Tatva Chintan Pharma Chem Ltd

NSE:TATVA

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to the Tatva Chintan Pharma Chem Limited Quarter 3 and 9 Months FY '23 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 from ICICI Securities. Please go ahead, sir.

[Sanjesh Jain, analyst]

Thanks, Arvind. Good evening, everyone. Thank you for joining on for Tatva Chintan Pharma Chem Limited Q3 and 9 months FY '23 results conference call. We have Tatva Chintan management on the call represented by Mr. Chintan Shah MD; Mr. Ashok Bothra, CFO. I would like to invite Mr. Dinesh Sodani, AGM Finance to initiate with the opening remarks, post which we will have a Q&A session. Over to you, Dinesh ji.

[Dinesh Sodani, executive]

Thank you, Sanjesh ji. Good evening, everyone. Please note that a copy of our disclosures is available on the Investor section of our website as well as the stock exchanges. Please do note that anything said on this call, which reflects our outlook towards the future or which could be construed as a forward-looking statement must be reviewed in conjunction with the risk that the company faces in terms of uncertainty. With that, I would like to hand over the floor to our MD, Mr. Chintan Shah for his initial comments. Over to you, sir.

[Chintan Shah, executive]

Thank you, Dinesh ji. Good evening, everyone. On behalf of the management of Tatva Chintan Pharma Chem Limited, I welcome you all to the Q3 9 Months FY '23 Earnings Call of Tatva Chintan Pharma Chem Limited. Wishing you all a very happy, healthy and prosperous 2023. I believe you've got a chance to go through the investor presentation uploaded on the stock exchanges as well as the company's website.

To start with, I would like to brief you with the financial numbers. During this quarter, the company reported a revenue from operations of INR 1,206 million, a growth of 15% year-on-year and 34% Q-on-Q, respectively. As anticipated, improved offtake in SDA segment is reflected in numbers of this quarter. EBITDA during this quarter was INR 179 million, a decline of 25% year-on-year and a growth of 60% Q-on-Q, respectively.

EBITDA includes ForEx gain of INR 0.7 million. So the operational EBITDA during the current quarter is INR 178.43 million, which translates into EBITDA margin of 14.79%. Net profit after tax was INR 116 million, a decline of 49% year-on-year and a growth of 63% quarter-on-quarter basis. There have been a few positives for the business this quarter, like a marginal decline in power and fuel costs and a significant drop in shipping costs beginning mid-November.

Also since December, the solvent prices have started to rationalize, though the price of basic chemicals and commodities still continue to remain very high. We have witnessed rampant currency fluctuations across various geographies this quarter, particularly adverse movements in euro and yen. Keeping in mind our long-term partnerships and associations with select key customers belonging to these geographies, we opted to support them during these adverse times and tried to return their favors from the past. In certain cases, we marginally reduced the prices and in few cases opted not to ask for price increase and absorbed certain increased cost ourselves. During the quarter, the inventory at consolidated levels have come down from INR 2,030 million to INR 1,762 million.

Now let us talk about each product categories and the key developments that took place during this quarter. PTCs have registered revenue of INR 325 million in this quarter and 9 months revenue of INR 1,054 million, contributing 35% of the revenue and a growth of 55% year-on-year basis during 9 months FY '23. Demand from PTCs from various user industries continue to remain robust. Major supplies of PTCs are in overseas market. Electrolyte salts have registered revenue of INR 41 million in this quarter and 9 months revenue of INR 156 million, contributing 5% of the revenue and a growth of 357% year-on-year basis during 9 months.

As informed earlier, the offtake from one of our large customers is on hold as they are working on debottlenecking their productivity, and we expect that to resume their offtake from the end of June '23. We have supplied multiple electrolyte salt samples for approval to a new global potential customer and are awaiting for their approval.

During the quarter, we have some significant achievements in this area of electrolytes. We successfully got our first approval for high-purity electrolyzed solutions from R&D scale. In current month, that is January '23, we have shipped the first small-scale trial order from our pilot plant successfully meeting the most stringent quality requirements. We anticipate getting a formal approval, followed by a planned scale trial order to be executed in June 2023.

We have received yet another customer's request for supply of electrolyte solutions. We shall be sending out R&D scale samples in February '23. With increasing demand for super capacitors and energy storage systems, we are confident to deliver exponential growth in this segment over the coming next 3 years. Pharma and Agro Intermediates and specialty chemicals have registered a revenue of INR 264 million during the quarter and 9 months revenue of INR 1,036 million, contributing 35% of the revenue and a growth of 36% year-on-year basis during 9 months.

In monoglyme, the final inspection of the pilot stage equipment for continuous flow chemistry is finally under process, and we expect to receive the equipment by first week of February. Post installation, we will be able to finally start the most -- much awaited trials. As discussed earlier, for our second product on a continuous flow basis, we have received the quality approval from our small-scale plant trial material. Now we have been requested by the customer for a full plant scale trial material. This has happened much faster than we anticipated. We plan to supply the plant scale trial material by the end of August 2023. Post successful trials, we strongly expect a very interesting opportunity to begin commercial supplies post April 2024.

Regarding a new product in the application area of metal extraction, the production has commenced for commercial supplies, and we expect the first shipment to happen in February 2023. As informed during my last call about the successful completion of development of our third product on continuous flow basis, which is the key base raw material for multiple Agrochemical Intermediates. I am pleased to inform you that we have been allotted 2 projects to work on downstream Agrochemical Intermediates. The work on these molecules have already been initiated in our R&D.

Our team has a remarkable success in development of our fourth product on a continuous flow basis. The development is nearing completion. We have undertaken development of 2 new products on a continuous flow basis recently. By demonstrating our capabilities to run specialized chemistries, we are seeing a consistent rise in the confidence and comfort of large customers to work with our company. We are very confident about the strong growth in this product category over the coming years.

SDAs have registered revenue of INR 571 million during this quarter, and 9 months revenue of INR 728 million, contributing 24% of the revenue and a decline of 61% year-on-year during 9 months FY '23. As previously guided, the sale of SDA has seen an uptick in this quarter with demand coming from few customers. The overall demand in the market is not back to normal levels yet. We expect the demand of SDAs to remain at nearly similar levels for the next 2 quarters.

As China boundaries have finally opened up with curtailment of government zero-COVID policy. The market expects the commercial vehicle sales in China to rebound, leading to growth in SDA demand from late Q2 FY '24. During the quarter, we successfully supplied plant-scale trial material a new SDA to a new customer, about which I had mentioned in my last call. Now we have been offered an opportunity to supply the second SDA on a plant scale trial, which can be executed during Q4 FY '23. We expect the approvals for both the SDAs by September '23. We are confident that the volumes in SDAs will rebound strongly from July onwards, and we remain optimistic about increasing volumes over the coming years.

Regarding flame retardants, after successful completion of plant trials, we are under process of approval with various customers. We have received formal approval from 2 customers and are awaiting approvals from a few others. We are awaiting plant scale trial orders and expect to receive them by the end of this month. This will get us going commercially and eventually scale up the volumes from Q1 2024.

The key watch areas would remain how the European energy prices rolls out over the next few months and how the demand revival for heavy-duty commercial vehicles pans out. Also with the China economic opening up, it would be important to observe how quickly that business rebounds. Looking at the challenging global macroeconomic factors, it seems that business would be under demand and pressure -- the demand and price pressure over the next 3 to 6 months' time. Your company is working relentlessly in optimizing the processes, working closely with key customers to enhance mutual benefits and creating a path for strong growth ahead. Despite of the challenging times, we expect flattish growth for next 2 quarters and are confident to deliver a decent growth for the next financial year. As guided earlier, this financial year has been a tough year. Despite that, we expect to close FY '23 with a revenue in excess of INR 400 crores though with subdued profitability as compared to FY '22 due to the known global economic factors.

We are happy to inform that the CapEx at our the Dahej SEZ plant is completed and trial runs are underway. Please note that nearly 93% of the IPO funds have been utilized so far. The expansion of R&D facility at Vadodara is on finishing stages. We already completed -- with already completed or nearing completion R&D projects, having promising business potentials dedicated infrastructure would be required to produce them commercially. Over the next few quarters, we might be looking to raise fresh capital for expansion with the new greenfield land. The environmental clearance of the same is expected to be in place over the next couple of months. It would take at least 24 to 27 months to execute a greenfield project. We will begin the execution at a correct time. We commit ourselves to scale up the already approved or developed products at a fast pace to turn them into profitable revenue.

We shall continue to work hard in developing new products using latest technology to ensure that we continuously provide high purity products and innovative solutions to our customers. With this, I conclude my remarks and hand over the call to our CFO, Mr. Ashok Bothra for taking you through the financial numbers.

[Ashok Bothra, executive]

Thank you, sir, and good evening, everyone. I shall summarize the financial highlights for the quarter. Revenue from operation was at INR 1,206 million versus INR 147 million in Q3 FY '22. That is an increase of 15% on Y-o-Y, largely due to recovery in the offtake of SDA. Other income declined by 67% during Q3 FY '23, mainly due to reduction in interest income on Additionally, there was a gain of INR 28 million due to foreign currency translation during Q3 FY '22, which led to increase in other income in that quarter.

EBITDA was at INR 179 million versus INR 239 million in Q3 FY '22, that is decline of 25% on Y-o-Y basis. EBITDA margin was at 15% versus 23% in Q3 FY '22. The margins have been largely impacted due to change in product mix coupled with other factors which our MD sir has just shared. PAT was INR 116 million versus INR 228 million in Q3 FY '22, a decline of 49% on Y-on-Y basis, the impact is on the count of higher finance costs due to higher utilization of capital and higher interest rates. Also due to higher tax on account of end of 100% tax holiday on our Dahej Sez facility. Now our Dahej Sez facility is eligible for 50% tax exemption starting from Q1 FY '23 for a period of 5 years against earlier 100% exemption.

PAT margin was at 10% versus 22% in Q3 FY '22. During 9 months FY '23, exports stood at INR 2,095 million, contributing around 70% of the revenue. out of our net IPO proceeds of INR 2,072 million, INR 1,927 million has been utilized, that is 93% of the fund revenue as of 31 December 2022. That concludes an update on the financial highlights of Tatva Chintan during the quarter and 9 months. We shall now open the floor for question and answers.

[Operator]

[Operator Instructions] The first question is from the line of Nikhil Rungta from Nippon India Mutual Fund.

[Nikhil Rungta, analyst]

So 2 questions from my side. First is to start on the revenue side. You indicated that since China is opening up, we might see good demand for SDA, 2 to 3 quarters down the line. But earlier, we had indicated that SDA demand to start post Q3 FY '23 itself. So why delay of 2 to 3 quarters more. Further, China is -- that is now opening up. So wouldn't a few of our customers who were not importing from us have started import?

[Chintan Shah, executive]

Okay. Nikhil. Yes. So as indicated, see the uptick in demand of SDA is already visible. We have a decent sales of SDA happening in the last quarter, and we expect similar kind of performance even in the next 2 quarters as well. The issue is that we have one of our very large customers from the China geography. And they are still struggling with the demand and piled up inventory because of long shutdowns and very large drop in heavy duty vehicle sales in China, which has impacted their sales.

So they are still sitting on inventory and as indicated by them. We are expecting them to resume their procurements from May. So we anticipate from May or June onwards, we will have the strong sales also coming back. And rest of the customers are definitely coming back online as it was anticipated and going strong now. So I don't anticipate, except for the China customer, most of the customers are now falling back on track and the demand is getting stronger. And this Chinese customer, we expect to resume sourcing from May 2023.

[Nikhil Rungta, analyst]

Okay. And sir, coming to the margin side, you indicated a few of the pointers that we have absorbed you the cost and not pass on to the customers. But by when do you think we would be in a position to start reporting our normalized margins?

[Chintan Shah, executive]

Let me explain exactly what has happened. So as you are aware, we were sitting on quite a piled up inventory on the SDA side. in terms of not only finished goods, but also -- it's a multi-stage chemistry. So there are inventories lying with various stages in production. So with the finished good inventory, we had no issue because the price has not been reduced or dropped for the selling price is concerned. But when it came to converting the in-process materials to finished goods. That is where the higher solvent price in the commodities price definitely hurt us.

And there was no significant reason actually going back to the customer asking for a price rise for solvents or commodity chemicals kind of stuff. So we had to absorb those costs ourselves. We are sitting on this inventory even which should probably last till this quarter, the current quarter, the running quarter. And post that, now again, the solvent prices, everything is falling back in line. And commodity prices also we are expecting to fall back in line. So with this, by -- except for this, the next quarter, I mean, the quarter Q4, we also expect similar kind of margins, maybe slightly increase margins than what we have reflected in this quarter, but more or less in the similar lines.

But from April onwards, we expect to come back to a normal territory. Once we have consumed our old inventories, then we are again back to Zone 1. Also, a lot of our phase transfer catalysts and also what's required for the SDAs, these are bromine-based products. And there was a very rampant movement on bromine prices during this quarter.

So until early November, the prices were pretty much stable. And then the prices shot up very sharply by nearly 25%, just in a span of 6, 7 days. So which was beyond our control, and it was a very short time to ask for any kind of a price correction with the customer. So that is where also we had -- because a lot of our revenues come out of bromine-based products.

So that is where also which hurt our margins during this current quarter. But I think we will overcome this particularly for the phase transfer catalysts, we'll definitely overcome this issue. But SDAs, we will require one full quarter because we are sitting on inventory pileup inventory of intermediate stages which we need to convert to finished products. So there, we still continue to have some impact on profitability.

[Nikhil Rungta, analyst]

Okay. Sir, coming on to the revenue side, you indicated this year, we might close at approximately INR 400 crores of revenue. So if I have to look at 3 years target for the revenue, what type of revenue are we expecting, say, in FY '25, '26. And in that with the share of electrolyte solutions increasing, what could be the share of electrolyte in that FY '25, '26 compared to 5% now?

[Chintan Shah, executive]

So we are basically targeting by '25, '26 with basic -- as I told you, we have 4 projects on continuous flow bases, which are on floor now. So out of them 2 are getting into commercialization. One is monoglyme and one is the Agro Intermediate, which we have recently got approval. We have necessary infrastructure and space at our existing plant to execute both of these projects.

Then probably, we will start running short on executing any kind of future projects. And with the existing infrastructure, flame retardants, these 2 continuous flow products going on stream, we expect to fully consume our capacities by '25, '26. So I would estimate our revenue in a zone of about INR 800 crores -- upward of INR 800 crores to INR 850 crores by '25, '26.

[Nikhil Rungta, analyst]

Got it, sir. These were the key things. Just one point from my side. I mean you indicated that trial runs have started in our Dahej facility by when the commercial production will start?

[Chintan Shah, executive]

By 1st of February, that is what is targeted.

[Operator]

The next question is from the line of Sanjesh Jain from ICICI Securities.

[Sanjesh Jain, analyst]

Can you hear me now?

[Chintan Shah, executive]

Yes. Better.

[Sanjesh Jain, analyst]

Yes. First, on the SDA part of it. Are there any price correction in the SDA, which we have taken on the end prices are stable as we speak now. That's number one.

[Chintan Shah, executive]

So far, all the end prices are still very much stable. And we are also working on -- see, basically, these are lengthy chemistries. So we are working on some backward integration so that we can also optimize our margins further as well as pass on part of those benefits to the customer and optimize their cost as well.

So these are one -- some of very good backward integration projects that we have completed on R&D scale and which we intend to start -- we have completed plant scale trials as well for this, and we have submitted samples to our final customers for SDAs, we are awaiting their approval. Probably, it might take 3 or 4 months to get those approvals. It's not -- I mean it's a really time consuming affair to get this approval in place. But once we have these approvals, we might even see slightly upward movement in terms of margins with the SDAs going probably 5 to 6 months down the line.

[Sanjesh Jain, analyst]

Fair enough. And second, we are almost into '23 nearing to '24. How is the sanction on the Euro 7 norms and are we working anything on that? That's number one. Number two, China was supposed to adopt China 6 emission B norm. Should these 2 even drive the higher SDA volume growth over the next 2 years?

[Chintan Shah, executive]

Yes. See, on my -- I mean, just recently during my speech, I mentioned about getting an opportunity to approval of a second SDA, which we are going to supply this commercial lot, a full container lot in this month, and we expect to have this -- if we are going through with the approval, then this approval should be in place in September of '23.

And this is particularly for the Euro 7 application. Also, our existing large customer has already approved our product and started buying the SDA for the Euro 7 application. Of course, the volumes are much lower compared to the Euro 6 but the Euro 7 application has already kicked in.

And with happening of this and also with the BS 6 full implementation happening in China, yes, we expect this will have a very positive impact. And that is why I mentioned on my speech that we expect the sales to be robust over the next few years. This is particularly the key reason why I mentioned that.

[Sanjesh Jain, analyst]

Got it. Got it. Second, can you help us understand segment by segment, what are the new products we are working? And what is the time line? Are we looking? So let's start with an SDA, so we are working on Euro 7, which should start in a year or so, we were working...

[Chintan Shah, executive]

We have completed the development part and also the commercial scale-up of the Euro 7 SDAs. And I mean, we supplied one of them and the second one is now about to get dispatched. So with that, all potential candidates for Euro 7 SDAs are in place with Tatva Chintan as of now.

[Sanjesh Jain, analyst]

Got it. And we did mention a few more products in SDA bucket. One is high purity product. When are we expected to see some...

[Chintan Shah, executive]

So that is what we executed in December. So that is for a plastic application, which I talked about, recovering plastics. So that SDA has already been sent out for a commercial scale plant trial, one actually a lot of material. And this also we expect to hear back from the customer by August or September of '23.

[Sanjesh Jain, analyst]

Got it. And in the PASC, how many products we expect to commercialize over the next 2 years, say, in FY '24 and '25?

[Chintan Shah, executive]

So one large product, as I mentioned, is already getting into commercial mode. We have a second product for which the -- so this is the first large product, which I'm mentioning is on a continuous flow chemistry basis. The second product, the samples have been submitted, we expect the results of the samples by end of January just within the next week or 10 days' time. And if these are approved, then we will have an opportunity to supply for a plant scale trial by again, July or August of this year.

And this will again go into commercialization in '24. So 2 products that we are again submit -- we already submitted plant scale trial material for one pharmaceutical intermediate in last quarter. From that we expect to have commercialization by end of 2024. It's a little long shot because the pharma approvals in those years and all those things are a little time continuing. So we expect this to be increased by end of 2024.

And the one which I'm talking about, the new success in the continuous flow chemistry part, under which we have got opportunity to develop 2 Agro Intermediates. So we have just within our work on developing. So we have completed our work on the continuous flow part. So now we are working on the downstream products. which we expect to start sending samples within next 6 months' time frame. So this we can expect by end of '24 or early '25. And that should be the time when we should also be ready with our continuous flow equipment in place. So the timing would be more or less precise for us.

[Sanjesh Jain, analyst]

I was just asking because considering that we are speaking of INR 8 billion to INR 9 billion kind of revenue by '25, I just wanted to understand, are we being more conservative on the revenue guidance?

[Chintan Shah, executive]

So basically, I don't expect everything to go at a full scale in next 2 years, when a customer says, let us say, for example, a potential of 1,000 metric tons, we don't anticipate these 1,000 metric tons in a span of 2 years. So it would be a gradual ramp-up in next 3 to 4 years' time frame. Of course, the opportunity is much larger in terms of revenue, but we are looking at '25, '26, then this, I would say, is a very fair number to estimate.

Though it is conservative, but it is a very fair estimate to put in place. And in any case, we will not have enough plant capacities to go beyond that. So for that, the greenfield project has to be developed. And then only it can take us further view on INR 900 crores, INR 950 crores revenue. So -- and to have that greenfield project, let us say, assuming from today, in any case require 30 months to have that in place.

[Sanjesh Jain, analyst]

Got it. And Chintan, on the margin side, last time when we did INR 50-plus million in the revenue on the SDA side, we did an EBITDA margin in excess of 22%. Do you think on a steady state when we go back to, say, with the solvent issue getting resolved. Do you expect the company to go back to this 22%, that kind of a margin?

[Chintan Shah, executive]

We definitely expect to do that.

[Sanjesh Jain, analyst]

Got it.

[Chintan Shah, executive]

And to even overcome this solvent -- the fluctuating prices in these certain solvent which we are using on a very large scale. So as I had mentioned, last quarter, we successfully implemented a technology where we could recover and release one of our large solvent by which potentially we will reduce an effective usage of about 800 metric tons a year for this particular solvent.

And now in this quarter, we have successfully run trials to recover and reuse our second largest solvent, which is in place, and this could also potentially have an impact of about 700 to 800 metric tons a year consumption. So instead of having to dispose of that solvent after use, we'll be able to recover reuse at the same efficiency levels as a fresh forward. So that is the technology, it has been working very well for us.

[Sanjesh Jain, analyst]

Fair enough. So probably Q1 of FY '24, we will be back to that normal margin run rate what we were doing?

[Chintan Shah, executive]

Yes. But as of today, we have only one system in place, which can run one solvent at a time with our -- this CapEx plan, which is getting over and starting trials. So that is when we will start. So by mid of February, we'll have the second system in place, which is already installed at this new plant. So then we can simultaneously effectively recover and reuse both the large volumes solvents from the Dahej plant.

[Sanjesh Jain, analyst]

And have we started working on the new plant. I guess we have acquired a large land in an non-SEZ. Have you started the process of getting the EC approval and all those things?

[Chintan Shah, executive]

EC, we expect to have EC be in place in probably next 2 months' time frame. So most of the groundwork of EC is done, so we expect to have this in place by March of '23. And internally also, we have started applying designing concepts of how this plant should be and what kind of infrastructure we want in place. So all those discussions have already begun.

[Sanjesh Jain, analyst]

No, because I thought you said it will take 30 months. Now, it looks like we are running far ahead of the 30 months.

[Chintan Shah, executive]

No, no. Because it's a greenfield project, once we have EC only then we can break the ground. So post completion of this existing infrastructure going on. Once we are free from there, then we actually start seriously designing parameters for what kind of infrastructure precisely we need a new locations. So all those discussions have primarily begun, but the serious talk, I presume should happen from mid of February onwards.

[Operator]

The next question is from the line of Nirali Gopani from Unique Asset Management LLP.

[Nirali Gopani, analyst]

I just wanted to share my thoughts on the margin side. So in the last call, we had mentioned that we we're not passing the energy cost and the freight cost and we are bearing this cost to maintain the long-term relationships that we have with our customers. So my concern is how will we deliver on the margins because this quarter, this chemicals and other raw materials that is of a price increase. So if you can just share some thoughts on this.

[Chintan Shah, executive]

There are multiple factors associated to that. So one of the good part is that freight costs have started coming down from early December. So that is one very good part. So wherever we have not passed on the freight increases, we will have leverage in terms of margin in those cases. Again, the solvent prices has started to kind of rationalize. So we have seen a sharp peak in certain solvent prices, and then we have seen a drop in solvent prices beginning from December as well.

And this seems to be a continuous process and now solvents prices are kind of coming down to the normal levels. That is one very good aspect because see, when you calculate the cost of the product or you negotiate the product pricing for a large volume product to a customer. Typically, your pricing formula normally involves only the key raw materials.

And so the commodities which you use, for example, let us say, you are using caustic somewhere to maintain your pH standards or certain acids or stuff like that, for example, or the solvents. So these are all kind of ancillary requirements to the main process. This normally don't become a part of your pricing protocol with the customer. And unfortunately, the raw material prices more or less, except for bromine is one exception.

Most of the raw material prices remain pretty much stable, whereas this commodity and solvent prices just shot up by probably more than 200% in so many cases which had a definitive impact. Now with these prices of solvents at least coming back, we'll be able to repair it for us. So with this, we are pretty confident that we'll be able to again recover our margins back without actually going back to the customer for a price increase.

And we have very important customer base coming out from adversely impacted foreign currency zone, so typically, the eurozone and the yen, and they have seen a sharp appreciation in their currencies and which made it pretty difficult for them since they were import-dependent for certain products. particularly for our SDAs as well. So the cost was shooting up like anything.

So it was definitely a goodwill gesture from our side as well based on their request, we would have liked to support them. It's a long-term relationship we are looking at and building up a good strength, strong relationship with these customers for a long term. So it was also kind of a moral responsibility on our part to kind of absorb if it is possible. So we have taken that. And they have always supported us in our past issues whenever we had pricing issues they have been upfront in supporting us. So now it was a time for us to step up and support them and we did that.

[Nirali Gopani, analyst]

Right. Actually, sir, the disappointment is because in November, we have guided for the H2 margin to be 20% to 22%. And the difference from what you've have reported and what you have guided is pretty huge. So largely the disappointment is on that side?

[Chintan Shah, executive]

We will not disappoint you post April, that is for sure. And see, certain short-term sharp price movements are always very difficult for any manufacturer to handle. If you go through my list of products, a lot of products are based on bromides in the bromine chemistry. So a very sharp movement in a very short span of time. I mean, typically, it was roughly about a 20% to 25% spike in bromine prices, which was -- came as a big surprise.

And this is where it became difficult for us to manage certain things. But once we know that these are the stable high price mechanism, then you have an opportunity to go back to the customer and negotiate for the next quarter. Typically, pricing are the one more or less on a quarterly basis in most of the cases. So any sharp movements during the quarters always becomes difficult to manage. So sometimes you are at again, sometimes you are in a tough spot. So this quarter we were in a tough spot, unfortunately.

[Nirali Gopani, analyst]

Right. So Q4, the margin would also be in those range? Or we'll see around 20% of EBITDA margin?

[Chintan Shah, executive]

We should see a couple of percentage gain in terms of EBITDA margins in Q4 because still we are -- so this quarter, we already have certain orders in hand, which will clear up our old SDAs inventories in terms of finished good as well as in process material and we will be completely done with all the hold inventories that we have been holding. So we may not have that significant margins of 20% to 23% in Q4 and this is what we expect to assume from Q1 of next financial year.

[Nirali Gopani, analyst]

And sir, my next question is on the guidance that you are giving for FY '26. So in the last call, you had mentioned that this 4 new products in pharma and Agro side, they have a potential to reach INR 800 crores to INR 1,000 crores in the next 4 years. So am I missing something because this is...

[Chintan Shah, executive]

No. So these products at a full scale potential is at INR 1,000 crores revenue, but you don't achieve this in one year. So it will be a gradual ramp up to that levels in next 3 to 4 years' time frame and we'll also require in...

[Nirali Gopani, analyst]

But then your guidance will be too conservative, right?

[Chintan Shah, executive]

Not conservative, it is very practical because I have only enough infrastructure in place where I can raise probably INR 850 crores, INR 900 crores, INR 950 crores at max. Then we'll run short on the infrastructure. So we'll need a new plant to be able to achieve larger volumes and newer products to be manufactured.

So that is what now we have seriously started considering and with the kind of markets that we have seen over the last 6 months, so it's a little jittery. So we are also very cautious in going ahead with our decision to that. But probably, we have no choice, but we have to move ahead with that decision and go for a new CapEx. And probably in the next couple of quarters is what we should definitely consider.

[Nirali Gopani, analyst]

And sir, in the last question, you just mentioned that you have the stable margin will go up to 22%, maybe in FY '24. But can we go back to the earlier level of 25%, in a year or 2?

[Chintan Shah, executive]

Basically -- see when the issue when we say the drop in margins. So even if this quarter, if you realistically see we have cleared lot of our inventories rather than actually having larger volume of production. So once you have the ramp on production in place, which is occupying your facilities, probably 80%, 85% or something in place. That is when you actually see a real margin setting in.

So again, the reason why I'm saying Q4 we will have some subdued margin is, again, because we are going to clear up most of the inventories and a lot of plant capacities would still remain idle. And that would not be the case from Q1 because then we have cleared all the backlog inventories and then we'll actually see rampant production happening in place.

So of course, when your plants start getting occupied beyond 80% capacity is when your real margin start kicking. Most of the overheads -- a lot of overheads, though some of them kind of feel they're direct cost. But a lot of them -- most part of those direct costs are also kind of a fixed cost. So when your productivity goes up, that is where the cost starts getting distributed over various products, and that is where the beauty of margins set in.

[Nirali Gopani, analyst]

And sir, just last question from my side. So you said that you will have to raise funds for the greenfield CapEx. So will it be equity assuming that you'll have to bring down your stake also to 75%?

[Chintan Shah, executive]

That is probably the most relevant answer because we will be compelled to dilute by mid of next year. So that is definitely the option which we would like to explore.

[Operator]

The next question is from the line of Padma Raju Mathi from SBI Life Insurance.

[Padma Raju Mathi, analyst]

I hope I'm audible?

[Chintan Shah, executive]

Yes.

[Padma Raju Mathi, analyst]

Sir, my first question is like out of our total SDA sales, directly or indirect way, how much of that is dependent on China?

[Chintan Shah, executive]

I would say, indirectly, roughly about 40%, 40% to 50% is my best guess. I would -- honestly speaking, I would not really know the geographies where the end product would be going. So we are the first in the chain, we make the SDA. My customer makes the zeolite. His customer makes the final catalyst. And then this catalyst goes to the chemical -- to the automobile company getting fit into the catalytic converter.

So honestly speaking, I would not know the answer precisely. But my best guess would be roughly 40% to 50% dependence on the China market as of now. When we started producing and when we started getting approvals, we were shielded from the U.S., Europe, Japan market because those approvals were already in place with my competitor. So you were left with -- and that is where we also got the opportunity of, honestly speaking, is when the India and China market opened up.

So probably 90% to 100% of the products eventually made using our SDAs are finding any applications in these 2 geographies. And this geographical barriers should go away when we move from BS 6 to BS 7. So we are already in Q4 BS 7 approvals, getting few approvals already in place. Some commercial supplies already started. So BS 7 will remove all the geographical barriers for us.

[Padma Raju Mathi, analyst]

And my second question is on our costing side. So you highlighted some of the solvents have shot up towards in last quarter or so...

[Chintan Shah, executive]

Sorry, sir. Arvind, he is not clearly audible. Please repeat the question.

[Padma Raju Mathi, analyst]

Is it better, now?

[Chintan Shah, executive]

Slightly better. Yes.

[Padma Raju Mathi, analyst]

So from the total costing perspective, you mentioned the solvents have shot up towards last quarter. So out of the total cost, this solvent will come, how much portion approximately?

[Chintan Shah, executive]

Roughly about -- see, basically, the challenge is we are into high-purity products, right? So when you say solvent typically is not a part of your product. It's not a part of your key raw material. It's an ancillary that you require to produce. But after onetime use, your solvent gets contaminated with certain unwanted impurities which because by virtue of we want to produce high-purity substances, we are unable to reuse this solvents.

So when I talked about the technology, which we have now in place for one solvents in which now we have successfully established for the second solvent as well, this could be done by anyone, but the key part in this technology is whether we can recover and make the solvent equally pure as we are buying fresh. So that is what we could establish and we could have our final or the finished product with the same purity levels.

So that was the biggest challenge which we overcome. So ideally speaking, normally, we would say about 8% to 10% cost or 12% cost is a solvent cost. But when you are not able to reuse the solvents, then this becomes a significant part of your raw material.

[Operator]

Sorry to interrupt, sir. So the line from you sounds a little muffled. It's not very clear. May I request you to please use your handset when you're speaking, sir?

[Padma Raju Mathi, analyst]

Yes. Is it better now?

[Operator]

Yes, this is much, much better, sir.

[Padma Raju Mathi, analyst]

So the reason why I was asking this question is out of the 800 bps gross margin impact quarter-on-quarter. How much would you actually quantify to inventory loss?

[Chintan Shah, executive]

I would have to work out that number precisely and I can give you that answer off-line, probably tomorrow. Bothra ji, you can do that tomorrow? Yes, we can do that tomorrow.

[Padma Raju Mathi, analyst]

Okay. Last question from my side. I think I missed the status on the flame retardants project. Can you throw some color there and regarding of the commercialization?

[Chintan Shah, executive]

Yes. So here -- so now we have got full-scale approval from 2 customers. Now we are negotiating the price with them. And we are awaiting -- we have 4 approvals still in queue. So that we start commercially producing them in this quarter, the current quarter, Q4. And we -- then that would be to execute there, plant scale trial materials, right? So it wouldn't be a full-scale trial supply that would happen to these 2 customers in the current quarter. And then we should see commercialization happening from Q1 of '24.

[Operator]

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

[Yash Shah, analyst]

Am I audible?

[Chintan Shah, executive]

Yes, very much.

[Yash Shah, analyst]

Sir, my first question was regarding margins itself. Sir, since we have such high gestation period, wherein we start from lab scale then pilot scale and then plant trials, very high gestation period. So are we already in talks with 3 of our major customers to basically shift from 3 months to 6 months campaign orders and move to cost-plus model. Since the fluctuation in the solvent prices hampers our margins significantly. So are we already in talks for that?

[Chintan Shah, executive]

No, no. Most of our -- the large customers' business is already driven by a certain price model. But usually, solvents or the ancillary chemicals or the commodities never become a part of -- or not even the freight cost, okay? So freight costs or packaging, material costs or the solvents or the commodities don't become a part of the pricing formula. Usually the most -- the key raw materials is where it becomes a part of the pricing formula. So whenever you have such severe adverse movements in salon pricing only then we are able to go and go back to the customer and request for price increase.

So even as of today, despite of having this experience of last 8, 9 months of having adverse pricing cycles in solvents or commodities, Still, it's not a fair practice to include them in a part of your pricing formula. So usually, the pricing is governed by 2 or 3 key raw materials, which contributed say, about 60% of the RMC, total RMC.

And that is what is the negotiated platform, which is set and these prices can be probably governed or monitored on some international platforms, where it's a fair play for us. So it's not that I go and say that the prices has increase, for example, the bromine price. Then it is visible at most of the exchanges, chemical exchanges or prices is fairly available globally that what is the price increase in bromine, kind of stuff. Still solvent or the commodities are not part of the pricing formula. And probably it's never going to be that way. Not with us only probably with most of the chemical companies, specially the chemical companies, yes.

[Yash Shah, analyst]

So the only way we can mitigate that is by acquiring technology like how we've done for the 2 key solvents, and the large solvents, right? Understood, sir. Another question was regarding the PASC segment. Now if you see quarterly, the segment looks under pressure from which end user industry, did we face this pressure? Or is it just cyclical in nature?

[Chintan Shah, executive]

It is not actually cyclical. We are a second supplier to one of the -- there are 2 key products where we have seen some impact. One of them is a U.S. customer into pharmaceutical segment, which have postponed their orders up to April. So the November-December orders have been postponed up to April. And there is another large Agrochemical customers who had some pending orders from their key Chinese supplier, this containers got stuck because of these lockdowns and stuff.

So unfortunately, all these containers about 6 or 7 containers of product hit the Indian shores, at the in October. So then they had to actually stop buying from us in November and December, which has again come back to a normal pace. So our supplies as well as our competitors Chinese competitor supplies are now streamlined. So now we are seeing kind of a streamline business again back from January. It was just a timing phenomenon that was causing this little up and now.

[Yash Shah, analyst]

So we can expect to be -- basically the revenue to go back to INR 40 crores, INR 45 crores in H1 FY '24, right? That understanding will be right, sir?

[Chintan Shah, executive]

Perfect. Yes.

[Yash Shah, analyst]

Sir, my next question was regarding Electrolyte Salts previous quarter, you had mentioned that we had got an approval from one customer, which was some super capacitor batteries. And we were in talks with another customer for energy storage, if I'm not wrong. Sir, has the -- so has there been any kind of update on that part?

[Chintan Shah, executive]

So the energy storage customer, we have already supplied the plant trial material to them. And we expect them to run this product into their energy storage systems, and we should have a feedback in probably the next couple of months. And see, basically, they have been awarded certain projects by the U.S. government to set up certain energy storage plants across multiple locations in the U.S. And they are also running their trials with whatever the U.S. Energy Department of XYZ.

And they expect their approvals to be in place from July or August of this current year. So post that they will have these projects in-place and this should start to grow. So we are expecting very good business from this customer post approval probably from September onwards.

And the second customer where we supply the Electrolyte Salts, which got fortunately approved. And they actually like the quality and they insisted whether Tatva Chintan can actually help them to supply the electrolyte solution. So it's the same customer where we got approval for the Electrolyte Salt for the super capacitor application -- is where we have now successfully supplied the electrolytic solution.

So this is the first time where we have successfully made and achieved the desired quality of this electrolyte solution. So until now, we have only been into the salt areas, never made any kind of solutions. But this is the first time where we have now successfully produced the desired quality of the electrolyte solution. And based on that, now we have a request from yet another customer in Far East, where they are also looking for the products from Tatva Chintan in the solution form, not the salt form.

[Yash Shah, analyst]

So as it is, we had expertise in the salt. Now what we need is solvent...

[Chintan Shah, executive]

This is quite -- yes solvent suggestive and super -- I would say, a super special handling systems where -- because we are talking of absolute dry products. We are talking about moistures below 10 parts per million, which is even if you let it expose for 5 seconds to the atmosphere, then these products would not meet the quality requirements.

So that is the kind of systems we have already successfully deployed on the pilot scale. And now we are working on converting this into a plant scale because we are expecting the -- once we have this approval of the pilot material, which we have recently supplied, and we are expecting to have a plant scale trial order for about 8 to 10 metric tons of this electrolyte solution. But we don't have the necessary infrastructure in place as of today, and we are working in that direction.

[Yash Shah, analyst]

That was going to be my next question, sir. Right now, say, in SDA, we have about 4 products which are mostly in approval stage, which are in lab and pilot stage, right? So do we have it in Electrolyte Salts and SDA as well, a couple of products. As we are going to basically commercialize new R&D facilities so that will accommodate on your products where you want to work on the newer products wherein you will get request from the customers.

So don't you see this becoming a challenge when you have to convert it to a plant scale from lack of infrastructure because we targeted to basically raise money after a couple of quarters. And then the commissioning will start, which will take about -- greenfield expansion will take about another year or so, 8 to 10 months. So that was my question sir.

[Chintan Shah, executive]

Not for SDAs or the Electrolyte Salts that is not a challenge. We have enough capacities already in place. The challenge is only for running the newer type of chemistries, particularly the continuous flow chemistry that we are talking about. So we will have enough space in our current plant location, the existing, Dahej plant location where we are.

So we have enough space probably to just include 2 continuous flow chemistries at a full scale. So there could be a possibility to include a third one. But then this continuous flow chemistry products are not the final product that we are going to sell. So this becomes the key starting raw materials for the downstream products. That is where we will start facing challenges. That is the reason why we will have to start looking for a new infrastructure, which you cannot probably accommodate on this existing site.

[Yash Shah, analyst]

My last question from my side, sir. If you can tell me the name of the solution, sir, the electrolyte solution, which we'll be making, if you can provide some information on the chemistry and the additives and solvent, if possible?

[Chintan Shah, executive]

No, that is not possible. It's basically an NDA with our customers as well. So it's the kind of the additives that they require is a shared information that we have from them. The solvent which is being used. So it's a coded solution that we are selling today.

[Yash Shah, analyst]

Is it like in the case of like anything...

[Chintan Shah, executive]

But this involves, for example, just to give you a brief, this involves chemistries like quaternary compound, which is then eventually converted to high-purity SDA, this high-purity SDA is then converted into a high-purity Electrolyte Salt. And then this Salt is converted into a formulation, which is a electrolytic solution.

[Yash Shah, analyst]

Actually, I was trying to understand from the lines of the Electrolyte Salts like the LiPF6 which we make for lithium batteries. So I was trying to understand on those lines, like which chemistry will be used. I understood, sir.

[Chintan Shah, executive]

And the challenge which you have in LiPF6 is a salt and then you have an LiPF6 electrolyte solution. So few companies would be able to make the salt, but very select few companies would be able to make the desired quality of solution. So we are talking right now we are talking about venturing into electrolyte solution part.

[Operator]

We have the next question from Rohit Nagraj from Centrum Broking.

[Rohit Nagraj, analyst]

Sir, my first question is, we have indicated about INR 400 crores to INR 450 crores of additional revenues over the next 3 years. What would be the expected composition of the same across our 4 segments, PTC, Electrolyte Salts, PASC and SDA?

[Chintan Shah, executive]

I'll have to work that out precisely and give you a number offline. But typically, the electrolyte business is expected to pick up really very fast followed by a pickup in the PASC segment. So PASC segments, we are on the accrual stages. We will be supplying a few containers of products for plant scale trial, plant scale approval during this year of 2023.

So probably by mid of '24 is when we kick in the commercial supplies. And this would be a stage-wise increase going there. Whereas in PASC, we see a very strong demand growing exponentially over years. So this is something very difficult to digest, but that is what actually the industry is looking for -- so that is one of the segments that will grow very fast over the next 3 years. And PASC is another segment which will grow. And of course, the SDA is bound to grow with the new approvals with the BS 7 kicking in. So we'll also see a decent growth in this -- that area as well.

[Rohit Nagraj, analyst]

Sir, second question is in terms of the potential new greenfield project. So what would be our focus area, at least in the initial part? And any ballpark estimate in terms of the size of the project and maybe investments across different segments?

[Chintan Shah, executive]

Probably this is more -- we will have some kind of a safety production facility, offering a security of supply to customers for all the segments. So part of this facility would have SDA as well, Electrolyte Salts as well. But the most focused area for this facility would be to have continuous flow chemistries and downstream products made out of that. So that is what would be the key area of focus in the new facility.

[Rohit Nagraj, analyst]

And here, again, from an overall customer point of view, will it be predominantly for the exports market? Or will it be a combination of both domestic and exports?

[Chintan Shah, executive]

Combination of both, and that is the reason why we opted to buy a land. This new piece of land is not within the SEZ. It is in the Dahej industrial part, but it is outside of the SEZ. The idea behind that was -- the products that we are into have potentials both in exports as well as into the domestic area.

[Operator]

Ladies and gentlemen, that was our last question for today. I would now like to hand the conference over to the Managing Director, Mr. Chintan Shah for the closing comments. Over to you, sir.

[Chintan Shah, executive]

On behalf of the management, I thank you all for joining us on our earnings call. We appreciate your continuous support and trust on Tatva Chintan. We commit to deliver and see the market for our products improve going forward. We hope that we have been able to address most of your queries. You may reach out to Mr. Ashok Bothra, our CFO, or our Investor Relations partner, E&Y, for any further queries that you may have, and they will connect with you off-line. Thank you, Mr. Sanjesh ji for hosting our call. Thank you, and have a great evening, everyone.

[Operator]

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