PCBL Ltd

NSE:PCBL

Earnings Call Analysis

PCBL Reports Strong Q2 Growth with Significant Capacity Expansion Plans

PCBL Limited's Q2 FY '25 showcased a solid performance, with a 45% increase in revenue to INR 2,163 crores, driven by a 14% rise in Carbon Black sales volume. EBITDA surged 53% to INR 369 crores, with an EBITDA margin of INR 21,324 per tonne. The company targets a 20-25% EBITDA margin for Aquapharm by FY '29 and aims for 17-18% sales growth from FY '26 as it integrates new capacity worth INR 600-700 crores over the next five years. In addition, PCBL expects to reach one million tonnes of Carbon Black capacity by FY '27-28, enhancing its global market share.

Strong Growth in Revenue and Sales Volume

PCBL Limited reported impressive Q2 FY '25 results, revealing a 45% growth in consolidated revenue to INR 2,163 crores. This surge was supported by a 14% increase in carbon black sales volume, reaching 1.48 lakh tonnes. Both domestic and international sales contributed, with export volumes showing strong year-on-year growth of 22%. This growth trajectory creates a strong positioning for investors looking for solid financial performance.

Robust Margin Expansion

The company's consolidated EBITDA grew by 53% year-on-year, amounting to INR 369 crores, with an EBITDA per tonne from carbon black standing at INR 21,324. This reflects efficient operations and a favorable pricing environment. The company looks poised to sustain these margins and potentially improve them further due to ongoing operational efficiencies and a favorable product mix.

Segmental Performance Highlights

Segment-wise, the tyre accounted for 82,383 tonnes, with performance chemicals at 49,183 tonnes and specialty sales surging to an all-time high of 17,127 tonnes. Furthermore, power generation increased significantly by 25% to 209 million units in the quarter. Such diverse performance across segments indicates strong market placement and opportunities for further growth.

Acquisition Integration and Future Prospects

Aquapharm Chemicals, recently acquired by PCBL, is beginning to show stable performance post-integration, with Q2 revenues at INR 362 crores and an EBITDA of INR 50 crores. However, Aquapharm faced volume stagnation this quarter, attributed to improving operational efficiencies that will yield results in coming quarters. Underlying potential remains strong as the company targets 15-20% volume growth in this segment again in the future.

Capacity Expansion and Capital Expenditure Plans

PCBL is executing a robust capacity expansion strategy, targeting a total Carbon Black capacity of 1 million tonnes by FY '27-28. The company is committed to spending around INR 2,500 crores over the next 3-5 years for capacity enhancements, including a 20,000-tonne specialty carbon facility and a brownfield expansion in Tamil Nadu which includes the addition of 60,000 tonnes. This planned increase will significantly bolster production to meet rising demand.

Strategic Initiatives in Nanovace Technologies

A noteworthy development for PCBL is its joint venture with Kindia Private Limited to form Nanovace Technologies, focusing on nano-silicon products for lithium-ion battery anodes. This venture, backed by a $44 million investment across two years, aims to position PCBL in a rapidly growing market, potentially generating up to INR 2,000 crores in revenue once operational by FY '27 with expected EBITDA margins of around 50%.

Sustainable Debt and Cash Flow Management

PCBL anticipates generating approximately INR 9,500 to INR 10,000 crores in cash flow over the next five years, enabling sustainable growth while effectively managing its debt levels. The management targets a debt-to-EBITDA ratio below 2, indicating a disciplined approach to capital structure, which enhances investor confidence in financial stability.

Market Potential and Competitive Position

With the global demand for carbon black anticipated to grow, especially as traditional players in Russia and China reduce capacity, PCBL stands ready to capture market share. The company is not relying solely on domestic demand but is expanding its global footprint, as evidenced by a rise in exports from 30% to 40% of carbon black sales. This strategic positioning sets the stage for a thriving future.

Conclusion: A Promising Investment Outlook

PCBL's recent earnings call underscores its vigorous growth mindset, operational expansion, and strategic positioning in the market. The combination of revenue growth, robust margins, strategic acquisitions, and prudent capital expenditure marks it as a compelling opportunity for investors seeking exposure to the specialty chemicals sector, particularly carbon black and emerging technologies in battery chemicals.

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to PCBL Limited Q2 FY '25 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Sanjesh Jain. Please -- thank you and over to you, sir.

[Sanjesh Jain, executive]

Thanks, Nivedita. Good afternoon, everyone on the call. Thank you for joining on the PCBL Limited Q2 FY '25 Results Conference Call.

We have PCBL management on the call, represented by Mr. Kaushik Roy, our Managing Director; Mr. Raj Gupta, CFO; Mr. Saket Sah, Group Head, Investor Relations and ESG; Mr. Pankaj Kedia, Vice President, Investor Relations.

I would like to invite Mr. Kaushik Roy to initiate the call with his opening remark, post which, we will have a Q&A session. Over to you, sir.

[Kaushik Roy, executive]

Thank you so much. A very good day, ladies and gentlemen. Good afternoon and a very, very warm welcome to all of you. And at the same time, I wish you all a very, very happy Diwali and prosperous New Year. I'll take you to some of the major highlights first for the quarter, and thereafter, we'll be happy to take questions.

During the quarter, our consolidated sales volume from Carbon Black increased by 14% year-on-year to 1.48 lakh tonnes, while consolidated revenue from operations increased by 45% to INR 2,163 crores on the back of better realization, higher sales volume, and revenue from recently acquired Aquapharm Chemicals.

Consolidated EBITDA grew by about 53% year-on-year to INR 369 crores. PBT stood that INR 164 crores, while PAT stood at INR 123 crores. Consolidated EBITDA per tonne in Carbon Black business further increased to INR 21,324.

Of the total Carbon Black sales volume, domestic sale was at 90,219 tonnes, while international sale was at 58,474 tonnes. Export sales volume registered a strong year-on-year growth of 22% in Q2 FY '25.

Now let me move on to segmental performance. Tyre accounted for 82,383 tonnes. Performance chemical reported sales volume of 49,183 tonnes, while specialty sales volume were at 17,127 tonnes, which is again the highest ever in our history. We continue to expand our product portfolio and customer base. During this time, we also achieved the highest ever power generation and sales volume during the quarter. Power generation increased by 25% from 167 million unit in Q2 FY '24, to 209 million unit during the quarter with external sales volume of 126 million unit, as against 103 million unit in Q2 FY '24. PCBL's average realization stood at 3.56 per kilowatt hour.

Coming to 6 monthly performance, during H1 FY '25, consolidated revenue from operations increased by 52% year-on-year to INR 4,307 crore from INR 2,834 crore, which was H1 FY '24. Sales volume increased 19% year-on-year to 3,02,610 metric tonne in H1 FY '25. The consolidated EBITDA for H1 FY '25 was up 62% year-on-year to INR 738 crore, FY '25 INR 445 crore from FY '25 INR 455 crore. Power generation and sales volume also ended by around 20% in the first half of the financial year.

Let me now talk about Aquapharm Chemicals. Aquapharm Chemicals reported a steady performance during the quarter. Post the completion of the acquisition, we have been working on an integration process. The company is implementing various cost optimization and operational efficiency measures, which would result in better capacity utilization, leading to improvement in company's performance in coming quarters. In Q2 FY '25, revenue stood at INR 362 crores and EBITDA stood at INR 50 crores.

The quarterly sales volume stood at 24,510 tonnes. The capacity utilization witnessed remained above 75% during the quarter. PCBL is amid an aggressive capacity expansion program in Carbon Black, water treatment, detergent as well as oil and gas chemicals under Aquapharm. The company is working on strengthening its supply chain, improvement in product mix, and cost optimization -- cost optimization initiatives. The long-term prospects of all the business segment look quite positive and we believe there would be adequate business potential to sustain the growth momentum.

At PCBL, research and innovation are important drivers of both technical advancement and business expansion. As communicated earlier, the company has made substantial investment in infrastructure, human capital, and streamlined processes. These investments have significantly bolstered PCBL's capabilities in new product development, customization, and applications as well as process efficiency. The Carbon Black capacity of the company stood at 7,70,000 metric tonne per annum.

PCBL expects through commission the Specialty project of 20,000 metric tonne per annum in Mundra, and 30,000 metric tonne per annum, brownfield expansion of Carbon Black's facility in PCBL Tamil Nadu in Q3 FY '25.

The second phase of PCBL Tamil Nadu expansion of 60,000 metric tonne per annum would take the total installed capacity to 8,80,000 metric tonne per annum with a Green Power capacity of 134 megawatt in FY '26. Aquapharm Chemicals is implementing an expansion project of 38,000 metric tonne per annum, which is likely to be commissioned by March 2025. We aim to reach 1 million tonnes capacity in Carbon Black by FY '27-28, possibly we'll surpass this target as well. We're currently evaluating sites for proposed greenfield capacity. This would help us to significantly increase our global market share.

Now let me share some update on our recent joint venture in battery chemicals space, specific to anode. PCBL has executed a JV agreement with Kindia Private Limited to form Nanovace Technologies Limited for developing Nano-silicon products to be used in anodes of Lithium-ion batteries. PCBL holds 51% and Kindia 49% in Nanovace Technologies. PBCL would infuse $44 million in Nanovace in multiple stages over next 2 years for acquiring IPs, setting a pilot plant, and thereafter commercial scale manufacturing facility.

Currently, Nanovace is setting up a pilot plant at PCBL Palej plant -- Palej site. The Carbon Black business continues to be on a strong growth trajectory and is well poised to capture the growth in domestic and exports market with new capacity additions, wide product suite, and a strong R&D capability. The company continues to invest in growth, innovation, and supply chain capabilities across the world. We expect significant growth in international sales volume to European markets. With planned capacity additions, PCBL plans to ramp up global sales volume from FY '26.

With this update, I'll conclude now and open the floor for your queries. Thank you so much.

[Operator]

[Operator Instructions] The first question is from the line of Aditya from SMIFS Limited.

[Aditya Khetan, analyst]

Sir, my first question is on to the expansion, which we are doing of 30,000 tonnes by next quarter. So has the work at the site be completed fully as of now?

[Raj Gupta, executive]

Yes, Aditya, the project work is almost complete. We are awaiting consent to operate. We have already applied for it, and we expect commissioning soon.

[Aditya Khetan, analyst]

And sir, in this plant, so it is an extension to our existing grades only or we are -- so recently, we have also got some patented products into the Carbon Black space. So that new products we are planning to launch here or it is an extension of the old product?

[Raj Gupta, executive]

We have 3 broad portfolios or business segments under PCBL. One is specialty, which requires completely different processes and reactor design. Rest, all grades can be manufactured in this new facility. So other than specialty, specialty requires separate reactors. Currently we have such reactors in Palej and Mundra. Rest all plants can manufacture all the other grades, including the ones which we recently patented.

[Aditya Khetan, analyst]

So my next question is on to the Carbon Black EBITDA per tonne. So I believe, sir, for the last 2, 3 quarters, we are maintaining that run rate of INR 21,000 per tonne. So how sustainable you see this number to be going ahead? Can there be like this can fall down to your original target of INR 18,000 per tonne, which you were alluding 1 year back? Can that number be achieved? Or do you think this is a sustainable number for now?

[Raj Gupta, executive]

So the global business environment even now is extremely turbulent. Last quarter we saw the freight rates moving up by almost 35%, 40%. And the margins that you see for last quarter is in spite of that. We not only believe that these margins are sustainable, we believe there is fair level of cushion for us to go up on margins as our product mix change, as our operating leverage improve. And we are still working on improving our manufacturing efficiency. So yields also have scope to improve.

[Aditya Khetan, analyst]

But sir, suppose if the freight rates compress or they come down, which we have started to witness on quarter-on-quarter that freight rates are coming down. Still you see that these spreads can maintain because so decline in freight rates would definitely impact the spreads also of Carbon Black. In spite of this, you are factoring like this -- so this number can be maintained, do you mean?

[Raj Gupta, executive]

Aditya, when we sell in global markets, we have to compete with the local manufacturers. So when freight rates are high, our margins get compressed. So in a low freight scenario, the margins would tend to go up, not go down.

[Aditya Khetan, analyst]

I was, sir, actually mentioning, so when freight rates are high, so to pass on that impact, you generally keep the Carbon Black prices at a higher level, just to pass on that incremental freight. So in that time, generally, the spread looks optically higher as compared to a normal business environment. But still like you are alluding to the fact that this number can be maintained?

[Raj Gupta, executive]

Yes. I mean, when the cost of doing business comes down, generally, the margins expand, and that is true to our business also.

[Aditya Khetan, analyst]

Sir, on to the Aquapharm, I believe, sir, you were guiding earlier around 15% to 20% volume growth. In this quarter, sir, we had witnessed only, you can say, flattish volumes only. Any specific reason, sir, you can highlight for these flattish volumes?

[Raj Gupta, executive]

Aditya, there are a lot of stuff that we are doing in Aquapharm. We are primarily working on improving their cost structure, improving their operational efficiency and improving their capacity utilization. But all these initiatives will take some time. So the real reflection of such measures will flow into the numbers maybe after 2, 3 quarters. So current quarter, I mean, with all the global uncertainties which are there, plus the turbulence in global business conditions, last quarter was largely flat, but we expect this performance to improve maybe quarters going forward.

[Aditya Khetan, analyst]

Sir, just one last question. Sir, outlook on the debt, what we are foreseeing, and in earlier call, sir, you have mentioned that we are looking at around INR 2,000 crores of cash flow per annum. In half yearly, sir, we have made somewhere around INR 700 crores, INR 800 crores. Just want to know that -- so the INR 2,000 crore annual cash flow number can be maintained for the next 2 years, 3 years? And how that will be utilized for repayment of debt and for the further CapEx?

[Raj Gupta, executive]

Aditya, when we spoke about cash flow, we spoke about how much cash we are going to generate over the next 5 years. And we did speak about INR 9,500 crores to INR 10,000 crores of cash generation. But cash generation would increase every year with higher capacity, higher sales volume. So it will be not -- it will not be uniform across every year. So it will not be like INR 2,000 crores every year for next 5 years.

But we will be generating enough cash flow, which can support our growth plans as well as also help us reduce our debt.

[Aditya Khetan, analyst]

Sir, any debt figure you have made up in mind like for FY '26, '27, what would that -- so what would that number be look like?

[Raj Gupta, executive]

We are not looking at any absolute debt level, but we are not comfortable with our debt EBITDA beyond 2. So we'll try and bring it down to that. Now it might take a year more because we will not certainly compromise with our growth plans just because there is a little more debt on our books. But whatever surplus cash that we generate beyond our capital expenditure, that certainly we are going to utilize towards debt reduction.

[Operator]

The next question is from the line of Radha from B&K Securities.

[Radha Agarwalla, analyst]

Sir, my first question was that in the Carbon Black business, according to a previous presentation given by the Company. So I just wanted to understand the demand scenario. So India is expected to create an incremental demand of 4.5 lakh tonnes in the next 5 years. The Europe rebalancing of supply chain is creating an incremental demand of 2.5 lakh tonnes. And global market ex of India, if we factor in a low single-digit growth rate, then that is creating around 300 lakh tonnes of demand in the next 5 years. So from FY '24 base, PCBL's target is to achieve another 4 lakh tonnes of volumes in the next 5 years. So from India, if we assume 33% market share in India, then we can get around 1.5 lakh tonnes from India out of the 4 lakh tonnes of incremental volumes that we want to do in the next 5 years. So for the balance, that is 4 lakh tonnes minus 1.5 lakh tonnes, can you help us -- can you please help me how the road map is? How much from Europe rebalancing are you targeting? And how much from the remaining global market growth?

[Raj Gupta, executive]

Radha, we are not targeting any particular market for our growth aspiration. It's a fairly large market. It's a 15 million tonne market already. And if you look at the global growth rate, long-term growth rate has been around 3.5%, which creates a large opportunity for -- and scope for further increase in volume. Now a lot of countries which has large consumption are not adding capacity. So the opportunity for Asian manufacturers become very large. We are a global company. We don't depend on any single market. We don't even depend on India for that matter. If you look at our last 3 years, 4 years export volumes, these have increased from around 150,000 tonnes to 250,000 tonnes already. And there is a large market there. We have invested heavily in our supply chain ability in the last 4, 5 years. Currently, we don't have capacity to cater to all this demand which is there in the market, but the demand is there. So whatever infrastructure we have already created, that will support our growth plans. We are very confident that growing at 10%, 11% volume CAGR in the next 5 years is not going to be much of a challenge for us. We just need to have capacities.

[Radha Agarwalla, analyst]

So just if you can give this Europe rebalancing of 2.5 lakh tonnes that Russia and China used to supply. So out of that, how much can we get?

[Raj Gupta, executive]

Radha, we are looking at all markets with equal -- I mean, having equal possibility. So we are not focusing our growth plans on any particular geography. We will remain flexible. So wherever we see opportunity, and we are trying to create stronger presence on all markets where there is a potential. So Europe remains important for us, but this is obviously not going to be the only market. So putting a number to a market, I don't think that will be fair for us at this stage.

[Radha Agarwalla, analyst]

Sir, second question is on the CapEx front. So in the last call, you had highlighted that to achieve INR 2,300 crores of EBITDA in Carbon Black business, we need around 1.4 million tonnes of capacity. So on a base of FY '24 capacity of 7.7 lakh tonnes, we need to add another 6.3 lakh tonnes. So the CapEx per metric tonne was also highlighted in the last call, so that I have taken at INR 65,000 per tonne. So that gives us a CapEx of INR 4,500 crores only on the Carbon Black business. So -- but in the call, it was highlighted that on Carbon Black, we'll be spending INR 2,500 crores, but I am getting INR 4,500 crores. So please help me where I'm going wrong or help me understand these numbers?

[Raj Gupta, executive]

Radha, I think the numbers are not correct. We did speak about 400,000 tonnes of additional capacity requirement. So if we grow at about 10%, 11% every year, by 2029, we will require another 430,000 tonnes of capacity, which will involve a CapEx of about INR 2,500 crores, INR 2,600 crores, and that's the number that we shared during the last call.

[Radha Agarwalla, analyst]

Sir, lastly, you spoke about the supply chain that we have created over the years. So exports has become a very big factor for PCBL. So currently, 40% of our Carbon Black sales are exported. So that has gone up from 30% in the last 2 years. And in ACPL also 90% of sales are from global markets. So just wanted your thoughts a little bit about if you could speak on how the company has improved its supply chain in the global markets, both organically and inorganically? If you can tell us a bit of numbers in terms of how many distributors we have added in each region? Where we are standing versus peers? And how we are planning to scale this up in the next 5 years?

[Raj Gupta, executive]

Well, Radha, last 6 years, 7 years, we have been investing in supply chain bandwidth. Currently, we have 7 global offices. We are going to get another one, I think, in a month's time. So we'll have 8. Then we have our own warehouses, decanting stations, even R&D center outside India. And I'm only talking about [Technical Difficulty] currently, there are 21 touch points, which includes these warehousing facilities, decanting stations, and our offices in different part of the globe. Additionally, we also have tie-ups with dealers and distributors. But in all the geographies where we see large potential, we have our own office now. So only those -- I mean, the smaller geographies where it is more fragmented sales, that we are doing through dealers and distributors.

Additionally, now with Aquapharm coming under our fold, they have equal -- almost equal number of touch points. So together, if you look at the entire supply chain, currently, we have more than 40 global supply chain points outside India. And we are, of course, I mean, going to strengthen it further going forward. We don't -- as I said, we don't depend on India for our growth aspirations. Entire world is our marketplace. So we are going to further invest in supply chain capability going forward.

[Radha Agarwalla, analyst]

Sir, just one last question. Please help us understand the products in Nanovace. So what is the USP of the products that we'll be making in that compared to the peers? And will there -- or is there anyone in India having such capabilities? Or will we be the only company having the sole advantage?

[Raj Gupta, executive]

Well, Radha, so in battery, there are 3 important parts. One is anode, one is cathode, and one is the electrolyte. Cathode is where the reaction happens and the ions are generated and ions are stored in the anode part of the battery. So anode plays an important role in battery capacity. So the higher the absorption capacity of anode, the bigger will be capacity of the battery and also it will -- the lower will be the charging time of the battery.

Now conventionally, anodes were made from graphite, and graphite has very limited ion absorption capacity. What we are going to produce under Nanovace will be an additive, which when mixed with graphite and anode will increase its absorption power, ion absorption power, which will increase battery capacity and which will also reduce the charging time of the battery. Now it's a breakthrough technology. Currently, while I would not say we are going to be the only manufacturer in this space, a lot of work is happening globally on different materials. We are working on silica. And currently, the material that we are going to manufacture is one of its own kind. It's, like I said, breakthrough technology. This material is very expensive globally. Currently, it is getting sold at $300 a kg. We believe that even if we sell it at $100 a kg 2 years from now, we are still going to get about 65% gross margin. That's the kind of potential on the profitability side. So this is it, Radha, I hope I've been able to answer your question.

[Operator]

[Operator Instructions] The next question is from the line of Kunal from Kitara Capital.

[Kunal Ochiramani, analyst]

Sir, can you give me outlook for Aquapharm for next 3 to 5 years as in how to understand the business and how is the outlook for the business? And second, again, for battery chemical space, as I rightly understand, the revenue will start flowing from FY '27 onwards. So do we have any visibility for that revenue? And like you said, 60% gross margin. So what cost advantage do we have? Is it the labor or the raw material?

[Raj Gupta, executive]

It is the process itself, Kunal. So I'll answer your second question first, and then I'll hand it over to our MD to answer the Aquapharm thing. Currently, the process of manufacturing is extremely power intensive. And consequently, the cost itself is very high. We believe that we can produce it at 1/5 of the cost. So what this process will involve is conversion of natural silica or the regular silica into nano-silicon particles. Silica is one of the most abundantly available material in the universe, and therefore, I mean, very cheap. And our process will not be as power intensive, and therefore, we will have the cost advantage. Right? So that's on the -- this thing.

Now on the profitability part, we are starting with a 2,000 tonne capacity. Even at $100 a kg revenue, this 2,000 tonne full capacity will generate a INR 2,000 crore top line. So that's kind of -- and we believe that once this plant comes up, which should be in FY '27, it will not take us more than a couple of years' time, 2 years' time to utilize full capacity. So by FY '29, we should be doing at least INR 2,000 crores kind of revenue from this facility.

On Aquapharm, long-term business plans, of course, we have. But what we are doing currently, I think that is more important for you to understand. I'll hand it over to Mr. Roy, if you want to [indiscernible].

[Kaushik Roy, executive]

Well, on Aquapharm, there is 2 parts to it. One is the Indian portion and the other one is the U.S. portion. Now Indian portion, primarily they are into water treatment and detergent application. And U.S. is more into the chemical for oil and natural gas production. Coming to India, within detergent and water treatment application, there are 3 categories of products. One is phosphonate, which is kind of the base and fundamental grade. One is polymer and the third one is green chelates. Aquapharm currently is more focused on phosphonates. But going forward, our major focus will be on green chelates and polymer application for water treatment and detergent as well. The reason is polymer and green chelates both are more green product from the point of view of sustainability and will be the need of future for the entire globe. So therefore, the focus will move more and more towards green chelates and polymers. And this will be driven primarily by the R&D coming out with newer products in both these categories, polymers as well as the green chelates. And we see a clear, very sharp growth opportunity in these 2 areas. While phosphonate we will continue to hold our position as the leader, global leader, we'll continue to expand in phosphonate as well.

Coming to U.S.A., which is primarily for oil and gas chemical, this is primarily as of today for U.S. market, but we are likely to expand beyond U.S. into European market as well. That is our desire. Current capacity is not fully utilized. We are going to add further capacity as soon as we feel the current capacity is getting consumed fully. So that is the plan going forward. We expect to invest roughly around anywhere between INR 600 crores to INR 700 crores over a period of next 3 years to 5 years between Aquapharm and U.S.A. -- Aquapharm India and U.S.A.

[Kunal Ochiramani, analyst]

INR 600 crores to INR 700 crores of revenue?

[Kaushik Roy, executive]

INR 600 crores to INR 700 crores of investment in CapEx over a period of next 3 years to 5 years between India and U.S.A.

[Kunal Ochiramani, analyst]

And what should be asset turn for the CapEx?

[Kaushik Roy, executive]

What should be?

[Kunal Ochiramani, analyst]

The asset turnover ratio, so how much revenue should this CapEx generate?

[Raj Gupta, executive]

It should generate about -- so if you look at their current fixed asset block, they have about INR 400 crores of assets, which can generate about INR 2,000 crores of top line. We believe the ratio will be largely the same.

[Kunal Ochiramani, analyst]

And margins should be better or should be at similar range?

[Raj Gupta, executive]

See, historically, they have operated at about 20% plus margin. And with the new product launches, which are high margin, going to be high margin, we believe that we can improve it further. So FY '29, we are targeting about 25% EBITDA margin from this business.

[Operator]

The next question is from the line of Sanjesh Jain.

[Sanjesh Jain, executive]

First of all Happy Diwali to the entire team. I've got question, a bookkeeping question, let me finish that. This quarter, there was a sharp drop in the other expenses on the standalone side. Any particular reason? And this is despite since freight costs being elevated. That's one. #2, it appears that there is some compression in the gross profit margin at Aquapharm level and that's leading for EBITDA sequentially declining. Any particular thing happening in the Aquapharm? Is the general weakness in the entire market impacting?

[Raj Gupta, executive]

I'll answer the other expenses part. Aquapharm, Mr. Roy will explain. So our other expenses contain some of the variable expenses also. And volume this quarter was around 5,000 tonnes lower compared to last quarter. So there was a proportionate decrease there. Also in the first quarter, there were some shutdowns that we had taken towards end of first quarter. So there were some repair and maintenance related expenses, which were there, which obviously was not there in quarter 2. So it was primarily on account of that.

Coming to Aquapharm thing, I'll request Mr. Roy to answer.

[Kaushik Roy, executive]

Aquapharm, the decline what we have seen, actually, it has happened more from U.S. operation. The U.S. market from the point of view of oil and gas sector is going through a very, very rough patch in recent times and the demand has come down substantially. And that has put a lot of pressure on our capacity utilization as well as on the margin. And that is what is reflected in the number what we have seen. But our feeling is it will eventually recover in U.S.A. And that's all the more reason we talked about just now that we'll be expanding in the European market for oil and gas chemicals as well. So that is the reason we are expanding and we are going beyond because we don't want to put all the risk in the same -- all the eggs in the same basket. We want to kind of derisk the whole thing. And therefore, we are looking at beyond U.S. market to Europe.

[Raj Gupta, executive]

Very few.

[Sanjesh Jain, executive]

Raj, just on the operating cost, INR 14.50 is the operating cost this quarter and for last many quarters, if you see, we were hovering around INR 15 and INR 16. There is a genuine reduction in the cost. It's more of an operating leverage which is playing out here? Or do you feel that we will again go back to INR 15 plus?

[Raj Gupta, executive]

So it is largely operating leverage, plus, I mean, with all the investments that we have made in new business, we are also looking the scope to reduce our cost wherever possible. But it is mostly the function of operating leverage. With higher capacity, we are getting that advantage.

[Sanjesh Jain, executive]

So a last question from my side, on the battery chemicals side. How has been the response? Have we started speaking to the battery OEMs? And are they excited with the scope of integrating silico-graphite in their battery? Anything on the market side will be really helpful.

[Raj Gupta, executive]

I think we are constrained to talk. There are some developments.

[Kaushik Roy, executive]

There are a lot of excitements in the market, and we are in discussion with some of the leading battery and automakers. But at this point of time, we are a little constrained to share those names because of the confidentiality agreement. But generally…

[Sanjesh Jain, executive]

No, no, I'm not looking at names. Have they started integrating it? Have they started looking or putting it in the battery?

[Kaushik Roy, executive]

Absolutely. Absolutely. It has already started. So that joint development and how to use it, what is to be done, et cetera, the discussions have already started.

[Raj Gupta, executive]

Sanjesh, we are very confident that once we get the pilot plant, in a year's time, we will have approvals from most of the targeted consumers.

[Kaushik Roy, executive]

These are some of the global names. These are some of the global names. Unfortunately, we are constrained and not able to share with you. At an appropriate time, we'll do that. But these are all big global names, from auto and battery.

[Raj Gupta, executive]

Sanjesh, what we will also do maybe at a later stage, we will arrange investor interaction with some of the scientists who are part of this project. I think that will provide you with more understanding on the technical part of it and the feasibility part of the project.

[Kaushik Roy, executive]

They would love it.

[Sanjesh Jain, executive]

They would love it.

[Operator]

The next question is from the line of Bharat Sheth from Quest Investment.

[Bharat Sheth, analyst]

My first question is related to the Carbon Black. Raj, when we are talking of 10% to 11% of CAGR growth for the next 4 years, 5 years, within that, if you can give some color how much will be the specialty growth and performance chemicals?

[Raj Gupta, executive]

The whole pie has the opportunity. So while Specialty, we will be maintaining about 10,000 tonnes of volume addition every year, in rest of the portfolio also we are going to add similar kind of growth. So when we say 10%, 11%, this is both the pies are going to expand by the same. Only thing is that the base in specialty is smaller currently. So specialty will become almost double in the next 4 years, 5 years' time, but this portfolio will increase by about 60% to 65%. So the volume is on the entire pie. The volume growth is on the entire pie.

[Bharat Sheth, analyst]

And performance chemical side, if you can give a little more color, which I generally believe that has a little higher profitability than the tyre grade. Is that a fair understanding?

[Raj Gupta, executive]

Yes, that's more fragmented market and carries better margins, about 25% more compared to tyre, which is bulk business for us.

[Bharat Sheth, analyst]

So that will continue to grow at 10%, 11% or there is a room to improve the growth in percentage?

[Raj Gupta, executive]

Yes. More or less, I think the share percentage between performance and tyre grade segment will remain more or less similar.

[Kaushik Roy, executive]

Bharat Sheth-ji, tire and this performance chemicals market are pretty matured and a larger base. So what Raj talked about 10% plus will be naturally for these 2 segments will be around that, whereas specialty, since the base is a little smaller, the percentage terms, it will look larger. The growth will look a little larger in percentage terms. But as we mentioned, every year we're adding 10,000. Like this year, we are going to close possibly around 60,000, 65,000. We'll be adding another 10,000. So number wise, percentage number wise, it will be a little more. But if you look at the whole pie, the point here is that we'll be growing in all these 3.

Percentage don't look at because that's not the right measurement. It depends on the base and the size. In specialty, we are growing, it is a comparatively smaller base. So therefore, the percentage will look a little bigger.

[Bharat Sheth, analyst]

Now coming on to this Aquapharm, when you spoke about this INR 600 crores to INR 800 crores kind of a CapEx over 5 years and where we are seeing that phosphonate result -- polymer as well as green chelates has a better profitability and better growth prospects. So can you -- this capital allocation, if you can share some -- how much that your CapEx you are going for this polymer and green chelates side and some -- so that can be…

[Raj Gupta, executive]

See, these are all part of our innovation Bharat-ji. Now the margin profile even in the conventional business of Aquapharm is good. So we are not saying that these are going to be exceptionally higher margin in this business. But then as a business, we have to constantly move up the value chain and keep the business relevant for the customers. So all these innovations which are happening is towards portfolio expansion and also cater to part of the market currently to which we are not catering.

[Bharat Sheth, analyst]

And last question, Raj, for you. Normally, when the oil price is low for Carbon Black, I mean, we have the working capital comes down substantially. So anticipating oil remain in 70 to 75 range, broad range, how much saving that or additional cash flow can we generate from working capital?

[Raj Gupta, executive]

It's a very simple math. So crude falls by 10%, our working capital requirement goes down by around 8%. So that's a very simple calculation. But then that's on assuming that we have the same turnover. We are expanding in terms of volume, and that will also reflect on our top line. So the savings in working capital will also depend on the overall turnover that we are generating from business. But yes, the capital efficiency will improve when crude comes down.

[Operator]

The next question is from the line of Krishan from JM Financial.

[Krishanchandra Parwani, analyst]

Wish you a very happy Diwali. Firstly, on Carbon Black, what was the reason for the sequential dip in overall sales volume, especially the exports?

[Raj Gupta, executive]

Krishan, will you please repeat your question?

[Krishanchandra Parwani, analyst]

Okay. So am I audible now?

[Raj Gupta, executive]

Yes, yes, you are audible.

[Krishanchandra Parwani, analyst]

Okay. Okay. Yes. Yes. So I was asking on Carbon Black, what was the reason for the sequential dip in overall sales volumes, especially the exports?

[Raj Gupta, executive]

Your question is not clear to me.

[Krishanchandra Parwani, analyst]

I'm asking what was the reason for sequential dip in overall sales volume of Carbon Black?

[Raj Gupta, executive]

Okay. Sequential dip in sales volume?

[Krishanchandra Parwani, analyst]

Yes. Yes.

[Raj Gupta, executive]

So typically So Krishan, what happens, most of the tire companies, they take maintenance shutdowns during monsoon season in India. So that was one reason. And this is usual. I mean, every year, you will see this happening. And also last quarter, the availability of containers was a challenge. The freight rates also moved up because of that. So it also impacted our volumes in overseas market.

[Krishanchandra Parwani, analyst]

So basically, some of the volumes were affected due to the container availability and some due to, let's say, maintenance shutdowns. Is that correct?

[Raj Gupta, executive]

Yes. And overall capacity utilization was still 94%. So we are operating at almost full capacity.

[Krishanchandra Parwani, analyst]

And you expect going forward kind of this coming back to, let's say, 154 KTPA and higher? Or do you expect this to be in the similar range of 148 KTPA, 149 KTPA?

[Raj Gupta, executive]

Yes. I mean the idea is to utilize full capacity, and we know the scope is there in market. See, what is happening is now we are left with very little capacity cushion. And therefore, we can't commit capacity to the new customers or even for the same customers, we can't commit more capacity to them. So we are awaiting new capacities to be available. And therefore, we are also speeding up our project work. So initially, we had given a timeline of fourth quarter for this 50,000 tonne capacity. We kind of increased the pace of project work and now we are targeting commissioning within this quarter. So that will also give us some more capacity cushion. But it takes time between capacity to come up and then getting requisite approvals from customers and being able to ramp that up, utilize that. But idea is to have more capacity with us so that we can also get into more contracts with our stable customers.

[Krishanchandra Parwani, analyst]

And secondly, I think Kaushik Da mentioned that there was some roughness in the oil field chemical side, so the utilization was lower. So what is the capacity utilization you are targeting in Aquapharm for the second half and in FY '26?

[Raj Gupta, executive]

Second half, it will improve marginally. We -- currently we are at about 75% on an overall basis, India and U.S.A. all combined. We believe that by fourth quarter, we should reach around 82%, 83%. We are targeting a little more, but we have more confidence level at that level. But idea is to have full capacity utilization. I mean this 75% or 80% or 85% is not acceptable in our system. There is a fairly large market and all it takes is to spread out and identify opportunities where these are. So our target is to reach full capacity utilization. God's will, we will achieve that in the next few quarters, 4, 5 quarters.

[Operator]

The next question is from the line of Madhav from Fidelity Investments.

[Madhav Marda, analyst]

I just had 1 question. Basically, if you could just share where we are in the Carbon Black demand-supply cycle from a next 3-year perspective. There was quite a lot of disruption which happened in Europe because of the Russian supply and then China obviously had become cost uncompetitive in this space. So if you could just share some view from a 3-year to 5-year perspective, where we are today?

[Raj Gupta, executive]

We believe that China was dominant and prominent and it will remain prominent because they have a large market, captive market only in their own country. They account for almost 35% of global Carbon Black consumption. So the Carbon Black companies in China, they will continue to produce and continue to sell. And when they produce, they will also have some surplus that they will want to sell outside their country. Now, so far as cost is concerned, their cost structure is not what it used to be 10 years back. And China's stance also is today that we will sell to outside China customers, but not at a price at which they expect, but at a price what Chinese companies want. So it has created kind of a level playing field.

Having said that, not many companies in China are making money in this business. And therefore, possibly, they will consolidate further, and we will not see too much capacity coming up there. So the market size will remain more or less constant or it will consolidate further. Russia is facing now sanction from entire Western European Union. And consequently -- and that was where they used to sell their surplus capacity. Now they are selling this capacity elsewhere in the world, mostly in Asian countries. But what will this situation do to them is this will kind of reduce the further investment in capacity. Globally, only Russia and China had advantage in terms of cost. China because of scale and because of coal tar availability and Russia because of its own crude.

Now if China is consolidating or not adding more capacity or not making money in this business and Russia, again, is not making money in this business, and they are also kind of not adding capacity, the opportunity for the world becomes very large. Next 3 years to 5 years, we are looking at with a lot of confidence that it will be a large opportunity for Indian manufacturers and a rapid growth phase for us.

[Madhav Marda, analyst]

That's super helpful. Is there any other country in the world where double the capacity is being added today? Like I think Indonesia, Malaysia used to add some small capacity earlier, but where is the supply really coming to service the incremental demand because like you said, it's a 15 million tonne market, and we might need 4 lakh tonnes maybe each year incrementally. So who is building the capacity today?

[Raj Gupta, executive]

Other than India today, in India and China, I mean, when we talk about Asia, most of the other countries are marginal in terms of capacity. So while small, small pieces of capacity will keep coming up because these markets are also growing in terms of their local demand. If you look at, say, Indonesia or Malaysia or Thailand, these geographies -- these economies are also growing at a rapid rate, almost the same growth rate at which India is growing. So they will have their incremental demand locally, right? But in terms of catering to global demand, they don't have that level of surplus or they are not even planning for that level of capacity additions. So Indian manufacturers will have an age over their other Asian counterparts.

[Operator]

The next question is from the line of Khush from Electrum PMS.

[Khush Nahar, analyst]

Am I audible?

[Kaushik Roy, executive]

Yes, you are. Go ahead, please.

[Khush Nahar, analyst]

Sir, I had one question. So what kind of growth you are seeing in Aquapharm considering the CapEx from FY '26, once things are back to normal, what kind of top line growth and sustainable EBITDA margins?

[Raj Gupta, executive]

Growth in terms of top line, we believe that we can grow at around 17%, 18% from FY '26 onwards. And our margins, we believe that from next year itself, we will have around 20% EBITDA margin, which will gradually improve more towards 25% by FY '29. So we'll see annual increase.

[Khush Nahar, analyst]

And sir, just last question. So we have seen export grow year-on-year by 22%. So can we assume that some contribution was due to increased sale in European region because of the Russian ban?

[Raj Gupta, executive]

Yes, of course, our share of sale in European markets have gone up. In FY '22, it was only about 3.5%, 4%. Currently, we are doing close to 21% in those markets and the scope is much, much better. We are constrained by capacity.

[Operator]

The next question is from the line of Aditya from SMIFS Limited.

[Aditya Khetan, analyst]

Thank you sir for the follow-up. Sir, my question is on to the battery chemicals part. Sir, you had mentioned that -- so the battery chemicals business will generate around INR 2,000 crores of top line. Sir, what are the assumptions we are taking here in terms of the realization?

[Raj Gupta, executive]

We are considering $100 a kg realization, which is around 1/3 of the current market price of similar material.

[Aditya Khetan, analyst]

And sir, this is on to the capacity of 2,000 tonnes, right, sir?

[Raj Gupta, executive]

That's correct.

[Aditya Khetan, analyst]

And sir, similarly, how much would be the EBITDA margins like you have stated, so gross margins would be around 65%?

[Raj Gupta, executive]

It would be around 50%. It will be -- because it's a small capacity, we don't see any kind of elevated fixed overhead structure here. It will be a very lean structure. So around 55% should flow to EBITDA level.

[Aditya Khetan, analyst]

55%?

[Raj Gupta, executive]

50%, 5-0.

[Aditya Khetan, analyst]

And sir, I believe so eventually, we are talking of around -- earlier, we were stating that this capacity was around 3,000 tonnes, sir. I believe in our earlier meeting, you had mentioned 3,000 tonnes. Now that size has been reduced to around 2,000 tonnes?

[Raj Gupta, executive]

No. We are saying that our first plant will be 2,000 tonnes. Of course, we'll have to add another plant of equal size. And therefore, by 2025 -- '29, we should be doing around 2,000 tonnes to 2,500 tonnes at least. It can be even more. But the numbers that I'm sharing is for the first plant, first capacity which comes up.

[Aditya Khetan, analyst]

And from this pilot project only, we would be making around INR 400 crores to INR 500 crores of EBITDA?

[Raj Gupta, executive]

No, no, no, no. The pilot plant is much smaller, and this will be primarily used for sampling purpose.

[Aditya Khetan, analyst]

Sir, INR 2,000 crores of top line, so roughly 50%, so INR 1,000 crores of EBITDA for the JV and INR 500 crores for us from the pilot plant itself.

[Raj Gupta, executive]

No, no, no. Aditya, you're confusing between the 2. So we are initially setting up a pilot plant, which should come up in next 6, 7 months' time. We will use that for sampling purpose. That is not meant for commercial purpose. Parallelly, we are also setting up a commercial plant of 2,000 tonnes, which should come up in FY '27. And that plant, we will utilize for commercial sale.

[Aditya Khetan, analyst]

So this 2,000 -- sir, although this -- so the technology is -- we are already tied up with the technology. So what are the key challenges you see on to this? So if suppose we ramp up from 2,000 tonnes to around 10,000 tonnes, any sort of key challenges so you foresee?

[Raj Gupta, executive]

The market is currently growing at about 25% CAGR. It's about 15,000 tonne market for this material. Very few producers globally. No one is very sizable in this space. And the price of this material is currently prohibitive, as I said, $300 a kg, which kind of also restricts the growth potential. We bring down the price, the market -- I mean, the growth can explode from the current level. We have seen that kind of movement happening in the EV space and EV is not going to be the only industry which will create demand. The power saving requirement across countries that is increasing. And I think that will be one of the biggest contributors to demand for these materials. So currently, of course, we are focusing for the first plant and utilization thereof. But I think in this space, the opportunity is much, much larger.

[Aditya Khetan, analyst]

Sir, on to that 10,000 tonnes, suppose if we commercialize it by 2030, so we can assume some sort of INR 2,000 crores of incremental EBITDA only from this project?

[Raj Gupta, executive]

Yes. So if we put up another 2,000 tonne capacity, at full capacity utilization level, it should be giving us the same level of bottom line.

[Aditya Khetan, analyst]

Sir, on to the Aquapharm, sir, is there any split between the value-added and the commoditized segments like the phosphonates and the chelates into the segmental basket, how they fit into the commoditized and into the value-added side?

[Raj Gupta, executive]

Aditya, nothing is commoditized. I mean this entire portfolio is a very high level of complex chemistry. What we are doing is we are trying to create more sustainable material. But -- so that will be further moving up the value chain, but that doesn't make the existing portfolio or any part of the portfolio commodity. Right. And all the businesses, they will have to constantly move up the value chain. Today, what is relevant, what is specialty tomorrow, it might be treated as commodity, as supply increases or as new technology comes in. The businesses will have to keep moving up the value chain and the green chelates and polymers, these are all a step towards that direction.

[Aditya Khetan, analyst]

And sir, the backward integration into the yellow phosphorus. So when is the timeline, we are planning to complete that?

[Raj Gupta, executive]

We are not doing backward integration into yellow phosphorus. Yellow phosphorus is a mineral. Right? So it is mined. What we are doing is we are setting up a processing or filtering plant, right?

[Kaushik Roy, executive]

Right, right, right. We are going to source yellow phosphorus. We are trying to tie up with some of the miners. And then that we will process and make it usable for Aquapharm. That's the thought process.

Its really from rock phosphate to yellow phosphorus through proper process. That is what we are looking at.

[Raj Gupta, executive]

So part of the process, we will be doing backward integration for. But it remains a mineral, so it is mined. So we can't get into mining.

[Operator]

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

[Rohit Nagraj, analyst]

Sir, first question is on the battery chemical side on the additives front. So you said that the pilot plant will be set up over the next 6, 7 months. So in terms of scale up, would there be any challenges that you have faced in the initial lab setup from maybe kg to a few tens of kgs? And even when we set up a commercial plant, will there be any challenges that may come up and that may probably change the dynamics of the costing and the margins?

[Raj Gupta, executive]

Challenges will always be there because producing something at lab scale and at commercial level will have different issues. Controlling the chemistry at such larger scale I mean that will obviously pose some challenges. But having said that, at the lab level, when they increase the capacity or the reactor size from 2 liter to 20 liters, they got the same result. And therefore, we are very confident that we should be able to replicate the result at a much larger scale also. Also the scientists who are involved here in this whole process and who will be engaged in this whole setting up of plant and also in the initial production process, they are of very high pedigree. One of them even got nominated for Nobel Prize. So that kind of improves our confidence level further. And we have ran some close to…

[Kaushik Roy, executive]

1,200.

[Raj Gupta, executive]

…1,200 tests on the material in our own lab in Belgium and also in one of the external lab in Germany. And the results were very encouraging. So that gives us confidence that we should be -- challenges will be there. I'm not saying that it's the same cup of tea producing at small and large scale.

[Rohit Nagraj, analyst]

Sure. This is very helpful. Sir, second question is on Aquapharm. So there are predominantly 3 segments. What could be the breakup of contribution from each of these segments? And an allied question to that, you also mentioned that we want to go up the value chain and make more sustainable materials. So beyond these 3 segments or verticals, are we currently working on anything new which is in the pipeline? And where it could be a promising new segment for us?

[Raj Gupta, executive]

So I mean, the products that we are generating or producing under different segments, these are interchangeable and these are being used in more than one industry. So like the phosphonate-based product that we are manufacturing, they also have usage in oil and gas, right? So therefore, the margin profile remains more or less similar. I mean, there is not much difference at the gross margin level or at -- for that matter, at EBITDA level between the different segments to which Aquapharm products cater to.

Coming to the second part of your question, Mr. Roy will answer.

[Kaushik Roy, executive]

And the revenue split if that roughly between oil and gas chemical and phosphonate, it is close to 85% between the 2. And the rest remains between green chelates and polymers. Now talking about going up the value chain. Now as Raj mentioned a little while back, even phosphonates is also highly engineered product. It is not very simple product. It is not a commodity, let us accept that reality. It is an engineered technical product. But the objective is to move towards green sustainable product. So that is what we are focusing on right now more through the route of polymer and green chelates. And there are different grades within this overall vertical of polymer as well as green chelates. So fast immediately for next couple of years, we are looking at developing newer products in these 2 categories, polymer and green chelates. And there is a lot of headroom to grow there because the market share of Aquapharm in these 2 particular segments is in single digit. And we clearly see there's a lot of opportunity to grow across the globe. The immediate focus will be that. Okay? And thereafter, in parallel, we'll keep focusing on other opportunities. So we'll come back to you on that at an appropriate time.

[Rohit Nagraj, analyst]

Sure, sir. This is helpful. Can I ask 1 more question?

[Kaushik Roy, executive]

Yes, please.

[Rohit Nagraj, analyst]

Yes. So just on the Aquapharm front, given that there is a good amount of growth in these segments plus the margins seem to be higher, just wanted your perspective on competition maybe from outside, particularly from China or any other geographies that may come up in future given the opportunity and probably the margin dynamics of the segment?

[Kaushik Roy, executive]

Fine, let them come up. What is the worry? We are equally efficient and capable. So we are not too worried about Chinese or any other player. So Aquapharm globally in phosphonate, they're #1, #2 and we have enough capability. So we are not too worried. Competition may come up, it is fine, absolutely fine.

[Operator]

Thank you. That was the last question. On behalf of ICICI Securities, I conclude this conference. Thank you for joining us, and you may now disconnect your lines.