Tatva Chintan Pharma Chem Ltd

NSE:TATVA

Earnings Call Analysis

Company Prepares for Next Growth Phase Post Downturn

In Q3 FY '24, the company experienced a 30% Y-o-Y revenue decrease to INR 842 million and a 70% fall in profit after tax (PAT) to INR 35 million. The PAT for the first nine months was down by 27% Y-o-Y at INR 207 million, with exports making up 71% of operations revenue. Margin pressures were evident, with EBITDA margins at 13.1% for the quarter. For FY '24, revenue guidance is between INR 400-410 crores, with EBITDA margins expected around 20%. By FY '25, the company aims to recover with a revenue growth of 20-25%. This optimism is backed by plans for scaling up three products, commercializing six, and executing a capital expenditure of INR 700 million to enhance capacity to meet expected demand.

Financial Performance: A Tough Quarter

The company has faced a challenging third quarter in the fiscal year 2024, with revenues experiencing a significant decrease by 30% compared to the previous year, amounting to INR 842 million. Other financial indicators similarly reflect this downtrend, with EBITDA and PAT witnessing degrowth of 59% and 70%, respectively. This has also affected the margins; EBITDA margins now stand at 13.1% as opposed to the 14.9% seen last year, while PAT margins have dropped from 9.6% to 4.1%. However, the nine-month outlook appears to be steadier, showing only a 1% degrowth in revenues and a 19% growth in EBITDA year-on-year, suggesting some underlying resilience in operational performance .

Exports Remain a Strong Pillar

Despite domestic challenges, exports continue to be a bright spot. They account for a hefty 62% of the revenue in Q3 FY '24 and have grown to contribute 71% over the nine-month period. The company's international footprint is noteworthy, with a presence in over 25 countries, underlining the global appeal and diversification of its product portfolio .

Progress in Product and Technology Development

The company is keenly focused on innovation, particularly in the PASC segments. Despite some operational hiccups in the pilot trials of Monoglyme and the issues with safety, the technology and catalyst have proved successful, signaling a clear path toward commercialization by 2025. Additionally, the moves to advance various projects using continuous flow and electrolysis advancements are advancing well, suggesting a strong pipeline for growth in the future. A planned CapEx of about INR 700 million to set up new reactor plants also underscores the company’s commitment to scale and future readiness .

Significant Developments in Speciality Derivatives with Growing Customer Base

The Speciality Derivatives (SDA) segment is anticipated to show remarkable activity as the company has recently gained validation and initial orders from a large potential customer for three of four applications, with the fourth expected shortly. Moreover, the approval for new automotive applications by two additional customers will potentially bring in an estimated USD 2 million to USD 2.5 million, showcasing incremental growth opportunities and diversification in its customer portfolio .

Addressing Logistics Hurdles and Future Guidance

The business is grappling with soaring logistics costs due to global tensions, which have caused freight rates to escalate dramatically. This will impact the current quarter's financials, though not significantly in the grand scheme of things. Looking ahead, the company has projected revenue growth of roughly 70% for FY '25, suggesting optimism about upcoming commercialization initiatives and capacity expansions. However, investors might anticipate one challenging quarter as the company navigates these growth pains .

Asset Turnover Shifts Due to New Chemistries

There is also a strategic shift noted in the asset turnover, which has historically been above 3%. With the introduction of newer, multistage chemistries requiring additional reactor stages, the company is now targeting an asset turnover ratio of 1:1.5, indicating heavier CapEx requirements but also potentially higher value products. This suggests a move towards more complex, but potentially more lucrative product offerings that may transform the financial architecture of the company moving forward .

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to the Tatva Chintan Pharma Chem Limited Q3 FY '24 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded.I now hand over the conference over to Mr. Sanjesh Jain from ICICI Securities. Thank you, and over to you, sir.

[Sanjesh Jain, analyst]

Thanks, Tushar. Good afternoon, everyone. Thank you for joining on Tatva Chintan Pharma Chem Limited Q3 and 9 months FY '24 results conference call. We have Tatva Chintan management on the call represented by Mr. Chintan Shah, Managing Director; Mr. Ashok Bothra, Chief Financial Officer; and Mr. Ajesh Pillai, Investor Relations.I would like to invite Mr. Dinesh Sodani, AGM Finance to initiate with opening remarks, post which we will have a Q&A session. Over to you, Dineshji.

[Dinesh Sodani, executive]

Thank you, Sanjeshji. Good evening, everyone. On behalf of the management, I am pleased to welcome all of you to Tatva Chintan's earnings call to discuss financial results of the quarter and 9 months ended December 2023. Please note that a copy of all our disclosures are available in the Investors section of our website as well as on the stock exchanges. Anything discussed on this call, which reflects our outlook for the future or which could be construed as forward-looking statement must be reviewed in conjunction with the risks that the company faces.Now I shall hand over the call to our Managing Director, Mr. Chintan Shah. Over to you, sir.

[Chintan Shah, executive]

Thank you, Dineshji. Good afternoon, everyone, and welcome to this investor call. This time, I am pleased to introduce you to Mr. Ajesh Pillai, who I'm trying to delegate a lot of my responsibilities in terms of investor relationship. Ajesh has worked with me for nearly a decade now, and I don't have any doubts in his efficiency, and I'm sure he's going to do a good job. And today's speech, whatever the management side commentary has been written by me. I'm sitting right next to Ajesh. So whatever he's speaking, it is his voice, was written by me. And I'm gradually trying to hand over these responsibilities over to him over a period of time. Over to you, Ajesh.

[Ajesh Pillai, executive]

Thank you, Chintan. Good evening and wish you all a very happy new year. I feel privileged to take up this responsibility and hope I can serve the company and its investors to the best of my ability.Now coming to the numbers. This quarter, your company reported a revenue from operations of INR 842 million, a de-growth of 30% year-on-year and 13% quarter-on-quarter. As conveyed to you during the last earning call, the industry challenge continued in the third quarter too. The EBITDA for the quarter is INR 110 million, a decline of 39% year-on-year and 46% quarter-on-quarter. Revenue from operations for the 3 quarters of this financial year is INR 2,952 million as compared to INR 2,991 million for the same period in the previous financial year, recording a marginal decline of 1%, whereas the corresponding EBITDA is INR 526 million and INR 443 million, respectively, depicting a growth of 19% year-on-year.Further, when we look at the product segment-wise numbers, PTCs have registered a quarterly revenue of INR 248 million, a growth of 7% quarter-on-quarter and a decline of 24% year-on-year. The 9-month revenue of PTCs stand at INR 796 million, registering a decline of 25% year-on-year. Talking about electrolyte salts, have registered a quarterly revenue of INR 12 million, a growth of 2% quarter-on-quarter and a degrowth of 71% year-on-year. The cumulative revenue for 3 quarters for the segment stands at INR 37 million, declining by 77% year-on-year.When we come to pharma and agro intermediates and specialty chemicals, they have registered a quarterly revenue of INR 254 million, a decline of 12% quarter-on-quarter and 4% year-on-year. The revenue of the same for 3 quarters of this financial year stands at INR 852 million, registering a degrowth of 18% year-on-year. And when we talk about SDAs, SDAs registered a quarterly revenue of INR 323 million, a decline of 24% quarter-on-quarter and 43% year-on-year. The 9-monthly figure for the same is at INR 1,247 million, registering a growth of 71% year-on-year.I'll now give you an overview of the business in the past quarter and outlook over the midterm. We have traveled extensively in the past few months and have met most of the key customers in person. Based on the discussions and their forecast for the calendar year 2024, also looking at the slowly improving business sentiments, we are quite confident to state that the next 2 quarters, we will also gradually improving business sentiment and expect shifting of gears from August onwards. That is quarter 2 of financial 2025. The quarter 3 of financial year '24 was expected to be a slow demand quarter because of the financial year end for our global customers. And with their priority of controlling the inventory, some of the dispatch schedule got postponed to the next quarter. But considering the overall market and demand situation in quarter 3 of financial year '24, the overall achievement and numbers are satisfactory.Let me give you a brief about the development and the outlook by each category. Starting with phase transfer catalysts, we are happy to say that despite of aggressive competition, we are successful in retaining all the major export customers for PTC supplies for calendar year 2024 and also maintaining our margins. When we come to SDAs, except for China, the demand situation has been steadily improving. Of the ongoing validation at a new potential customer during the quarter, we were formally approved on 3 different applications, and we have received initial commercial orders from the customer. The fourth application is under validation and should get results by end of March 2024. We expect business to be modest in the first half and eventually get to a decent volume from the end of calendar year 2024. Our existing large customer has approved us on 2 products, and we will have larger business on one product from July quarter and on the second product from October quarter. The demand from this customer has been steadily growing. In other developments, we are now fully qualified with 2 other customers, that is customer #6 and #7 for automotive applications. We will see onset of business from April quarter with these customers. Overall, SDA demands are improving, and we shall see a robust next financial year in terms of SDA business.When we come to electrolyte salts business, the business has been slower than anticipated, primarily due to poor offtake in China market. The other large customer has started buying regularly. Due to their efforts in controlling the inventory, they are currently buying at a slower pace but they are also setting up a fully automated production line for energy storage battery. This will go online in August 2024 and will increase their demand drastically. Our approval with the large European customer has progressed very well. And from October 2024, we shall see onset of business. So 2025 is definitely going to be a very good growth year for electrolyte business. On another customer side, our electrolyte solution from large scale has approved a few months back. Now we have been asked to go to the pilot scale and submit electrolyte. This is another large opportunity where we are making steady progress.When we come to the the [ PASC ] segment of our products. On pharma intermediates, 2 out of 3 products are approved by production trials, third product will be kept under use test in March as customers planned. Final formal validation of 3 products are expected to be in place by September, and onset of commercial business is scheduled from beginning of 2025. On agro intermediates, 2 products have been fully approved and third is under validation. We expect robust growth from quarter 2 of financial year '25. And in this segment, as 2 products get in commercial supplies from August and third product from November.We are happy to share that we have received from approval of our first photochlorination product from pilot scale. The installation of commercial photochlorination equipment has been completed at Dahej plant. We have been asked to supply one container of this product for final approval, which we expect to ship out by end of March. This is again an agro intermediate with really large application. Our pilot trials apparently have been running smoothly. However, we faced certain teething issues, which we have now identified the potential reason for the issue and are now restarting the trials after necessary equipment modifications. The good part is that the technology or the catalyst is a success. And once these operation issues have been sorted, we are moving towards commercialization in 2025.To conclude, the chemical industry continues to face headwinds and pain is not completely over yet. However, for us, a combination of focused customer relationship and our R&D ability gives us underlying resilience to our business model. In addition, encouraging response from our customers, the manufacturing infrastructure in place will help the company get advantage of the change in industry trends. In meantime, we expect to sustain these challenging times with grit and integrity.With this, I hand over the call to our CFO, Mr. Ashok Bothra, to take you through the financial results.

[Ashok Bothra, executive]

Thank you, Ajeshji. Good evening to everyone present on our call today. Now I would like to share the financial highlights for the quarter and 9 months.During Q3 FY '24, the company reported revenue from operation of INR 842 million, a degrowth of 30% Y-o-Y basis. Other income during the quarter was at INR 12 million. During the quarter, the company reported EBITDA of INR 110 million, a degrowth of 59% Y-o-Y, which is EBITDA margins were at 13.1% versus 14.9% in the same period previous year. During the quarter, the company reported PAT of INR 35 million, a degrowth of 70% Y-o-Y basis. PAT margins were at 4.1% versus 9.6% in the same period previous year.During 9 months FY '24, the company reported revenue from operation of INR 2,952 million, a degrowth of 1%. During 9 months FY '24, the company reported EBITDA of INR 526 million, a growth of 19% Y-o-Y basis. EBITDA margins were at 17.8% versus 14.8% in the same period previous year. The company reported PAT of INR 207 million, a degrowth of 27% Y-o-Y basis for the 9 months FY '24. PAT margin was at 7% versus 9.5% in the same period previous year. During 9 months FY '24, the employee expenses were at 14% of revenue versus 9% during 9 months FY '23 due to new recruitment on account of [indiscernible] commissions [indiscernible] during the year and also recruitment towards the new R&D facility at Vadodara.During Q3 FY '24, exports stood at INR 525 million, comprising 62% of the revenue from operations. And during 9-month FY '24, the exports stood at INR 2,084 million, comprising 71% of the revenue from operations. The company has a customer base spanning over 25 plus countries.That concludes an update on the financial highlights of the company. I shall now request the moderator to open the floor for question and answer session.

[Chintan Shah, executive]

Sorry, Bothraji, I would like to take a couple of minutes. I think Ajesh has missed a couple of points on his speech. So let me cover that up. On the PASC segments, beginning with Monoglyme, our pilot trials happened, they have been running smoothly. But recently, we had a couple of hiccups in terms of safety. We have now identified the potential reason for the issues being generated and are now restarting the trials after necessary equipment modification. The good part is that the technology or the catalyst is a success. And once these operational issues have been sorted out, we are moving towards commercialization definitely in 2025.The development work of various projects on a continuous flow basis and a couple of projects on electrolysis basis are progressing very well. We expect to scale up 3 products to pilot scale by June 2024. We are adding 2 more continuous flow reactors in our labs, also adding one continuous flow reactor at the pilot plant. Our technical discussion and designing of our full-scale plant scale continuous flow reactor is nearing completion.Updates about flame retardants. The market situation in this segment continues to remain very sluggish. So we have not yet started commercial production, but we continue our development of products. This quarter, we have completed development of our second product, meeting with all the stringent requirements of specifications. Looking at now, we now have definitive time lines of commercialization of 6 products from the PASC, 3 on the pharma side and 3 on the agro side. Looking at the short short timelines, we are absolutely sure of running out of planned capacities by the end of 2024. To ensure smooth progress, we have decided to move forward with a plan of CapEx of about INR 700 million and set up 1 plant with 150 kL reactors and a separate distillation plant. In December of 2023, we finally received the formal environmental clearance for the greenfield project at our new land in Jolva, Dahej.First, we intend to expand our existing site at Dahej, which will be much quicker. And then we will open the site construction at the new site in Jolva in 2025. We expect to close FY '24 with a revenue in the range of about INR 400 crores to INR 410 crores and roughly an EBITDA margin carrying at about 20% levels. We continue to remain sure of FY '25 to be the next phase of growth, led by growing volumes and new customers in SDAs and also by multiple new products getting into commercializations in the PASC.Thank you. And now please let us open up the floor for Q&A.

[Operator]

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of [ Suruchi ].

[Unknown Analyst]

Chintanbhai, just want to address, because if I see SDA side, more or less we have done the SDA sales of the last year in the 9 months only. And what I remember that was the SDA was the highest margin product in our overall segment in 2022, and also the major driver of the margin. So is that the margin in SDA is going down in the last 18 months or something or what, because we don't know the margin-wise something because our margin profile has also gone down. Top line has gone down, I will come to that also. And the margin is also going down... at year end. Yes.

[Chintan Shah, executive]

Late April this year, we started commercial production from the newly expanded capacities. So our expenses in terms of recruitment, I think we have added nearly 130 people so far from April to December, your terms of consumption of fuel, power, everything has shot up because we have nearly doubled the production capacities. The new capacities have practically, we have been utilizing only for production of these new 6 products that we did and supply to the customers for validation and also 3 of our large products where we needed, again, a prior approval from the customer that if we are going to change a plant to produce it, then we would need an approval. So those were the 3 products which went to this new facility for again, practically on terms of validation purpose. So apparently, this new facility seems to be very busy. But ideally speaking, this new facility is really not generating any revenue so far. This is number one.So the margins in SDAs are absolutely intact, but the issue is on [indiscernible] of cost because of relatively low usage of the available capacities. In terms of top line, both in PTCs and SDAs, there is a severe drop in raw material pricing. And since most of the product pricing are linked with your raw material prices in an equation with the customer. So when your raw material prices go down, typically the final product prices also have to be relatively adjusted. In terms of PTCs, I would say the relative drop in terms of finished good pricing has been nearly 25% to 30%. In terms of SDAs, the price realizations have dropped by nearly 20% to 30%. But there is no movement in terms of the actual price realization in terms of margin for the product. So per kg basis, still the margins remain intact. The only thing is you see a lower top line in terms of value realization is going down.

[Unknown Analyst]

Okay. Got it. So in terms of volume, if we want to see, then how much we did as compared to last year 9 months?

[Chintan Shah, executive]

That I will have to give you the exact number, but I assume it's a growth of about 30% compared to last year in terms of volume...Again, just to brief you what is the real situation on SDAs. So we have 4 commercial customers so far. Out of these, 2 are actively buying. Our largest customer and the fourth new customer in a different geography, these 2 are the customers who are regularly buying. Our second largest customer is in China, who is yet to resume buying or he has not bought a single [ kg ] product since last 1 year. And the third customer from the European territory has started buying, but it's still on a very small volume. So practically, this growth, whatever numbers we are seeing in terms of SDA volumes and value is technically coming only from 2 customers who are now back to nearly normal volumes of what they used to buy pre-COVID levels. And now with this largest customer, we are now approved for 2 different products where we didn't have the product opportunity. So now we have been fully approved one product goes into commercialization from June quarter. And second product, we expect to start selling to them from the October quarter. Coming June and coming October quarter. So this will also push up the volumes.Another interesting development on SDA, as Ajesh already talked about is out of the 4 applications we were under validation with one of our very large potential customer, we have been approved on 3 of them, and we have already received the initial purchase orders for the current quarter from this customer. And the fourth application, we expect to have final validation results out by March of this year. Again, their volumes are low for this year, but they expect to start and some commercialization for this volume beginning from October of '24. So definitely, volumes and value in SDA is going to become very interesting. Again, we have 2 more customers. Of course, the business is not very large on those 2 new accounts that we have been approved for the automotive application by these 2 customers. potentially, we may see a value coming in at about USD 2 million, USD 2.5 million from these customers. So it's not a very large account. But these 2 customers are new addition, which was not there on our list. So customer #6, customer #7. So all these put together, everything gets into commercialization, beginning from April to October. So I'm sure SDA is going to be a very interesting year. Next financial year is going to be quite interesting in terms of SDA.

[Operator]

The next question is from the line of Sudarshan Padmanabhan from JM Financial.

[Sudarshan Padmanabhan, analyst]

Sir, my question is, has there been any kind of a deferral of sales in any of the business because it looks like the revenue run rate has substantially fallen. Or is it just that the lower demand that has driven this kind of numbers?

[Chintan Shah, executive]

Padmanabhanji, there were about 11 containers, which were postponed to this quarter from the December quarter. So there was some deferral because none of the major customers wanted any invoices to be raised because it was their year ending, and they are probably trying to show good numbers in terms of their inventory values. So they didn't want any invoices to be raised in December and everything was postponed to January. So that is one part, but it is not a very significant amount. The large contribution is coming from the drop in prices. because if you see a 25% price drop in PTCs and SDA, really significant impacting your top line. So that is one of the key reasons, I would not say that business has been improving steadily. But the only impacted segment, I would say, was the electrolyte salts where definitely demands were very low. But apart from that, I'm really happy with the performance that we have done in the last quarter.The major aspect is we have to raise these volumes, and this is what we expect to start from August because once we start producing your PASCs, I'm sure we are going to run out of plant capacities August onwards. And that is the reason why we are kickstarting our CapEx immediately and investing about INR 70 crores on that. And once you have this plant getting fully occupied is when you will really see the numbers coming in because most of this cost goes unabsorbed. Lot of this overhead cost goes unabsorbed because of lower utilization.

[Sudarshan Padmanabhan, analyst]

Any idea how much is this 11 containers in terms of sales, sir, actually sales will it be decent enough?

[Chintan Shah, executive]

It was roughly about INR 11 crores, INR 11.4 crores roughly about...

[Sudarshan Padmanabhan, analyst]

Okay. And sir, with respect to the ongoing tensions on the [indiscernible], do we see any kind of impact specifically going forward on our business?

[Chintan Shah, executive]

Logistic costs have shot up like anything. So of course, past quarter, we have not seen that impact, but logistic cost is going to be impacted in this current quarter. Freight rates to Europe, we have since skyrocketed from roughly about USD 900 a box container say from India to main European port. The freight has gone up from USD 900 to nearly USD 3,500. So that's a significant cost that probably everyone is going to incur. Similar is the situation on the U.S. route. But besides that, I mean, besides the marginal cost that you are going to incur, I don't see any other major impact coming in from that situation.

[Sudarshan Padmanabhan, analyst]

So that will basically help reprice the product as well, right? I mean, that way.

[Chintan Shah, executive]

So it will not happen immediately. So it will happen over time. So 1 quarter you are going to absorb that cost more or less.

[Sudarshan Padmanabhan, analyst]

Sure, sir. And sir, coming to your guidance earlier, our guidance was the sales growing about 70% to 100% in FY '25. And if I go by our current guidance that we are going to run out of capacity now, which means that you're primarily looking at the FY '25 numbers being very similar to what we had initially thought, or even slightly higher. But probably, there could be 1 quarter of pain. So is that the right way to look at it, sir?

[Chintan Shah, executive]

I would assume at least a 70% growth is justifiable. That is considering primarily because we are going to see a lot of value erosion has already happened in terms of value of the products on PTCs and SDAs. Otherwise, the numbers would have been even little better. And also all the 3 Agro products, which we were actually scheduled to begin commercially from February or March of 2024, because of their poor offtake and their demand and their constraints in terms of productivity, these have been gradually postponed, postponed, postponed and now being rescheduled to start commercialization from July and August. And now this is firm it seems. So now they have instructed us and they have started coming to place POs and stuff like that. So now I don't see this is a very firm time line to start commercialization from August of '24.

[Sudarshan Padmanabhan, analyst]

And beyond FY '25, we will also see the opportunity in the BS-7 on the SDA side which is where I would assume that the capacity is also coming in.

[Chintan Shah, executive]

Again, unfortunately, the SDA BS-7 got shifted from 2025 to 2027. Yes. So next year is not going to be the BS-7, but the year after that, FY '26 is when we'll see actual commercialization of the BS-7 also happening. And also as I mentioned on my later on speech is, we are also commercializing, so piloting 3 new products, which are involving continuous flow chemistry and electrolysis. So again, these are very nice molecules. One of them is good getting into the battery materials with the electrolyte products. And the rest 2 of them are getting into the polymer side of the chemistry. And these are very large size molecules, and we see a good potential. Each of these molecules carrying a worth value of about INR 50 crores in terms of revenue potential is what we are piloting in this June. Up to June, we will pilot all these 3 new products.

[Sudarshan Padmanabhan, analyst]

Sure. And sir, one final thing before I joined the queue is after the price erosion of products across the segment, the current capacity, I mean, now what do you think should be the asset turn and should be the optimum sales that one should expect? And also, if you can give some color on the margin. I mean, what should one expect in FY '25?

[Chintan Shah, executive]

The asset turn is taking very interesting changes because with these newer chemistries, these are more lengthier chemistries. So far, when we were involved into PTCs and SDAs and electrolyte salts, we were typically seeing an asset turn of in excess of 3%. Now when we are looking at this all new PASC segment products, which are multistage chemistries, so we require more number of reactors to achieve the desired product. So the asset turn is now looking at 1:1.5, maximum 1:2. But realistically speaking, 1:1.5 is what we are looking at for all the new products that we have been doing. Because you may be doing on stage on electrolysis or one stage on continuous flow chemistry, but there will be another couple of stages, which are conventional chemistries. So this is where we have to yet touch requirements, the CapEx requirements become much higher compared to what we have been doing in all these last years. The typical is what we are looking at. So the INR 70 crores what we are going to invest is going to be an add-on facility to what we have already done. And out of this, we are looking at, so if we don't invest the INR 70 crores and what happens if we invest the INR 70 crores. So by investing INR 70 crores, we will have only an additional revenue of about INR 95 crores to INR 100 crores. But if we don't do it, then we will lose on a lot of opportunities and mismatch in terms of delivery time lines and stuff like that. So that is the reason why we are moving so fast in investing this and creating one new block of products in plant at Dahej facility.

[Sudarshan Padmanabhan, analyst]

And sir, this 1.5x asset turn versus 3x asset turn, are we being adequately compensated the margins for lower asset turn? I mean, what could be the incremental margins, if I can assume, say, in FY '25...

[Chintan Shah, executive]

Not realistically incremental margins. Probably margins, we are working on similar margin levels. But when we are looking at very large potential. So for example, one of these agro products that we are commercializing this year has an eventual potential to give you a INR 200 crore revenue. Now when you are looking at those kind of opportunities, then of course, there is a setoff between volume and margin. But because we are introducing something in a different way. So at least we are able to retain the margins what we are doing on the other products in terms of electrolytes or PTCs or SDAs. But despite of having double the CapEx requirements, it is not necessarily translating into much higher margins compared to SDAs or the electrolyte salts.

[Sudarshan Padmanabhan, analyst]

And sir, on the steady state margin side, on FY '25, what should one look at? Because currently, there is underutilization of asset and the newer scale-up is yet to happen. So probably these margins, what we are seeing in the last few quarters are also not right representative. So what should one realistically look at sir? I mean, in terms of top line, we understand what you said. But in terms of margins, should it be northwards of say 25%...

[Chintan Shah, executive]

So from October, when the plant really will be running at a full capacities, I would say a realistic margin estimation of 25% would not go haywire.

[Operator]

The next question is from the line of [ Sabyasachi Mukerji ] from Bajaj Finserv.

[Unknown Analyst]

My first question is a bit of a clarification. You spoke about almost 25% to 30% price erosion in PTC and SDA. That has led to revenue kind of contraction. But you also mentioned that the absolute EBITDA per kg is somewhat intact. Mathematically, then your percentage margin should look better, right?

[Chintan Shah, executive]

It is better and that is why we are not going in the red. Otherwise, we definitely would have been in the red with this kind of top line. Because if you look at the overhead increase that has happened in the last 9 months, periodically, if you just compare it on a quarter-on-quarter basis, we'll realize a steep rise in terms of your overhead costs. And despite of that this top line, we are able to sustain is only the reason because we are seeing an artificial gain in terms of percentage margins on these products. Otherwise, we would definitely have been in trouble by now so far. So the volumes have picked up. There is no doubt about it. But the values have eroded because the top line is going down because the product pricing is linked to your raw material cost, which is pushing the product cost down. But your per kg margin is fortunately remaining intact, which is helping you to sustain in this situation.

[Unknown Analyst]

So essentially, what you're trying to say is that the kind of resource or capacity that we have added that is not yet utilized.

[Chintan Shah, executive]

So that's what I told on the previous question. Yes. Because that's what I told, we had 200 kL capacity of reactors. And in April, we started with another 200 kL being added. This additional 200 kL reactor is technically a whole new plant. And we have only produced these 6 products which have gone into validation on the pharma and the agro side. And only 3 of our existing products where we require revalidation from the customer because we are going to change the plant location where we are going to produce. So besides these 9 product campaigns, we have practically not utilized this plant, and we are incurring the cost 24/7 in terms of manpower, electricity, utilities. Even if you run 4 reactors out of 20 reactors, you are running your [ cooling ] plant, [ ceiling ] plant, [ grind ] plant, everything is just going on and on. So unabsorbable cost is really very high, which is detrimental for this.

[Unknown Analyst]

Got it. My next question is on the demand revival commentary that probably you made that probably sometime in August we'll see the kind of shifting gears in business that you mentioned in the presentation as well. My question is in an earlier call in Q2 call you mentioned this to be timeline was somewhere around June '24. Now it has been postponed to August. Do you see further postponing of this?

[Chintan Shah, executive]

At least as far as we are concerned, I can talk only personally about Tatva Chintan, right now I'm not talking in terms of the overall industry. But let us say if I per se talk only about Tatva Chintan, I don't see any further shifting to happen because now we have a given definitive fixed schedule. We have started procuring raw materials and started planning the production for those campaigns. Now I don't see any possibility of any postponement of these timelines, at least for us.Now generally speaking about the overall industry per se, not only about Tatva Chintan, but general industry per se. Then I would say agrochemicals, we would see a similar 2024 as we have seen in 2023, demands are definitely not going to really pick up in terms of the agro product requirements. In terms of polymer, people are still skeptical. There is a slight hope and a slight indication that things are improving, but this could be deceptive. So at least 6 months from now, don't expect any major change in terms of polymers or epoxies to change in a big way.Apart from that, I think the SDA segment is doing well. The pharma side products are doing pretty well. So I think the dyes and the pigment industry has started to pick up nicely now. So I believe the overall indications are going towards a positive, but this is not going to happen very immediately. I would say be patient at least for next coming 2 quarters and then overall per se in terms of general industry perspective, also, we should see better sentiments beginning maybe 6 months down the line. But as far as we are concerned, personally, I would say we would not have any potential shift in terms of shifting gears. It has to happen from the month of August.

[Unknown Analyst]

Got it. Last question from my side, bit fundamental one on the SDA application. Now, there is a lot of hue and cry about electric vehicle and in the commercial vehicle segment, if not EV, then hydrogen may be used as a fuel. When it comes to SDAs, it goes specially into the emission control thing. So what's your thought on this, if at all we see, I understand it is a time taking process, but then let's say 5 years down the line, if all the commercial vehicle turns into EV, or let's say hydrogen, do you see any opportunity in SDA or do you kind of think of compensating it with other, your product lines?

[Chintan Shah, executive]

So, no, if you say in terms of timelines, let us say the EV cars, the passenger cars. So it is very hypothetical to state that in next 5 years, everything will become EV. So this is practically not possible. Again, as you rightly mentioned, commercial, large commercial vehicles getting into EV is still way down the line. Potentially, it's not 5 years, I would say at least a timeline of 15 to 20 years. Again, as EV technology has taken a couple of decades to really start showing penetration. Hydrogen is just being demonstrated on a pilot scale, I would say not even pilot scale. So it is still probably a potentially couple of decades away when we really talk of hydrogen. Because again, this technology, there are a lot of concerns related to safety and commercialization and making hydrogen available at various outlets in a safe manner. So there are a lot of things that are getting into it.So of course, I would say 20 years should be a definitive phase. It may lose its growth phenomena potentially over next 10 years down the line, and then come to a stable phase and then gradual decline, potentially 15 to 20 years down the line. Now, this is also our personal thought process that how will we protect our business in case that, let us say hypothetically, if someone is feeling this can happen in next 10 years, what will you do after 10 years? And that is the reason why we moved into the electrolyte space, on the battery space, where if you go from the fuels and get into any EV or any other mode of battery systems, you will require electrolytes.So, let us be present there. And we have made an entry in that at very right time. So, we have been working on this electrolyte space now nearly a decade, I believe it was 2011, the first time we got introduced to it, and started developing the product. So it's more than a decade when now we have established ourselves as a recognized players. Except for lithium battery, we are there in most of the segments where people come to us and check with us whether we can offer them the electrolyte salts or the electrolytes for these batteries.So, we made that conscious choice a lot of years back, that what if the fuel cars don't, as you are assuming that these things will die over a period of time, then what we will do. So, this is an alternative plan for us to keep the business size and growing all the time.

[Unknown Analyst]

Got it. So directionally, let's say, if not 5 years, 10 years, or 15 years down the line, our mix of these segments will look a bit different. SDA will probably come down and then electrolyte salts will go. That is directionally the thought process, right?

[Chintan Shah, executive]

Right. And these are all, see, basically, now there is this new application they are working on in terms of plastic reprocessing. So this was never heard of, probably 5 years back, where the SDA could be used. Now, this is something new that has come up.So there are a lot of things that people are working on. So these are all [ zeolite ] based applications. When it comes to precision, they require SDA. So if not this application, what will be the next big thing? So, there are a lot of companies who are working on these things in day in, day out, and nobody is going to let their business die. So from Euro-6 to going to Euro-7, again changes lot of equations in terms of SDA consumption, the products that are required in terms of SDAs are going to change. So a lot of changes are going to happen.And all these things are being pushed so that the large catalyst companies can continue to have their businesses intact and continue to grow. And they are also simultaneously working on this variety of different applications where they can synthesize new [ zeolites ] for new applications.

[Operator]

The next question is from Sanjesh Jain from ICICI securities.

[Sanjesh Jain, analyst]

I got 3 of them. First, on this CapEx of INR 70 crore, what we have announced today, when are we expecting the commercialization of this plant?

[Chintan Shah, executive]

October of 2024.

[Sanjesh Jain, analyst]

October of 2024. So we will be able to put this plant in next 7, 8 months?

[Chintan Shah, executive]

Yes. So we have already completed the designing part. All the vendors are already coming in from the same supply chain what we have utilized in our past expansion, even our construction company which we are going to utilize remains the same. And we have just inducted on board a new PMC team which is something different. So we have brought in a multinational PMC team to take care of this project.And this purposely we have taken in account because it's more professional in terms of the earlier PMC we were using. And we will also have a feel whether we want to utilize the same PMC for our upcoming new greenfield project. So it would be a good handholding and a kind of an experience sharing with this new PMC.

[Sanjesh Jain, analyst]

What is that PMCT? Can you elaborate?

[Chintan Shah, executive]

CBRE is what we are inducting. We have already inducted. Not inducting but we have already inducted.

[Sanjesh Jain, analyst]

And will we require this to get again audited because this will be technically a separate plant, right?

[Chintan Shah, executive]

Only if we want to produce SDAs from there. But no, we are not going to produce the SDAs. For the agro intermediates, specifically we are bringing in this for the 3 new ag intermediates that we are commercializing and there we will not require any kind of revalidation of the product.

[Sanjesh Jain, analyst]

Fair enough. Second, on the SDA you said that the price erosion is 25%, 30% and Y-o-Y revenue growth decline is 40-plus percent.

[Chintan Shah, executive]

I'll just correct this. So not all SDAs we have seen but our largest SDA has seen this kind of a correction in terms of value because the raw material prices came down from $18 to $10.8 and that is what is leading to the price drop from $12 to $9 in that particular SDA. So this is when the raw material price was $12, now it has gone down to $10.8. We are expecting the further price to go down to $8.5. Currently the price has come down from $12 to $9 and we are expecting it to go down to $8.5, but it is purely the conversion of what quantity of raw material per kg we are using to make this SDA. And this is the drop in the raw material price. So it is pure mathematics. [Foreign Language] reduce $2 from the product price. It is very simple mathematics that we follow with the customer.

[Sanjesh Jain, analyst]

Fair enough. So with this fall in the raw material, does it still make a sense to be a backward integration which we were talking earlier?

[Chintan Shah, executive]

Yes. So this is the product that we have already backward integrated. Now with this kind of a price drop if you are able to buy at the same price which you are able to produce, then why would you want to produce? Going for a strategic 30% production in-house, so that is we continue to do that because that is our strategy and that is what we have presently to the customers. That non-Chinese origin raw material absolutely indigenous made in India. And this is what non China supply chain is what we are offering and that is what has got them interested. And we have got this opportunity with a large customer. So we continue to produce 30% in house. But balance we don't even see a reason why we should unnecessarily occupy our plant.

[Sanjesh Jain, analyst]

Got it. Next coming to the PASC segment now that all the products are in place and we are telling that we are very confident of production. When should the really revenue recognition start? Will it start in June quarter or you expect something to come from April month?

[Chintan Shah, executive]

It will begin from the month of August. Quarter of July to September. So full quarter, if you say, it will be October to December. This will be a part quarter and October to December will be a full quarter where we will recognize the revenue from PASC.

[Sanjesh Jain, analyst]

Got it. And on the SDA we said that we are now approved for the pre-production. Fourth is awaited. When should we start that revenue recognition?

[Chintan Shah, executive]

I would say a realistic revenue recognition from October of '24 when these large customers and the second product with our largest existing customer both we expect to have commercialization from September or October. Full scale commercialization.So I would say October. Of course, the revenues in SDAs will continue to and it has already begun and it will continue to grow from today until September. But October we will start seeing a real shift in that phenomena.

[Sanjesh Jain, analyst]

Got it. One, on the guidance you gave for this year, you said that INR 400 to INR 425 crores. If I look at the lower end we are talking of INR 105 crores of sales next quarter, to INR 130 croes. So anywhere between INR 105 crores to INR 130 crores and in first 9 months, we have done an EBITDA margin of 17.6%. So technically, we are expecting that next quarter we will be hitting a margin of 20% to 23%. You're saying that this INR 11 crores, what is got delayed will get recognized and then there will be a growth sequentially.

[Chintan Shah, executive]

Correct.

[Sanjesh Jain, analyst]

That's a fair understanding, right?

[Chintan Shah, executive]

Yes. Perfect.

[Sanjesh Jain, analyst]

One last, before I get back onto the queue, more on the electrolyte side. What's our talk on the customer side? When are they completing their automation project? When we can really expect our offtake to happen. Will it happen in CY '24? It will take one year for them and for us, it's only a CY '25 story?

[Chintan Shah, executive]

So this, our large customer is automating their battery assembly plant. And this will go online from August of 2024. And typically, the number of batteries that they assemble today manually and the number of batteries that they will assemble by this automated line is going to become 4 times. Okay. And this is their first automated line, which they will become operational in August of '24. And they have got subsidized and low cost funding from the government of U.S., where they will eventually set up 4 such assembly lines. Additional 3 more assembly lines will be set up over a span of next 2 years. So from '24 to '26, they will eventually set up 4 assembly lines.So your x demand of today virtually translates into 14x to 16x in next 3 years' time, considering they even produce at 50% of their capacities, then also this will translate into a very large business over a period of next 2 to 2.5 years' time.

[Sanjesh Jain, analyst]

And that product is verified successful...

[Chintan Shah, executive]

Yes, that we have been supplying since last 1.5 years. Almost 2 years now, I think.

[Operator]

The next question is from Krishnan Parwani from JM Financial.

[Krishanchandra Parwani, analyst]

Just 2 clarifications from my side. So the first is, I think, since you mentioned about 1.5 times asset turns. So on your capacity expansion, which you did at about INR 150-odd crores, you'd be able to do INR 225 crores of incremental revenue. So that means about INR 625 crores of...

[Chintan Shah, executive]

Which INR 150 crores are you talking?

[Krishanchandra Parwani, analyst]

The one that you did during the IPO.

[Chintan Shah, executive]

No. So that was a mix of having PTCs, SDAs and the PASC altogether. So there definitely we had about INR 200 crores. What was our CapEx? [ 250 ]. Of course, from the IPO process, it was maybe INR 150 crores or INR 160 crores that was promised and we did about INR 250 crores of CapEx in that.And where we see an asset turn of about 2. So that definitely takes us from INR 400 crores to INR 900 crores in terms of revenue. Now what I'm trying to say is these new product launches that are coming in the PASC, where the pharma and the agro intermediates, these are all coming in as multistage chemistries. So let us say if I produce x kgs of a product, theoretically I am producing 3x or 4x kgs of total chemicals to eventually come down to x. Because multistage, stage 1, stage 2, stage 3, everywhere you are producing x, x, x to go to the x product, theoretically you are producing 3x but ultimately selling only 1x out of it. That is what is causing the asset turn.If I only talk in terms of PASC and which will be our focus of next 3 years in terms of any development and this is going to be our large growth driver over next 3 years, then I would say asset turn of 1.5 is what we are looking at. So the new INR 70 crores that we are intending to invest right now is specifically for this PAsC, the agro intermediate. That is where we are looking only at 1.5 asset turn.

[Krishanchandra Parwani, analyst]

Understood sir. So basically earlier of the initial CapEx or the IPO CapEx that you had incurred. So there you had probably guided about a 3x asset turn which you have lowered it to 2x. Correct? And then the incremental for PASC, it is a 1.5x. That is correct, right?

[Chintan Shah, executive]

Correct.

[Krishanchandra Parwani, analyst]

Okay, so that's clear. Just one last clarification.So in terms of whatever incremental revenue that you're going to do from let's say FY '24 onwards. So could you break it down like let's say what percentage of incremental revenue would be from PASC? And let's say if the incremental revenue is INR 300 crores, INR 400 crores over the next 3 years and the breakup between the PASC and the SDAs, that's it.

[Chintan Shah, executive]

Primarily the growth is going to come from PASC and SDA, 60% from PASC and 40% from SDA. We are looking at about the major. So all these 6 products going into commercialization. So all these will take impact from month of August. So the first 4 months, if we exclude, then, if on a whole year basis we are talking, then we are looking at about INR 200 crores in terms of revenue from the PASC segment and about an additional revenue of incremental revenue of INR 80 crores to iNR 100 crores on the SDA side.

[Krishanchandra Parwani, analyst]

I'm sorry, what number did you say for the incremental for PASC?

[Chintan Shah, executive]

INR 200 crores.

[Krishanchandra Parwani, analyst]

INR 200 crores. And for SDA it is INR 80 crores. So roughly about INR 680 crores more or less.

[Chintan Shah, executive]

Correct.

[Krishanchandra Parwani, analyst]

Okay, understood. Thank you so much for answering my questions and wish you all the best.

[Operator]

The next question is from the line of Vipin Goel from Mirabilis Investment.

[Unknown Analyst]

I had one question on the flame retardant segment. At one point we were expecting about INR 200 crore peak sales for the product that we were developing, which now we have decided not to produce because of the market conditions. So what are our plans here? And also if you could talk about the second product that you are developing in this segment which you talked about here in the call.

[Chintan Shah, executive]

So the clients in these segments are basically polymer manufacturers. It is not that we are never going to produce. It is purely because of the current market situations and the price at which these products are available, which are ridiculously low. It doesn't make any commercial sense to produce this right now. Just to give you an example, one of the first product that we have introduced in this flame retardant category. Let us say my raw material cost comes to $2.8. The product is available at $2.9 nobody can make. See, if you add 1 kg plus 1 kg, you can make maximum 2 kgs. You cannot make 3 kgs, right.And this product pricing is in such a way as if people are able to make 1 kg out of only 500 [ kg ] raw material. This is unrealistic. And my key competitors in this area are the people who have large capacities to produce bromine, which is the key raw material for that. So I believe the product pricing is happening globally in a way where they are only getting rid of the bromine that they produce. So they are just valuating their bromine and not evaluating the product per se in terms of flame retardants which they are selling. If I say in terms of raw material cost, if 60% cost comes from bromine in this particular product. So if, let us say a $3 product, $1.8 is coming out of bromine as a raw material cost. Now this product is available at $2.8.Practically they are trying to sell bromine and not actually considering any overheads or margins on the rest of the chemistries that they are putting. So as of today, this same product was available at $4.5, $5, $6, $6.5 and went up to $8. But a standard pricing of this product is about $5, $5.5.And that is where it has any economic sense to produce. But because the demand is very low, very low, it's probably not even 50% than it used to be 1.5 year back. And that is what has caused this price to drop. People are sitting on large piece of inventories, trying to just get rid of it at whatever price they are able to. As of today, it doesn't make sense to produce these products. And that is why we are holding off.But we have very interesting negotiation going on with one of the customers in the western world. It's a very large potential customer where we have been fully approved right now. And of course, the business is not happening per se because of the pricing situation that persist. Now this customer has slowly and steadily come to a point where they have agreed on a pricing mechanism, irrespective of what the market price would be based on the global raw material pricing and a conversion model that what would be the overheads to produce at Tatva, and let us say Tatva has a 10% margin over it, and what is the product cost. So this is the kind of a mechanism which they have merely agreed. I'm not announcing this today because they have not formally agreed or it is not 100%, but they are moving in this direction where they understand that today it's an artificially low pricing.But when the market turns and suddenly these prices start to rise, the availability becomes a question mark and you have to pay very high spot prices, and which people have done in last 3 years, paying abnormally very high prices in terms of spot buying. So they don't want to get into that situation. And virtually, we are very near to close this argument with them to have a contract in place which will be governed in terms of a fixed margin for Tatva and fixed overhead. And the price of the product varies in terms of the raw material pricing as and when it changes.The second product, which we introduce again, it comes from the same category, it's a flame retardant getting into polymers and similar set of customers, which we are working.

[Unknown Analyst]

Sure, sir. This really helps. Sir, one more thing on the SDA front. What we understand is that the first and the fourth customer are back to pre-COVID levels. So I mean, just to understand what portion of the pre-COVID peak sales that we are doing in terms of volume, what would they be?

[Chintan Shah, executive]

That customer #2, the China customer, which is not buying since probably last 14 or 15-odd months was buying nearly 90% of what my customer 1 used to buy, maybe 80%. So not very less than my customer #1. And this customer has literally vanished from the scene in last 14 or 15 months. That is a kind of demand situation within China where they are selling very less quantum of their own products within their own territory. Now despite of that, we are seeing this growth. So you can understand what the customer #1 and customer #4 are bringing in terms of volumes, nearly offsetting what the Chinese customer is not offtaking.

[Unknown Analyst]

Again if you have to map the fifth customer on the backdrop of this...

[Chintan Shah, executive]

...largest potential customer, even potentially much larger than my largest customer today.

[Unknown Analyst]

Okay. And sir on the SDA front again you had alluded some quarters back that there's a high cost in [indiscernible]. So is that all has been utilized or is it still holding some part of it?

[Chintan Shah, executive]

No, we still have lot of idle capacities flying around this. I expect we should overcome this scenario from July or August is what I strongly feel and I'm very confident of that in fact.

[Unknown Analyst]

Okay. So will that also be throwing into the margins?

[Chintan Shah, executive]

Of course, yes. Because this is idle cost is a huge cost. It's an unbearable cost. It's a huge burden for us because as I explained repeatedly all your equipment, facilities are running but producing hardly anything. It's a huge cost for you. Just imagine bringing people from Baroj to Dahej, it's a distance of 50 km. How many buses we have? 12.We have 12 buses across the shift and now we have just doubled that right from 6 to 12. So even if you produce or not produce you are paying for 6 buses on a daily basis to transport your employees from Baroj to Dahej and back. And this is what a cost of INR 24 lakhs a month.So this is the kind of cost that you keep on adding if your plant is not operating at a full capacity. So once this becomes fully operational, your revenue recognition starts happening. Then all this cost automatically starts getting absorbed in a decent way.And that is where you will see a decent growth in terms of EBITDA as well.

[Unknown Analyst]

One last question on the SDA [indiscernible] now we are seeing picking up in volumes. So how do you think about the PTC segment? How should we think about it in future? And what kind of growth can we...

[Chintan Shah, executive]

PTC segment actually there is no real drop in terms of volumes. Okay. The volumes are nearly the same. There may not be a growth. There is a significant erosion in terms of pricing. Just for an example our largest selling phase transfer catalyst is TBAB. Let us say about what by last March, March of 2023, we were selling this product at INR 425 in Indian market.Today this product is selling at INR 250 and INR 275. Now, how do you compensate your top line growth when your product prices...this is not necessarily, I'm talking that margins have dropped. Only your product prices have dropped so drastically. But in PTCs we have also seen margin erosion because there is very fierce competition in PTC in domestic market. Our margins and customers in exports have been very well protected. But here the scenario is a bit different when we talk of domestic customers, it's not that it's a catalyst and people say that it's a very critical component of reaction. So we don't want to change the source. That is a philosophy which most of the MNC customers live with.But it is not the scenario when we talk of the domestic customers. So here people tend to change source of catalyst even for a INR 5 change in the product pricing. Here we have erosion of margins from the domestic front. But at least on the exports front, 70% of our PTC revenue again comes from the exports. But those margins have remained pretty much intact.

[Unknown Analyst]

The volumes for PTC sales should remain at these levels?

[Chintan Shah, executive]

PTC has never been a very exponential growth business for us. PTC has been organically growing at 10% to 15% per year. And so this year may be an exception to that, that there may not be a volume growth. It's a top line degrowth because of the product price has gone down. So we see a top line degrowth in that segment. But in terms of per se the business, it remains very much stable.In fact, for the upcoming 2024 year, we have already business in place for most of my existing large MNC customers. So those businesses have been secured. So I am pretty much relaxed in terms of PTC sales for the calendar year 2024 already.

[Operator]

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