Sudarshan Chemical Industries Limited (SUDARSCHEM) Q3 FY23 Earnings Concall Transcript

Sudarshan Chemical Industries Limited (NSE:SUDARSCHEM) Q3 FY23 Earnings Concall dated Feb. 10, 2023.

Corporate Participants:

Nilkanth Natu — Chief Financial Officer

Rajesh Rathi — Managing Director

Analysts:

Sanjesh Jain — ICICI Securities — Analyst

Ankur Periwal — Axis Capital — Analyst

Aatur Shah — ICICI Prudential AMC — Analyst

Chetan Thacker — ASK Investment Managers Limited — Analyst

Madhav Marda — Fidelity International — Analyst

Yash Goenka — Auriga Capital Management — Analyst

Anand Venugopal — BMSPL Capital — Analyst

Varship Shah — Envision Capital — Analyst

Rohit Nagraj — Centrum Broking — Analyst

Archit Joshi — B&K Securities — Analyst

Rohit Ohri — Progressive Shares — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Sudarshan Chemical Industries Limited Q3 FY 2023 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Sanjesh Jain from ICICI Securities. Thank you, and over to you.

Sanjesh Jain — ICICI Securities — Analyst

Thanks. Good morning, everyone. Thank you for joining on Sudarshan Chemical Industries Limited Q3 and FY — Q3 FY 2023 Results Conference Call. We have Sudarshan Chemical management on the call, represented by Mr. Rajesh Rathi, Managing Director; Mr. Nilkanth Natu, Chief Financial Officer.

I would like to invite Mr. Nilkanth Natu to initiate the opening remarks post which we will have a Q&A session. Over to you, sir.

Nilkanth Natu — Chief Financial Officer

Thank you. Thank you ICICI Securities and Mr. Sanjesh Jain for hosting our earning call. Good morning, ladies and gentlemen. Welcome to Sudarshan’s Q3 FY 2023 earnings conference call. Our investor presentation has been uploaded on the stock exchange for your ready reference. I would like to take you through the financial highlight for this quarter. It was indeed again a very challenging quarter both on sales as well as the margin front, not only for Sudarshan, but the entire industry. On a consolidated basis for the quarter, total income from operations stood at INR528 crores as compared to INR602 crores for the same period last quarter last year grow by 12% year-on-year.

EBITDA for the quarter stood at INR42 crores as compared to rupees INR74 crores in Q3 FY 2022. EBITDA margin stood at 7.9% as compared to 12.3% over the same period last year. Profit after tax stood at INR0.6 crores as compared to INR36 crores for the same period last year. Sequentially, revenue remains flat at INR528 crores compared to Q2 FY 2023 and EBITDA is at INR42 crores compared to INR43 crores of Q2 FY 2023. On a yearly basis, total income from operations stood at INR1,611 crores versus INR1,574 crores in the same period last year, a growth of 2%. EBITDA for the period ending 31st December 2022 is at INR126 crores versus rupees INR189 crores last year. EBITDA margin is 7.8% versus 12% over the same period last year. PAT is at INR12 crores compared to INR85 crores for the same period last year.

Now, going into the details of our pigment business, for the quarter income from operations stood out at INR483 crores as compared to rupees INR560 crores for the same period last year, lower by 14% year-on-year, sequential revenue is slightly higher by 2% compared to Q2 FY 2023. India sale for the quarter is at INR251 crores compared to INR306 crores in the same period last year. As in the last year Q3, we saw significant increase in the domestic demand post-COVID wave two. We have continued seeing buying decision deferment by the customer due to volatility in overall size, which has resulted in lower inventory level at the customer end especially the plastic segment has impacted due to volatility in overall prices, which remained till November 2022. And from December 2022 onward, we are seeing some improvement in the demand.

Historically, Q3 is a weaker quarter for coatings segment as we normally witness drop in the demand because of post festival season. In the current year, coating customers were carrying extra inventory at their end and this buildup was due to anticipated higher demand during the festival season. However, demand did not picked up as anticipated. We anticipate buoyant Q4 FY 2023 for the coating segment. Our market share in the coating and the plastic has been well maintained. Export for the quarter is at INR232 crore as compared to INR254 crore last year Q3 lower by 9%. Geopolitical situation due to Russia-Ukraine war tightening of the monetary policy by a majority of the central banks to control inflation, rising interest rates are leading to subdued demand across majority of the region. Europe has witnessed major demand disruption.

Specialty pigments sales stood at INR341 crore as compared to INR370 crore for the previous year same quarter 9% growth [phonetic] year-on-year. Non-specialty sales for the quarter stood at INR143 crore compared to INR185 crore for the same period last year. Gross margin for the quarter stood at 40% as compared to 41.6% for the same period last year. Sequentially, it shows improvement over Q2 FY 2023 when gross margin was at 38.8%. We are seeing softening of the RM prices and relatively stable RM price environment due to lower demand and drop in basic cost drivers such as crude oil, benzene, toluene. This should help us in sustaining the current gross margin levels. We expect to see improvement in the margin as our high costs inventory reduces. However, margins are subject to overall demand and the price inflation.

Apart from the raw material costs, we continue to see the energy cost at an elevated level during major part of Q3. We are seeing some early sign of coal prices easing which should benefit the manufacturing cost in the coming quarters. Logistic costs are coming off from the peak level seen earlier. And we expect this trend to continue. EBITDA for the quarter stood at INR38 crore as compared to INR77 crore in Q3 FY 2022. EBITDA margin is at 7.8 compared to 13.7 over the same period last year. Sequentially, EBITDA is flat INR38 crore compared to INR39 crore of Q2 FY 2023. Given the difficult external environment, management is aggressively focusing on the cost reduction initiatives. We will have to continue with the pricing decisions with the calibrated approach to balance volume growth.

Now coming to the capex project, which is our thrust for future growth. We are in the growth phase to implement overall capex of INR750 crore, out of which we have put to use asset worth INR620 till now. Balance INR130 crore projects are part of the CWIP. Now these projects are at advanced stage of completion and we expect this to get commercialized by the end of FY 2023. About 85% of our caoex has been put to us and started generating some revenue. For new product capex, we are getting good responses from the customer and these products are an advanced stage of evaluation. However, due to demand contraction, the revenue ramp up is getting delayed. In the mid-term, the management remains confident to accrue the benefits as these are the specialty products and should generate good demand and product line remains very attractive.

We are glad to inform you that, on account of securing the requisite permission from government authorities, the line owned by the company at 162 Wellesley Road, have now become marketable. And the Board of Director at its Meeting held on Thursday 9th February 2023, has awarded in principle approval for sale of Freehold, clear and marketable title land and measuring approximately 5.76 acres along with the structure standing there on. The proposal shall be subject to the necessary due diligence, approval, consents, permissions from the concerned authorities, as may be necessary. We look forward to continuing our growth journey and delivering value to all our stakeholders.

With this, we now open the floor for question-and-answer session. Thank you.

Questions and Answers:

Operator

Thank you very much, sir. Ladies and gentleman, we will now begin the question-and-answer session. [Operator Instructions] Ladies and gentlemen, we will wait for a moment while the question queue assembles. Our first question is from the line of Ankur Periwal from Axis Capital. Please go ahead.

Ankur Periwal — Axis Capital — Analyst

Yeah. Hi, sir. Thanks for the opportunity. First, question on the revenue recovery both in the domestic as well as in the export side, so not from a quarter perspective, but let’s say nine month, how has been the demand destruction in the international and domestic market? And maybe if internationally, you can cut it out into Europe and non-Europe?

Nilkanth Natu — Chief Financial Officer

Hi. I’m Nilkanth Natu here. So on the demand side if I see the YTD number, between Indian and Export, in the Indian market, we are seeing the softening of the demand in the plastic and the coatings segment. As we mentioned in the plastic segment major a major part of the quarter, it was polymer availability and variability, prices variability was the issue. So, we are seeing the demand disruption in the Indian market.

On the export side, we are seeing the softening of the demand and the demand destruction rather in Europe, due to the geopolitical pressure, which is continuing. China was also soft, during this period with the zero-COVID policy, wherein we saw on the demand in China was lesser. And demand in China was lesser. Also one factor which is also impacted on the front of China is the anti-dumping. China has imposed anti-dumping on Phthalocyanine pigments, so which is also impacting the overall demand. So this is YTD in nine months overall overview.

Ankur Periwal — Axis Capital — Analyst

Sure, Natuji. If you can, maybe quantify a bit, what could be the absolute, maybe directionally, 5% demand destruction, 10% maybe international could be slightly higher that will be helpful? And in the domestic specifically, how is the channel inventory, is it still elevated or maybe the refill will probably start this quarter itself? Hello?

Nilkanth Natu — Chief Financial Officer

Yeah. Yeah. Ankur, so, while directionally I can tell you, while not quoting the percentage, India has been subdued, but compared to India, we are seen the export market has been more sluggish, and the demand in Europe has been more disrupted due to the geopolitical pressure. And regarding the inventory at the channeling, how the inventory getting filled up.

So, as we have experienced till now, since there has been a lot of variability in the prices and the market is expecting the price reduction based on the raw material prices getting stabilized overall inflationary situations are coming under control. So, what we have seen is also buying decision department at the customer end, which is also impacting overall inventory, built up at the customer end and in the channel. So, this is the current position on the inventory side.

Ankur Periwal — Axis Capital — Analyst

Sure sir. And just lastly, on the gross margin front, will it be fair to assume that all the RM hike that you — that was supposed to get passed through is already done or there is still some pending benefit which can accrue over the next quarter or so.

Nilkanth Natu — Chief Financial Officer

So, Ankur, while we mentioned that RM prices are getting stabilized and we see more than normalized RM environment not as compared to the pre COVID area, but we see more of a stability coming in RM. However, if you really see the current quarter, our gross margin is at 40% compared to 38.8% in the Q2, which shows the positive sign that RM by a percent increase is a positive. Two things to look at it. One is, how this RM inventory impact will come in a P&L because we also have the inventory.

So it will have to get averaged out over the period once the demand pick up and our new purchases of RM inventory goes up. Second factor to watch out for is the overall demand, it picks up then the margin will definitely be higher, but if the demand remains subdued, then we have to take the call between the volume and the pricing.

Ankur Periwal — Axis Capital — Analyst

Sure, fair enough, sir. That’s it from my side. I’ll get back into the queue. Thank you and all the best.

Operator

Thank you. Our next question is from the line of Aatur from ICICI Prudential AMC. Please go ahead.

Aatur Shah — ICICI Prudential AMC — Analyst

Yeah. Hi, sir. Good morning. Just two questions. One on the land parcel points which you mentioned what according to you would be a fair assessment at this point in terms of the value of the land.

Rajesh Rathi — Managing Director

This is Rajesh Rathi. I think, it’s too early in the process. We’ve not started the process because this has been approved by the board yesterday itself. So, currently, it’s very — it will be very premature to state any value or timeline on the process.

Aatur Shah — ICICI Prudential AMC — Analyst

Okay, Okay. And secondly, if your like — financial on nine months, OCI shows a loss of about INR18 crores, how should one see that on an nine month basis in the P&L?

Nilkanth Natu — Chief Financial Officer

Can you repeat Aatur your question, please?

Aatur Shah — ICICI Prudential AMC — Analyst

In other comprehensive income for the nine month basis cumulatively, there is a loss of about INR18 crores, I think maybe pertaining to Forex or something, can you just further explain that part please?

Nilkanth Natu — Chief Financial Officer

Yeah, thanks, thanks. So, as Aatur, we, as you know, we had taken the ECB foreign currency loan for our capex, phase one and phase two. As a part of this is ECB, we follow the hedging strategy as per our risk management policy and hedge accounting. Now, this particular OCI increase is nothing but the reflection of the dollar rupee movement which has been there from INR76 to INR82 over this nine-month period, wherein the loan reinstatement will happen and it will be there in the OCI. We monitor our ECB performance based on XIRR. So, while rupee has depreciated by 10%, our XIRR has not moved that much. So, we are within the range and we are actively monitoring because there has been also the reduction in the forward premium.

So, this OCI is on account of the increase in the spot exchange rate. And this is also one of the reason why it is there in our foreign exchange for the quarter, because we had started repaying this foreign currency loan and on the loan repayment, this particular exchange loss will come to the P&L. However, we need to look at it from the perspective of the interest costs, because it is nothing but the add-on to the interest cost. And on the XIRR basis — sorry. So Aatur —

Aatur Shah — ICICI Prudential AMC — Analyst

One follow-up on the land part that eventually used to be delevered, right?

Nilkanth Natu — Chief Financial Officer

Can you please repeat the question, there was some –?

Aatur Shah — ICICI Prudential AMC — Analyst

No, just on the land question earlier that eventually the proceeds will be used to be delever the bank, right?

Nilkanth Natu — Chief Financial Officer

Yes, I think that’d be one of the uses. But I think the board would — once there is a definite proposal, the board would look at the use of funds. But, the intention is also to look at that, so.

Aatur Shah — ICICI Prudential AMC — Analyst

Thank you so much. Thanks.

Operator

Thank you. Our next question is from the line of Chetan Thacker from ASK Investment Managers Limited. Please go ahead.

Chetan Thacker — ASK Investment Managers Limited — Analyst

Hello, I’m audible?

Operator

Yes, you are.

Rajesh Rathi — Managing Director

Yes.

Chetan Thacker — ASK Investment Managers Limited — Analyst

Good morning, Sir. Sir I just two questions. One was you’ve been highlighting that you’re internally working on cost initiatives. So just wanted to get a sense on eventually, the cost initiatives that you’re undertaking, how much should we build-in in terms of margin improvement that these initiatives should add? And second is on working capital, which has increased. What are the steps that we are taking and where would this number eventually stabilize at?

Rajesh Rathi — Managing Director

So, the first question on the cost front, so as a management, we are taking a lot of action looking at all the cost levers, whether it is a manufacturing, whether it is employee cost and the fixed costs. And the efforts are there to take out the inefficiencies in the cost structure and make it the lean to the extent possible. And given the current scenario, wherein we have seen the subdued demand, we could able to maintain the EBITDA at around INR38 crores despite first loss of around INR10 crores in the quarter, is also on account of the cost reduction initiatives, which we have taken. We expect that these initiatives will continue in the coming quarters and there is a continued focus in bringing the efficiency.

In terms of the working capital, if you really see the net working capital cycle or gas conversion cycle compared to the Q2 has gone up by four days from 108 to 112 days. This is predominantly because of the buildup in the inventory at the subsidy end, which is RIECO, wherein they got the large value orders for which they are stocking up the material for the deliveries which are planned in Q4. At Sudarshan, on the pigment side, we are taking all the actions to reduce the inventory bringing in the AR liquidation and bringing the creators on time. Currently we are at around 26% plus as far as the net working capital cycle is concerned, our aim and endeavor is to bring down to the level of around 24% and then get to the level of around 22% over a period of time.

Chetan Thacker — ASK Investment Managers Limited — Analyst

This number and percentage at Sudarshan, pigment level would be what currently and where do we expect that to settle because 26, I assume would be including Rico?

Rajesh Rathi — Managing Director

No, so, 26% is including is pigment 26.5% is including Rico. So, what we are expecting that pigment level of 26% should come down to around 24%. That is a first level target and we would like to bring the net working capital to 22% to the level of around 90 days cash conversion maybe in the year’s time.

Chetan Thacker — ASK Investment Managers Limited — Analyst

And so just on the costs takeout, is there a number that you can put up in terms of compared to our earlier cost structure? What would be an absolute saving that you envisage in the next two years or that would be a little difficult at this point in time?

Rajesh Rathi — Managing Director

So, it will be difficult to actually answer this on the call, but see there are two, three points. One is the cost reduction which is structural and systematic, which will be there in the system. There are a couple of cost reduction which we are doing in terms of the manufacturing and RMC, wherein based on the market condition we have to take the call off you know, passing off, so, giving the numbers on this will be slightly difficult.

Chetan Thacker — ASK Investment Managers Limited — Analyst

Okay, and so highlighted that, despite the Forex, we saw the EBITDA that we saw, so fair to assume that Forex would be a good assessment of – so INR nine crore INR10 crore is cost takeout that was possible this quarter or that is also a difficult number to protect? Just wanting to understand that what is internally in our control, how much can we at least squeeze out of that? Because the environment is the environment and we can’t do much about it, while trying to optimize that, so.

Rajesh Rathi — Managing Director

Absolutely. So, given the Forex number of INR19 crore, despite maintaining the EBITDA, one-third assumption will be the cost takeout is around little.

Chetan Thacker — ASK Investment Managers Limited — Analyst

Sure. Thank you so much, sir. All the best.

Rajesh Rathi — Managing Director

Thank you.

Operator

Thank you. Our next question is from the line of Madhav Marda from Fidelity International. Please go ahead.

Madhav Marda — Fidelity International — Analyst

Yes, hi, sir. Good morning. Thank you so much for your time, just wanted to clarify the Forex loss of INR10 crores INR11 crores. Is that captured in our other expenses for the quarter or where does it reflect in the P&L?

Nilkanth Natu — Chief Financial Officer

Hi, Madhav. So, thanks for your question. The Forex loss of INR10 crore is captured in the other expenses.

Madhav Marda — Fidelity International — Analyst

Okay. So, the Q-on-Q increase in other expenses largely on account of Forex loss basically, right otherwise it would have been stable.

Nilkanth Natu — Chief Financial Officer

Yes, yes.

Madhav Marda — Fidelity International — Analyst

Got it. Got it. Understood. And sir the – my second question was that on the plastic side demand, totally understand your point, there was a lot of channel destocking, which has happened as – can be seen across the plastics industry in India, but now that some of the prices for – the PVC prices that have stabilized and there is demand seems to be picking up on that side in the country. So, would it be fair to assume that, this quarter onwards at least, like you said, coatings should be boiled, plastics also should come back this you know, from Jan onwards probably?

Nilkanth Natu — Chief Financial Officer

Yes, yes, Madhav. Thanks for the question and your assessment is correct. So, what we are seeing currently is early sign of revival in the plastic segment. So, we expect a plastic and a coating, both the segment should be better compared to the Q3 and the demand revival. As of now, what we can see the number, we see the demand revival, and especially that is in the India market.

Madhav Marda — Fidelity International — Analyst

Got it. Understood. Okay. Thank you, sir.

Nilkanth Natu — Chief Financial Officer

Thanks Madhav.

Operator

Thank you. Our next question is from the line of Yash Goenka [Phonetic] from Auriga Capital Management LLP [Phonetic]. Please go ahead.

Yash Goenka — Auriga Capital Management — Analyst

Hi, thank you for taking my questions. I’m new to the business. So, can you let me know, I’m trying to understand how — why a market share has not been increased from 2014. It’s been fairly consistent at 35%?

Rajesh Rathi — Managing Director

So I think — so there are two, three areas. I think one is the — as you can see our share in plastic, the plastic market has grown and I think we’ve been — our share in the plastic market has been quite stable. On the inside, we had lost some business due to cost pressures. And that’s where I think, gaining, looking at the 30% — 30% to 32% market share that’s where we’ve been maintaining

Yash Goenka — Auriga Capital Management — Analyst

Okay. And sir, second question would be company allocate the portion of its commission to a group entity, Rabro Speciality Chemicals, in which individuals associated Sudarshan are also part. So, can you provide more information on the reasoning behind this arrangement and the nature of services provided by the entity?

Rajesh Rathi — Managing Director

So, it’s arm’s length transaction on the ordinary course of business where there are — there is a selling arm, which provides all the necessary service to the customers.

Yash Goenka — Auriga Capital Management — Analyst

Okay. So it is providing a selling service to us sir?

Rajesh Rathi — Managing Director

Okay. Thank you. That’s all.

Operator

Thank you. Our next question is from the line of Anand Venugopal from BMSPL Capital. Please go ahead.

Anand Venugopal — BMSPL Capital — Analyst

Thanks for the opportunity. What I want to know is first year capex, what will your total gross block be, and at full capacity utilization, what type of revenue can the company achieve? And lastly, can we get to INR4,000 crore revenue at full capacity utilization?

Nilkanth Natu — Chief Financial Officer

Hi. On the capex side, so as we have mentioned that this is INR750 crore of growth capex, which we have put to use with this what we are guiding the marker revenue will be around INR1,500 crore potential revenue from this capex, and this ramp up will be over three to four years period as currently we are in the demand inception. That is point one. Second is — your third question was when we expect it to be INR4,000 crore, correct?

Anand Venugopal — BMSPL Capital — Analyst

Yeah, like can we get to INR4,000 crore revenue at full capacity?

Nilkanth Natu — Chief Financial Officer

So, at current capex we will be reaching to around INR3,500 crore level and as we guided the market, it will be over three to four years period of time.

Anand Venugopal — BMSPL Capital — Analyst

Okay. Got it, got. Thanks.

Operator

Thank you. Our next question is from the line of Akul Broachwala from IIFL Securities. Please go ahead.

Anand Venugopal — BMSPL Capital — Analyst

Yeah, thanks for the opportunity. Just taking forward question on capex. So, are we to assume that most of this capex dedicated to revenue generation is now over and probably next leg of capex would be more focused towards backward integration because I do remember in the past that we have been emphasizing on improving our backward integration for critical raw materials. So, what’s the sense that management overall is taking?

Nilkanth Natu — Chief Financial Officer

All our revenue capex should be completed by March end. So, we’ll put to use all our revenue capexes and the infrastructure required for it. We’ve taken a decision given the downturn in the business that we should not till the business improves, we will not be doing any more capex for some time. And from that perspective, however, we are looking at still backward integration is an important lever for us. We are looking at alternative methods where we can work with some of the — some of our outsource partners where we can get these raw materials manufactured from. And — so though we may not get the full benefit of — if we’ve done the capex, but we would get some — we will get the partial benefit.

Anand Venugopal — BMSPL Capital — Analyst

Understood. And like secondly, on this revenue potential, talked about INR1,500 crores. So, like, how far are we from — in terms of pricing, because right now, considering overall volatile market environment as well as the fact that Europe is under pressure. So, is there is there any — are you anticipating any further challenges in terms of achieving such kind of asset turnover or do you still do still remain confident in terms of achieving such kind of asset turns as well as return ratios on this capex?

Nilkanth Natu — Chief Financial Officer

Sure, I think — so just to understand the thesis of our expansion, we were looking to change our product portfolio, right, move towards more high-performance pigments, move towards more specialty pigments, specialty pigments, etc., right. So, from that perspective that was the whole thesis for our — thesis for the growth. So, from a long-term perspective, though, there’s a short-term issue in demand or this, these are some short-term issues. Our long-term strategy remains the same. The only thing which may happen, our initial estimate was that this growth we could have achieved in three years, this may take maybe four years or five years if this trend continues.

Anand Venugopal — BMSPL Capital — Analyst

Got it. Thank you.

Operator

Thank you very much. Our next question is from the line of Varship [Phonetic] Shah from Envision Capital. Please go ahead.

Varship Shah — Envision Capital — Analyst

Yes, sir. Thanks for taking the question. I’m sorry for [indecipherable]

Operator

I’m sorry to interrupt, Mr. Shah, if you’re on a speakerphone, could you please use your handset so that we can hear you clearly?

Varship Shah — Envision Capital — Analyst

Yes, this is better. Am I audible now?

Operator

Yes, sir. Please go ahead.

Varship Shah — Envision Capital — Analyst

So, could you just please explain forex once again, I missed the remarks, and is expected to reverse going forward?

Nilkanth Natu — Chief Financial Officer

Hi, so Nilkanth here. So, look forex loss, what we have mentioned is predominantly on the capital account due to the ECB which we have a drawdown on our capex. We follow the hedge accounting policy and we have a robust forex risk management policy in place. What we monitor for this ECB is the ex-IRR and currently, even the depreciation rupee also our XIR is maintained because we got also the benefit of the corporate premium.

While this quarter we are seeing the exchange loss on a higher side, because there were the repayment and during the quarter rupee depreciated sharply. Going forward, if the rupee is at the same level, I expect the exchange loss will be slightly lower, but it will not get reverse. The reason why this exchange loss is there in the P&L now is due to the loan repayment, which has started on the ECB. So, ideally one should look at it as a part of the interest cost, because interest cost overseas is subdued to 2.5% with this it will still be lesser than the Indian interest cost, domestic rate of interest.

Varship Shah — Envision Capital — Analyst

Okay. And could you give a breakup it fit into long-term and short-term?

Rajesh Rathi — Managing Director

Sorry, I didn’t get your question, long-term and short-term meaning?

Varship Shah — Envision Capital — Analyst

The total debt how much is working capital debt and how much is own loans and…?

Rajesh Rathi — Managing Director

So total debt including the group RIECO is around INR946 crores and the long-term debt is around – it is around INR650 crores.

Varship Shah — Envision Capital — Analyst

All right, sir. Thanks for taking my question.

Operator

Thank you very much. Our next question is from the line of Rohit Nagraj from Centrum Broking. Please go ahead.

Rohit Nagraj — Centrum Broking — Analyst

Yes. Thanks for the opportunity. So, first question is on the RIECO engineering business. We have seen in the last few quarters this business has been reviving. So any plan so far further taking some steps to revive this business? Thank you.

Nilkanth Natu — Chief Financial Officer

Hi, Rohit. Nilkanth here. So as you mentioned, we’re the management has taken various initiatives to revive this business and RIECO business over the past two, three years turn around. Last year was slightly bad due to the inflationary pressures. But this year overall performance of the RIECO compared to the last year is in positive territory. The RIECO management is focused and Sudarshan management is also anchoring this entire business and the revival. Currently, the order book is very healthy for the RIECO and we expect the RIECO business to be better in the next year.

Rohit Nagraj — Centrum Broking — Analyst

Thanks. Sir, second question is on the plastic side. So in the last six, seven months, we have seen these imports, plastic imports have gone up substantially. So when the plastics are imported, does it have an impact on our business? Because whether it is coming as a pigmented plastic or it’s a virgin plastic does — so does it have an overall impact in terms of our business? Thank you.

Nilkanth Natu — Chief Financial Officer

I think the imports of plastic really does not have an impact on our overall business. I think a few trench to watch in the plastic industry is the one-time usage, which has impact, though, not a major impact for Sudarshan, because for the low end markets.

Rohit Nagraj — Centrum Broking — Analyst

Right. And just one last clarification in terms of EBITDA margins, before pandemic, we used to close to about 14% to 15% EBITDA margins, whenever the — so if the demand stabilizes and revives both in domestic and international market. When is a possibility to achieve this — so will it be like three years hence, where till we going for optimum utilization? Or probably it will happen in the next one to two years? Thank you.

Rajesh Rathi — Managing Director

It’s very difficult to predict, sir, as to when the demand would normalize. I think we are — we were hit up — if you look at our EBITDA margin, we were hit on two counts, one was the volume shrinkages and the extreme inflammatory environment which, caused the margins to reduce and what happened is with the volume reduction — volume reduction also had an impact on margins, because all competitors were trying to work on the same pie right. So, it was fierce competition. So, as soon as this kind of reverses out, and all our cost reduction efforts, we should be able to see a better performance, very difficult to predict when this could happen, sir.

Rohit Nagraj — Centrum Broking — Analyst

Yes. Thanks. Just one last…

Rajesh Rathi — Managing Director

Something to add here is a directionally as when [Indecipherable], that is with the current scenario, it is difficult, but once the demand, gets revived directionally the beta margin should go up, because we then should see the operating leverage playing out, but I will not like support the number that by when we can see because we used to operate earlier at 15% EBITDA margin. So, at what point of time, we will lease the — would not like to put a timeframe, but in the coming years that extended we should be moving foward

Rohit Nagraj — Centrum Broking — Analyst

Right. Just one last bookkeeping question. So the capex incurred of INR620 crores, does it reflect in the depreciation for this particular quarter, the entire capex?

Rajesh Rathi — Managing Director

So whatever has been put to use till now is reflected in the depreciation cost.

Rohit Nagraj — Centrum Broking — Analyst

Sure, thank you so much and best of luck, sir.

Rajesh Rathi — Managing Director

Thank you.

Operator

Thank you. Our next question is from the line of Archit Joshi from B&K Securities, please go ahead.

Archit Joshi — B&K Securities — Analyst

Hi, sir, thanks for the opportunity. I have two questions. One on raw materials, I think previously you commented about some mitigation that we are trying to do in terms of our sourcing basis. In the past also we have kind of tried to allude to our dependence on China with respect to raw materials and certain raw materials cannot be indigenously manufactured in the backward integration that we have been talking about. On the same trend, how exposed are we to China at this point in time and to what extent can we diversify our sourcing through different other supply chains. And number two is what would be the peak rate given that we are almost at 1,500 1,600 products long and short, where would it peak in the midterm?

Rajesh Rathi — Managing Director

Thanks, Archit. So, in terms of our dependence on the China, currently the China import is at 30%. And there has been a lot of initiatives which has also been taken for the diversification of the supplier base. As for as the backward integration project, what we have — said earlier, currently, we would like to get our current capex is getting stabilized generating the revenue and the cash flow and then the backward integration and the reduction of the raw material cost initiatives we will take it forward. On the debt side, debt is not at around INR1,500 crores, it is 946 crores as of December end. And I expect this should be a peak level. And year end number, I would expect it in the range of around INR860 crores to INR880 crores.

Archit Joshi — B&K Securities — Analyst

Sure, sir. So just one follow up here, could you throw some light on our debt repayment schedule in the next two years? How are we planning to reduce it?

Nilkanth Natu — Chief Financial Officer

So, given the current estimates ECBs which have been drawn down, and the moratorium period, our debt repayment will be in the range of INR150 crores to INR160 crores. We’re also —

Archit Joshi — B&K Securities — Analyst

Yes, sir. Which is annually, right?

Nilkanth Natu — Chief Financial Officer

This is annual.

Archit Joshi — B&K Securities — Analyst

Got it, sir. Got it. Sir, just one thing. On the first question that I asked, with respect to how well we can mitigate this raw material dependency. So, right now, as I said, 30% of our RM is coming from China, to what extent can we better it, any color on that?

Rajesh Rathi — Managing Director

So what we’ve done as a first case scenario, we do have alternate sources in other parts of the world for China. So we are not totally dependent. There are a few raw materials, which we are still dependent, so we do take a business and commercial call where we have. But when if things come to — if there are issues with that, we do have alternate resource — sources. And once our backward integration also takes off, that will also help us with some of this dependence.

Archit Joshi — B&K Securities — Analyst

Sure, sir. Thanks. Thanks a lot for the clarification and all the best.

Rajesh Rathi — Managing Director

Thank you. Sure.

Nilkanth Natu — Chief Financial Officer

Thank you.

Operator

Thank you. We have a question from the line of Mr. Sanjesh Jain from ICICI Securities. Please, go ahead.

Sanjesh Jain — ICICI Securities — Analyst

Thank you, sir. Thank you for taking my question. I got a few of them. First, on the India coating side, we have seen that there is lot not many new entrants coming in. Do you think there’s an opportunity here to increase our market share in the Indian coating pigment business? That’s number one.

Rajesh Rathi — Managing Director

Yes. So, I think, so — of course, with the new entrants and our strong product range, we should be — we are already looking at the technical development with them, so that we can partner with them to kind of deliver value to them. So, as soon as they start commercializing and manufacturing, we would get that benefit.

Sanjesh Jain — ICICI Securities — Analyst

Okay. So, it is fair to assume that over next two to three years, we will have India business growing slightly faster, because of the tailwind on the India coating business side, right?

Rajesh Rathi — Managing Director

Yes. So, assuming that the coating pie does grow, right, that it should not happen that this — if the coating pie does grow. Yes, definitely.

Sanjesh Jain — ICICI Securities — Analyst

Now, I think the commentary from the coating guy is that they still look at 10% to 14% of a volume growth

Rajesh Rathi — Managing Director

Yes.

Sanjesh Jain — ICICI Securities — Analyst

We should proportionately grow, right? Or is there an opportunity, because the better kind of coating are going up? So, it should be higher than that for us, how should one see that?

Rajesh Rathi — Managing Director

I think we should grow with that, right, the growth. We should grow with that volume.

Sanjesh Jain — ICICI Securities — Analyst

Got it. Second, on this yellow pigment, where are we in terms of commercial supply? I understand the demand side of the challenge. But have we started supplying it on a commercial scale, or it is still on the approval? Where are we in the journey for the yellow pigment?

Rajesh Rathi — Managing Director

So we have several approvals and commercial supplies have begun — began in the last six months.

Sanjesh Jain — ICICI Securities — Analyst

So we have already started doing commercial supply from the yellow.

Rajesh Rathi — Managing Director

Yes, yes.

Sanjesh Jain — ICICI Securities — Analyst

Okay. So excess, then it looks like we are seeing a lot more challenge that the new products are helping, is that the right way to look at?

Rajesh Rathi — Managing Director

Could you repeat, please repeat your question?

Sanjesh Jain — ICICI Securities — Analyst

So my question was in excess of these new products underlying the decline in the business is higher. I’m just looking at can we grow or bounce back much higher, because the base has the base business x of the product has fallen more sharply. So the recovery will also be sharp and when you see plastics coming back and probably coating coming out of the inventory cycle, is it fair to assume that next two, three quarter we have for tailwind from the industry coming back? Reinventisation happening? Are we seeing any such signs in terms of the demand side of the business?

Rajesh Rathi — Managing Director

So obviously our business, when we’re talking about the India market, the India market is only 50% of our total value, right? It also depends on how the international markets pick up. And that’s where I think that will be. So both areas would have to pick up. So for that to happen.

Sanjesh Jain — ICICI Securities — Analyst

Got it. I got some specific question on the export market. So one China opening up now, is it as a positive development for us? Or will it increase the competition? How should we see China opening up having implication on the pigment side of export business?

Rajesh Rathi — Managing Director

So with China opening up for what had happened earlier, the China market, because the zero COVID policy, there was pigment production on, but the consumption in the China market had reduced. That’s how they there was more products being extra, so there was more fierce competition in the export market. So with China opening up, definitely, it helps in the sense of the Chinese producers more selling into China, right? That’s one question. The second is, of course, we have business in China, and that will help our cause. But there’s a headwind where there is an anti-dumping duty on Indian driven green pigments into China. So that could be that business, we got some business there as an industry and production.

Sanjesh Jain — ICICI Securities — Analyst

But we don’t make tylos [phonetic], right, we just make value added out of tylos. It does categorize within the tylos for us?

Rajesh Rathi — Managing Director

We may Palatine pigments so completely.

Sanjesh Jain — ICICI Securities — Analyst

We make them as well. Okay. Okay. Thanks. Fine. And now in terms of the geographical footprint in the global market, we have predominantly been very strong in Europe, but U.S. has been relatively smaller for us. Now that considering that euro is facing its own challenge, do we anticipate to increase effort in the other global geographies to recoup some of these volumes?

Rajesh Rathi — Managing Director

Our effort is, of course, we want to grow not only in the U.S. market, but the South American markets also provides a great promise. So our focus is on those markets too.

Sanjesh Jain — ICICI Securities — Analyst

Got it. Got it. Last question on the debt and debt side of it. Considering these near term challenges, you don’t see any risks to the covenants in terms of the debt, we hold exclusive 1,000 crores?

Rajesh Rathi — Managing Director

So Sanjay, with the current situation and the current debt level, we don’t foresee any challenge in terms of the repayment and the interest servicing. And as far as the covenant also, we as of now we will be able to..

Sanjesh Jain — ICICI Securities — Analyst

Meet the covenant, right. Got it, got it. Yeah. Those are the questions from my side. Thank you very much, and best of luck for the coming quarter.

Operator

Thank you. Our next question is from the line of Anand Venugopal from BMSPL Capital. Please go ahead.

Anand Venugopal — BMSPL Capital — Analyst

Yes, thanks for the opportunity. Sir, excuse my ignorance, but if I may know, why has your promoter holding reduced over the last few years?

Rajesh Rathi — Managing Director

We – promoters have decided to pursue their own entrepreneurial ventures and for that the entrepreneur – certain and that’s how they, you know, that’s what they diluted to pursue their entrepreneurial ventures

Anand Venugopal — BMSPL Capital — Analyst

In pigments that China has imposed, and what’s the end goal here, do you think? Like this is a temporary duty or you see it to be there for a while?

Rajesh Rathi — Managing Director

You’ll have to repeat your question. We weren’t — it wasn’t clear.

Anand Venugopal — BMSPL Capital — Analyst

Yeah. What is the duty on green pigments that China has imposed? And what’s the end goal here, do you think. Like is this a temporary duty or you see it to be there for a while?

Rajesh Rathi — Managing Director

No, I think it’s an anti-dumping duty and though we as an industry are fighting it together from India side. Unfortunately, it didn’t work in our favor. So this duty would be there for some time.

Anand Venugopal — BMSPL Capital — Analyst

Okay. Thanks, sir.

Operator

Thank you. [Operator Instructions] We have a follow-up question from the line of Madhav Marda from Fidelity International. Please go ahead.

Madhav Marda — Fidelity International — Analyst

Yeah. So, I just wanted to kind of what we discussed on the call is it fair to assume that domestic market demand should pick up from your exports, you know, depends on the macros there, its not in our control. And on the cost side, freight costs, you know, should have already been easing. Coal prices are also coming down and RM is also, kind of, stabilized to see some declining trend. So, is that the right assessment across the various operational parameters of the business.

Nilkanth Natu — Chief Financial Officer

Madhav, Nilkanth here. So its right assessment. India, we are — we see early sign of revival in the demand. Export market is a slightly subdued. It depends on a lot of geopolitical pressure. And, you know, the demand disruption. In terms of the cost, structurally we are seeing the RM prices getting stabilized. The coal price is slightly coming off the peak, but not to the level what we are seeing pre-COVID. But yes compared to here, we see some early sign of reduction in the prices. And freight cost also one was earlier the availability. So there is no availability as — kind of availability as a challenge. And the costs are also coming up the peak levels which are seeing post-COVID. Not to the level which we had seen earlier, but yet compared to the last year those are coming up.

Madhav Marda — Fidelity International — Analyst

That’s it. And sir, just on the capex side, like Mr. Rajesh also mentioned that we expect to now you know, now that we’ve done our revenue generating capex. So what could be the capex expectation for FY 2024?

Nilkanth Natu — Chief Financial Officer

Okay. So, Madhav FY 2024, we don’t expect major capex to happen. It may be only the maintenance capex. Current goal is we will be completing majority of this capex by this year end. So except those capex, I don’t expect any further capex to come in the next year.

Madhav Marda — Fidelity International — Analyst

And how much is difference in maintenance capex or broadly is how much this year?

Nilkanth Natu — Chief Financial Officer

Maintenance capex will be in the range of around INR40 crores?

Madhav Marda — Fidelity International — Analyst

INR40 crores, got it. Okay, okay. Thank you.

Operator

Thank you. Our next question is from the line of Rohit Ohri from Progressive, I’m sorry, from Rohit Ohri from Progressive Shares. Please go ahead.

Rohit Ohri — Progressive Shares — Analyst

Hi sir. One question which is related to the strategy which we had in the past. So we were trying to pare away from the non-core businesses and IMSD was one of that. So the other or non-core business was RICO. And would you like to share some more details on that, if you would like to divest away from RICO, because since the system is seeing that it is turning around? So any thoughts on that, would you like to share something on that?

Nilkanth Natu — Chief Financial Officer

Yes, sir. So I think, so the board has been actively seeing, how do we build the business back and some of the capabilities and at the appropriate time the Board — the RICO Board would evaluate what should be or what should be the further course of action? No such decision has been made so far. But I’m sure the board is closely looking at this whether we can really grow this business and what or whether we should be divesting?

Rohit Ohri — Progressive Shares — Analyst

Okay, sir. So that was the only question. Thank you, Rajesh and thank you.

Operator

Thank you. Our next question is from the line of Rohit Nagraj from Centrum Broking. Please go ahead.

Rohit Nagraj — Centrum Broking — Analyst

Yeah, thanks for the follow-up. Sir, what is weak revenues of about INR35000 crores will the mix of exports change and similarly, whether the mix for speciality, non-speciality would also undergo change. Thank you.

Nilkanth Natu — Chief Financial Officer

Hi Rohit. Nilkanth here. So yeah your assessment is correct. Once we get the full benefit of the capex and the revenue, the date between the domestic and export will move slightly on the export side. And between speciality and non-speciality it will be more on the specialty side.

Rohit Nagraj — Centrum Broking — Analyst

Excellent. Understood.

Operator

Mr. Nagarajan, I’m sorry, but there’s some disturbance on your line. Could you switch to your handset, please?

Rohit Nagraj — Centrum Broking — Analyst

Yeah, my question is over. Thank you.

Operator

Okay. Thank you very much. Gentlemen, we take that as the last question. I now hand the conference over to the management for closing comments.

Nilkanth Natu — Chief Financial Officer

Thank you. Mr. Sanjesh Jain and thank your participants for your time and interest in Sudarshan Chemicals. We remain confident in the long-term prospects of our business. And we look forward to engaging with you again in future. Thank you.

Operator

Thank you very much. Ladies and gentlemen, on behalf of ICICI Securities [Operator Closing Remarks]

Nilkanth Natu — Chief Financial Officer

Thank you.

Operator

Thank you.