Camlin Fine Sciences Limited (532834) Earnings Call Transcript

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Thank you, Janice. On behalf of Edelweiss Professional Investor Research, I welcome you all to the Q2 FY '21 Earnings Conference Call of Camlin Fine Sciences Limited. We have with us today, Mr. Ashish Dandekar, Managing Director; Mr. Nirmal Momaya, non-Executive Director; and Mr. Santosh Parab, Chief Financial Officer. We request the management for their opening remarks, post which we will open the floor for the Q&A. Thank you, and over to you, sir.

Thank you. Thank you. Welcome, ladies and gentlemen, to this conference call. I will hand over the proceedings to Santosh Parab, our CFO, who will give you the outline of the quarter, and then we'll, as usual, take questions. Thank you.

Thanks, Ashish. This is Santosh Parab, CFO of Camlin Fine Sciences. Good morning to everybody. We hope you and your kith and kin are safe and healthy. Coming now to the highlights of the quarter. Last quarter, as you know, was a unique quarter for the company. But this quarter, we can say that it's a steady quarter. Of course, southward movement of dollar in the current quarter did have some impact on the profit of the company. However, the revivals of the economies in the world with progressive renewal of lockdown restriction is certainly a positive sign for our business going forward. All our manufacturing officially in all geographies were operating at optimal capacities during this quarter, albeit corporate offices in major cities were largely operating remotely by the employees working from their home. Now I'll come to the financial results of the company. Stand-alone operational revenue was at INR 146.78 crores, which shows a growth of 21.13% over the last quarter, while it has grown by 2.31% as compared to the corresponding last quarter. The margins are higher by 144 percentage point as compared to last year. It has been lower by around 407 percentage points as compared to the last quarter. This has been due to the strengthening of rupee in the current quarter as well as change in the product mix. Consequently, the operating EBITDA margin, that is without considering foreign exchange loss, has been at 9.82% as compared to 13.44% and 12.56% against last quarter and last year quarterly, respectively. During the current quarter, foreign exchange loss recorded in operating expenses is to the tune of INR 7.32 crores, which has suddenly impacted the profits of the quarter. Total foreign exchange loss for the quarter, including the gain of INR 1.99 crores accounted as interest expense, is INR 5.33 crores. On half yearly basis, the standalone turnover was INR 267.95 crores, which was lower by 6.66% mainly -- over last year, mainly due to the impact of COVID. Margins were higher by 209 percentage points. The operational EBITDA, again, without considering foreign exchange losses was at 11.45% as compared to 11.04% last year. Foreign exchange losses for the current year were at INR 7.32 crores as against a gain of last -- of 1 point -- INR 3.49 crores last year. Corresponding overall foreign exchange impact was INR 5.53 crores in current year as against INR 1.2 crores only in last year. Coming along with the consolidated numbers, on a consolidated basis, the turnover for the current quarter was INR 256.81 crores, which is lower by 16% as compared to last quarter, whereas it is has grown by 15.54% over last year quarter. Pursuant to our robust product mix, the gross margins were higher by 665 percentage points, while they were largely constant with respect to last year. The operational EBITDA margins were 16.55% in the current quarter as against 75 -- 17.76% in previous quarter and 13.99% last year. On a consolidated basis, the net exchange impact was INR 5.67 crore as compared to INR 3.01 crore in the last quarter and INR 6.92 crore in last year quarter. Consolidated profit before tax was INR 17 crores as compared to INR 8.6 crores for last year. In the half year, the turnover was INR 562 crores, showing a growth of 16.62% over last year. Margins have been around at 15%. Consequential operational EBITDA has been recorded at 17.21% as against 13.86% in last half year. Half yearly turnover is at INR 562 crores as against INR 482.40 crores and the respective operational EBITDA in real terms of INR 96.79 crores in these 6 months as against INR 66.87 crores in last year. I'll come to the brief of the subsidiaries or the geographical overall global business of the company. U.S. -- CFS Europe, our subsidiary, which is mainly manufacturing diphenols, posted a turnover of INR 95.06 crores as against INR 111.85 crores in the last quarter, and this turnover was INR 78.70 crores in last year's corresponding quarter. Half yearly, turnover is around INR 206.91 crores as against INR 185.85 crores. Our CFS Mexico reported a turnover of INR 60.66 crore in the current quarter versus INR 72.28 crore in last quarter and a corresponding turnover in the previous year's -- last year's quarter was INR 60.99 crores. Half yearly turnover of Mexico is INR 132.95 crores as against INR 117.81 crore last year. The operating revenues of our subsidiary sales in Brazil were INR 15.87 crore in current quarter, which was INR 15.71 crore in last quarter, while the corresponding previous year quarter reported a turnover of INR 14.93 crores. While the half yearly numbers for the CFS Brazil were INR 31.59 crores in current year and -- as against INR 26.85 crores in last year. Now I'll come to the -- our North American subsidiaries, CFS North America. It posted a quarterly revenue of INR 9.67 crores, which as compared to last quarter, which was INR 8.82 crore, while the corresponding last year quarter, it was almost same at the levels of INR 9.67 crores, while half yearly revenue for this subsidiary was INR 18.49 crores in current year as against INR 21.88 crores in last year. Our vanillin manufacturing subsidiary in China recorded a turnover of INR 30.94 crore in this current quarter. This was INR 59.06 crore in the last quarter. It was only INR 28.29 crore in corresponding last year's quarter. The total half yearly turnover of China subsidiary was INR 90 crores in this present quarter -- these 6 months, which was INR 74.63 crore in last year's 6 months. Now I'll come to the other major results which happened during this quarter. As you are aware, our diphenol plant at Dahej has started its commercial production on September 21, 2020. Obviously, the impact of which is expected in the subsequent quarters. The plant has stabilized its production in the month of October, and we expect to operate the plant at 60% capacity in the remaining current quarter. We are confident of -- to achieve an optimal scale before the end of this financial year. In the current quarter, we also received the part subscription of amounting to INR 56.1 crore against the preferential issue of warrants to the new investors, namely Infinity Holdings and Infinity Direct Holdings. This is 33% of the total subscription of INR 170 crores. The balance money will be called as and when required. Total consolidated debt of the company stood at INR 488 crores as on the end of this quarter, which is almost around the same level when compared to 30th September 2019. The total cash carried at the end of this quarter is INR 222 crores on a consolidated basis, which obviously includes INR 55 crores, which is received against the warrant subscription. The company is adequately funded to face the challenges of current economic scenario as well as the growth of the potential company. You would have read in our outcome that the company has also declared its intention to set up a manufacturing facility of ethyl vanillin and allied products of around 6,000 metric ton at its existing Dahej facility at a total estimated cost of INR 135 crores. This is the brief of the operations of the company over the quarter. Now before I open the call for the questions, I wish you a very Happy Diwali and a prosperous New Year. We can now open the call for the questions.

[Operator Instructions] The first question is from the line of Rohit Sinha from Emkay Global.

Congratulations, sir, for a good set of numbers and for Dahej commissioning as well. So first of all, on the revenue growth side, I mean, if we look at the revenue growth in the subsidiary, we're slightly lower. So how much was from the, you can say, normal operations? And how much -- is there any currency impact on the revenue of the subsidiaries?

Santosh?

Yes. Rohit, thank you. I didn't exactly understand your question. Maybe -- I think you are asking that whether there are abnormal revenues have been recorded in this quarter?

Yes. Yes.

So in fact, this is the most steady quarter. There is no abnormal revenue recorded in any of the subsidiaries during this quarter. Of course, last -- it's not perfectly right to compare this with last quarter. Because last quarter was a unique quarter, COVID thing and other things and beneficial things were taken by the company. So this is a steady quarter. There are no abnormal revenues that have been booked in this quarter at any of the subsidiaries.

I mean Mexico is slightly muted. So just wanted to know where we should see the revenue run rate for Mexico going forward? Or for other reasons -- yes.

Yes. So for Mexico, Rohit, this was -- the impact in this quarter was purely because of COVID. In the first quarter, people had stocked up for -- because of supply chain issues. And so they were destocking it in this quarter. And again, in the third and fourth quarter, it will be back to where it was on the same level of growth as projected in.

Okay. Okay. And sir, on this Dahej side, how this Dahej is now, I mean, operating at? And how it would be impacting the European business? And basically, what kind of margin should be there on the European side in -- maybe in this current quarter also and going forward as well?

So currently, Dahej, in terms of ramping up, we had certain -- some teething problems in October. But now it has stabilized, and we are producing at 60% of capacity, which by end of this quarter, we'll ramp it up to 100%. So in the next quarter, you will see our full-blown subsidiaries running to capacity. As far as Italy is concerned, it continues to produce, and the prices are stable if you need to sell any surplus hydroquinone or catechol in the market after taking care of our own needs. The prices are stable, and we don't see an issue in maintaining the margins that we have currently. The only possibility is in case raw material prices do go up, which till now, we have not seen any strong indications of -- raw material prices have been steady. So I think maintaining the margins that we've got currently in Europe should continue in the near future.

Okay. Okay. And lastly, sir, on this ForEx loss side, I mean, how we should -- I mean, what's our strategy towards hedging these things? And how we should see...

No. So we have a natural hedge. And in fact, in this quarter, you see already, it has reversed. So you will see some gain coming. It's coming back to almost INR 74.5, INR 75. So over a period of time, as we've explained in the past, that there can be 1 or 2 quarters of aberrations either way, up or down. But when you look at over a period of time, there is a natural hedge that we have. And if there is any unhedged position because we -- all our businesses exporting out of India is -- are exported in dollar as well as, in most countries, our business is done in dollar. As far as Europe is concerned, we always hedge the euro versus the dollar. So that's always covered. And in India, if there is any unhedged positions, we take small hedges, which we've started taking recently. But it kind of evens out for us in -- over a period of 2 or 3 quarters, yes.

And just to add to what Nirmal said, the major impact is on the unrealized data. So this has been updated on the 30 -- on the last day of balance sheet. So as the dollar has moved now up again, these unrealized losses are going to reverse. In the whole loss which we have accounted, there is only 1 -- less than INR 1 crores of realized losses. So major impact is because of unrealized losses, which is a book entry, where we get -- we update our data on the last day of the reporting period.

Okay. Okay. And sir, lastly, on this -- on the update on the China facility, I mean, shifting of China facility to India. So how are things going on there? And any change in the time line? Or it still remains the same way?

So as far as shifting of China is concerned, we've kept that on hold broadly because of the political situation, which is there in terms of trying to acquire our partner and then bringing the equipment out of China to India. So till the political environment in China doesn't get normalized, it was prudent for us to keep that on hold. In the meantime, we are setting up -- we've announced that we're setting up a facility to make ethyl vanillin 6,000 ton capacity, which is also fungible. So if required, we can also make methyl vanillin with some modifications. So the plant will be a multiproduct plant. And the idea is to have this plant ready by FY '22. By the end of FY '22, this plant will be ready. So we'll take a call on China as the political environment kind of unfolds, and if there is an opportunity to bring it to India, we will. Otherwise, we are setting up 6,000 metric ton capacity also. So we are well covered for our vanillin business, with the capacity that we're setting up in India as well.

Okay. So that facility will be still operational, and obviously, we'll be running at our...

We will continue to operate it -- yes, absolutely. We're continuing to operate it. We will continue to operate it. And we will take a call on what to do with that facility, whether to shift it to India or not in the future, depending on what the situation is.

Okay. And the fund which was actually supposed to allocate on that shifting part?

That is going for setting up this capacity of 6,000 tons also -- part of that, yes.

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

Congratulations for the good set of numbers, sir. A couple of questions. Just continuing on the kind of the new capacity addition, sir, earlier, what we were knowing that around INR 60 crores kind of fund that was allocated for ethyl vanillin and MEHQ. So now I think there is a kind of a range that we are seeing. So -- and also you have said methyl vanillin as well is a light product. So can you provide some clarity on the kind of products that you'll be looking for? And what would be the mix in terms of capacity that one should think about it, the additional capacity?

Yes. So, Surya, the 6,000 metric tons of ethyl vanillin and allied products is -- the allied products are other types of vanillin, whether it's methyl, natural. So we're looking on natural vanillin for the U.S. market as well. So that plant will be capable of even producing the natural vanillin. So we have made it into a multipurpose plant. So it gives us flexibility to use it for, depending on market conditions, whether ethyl vanillin -- the demand is growing in ethyl vanillin, which we see today, we can move the plant towards ethyl vanillin. And if you think methyl vanillin is what is capacity is where we require, we can shift. So it's a multiproduct facility. So it gives us the flexibility to produce all 3 vanillins.

Okay. And whether the adequate, means -- so regards to MEHQ, it was around 2,500 ton kind of a capacity that was included. Whether that is included in this or it is not?

No, it is not included in that. MEHQ, what we are doing is we are debottlenecking Tarapur, and we are setting up the capacity in Tarapur for the 2,500 tons. It's a very marginal investment. We don't require a substantial investment if we do it in Tarapur. So that is -- that process is going on right now. In the next 1 month, we will have the complete debottlenecking done. And by January, we should be at that capacity of about 100 -- between 150 to 200 tons a month, which will be ramped up as we get into the market to take it to full capacity, yes.

So this additional capacity in Tarapur is practically going to add MEHQ capacity up to 2,500 tons, kind of?

Correct. Correct. That is right.

Okay. And sir, when you talked about the vanillin capacity, obviously, I think since you are talking about the methyl vanillin also. So that is, in a way, kind of expanding the portfolio, and qualitatively, that is, because from the synthetic permethrin, that would be appreciable only. And -- but in that, do we have that adequate quantum of this input product that is guaiacol, catechols, I think, so we have...

Yes. So what we are doing is -- so there is -- for ethyl vanillin, the intermediate product is called guaethol. And for vanillin -- methyl vanillin, it is guaiacol. So what we are doing is we have capacity currently for about -- if you take care of our China capacity of guaiacol, and for what we are setting up in Dahej, that includes the guaiacol and guaethol capacity. So what we'll do is we'll take the catechol from Dahej -- from -- in molten form, so we don't need to even transport it, dry it, none of that and take it into guaethol, and in process only, then convert it to vanillin. So it saves a lot of utilities and logistics and even ease the matter if you do it that way. So it's an integrated facility we are making, where you start with catechol and you finally come with the vanillin at the bottom.

Okay, okay. So I think we have -- even including the guaethol in between for its synthesis.

Yes. Yes. Guaethol is -- will be made there in that facility. So the idea is that the catechol that comes from Dahej, all of that catechol will just convert into vanillin. Then the other products that we require, that we will bring from Italy, the catechol for making -- for China guaiacol, guaiacol in the pharma business, I mean, which we supply as a product to the API industry, our veratrole and TBC. That -- all that will come from Italy. And this, we will convert the whole thing into final vanillin in the Dahej facility.

Okay. So that means it is -- is it fair to believe that now there is no became-the-vanilla business in the process of transition what we have been thinking. And so it is a kind of everything ongoing and progressive.

Correct. Yes. So that -- so we've tried to eliminate that risk of -- because in today's times with COVID, it's very difficult to estimate also with -- we are seeing logistics right now. We are seeing delays of over 1, 1 month for some of the destinations, either way, bringing in raw material or shipping out finished products. So it's challenging. So I think we tried to eliminate that risk also that if there was any delay in transferring it and then you're out of the market and -- there's a lot of disruption. So with this, hopefully, I mean, we should be able to be steady in the market and not have any disruptions, yes.

Okay. Okay. Sir, second question is on the blends business. So I think if you can, first of all, in the first half, what is the blends growth that we are seeing, if you can, Santosh sir, please help, that would be helpful? And also, I wanted to have a sense from you, sir, see, I think there is a kind of study in business process that we are seeing led by Mexico and all that. But I think the true benefit of global presence in the blends operation, that is yet to be seen. So if you can share the number and also comment on the kind of a likely progress on that front? And which are the markets that will practically provide some positive surprise in terms of momentum?

Okay. So the numbers I will come to later. I'll just tell you what is going on in each of the markets and what is the outlook that we are seeing. Even though with COVID and the economy shrinking in say -- let's talk about first, Mexico and the surrounding areas, the other countries where we have our operations. We've been able to grow the business, so which is a good thing over last year. In the first 6 months, we've been able to grow it in that region, which has happened not because of anything else but it's better distribution. I mean we've -- we increased the number of customer base because each of the customer was consuming a little less during these periods because they would have lockdowns or whatever. But the number of customers we've expanded as well as we've expanded our portfolio of products. So -- which has given us a very good position, and we're getting stronger and stronger in the market with our new portfolio, with the new products that we've launched in the last 6 months. And we expect that in all these markets, whether it is Peru, Guatemala, Colombia and Mexico, those new products are also going to contribute to at least 15% to 20% growth in these regions here. So apart from increasing the number of customers, it's also the portfolio we are increasing. So I think the goal is -- the idea is to grow it by 25%, we'll come close to that here in Mexico and Central America. As far as Brazil goes, again, there, also, we've done the same thing. We've consolidated it. We've brought in more products. So though consumption with our existing customers did come down for some of the products because they were producing a little less during -- again, Brazil was badly hit in this period, and now it's all opening up. So there again, we expect that same similar 20%, 25% growth that we will be able to clock in these 2 -- the Q3 and Q4 because it's summertime now in Brazil. So the virus, the impact has come down considerably, the cases have come down and everything is opening up now. So similarly, we see that similar kind of growth with new products coming in. The U.S., first 6 months, we were more or less the same as last year purely because we couldn't expand the number of customers. There's -- customers weren't working, they were not allowing people into the plants. All the new projects that we had have taken slightly longer. So what we expected in this year that what we would have achieved in the U.S. is probably pushed to in sort of 12 months, it will probably take 18 months because the first 6 months did slow us down, but now it's coming back. And I think in the next quarter, we should see what we should have seen 6 months ago, as we have projected, because of the pandemic and situation in the U.S., as you know was very, very dicey. So as far as -- so the blends business, that's what we are seeing in the Americas. In other parts of the world, India, we are growing in some of the segments at 20%, 30%; some segments, we're growing more; some segments, we are stable. So I think, overall, it's fair to look at, between 20% to 25%, we should be able to grow even in this situation.

Okay. Okay.

And the numbers now -- Santosh, what was the numbers compared to last year? In the first half?

For our blends business per se, total quarterly turnover for -- only for blends on a consolidated basis in last quarter, quarter 1, was around INR 83.89 crores, which was INR 74.01 crores in this quarter. In the corresponding quarter last year, it was around INR 75.35 crores. And if we see half yearly total of blends business, in the last year, half year, it was INR 148 crores, which is INR 158 crores in these first 6 months.

So we've grown even in this pandemic, yes.

Yes. So this is 6% growth over last year only in blends in spite of the pandemic.

Sir, the value...

[Operator Instructions] The next question is from the line of Susmit Patodia from Motilal Oswal AMC.

Sir, there's a CapEx outflow of INR 25 crores in H1 as shown in the cash flow. What is that towards?

Which item?

INR 25 crores of purchase of plant and machinery, is that towards debottlenecking?

Yes. I understood. This is -- as you know, our Dahej plant got capitalized in the last -- the 31st (sic) [ 21st ] of September. These are mainly for some transient production costs and some maintenance CapEx at other locations. Around INR 18 crores was for Dahej and balance was for maintenance CapEx happening over all over the world.

Okay. And this should be the end of CapEx for the catechol plant in Dahej, right?

Yes, Dahej is fully capitalized. There may be some small work of INR 2 crores to INR 3 crores, but that's not related to factory, but other services like roads and drainages and all those kinds of things.

Sure. If you can give us some idea about the production cost that you are having now at the new Dahej plant? Is it around $2? Or how is it trending?

Yes. So once we reach capacity from all the yields that we are seeing, it is in the region of $2, yes. We are only at 60%. But for that $2 to happen, we have to be at 80%-plus.

Got it. And that should be reached by Q4, right, as you had earlier said?

That's right. That's the expectation, yes.

Got it. And this new CapEx of INR 135 crores, I'm sorry, I just got a little confused, is towards the vanillin, correct?

That's right. That's right.

And that is also in Dahej. So in a way, it is the forward integration of the catechol plant? It is my understanding.

So we want a fully integrated facility for vanillin.

Right. And is there any other -- I mean, how much land do you have in Dahej? I'm just trying to understand, is land a constraint at all?

No, not for this project. It's -- we are not planning for this project.

After this INR 135 crores?

After this, there's only very little land left here. So maybe 1 more project is what is expected there. Otherwise, we'll have to -- we're, of course, solving for land for anything else that we need to do to be in that area around Dahej.

Got it. And my last question is you have consol debt of nearly INR 500 crores, but net debt of only around INR 250 crores, right? Your interest cost is very high. Any -- what is the outlook towards that? Is there a way that -- because I -- maybe there is some cash sitting outside India, which is yielding very less. So how are you thinking about interest costs, the outgo is about INR 40-odd crores annually?

So basically, it's not very tax efficient, again, for some of the cash to bring back into India because you lose maybe 60% on the way in. So that's something that we need to juggle with. But yes, the idea is that over a period of time, we have to find ways and means, which are tax efficient to bring back some of the cash. But at this point of time, the way it is structured is it's extremely expensive to bring it back. So we're trying to see whatever working capital can be financed through those lines and see if we can use the cash more efficiently. So it's an ongoing process. But the idea, of course, is to bring down the interest cost as we go along.

Sir, how much of the cash will be outside India out of the INR 222 crores?

Out of INR 122 crores cash which is available on 30th of September, around INR 55 crores is against the subscription which we've received against the preferential efforts. And the cash on the business is to the tune of around 55 -- another INR 55 crores to INR 60 crores. Major cash is lying in Italy and Mexico.

Sorry, the cash is INR 122 crores, is it? Not INR 222 crores?

Yes, it's INR 122 crores.

Okay. Okay. Sorry. So out of the INR 122 crores, about half is in India and half is outside India, correct?

Yes. In India, but the major project is preferential offer, the money is preferential offer and the cash -- and just to add to Nirmal -- what Nirmal said, we have -- are trying to now borrow in those subsidiaries so that the debt burden in India releases and it gets to the income-earning subsidiaries outside India. So that's the plan we are working on.

And with lower interest rates. So -- exactly, in fact, we've replaced high-cost debt during this quarter which was in Europe from Axis Bank. We've replaced Axis Bank with local European bank. And the rate of interest saving is almost close to 4% on that debt. Yes, so we are working on reducing the interest costs all the time to see where we can try and replace -- India is high cost. I mean it's typically -- dollar also at 5%, 6% and rupee is always at 10% -- around 10.25%. So the idea is to replace as much as we can debt outside of India.

The next question is from the line of [ Sheetal Mehta ] from Equity Capital.

I just had one question. Can you give us some guidance on the tax front? Because I think this quarter, on the consol level, the tax was at around 44%. So is that something that's going to be the case going forward? Or is it going to be lower?

So the tax rate is higher by around -- if you calculate -- generally, the tax rate all over the world, and in a steady-state, our tax rate should be in the range of 25% to 27%, [ 28% or higher ]. The differential is mainly because a couple of subsidiaries like U.S. is making losses. And you cannot add these tax losses through the -- inter-sovereignty tax losses cannot be adjusted. And as a prudential thing, we are not looking at deferred tax assets for that. So what's happening is that we are not getting credit for the losses, which we are doing at some of the sovereignties. So that's why the tax rate is high. But as the subsidiaries are going and they are achieving the breakevens and profitability, the tax rate will move down to a range of 25% to 27%. That's the range.

Okay. So this, we expect mainly by FY '22, it should be standardized at 25%, 26%? Or will it take longer?

So it will move -- steadily move down. We expect that it will be in the range of 34% to 35% in this year. And then as you rightly said, in next 1 to 1.5 years, 2 years, this will come down to a steady-state of 27% average.

[Operator Instructions] The next question is from the line of Ravi Mehta from Deep Financial.

Congratulation on good numbers. My question is on the guaethol and guaiacol being planned in Dahej. So is that also fungible?

Yes, that's right. So it is fungible because the process is very similar. And only the raw materials used are slightly different.

So you need guaiacol...

So guaiacol...

[indiscernible] catechol. So that is there and the process changes for guaiacol and guaethol.

That's all. Yes, so there, the material used to make from catechol to guaethol, other raw material that is required is different. It is ethyl. Whereas to make guaiacol, it is methyl. But the equipment is exactly the same.