Camlin Fine Sciences Limited (532834) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Camlin Fine Sciences Limited Q1 FY '21 Earnings Conference Call hosted by Dolat Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Archit Joshi from Dolat Capital. Thank you, and over to you, sir.

Thanks, Vardaan. On behalf of Dolat Capital, I welcome all participants to the Q1 FY '21 Earnings Conference Call of Camlin Fine Sciences Limited. We would like to thank the management for giving us this opportunity to host this call. We have with us today, Mr. Ashish Dandekar, Managing Director of Camlin Fine Sciences Limited; Mr. Nirmal Momaya, the Director; and Mr. Santosh Parab, the Chief Financial Officer of the company. Without further ado, I would like to hand over the floor to Mr. Ashish Dandekar for his opening remarks. After which, we will have the floor open for a Q&A round. Over to you, sir.

Thank you. Good afternoon, ladies and gentlemen. Good morning. Welcome to the investors conference call. The details of the first quarter will be explained to you by Santosh Parab, our CFO. And after that, Mr. Nirmal Momaya will take questions. Over to you, Santosh.

Thanks, Ashish. Hello, everyone, and a very good morning. As Ashish said, I will start the call with some highlights on the performance of the company for the quarter, and then we'll open up for the questions. We have had a good performance in the first quarter of the financial year, and we are extremely proud of our team who have been able to achieve this in this most trying times. As you are aware, our manufacturing plants were working, even though there was lockdowns and also in the global arena also our plants were working. This was because of our products are under Shelf-Life solution business, which generally falls under the category of essential services. The authorities have since extended the permissions to manufacture other products as well. At present, all our manufacturing facilities situated in India and globally are working at an optimal capacity in spite of the tepid circumstances. I will now share some of the highlights of the financials, starting with the stand-alone financials. Our operational revenue in the stand-alone was INR 121 crores as against INR 139 crores in last quarter, while it was INR 143 crores in the corresponding period in last financial year. The operational EBITDA was INR 16.3 crores, which represents an EBITDA margin of 13.45%, an expansion of 349 basis points on year-on-year, while 454 basis points sequentially. Company posted a profit after tax of INR 3.8 crores in the quarter against INR 16.5 crores in last quarter and INR 1.6 crores in the corresponding last year's quarter. Now on a consolidated basis, the company posted a record operational revenue of INR 305 crores. This is the first time that we guys passed -- crossed a quarterly revenue of INR 300 crores. As compared to the last quarter's revenue of INR 292 crores and corresponding last year's quarter, it was INR 260 crores. This represents a growth of 4.4% sequentially, while 17.5% on year-on-year basis. EBITDA stood at INR 51 crores as compared to INR 34.3 crores in last quarter and INR 35.5 crores in the corresponding period in the previous financial year. This is an improvement of 497 and 303 basis points, respectively. Profit after tax was INR 20 crores in the current quarter as compared to INR 2 crores only in the last quarter, while it was INR 16.4 crores in corresponding last quarter. The increase in the top line and margins is mainly due to favorable product mix, which was buoyed by the situation under COVID and, of course, efficient expense management. Geographically if we start to look at our global business, CFS Europe posted an operating revenue of INR 111 crores in the current quarter as compared to INR 74 crores in the last quarter and around INR 103 crores in year-on-year. Our Mexico subsidiary reported revenue INR 72 crores in the current quarter as compared to INR 74.8 crores and INR 56.8 crores quarter-on-quarter and year-on-year, respectively. CFS Wanglong, our subsidiary in China which manufactures vanillin, clocked a revenue of INR 59 crores in this quarter as against INR 29 crores in last quarter and INR 46 crores in the corresponding period last year. CFS Brazil netted a revenue of INR 15 crores as compared to INR 17 crores in the sequential quarter and INR 11.9 crores in year-on-year. CFS North America posted a revenue of around INR 8.8 crores against INR 7.6 crores in the last quarter and INR 12.2 crores year-on-year. In this situation of COVID pandemic, the company has been able to record a better performance in this quarter. However, the COVID scenario remains unpredictable and uncertain. The company is bracing itself to face this uncertainty in the quarters to come. While achieving these results, our focus has been on the well-being of our employees and efficient delivery to our customers. Company had desisted from restricting the salary of its employees and had rather focused on increasing their efficiency and output of the workforce in this circumstances. Company has retained its entire staff across the globe, and our employees have proved our faith in them with their unflinching support and efforts during this pandemic. In the current times, the priority was also focused on efficient cash management and maintaining the liquidity position. The company was successful in maintaining its indebtedness at a tad below the level as at financial year '20 year trend. As you are aware, the trial runs were impacted -- this is regarding Dahej project. As you are aware, the trial runs were impacted first in March due to the nationwide lockdown, and then due to the unfortunate blast that occurred at our neighboring factory on June 3, 2020. This frequent and major disruptions have impacted the successful completion of the trial runs. The company has produced diphenol during this trial run, and it is being internally consumed at Tarapur plant. Looking at the progress of trial runs at present, the commercial production is likely to commence before the end of quarter 2 FY '21. Lastly, the shareholders of the company approved the preferential issue of our -- up to INR 180 crores in last week of June 2020. Post the statutory approvals, the agreed amount of part subscription of this issue is expected in a very near future. Companies plan to acquire the balance stake in the Mexican subsidiary and building of vanillin facility in India is on track as per envisaged plan. With that, we can now open up the call for questions. Thank you.

[Operator Instructions] The first question is from the line of Madhu Kela from MK Ventures.

Yes. Nirmalji, fantastic set of number, congratulation to you and the entire team. See, I wanted to ask one thing that in the last 5 years, there has been significant free cash outflow from the company. Basically, the company has not generated free cash. With the implementation of this Dahej plant and the profit improving, when do you think the company will be in a position to generate some substantial free cash flow because that will be the key to re-rating of this company?

Sir, this is the operator. The audio is breaking from your line, sir. [Operator Instructions]

Sorry, could you repeat the question? I have a very bad -- poor network today, so.

So Nirmalji, I was asking, first, congratulating you for a fantastic set of numbers in this quarter, you and the entire team. I was asking that the company has been in an investment mode and working capitals have also increased. So essentially, the free cash flow out of the company has been to the tune of INR 450 crores in the last 5 years, negative. When do you expect that we'll be able to get back to free cash flow from the operations, sir? That was my question.

Okay. Thanks. Thanks, Madhuji. Yes. Our expectation is by FY '22 we'll be back in a positive free cash flow position. Because FY '20...

And do you think that after that, we'll intend to reduce the debt out of free cash flow or you'll still going for some acquisition or some other investments?

So at this point, we don't have an acquisition plan, anything on the table. But the idea is that over a period of time, we want to reduce the debt, for sure, in the next 3 to 4 years, any which ways, we have an IFC debt, which is 2023, maturing '23 and also we are paying off our Mexico debt. So the 2 long-term debts will get cleared in by FY '24. Yes.

And Nirmalji, the other -- the second question which I had, can you give a little bit more detailed color on the Dahej plant? It is not only the commercial production is starting. But over the next 2, 3 years, what are the possibility? How the backward integration will happen? How the value addition will happen? Can you speak a little bit about that?

Right. So Dahej facility, basically, we are currently -- the plant that is being commercialized is for diphenol, which is hydroquinone and catechol, which are the base raw materials that we make in Italy. So we have a capacity of 10,000 tons in Italy, total combined capacity and a similar capacity we've set up in Dahej. So the total capacity of our hydroquinone and catechol will double. And our idea is in the next 2 to 3 years, the downstream products made from hydroquinone and catechol, we will start producing those as we go along so that we become 100% fully backwardly integrated for our hydroquinone and catechol. So which means we will consume the entire hydroquinone and catechol built -- produced from both these facilities. So the idea really is that today, they're consuming about 10,000 tons of hydroquinone and catechol, and our business size is x. With this, we will double our business size with taking that as a basic raw material and then value adding in the next 2 to 3 years.

The next question is from the line of Surya Patra from PhillipCapital.

Congratulations for the great set of numbers, sir. Just -- although you have mentioned about the plan for consolidating your position in the Mexico business and vanilla business and as well as the kind of activities towards the health and -- health care and product areas, so that is on track. But if you can give some more incremental update on that side, how is that progressing? And also, if you can give me some sense, what was the kind of a EBITDA contribution of Mexico and the vanilla business for the quarter?

Right. So well, the talks are progressing as we had discussed on our last call. And we are hoping by end of the year, we will finalize the -- complete the acquisition of Mexico minority interest. And the vanillin facility also in the next 12 to 15 months, depending now because of COVID, setting up the facility in Dahej, transferring it from China or also setting up some brand-new facility -- capacity here would take anything between 12 to 18 months purely because of labor and conditions that we are in -- currently facing in India. So difficult to give an exact time frame, but it is within the next 12 to 18 months, that facility will be ready. And on the health and wellness front, we are progressing. We are setting up an extraction facility, which -- in Karnataka, which should be -- we've acquired it -- rather we've taken on lease 1 facility, which ultimately we will acquire and that should become operational in the next quarter. And that will start giving us contribution in terms of sales coming from the natural products in the health and wellness division, so you will see some contribution coming in from the next quarter.

Okay. And so that is good. Interesting piece is that you're saying that immediately, we'll be seeing some traction on the health and wellness side. But how big is that investment or anything on that front?

Right now, the investment is small because they're starting small.

No, means the capacity that you are going to that acquire there.

Yes, so that -- yes, that can give us potentially annually about INR 50 crores to INR 60 crores of top line, which is expandable -- this capacity is expandable to about INR 100 crores in this facility. So that's the first step for us.

Okay. And investment in that?

No, the investment is small, it will be of a couple of crores, yes. Yes.

Okay. Okay. So is it because of the kind of low volume, high-value nature of this product or anything else?

Yes. Yes, that's right. Because we are taking this on lease. Ultimately when we acquire it also, it's not -- the total acquisition is not much. I mean the products are typically INR 4,000 to INR 5,000 per kilo. So therefore, it's a very high-value and the volumes you handle are much lower. So the investment and the turnover that you get in terms of investment is much larger.

Okay. Now since we are internalizing that in the minority stake of Mexico as well as the China one. Can you just share, sir, what is the EBITDA number for this quarter for these 2 entities? Minor entity number?

So the -- so China is at breakeven. Of course, there is some margin we make in guaiacol, but on the final vanillin, on the CFS Wanglong, it was at breakeven on EBITDA level. And Mexico was about 25 -- 26% was the EBITDA margin.

Okay. Okay. So whether it has gone up, sir? Why because see, last year, I think...

Yes, it has gone up. Yes, it has gone up from about 20% to 25%, yes.

Okay, fine.

In the quarter, yes.

And sir, coming to the overall revenue mix, sir, if you can share, what is the share of blend this quarter in other product areas? So my interest is just to understand that whether the product mix has changed or the kind of a superlative margin performance what we have seen, I think this is one of the best over last 4- to 5-year period, annually...

So it's not really so much the product mix. I think the COVID effect has done 2 things. One is some raw material prices have come down, which we saw with the crude prices going down so in that quarter. So that, of course, is -- does help a little bit. But also some of the currencies have also devalued. So our business is in dollar, but expenses are in local currencies. That also helps in the profitability. And also in the COVID, since there were some logistics problems and stock problems and things, realization also has improved slightly in terms of the pricing that one has charged has improved a little bit. So it's a combination of many factors, which has led to this improvement in margin. So if you were to look at it, it's not 1 thing that really has given us that.

No, that's right. But if you can say, sir, what was the blend share for this quarter?

Yes. Santosh, can you give the numbers. He will give you the exact numbers, yes.

Yes. On a consolidated basis, the total business, blend on a stand-alone only blend was around 27% of the total revenues. And Shelf-Life, the balance states are around 24%.

Okay. Okay. So that is -- really this is interesting fact that despite blends remaining relatively lower than the 30%, which used to be generally. This quarter, the margin performance, we are seeing a kind of a significant surprise. So my question here is that, is it fair to believe the base business -- see, the base old business, what we used to generally have, so that has got a kind of a margin put in say like this and which would further be complemented with the commissioning of the Dahej plant and also the way that you are indicating the health care product, which is, obviously, value wise is a value proposition addition. And on the top of that, even the Mexico, the way it has performed margin-wise. So all those are giving any kind of a significant margin growth trajectory or expansion trajectory. Am I right or any or anything else to be factored?

Surya, I mean I'd like to be a little cautious on this is that times are not very certain with COVID.

Certainly, sir.

Especially in some geographies. And now we are seeing in India also new lockdowns may come, new things -- already we have a lot of rumors of what is going to happen. So keeping that in mind, keeping how interest rates are, how currencies are, everything is connected ultimately. And keeping all that is coming, we are hoping that this is the base business. We are hoping that this is the base business. But with these uncertainties, it's really, really difficult to say that -- peg it and say that this is what it will be for sure. But having said that, we are seeing that there is an increment in the margin. And the business itself we haven't seen too much contraction in volume offtake. In some markets, there has been, because of the lockdown, some markets, there has been more because the lockdowns happened at a different point of time. So it's all very uncertain the next 6, 8 months, 9 months. So it's just very difficult to say whether this becomes your base case. But yes, I mean, this is what we hope that it will be our base case. And yes, of course, with Dahej commissioning around the corner in this quarter, over the next 2 quarters, we will see the upside that we will get from Dahej. As well as we will see certain debottlenecking that we are doing in our Tarapur facility. We will see upsides of that because they're increasing capacity in some of the Performance Chemicals by almost 30% to 40%. So the value addition that will come out, we will see some upside coming from there as well in the next 2 quarters.

Okay. And last 1 question from my side. See, on the blend side, I was reading somewhere that because of the increased demand for the packaged food and all that, so generally, there is a kind of a significant positive scenario or a demand outlook for antioxidants. So whether that is applied to your product also? And secondly, whether that is giving any kind of a additional visibility in terms of growth trajectory for your blends business?

So there are 2 aspects to this. One is, of course, the packaged foods means oil consumption goes up, oil consumption goes up, which means antioxidant consumption goes up. So that cycle will see some -- surely will see some volume uptake increasing in TBHQ sale, especially because that's where -- what goes into edible oil. So that -- yes, but at the same time, on the animal nutrition side, because of the lockdowns and because of some institutional selling, the restaurants not being open and there's more home consumption, so there is a bit of churn that is happening in that market. So there, you will see some -- somewhere you will see a bit of volume contraction in -- during these lockdown times in some parts of the world. So if you balance the 2, I think we are okay. We are very well balanced to cater to both sides of the market. So whether it's home consumption or whether it's restaurant consumption. So from that perspective, I think we are okay. We'll be very much on target, yes.

Okay. On just the same question, sir, the blends what I was asking. So whether any optimism that you're finding? Mean, in terms of your overall outlook for the blends business, how should one really look at given the current scenario that is prevailing in the world across?

So I think, I mean, in the next 3, 4 years, what we've set out to grow in excess of 25% a year, that looks on track in blends business. Give or take a few quarters here or there. But generally speaking, we will grow at 25%.

The next question is from the line of Tarang Agrawal from Old Bridge Capital.

Congratulations for a great set of numbers, especially for CFS Mexico. I have a couple of questions. One, I wanted an update on the shifting of plant from China to India. Second, if I look at your India business, look at the stand-alone business, there's a revenue of around INR 120 crores in Q1. And your Europe business is with a revenue of around INR 111 crores. So just wanted to get a number of what would be then Europe's captive sales to India and India's captive sales to China in those numbers?

Santosh, you can answer that.

Yes. Europe sold around 40 -- INR 38 crores to India during this quarter. From India to China, there was a sale of only INR 10 crores.

So balance, Europe and balance, India is largely all external, right?

Another 10 -- INR 12 crores from India was the sale of subsidiaries -- sales to subsidiaries, other subsidies.

Sure. No, sorry, I wanted your few bits on China, movement of the China facility.

To China. So we -- as soon as -- we just got the approvals now. And once we have the money, we will start the conversation for that project. So we will give an update in the next meeting. But overall, it's -- like I mentioned earlier in the call, it's between 12 to 18 months.

The next question is from the line of Rohit Sinha from Emkay Global.

Congratulations for great set of numbers. A few questions from my side. First of all, on the gross margin, if you look on the consol basis, it's slightly down. But on a stand-alone basis has gained gross margin, the revenue was down there. So how has been the volume and pricing that have played in the stand-alone and proprietary level?

So basically, if you look at it, the gross margin is slightly down maybe 0.25%. We have, in Italy, we have produced in record production in the last quarter compared to in the past. So where the gross margin is slightly lower. So that is the reason, but the volume is much higher. That's the reason why you will see that the margins are -- at the EBITDA level have improved. And in India, to answer your question on India. Our -- we got a slightly better price rise and product mix. Basically, we sold more of the food products because first 2 months we were allowed only to produce for essential items, which was food and pharma. So the balance 15%, 20%, which is nonfood business, we were not producing at all. And that is a slightly lower-margin business. So India had a better margin profile. And overall, the margin profiles remain constant or very same.

Okay. Okay. So basically, I mean, on the subsidiary level, so main -- how would take a -- main culprit is the Italy facility where gross margin has come down or other subsidiaries are also some contraction in the gross margin?

No, they more or less remain the same. Everywhere, it's remained more or less the same. That's why it's almost the same on the top line.

Okay. And secondly, as you mentioned, the EBITDA margin of Mexico jumps over almost 500 to 600 bps. So was there some -- I mean, how we should see going forward this thing? I mean majorly, I believe it would be some currency benefit as well in there and this slightly gross margin benefit also. But going forward, how -- what kind of a stable gross margin would be there? And how we should see that progress?

So I answered that earlier, Rohit. I said that in these COVID times, it's very difficult to say in the next -- for the next -- especially for the next 6 months and 9 months depending on lockouts and if there's a lockdown, the plants running, not running, all of that is always a question mark because we're in so many different geographies. So very difficult to say that whether this is the base margin or it can be improved or it will be lower, but we are hoping it will remain in this region.

The next question is from the line of Mithun Soni from GeeCee Investments.

A couple of questions, most of it has been answered. In terms of our capacity utilization, other than like you indicated that Italy is almost running at full utilizations. How is the situation in -- is in blends and aroma and all those -- where is it that we can get that additional revenue other than the Dahej plant?

So in Aroma, of course, we have additional capacity. We are at about 60%. So we have scope in that. Blend capacity is never a problem. So we can easily produce 50% more if required. Because it's a -- blending operation is just as -- it is a blending operation. So it's not really -- capacity constraints are not significant. And in the Performance Chemicals, we have potentially, which I mentioned earlier, we are debottlenecking our Tarapur facility to increase capacity in our Performance Chemicals products, which will reflect in the last 2 quarters where there is potentially about -- we can debottleneck by about 30% to 40%, so there is a chance of at least growing that business by about 30% to 40%.

And by when will this debottlenecking happen?

By September end. So that's why I'm saying from the last 2 quarters, October to March, the last 6 months of the year.

Okay. The second half, you will see. In the blends business in last year, December quarter, we had run -- done almost like about INR 120-odd crore of top line. Can we -- are we seeing an increased demand from people who want to move away from China or any increased inquiries? Can we hit that sort of revenue again?

Yes. So China is not really a player. So the blends business is all local. You need local blending facilities to sell. We are producing everywhere wherever we are present locally. And yes, there is an opportunity, surely. Like I said earlier in my -- in the call that COVID lockdowns can impact some of the plants, which were shut down for a month, 1.5 months in some of these geographies. So keeping that in mind, I mean, the demand will come back once everything is normalized.

Okay. So basically, currently, for the coming 2 quarters, your benefit, what you can get is a little bit from the aroma because the Dahej plant will -- and the Dahej plant will start coming towards the end of the quarter and the Tarapur facility will come...

No, towards this quarter.

After 2 quarters from the top line perspective?

No, no, no. For the -- in this current quarter, which is September ending, we will finish Dahej commercialization and we will finish our debottlenecking. And from October onwards, those capacities are available to us.

Okay. So Dahej will not give any revenue in September quarter?

It's difficult to say, I mean.

Okay. But we'll see in the December quarter. From December quarter, we'll see the benefit of both Dahej and as well as Tarapur?

Right.

Perfect. Perfect. And 1 question this quarter compared to -- we have seen the lowest operating cost and compared to even the last 2 quarters, any particular area where we got the cost savings and sustainable?

Yes. So I mean, this work-from-home and a lot of the travel and establishment costs and things -- we saw a lot of -- and we did rationalize many other costs. We got many opportunities to cut costs on an operating level as well. So going forward, I mean, work-from-home looks like it's the new normal. For most of the functions, we have been able to do it very efficiently and very effectively. So kind of sustainable in the long run, these kind of costs, even if there is a slight increase in the cost, we are not going to add many more people or -- for the added turnover. We just see that it's so much more efficient people working from home than traveling 4, 4, 5, 5 hours really to their workspace when they actually are not really required physically, if everything can be done online. So we see that, that benefit will continue.

Perfect. And what would be your current net debt?

The current net debt would be around INR 420 crores or so.

INR 420 crores. Okay.

The next question is from the line of Sumit Bhalotia from MK Ventures.

Yes. Congratulations for the good set of numbers. My question is on an update of Dahej plant. So assuming that our commercial production will be from September end. So what is the strategy for the Italy plant production in the second half? I mean, how are we going to absorb the second half production of HQ and catechol given the current demand environment? And so basically, is there a plan of moderation in utilization of the Italy plant? That was the first question? And secondly, how is the product quality? And how is the cost structure we are seeing compared to whatever assumptions we had done, we had shared a few years back so basically that $1 cost savings, is it intact? Are we seeing that kind of efficiency in current production?

Yes. Okay. So the first part of the question, the first question is what are we going to do with the hydroquinone and catechol. So basically, we have that what I said earlier that we have done some debottlenecking, which will give us at least 30% to 40% more capacity for the downstream Performance Chemicals products as well as we have debottleneck our Shelf-Life solution. That is the TBHQ, BHA. So we have an opportunity there also to gain more market share. So the idea is really to continue to consume from Italy, the hydroquinone and catechol. Specifically, I would say, about 80% of the catechol and about 60% -- 50% to 60% of hydroquinone. And the balance only -- that portion will be sold in the market, for which we already have a predefined market. So we are not going to cut down or curtail the production because of market -- because of absorption of material. And the second part of your second question was on the cost structure, yes. And so we are seeing in the trial production, pretty much that -- the assumption that we had is pretty much visible.

Okay. So I understand that, as you mentioned earlier, it's difficult for you to comment on the sustainability of the margins that we have reported this quarter but whatever would be the base case margins, the margin benefit that we were really expecting from the Dahej plant from both low production cost and as well as the release of capital, those will be intact?

Yes. That will be intact. Yes, absolutely.

Okay. Sir, if you can just share a little bit on the working capital improvement that we would be seeing once Dahej plant commences, that would be very helpful.

Yes. So currently, for our, I would say, at least, beside the blends business, all the other business, the raw material comes from Italy, which is a long cycle. Because produced in Italy, shipped to India, produced -- and then converted in India then shipped to China. Converted in China or shipped to customers. So it's a long cycle. So here, we are eliminating for at least more than half of the raw materials. We're eliminating the long period that we have because Dahej is right here. So we save at least 45 to 60 days in the cycle for the product that comes out of Dahej. So on a blended basis, because we will be importing, it's not that we're not going to import from Italy. So on a blended basis, there should be a good amount of reduction in the working capital cycle, yes.

Okay. Sir, in that case, other than the INR 50 crores, INR 60 crores of working capital requirement that we have already planned and provided for in Dahej, our net debt, which is currently INR 420 crores and including the expansion plant, it should not sore up beyond INR 550 crores, in the next 3 years?