requirements. So that itself is a plus. But I don't know whether -- like we will be able to pass on. But sometimes, it may create a bottleneck at our customer end. And like for them, for example, this vapor absorption chiller, right? They compete against a compressor-based machine. So now a compressor-based machine doesn't have a price increase because of lithium. And if the vapor absorption machine has a price because of lithium, what will be the overall impact? So that's something which we are not able to say as yet. So I think we will have to see whether the overall volume goes down a bit, at least in some segments because of such a high price increase. But that -- the answer of that will be the Q4. And it's going to be even worse for the next 2, 3 quarters because lithium prices are likely to further increase at least until end of this year. After which, they are likely to taper off and improve. So this entire calendar year of 2023 is going to be a test of that.
The next question is from the line of Anshul Verdia from Edelweiss Wealth Research.
I have a couple of questions. First, on the gross margin, so in this quarter, we saw the gross margin expansion. So could you throw some light? Is it driven by the lower raw material cost or there is a shift in the overall product mix?
No. So I think mostly, it's been the product mix. And we've been seeing last 2, 3 quarters that our gross margins have improved. So historically, the gross margins -- I mean, when I'm talking historically, I'm looking at a very 10-year, 12-year kind of perspective. Neogen used to be between 38% to 42%. Now with this advanced intermediates and some of these CSM molecules we're doing, where we are doing 7-stage, 8-stage kind of chemistry, because of that, the -- like the raw material contribution is a bit less and the processing cost is a bit higher. So what gross margins that you are seeing is like some reflection of that. So what -- at least based on whatever I've seen so far, the historical range of 38% to 42% seems to be now more like to 42%, 44%, seems to be the new quarter-on-quarter, depending on the product mix, price of lithium, like these kind of the range of what we are seeing. So I am seeing at least a 2% increase like on an average improvement over what has been historical, okay? So now I expect 42%, plus/minus 2%, as our gross margin. But consequently, we've also seen that manufacturing cost as a percentage will also increase because we are taking more of the manufacturing resources for achieving the same revenues. So therefore, the manufacturing cost and depreciation as a percentage will increase to some extent.
That's really helpful. So one on the EV, so we spoke about the PLI scheme, the advanced chemical cells scheme, which will be helpful for the companies like Neogen and providing electrolyte as one of the leading domestic manufacturers in the coming years. So what is your initial interaction with the customers, the potential customers? What is the sense on the electrolyte market as well? Because there, time-to-time, we have seen a shift in the technologies. Now people have started talking about the sodium-ion battery. So is this something a risky territory we are following into? Or what is your views from the initial interaction you had with the customers? Because when the people who applied for the plants for ACC and the PLI, they are not sure of which technology would they be seeing. So any initial thoughts, that would be really appreciated.
So again, currently, at least based on our views, and I think what we discussed a little bit also in the last call, that for EV applications -- so there are two major applications of these storage batteries. One is -- I mean, two large applications. One is the EV and second is storage for renewables or intermediate storage for, let's say, hydrogen production. So when you are talking of intermediate storage for hydrogen production or, let's say, storage for, let's say, renewables, that is where sodium-ion battery can have an advantage if it becomes efficient because these are static systems. And the charging of these batteries happens over a period of time. So it's not a very fast charge, fast discharge and the performance and the weight of the battery is not critical. To the best of my understanding, for EV, lithium-ion battery is going to stay. Now within lithium-ion battery, there are different cathode chemistries. And depending on different cathode chemistries, there would be slight variation in each customer's electrolyte composition, so the salt they choose or the additives that they choose or the stabilizer that they choose, so will be customized for each customer. But the basic requirement remains the same for the electrolyte as long as we are talking of lithium-ion batteries applications. So I think, at least in my understanding, the kind of electrolyte which we are making is going to be required, irrespective of the lithium chemistry we may choose. I think, again ACC also had some battery performances that you have to have some gigawatt-hour per kg performance or -- sorry, not gigawatt-hour, so some kilowatt-hour per kg and some performance parameters are there. So I think based on my understanding, most of these are going to be lithium-ion batteries. Of course, sodium-ion will be there. But lithium-ion continues to be one of the key technologies. And the demand for electrolyte is still going to be significant. Of course, the reason why we've not yet done the final investment is because we are waiting also for clarity. And at some point of time, like I said, by June, our customers will be -- by June or maximum, September, our customers will be making this decision. And as our customers make decisions and we get comfort from them and they get comfort on the development that we do, we will go ahead with that. So that's something we'll keep watching.
That was really helpful. Just last couple of ones on the modeling side, so we saw the other expenses increasing, almost doubling this quarter. And also, they increased quarter-on-quarter, 30%. So in your initial opening remarks, you said it consists some of the COVID-related protocols, some cost on the transient cost. So can you quantify what the COVID-related protocol? And is there any component of QIP, raising the cost related to QIP [indiscernible], which is not a one-off for the next quarter?
There is no QIP raising costs. But more or less, let's say, the capacity that we have today is good enough to like do INR 165 crores, INR 175 crores worth of revenue, correct? So it kind of almost doubled as compared to what we were doing earlier. So that's one of the criteria that, okay, most of the capacity has come in place while we have not yet reached full utilization level. But people and some of the maintenance systems, QC, R&D systems, all of those have already come in at the full level. So as the utilization improves, as a percentage, it will drop. And the second reason for increase is what I've shared with you earlier that our gross -- the product mix is such that, let's say, by 1% or 2%, our gross margin has improved. But at the same time, the manufacturing cost has gone higher.
Got it, sir. And lastly, on this interest cost, so this will continue to be the run rate going forward. This quarter, we had like a higher interest cost.
So the interest cost again should improve because of the fund raise that we did. But I would ask Ketan to maybe give up the [indiscernible].
Yes. As we did our fund raise and the funds have come in, we've tried to deploy the funds to optimize the finance cost. While we look at -- looking at -- let's see what's best as we negotiate with the bank to optimize our interest cost and use the funds that we have to lower down the working capital cost that we have and half of the -- some of the funds to gain some interest while the CapEx plans get finalized in coming quarters. So we do expect that we should have a better -- a lower interest cost in the current Q4 quarter.
[Operator Instructions] The next question is from the line of [ Manish Jain ] from [ Moneylife Advisors ].
My first question is what is the traction you're witnessing on the custom manufacturing business? Have you added any new projects or customer under this segment?
We've added new projects. But those are early-stage projects. So we've not added like what -- other than what we had commercialized. So we've not yet like signed a multiyear agreement, if that's the question being asked.
Okay. Any new inquiries from the company?
We keep getting new inquiries from customers all the time. Also, as we had informed earlier, once our Dahej site is like fully commissioned, and we are also in the process of getting this quality certification completed by this quarter, so once these are completed, we have in parallel also started approaching some key large customers, who we were holding back because we did not have the SEZ site fully ready at that time. And also, the capacity availability was also a question. So now with Dahej having some extra capacity, we have started approaching these clients. But again, these take 1 or 2 years to develop. So I think between now and, as I mentioned, next year, Q3, Q4, we will have a clear idea of what the pipeline looks like beyond FY '24. And what happens in this 1 year is going to determine how many of the existing molecules are kind of ramping up and the new customers with whom we are discussing what is the potential volumes of this, is what is going to allow us to take the decision on the next CapEx in the MPP and Dahej.
Okay. Secondly, can you provide some insights on how you're planning to utilize INR 225 crores through the preferential issue of shares?
So I think initially, we will be paying off our rupee debt. Because we also get export funding, which is at lower interest cost, lower than like what we can even get normally. The remaining, we would pay off. And some of the term loans, we will pay off, which anyway have a maturity in next 1 or 2 years. Those will be paid off. And then remaining additional money will be deployed -- will be kept as a cash in the form of an investment until our further capital -- further CapEx plans get bumped up.
The next question is from the line of Saurabh from Asian Market Securities.
Sir, just wanted to understand more on the electrolyte thing. So based on your comment, is it right to understand that you'll be working on 3 or 4 types of salts with the different customers?
So different customers might not have the same -- I mean, they may have different salts or they may have the same salt. But generally, salt, solvent -- so there are three major parts, right, salt, solvents and additives. So the combination of these, how much of salt, how much of solvent, which solvent, which additive, that remains different for different customers.
Okay. And what about the additives? So are we also looking at working that as well?
Yes. So if the additive is a lithium-based additive, then yes, we are looking at making that in-house. Some are non-lithium additives, where we will take a call whether it makes sense or whether it makes sense to just buy them.
Okay. In your last call, you mentioned you're also working with the international customers. So is there any further progress in terms of export opportunity for the electrolyte?
Yes. I mean, we are evaluating that. But as I mentioned, we want that small facility to start with which we can start working with our customers. So the customer does remain interested and we are exploring. Although I have to say, the international customer is -- the main interest is that he will also eventually tie up with somebody in India. So once we have done the evaluation, whoever he ties up in India as we are already approved source. So again, how much he will purchase internationally or more he is interested or whatever they are planning to do in India is something which time will tell. But electrolyte inherently has some challenges in shipping, like some disadvantages if you are shipping it very long. Because the tanks which are required or the containers required are very specialized. And you need to bring them back and forth. So then the cost of doing internationally sometimes can be higher. Again, if they don't have a domestic source with enough quantities, they may still do it as an option. But like my personal feeling is that majority of the electrolyte business will be domestic.
Okay. And just maybe a broad comment on next 3 to 5 years' time frame in terms of investments, so are we now looking at a higher CapEx outlay on the electrolyte or EV part of the business and probably organic CapEx should be 20%, 30% of overall business?
So I wish I can answer you that. But I think when it comes to CapEx, it just makes sense to take one decision at a time in our view. And it's too early to predict. So we have opportunities in both the segments. So each opportunity, we will take what are the risks associated with that, what are the opportunities that we find. And that will be the main driver for CapEx. So I think it's too early to predict how much will be lithium and how will be the organic. But one thing I'm certain that there will be investment into both, percentage like seems difficult to predict now.
Okay. And all the CapEx maybe over the next 1 year, 1.5 years, so is it fair to assume that earliest this CapEx can contribute is in second half of FY '24?
No. So I mentioned the CapEx decision is going to be taken, let's say, earliest, like all the three CapEx, which I mentioned, the earliest can be June, for example. And the maximum would be, let's say, by Q4 FY '23. So that's when we will take the decision. And majority of this will come online, let's say, in FY '24. FY '25 is when they will contribute, depending on timing, some of them may contribute in FY '24 also. Let's see, so if these CapExes, for example, if it happens, let's say, by June, we can get it to contribute in FY '24. That would be great. If the visibility and the clarity is there. But most likely, it will -- the major contribution or significant contribution will be in FY '25 onwards.
Okay. And sir, just last one on the other expense, so you mentioned maybe as a percentage of revenue will come down. So can you give maybe what is the breakup of variable and fixed cost [indiscernible]?
That's a bit difficult to do. But as I mentioned that on a steady-state basis, once we have full utilization, I am currently expecting like, for example, 2% improvement in our gross margins, so at 42%, and 2% increase in other expenses, more or less, right, over what was kind of a steady situation, let's say, last 2, 3 years, so remaining more or less EBITDA neutral. Of course, if we are able to do better than that, then that's where the EBITDA margins will improve. And as I said earlier, one of the major driver of that is going to be like the innovation that we do or some higher efficiency which we achieved as compared to what others have done. So I think once we start doing this, this stabilizes, like innovation kicks in, improvement kicks in, that's why we can basically see further improvements on that. The only variable here, I would like to say, is the lithium price. Because the way lithium prices are growing very high. On like the absolute margin, the margin levels, there might be some impact there, depends on how long -- how high they go. And like I said, sometimes we'll also have to support our customers in this very demanding 3 or 4 quarters, which is going to be there, so depending on that. But otherwise, like my expectation is like a 2% improvement in gross margin, 2% increase in other expense on a steady-state basis. And then any innovation will help us go beyond that 18%, 19% EBITDA, which we usually consider.
Okay. And sir, any price hike taken in our organic business?
So yes, some of the raw materials have been increasing. And because of those increases, we also have been passing on to our customers. So the solvent prices have increased. Bromine prices also have increased. But so far, because of our long-term contracts, we are -- like on an average, the impact has been very limited, which we were able to cover. So the more impact of the bromine price hikes will come in the next financial year, when our contracts will reset and we'll also have to reset with our customers.
The next question is from the line of Manish Gupta from Solidarity.
Dr. Harin, India has such aggressive plans for lithium-ion. But from a supply side perspective, I mean, has India tied up the amount of lithium we will need to import?
So India as a country has not tied up. Individual players like Neogen or whatever Neogen is planning to do in lithium, we've talked to the major lithium guys and we are quite confident at least for the electrolyte or the lithium salt that we are considering for international market, we should be able to get, although the big demand of lithium is going to be in the cathode side. So the cathode requires much larger lithium as compared to the lithium, which is present in the electrolyte. So some of the companies in cathode, and Neogen is also exploring some cathode chemistries. That is where we'll be more worried about, will we get enough lithium?Now again, the way we see it -- so the good news is that India is starting in 2024, and the major demand, where we become a significant player, where we have to worry about will we really get -- like we become a bottleneck or decision-making for the world's lithium. It's not going to be by FY '26, '27 or maybe '28. Because the world lithium capacity is increasing so much that we should be able to get some share of it. How competitively we'll get, time will tell. And I think government of India also has set up a particular company. And they have taken some initiatives to -- as a sovereign nation, to secure the materials -- like to secure lithium for India so that companies like Neogen can then tie up with a company. It's a concept similar to like ONGC Videsh to kind of give you the most easiest example. So I think there is some action on that trend by the government. Like again, I hope -- I know there are some -- they are also working very hard. And I think by the time it becomes critical, if everything goes well, these -- like as a sovereign nation, we have done something to secure lithium. Otherwise, we will have to kind of step up, and each individual company will have to go and secure its lithium from internationally what is happening.
But say, for Neogen right now, if you are putting up capacity, you would have tied up back-to-back long-term arrangements for supply.
Yes. So when we will set up a capacity for X or whatever capacity X that we are planning, the lithium, which will be required for that. So we've talked to the existing lithium suppliers, and they're confident that they can give to us that material. So lithium will not become a constraint for us for the plans that we have so far.
Okay. And this first phase that we're doing, 250 metric tons, at steady state, what's the revenue potential of this?
So this 250 metric tons is going to be really trial volumes, okay? So therefore, it doesn't really make -- so again, this 250 metric ton is not -- I would -- so the prices will be because we are doing a smaller quantity, the lithium prices will be different. So I would not want to put a number on that at this moment, okay? So as we said, the INR 35 crores CapEx was both for this as well as for the pilot facility, where we can make like the initial requirements of international customers in the CSM business. And together, they will contribute INR 45 crores, INR 50 crores. So that's something which we think we can achieve. And let's say, if some of the revenue doesn't come from here or it's a bit lower, that's something which can be solved very easily with like incremental CapEx in my existing facility or just like better utilization of my facilities and stuff like that. So that's why I would not like to put a number on the 250 metric tons. It's more essential as like getting approvals, demonstrating and the knowledge -- to gain knowledge, so we can design our larger capacity, which will be at least a couple of thousand tons more efficiently.
Okay. So let me rephrase my question, Dr. Harin. In Slide 18 of your presentation, you have a chart which you say that the electrolyte demand for India will be 70,000 metric tons as per the estimates given, right? So let's say that the electrolyte demand of India is 70,000 metric tons. Let's, for a minute, assume that Neogen is only supplying 10% of that, right? So if we say for a 7,000 metric ton capacity, what is the revenue of that, sir?
So mainly for various reasons, I don't want to name the value of that. If I wanted to, in the same slide, I could have done [indiscernible] added some numbers, so it becomes easier. But one is because lithium prices are moving so much, still don't -- not like very clear clarity of what is going to be the composition of the 70,000 metric tons. So although I have the number with me very clearly of the range, but currently, I'd not like to share that if it's okay.
No, absolutely. Absolutely, sir.
If you just google electrolyte prices worldwide, like there are some research reports also which kind of give you that. Again, some of them are on the lower side. That's what we believe. And that's why we don't want to put a number until we understand. Also, the price of the electrolytes in China is very different; in Japan, it's very different; in Europe, it's very different. So what's going to be the India one? And that range is also quite a bit, so that's why I don't want to put a number on that as yet.
[Operator Instructions] The next question is from the line of Sabyasachi Mukerji from Centrum PMS.
Congratulations on a good set of numbers. So my first question is on the electrolyte CapEx. So you mentioned that it is around INR 50 crores to INR 100 crores probably in Phase 1. What would be the likely asset turns out of this CapEx?
Again, sorry, I don't have an accurate number for you as yet. As and when -- as I said, because I've answered in the earlier call -- also an earlier answer also that the exact composition with the customers are going through, what would be the price? Still, these numbers are varying quite a bit. And like although I have an approximate number in mind, also exactly what capacity which we are going to put up. So we can put up, let's say, considering a 10% market share, 20% market share, 30% market share or we can put up a capacity for 3 years versus 5 years. So a lot of these questions still need to get answered. So unfortunately, I'm not able to answer at this moment. My guess is generally inorganic -- like inorganic CapEx is usually like requiring having better asset turns than organic. So if in the organic, we are able to achieve like 2, 2.5, my guess is it has to be better than that based on whatever. But how much better, whether it would be same or better, that's something I need to be more sure of a lot of -- some of the details. Only after that, I can share.
Sure. Only other thing -- a follow-up to that is if you can probably indicate what would be the CapEx per, let's say, 1,000 metric tons of -- I don't know what figure you are looking at. But if a ballpark figure, if you can give us what would be the CapEx per 1,000 metric ton capacity, so that would help us.
So most likely the capacity, because the existing one itself will be 250 metric tons, so the capacity that we will set up will be at least a couple of thousand metric tons. It will be more than that. Again, unfortunately, I don't have a number on that yet. Please allow me, I hope, by May, I can give you -- in the next call, I can give you better clarity on this. Worst-case scenario, definitely the call after that, so July, I think, we should have a much clearer answer on that.
No worries. Next question is again on the CapEx side. So you mentioned three areas of CapEx that currently you're thinking of. So one is electrolytes. The other is salts for international customers. And third is inorganic.
Third is organic.
Third is organic. Okay. So that is where actually my question is coming from is -- so probably, our organic chemical CapEx would be fully utilized by FY '24. So I mean, what is the plan over there? And what is again [ present ] quantum of CapEx you are looking at?
Sure. So I think, as I mentioned earlier in one of the answers, as you very rightly said, in FY '24, we expect to be fully utilized condition. So somewhere in second half of FY '23, like we should be making a decision, most likely, I would say, in Q4, taking a decision on the organic CapEx if the demand remains very strong, we have good business visibility, et cetera. So that if we take the decision by, let's say -- even if we take the decision by end of FY '23, so by end of FY '24, we have a new capacity which comes online, which can help us continue our growth in FY '25. And generally, my expectation is expectation will be somewhere around INR 100-odd crore of CapEx, with again 2 to 2.5 asset turns, which we should be doing. Then usually, it's an incremental CapEx. So I think we should be able to do that in Dahej. But again, more precise numbers, we can give you at that time. But this is my general expectation.
Understood. Last bit on the other expense side, so is there any element of elevated freight cost and the high utility and energy costs also impacting the margins?
Yes, to some extent. But of course, the -- I would say the bigger driver is like just the utilization, so as we improve the utilization levels. Again, it's still within the range which I mentioned, right, 18%, plus/minus 1%. So we're still there, maybe like not on the higher side of it. But I think yes, freight has been higher. But again, I think most of that view kind of passed on. Fuel prices have increased. It will take some time for us because that's not something which we anticipated and it will take some time. But the contribution of that is -- it is there. But in my mind, it's more my Dahej plant getting fully utilized and utilized in an efficient manner. So the efficiency and the increased utilization levels is what is critical for us to improve. And some of that, as you've seen, it's not -- I mean, maybe the comparison may directly look double, so it becomes more stark. But if you look as a percentage, it has been increasing because of the product mix already, as I mentioned earlier.
Ladies and gentlemen, we take the last question from the line of Mihir Damania from Ambit Investment Advisors.
So are we maybe looking at any inorganic acquisition [indiscernible]? That's my first question.
No. I mean, historically, what we have said, the same remains that normally, our growth strategy is not through inorganic. Inorganic, if at all an opportunity comes in front of us, where we think it can add a lot of value, we are always open to consider that. But usually, Neogen's plans are more like organic growth and the fact that we have land available both in Dahej, Karakhadi. We already have approvals. Like unless there was a specific reason, we would not think of an inorganic growth and acquisition or something like that.
My [indiscernible] more on the fundamental [indiscernible]. So fundamentally [indiscernible]
This is the operator. Sir, I'm sorry to interrupt, your voice is breaking.[Technical Difficulty]
So my question is basically on the [indiscernible]. How does the electrolyte opportunity [indiscernible] margin trend? So I'm not looking for guidance or something like [indiscernible]. But I just want to understand how it started compared to what our other segment. So will it be more of [indiscernible] margins? Or will be growth [indiscernible]? Or maybe even better or worse off than each of these segments? What is the initial assessment on that?
So again, as I mentioned, because the exact mix complexity and even the planned investment is still not yet clarified, it currently -- I mean, there is no current answer to give you exactly how the margins are going to change for the electrolytes. However, the expectation is that the margins could be lower as compared to organic. But expectation is that the asset turn will be better. And let's say, on an ROE or ROCE basis, they will be equal to what we would see incremental CapEx in organic. This is just what I would wish for. If I were to put my model, that's how I would put it in my model. But again, it's too early to like give you more clarity on that.
Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.
Thank you, all the participants, for joining the call. I hope we were able to respond to all your questions. If you have any further questions, please feel free to contact our Investor Relations team, CDR India, and we will address them. Thank you once again. Stay safe, and we look forward to connecting with you in the next quarter.
Thank you very much, sir. Ladies and gentlemen, on behalf of Neogen Chemicals, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.