Neogen Chemicals Ltd
NSE:NEOGEN
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Neogen Chemicals Ltd
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Ladies and gentlemen, good day, and welcome to the Neogen Chemicals Q3 FY '23 Earnings 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.
Thank you. Good evening, everyone, and welcome to Neogen Chemicals Q3 FY '23 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 thoughts from the management team, post which we shall open the forum for question and answer, where the management will be addressing queries of the participants.Before we commence, I would like to share our standard disclaimer. Certain statements made or discussed on the conference call today will 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 '23 earnings presentation, which has been shared earlier. I would now like to invite Dr. Kanani, to share his perspective. Thank you, and over to you, sir.
Thank you, Nishid. Good evening, everyone, and welcome to our Q3 FY '23 earnings conference call. We published our Q3 financial results and subsequently earnings presentation over the weekend. I hope you were able to go through them. I will be sharing the performance overview, key developments and strategic insights, while our CFO, Mr. Ketan Vyas, will share the financial highlights for the period under review.Q3 of the current fiscal year was an eventful period for us. Not only did we demonstrate financial performance but also undertook several strategic initiatives to further strengthen our business model across both existing as well as lithium and battery space. I will share some of the key fine prints of this development in just a bit.Firstly, on the financial performance, we reported 40% gains in revenue in Q3 FY '23 with solid profitability, where EBITDA increased 12%, profit after tax grew by 40%. This was the result of our relentless efforts of having higher plant throughput with increased focus on value-added portfolio based on incremental capacities available. The goal was achieved despite impact of continued high inflation in some of the key input costs, especially lithium, which stood elevated during the period under review. Having said that, we were able to pass on these cost pressures to our customers, thereby [Technical Difficulty] absolute EBITDA.In Q3 FY '23, we registered 30% gains in organic chemicals revenue, while growth in inorganic chemicals stood at 85%, which was steered by a mix of realization improvement and volume expansion. The demand trajectory continues to be favorable, and we are capitalizing on the incremental opportunities emerging in the sector. Our scale-up in advanced intermediates and custom synthesis manufacturing is progressing well and, as expected, we are taking up more complex assignments that require multiple steps, thereby leveraging our process expertise and manufacturing infrastructure to deliver customized solutions. The objective is to further elevate the performance trajectory of high-margin value-added portfolio within the business mix by utilizing our competent R&D capabilities.During the 9-month period, we have added 8 new customers across various geographies and industries. And with this, we are now engaged with more than 39 customers in this custom synthesis and manufacturing segment. Overall, we are working on 23 products with combined revenue potential of INR 2,100 crores with further pipeline and new inquiries flowing in.Now let me take you through some of the major developments in this quarter. Firstly, I will update you on some of the existing CapEx initiatives. With regard to the expansion of specialty organic chemical capacity by 60,000 liters or 60 meter cube, we are glad to have commissioned 15,000 liters or 15-meter cube, while remaining 45,000 liters will come up by September 2023. We have a total [ physical ] capacity of 466,000 liters or 466-meter cube in organic chemicals.Our expansion of inorganic chemical capacity from 1,200 metric tons to 2,400 metric tons in Dahej, which amounts to 30 meter cube reactor capacity in the existing inorganic MPP is in progress, and we are on track to commission this by May or June 2023.Within battery chemicals, the new capacity of 400 metric tons per annum or 92 meter cube reactor volume for manufacturing of specialty lithium and additive for electrolytes will be commissioned by June 2023.Lastly, as you may know, we have announced CapEx for building a pilot plant to manufacture 250 metric ton of electrolyte at Vadodara facility. This will now come at Dahej SEZ facility. And based on expected demand, we are enhancing this capacity to 1,000 metric tons, which will be ready by August, September 2023. All these initiatives will start contributing to our revenues in a phased manner from FY '24 and will peak out in FY '26.Moving on to second key development. We are setting up a wholly-owned subsidiary of Neogen Chemicals Limited, that will accommodate the battery chemicals business of the company. This was executed after numerous internal discussions and consideration. The key rationales of this are battery chemicals business requires a high-volume setup with different CapEx and OpEx as compared to the legacy business. This business requires different kinds of skill sets and expertise across functions, and we would like to take advantage of lower corporate tax rate of 15% for newer corporates.Now third development in line with robust demand and environment for battery chemicals in FY '25 and beyond, the Board has approved expansion of one electrolyte capacity to 5,000 metric tons, which will be operational by June 2024, followed by specialty lithium salt capacity of 1,000 metric tons, which is about 232 meter cube of reactor volume, which will be operational by June 2024. The Board has also approved further greenfield expansion of electrolyte and specialty lithium salt at a new site for dedicated battery materials. This will include additional 5,000 metric ton of electrolyte capacity, making total installed capacity across sites 10,000 metric tons and additional 1,000 metric tons of specialty lithium salts, making total installed capacity about 2,000 metric tons, both of which will be operational by September 2025, which is expected to meet the incremental demand rising from FY '26-FY '27. These projects will [Technical Difficulty] will add to revenue from FY '25 and will peak out by FY '26-FY '27. The overall CapEx for all the new projects will be close to INR 450 crore and will be funded by a mix of debt and internal accruals.While the debt levels will increase with this expansion, the debt equity will continue to remain below 1.25x as guided earlier. These CapEx initiatives will significantly contribute to our earnings from next financial year. At a consolidated level, our goal is to attain more than 30% revenue compounded annual growth rate, translating into INR 2,000 crore to INR 2,250 crores of revenue by FY '26 or FY '27. This compares to INR 487 crores top line achieved in FY '22.I'm immensely pleased to outlay our growth plans. And let me assure you that our teams will work tirelessly, judiciously to achieve that. Neogen is anticipated to experience a substantial increase in financial performance and demonstrate its proficiency in manufacturing to clients worldwide. And optimistic outlook for demand and India's position as a desirable manufacturing center will increase their market size and attract additional customers throughout the supply chain.That ends my opening thoughts. I would now request our CFO, Mr. Ketan Vyas, to share the financial highlights for the period under review. Over to you, Ketan.
Thank you, Dr. Harin. Good evening, everyone, and welcome to our Q3 and 9 months FY '23 earnings call. I will now take you through the key financial highlights. Please note that these are on a stand-alone basis and based on year-on-year comparison.In Q3 FY '23, revenues grew by 40% year-on-year basis to INR 186.3 crores and in 9 months FY '23, it grew by 46% Y-o-Y to INR 482.3 crores. The growth was boosted by the increased utilization at plant, which was aided by firm demand and crucial end user industry. The company has started to see positive results from the efforts around scaling up its high-margin advanced intermediates and custom synthesis manufacturing business as highlighted by Dr. Harin.Organic Chemicals saw a growth of 30% Y-o-Y at INR 136 crores in Q3 FY '23, whereas Inorganic Chemicals jumped 85% Y-o-Y at INR 50 crores. In 9 months FY '23, Organic Chemicals saw growth of 23% year-on-year to INR 326 crores, and Inorganic Chemicals grew by 137% Y-o-Y at INR 157 crores. The domestic and export mix for Q3 FY '23 stood at 47% and 53%, respectively. EBITDA increased by 27% Y-o-Y at INR 30.1 crores in Q3 FY '23 and 32% Y-o-Y at INR 79 crore in 9 months FY '23. Despite the persistent inflation in some raw materials and utilities, a robust EBITDA was attained through effective management of the product mix. The company faced a rise in certain costs such as employee expense, which aligns with the management plan to enhance workforce across various departments.Coming to PAT performance for Q3 FY '23, it improved by 40% Y-o-Y to INR 14.7 crores; and in 9 months FY '23, it enhanced by 23% Y-o-Y to INR 35.7 crores. The increase in profit after tax demonstrated our operational efficiency, which was marginally impacted by high depreciation resulting from the additional new capacities and surging finance costs caused by rising interest rates.Those were the key financial highlights. I will now request the moderator to open the forum for Q&A session. Thank you.
[Operator Instructions] The first question is from the line of Mihir Damania from Ambit Asset Management.
So my first question is you alluded that we are looking to fund the entire INR 450 crores of CapEx by debt and internal accruals. Do you envisage or do you want to give like a breakup of how we are going to fund the entire INR 450 crores, an indication would be really helpful. And just a follow-up on that, are you also looking to raise additional capital to fund this INR 450 crores of CapEx?
Thank you for your question. So based on our projections and numbers that we have looked at, for this INR 450 crores, the capital which we had raised in last financial year would be sufficient in terms of our equity. Approximately the banks normally fund 70% to 75%. So we would utilize maximum funds from the bank. So somewhere between 70% to 75% of the INR 450 crores will be funded through bank term loans. We are also requesting banks for a longer maturity and longer moratorium term loan, considering the business is growing significantly well. And so far, we've received positive response. The balance will be funded through our own internal accruals. And like part of the equity, which we had raised last year, which we have kept aside in the form of investment and financial products will be brought in. And together, we'll be funding the equity portion of the INR 450 crores.
My second question is, what do you envisage the anticipated payback for the CapEx of INR 450 crores is going to come onboard, or internal ROEs, whichever may --
I didn't get your question.
What would be the anticipated payback for the CapEx of INR 450 crores, which we are doing? Or what would be the internal return on equities on the said project?
So when we are looking overall, like when we look at -- when the CapEx is fully utilized by FY '27, our ROEs and ROCEs will stand much above 20% is what we are projecting.
So this CapEx would be ROE accretive to the current business?
That's what my understanding is from that point.
I would say it would be more or less similar, because -- it would be more or less similar because even existing on a full utilization when the business has stabilized, would be like a 20% plus. So the way -- so far, we have looked at it that if we are making -- so currently, in the lithium salt business -- in the electrolyte and lithium salt business, what we have seen is that if we are making the salt ourselves along with the electrolyte, it looks almost similar to our existing business, at least in our projection, that's what we've taken. So we've taken like similar asset turns, we are taking similar kind of like operating margins as well. Again, as I've said in my previous call, this is a new industry first time being established in India. So as it gets established, we'll have a better picture on it. But at least currently in our models and based on whatever we've looked at pricing, investment and internal cost structures, we feel we should be able to get at least similar asset turns and -- asset turns as well as similar margins on investment.
Got it. And just my last question. Do you have any firm orders or something of a guarantee of sort, which gives us the confidence of achieving the INR 2,000 crore to INR 2,250 crores of revenue?
Yes. So from this INR 2,000 crores to INR 2,250 crores, about INR 1,000-odd crores is coming from our regular business. So when we look at our pipeline, the incremental demand of our customers, we are fairly confident that our existing business can easily earn like up to INR 1,000 crores, INR 1,200 crores, let's say, by FY '26, FY '27. Now when it comes to battery business, what gives us the confidence in this is like we have worked both with international customers for lithium salts as well as we work with Indian customers for their electrolyte requirement. Several of these customers have started evaluating Neogen samples, and some of them have given like very positive feedback that the first samples submitted has also met majority of their criteria. This is both for our electrolyte as well as international salt customers with whom we have worked. So I think together, this has given us the confidence to basically continue the journey what we had started. So we'd already discussed, basically, we already discussed the initial trial investment, which we had already planned, the 250 metric ton of electrolyte, which we are now revising it to 1,000 metric tons and the salt of 400 metric tons. So looking at the time lines, which are required for India from our customer side, we have decided to basically take the decision. And based on the feedback received from customers and their plants getting more and more clearer, we have decided to go ahead with our CapEx plan.
Next question is from the line of Saurabh Kapadia from Sundram Mutual Fund.
Sir, so this project, as of what I understood, we don't have firm contract on the customer for this electrolyte capacity. But now according to you by when we can get that clarity in terms of number of customers for electrolyte, and whether it will be 1 customer or there will be 2 or 3 customers, what you're looking at?
So thank you for your question. So we are working with almost 15 potential customers for electrolyte within India and maybe a couple of customers outside as well. Several of these customers are starting by 2024, especially those who are part of the PLI scheme need to start and some others also will start by 2024. Therefore, we need to be ready by at least end of 2023 to take care of their initial requirements. So that's why we are projected like initially to increase the capacity from 250 metric tons to 1,000 metric tons, followed by immediate increase of that 1,000 metric ton to 5,000 metric ton, hopefully, by June 2024, which will take care of their FY '25 requirement and early FY '26 requirement. [Technical Difficulty] customers, some of them have already approved our samples like in their Phase I trial. The next approval will be once the pilot facility starts. So we need to start the pilot facility, so from where we can submit the samples, and then we can start more commercial supply to them from, let's say, in FY '25. Similarly, as I explained on the salt side also, the customers have already approved our R&D samples. And once the pilot facility starts, let's say, by June or so, they will also start approving these samples as well.
So the firm contracts will only come post the pilot facility product get approved?
Yes, after the pilot facility. So somewhere beyond June, let's say, beyond June to December period. Before that, we may get some conditional contracts. So the contracts will be approved or like we may have some conditional contracts. But they will be subject to final qualification of the final plant.
Okay. And sir, so if you can give some color in terms of how the margin profile will be, also how the working capital cycle could be for this new business?
So we are expecting that the margin profile will be at an EBITDA level, we are expecting, let's say, between like at least like same what we have 18.5% plus or minus 1%. That is the bare minimum we are currently considering. And we are considering this when we are seeking from, let's say, starting from lithium carbonate and making the salt ourselves, and then we are making the electrolyte. So if you're doing the whole thing, the minimum margin we should be getting is this much. If we are able to get a better margin, we will, of course, strive for that. It will depend upon how much value we are able to add and how the competitor landscape looks like. So this is on the margin.And in terms of working capital cycle, we hope because this will be fewer products and more fewer customer and more long-term kind of business, from a working capital cycle point of view, it should be significantly better as compared to our existing multiproduct, multi-customer organic business. So we believe the working capital cycle would be better. And this is what we have presumed in our model.
Okay. Sir, lastly, where do we stand in terms of working capital improvement on our existing business?
So in absolute terms, our working capital utilization, our inventory remains more or less similar to what it was at 6 months level, but like our revenues are increasing. So if you are looking from like number of days point of view, the working capital cycle is improving. And let's say, by next quarter, it will improve further. So we stand by what was our original kind of view that, let's say, by FY '24, we want to come down to net working capital cycle of around 120, 125 days. And then beyond FY '24, we will look at further improving this.
The next question is from the line of Archit Joshi from B&K Securities.
Congrats on a great set of numbers. So my first question is rather a clarification. I couldn't hear the number that you said about the CSM business, I think, did you by any chance say that the potential of CSM business is INR 2,100 crores? Or is it for the total potential that we are envisaging after the battery chemicals unit is also setup?
The number which I mentioned in the call, INR 2,100 crores refers to all the molecules which are currently under development. So we are currently -- like there are 23, 24 molecules, which are various stages of development, something which is in R&D, something which is in pilot, something which is, let's say, in our first trial run. So the total value of that is around INR 2,100 crores.
Right, sir. And with -- in the due course of time upon considering the waiting period and once it gets approved, any direction that you are looking at with respect to achieving any milestones or when this will be realized into sales?
So this is at R&D level. So from -- and there's a total potential of this molecule. So depending on how successful is the R&D, like how much percentage of revenue, how much percentage of them succeed, like it will determine finally how much is realized. So like this is basically the pipeline what we have, when we, let's say, go from like INR 480 crores last year to, let's say, 1,100 crores or INR 1,200 crores revenue potential, what we are saying, let's say, by FY '25, FY '26. So this is what -- so that's the healthy pipeline we have. Now some of it may even replace some of the existing molecules if the demand or the margin profile were to change. So this was just to kind of give an idea of what is the pipeline. It doesn't mean exactly all of that will get converted.
And sir, currently at what run rate or what annual number would be looking at only in the CSM business, I think, which is largely on the agri side? Is there a meaningful change that we are seeing with respect to all these molecules in the pipeline and the R&D stage, are the application areas increasing -- or any color on that, sir?
I think in terms of application areas, I already gave a little bit of additional information last call that like we are also seeing interest from flavors and fragrance area as well as another -- like just a specialty chemical industry, which is non-agri, non-pharma. So both these, we are seeing more interest coming in and that continues. In terms of CSM, like percentage, our target was that by FY '24, we wanted to achieve 20% of our revenue coming from CSM business. So far, currently, in this year, we are at about 15% number. So we are getting close to that, and we are hoping -- we have received like several further like initial first commercial orders which we are planning to execute, let's say, between now to June. And depending on that, we feel this will add further. Plus, we are trying to work with the existing customers with their increasing demand. So hopefully, by next year, as we had planned, we are reaching at least INR 700 crores, INR 750 crores on a -- INR 750 crore on a standard lithium price. With today's lithium price might become somewhere close to around INR 800 crores, INR 850 crores with at least 20% contribution coming from CSM. So that was our target and we stand by that target.
That's great. Sir, just one more on the battery chemicals CapEx that you have announced. So the greenfield expansion that we are planning, which as per the presentation, most likely will be commissioned in FY '26 and the total revenue target that we are looking at of INR 1,000 crores to INR 1,200-odd crores only from the battery chemicals division. Would that -- would it be fair to assume that after we commissioned the 5,000 ton plant in electrolyte and another 1,000 tons from specialty lithium salt, there'll be some leeway in terms of ramping up that capacity going into say FY '27 or FY '28. So is there a number that we are looking in FY '27-FY '28, also with the contribution coming from capacity that we'll commission in FY '26? Or right now for now, we are just looking at INR 2,000 crores in FY '26-'27?
So what we have said so far is, first of all, in the battery materials, we have only assumed India electrolyte demand currently. Of course, we keep the international demand as a backup, but we've not taken like any significant number from that into our projections. So we also have said that the capacity, which we've said, like it could peak by, let's say, FY '27. So we will be fully utilized by FY '27. And this is based on the clarity that we have. And this is a minimum we feel what we need. So as we go further, as we talk to more customers, as customer requirements crystallize, and as we keep signing contracts, if there are opportunity beyond this in electrolyte depending on what market share we are able to get, we may have to further increase our capacity. And for sure, we will have to increase capacity beyond FY '27-'28, like as we get into FY '30, where the overall demand is expected to be around, let's say, 100,000 to 150,000 metric tons per annum. So with this capacity which we have said we will have only capacity of 10,000 metric tons. So by FY -- like by 2030, we will definitely need more. And depending on the market share, even by FY '27-'28, we may need more. But this is a bare minimum that we need. And just to keeping in mind this additional capacity which we may require beyond this as well as, let's say, if -- like our initiatives for salts if the international market may work as well as if the cathode material requirements also work. So to consider this opportunity, that is why we felt the subsidiary having its own space and maybe having a greenfield site would be beneficial. And that's why the Board is currently considering if this can be done at a greenfield site, especially once we have taken care of the initial requirement of the next 2 years, afterwards, we can move -- in parallel, we can get the greenfield site ready and then that becomes the main site for our battery chemicals.
Sir, pardon my ignorance here, but is it -- how easy or difficult is it to ramp up these capacities? Because I can see that in FY '25, we'll have a 5,000ton plant in place, which will be a brownfield expansion. And then we'll have 5,000 tons from a greenfield expansion. And we are looking at INR 2,000-odd crore potential in FY '27 or FY '26 at earliest. So is it that once it gets commercialized --
Just to clarify, the INR 2,000 crore number is both battery and regular molecule together, right?
Yes.
Out of that, for the regular demand we have already made most of the investments are already in place, and the remaining will come, let's say, by middle of next year.
Right, sir. So, actually not the INR 2,000-crore number but the INR 1,000-crore to INR 1,200-crore number that you had talked about only from the battery chemicals division. So my question was, how easy or difficult is to ramp up these capacities? Because as I said earlier, FY '25, we're looking at a brownfield expansion of 5,000 tons. And then immediately in the year after that, we'll have 5,000 tons more. So all in all, with these 10,000 tons in place, we'll be able to achieve this INR 1,000 crores, INR 1,200-odd crores number. So that will happen in the same year instantly. Is that understanding correct?
Yes. So what will happen is the greenfield and brownfield will be running in parallel, because the greenfield will take a little longer time. So some of the things like site development, etc., will be happening in parallel. So we'll start the 1,000 metric ton we are doing is, in the existing plant with very limited modification. So that will come first. Then in parallel in our existing facility, we'll do a brownfield to 5,000 tons. In parallel, we'll also increase the salt capacity, which is 400 metric tons to 1,000 tons. So all these will come at our Dahej site because this is where our majority of the lithium chemistry and the expertise current is. In parallel, we'll start working on the greenfield. So we feel that's why we have made all the announcement together because some of this may run in parallel, so it's not one after another. So yes, I mean, it will take little bit of a challenge, but we feel with what we've been doing in preparing for this for last 1.5 years, we are now fairly well-prepared to be able to achieve this time.
Next question is from the line of Anirudh Shetty from Solidarity Investment Managers.
Sir, my first question was on the INR 1,000 crores to INR 1,200 crores revenue potential that we see from our battery chemical business. Of that, how much would be from salt that we will be selling to third-party customers? And I believe that a majority of the salt capacity will be used in-house. So my second question around this is, is why aren't we investing more aggressively towards salt for international opportunities, especially, given that the pace at which EV is growing globally is much faster than it is in India at this point in time?
So like, yes, so the way we have currently said is that 10,000 metric tons if we are using, then it will require somewhere around 1,200 to 1,500 metric ton of salt itself and then remaining 500, 600 tons would be available to us. But let's say, for now, we don't want to commit ourselves that so much will come from electrolyte and so much will come from salt. So as the business will develop closer -- because we are like 3 years away, and we are just starting. As the business will develop closer, we will keep evaluating, and we'll see how the mix kind of develops, so how much comes from salt and how much comes from electrolyte.Like as I've said in my previous call, like in terms of strategic advantage in terms of moats, when we think of India electrolyte demand, we feel we have the maximum number of moats or the strategic benefit or the value add which we can do. Like right now, when we are working with electrolyte, we have advantage of local like being able to take care of logistics. So we have some benefits over China. Now if we are targeting a non-Chinese international market, like we are in a direct competition and it's a head-to-head comparison. I mean there is -- China has a clear scale advantage over us, whereas the only thing which we have is, we can be China Plus One. Other than that, so far, like we are catching up sales in the international market. So that's the reason why our primary focus remains on domestic electrolyte demand. We keep exploring international salt. We have got positive feedback. But like we always -- like at least at this point in time, it's our -- like a plan B or a second source. If and as we go forward and as once our trial production start, we do commercial supplies, and we really can see -- like we understand our cost structure as compared to the Chinese, how much is it different and also willingness of customers to be able to pay a premium over China for a China Plus One or a supply security kind of a strategy. So that's when we'll have a better idea of how much further investment which we would need, let's say, for the salt demand for the international market.So like there are many moving things here. So this is -- the capacities which we have announced is the capacity which we feel we barely need to take care of India's demand and we need to get started on that to meet the customer time line. So that's the announcement we have made for now. And as our pilot facility start, trial production start, as we keep getting more customer feedback, that's when we can keep revising our plans.
Sir, my next question is on the margin profile for the battery chemical business. I remember in one of the past calls, you had mentioned that on the innovation curve, the organic specialty would be higher than this -- the electrolyte and the salt business. So what would explain why the margin profile would be similar for this new business? And second question is within electrolyte and salt, is there a difference in the margins that one would make if, say, you sell this salt to directly to a third-party customer?
So when we are looking at our salt business, like it's similar to making a simple lithium salt. It's just like in bromine derivatives as we made bromine derivatives and then we went on to make advanced intermediates and then maybe making advanced intermediates for innovator, which is the CSM business. So I think it's almost like that in a sense that we have to first make from lithium carbonate a basic lithium salt. Of course, the purity requirements are much higher. Then we have to make a lithium salt, which will be a little 2 stage, 3 stage kind of a reaction. And it also has its own stringency in terms of purity. It has its own stringency in terms of like the moisture control and other impurity control requirements and also some of the handling challenges of these materials. And then you are also doing a value add and making electrolyte out of that, which adds to another layer of complexity and customization for each individual customer. So I think it's kind of a -- so when we are doing all 3 together, we feel it's similar to basically making bromine derivatives, making advanced intermediates and then doing CSM on an OEM basis. So that's why we feel it's kind of a similar margin profile. When we've looked at it also from a cost point of view, the reactor volumes versus business point of view, it looks similar. So that's why we are hoping that, let's say, we will get at least similar margins. So that's the bare minimum we are looking at. Depending on the criticality customization required by the customer, and if we are able to add further value and competitive scenario, we may try to get a better margin there. But at present, in our models, we are using like similar margins as our current target, which is 18.5% plus or minus 1%, so basically on that. And in our models to be more comfortable, we are using like a 17.5% as a base. So we'll see like as the business develops, we'll have the right number will emerge.
And -- but if say, the margins are similar, then shouldn't the return on capital employed for this business be higher at scale? Because like you mentioned, the working capital days are much tighter over here. And I believe in lithium, the asset turns also tend to be better. So if everything goes as per plan, couldn't this be a higher ROCE business for us?
So 2 parts. The asset turns, like we have seen are similar because like this has the other complexity of moisture control and like very high purification requirements, et cetera. So ultimately, the asset turns are coming similar to that of like organic production that we have seen based on whatever we can see now. But yes, working capital cycle could be better. And in that term, on the ROCE level, we could have a separate business. But I mean, you can have an improvement over our existing like organic business. But for now, at least, let's consider similar margins and returns. They should be 20% plus ROE at ROCE level.
I had one final question. May I go ahead with it?
Yes.
Okay. In our existing business, with our current run rate, we could probably do around INR 600 crores, INR 650 crores in this year. And the revenue potential by 2027 is around INR 1,050 crores. So that translates to anywhere between 13% to 15% kind of sales CAGR. So given the opportunity that we have in this business and the China Plus One and scope of more value add, is 13% to 15% a conservative number? Or do you think that this -- the opportunity is much larger and the growth could be higher than this as we make further investments along the lines?
Yes. So Anirudh, I think this is just based on the investments which we have done so far. Like we are seeing -- like as Dahej is stabilizing, we are seeing lot of customer visits to our sites. So we have seen several pharma, agro, aroma, and like other industry customers also come in and show a keen interest, work with Neogen for this new project. Like some of them are also discussing fairly large project volumes, like our right now target is how we can have single molecules between INR 50 crore to INR 100 crores or INR 100 crores plus as a single molecule. So we are seeing several projects come in, which kind of meet this criteria. So we remain hopeful there. But the number which we have shared is based on our current existing CapEx, which we already announced. Beyond that, if -- as I said, we feel we will max out by FY '25 and maybe FY '26, FY '27, if we require further investment. I mean it might require further capacity. So for that, we may have to do further CapEx in FY '25 or FY '26, depending on how the business develops.
[Operator Instructions] The next question is from the line of Noel Vaz from Union Asset Management.
Yes. I just had one question relating to CapEx. So INR 450 crores is the total CapEx. So exactly how do we see it being paced out over the next 5 or 6 years? And also, you had mentioned regarding CapEx itself in case the demand is much higher or much lower. I mean, much higher than expected, then accordingly, we would have to make changes also. So if that were to happen, then how would that exactly like -- I mean, how would that exactly happen like within a few years? I mean within next 2 years, you could see another revision to this group?
Yes. So if you see, we in current -- so in the next financial year, we are increasing the 250 metric ton to 1,000 metric ton electrolyte capacity. And then in parallel, we are also building a facility which can increase this up to 5,000 metric tons, which will come by -- which will come by, let's say, June 2024. So like so this is the first part. And this will be -- and in parallel, we have working capacity which will come online by June '25. So I think we don't have like a year-wise number which we can share at present. But yes, we do have in our internal models, but we wanted to further fine tune it before we give you a year-wise breakup of the CapEx. But based on that, you will see that initially, we are just doing 1,000. 1,000 is becoming 5,000. And then the 5,000 is again doubling. So the majority will be -- the CapEx will come when we are setting up a greenfield and when we are doing the doubling part, which is basically coming online by FY '26. So you'll see significant CapEx happening on that line in FY '24 and FY '25. So this is on the CapEx breakup.Also, as I explained, yes, this is a -- so this is a bare minimum demand that we see, and we are quite confident that we can achieve this number like through several customers. But as I said, we'll be able to give more clarity whether this is sufficient, whether we need more or let's say, we need more of the salt or more of the electrolyte, et cetera. So that's kind of a slight adjustment that we all have to do. We will be able to do, let's say, maybe 6 months, 9 months down the line once our pilot facility starts and more approvals start coming in from our customers, and then we can give more clarity. And if required, based on that, our FY '25, FY '26 CapEx plan can be fine-tuned.
Okay. So quite simply put, based on the offtake that you would be getting at the pilot plant, then definitely, you will get a much more clearer picture as to what the demand scenario would be, so you'd get a much more drill-down idea as to whole demand scenario?
Yes. Because a little bit on this side, the demand is a bit more fluid as compared to our bromine derivatives and pharma business. That is the reason why we felt having a separate subsidiary gives a very clear view of how the operations are shaping up and how the changes are taking place.
Okay. And just one last query. Regarding the revenue guidance, so this is assuming a full utilization? Or is this like more like an 80% utilization? What's the better of thinking of it?
Yes, so basically, the guidance whenever we give is considering 80% utilization of a facility.
The next question is from the line of Yash Shah from Investec.
Sir, my first question was regarding our capacity on formulation and salt. So we can see that we have -- we will be increasing our capacity in tandem, which will be basically 20% of the salt capacity for the formulation. So I wanted to understand from you, sir, like how much of the demand will be filled from the -- will be captive consumption? And how much will we have to procure from outside, the electrolytes also the formulation? That would be my first question.
So most of the salts will be made in house. So in fact, we have slightly excess above what is required for internal consumption. So let's say, depending on the formulation, how it forms a 10,000metric ton electrolyte facility would need somewhere between 1,000 to 1,500 metric tons of salt. Against that, we are planning a 2,000 metric tons. So we always have a little bit of a buffer because the reaction chemistry, the lithium salt reaction takes a bit longer time. So it's always -- like it's always good to have slightly overcapacity there. So if at all, you have an additional electrolyte requirement, you can quickly do the electrolyte and be able to serve your customers at a shorter period of time. And the additional capacity can always be used to target international demand. So that's the way -- so at least the way we've taken it, most of the lithium salts, we should be able to make ourselves. However, there are many new additives, which -- so the main electrolyte salts and then there are some specialty additives that we need to take. Usually, specialty additive in terms of volume are not much, and new additives keep coming all the time. So some of the additives, we will be making ourselves and some additives, we may -- if it's a specialized one, we may have to buy from Japan or Korea, where it has already been established till we make on our own. So majority of the salts should be made in-house. Only small quantity additives, some specialized additives might be bought till it becomes of a scale where it makes sense for us to make ourselves.
So that was going to be my next question. Like if we intend to sell the additives as well to the third -party customers. So if my understanding is right, we do not intend to sell them, right?
No. So like the salt which we are making, whenever we have added capacity available, we are -- yes. Similarly, to make our own additives -- yes, even additives also, so if we make ourselves, we would be happy to sell them as if we have excess capacity available.
Sure. Okay. Sir, my next question was about our inorganic segment, the lithium, the traditional lithium salt business, which has been performing extremely well in this year. Can we expect a similar kind of growth to continue in the fourth quarter and in the year ahead, FY '25? And also if you can provide some kind of commentary on the prices of lithium?
Yes. So prices of lithium, as we have shared earlier, like as compared to their standard lithium price what has been there for many years, it's around 6x to 8x. They've been between 6x to 8x of whatever is the usual lithium prices. Like so they are significantly on a higher side. And like when you are comparing last year versus this year, a significant portion of that is also because of this price increase. So when you go a year forward, yes, so as we've explained, we are increasing our Dahej facility. And over next 2 to 3 years, we also expect that that facility should get fully utilized. But like -- so if the lithium price remains the same, you may see like a 40%, 50% increase over the next 2 to 3 years. But in terms of percentage, what we are seeing, 85% and stuff like that, with the lithium prices, so significant portion of that is because of the higher lithium prices. So if the lithium prices were -- so next year, you will -- like we'll maintain the same level and then show further volume increases. On an absolute value term, whether it remains the same or it might even drop if the lithium prices start going down, let's say, what we are estimating is that when the dust settles and when enough lithium demand/supply is kind of balance, it might be 2x or 3x of what was historical lithium prices. So like as it goes there, that transition, when it will happen, it's very difficult to predict. Will it happen in 2 years, it will take 4 years or it will take 6 years to reach those levels is very difficult to predict. So that's why lithium price remains a bit of a question mark. But at least from what we heard, it is not going down to the previous level for sure. Even when it settles down, it will be 2x or 3x what was historical lithium prices, and it might happen anytime between the next 2 to 4 years. So volume-wise, we expect the volumes to -- like the additional 1,200 metric tons which we are adding, which will give us additional volumes over the next 2 years, 3 years. But value-wise, it's a bit uncertain, depending on how the lithium price behaves.
Got it, sir. Sir, last question from my side would be, in the previous quarter, sir, we had mentioned that we had added about 5 customers on the CSM side on the Flavors & Fragrance, which had a revenue potential of INR 200 crores and wherein some of our projects have moved from pilot stage to the commercial stage. So have we already started supplying them in the current quarter?
Yes. So whatever has moved to from pilot to commercial stage, we have started supplying. Some we will be supplying in Q4 of this year. So like yes, so we did supply something last year, something this. The aroma ones are still under discussion. The flavor, fragrance ones are still under discussion. They've not yet commercialized. But we are hoping in next financial year, we'll see some revenue contribution coming from there.
So we remain intact with the 20% contribution from the CSM business by FY '25, right?
By FY '24, yes, that's the target.
[Operator Instructions] The next question is from the line of Nitin Tiwari from Yes Securities.
My question is a clarification on the CapEx side. So the first part of that is the INR 150 crore CapEx that you are doing on the existing business --
Your voice is not very clear.
Is this better?
Yes.
Yes. So sir, my question is on the -- clarificatory question on the CapEx side. So the INR 150 crore CapEx that we had announced in the existing business. So is that completely over? Or what percentage of that CapEx is over? That is one. And then secondly, is that INR 150 crore a part of INR 450 crore in new businesses that you announced? And thirdly, if not, then does that INR 450 crore cover both the phases of battery plant expansion -- battery electrolyte plant expansion?
So thank you for your questions, Nitin. The question [Technical Difficulty] is about how much INR 150 crores we have done. As I said in my opening remarks and in the investor presentation. So 50-meter cube out of 60 meter cube in organic capacity has already been like -- already been commissioned. And the remaining 45 meter cube, we are expecting to complete, let's say, by September. On the lithium capacity increase, like we expect most of the reactors to be in place, let's say, by March. So any time between March and May is we are targeting full commercialization of that. And the third part of the INR 150 crores was the lithium salt trial production. This we will be completing by June. In terms -- I think we have -- of the INR 150 crores, we have already spent somewhere around INR 50 crore to INR 60-odd crores, maybe a little bit more than that. Ketan would have a number, but that's where we currently are in terms of the total CapEx which we have done.Your second question was that, does the INR 450 crore in addition of this INR 150 crores? Yes, this INR 150 crore is separate; INR 450 crores is for the additional CapEx, which is basically to increase the 250 metric ton to, let's say, 1,000 metric tons and then 1,000 to 5,000 metric tons, increasing the salt sourced from 400 metric tons to 1,000 metric tons, and then another 1,000 metric tons and another 5,000 metric tons at the greenfield side. So together, this will be INR 450 crores CapEx and it includes both the phases.
So does the INR 450 crore CapEx also include the cost of land at the new site, which you've not declared? And is it excluding the cost of land that you would have to acquire?
Yes.
Yes is, I mean, it's excluding the cost of land?
No, no, it includes the cost of the land.
So let me summarize this. So for 10,000 tons of electrolyte and 2,000 tons of sold, the entire CapEx requirement is INR 450 crores?
Yes.
And can you break it up in terms of like how much would be required for the salt capacity and how much for the electrolyte capacity?
So currently, because of confidentiality reasons, we don't want to share the breakup of this. Please give us some more time where we are comfortable sharing the break up.
Sure. No worry. Lastly, sir, any comments on the lithium deposit found in Jammu in India? So what's your take on that? Would that work to like bring the prices down? Or like how do you see it evolve?
So we are very happy to know that -- with this development. This will definitely -- like and we are sure that as the world progresses further, more such deposits will be found. Because originally, if we look 3 years ago or 4 years ago situation, we already had identified a lot of deposits as compared to what the world needed. If you just think of India also, it required hardly 2,000, 3,000 metric tons of lithium. So nobody was motivated enough to look hard. And now I'm sure the entire world is looking hard, and I'm sure like I'm happy that in India, we already found a deposit, and there will be more deposits also which will be found. Because previously, people were just not looking hard enough because the demand was not to that extent. It would not help us immediately because I personally believe there's a lot of work still to be done to understand the exact composition. They have an estimate on the quantity, but what is the commercial viability of that. So we are also still trying to find out the exact composition, concentration, what are the other minerals and how the separation would work. So we keep our figures crossed. We are still trying to find more. But I don't think this alone will solve the lithium price issue. But overall, I personally feel that ultimately, demand/supplies will catch up. There's a lot of lithium capacity being added world over. So like over a period of next, let's say, between -- somewhere between 3 to 6 years, the lithium price, the demand supply will match up and the prices should like become more closer to what they were. As I answered in my previous call, it might be 2x or 3x what was the historical average is because some of the new resources which are being found, the processing cost is much higher and the royalty which you have to pay to the government is much higher. So therefore, it will never go back to the historical level, unless there is some very strong demand crash or something or a part breaking new innovative technology, but it will be like lower as compared to what it is. It's just difficult to predict when.
We'll take our last question from the line of Sabyasachi Mukerji from Centrum PMS.
First question is if you can explain the reason behind the gross margin dip during the quarter, both on Q-on-Q basis as well as Y-o-Y basis is lower?
Yes. So it's just a function of both the lithium prices as well as the product mix in the current quarter.
No, I mean, you have been saying that we are increasing our CSM mix, which I believe is a higher margin and which was kind of reflected in the margins in gross margins in Q1 and Q2. But then sequentially, has there been -- I mean, any other thing other than lithium prices, let's say, bromine prices were very expensive or something like that or any other reason?
Yes. So between CSM projects also, there are some projects which are more longer and have different gross margin profile. So it's again, just product mix difference between these molecules.
But in the long term, you would stick to around 45%, 46% of gross margin that we intend to do, is that remain intact?
Yes. So what I had explained earlier that we used to be like 40% plus/minus 2% historically. And now we expect 42% plus/minus 2%. So let's say, between 40% to 44% on a stable basis. That's the way so far we have seen, yes. So at least till FY '24, we expect that to be the case. Sometimes we may have a slightly higher margin, but more or less -- right now the way the [Technical Difficulty].
Okay. Next is on this electrolyte capacity that we are putting up to 10,000 metric tons and this is largely almost 1,200 to 1,500 metric tons will be internally consumed. So lastly, if I do a broad math, 10,000 metric ton is INR 1,000 crores of revenue. One metric -- I know this is not so easy, but then broad crude math, 1 metric ton is easily INR 1 million. So the 150,000 metric tons of potential capacity that India will have -- I mean, India will need by 2030, does it reflect that it is probably a INR 15,000 crore market size that we are looking at that then probably we would be having bare minimum 25% kind of market share or more than that? Is that the way we are looking at?
So that's why for purpose, we have still not said how much 150,000 metric ton means. So again, this is a mix of salt and electrolyte. These are the capacities. And like as I said, not all can happen together. So you'd still not want to comment on the exact price and the exact market size. We would like to wait like until at least some few contracts are signed, or, let's say, there's a better clarity in terms of how this business develops in India. So please allow us time till that time.
Sure. And this INR 2,000 crore to INR 2,250 crores, whatever you are guiding in FY '27 at peak utilization, these are at , I believe, at stable prices. And on top of that, if I do the 18.5% of, let's say, 18% EBITDA margin, so you're looking at a INR 350 crores, INR 360 crores of EBITDA by FY '27. Is the math correct?
No. So we wanted to keep tracking what is stable lithium price and what is normal lithium price. So currently, like for now, the current price looks like the price is going to stay for the next 2, 3 years. So that's why when we get the revenue projection, it's more keeping in mind the current lithium prices.
And do you believe the 16%, whatever we are doing, 16%, 16.5%, margin, that will probably inch up to again probably 17.5%, 18% or 18.5% by the time we reach the INR 2,000 crores or INR 2,250 crores by FY '27, right?
Yes. So if the lithium prices remains the same, then it might be like, again, a little bit on the lower side. So the way you are seeing it. I'll have to do the exact math that how much lithium will contribute. And it will be somewhere around 16.5% to 17.5% in that region. And like yes, with a stable lithium price, it will be somewhere around 18.5% to 19% in that region. In our business, if we do the lithium price correction, we've been able to -- like depending on how [Technical Difficulty] lithium as well as the currency or how stringently we do the correction, we are again in that range of 18.5% to 19% EBITDA. So this year also, we had targeted about INR 110 crores EBITDA. And with the run rate that we are at most likely we should be able to increase, like overshoot -- like the INR 100 crores to INR 110 crore target, which we had kept for this year, we should be overshooting beyond INR 110 crore. For more specific like EBITDA level targets, et cetera, my request is let this business develop a little bit. And then as we are more closer to the years, we'll keep giving you guidance on what the EBITDA looks like, what the lithium price looks like. This is just to kind of give an approximate idea on what kind of revenues we can generate and what kind of CapEx which we are planning, which we wanted to give today.
Sure, sir. Last question, if I can squeeze in. The greenfield capacity for the battery chemicals, I believe, would be mostly domestic focused. And hence, probably the sites will not be in Dahej edge or in some other place. Is my assumption correct? Have you finalized any land?
So it will not mean in SEZ. So you are right, it will be largely domestic and certainly not be in the SEZ, so that's correct.
Ladies and gentlemen, that would be our last question for today. I now hand the conference over to the management for their closing remarks. Thank you, and over to you.
Thank you all the participants for joining the call. I hope we were able to address your queries. If you have any further questions, please feel free to reach out to our Investor Relations team, CDR India, and we will address them. Thank you, once again. Stay safe, and we look forward to connecting with all of you again in the next quarter.
Thank you very much. Ladies and gentlemen, on behalf of Neogen Chemicals Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.