Chemplast Sanmar Limited (CHEMPLASTS) Q2 FY23 Earnings Concall Transcript

Chemplast Sanmar Limited (NSE:CHEMPLASTS) Q2 FY23 Earnings Concall dated Nov. 07, 2022

Corporate Participants:

Ramkumar Shankar — Managing Director

N. Muralidharan — Chief Financial Officer

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

Analysts:

Sanjesh Jain — ICICI Securities — Analyst

Ahmed Madha — Unifi Capital — Analyst

Rajesh Kumar Ravi — HDFC Securities — Analyst

Yogesh Tiwari — Arihant Capital Markets — Analyst

Dhaval Shah — Girik Capital — Analyst

Ritesh Shah — Investec — Analyst

Rohit Nagraj — Centrum Broking — Analyst

Unidentified Participant — — Analyst

Nitin Tiwari — Yes Securities — Analyst

Ranjit Cirumalla — IIFL Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Chemplast Sanmar Limited Q2 FY23 Earnings Conference Call. This conference may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the Company as on-date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict.

As a reminder, all participant lines will be in a listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ramkumar Shanker, Managing Director. Thank you and over to you sir. Thank you very much and good afternoon. On behalf of Chemplast Sanmar Limited, I extend a very warm welcome to everyone joining us on the call today. On this call, we are joined by our CFO, Mr. N. Muralidharan; Dr. Krishnakumar Rangachari, Deputy Managing Director, Custom Manufactured Chemicals Division; and SGA, our Investor Relations advisor. I hope you all had an opportunity to go through the financial results and investor presentation, which have been uploaded on the stock exchange website and also on our Company’s website. The unique challenges facing the PVC industry continued through this quarter. Our business continues to face headwinds in Q2 FY23 as well due to the zero COVID policies in China, rising energy costs due to the Russia-Ukraine war and overall inflationary pressures. Slowdown in PVC consuming sectors in China due to their zero COVID policies led to PVC inventory buildup in China and continuous dumping into India. However, with the commencement of proceedings and possible safeguard measures, some reduction in the quantum of imports have been witnessed in the last couple of months. While the conditions have been extremely challenging, the strength of our balance sheet and the portfolio of products that we manufacture have helped us to fare reasonably well in this very difficult situation. We closed the first-half of the fiscal with a flat topline and a double-digit EBITDA margin of 11% at a consolidated level. While the topline was flat, what is encouraging is that sales volumes have registered a good increase across products, showing the recovery of demand post the pandemic. Talking further about business environment and our outlook across product categories, the first-half of the fiscal witnessed a sharp drop in paste and suspension PVC prices. While feedstock prices — I’m talking about EDC and VCMs, prices also dropped, albeit with a lag. The benefits of the drop in feedstock prices will however be realized only when the stability is reached on PVC prices. This sharp and continuous falling prices that had a significant impact on the EBITDA margins, which had dropped to around 11% in H1 FY23 compared to the 19% in the corresponding period last year. The margins are under pressure also due to increase in energy costs, which continue to remain high with coal and natural gas prices on an upward trend. We believe that both paste PVC and suspension PVC prices are nearing the bottom and with stability expected towards the end of Q3, we expect to see an upturn from Q4 on this. As mentioned earlier, sales volume of all products witnessed an increase in H1 FY23 compared to the volumes in the corresponding period last year. Based on current trends, the custom manufacturing business is expected to grow at around 30% on the topline in FY23. Recently, we have signed a letter of intent with a global innovator to supply an advanced intermediate for a recently launched active ingredient. To cater to the additional volumes of the custom manufacturing business, we plan — we plan to increase the capacity in phase 1 itself and fasttrack the expansion. We expect to achieve significant growth in this segment in the coming years. Overall, in H1 FY23, our Specialty Chemicals segment revenue remained more or less at the same level on a year-on-year basis. In the first half, the Other chemicals business comprising caustic soda, chloromethanes, hydrogen peroxide and refrigerant gas, delivered a 61% surge in the revenues led by growth in volumes of all products and the sharp increase in caustic prices, which have more than doubled on a year-on-year basis during the first half. Demand for chloromethanes is also steady. There have been a few capacity additions in the country recently, which could have a temporary impact on prices. However, we expect the prices to the recover and stabilize once the market absorbs the additional quantities. Hydrogen peroxide demand increased on the back of improved demand from the paper industry, the outlook remains positive with rising prices due to the tightness in natural gas availability impacting supply of hydrogen peroxide in the region. On the suspension PVC front, our revenues were lower by 10% during the first half largely due to the price drops. Sales volumes were 5% higher in the half year on a year-on-year basis. What is encouraging is that the industry demand for suspension PVC in H1 was quite strong, it was up 18% on a year-on-year basis. We expect that in ’22 – ’23, the industry demand for suspension PVC resin in India would revert to the pre-pandemic level of 3.3 million metric tons, which would be a 16% increase over FY22. Moving on to an update on our expansion projects. What is well under way for the additional 41,000 tons per annum paste PVC expansion project at Cuddalore. We have already received the required approvals. Detailed engineering has been completed and significant progress has been made on procurement. Construction is also progressing well and we expect to commission this as per the schedule in the second-half of FY24[phonetic]. The first phase of a multi-purpose custom manufacturing block is slated to be completed by Q2 of FY24. We intend to complete the civil work for the entire project in this phase. Effectively, phase 2 would take much shorter time to commission after completion of phase 1 as it would not require any additional [Indecipherable]. With a greater visibility on new products, especially with the order win in this half year, we plan to increase the capacity in phase 1 itself to provide incremental volumes. Now I would request our CFO, Muralidharan to share the quarterly financial highlights. Murali.

Ramkumar Shankar — Managing Director

Thank you, Ramkumar and very good afternoon to all the participants on the call. Chemplast Sanmar on a consolidated basis registered a drop in its revenue and operating profits for Q2 FY23 as compared to the same period in the previous financial year. Revenue from operations for Q2 FY23 stood at INR1,194 crores registering a drop of 29% on year-on-year basis. This was largely on account of the combination of lower realizations per ton and drop in volumes for our PVC products.

Sequentially, we didn’t see any major variations in employee costs and other expenses. However, on a year-on-year basis, other expenses have gone up by almost 27% primarily on account of higher fuel cost. EBITDA for the quarter stood at INR98 crores compared to INR346 crores in the corresponding quarter last year on account of the recent [Indecipherable]. EBITDA margin for the quarter as a result stood at 8.2%. Our finance cost for the quarter has come down to INR40 crores compared to a INR149 crores which is a significant change. This is primarily driven by reduction of debt using IPO proceeds and also the reduction interest consequent to the upgrade in rating.

Last year Q2 also had a one-off impact, which was not there in the current year in the interest and financials. The PAT for the quarter was INR39 crores as compared to the PAT of INR151 crores in the corresponding quarter last fiscal. Looking at the half year numbers revenue from operations was flattish at INR2,606 crores as compared to the corresponding period last year and EBITA stood at — for the half year stood at INR293 crores with EBITDA margin at 11.2%. Net profit for the H1 FY23 was at INR79 crores as compared to a INR180 crores in the corresponding period in the previous year.

Coming to the cash flows, the company generated net cash from operations of around INR300 crores in H1 FY23, we spent INR115 crores for the purchase of property, plant and equipment during H1 FY23 with project capex accounting for significant part of it. As mentioned earlier, to cater to the additional volumes of custom manufacturing business, we plan to advance some of the capacity planned in phase 2 in phase 1 itself, which will lead to the project cost from phase 1 moving up from INR260 crores to INR310 crores.

We have tied up the loans for the paste PVC project and partially drawn down. We have drawn INR80 crores during that — during this quarter. We are in the process of paying up the debt for the custom manufacturing business, which will get tied up in the ensuing quarter. With a healthy cash balance of INR1,400 crores, we continue to be net cash-positive on a consolidated basis.

With this I conclude the presentation and open the floor for further discussions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We have the first question from the line of Sanjesh Jain from ICICI Securities. Please go ahead.

Sanjesh Jain — ICICI Securities — Analyst

Yeah, good afternoon. Thanks, Ram and Murali, for the opening remark. I have few questions. Sorry, I may stretch a little bit here. First, on the custom manufacturing, at the start of the year we gave a guidance of 15%, now we have inched it up to 30% and the 15% more on the premise that we were running short on the capacity, what is driving this incremental growth because I don’t think we have added anymore material capacity. So that’s number one.

Number two, this new opportunity that we have just disclosed where we have won a long-term contract for advance intermediary for AI. Can you help us understand what is the total project size we are looking at for this product, how much incremental revenue will this bring and what is the investment for this particular product.

Number three, in general for custom manufacturing, it looks like things are working quite well for us. We have increased the capex guidance from 2.6 in the first place from 2.6 to 3.1, do you think more upside there possible with more effort from the Company to drive that growth business and what is really driving that business for us. So that’s my first one. Thank you. Okay. Good afternoon. This is Krishna Kumar Rangachari. With respect to the first question on capacity in the existing site, yes, we are out of capacity, but I have to say that the good chemical engineers in the manufacturing facility seem to keep finding some way to debottleneck or squeeze or sweat the assets. So, the topline growth was driven by the fact that, with this triggering now to get some incremental volume on the products for the campaigns that we are running this year. And that’s what is going on. On the — on the letter of intent, unfortunately we cannot give much details because of confidentiality reasons with the customer, but it is a significant development and a milestone. The customer is very bullish on the — on the AI that they have launched. They expect it to be a blockbuster and we think this will have a significant impact in terms of capacity utilization of our new production block. Anything else you want to add, Murali, on that.

N. Muralidharan — Chief Financial Officer

Sure. This is also adding to our thought process in terms of increasing the capacity in phase 1 itself, because as this AI itself will occupy significant part of the phase 1 capacity expansion that we’re doing. So this — this we believe is a significant win for us. I think that will occupy significant part of phase 1 of capacity and will add materially to the revenue of the custom manufacturing business in the coming years.

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

And your third question was on more upside and should we be doing anything differently, we have — the pipeline that we have is a fairly strong as well as quite broad in terms of the number of products that we’re working on and then that’s, as Murali and Ram indicated, this is one of the reason why we are advancing some of the capex investment and though we anticipate more — more investments needed down — down the base as and when the project materializes.

And what is driving the growth, it is basically the innovator companies in this space are we looking for reliable partners outside of China and outside of Europe. China was the big factor even till six or nine months back and with all the issues now going on in Europe, they are also realizing that they would need a stronger alternate geography to source that material. Hence the focus is on India and as they look for partners, there are not that many reliable partners to meet the stringent requirements of the global innovators in terms of health, safety and environment compliance, the strong ethics and the value system related to maintaining their intellectual property and companies with a track record of execution. And so, that’s what is driving the growth and the pipeline for us in this space.

Ramkumar Shankar — Managing Director

Sanjesh, to add to what Krishna said, with all these positive done with us putting steel on the ground showing sort of our intention to put capex in this is actually attracting a significant interest from the innovators and which is something in a strong pipeline and to your question whether there is upside to this, we do believe this is an area which has unlimited potential for growth. So we do believe that this is definitely an area for growth in future and we would be looking to fast-track growth in this area.

Sanjesh Jain — ICICI Securities — Analyst

Thanks. Thanks for that. Krishna, one just follow-up on that, the letter of intent thing. Is it an innovation patent-protected product or it is a — because you said they expect it to be a blockbuster that I believed it should be a patent-protected product, right.

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

It is a new molecule that they have recently launched. So, yes, it would be protected — it would be patent-protected product.

Sanjesh Jain — ICICI Securities — Analyst

So, it also means that have we worked on this product before this or we got an entry post the commercialization of this product. At what stage we started engaging the customer.

Ramkumar Shankar — Managing Director

So, this — I think in prior calls I’ve said that the timeline on all these projects is anywhere between 18 to 24 months. This is something we actually started working almost two years back and we have been on a development more with the customer and parallelly they were going through some registration process and which I think most of it is done from their end. And so this is — I mean again this product has already been launched commercially by the customer. So they do have a very limited supply-chain for the raw materials and now they’re expanding further.

Sanjesh Jain — ICICI Securities — Analyst

Fair enough and any update on pharma side. Are we doing anything or the action is more than the agrochemical side.

Ramkumar Shankar — Managing Director

So, we do have. I mean, currently we do have intermediates that we are supplying into the pharmaceutical end use. That is also an area of focus for us and we are working on various projects in the pipeline for that. But I mean again that’s — you may be aware the pharma CDMO is more slightly different when compared to agro, agrochemical and you have more longer lead times as well as more — and we have a much more broader pipeline in terms of other projects that you need to work on to get to a commercialization in a stage gate type approach. But we do — we are working on the pharma side.

Sanjesh Jain — ICICI Securities — Analyst

But we have few products on the CDMO on the pharma side.

Ramkumar Shankar — Managing Director

[Speech Overlap] Yes, both now and historically, we’ve always had capabilities as well as — by capability, I am both chemistry as well as the regulatory and the quality assurance and quality-control that’s required in the pharma sector. We have the capabilities, we do have [Technical Issues] more.

Sanjesh Jain — ICICI Securities — Analyst

But we don’t have a CGMP plant, right, so that will be required at some point of time for us to scale up the pharma.

Ramkumar Shankar — Managing Director

So, CGMP is required only if you’re making the actual API. So there so two answers to that question; one, what we have now are intermediates, which do not require a CGMP type facility. The second is, in the past at the site where we are running this business, we do — I mean we still do actually have the capability to make APIs also. So we are very familiar with what the requirements are in terms of CGMP requirements to make — to make API. It’s not new for us, if it get — comes to that, but we will do it only if the customers want — want an API from us.

Sanjesh Jain — ICICI Securities — Analyst

No, no, my question is because we were more strong than [Speech Overlap] yeah, just last one. So on the [Indecipherable] side, we were very strong, right and I thought [Indecipherable] had a much more rapid — much more stronger application on the pharma side than agrochemical side. Am I missing anything here?

Ramkumar Shankar — Managing Director

No, no, not really. [Indecipherable] it’s useful both — in both those end markets. So, again so, we do [Indecipherable] for pharma as well today. So, what I am saying, we are in the intermediate space. We don’t make any API for our customers in this space right now. That’s what I am try to say, but I am saying that we have the capability to make APIs if we need to.

Sanjesh Jain — ICICI Securities — Analyst

Great. Thanks. Thanks for all the answer. I do have a lot of question on PVC but I think operator wants me to come in the queue. I’ll get back in the queue. Thank you.

Ramkumar Shankar — Managing Director

Thank you.

Operator

We have the next question from the line of Ahmed Madha from Unifi Capital. Please go-ahead.

Ahmed Madha — Unifi Capital — Analyst

Thank you for the opportunity. I’d like to probe more on this topic of custom manufacturing as Sanjesh was discussing. So part is earlier I think we had INR350 crores – INR340 crores capex plan combined what phase 1 and phase 2, now that we are doing INR300 crore in the phase 1, what are thoughts on the phase 2 of capex, how should we look at it and what are the timelines for the same.

N. Muralidharan — Chief Financial Officer

You’re right, actually we are fast-tracking the setup and incurring significant part of in phase 1 itself. Obviously the phase 2 is not going to get restricted to the balance INR40 crores – INR30 crores. It will definitely be higher[phonetic] than that and we are evaluating the pipeline and options looking at fast-tracking phase 2 as well. We would sort of announce it once we have — once we firm up our view on that.

Ahmed Madha — Unifi Capital — Analyst

Got it. And just to understand the letter of intent which we have signed, so does this product to be this form significant portion of the capacity which we are building, how should we look at it, what sort of diversification we will see in product portfolio. Can you — can you throw some light on that.

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

Yes. So, we expect a steady state this particular molecule that we have signed a letter of intent to almost occupy one-third of the capacity in the new production block that we’re building. So, that’s the — that’s why it is a significant opportunity and as I explained, the customer is very bullish in terms of the demand both for the intermediate as well as the demand for their molecule. So, hopefully that gives you a flavor for the magnitude of that.

Ahmed Madha — Unifi Capital — Analyst

Yeah, got it. But then one-third of the capacity we’ve already made the commitments, but for the balance part, does this mean that we are already in a discussion in advanced stage or it is just that we will put up capacity and then slowly we’ll work on the products with customers. How will the ramp-up look like.

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

So — yeah, okay, as I explained to the previous question, this particular molecule that — for which we signed a letter of intent, we have been working for almost two years. So we have a number of such products that are in the pipeline either at similar levels or at different levels of commercialization or qualification. So, we — I mean, you would have to wait for us to come back to you in the future in terms of how those molecules are moving — moving in the pipeline. So, it’s not that we will start working today to fill-up the balance capacity. We are already — we have now in the pipeline that would ensure that the capacity will be occupied when it gets commissioned. Also, we are parallelly working, like Krishna said, there is a strong pipeline and we are parallelly working on commercializing some of them and it’s — we have not talked about the individual products and we have talked about this because this we felt is a significant part of the capacity. So we are highlighting it. It doesn’t mean that we are bidding the other capacity unaddressed. We have sufficient pipeline to take care of the other capacity as well. So that is in various stages of commercialization and that’s progressing as per plan.

Ahmed Madha — Unifi Capital — Analyst

Okay, makes sense. So now moving to the other part of the PV and suspension PVC. So, if we look at the EBITDA which we’re on and if we sort of adjust it for the inventory loss which we took for Q1, we have virtually on negligible EBITDA or contribution, whatever we like to put it, on the paste PVC and suspension PVC part. So, now going forward for as of today, how does this spot spreads look like considering that PVC prices have corrected more than 50%, the raw material prices have also corrected but then there is competition from China and there are lot of other factors as well. So how do the spot spreads look like and where do we see Q3, Q4 in terms of the spreads, which you are talking about in terms of $250 – $300 a ton. How does that look like now.

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

It’s a very valid question question. Actually, if you see the PVC prices, they had run up pretty sharply over the last couple of years till about October 2021. And thereafter they had come off a little bit but the sharp drop in prices really happened from around March or April of this year. And if you see the number and quantum of price drop there had been, from April onwards there have been more than 12 drops in suspension PVC prices alone and this kind of frequent price cuts obviously affects the sentiment. Unfortunately for us, this also coincided with the monsoon season, which is typically a weak season for demand for suspension PVC in India.

So this was a combination of both that weak seasonal demand as also the fact that pricing sentiments were so negative and that kind of spread on each other. The margins have — in this kind of situation where prices keep falling, unless people are absolutely sure that the price drop has stopped, the buying sentiment is also then weak and people buy only for their immediate need and not for inventory. And today, across the PVC channel, inventories are running low and people still continue to buy only for their immediate needs, because the perception is that the bottom, while we have close to the bottom we are still not yet completely there.

So what — to address your specific question, we believe that given the cost price dynamics, we are close to the bottom. But it will take maybe another month or so for us to see it and therefore by end of Q3, we will have that stability come back. So Q3 will continue to be a difficult quarter as far as margins and prices are concerned on PVC. And we will start seeing once that stability in prices comes back — and if it comes back as we expect by around December. Q4 should see the results.

Ahmed Madha — Unifi Capital — Analyst

Okay. Can you quantify the spread number earlier, I think you have even explained the contribution margin per ton monthly wise. So can you quantify what sort of spreads or contribution margin we are running now?

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

Currently, the margins roughly around $180 level. CFR India prices were somewhere around $825, $830, and VCM Asia is around $645, $640 to $650. So roughly around $180, $190.

Ahmed Madha — Unifi Capital — Analyst

Okay. So is this a barrier to understand that —

Operator

Sorry. Request you to kindly come in queue for follow-up questions, sir.

Ahmed Madha — Unifi Capital — Analyst

Thank you.

Operator

[Operator Instructions] We have the next question from the line of Rajesh Kumar Ravi from HDFC Securities. Please go ahead.

Rajesh Kumar Ravi — HDFC Securities — Analyst

Yeah, hi sir. Good afternoon. Am I audible?

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

Yeah, you’re audible, please.

Rajesh Kumar Ravi — HDFC Securities — Analyst

So just follow-up with the previous participant’s question, I just wanted to understand what is the outlook in terms of the pricing, and how is the level of dynamics playing out the China factor? And what we — we have some other players that in US prices, demand is weakend and that is having a negative impact on Indian prices and resin then prices. Could you share your thought please?

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

Sure. Let me address the demand part first. The demand for PVC in India is actually strong. This first half has seen a 17% year-on year increase and we expect the full-year, like I said in my opening remarks to be back to the pre-pandemic level of 3.3 million tons, which is 16% to 17% year-on year over FY’22. Therefore, the demand in India is quite strong. It is the fact that the demand in for instance the US has come off a bit largely due to higher mortgage rates. But that again if you see the earnings call that some of the large PVC producers in the US, they are pretty confident that this wll come back by the middle of Q1 of their calendar year, it is January-March quarter.

The biggest problem has been in China, as we have been highlighting this in fact you would appreciate that as a company we were the first to highlight this and very transparently recognized an inventory write-down as well in Q1 itself. And this is largely due to the zero COVID policies of China. Around 75% or so of their capacities are in the Northwest of the country and 70% of the demand is in the South-East. And while all the the COVID-related lockdowns have been concentrated unfortunately in the Southeast of the China. And therefore, the demand for PVC has come down while the production continues. And that is what has led to this entire sharp drop in prices starting from around March or so.

We believe that getting close to that and in terms of that quantum of the price drop or the frequency of the price drops largely because costs will also kick-in at this point in time and beyond a certain level prices cannot go down, so the Chinese producers may also use this. So the recovery in demand in China is what will drive the prices up in the future. Now when that will happen is the question and that is dependent on the reversal of zero-COVID and opening up of the Chinese economy. But the stability is we expect this to come by around December this year.

Rajesh Kumar Ravi — HDFC Securities — Analyst

Okay. So this Chinese factor, so is this still continue to be a major issue or are things stabilizing in terms of the domestic convention in China?

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

The expectation largely was that that was the Communist Party Congress that happend recently, zero-COVID policies would be eased off and life as normal would return. But there is still some question mark on that. So it is not very clear at the moment when that would happen. It may happen in a couple of months or it may take a quarter or so. The logistics is the fact that the economy in China has been badly hit by this and there is some discomfort to put it mildly in society as well there, maybe there could be a — there is a lot of expectations generally around the world that there could be some easing up, we have to wait and see.

Rajesh Kumar Ravi — HDFC Securities — Analyst

Okay. And then one last question — yeah, yeah, please go ahead, sir.

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

Yeah. One thing that I would like to reiterate is that the medium and medium to long term in our expectations on the PVC demand-supply balances, those continue. So this is something that is very peculiar one-off kind of a situation. But once this is resolved, we still are very bullish on the PVC industry and the fact that the capacities are not going to the extent to which demand is expected today.

Rajesh Kumar Ravi — HDFC Securities — Analyst

Okay. And sir, just this follow-up, you mentioned that this first half we have seen 17% growth in the PVC demand in India. So could you share what is demand number for FY’22 and what sort of number you are looking for FY’23 PVC demand in India?

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

FY’22 was 2.83 million and we expect that this will go to 3.3 million in FY’23.

Rajesh Kumar Ravi — HDFC Securities — Analyst

Okay. And ’21 how much was this number, sir?

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

2.38 million tons — in ’21 it was 2.76 million.

Rajesh Kumar Ravi — HDFC Securities — Analyst

2.76 million. Okay. Great, sir. Wishing you all the best. Thank you.

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

Thank, Rajesh.

Operator

Thank you. We have the next question from the line of Yogesh Tiwari from Arihant Capital Markets. Please go ahead.

Yogesh Tiwari — Arihant Capital Markets — Analyst

Thank you, sir. Am I audible?

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

Yes, please.

Yogesh Tiwari — Arihant Capital Markets — Analyst

Yes, sir. My first question is on — basically on PVC. Sir, can you quantify the Chinese imports, what would be the monthly run rate for Q2? Our Chinese imports for PVC compared with that in October.

Operator

This is the operator, sorry to interrupt, I would request you to kindly go on the handset mode because your audio is not very clear, Mr. Yogesh.

Yogesh Tiwari — Arihant Capital Markets — Analyst

Am I clear now?

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

Yes, much better.

Operator

Yes, sir. So just the first question is on the Chinese imports for PVC. If you can quantify what would be the monthly run rate for Chinese imports in Q2 versus that in October?

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

Okay. Actually, October numbers are not yet — has not yet been busy because we depend on officially received these data. But if you look at the last few months of imports from China, in April we received something like 67,000 tons from China, in May India received 90,000 tons, in June it was 98,000 ton, in July it was 76,000 and then in August and September they fallen off to 32,000 and 20,000. This is largely to do with the commencement of safeguard measures, investigation by the government based on a representation by the industry. That is an ongoing process, so there’s some drop-off in the imports from China.

Yogesh Tiwari — Arihant Capital Markets — Analyst

Thank you, sir. And sir, the other question is on other chemical, so it looks like that realization in other chemicals has declined on a quarter-on-quarter basis. So if you can help us understand what products, it is basically chloromethane caustic soda, which product is actually do you think that decline?

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

Okay. Actually caustic soda has gone up and Mettron gas — refrigerant gas has also gone up. Chloromethane, quarter — I’m sorry. Let me — I’ll rephrase it. My apologies. Chloromethane is from around 60,000, I think it’s around 52,000. So it’s not and all of these have really gone down significantly. Caustic soda, again, hovered at around the INR52,000 to INR56,000 per ton. And in fact it is — in October, again, it was back at the NR56,000 per ton. And the rest of it, it’s pretty much stable around, maybe, give or take another INR2,000 or so here or there, but they are more or less stable in the other chemicals.

Yogesh Tiwari — Arihant Capital Markets — Analyst

Sure, sir. And lastly one on the other chemicals results, there has been an increase in volumes on a quarter-on-quarter basis about 10%, so this will be driven by what would be the drivers for it, the volume increase?

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

The caustic volume has gone up this quarter compared to the previous quarter.

Yogesh Tiwari — Arihant Capital Markets — Analyst

Okay, sure. And if — one question if I can just come in, like, for specialty chemicals like Q2, it seems to be a very strong quarter like 20,000 tons last year also and this year also. So is there any seasonality in specialty chemicals for Q2?

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

Not so much. Actually paste PVC doesn’t have the kind of seasonality that suspension PVC has. This is pretty normal. We had pretty much around-the-clock kind of sales for paste PVC.

Yogesh Tiwari — Arihant Capital Markets — Analyst

Okay, because Q1 we had about 14,000 tons in specialty, the volumes sold.

Ramkumar Shankar — Managing Director

That that was because of some stuff that was built-up as part of it has been liquidated in Q2.

Yogesh Tiwari — Arihant Capital Markets — Analyst

So in Q1 actually these — that Ram was also explaining earlier when the prices were falling. People are holding off purchases to some extent, which resulted in lower volumes in Q1. Otherwise, generally, unlike suspension PVC, we don’t have a seasonality — sort of seasonality in paste PVC as specific. Sure. Thank you, sir. That’s all from my side. Thank you. We have the next question from the line of Dhaval Shah from Girik Capital. Please go ahead. Hello. Yeah Hi, sir. Sir, with this volatility in the PVC prices, how will this impact your decision-making process for the next round of CapEx, because we have been attracting this past one year now the scenario and the commentary by the management was much different and we are expecting a global demand supply mismatch to sustain for a long-time. And there was a lot of positivity around the PVC demand-supply and now we added this juncture, so how will this Impact the next annual expansion in the PVC? Yeah.

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

As I said just a little while back at also we have to — we are still we continue to be bullish on the medium to long term prospects of PVC. The demand-supply structure of the industry has not changed at all. What has happened over the last few months is really the one-off event revolving around COVID and then suddenly you find country which accounts for around 40% of the global capacity. There demand drops off suddenly and then they start exporting to the rest of the world. Obviously, that will have an impact on prices around the world, this is not just in India, the prices have been affected around the world. But this is not something we’d expected to continue. China’s demand will come back, there the economy will come back once the zero-COVID measures are used. And when that happens we believe that the situation that we have spoken about in the past will continue to reassess itself. So PVC demand will grow faster than PVC supply well and that will lead to tightening of the capacity for PVC. This will play itself [Phonetic]. I don’t think we should let the immediate short-term change the views on the medium-to-long.

Dhaval Shah — Girik Capital — Analyst

Okay. So then about the next major expansion in addition to PVC business, by when can we expect? Any decision on the same?

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

Yes, we have always been saying we don’t have any final decision, we’ve not made any decision on the expansion of suspension PVC. We have focused on expanding our specialty businesses, which is why you’re seeing the fast-tracking of expansions on custom manufacturing business and also the expansion of our paste PVC business, we have quality well into our projects on both of those, and we are on track to commission those. Suspension, we don’t have any investment plans as of now.

Dhaval Shah — Girik Capital — Analyst

Okay. Yes, thank you, sir.

Operator

Thank you. We have the next question from the line of Ritesh Shah from Investec. Please go ahead.

Ritesh Shah — Investec — Analyst

Yeah. Hi, sir. Thanks for the opportunity. Couple of questions, first is on PVC, sir, I presume there has been some safeguard duty, which has been proposed. Can you please highlight at what stage of the process the government is in and if there has been industry representation of the sort of duties, quantum of duties, if you could please highlight? That the first question, sir.

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

So we are not clearly looking at a safeguard duty as such what we have as an industry, what we have as for our safeguard measures, it could be quantitative measures or quantitative restrictions. And this is largely to do with the quality of the product that is coming into India. As a country we — since we lead PVC to be important it is not that we are saying that should be no imports, we’re only saying that poor quality product should not be imported into India. This has been taken cognizance of and the government has started its investigation and due process. It is too early for us to talk about where it is and when it will fructify if at all and all of that.

Ritesh Shah — Investec — Analyst

Sir, this is only for PVC right? And sir, when we say quality, is there any particular, can you explain simplistically how should one look at it say for K63 or any other grade of resin K67?

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

And it is basically to do with red signal VPN [Phonetic] presence in the products. So we are talking about any product in excess of new VPN of residual VPN, that should be quantitative restrictions because all of what is produced within India values below that. And that really is the entire purpose of this mission.

Ritesh Shah — Investec — Analyst

Perfect. That’s very helpful. Sir, my second question is,if you could please highlight what the PVC prices are in Southeast Asia or China right now? And if you could just provide some clarity on the duty structure? I think are the current duty at around 11% of the imports from China. And there was an adhoc number of around $147, which I think was taken off in early Feb or mid Feb. So I just wanted to understand the import parity math on the resin. China, the prices in China is around $780 whereas Taiwanese producer quoting — when we quoted $830 per ton to India they quoted $780 per ton to China. As far as duties are concerned there are today no anti-dumping duties on PVC, the only duty is the basic customer duty of 7.5%, which will effectively be 8.25%, 7.5% is the basic customs duty. Okay. And sir how much will be the freight from China to India if one has to assume on an import parity base business, if I have to calculate for say one ton of PVC, so $70, $80. $7.5 you indicated, $8.2 and what is the freight should one assume $100, $150, $200, what should that number be?

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

It is because of the very muted level at which the Chinese economy is operating and the fact that there is not much of cargo moving in and out of China, it is only at around $40 a ton. But that’s about — once the economy comes back into full operations, I presume that this could go.

Ritesh Shah — Investec — Analyst

Sure. Sir if I just — just last question. Sir, if I just put in the numbers what you indicated, $70, $80, $8.2, $40 a freight, it essentially implies on import parity basis, landed price should be at INR72, INR73 rupees, this looks pretty far from where the current PVC resin prices are. Does it imply that there is far more downside?

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

This is the point I would say, in fact that after Septmber, in October also there have been a couple of freight drops. So we were talking about the current. position, the current price levels that we see in the market. This is why I said that Q3 will be challenging again, and it is only towards the once the price stability reached by the end of Q3 that you will start seeing the recovery and reversal in terms of margins.

Ritesh Shah — Investec — Analyst

Sure. Perfect, sir. Thank you so much for the answers.

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

Thank you.

Operator

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

Rohit Nagraj — Centrum Broking — Analyst

Yeah. Thanks for the opportunity. Sir, first question is on the custom manufacturing, so the last quarter we had indicated that Phase 1 will be commissioned in Q1 of FY’24 and now we are seeing Q2. So this is purely because of the revision in terms of the CapEx or are there any other delays because of which it has been postponed by a quarter or so?

N. Muralidharan — Chief Financial Officer

Yeah, Rohit, this is Murali. We had indicated it will be commissioned by H1 of FY’24 and it still holds even with the increased volumes that we are looking at, we’re still commissioning by H1 of FY’24. There is no change in the plan.

Rohit Nagraj — Centrum Broking — Analyst

Sorry. Sir, second question is on the, again, customer manufacturing, so what kind of product pipeline usually we have and what are the product commercialization schedules that we expect for the next maybe two to three years? And generally, how much time does it take from an inquiry to commercialization perspective?

Ramkumar Shankar — Managing Director

Sorry to interrupt. Mr. Rohit, your voice is breaking [Technical Issues] the speaker phone once?

Rohit Nagraj — Centrum Broking — Analyst

Is this better?

Ramkumar Shankar — Managing Director

Yes.

Rohit Nagraj — Centrum Broking — Analyst

So on the custom manufacturing front, in terms of product pipeline, the product commercialization scheduled over the next two, three years and generally how much time does it take from inquiry to commercialization? Thank you.

Krishna Kumar Rangachari — Deputy Managing Director – Custom Manufactured Chemicals Division

Yeah, it’s Krishna here. So, typically it takes anywhere from 20 to 24 months from an inquiry to commercialization. And as we have indicated in the past, we have a number of products at various stages of commercialization and we will be giving you updates as and when each of these get closer to commercialization, just like we have announced today on Friday regarding signing a letter of intent for one of the projects. All I can say is, the pipeline is very healthy and moving forward at currently quick base with respect to qualification and commercialization.

Rohit Nagraj — Centrum Broking — Analyst

All right.

Ramkumar Shankar — Managing Director

[Technical Issues] we are advancing the CapEx — part of the CapEx from Phase 2 to Phase one, obviously due to the fact that the pipeline is healthy and we are looking at capacity for additional volume. So that demonstrates our confidence in terms of our pipeline and the pace of commercialization.

Rohit Nagraj — Centrum Broking — Analyst

Right. Got it. Sir, just one last question if I may have. In terms of cash balance on our balance sheet, we currently have a strong balance sheet. So, are there any plans of going in for any inorganic initiatives, coupled with whatever CapEx is that currently are ongoing on organic basis? Thank you.

N. Muralidharan — Chief Financial Officer

As far as the usage of cash is concerned, broadly if you look at the cash, we are carrying around INR1,400 crores by September end. Of that, almost INR850 crores is with the subsidiary, which is PCBL and INR550 crores is the holding company. And already with the INR550 crores, we have already commissioned projects [Indecipherable] INR150 crores of which required equity [Indecipherable] of around INR300 crores. So, there is some surplus, which we’d like to keep some buffer with us. But at the same time, we are also looking at number of growth opportunities specifically on the specialty side. If you’ve asked us anything specific inorganic, we don’t have anything to say today in terms of on-hand to date we have something on inorganic that we want to do. But the same time, we are a company, we have grown over time through organic as well inorganic means. So we can never say never.

So broadly, yes, you are right. We are sitting on significant cash. But the part of the cash — large part of the cash is with the subsidiary. The holding company is deploying cash in specialty growth and we are more focused on growing the specialty business, primarily on the custom manufacturing side. And as far as other opportunities as they emerge, certainly we would like to look at capitalizing them if we believe there is synergy and growth in those opportunities.

Rohit Nagraj — Centrum Broking — Analyst

Thanks, sir. Got it. Thank for answering all the questions and best of luck, sir.

Operator

Thank you. We have the next question from the line of Krishnakumar Srinivasan from [Indecipherable] Capital. Please go ahead.

Unidentified Participant — — Analyst

Hi. Good afternoon from Kumar. You just mentioned that in terms of overall long-term demand situations and also China. Considering the medium-term optimistic outlook on the cash that you have, would it be product to stock up on the materials and probably build up stock, which probably can be used up going forward and the demand across sharply in the market. What would be your policy in such topic?

Ramkumar Shankar — Managing Director

Thanks KK for the question. It would be difficult for us to build up stocks and maybe not so prudent to do that as well. Because especially in the immediate short terms with the prices falling, any additional stock that we have will help us in terms of inventory losses. But even otherwise, what the policy that we have built-up over many years of experience is that, we operate [Indecipherable] stocks on finished products. We normally have only around four or five days of production as inventory. And in terms of our feedstock as well, we buy it with a very tightly controlled supply-chain and the tankage is determined that kind of stock that we can have. So, there is not much of leeway there in terms of feedstock.

Unidentified Participant — — Analyst

Okay. Thanks a lot and all the best for the future.

Ramkumar Shankar — Managing Director

Thanks.

Operator

Thank you. We have the next question from the line of Nitin Tiwari from Yes Securities. Please go ahead.

Nitin Tiwari — Yes Securities — Analyst

Hi, sir. Thanks for the opportunity. Most of my questions are answered. Just want to get one in. You mentioned during your presentation that in the longer run, you still see that the fundamentals for PVC market are impacted in India in terms of demand and supply. So, how do you see this evolving in terms of the capacity expansion that have been announced by your competitors and some of them are pretty large? So, correct me if I’m wrong, like we have currently 1.5 million tonne of production capacity in India, but as the announced production capacity over next two years is to touch almost $3 million. So, we will practically be reaching about 4, 4.5 by the end of two or three years. So then, how do you see the pricing and the demand-supply dynamics shaping up once this pans out?

Ramkumar Shankar — Managing Director

See, the current demand for suspension PVC in India is around 3.3 million tonnes. That is what we expect it to be by the end of this financial year. And the current capacity is around 1.5 million tonne. In four year’s time, this demand is expected to grow to anywhere between 4.5 million tonne to 5 million tonne. And the expansions that has been announced, they will come in phases, they will not all come together, and they may take three to four years. We need to see how much of — how many of these projects of which ones will come down. So, even assuming that all of them come together by say 2026 to 2027, when the final — all the capacity, all the phases fully come in then, wWe will still be short in the country by 1 million tonnes or so.

So, I don’t believe that there is anything to worry about in terms of demand-supply within the country because CPVC is really growing well. In fact, it is very underserved within India. Our per-capita consumption is hardly 2.5 kg as compared to maybe Southeast Asia at 4.5 to 6 kg. China is well above 12 and the rest of the world — the developed world would be maybe around 15 kg to 20 kg. So, there is a lot of scope for demand for PVC in India to growth. Today, it is constrained by lack of availability. When more capacity comes, we believe that the demand will grow even faster. So, we do not foresee any threat because of this newer capacity. We, in fact, welcome this.

Nitin Tiwari — Yes Securities — Analyst

Thanks for that explanation. The reason I ask because and correct if I’m wrong, globally we are oversupplied as far as PVC capacity is concerned. So far, the dynamics within India was such that we were underserved. There was under capacity. So, what do you see — do you believe that there could be any pricing pressure going ahead given that now India would also be perhaps reaching to almost our capacity as well as the near-term demand is concerned with these capacity is coming up? Of course, I understand that they’re going to come up in phases, but as these capacities keep coming in, they will be closing the demand-supply gap that exists. So, do you think that it has the potential to put pressure on pricing in any way?

Ramkumar Shankar — Managing Director

Yeah, that’s what I was trying to explaining. Basically, as these capacities come on in phases, you will on the other side see the demand also going up every year. So, by the time these capacities are finally in, we would have the demand having gone up to maybe 4.5 or 5 million tonne and that could result in the gap between demand and supply still at a very healthy million tonne. That is demand will be in excess of supply. So, we do not believe that the situation in India is going to get tight in terms of availability so long as the normal demand pattern continues and we are confident that it will continue for all the reasons that I said.

One is the per-capita consumption being low and the fact that there is still so much space for PVC consumption to grow in India. The fact that in irrigation, less than 50% of the net crop sowing area in India still are not irrigated. Less than 50% is irrigated. More than 50% is still non irrigated. And dependent on the vagaries of the monsoon and that is something that gives a huge opportunity for PVC pipes. And then in the non-agri sector as well, with new houses, the government-driven housing program, the Smart City program and all of that, you would find a lot of PVC consumption being required. And, of course, for drinking water [Indecipherable], even for that, it’s a lot of pipes that would be needed.

So, all of these programs from the micro level and from the macro-level, you’re talking about the per-capita consumption. There is enough confidence is being generated that the PVC demand has continued to outstrip PVC supply within the country, even with all these new capacities.

Nitin Tiwari — Yes Securities — Analyst

Great. Thanks for that.

Operator

Thank you. We have the next question from the line of Ranjit from IIFL Securities. Please go ahead.

Ranjit Cirumalla — IIFL Securities — Analyst

Yeah, hi sir. Thanks for this opportunity. So, I have two questions, sir. Firstly, on the balance sheet front. So, we have net cash at the same time we also have a sizable debt on the balance sheet. And I believe that the cash and the large portion of the debt is sitting in the CCBL. So, just wanted to understand the thought behind carrying these debt on the balance sheet. Do we intend to pay this off? What’s the thought process? And also, about the cash that is lying, what is the policy of deployment? We do it in the debt or the mutual funds? That’s the first part. Thank you.

N. Muralidharan — Chief Financial Officer

Actually the debt that we carry in the balance sheet, Ranjit, we do believed that debt is an integral part of capital. So, we would like to retain the debt and then pay it over the period of time as it matures. And as well as the cash in the balance sheet is concerned, like I explained earlier as well, we have INR1,4000 crores of cash, out of which INR550 crores is in the holding company and INR850 crores is in the subsidiary. And we don’t deploy in mutual funds, we redeploy only in bank deposits.

Ranjit Cirumalla — IIFL Securities — Analyst

Sir, what is the repayment schedule of the that particular debt on the balance sheet, in the system [Indecipherable]?

N. Muralidharan — Chief Financial Officer

It has three components. The significant part of the debt runs till 2030. There is one small INR150 crores, which gets repaid in another four years’ time.

Ranjit Cirumalla — IIFL Securities — Analyst

Okay, sir. Thank you. And the second on the CSM front. So, all the capital that is we are deploying is going to generate revenue or there is also an element of backward integration into that?

Ramkumar Shankar — Managing Director

So this is basically — the custom manufacturing means it’s primarily revenue-generating CapEx. We are adding capacity mainly to take care of the new pipeline of products that we have and the incremental volume of orders that we.

Ranjit Cirumalla — IIFL Securities — Analyst

Sure. Thank you, sir.

Ramkumar Shankar — Managing Director

Thank you.

Operator

Thank you. Due to time constraint, that was the last question. I would now like to hand over to the management for closing comments.

Ramkumar Shankar — Managing Director

Thank you everyone for Joining us today on this earnings call. We appreciate your interest in our company and if you have any further queries, please do not hesitate to contact SGA, our Investor Relations Advisor. Thank you very much and have a pleasant evening.

Operator

[Operator Closing Remarks]