Fairchem Organics Ltd (NSE: FAIRCHEMOR) Q2 2025 Earnings Call dated Nov. 14, 2024
Corporate Participants:
Rajen Jhaveri — Chief Financial Officer
Analysts:
Nupur Jainkunia — Analyst
Pratik Kulkarni — Analyst
Harini Dedhia — Analyst
Nirag Shah — Analyst
Chirag Vakharia — Analyst
Narendra Khuthia — Analyst
Damodar Baliga — Analyst
Keval Shah — Analyst
Ashish — Analyst
Mirav Gosalia — Analyst
Presentation:
Operator
Ladies and gentlemen, good day, and welcome to Q2 and H1 FY ’25 Conference Call of Fairchem Organics Limited. As a reminder, all participant lines will be in the 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 Ms. Nupur Jainkunia from Valorem Advisors. Thank you, and over to you, ma’am.
Nupur Jainkunia — Analyst
Thank you. Good afternoon, everyone, and a warm welcome to you all. My name is Nupur Jainkunia from Valorem Advisors. We represent the Investor Relations of Fairchem Organics Limited. On behalf of the company, I would like to thank you all for participating in the company’s earnings call for the second quarter and first half of the financial year 2025. Please note that Mr. Nahoosh will not be able to participate in today’s call due to an emergency, but Mr. Rajen will take over on his behalf.
Some of the statements — before we begin, a quick cautionary statement. Some of the statements made in today’s con-call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management’s beliefs as well as assumptions made by and information currently available to the management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. The purpose of today’s earnings conference call is purely to educate and bring awareness about company’s fundamental business and financial quarter under review.
Now, I would like to introduce you to the management participating with us in today’s earnings call and hand it over to them for opening remarks. We have with us Mr. Rajen Jhaveri, CFO of the company. Without any further delay, I would request Mr. Jhaveri to start with his opening remarks on the financial highlights. Thank you, and over to you, sir.
Rajen Jhaveri — Chief Financial Officer
Thank you, Ms. Nupur, and good afternoon, everyone. Welcome to our earnings call for the second quarter and first half of the financial year 2025. Let me first start off by giving you some of the key financial highlights.
For the second quarter under review, the revenue from operations stood at INR139 crores, which declined by 9% year-on-year. EBITDA for the quarter was INR9 crores, which declined by 48% year-on-year, with EBITDA margins at 6.28%. And the net profit was INR4 crores, which declined by 61% year-on-year, with PAT margins at 2.89%.
For the first half of financial year 2025, the revenue from operations stood at INR304 crores, which declined by 3% year-on-year. EBITDA was INR31 crores, representing a growth of 7% year-on-year, with EBITDA margins at 10.05%. Net profit for the period was INR18 crore, which has grown by around 9% year-on-year, with PAT margins reported at 5.9%.
I would now give you operational highlights for the period under review. On the operational front, for the quarter under review, sales of finished goods declined by 15.60% and 15.90%, respectively in terms of volume and value, on a Q-to-Q basis. The demand for linoleic acid/soya fatty acid which goes to for the — from the paint sector, remained low, especially in the second half of the quarter, impacting the financial performance.
In the month of September 2024, the Indian government increased custom duties by 22% on certain types of crude vegetable oils, resulting in higher raw material costs for our dimer acid production. The custom duty on dimer acid import remained same and so the company had to absorb higher raw material costs, both to stay competitive as well as retain its market share in the domestic market. As a result, the EBITDA margin declined to 6.28%, mainly due to relatively higher raw material costs as a percentage to sales and also absolute decline in revenues also. Having said this, the silver lining still continues to be that the company remains quite optimistic about its value added product, Isostearic acid.
With that, I open the floor for a question-and-answer session. Thank you.
Questions and Answers:
Operator
Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Pratik Kulkarni from KamayaKya Wealth Management. Please go ahead.
Pratik Kulkarni
Yes. Hello, sir. Thank you for the opportunity. I had a few questions. I mean, I had two, three questions. First, like you said that the duty on the raw materials has been increased. It’s almost 22% now. So, is my understanding correct that we are not able to pass on the dimer acid — not able to pass on it to the dimer acid prices due to imports from dimer acids coming at very low prices?
Rajen Jhaveri
Yes, that is right, because China nothing has happened and in case of dimer acid, we are competing with imported dimers from China. So, China prices remain same and custom duty on the dimer import has also remained same at 7.5%.
Pratik Kulkarni
Okay. So, what would be the — what would have been the difference — the import duty on raw materials did not increase. What would have been the difference between the import price of dimer acid and our selling price of dimer acid?
Rajen Jhaveri
See, our policy all these years has been that whatever is the imported price, CIF landed cost of China — Chinese dimer acid plus this non-cenvatable custom duty of 8.25% and whatever amount comes. Suppose it comes to INR100, then our price would be INR98 or INR99. That is our formula. So, since this custom duty has remained same and Chinese import price also has more or less remained same, the price at which we can sell also has more or less remained same. But the raw material which we need for making this dimer acid, the price of that has increased.
So, we are compelled to absorb this additional raw material cost if we want to make and retain our market share in dimer acid and we have decided to maintain the price to retain our market share because we believe that one day, may be one quarter later or may be few months more later, government will have to reverse this. This cannot go on forever. Once the farmers sell their produce of whatever oil, seeds, soya, etc., government may come out with reversal of this duty. That is what we hope.
Pratik Kulkarni
And what would be expected timeline for the same?
Rajen Jhaveri
We do not know. This is a government decision. We did not know — when this notification came on 14th of September. We came to know on that day only that government has come out with this. So, when the government will withdraw, on that day only, we will come to know that government has withdrawn this. We are not that big enough to have any sense in advance about this.
Pratik Kulkarni
Right, right. So looking at some good points like Isostearic acid, so how is our demand panning out there? How are our shipments doing there?
Rajen Jhaveri
See, why we are sticking to this dimer production, another reason is this Isostearic acid. When we make dimer acid, we simultaneously get monobasic acid and monobasic acid is the basic raw material for making Isostearic acid. Isostearic acid has given a tremendous good response from various customers and many such approvals are expected in the coming months. So, we are quite optimistic about this quantum sale of Isostearic acid and that is why we want more of monobasic acid and if we want more of monobasic acid, we will have by default more of dimer acid and if we want — have more of dimer acid, we will have to sell it. So, we have to retain our market share by matching the competitive price.
Pratik Kulkarni
Okay. So one last question would be — sorry, two questions I had. So, how is the demand from the paint sector? You mentioned in your presentation that the demand has been low.
Rajen Jhaveri
Yes. Demand from the paint sector, particularly from middle of August onwards, was very low. And in case if you have happened to see the commentary and the results of Asian Paints, which is having the largest market share in Indian market, they also — their CEO also said the same thing, that particularly decorative paint and our linoleic acid to Asian paints, etc., and other companies, it goes for decorative painting. And there was a lack of demand for decorative painting and in fact, at least for the coming six months also, CEO has somewhat sounded pessimistic about this paint sector. Of course, we are not going by that commentary, but that is what I am telling you that that is what Asian paint CEO had said about two days, three days back.
Pratik Kulkarni
Okay, okay. And the last question would be, we had given a guidance of 10% to 15% volume growth for FY ’25. So, is that the guidance still same or are we revising it?
Rajen Jhaveri
We are not as of now revising it, but it will be difficult to achieve considering that the second quarter did not achieve that volume growth and that is unlikely that the third quarter also may achieve that kind of volume growth because unless and until government reverses this, we will be going somewhat slow on this.
Pratik Kulkarni
Okay. Okay. Thank you. Thank you, sir. That’s from my side.
Rajen Jhaveri
We will try our best to explore other means and achieve the growth if possible, particularly during fourth quarter, whatever growth is possible.
Pratik Kulkarni
Okay. Sure. Thank you, sir. Thank you.
Operator
Thank you. [Operator Instructions] The next question is from the line of Harini Dedhia from Tamohara Investment Managers. Please go ahead.
Harini Dedhia
Hi, sir. Sir, this notification came in for the excise duty hike on 14th September. So, just 15 days in a quarter, would that have affected our gross margins by so much?
Rajen Jhaveri
No, no, no. That gross margin effect was mainly because of lack of demand from paint sector.
Harini Dedhia
Okay.
Rajen Jhaveri
That is what I said that from middle of August onwards, there was a lack of demand from the paint sector. I understand that this 14th September notification will have limited impact for the quarter per se, but there was a lack of demand per se as such though, but from the middle of August, it was more pertinent.
Harini Dedhia
Okay. Got it. And sir, Isostearic, we had mentioned in the presentation that we started shipment, so that is in Q3 itself, right? So, in the month of October, we would have started shipment or even earlier?
Rajen Jhaveri
No, no, we have started shipment from January only onwards — January 2024 onwards in a small way and now it is getting momentum and we hope that by the beginning of the next financial year, we will achieve quite good volume. The third quarter also, the October-December quarter will have perhaps the same volume as this quarter, July-September quarter. But from January-March ’25 quarter, as we will receive more of approvals, because at many places, at many companies world over, where our samples have gone many months back, we are awaiting the approval. Because this is a long-term process, our Isostearic acid sample, they would use to make their product and then it will undergo some test of a certain period, may be two months, three months, four months, depending upon the company’s policy and after that only, we will get the approval. So, we are expecting approval from many of them during the quarter of January-March 2025 and we, on our part, are gearing ourselves to meet that demand of Isostearic acid also. So, that is what we have mentioned in our presentation also, that isostearic acid under these present circumstances of lack of demand from paint sector and increase of custom duty, Isostearic acid still continues to be our silver line — silver lining.
Harini Dedhia
Okay. Got it. Thank you.
Operator
Thank you. The next question is from the line of Nirag Shah from Exemplar Investment. Please go ahead.
Nirag Shah
Yes, thanks for the opportunity. What has been the sales volume for the quarter?
Rajen Jhaveri
Sales volume for the quarter, I think it is already mentioned in the presentation. If not mentioned, I will tell you. Sales volume for the quarter, quarter two was 14,000 plus tons.
Nirag Shah
14,000 plus. And what is the contribution of linoleic/soya fatty acid over Q2 sales as also that of dimer acid?
Rajen Jhaveri
See, typically between linoleic acid and dimer acid, in terms of value, the contribution ranges from 65% to 68% and this quarter also, the contribution between linoleic acid and dimer acid put together was about 68%, 69%. In the previous quarter also, it was around 67% put together. So linoleic acid and dimer acid, as of now, still continue to be our prime product. Going forward, Isostearic acid also will become our prime product. But as of now, these two are the prime products.
Nirag Shah
Okay. Since we are almost at the middle of Q3, and after end of September, we have seen a significant rise to the tune of almost 35% in global palm oil prices, as also soya and sun. So how do you see it impacting our sales and margins this quarter? Will it translate to higher realizations for Q3, for our end products?
Rajen Jhaveri
So, we are not into refined oil business. Since the pricing of refined oil I think — for us, the raw material price has increased. And as I said, dimer acid which contributes nearly 24%, 25%, the raw material price has increased, but we are not able to pass it on because we are competing with Chinese dimer and there, our contribution is going to take a big beating. So there is no question of increasing the margin during October, because already 45 days have already gone off this quarter. So October-December quarter, we cannot expect to increase the margin compared to July-September performance.
Nirag Shah
Okay. But I think global end product prices are based on palm oil, right?
Rajen Jhaveri
That depends. That depends. Palm, of course, has risen substantially after this duty announcement. We understand that there are two or three reasons for this. First, Thailand perhaps has banned this export of palm from their country and Indonesia has perhaps diverted some of its palm for biodiesel. Earlier it was allowing some blending of 30%. We understand that it is going to allow more percent from January or somewhere onwards. It is going to allow more percent. So exports from Indonesia also may come down. And India, being the highly populated country, is approximately importing 50% to 60% of its vegetable oil from countries like Indonesia, Malaysia, Russia, Ukraine, which are under war, and Brazil and Argentina for soya, Russia and Ukraine for sunflower, and Indonesia and Malaysia mainly for palm.
Nirag Shah
And what is the status of the project with respect to that new raw material, the new product that we are planning to commission?
Rajen Jhaveri
Yes, that pilot plant work is going on as of now. So it will be somewhere going — it can go on-stream somewhere in the financial year ’25-’26 only.
Nirag Shah
Okay. Okay. Thank you very much. I will [Indecipherable].
Operator
Thank you. The next question is from the line of Chirag Vakharia from Budhrani Finance. Please go ahead.
Chirag Vakharia
Yes. Good afternoon, sir.
Rajen Jhaveri
Good afternoon.
Chirag Vakharia
Sir, this Isostearic acid, in terms of turnover, how much would that be for quarter two? If you can give some number?
Rajen Jhaveri
Yes, I can give you some numbers. I don’t mind giving the numbers for all these things, but you — all the participants, you will have to understand one thing, that whatever we are sharing here, and whatever we are talking here, we are required to share this audio tape on stock exchanges. Then we are required to share this printout also with the stock exchanges. And for linoleic acid, our competitors, whoever three, four competitors, Indian competitors are there, they are unlisted competitors. But they know that we are listed competitors, we are having this quarterly earnings call, you people are asking, and I don’t mind you people asking the question and you people are asking so many questions about the quantity, volume, etc., etc., and they are listening and they are taking their business…
Chirag Vakharia
Sir, then if you can help me understand, sir, the profitability that has come, the margins that have come for this quarter, is it because of the contribution of Isostearic acid or linoleic acid was still profitable?
Rajen Jhaveri
No, no, it is a combined — it is a value-added product. See, you have to understand one thing, Mr. Chirag, like a petroleum refinery, which purchases brent and makes different products, petrol, diesel, aviation fuel, furnace oil, etc., etc., we also purchase a waste product from the vegetable oil refinery and extract different fatty acids, upgrade these. Isosteric acid is a value-added product from monobasic acid. For almost 20 years, from 2002 to ’23, till 2023, for 20 years, we have been selling monobasic acid. We started working on upgradation of monobasic acid in our R&D somewhere in 2019 or so, and now came out with a value-added product. So, what I am trying to say is that from one raw material, we are making these value-added products. So, there is no separate contribution. The contribution — the profit, it is not based on any particular product. It is a combined composite thing that we are making.
Chirag Vakharia
Okay, okay. So, sir, for us, what is critical going forward is the duty component, right?
Rajen Jhaveri
See, very critical for us is — reversal of this hike in duty by the government is very critical. Otherwise, according to us, we were well on the course of achieving better performance based on our Isostearic acid achievement. But this government notification has created a havoc. Now, we will have to wait for this reversal of government and of course, paint — this demand from paint. But we expect that ultimately India being a 150 crore population country, demand for paint ultimately will get back, may be one quarter late or whenever.
Chirag Vakharia
With some new players coming up, wouldn’t the off take be more with new players coming in paint segment?
Rajen Jhaveri
But see, supply would be more, but the demand — and on consumers.
Chirag Vakharia
Right, correct, correct, correct.
Rajen Jhaveri
And mind one thing, we have the approval from other paint companies also. So, don’t think that since Asian Paint may lose some share to other competitors, but we are not worried on that. We are supplying to Berger also. Our samples have been approved by Grasim also. We had supplied to alkyd resin manufacturers who ultimately supply to ICI, etc., also. So, it is not that we are exclusively supplying to Asian Paint Limited. But Asian Paint Limited has been our major customer.
Chirag Vakharia
Okay. Okay, sir. Okay. Thank you, sir. Thank you.
Operator
Thank you. [Operator Instructions] The next question is from the line of Narendra from RoboCapital. Please go ahead.
Narendra Khuthia
Hi, sir. Thanks for the opportunity. Am I audible?
Rajen Jhaveri
Yes.
Narendra Khuthia
Yes, yes. So, sir, given the headwinds that we are facing, right, so, the current margin of 6%. So, I believe unless the government policy changes and the paint demand comes back for this year, so the recovery doesn’t seem possible, right? So, the margins could be around this level only, right?
Rajen Jhaveri
Narendra, earlier whatever we discussed, there are two, three points on this. First is we said that Isostearic acid, we are quite optimistic for January-March 2025 quarter. If that happens, it will help us in improving our margin. As far as paint sector demand is concerned, that also we are hoping that it can go worse even for one more quarter of October-December. But from subsequent quarter, it should revive because ultimately India is a 150 crore population country and export market also could be there. So, that is another thing as far as January-March 2025 quarter is concerned.
As far as government duty is concerned, we cannot say anything because it is absolutely government’s decision. But as we earlier said in response to someone else’s question, October-December quarter, yes, October-December quarter could be impacted, most likely impacted because 45 days have already gone.
Narendra Khuthia
Okay. Okay, understood, sir. And just, what if everything falls in place, what kind of margin should we expect? I mean, just…
Rajen Jhaveri
Then, whatever we had earlier said that we will be aiming to achieve 14% to 15% EBITDA margin, we will be again well on course to achieving that kind of margin of 14% to 15%.
Narendra Khuthia
Okay. Okay, sir. And any more details that you could give on the…
Rajen Jhaveri
See, then it would become — there are two things. One, it would become UPSI, more detail and another thing, just now what I said that our competitors are having more post-mortem of whatever we are sharing than the participants in this call.
Narendra Khuthia
No, no, sir, I am asking about the new raw material, if you could…
Rajen Jhaveri
New raw material, that work is going on, I say in pilot now. At laboratory scale it is over. Now we have purchased the pilot plant, so pilot plant work would start and then the plant work would start in the financial year ’25-’26. Plant erection will start — after the successful pilot plant, plant erection would start in the financial year ’25-’26.
Narendra Khuthia
Okay, sir. Okay. Thank you so much and all the best.
Rajen Jhaveri
Thank you.
Operator
Thank you. [Operator Instructions] The next question is from the line of Damodar Baliga from DB Investments. Please go ahead.
Damodar Baliga
Sir, good afternoon, and thank you for the opportunity.
Rajen Jhaveri
Yes, good afternoon.
Damodar Baliga
Sir, the first question is, now as you rightly said this notification on the custom duty has come in 15th September, so the drop in the gross margin is mainly due to the drop in demand from the paint segment. Is that understanding is correct?
Rajen Jhaveri
Drop in the margin is substantially due to lack of demand from the paint sector and partly due to these notifications.
Damodar Baliga
Partly, but now my question is, now that you will have this notification effect for the full three months. For the Q3 you said it will get impacted, so that means the gross margin would come down drastically again further, let’s say up to 12% or so for Q3?
Rajen Jhaveri
We are trying to do some alternative things, again it is a business kind of a thing, to ensure that we — our performance do not further deteriorate that what it is in — you are quite worried about the performance may further deteriorate in Q3 compared to Q2 because it will have a full impact of the duty, I can understand that, but on our part, we are trying our best to ensure that our performance remains at par at Q2 level.
Damodar Baliga
Actually, my next question was that only, any action taken by the management to reduce this impact? So is that utilizing the alternative raw material, but anyway you said that you are putting up the plant only next financial year, so that also will not come handy, correct?
Rajen Jhaveri
Yes, that will not come handy, but we are exploring other things, which I cannot disclose as of now. We are trying our best to ensure that the performance does not further deteriorate. Let us see how it goes.
Damodar Baliga
Okay, fair enough, sir. Sir, my second question is regarding the paints. See, out of the linoleic acid that we sell, what is the percent of that sales to Asian paints? Percentage wise you can tell me, how much we are dependent on them?
Rajen Jhaveri
Approximately, out of our total sales, approximately two-thirds would be to Asian paints limited.
Damodar Baliga
Okay. Now my question is, in case if other paint manufacturers pick up in the decorative segment, is there any chance we can supply to them because you said we have already been approved by them?
Rajen Jhaveri
No, we are supplying to others also in small quantities already. We have been approved by everybody.
Damodar Baliga
No, no, then why — see, once we had increased our capacity…
Rajen Jhaveri
Comparative [Phonetic] prices will be the main criteria compared to Asian Paints.
Damodar Baliga
No, agree, instead of keeping it idle or running at a lower capacity, may be it makes sense to supply to other players, just to…
Rajen Jhaveri
No. We are not keeping it idle. That particular raw material, we are not keeping it idle.
Damodar Baliga
[Foreign Speech] So that means then why the sales are down? Because you said sales are down because of the dropping demand from the paint segment. So, what I was thinking is that you are producing, let’s say, 100 kg, you are able to sell only, let’s say, 60 kg. The remaining 40 kg, instead of keeping it, we can sell it to other paint players, no sir?
Rajen Jhaveri
But that other paint company, if it give us the desired margin, then only we will produce. That is what I am trying to tell you.
Damodar Baliga
Agreed, but even if they are giving lesser margin, instead of keeping it in our storage line, does this not make sense to sell it to them?
Rajen Jhaveri
It should completely cover our — recover our cost and then it should have some margin. Otherwise, there is no point in running the machine.
Damodar Baliga
[Foreign Speech] Okay. Got it, sir. Correct. Correct. Okay.
Rajen Jhaveri
In paint sector, there is no customer like Asian Paints Limited. Let me tell you upfront, in terms of everything, fair dealing, timely payment, etc., everything, everything.
Damodar Baliga
Okay, fair enough. Sir, our capacity is based on the raw material processing is around 1,20,000 metric ton. So, what is the capacity utilization as on 30th September?
Rajen Jhaveri
1,20,000 metric tons, we have already earlier said that we have now divided it into two parts. 80,000 metric tons for our present set of activities and 40,000 metric tons we have earmarked for that new set of products which is under development. So, that 40,000 metric tons is now earmarked. So, we are now talking about the capacity utilization out of these 80,000 metric tons. And as I said, what we produce — what we process during this is approximately 14,500 metric tons. So, annualized, you can consider annualized 60,000 metric tons. So, against 80,000 tons of installation capacity, our annualized, based on this quarter was 60,000 metric tons. So, 75% utilization you can consider for this quarter.
Damodar Baliga
Okay. Sir, these 40,000 metric tons means which you’re earmarked for the development of the new products means you are not utilizing for the regular production, right?
Rajen Jhaveri
Yes, yes, because those equipments we have — some of the equipments we have earmarked for that new product and the balance equipments we will be procuring after the successful pilot plant runs.
Damodar Baliga
Okay. Sir, that means if you are taking it as a 75% capacity utilization, so that means we are having only 25% additional spare capacity, if there is any further increase in the demand, correct?
Rajen Jhaveri
Yes, that is right.
Damodar Baliga
Okay. Sir, next is, are we doing any other capex during the current financial year?
Rajen Jhaveri
Not too much, except for solar. In case if we decide to go for solar plant, then there could be a capex of may be up to INR30 crore, INR35 crores for solar. Otherwise, for a present set of activities, whatever expense, capex we’ve had to incur, most of the expense we have incurred and maybe some INR5 crores, INR10 crores is left out, which we will be incurring may be by March 2025 from our internal accruals.
Damodar Baliga
Agree. So, how much it could become, sir? How much approximately other than this solar?
Rajen Jhaveri
About INR5 crores only by March 2025.
Damodar Baliga
Then, sir, why I was asking this question is, there is an increase in the debt as on 30th September?
Operator
Sorry to interrupt you sir. I request you to come back for follow-up.
Rajen Jhaveri
No, no, there is…
Damodar Baliga
Okay, madam. I’ll complete this question. I’ll complete this question. Sorry, sir.
Rajen Jhaveri
There is no case of increase in debt, I will tell you. Earlier, we were utilizing this Asian Paints bills discounting facility, whereby we were knocking out the receivables on one side and we were not — instead of booking the borrowing because banks had no recourse to us on the due date. They had recourse to Asian Paints Limited. So, under the accounting guidelines, we were not required to book it as a debt. So, though we were availing the facility, we were not booking it as debt. On the contrary, we were knocking out the receivables. But now, we are not utilizing that facility. So, now there is receivables on one side of Asian Paints Limited for 60 days and on the other side, there is a short-term borrowing.
Damodar Baliga
Okay. Got it, sir. Got it. Okay, sir. Thank you very much and all the best, sir.
Rajen Jhaveri
Thank you.
Operator
Thank you. [Operator Instructions] The next question is from the line of Keval Shah from Jeetay Investments. Please go ahead.
Keval Shah
Hello, sir. Thank you for the opportunity. Sir, you said that we had 15% drop in volumes and 15% drop in revenues this quarter. We see gross margin in terms of percentage basis. So, while drop in revenue and volume is fine because obviously the application industry — paint industry had not done well. But, sir, why have — if we see compare with — if we compare Q2 with Q1, why have gross margins dropped from 30% to 24%?
Rajen Jhaveri
Gross margin also would drop, because there are two things. One is this duty increase during last 15 days or so and another thing is when there is a lack of demand from the paint sector, generally what would happen, whatever limited quantities they would want to buy, they would try to bargain hard with us. You take any business. If it is passing through a bad time, what would happen, your sales price would tend to be lower than the normal sales price because the buyer is in a commanding position. So, these are all business secrets. As I said earlier, if we discuss all these things, all these Asian Paints Limited and our competitors in [Indecipherable], they only would come to know. You would know and satisfy — you would be satisfied with the answer. But what we are sharing is ultimately hurting us and ultimately hurting our shareholders only and the investors only.
Keval Shah
No, no, understood that, sir. My only thing was that the effect of the duty hike was only for 15 days…
Rajen Jhaveri
I understand. I understand But in case if you are doing business, you would have undergone this particular phenomenon about which I talked.
Keval Shah
Right, right. And we are continuing to see that, right, sir, for Paints, not for the dimer?
Rajen Jhaveri
We are continuing to see that and continuing to see that in a big way.
Keval Shah
Okay. And then, sir, a second question was on Isostearic acid. When — let’s say in quarter four, when we come up with — we get right approvals and the orders are there and we can start shipping in full sort of full output capacity. Sir, do you think that the margin that we — I don’t want a quantitative number because you correctly mentioned that it’s kind of — it would not help either the management or the shareholder. But, sir, just like — just some color that when we start doing it in full capacity, do you think it has ability to offset whatever hit that we have got due to the duty hike in dimer acid? Do you think that it has the ability in consolidation to get the margins to around 12% to 15% even if the duty hike persists, if the duty hike — even if duty hike is not reversed?
Rajen Jhaveri
Up to 12%, yes, it has the ability to hit the margin up to 12% even if the duty hike is not reversed. Only if the paint from demand is revived and Isostearic is — we receive approvals from so many customers, then, yes, it has the ability to go up to 12%.
Keval Shah
And then, sir, we do have — do we have any sort of an indication that we should be receiving good amount of approvals like Q4 of this financial year, like Q4 or maybe starting of next financial year? Do we have the right indications there?
Rajen Jhaveri
We are hoping that. It is difficult because, see, these are all foreign developed countries, Europe and USA and Japan and Singapore and those kinds of countries. Now, you can understand that they may have their own protocols for granting approvals, etc.
Keval Shah
Right, right, right. So, that still may — the trial run process…
Rajen Jhaveri
We are hoping that during January-March 2025 quarter, we should be receiving more approvals.
Keval Shah
Okay, right, right.
Rajen Jhaveri
And we are now targeting one more thing, perhaps in the previous quarter we might not have discussed. Our initial shipments of this Isostearic acid from January onwards till date, it was going for lubricants. But now we are targeting that costlier market of cosmetics. And all these approvals are required for cosmetics. And since cosmetics are to be applied on the human skin, it will need more approvals. Lubricant is one thing and cosmetics — it is like — it is like of a semi kind of a pharma U.S. FDA. Because this drug, because humans consume the drug, this U.S. FDA, etc., requirement is there. And similarly, if you want to apply this Isostearic acid in — use in cosmetics, the cosmetics are ultimately used by the human beings only and that is why they need to be more cautious before granting their approval and that is why it takes more time.
Keval Shah
Right, sir.
Rajen Jhaveri
But it is a costlier product against that. Let me tell you one thing. Compared to lubricants, the application for cosmetics can fetch a somewhat higher value.
Keval Shah
Okay. Okay. And lubricant in itself would be much higher value, let’s say…
Rajen Jhaveri
In absolute terms, it is the highest priced product of our entire product basket.
Keval Shah
Right, right, right. Understood. Understood, sir. And sir, the last question was on the 40,000 tons capacity that we have earmarked for the new raw material. Sir, what stage of development are we in right now for that?
Rajen Jhaveri
As I said, it is done in laboratory at laboratory scale. Now, we have procured pilot plant and the pilot plant work would start. And after the successful pilot plant run, we will proceed with the erection of the plant in financial year ’25-’26.
Keval Shah
Okay. And sir, the application industry for the new raw material, have we discussed that, or is it something that you would want to discuss at a later stage?
Rajen Jhaveri
No, no, that — because see if we tell you what is the application of this, then everybody would come to know what is the product.
Keval Shah
Okay. Okay. But it is very much in line, right?
Rajen Jhaveri
It is very much within the oil, that our core competency only. We are not going for something that we are into this oil and fat business and we are going into cement. No, no, no. Nothing of that kind of a thing. It is overall within these specialty chemicals, specialty oleochemicals only.
Keval Shah
Okay. okay, okay. Understood, sir. Got it. Got it. Thank you. Thank you, sir.
Rajen Jhaveri
And it is — we are going to be the first company in India to make these kinds of products.
Operator
Thank you. The next question is from the line of Ashish, an Individual Investor. Please go ahead.
Ashish
Yes. Thank you very much for giving an opportunity to speak.
Rajen Jhaveri
Welcome.
Ashish
Yes. We are very disappointed with the result presented by the company due to the government policy.
Rajen Jhaveri
We are also equally disappointed.
Ashish
Yes, yes. And can you tell me how could you say that this duty will be reversed?
Rajen Jhaveri
We are not saying duty will be — we are hoping that once the farmer sells their produce, government will have to consider reversing this duty because it has already increased the prices of all the oil. See, government is trying to balance between farmers on one side and consumers like you and me on the other side. With this imposition of duties, all this soya oil price which was ruling around INR100 has already become INR130, INR134. So ultimately, we will end up paying more price for this and that would get reflected in the inflation. See, October inflation has already risen. And if it continues, it will have further effect on the inflation. So, government may be forced to take the decision once farmers are through with their inventory. We are not saying. We do not know. We are not part of the government.
Ashish
So, we are hoping only, right? We are hoping. So we cannot say come whether government will reduce or not, that is — nobody can say, right?
Rajen Jhaveri
[Speech Overlap]
Ashish
Yes, I agree. So how you will compensate this loss of duty with other products’ margin? Is it possible to compensate this margin with other products or any new product line or any innovative product by the end of this year?
Rajen Jhaveri
We already discussed this with previous — many of the previous speakers raised this points. We already discussed this that Isostearic can give as additional contribution. Revival from paint sector can give additional contribution. And as far as this is concerned, it is hardly we can do anything. Of course, we are exploring in our own way. But it is at a very uncertain stage and it is difficult to say that how it can go. But till the government reverses its duty, this absorption of the additional raw material cost by us would remain, would be there.
Ashish
Okay, right. Thank you. Thank you so much. Thank you so much.
Operator
Thank you. [Operator Instructions] The next question is from the line of Mirav Gosalia [Phonetic], an Individual Investor. Please go ahead.
Mirav Gosalia
Hello. Sir, am I audible?
Rajen Jhaveri
Yes.
Mirav Gosalia
Yes, sir. So this — the first half, if you see the balance sheet, we have seen that the trade receivables has gone from, like, from FY ’24, it was around, like, INR55 crores and in H1 ’25, it is around INR80 crores. And borrowings — current borrowings have also increased. So, is it the thing that, like, not just we are able to pass on the prices to our customers, but also we will have to, like, give more lenient credit terms to them as well to maintain our market?
Rajen Jhaveri
So, you were on the call about 10 minutes, 15 minutes back also, because one of the speakers asked this question, and I said that what arrangement we earlier had with the Asian Paints and what we are doing. So, because of that, now we have higher trade receivables on one side and higher borrowing on the other side. That is one thing.
The other thing is this Isostearic acid which we are selling is selling to European and U.S. customers, where we have to extend the — they are all big companies. No need to worry as far as recovery of money is concerned. They are all big companies and we are required to extend additional credit compared to what we have been generally extending for our prime products in Indian market and that is why these higher trade receivables. And going forward, these trade receivables will further increase as we increase the sales of Isostearic acid. But according to us, as far as European and U.S. customers are concerned, we are quite not worried on that, because they are big companies.
Mirav Gosalia
Okay, right. And also, sir, about the new product which you are about to like start with, is it a high value and a high margin product?
Rajen Jhaveri
It is a high value product. Whether it is high margin or not would be known only after the detailed study is done. Detailed study in the sense that after the pilot plant results are available. Because on the basis of lab scale, you cannot work out the economics. Pilot plant would give better indication. Because yields are very important and in pilot plant, what kind of yields we are getting, that is very important. Based on that, margin would be decided.
Mirav Gosalia
Right. Sure. And so the current capacity for Isostearic acid is around like 2,000 tons per annum, right?
Rajen Jhaveri
Current capacity is more than 2,000 tons per annum. We can go up to 3,000 tons per annum.
Mirav Gosalia
Okay. Sure. And so if the demand goes up, like can we shift our capacity more to Isostearic acid if we get the demand and the approvals?
Rajen Jhaveri
No. Isostearic acid is a value-added product from monobasic acid. So, if more monobasic acid is available, then only more Isostearic acid will be available. And for more monobasic acid, you will simultaneously get more dimer acid. So, if you are able to sell more dimer acid, then only you will be able to get more monobasic acid and then only you will be able to get more Isostearic acid. So, everything is linked to that extent and we are going in that manner only. As of now, though our Isosteric acid capacity is 3,000, but we are already working out as to how we can increase the same in future if the demand further increases.
Mirav Gosalia
Okay, right, sir. And the other industry that we are currently…
Operator
Sorry to interrupt you, sir, I request you to come back for follow-up question.
Mirav Gosalia
Yes, sure. Thank you.
Operator
Thank you. [Operator Instructions] The next question is from the line of Damodar Baliga from DB Investments. Please go ahead.
Damodar Baliga
Sir, thanks for the opportunity again. Sir, this new product where you have earmarked that 40,000, you said the pilot plant would be constructing from next financial year. So that would take minimum six months to nine months to construct, then commissioning. Thereafter only you would be requiring that 40,000 capacity, right?
Rajen Jhaveri
Yes. That erection etc., may take up to nine months. You are right.
Damodar Baliga
Correct. So that means in the meantime if there is any increase in demand, can we utilize that 40,000 or not?
Rajen Jhaveri
Out of that 40,000, at the most we can utilize up to 10,000.
Damodar Baliga
Okay. Okay. Fair enough. Sir, this solar, you said there is an investment of INR30 crores to INR35 crores. Now question is when you will be taking a decision and how much saving it will be there for the company?
Rajen Jhaveri
See, as far as saving is concerned, the solar tentative working which we have done, it is having a payback period of four years, four-and-a-half years. So, the present ruling interest rates are around 9%. So, four years, four-and-a-half years is a very good period for payback. And as far as implementation period is concerned, we have identified two pieces of land, but you will be aware if you are based in Gujarat or maybe anywhere in India, this land title, etc., particularly in rural area, how difficult it is. So, once we identify, once we zero in on a particular piece of land out of two, three options which are available and subsequently the title, certificate, etc., that process itself will be the main thing. Otherwise I understand that implementation of solar plant per se, once the title is cleared, land registration is done, payment is made etc., and it is handed over for the installation, it should not take more than 60 days. That is what I understand.
Damodar Baliga
Okay. And how much savings it would give us, sir?
Rajen Jhaveri
I said it is having a payback period of four years, four-and-a-half years.
Damodar Baliga
Okay. And the cost we…
Rajen Jhaveri
[Indecipherable] have to do what we are required to do. Whatever we consume here at our factory and whatever we generate at the solar plant, we have to pass on that units to the Uttar Gujarat Vij Company Limited, and we get the credit for that. Presently we are getting power at INR9.75 per unit. So we will get the credit of 9.75% provided it is matching. In case if it is an excess generation for any reason, then the excess generation credit would be only INR2, INR2.5 — INR2, INR3 only. But generally that would not happen unless our plant has remained closed due to any reason and during that period if there is a generation, otherwise there is not likely to be such kind of a case. We have worked out accordingly only.
Damodar Baliga
Okay. And the investment is on the higher side because we are purchasing the land also, correct?
Rajen Jhaveri
Yes, we are purchasing the land also. We are purchasing the land also. That is why.
Damodar Baliga
Okay. Sir, there few years back we had purchased a plant in one of the industrial areas, so that has remained vacant only as on date?
Rajen Jhaveri
Yes, it is vacant only as on date.
Damodar Baliga
So there is no plan for any immediate usage of that?
Rajen Jhaveri
No, no plan immediately because in case if for any activity you create a separate plan there, it will entirely entail that additional setup cost, etc. So till such time we can absorb whatever we want to do at our present plant, we would prefer to do here only. You will understand that if you put up an entire different setup, that additional cost, what kind of additional cost it could be.
Damodar Baliga
True. So lot of infrastructure and basic, so all that would be.
Rajen Jhaveri
Yes. So we are trying to utilize this as a first thing by making space wherever available, wherever there is an opportunity, going from horizontal tanks to vertical tanks, etc., etc., doing those kinds of things.
Damodar Baliga
Okay. Sir, since you’re busy with this…
Operator
Sorry to interrupt you, sir, I request you to come back for a follow-up question.
Damodar Baliga
Okay.
Operator
Thank you. The next follow-up question is from the line of from the line of Chirag Vakharia from Budhrani Finance. Please go ahead.
Chirag Vakharia
I wanted to know, sir, you have said that you have a spare capacity of, additional capacity of 40,000 tons and then you have mentioned that you will be erecting a plant in FY ’26. Can you clarify, sir? I got a bit confused.
Rajen Jhaveri
No, no. We have earmarked the capacity with some equipment. That additional equipment for that particular set of products are to be obtained and that would be decided based on the pilot plant.
Chirag Vakharia
Okay. So, sir, in case, you move ahead with this plan, how much would be the capex then for the new machinery and all?
Rajen Jhaveri
That also it is difficult to accurately say anything about that. Only our guess work, which could be plus, minus, whatever, it could be additional INR35 crores, INR40 crore. But it is, as I said, it could go wrong anyway. This is very preliminary estimate and based on the pilot, after the results of pilot plant are available, because yield in this particular thing is most important and for obtaining that yield, what kind of equipment we will need. See, if the equipments are custom made, then it may take longer also because the equipment manufacturer will need more time for that. So, everything would be known only after the pilot plant test is completed.
Chirag Vakharia
Okay. Okay. And sir, second thing on this duty, sir, if this duty was to persist, would it make a case for increasing in the price of dimer acid then?
Rajen Jhaveri
It will not be possible because then the — to an extent, it will be possible because all the Indian consumers would be wanting to keep us also as one of the sources. But what will happen, presently our share is 65% to 70% and imported share is 30% to 35%. That ratio may get reversed. Chinese import would become 65% and our share will become 35% if we increase the price beyond what is the landed cost of Chinese dimer because otherwise, their ingredient cost also will go up.
Chirag Vakharia
Sir, qualitatively, your — the dimer that you supply vis-a-vis the Chinese one…
Rajen Jhaveri
Matching, matching, matching.
Chirag Vakharia
Okay. So, it is an arbitrage then. Okay. Okay, sir. Thank you. Thank you.
Operator
Thank you. The next follow-up question is from the line of Damodar Baliga from DB Investments. Please go ahead.
Damodar Baliga
Hello. Sir, thanks once again for the opportunity. Sir, I had this question regarding increasing the tocopherol concentration. So, we are not focusing on that?
Rajen Jhaveri
Yes, we are not focusing on that as of now. See, because world over this toco business is controlled — more than 80% business is controlled by these three…
Damodar Baliga
Hello? Hello? Hello?
Rajen Jhaveri
…sensed this thing — particular thing.
Damodar Baliga
Sorry, sir, in between you went off, sir, we could not hear. Can you repeat from the beginning? You said four major players are there in the tocopherol. Thereafter we didn’t hear you.
Rajen Jhaveri
Three major U.S. companies, Cargill, ADM and earlier Cognis, now it is taken over by Kensing Solution. These three companies control 80% of mixed tocopherol market in the world. And further, this tocopherol business is a cyclical kind of a business as far as its pricing is concerned. Because we are in this business since 1996. We started only with the exclusive business of tocopherol only in 1996. And in September 2000, we received the first shock of a 60% overnight drop in the price. So, we know this business more and about five years, six years back only, Nahoosh bhai sensing this particular thing that this has been the history of tocopherol business, he decided to focus more on fatty acid business and decided to expand for fatty acid business only.
So tocopherol business now is a — because we have been doing this business and because we want to remain in this business, whenever we get orders from these U.S. customers, whenever they have a short supply and they approach us, then only we make the tocopherol concentrate and supply to them. Otherwise, it is not that focused area, though it continues to be in our product line.
Damodar Baliga
Okay. But you had some problems in sourcing the raw materials. Soyabean, raw material waste…
Rajen Jhaveri
Because raw material — raw material is in a very — it comes out in a very short quantity, in a very low quantity. It comes into small, it is 0.15% or 0.20% only of the crude soya oil refined by these refineries. So, the quantity itself and there are already two, three other players in this. There is space for only one player and there are already two, three players in this business. We doubt whether those two, three other players are also making money or not. But we, on our part, have decided to remain focused on this fatty acid business.
Damodar Baliga
Okay. Lastly, on the Isostearic acid, is it possible for you to tell us how much sales we can expect in ’25 and ’26, sir? If you don’t want to give us the volume, that is okay. Just tell us how much in value terms we can expect in ’25 and ’26?
Rajen Jhaveri
Well, value terms, financial year ’25-’26, so it can go up to any amount. It can go up to, I will tell you, Isostearic acid can go up to — at peak capacity of about 3,000. I don’t know when we will achieve this, but theoretically I am saying, at peak capacity we can go up to INR150 crores.
Damodar Baliga
And is it possible to tell us how much we can do in FY ’25 at least?
Rajen Jhaveri
FY ’25, that would depend on what kind of approvals we have…
Damodar Baliga
Approvals and on. So, if you get all the approvals, let’s say, by April, then FY ’26 itself we can achieve this, no sir?
Rajen Jhaveri
No. As of now, our capacity, as I said, our capacity — we are gradually ramping up the capacity. And even if we receive the approval, the ordering process could be slow. Initially, they may take one container only, and then they may be using one container. See, the approval will be in a multiple stage. As of now, they are approving the samples. Then they would take the full production lot and the production lot would reach, nowadays — after 45 days, it would reach U.S., from the seaport. And after that, it will leave their plant and then they will use it. They will make their product and again that will go under testing, etc. So, it could be gradual. Once they are fully satisfied about our quality on a consistent basis, then only the full kind of orders will be received. See, it is a difficult product, but in the world, only four companies — if I correctly understand, only four companies are making this Isostearic acid. So, it is not an easy product.
Damodar Baliga
Okay. So, that means it is gradual. Maybe by FY ’27, at least, we can reach that figure, based on whatever you are saying.
Rajen Jhaveri
Yes.
Damodar Baliga
Sir, and lastly, about this alternative raw material, that we can expect by FY ’26 to be ready, let’s say by December ’25?
Rajen Jhaveri
That is what I said. Everything would depend on the result of pilot plant. I think once or twice I said that yield is very important in taking the decision. So, that we will come to know only after the pilot plant result is available.
Damodar Baliga
Sir, this pilot plant, what you are talking is, it is for the alternate raw material also, as well as for that value-added products also. Both we are using the same pilot plant?
Rajen Jhaveri
Which value-added product? Value-added product part is already completed. We are now talking of another set of, that 40,000 earmarked capacity only, for the pilot plant.
Damodar Baliga
Correct, pilot plant. So, what I am saying is, so you — the pilot plant is same for both these purposes or it is different for each one of them?
Rajen Jhaveri
From that raw material, we are going to make two products, which are novel products. Again, we will be among the first in India. That is what we are talking of from one raw material, two finished products.
Damodar Baliga
Okay. Got it, sir. Got it. Thank you very much, sir. And wish you all the best.
Rajen Jhaveri
Thank you.
Operator
Thank you. Ladies and gentlemen, we will take this as the last question. I now hand the conference over to the management from Fairchem Organics Limited for closing comments.
Rajen Jhaveri
Thank you all for participating in this earnings conference call. I hope we have been able to answer your questions satisfactorily. If you have any further questions or would like to know more about the company, please reach out to our IR Manager, M/s. Valorem Advisors. We once again feel sorry that our CMDC, Nahoosh bhai could not remain present to answer the questions of the participants. Thank you.
Operator
[Operator Closing Remarks]