IOL Chemicals and Pharmaceuticals Limited (IOLCP) Q2 FY23 Earnings Concall Transcript

IOL Chemicals and Pharmaceuticals Limited (NSE:IOLCP) Q2 FY23 Earnings Concall dated Nov. 15, 2022

Corporate Participants:

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Pradeep Khanna — Chief Financial Officer

Analysts:

Venkat — 3Sigma Financials — Analyst

Unidentified Participant — — Analyst

Shaikh Mohammed Ayaz — Private Investor — Analyst

Bezad Deboo — Systematix Group — Analyst

Govindlal — Private Investor — Analyst

Mahesh Vyas — UTI Mutual Fund — Analyst

Niharika — Aequitas Investments — Analyst

Anupam Agarwal — Lucky Investment Managers — Analyst

Gautam Gosar — Perpetuity Ventures LLP — Analyst

Chaitanya Chinmayi — Private Investor — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to Q2 FY ’23 Earnings Conference Call of IOL Chemicals and Pharmaceuticals Limited.

From the management, we have with us Dr. Sanjay Chaturvedi, Executive Director and CEO; Mr. Pradeep Khanna, Chief Financial Officer; and Mr. Abhay Raj Singh, VP and Company Secretary. [Operator Instructions]

Before we begin, I would like to mention that some of the statements made in today’s discussion may be forward-looking in nature and may involve risks and uncertainties.

I will now hand the conference over to Dr. Sanjay Chaturvedi for his opening remarks. Thank you, and over to you, sir.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Thank you. Good afternoon, everyone. We welcome you to our Q2 and H1 financial year ’23 earnings call.

I trust you have all gone through our financials and the investor presentation that is available on exchanges as well as on our website. I would like to share some insights on the global economic growth and Indian market before we dwell into your Company’s performance for the second quarter. Then my colleague, Mr. Pradeep Khanna, our CFO, will take you through our financials, post which, we will open up the forum for Q&A session.

So, the global economy is going through a roller-coaster ride as the central banks battle inflation through rate hikes. So, though the commodity prices have softened in the last few months, the developed markets are still facing very high inflation and, thereby, prompting central banks to take very stringent steps. In the United States, the Central Bank, the Federal Reserve, last week, approved fourth straight rate hike to 4%, the highest Fed rate since 2008 crisis. Hong Kong and Norway have followed suit, raising the benchmark rates to 4.25% and 2.5% respectively. This was followed by Bank of England raising interest rate to 3%, the biggest rate rise in three decades. With central banks still chasing inflation, the global growth outlook has weakened within International Monetary Fund forecasting global growth at 3.2% in 2022 and 2.7% in 2023, down from 6% in 2021, in its latest global economic outlook.

Apart from inflation, the global trade and investor sentiments are also impacted by uncertainty over Russia’s invasion of Ukraine and the resulting trade imbalances. Frequent lockdowns in China following a zero-COVID policy is further destabilizing the global supply chains. These global challenges have led to broader and sharper than expected slowdown, alleviating the cost of living crisis, as the IMF report said.

Back home, the Indian economy, despite global uncertainties, is recovering as is evidenced from numerous factors like factory growth, manufacturing, Purchasing Managers’ Index, optimism around fresh hiring and overall demand scenario. The Indian economy has showed resilient towards persistent high inflation and has clearly emerged as an outlier with private capital expenditure expected to surge in the next half of the current financial, as companies gear up to increase production and to add inventories to fulfill the growing demand.

The optimism for the Indian economy is high in global investor community as well, which is shown by continuous FII inflows into the equities market. For the Indian market, there are factors that are a blessing in disguise. API is one such opportunity. While the world has looked at China so far for API, the supply disruptions amidst the COVID-related lockdowns is opening up a grand opportunity for the Indian API players who are finding robust export inquiries. We believe that this situation is likely to persist over the next few quarters as Indian players vie for the Chinese share.

For the Pharmaceutical segment, we continue to derisk and reduce the ibuprofen business and increase the share of the non-ibuprofen API business and other intermediates. Currently, the Company is focusing on growing metformin, clopidogrel, fenofibrate and doing capacity additions to grow our market share in some of these molecules.

In the Specialty Chemicals segment, the Indian players are trying to stabilize with commodity import price cooling off to certain extent. We believe that the rise in energy and commodity prices is temporary and hence we’ve tried to enlarge [Phonetic] some portion of it and some of it has been passed along to customers. As mentioned in our last call, we are in the process of setting up new capacity for both specialty chemicals as well as pharma products. By the time the capacities are up and running, we expect the headwinds to subside and, therefore, give us an edge in terms of operational efficiency and higher margins with increased production.

During the quarter, we registered the REACH Certificate for Ethyl Acetate and with the tonnage band of more than 1,000 tons per annum in according to EU REACH regulations on the chemicals and the safe use. This certification allows the Company to export ethyl acetate across all countries in the European Union. Last week, we also received the EDQM certification to supply pantoprazole sodium as well as API in the European markets.

With this, I would like to hand over to my colleague Mr. Pradeep Khanna, our CFO, who will be sharing financials in detail. Over to you, Mr. Pradeep.

Pradeep Khanna — Chief Financial Officer

Thank you, Dr. Sanjay. Good afternoon, everyone, and thank you for joining us today to discuss our performance for the second quarter ended September 30, ’22. I will take you through financial highlights for the second quarter and first half of financial year 2023.

The total income of the Company in second quarter of financial year ’23 stood at INR546 crores as against INR540 crores in the corresponding quarter of financial year ’22 and INR570 crores in previous quarter ended June ’22.

EBITDA for the quarter was INR37 crores as against INR54 crores in the corresponding quarter of financial year ’22 and INR61 crores in quarter one of financial year ’23.

EBITDA margin for the quarter was 6.7% as against 10.7% in the previous quarter.

Net profit in the second quarter was INR15.70 crores as against INR31 crores in the corresponding quarter of the last year and INR35 crores in the quarter first — one of financial year ’23.

With this, we open the forum for question-answer session. Thank you very much.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Venkat from 3Sigma Financials. Please go ahead.

Venkat — 3Sigma Financials — Analyst

Thanks for the opportunity. Sir, for the last several quarters, our margins has been coming down. So, what is the challenge? Are we not able to pass-on the price or what kind of challenges are we facing? Now that the raw material prices also have come down and trade prices have come down substantially. So, is there some problem in product mix or what kind of challenges are you facing, if you can throw some light?

And also, if you look at the sales numbers also, they are somewhere around INR550 crores. So, it looks like there is some scalability issue also we are facing.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Okay. So, let me — there are two questions you’ve asked; one is on the profitability as it relates to raw materials, and the second has got to do with scalability. So, let me talk about the second point first. On scalability, there is no issues in our business. We have two divisions; on the chemical side and the pharmaceutical side.

The chemicals business is capped in terms of volume, because the capacity expansion that we are doing hasn’t come on stream yet. So, the revenue that we get on the chemical side depends entirely on the price offs, our key product that is ethyl acetate. Okay? If you look at the price of ethyl acetate in Q1 versus Q2, the price corrected by about 14%. And that’s the reason you see the dip in sales for the Chemicals segment.

If you look at our Pharmaceutical segment, the Pharmaceutical segment has actually grown. Okay? And, that growth is related directly to the volume and the asset utilization on the pharmaceutical side. So, we are addressing the scalability issue by actually adding capacity on the chemical side, and there is no scalability issue on the pharmaceutical side.

Now, let me come to the profitability part. You are right in saying that now the raw material prices seem to have stabilized, but a lot of the raw materials that we buy along with our peers are actually imported and, therefore, these orders are placed months in advance. So, if you look at the chemical side, our key raw material, acetic acid, between Q1 and Q2, the acetic acid price has corrected by as much as 40%. And what that meant was that during quarter two, we were left with a lot of inventory of acetic acid that we had actually purchased towards the end of Q1 at a much higher price. And in these kind of commodity products, it’s not easily possible to pass on the entire cost increase.

So, if you look at the corresponding quarter for Q1 in the previous financial year, you will see that the Chemicals business has shown huge profitability, and that was because the prices of raw materials had actually gone up, so we benefited in that quarter, because we had a lot of inventory at a lower price. So, when you look at chemicals, in some quarters you will come out ahead, in some quarters you will come out behind, but on an average, it is reasonable to expect that your EBITDA margins will be maybe 6% to 8% range.

On the pharmaceutical side, the raw material prices, we’ve been able to pass along and actually that is a business that is also running at about almost double-digit EBITDA margins. Yes, with our asset utilization going up, we expect these margins to go up as well. And the industry — the API industry, if you look at overall Q2, all our peers and competitors has highly muted numbers. And I think with the exception of maybe one large API player, almost eight or 10 API players that have benchmarked have all degrown their profit quarter-on-quarter.

But I think it is good to understand what is the baseline and I would say that running an API business at about 15% EBITDA margin is a reasonably good quality business, and we will get there by the end of this year.

Venkat — 3Sigma Financials — Analyst

And how would the growth numbers look sir from next quarter next year? So, earlier we used to give a 15% growth projection actually. So, what — are we on the track or we are not going to be there?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

This year we are going to show some muted growth in the single-digits, but next year going forward, in the next financial year, we are very confident of double-digit growth in terms of value, not just volume.

Venkat — 3Sigma Financials — Analyst

Okay. Sir, my second question is on specialty chemicals and chemicals, where we are talking about EBITDA margin of 6% to 8%, while the cost of funds itself is getting closer to like double digit. Sir, do you actually see value in expanding the capacity or do you find justification like returning that money to shareholders? The management itself is a big shareholder as you might — they might be benefited with that. So, 6% to 8% is not [Phonetic] even covering the cost of capital actually or close to cost of capital.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

It’s an excellent question. If I were borrowing capital at 6% to 8% to run this business, then you’re absolutely right. But I am currently a zero-debt company and meeting all my cost through internal accruals, so I’m not really — this is a notional cost or the cost of borrowings as far as this business is concerned. And one is, of course, running the business, the other is customers. So, there are lot of customers who buy from me not only the specialty chemicals but APIs as well.

We cannot take long-term business decisions based on quarter-by-quarter performance. I mean, imagine for a moment that I have a very large pharmaceutical customer who is buying ethyl acetate along with APIs and I walk up to this customer and tell him that “Look I understand you have been buying with me for the last 10 years, but today this quarter, I’m not making money, so I’m stopping production.” [Speech Overlap]

I’m trying to sensitize you that there are larger issues at play when you are dealing with large pharmaceutical customers who buy a range of products that includes specialty chemicals and intermediates and APIs.

Venkat — 3Sigma Financials — Analyst

No, there are two aspects that I wanted to mention, sir. Quarter-on-quarter, we have been discussing about chemicals and specialty chemicals, what you call, EBITDA less than or probably in single digit. So, this is not specifically quarter-related problem. And the second point is we are adding capex on top of the existing capacities actually on something which has such as low capex — sir, such a low EBITA. So, that is where my thought process comes actually.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, I am not actually adding a new plant for this right now. The capacity that I’m adding is — I’m augmenting my existing capacity at very modest capex that I am funding through internal accruals without taking debt.

Venkat — 3Sigma Financials — Analyst

Okay. So, you find justification in giving value to the customers, so that is the value add that you are providing by adding the capacity and functioning of chemicals and specialty chemicals?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Yes.

Venkat — 3Sigma Financials — Analyst

Okay, fine. Thank you. I don’t have any further questions.

Operator

Thank you. Next question is from the line of Avinash Kumar from [Indecipherable]. Please go ahead.

Unidentified Participant — — Analyst

Good evening, Mr. Chaturvedi.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Good evening.

Unidentified Participant — — Analyst

Sir, my question is regarding the expansion that we have planned. By when the capacity would be upstream? And how much revenue are we going to generate from that capacity expansion?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

See, the current capacity expansion that we’re doing in our existing site is roughly around 20,000 tons a year. And depending on what the price of ethyl acetate could be, if the price of ethyl acetate is INR100 a kilo, that should add INR200 crores, and if it is INR80 a kilo, it should add about INR160 crores.

Unidentified Participant — — Analyst

Sir, actually my question was regarding the expansion which you had planned in the west side of India.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Okay. So, that exercise is still ongoing. We have contracted some credible partners to identify the site for us. And I think it would take maybe Q4 before we are able to conclude what we are going to do and at what scale we are going to do.

Unidentified Participant — — Analyst

Okay, sir. Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Shaikh Mohammed Ayaz, individial investor. Please go ahead.

Shaikh Mohammed Ayaz — Private Investor — Analyst

Good evening, sir.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Good evening.

Shaikh Mohammed Ayaz — Private Investor — Analyst

So, sir, what margins we can expect from next two quarters, EBITDA margins?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, I think it is reasonable to say that in the next two quarters, we’ll be back into the double-digit margins as far as EBITDA numbers are concerned.

Shaikh Mohammed Ayaz — Private Investor — Analyst

Sir, you told that most of the companies’ EBITDA margin has been reduced, but if you see Neuland Laboratories, Granules, Gujarat Alkalies, no one — Solara has reduced their loss, it was — last quarter, they have made loss, sequential loss, but now they have reduced their loss. But while comparing to that, we have saw degrowth in terms of EBITDA margins. I understand it is because of the chemical division only, but due to the reduced cost of raw material and shipping costs, there should be some improvement. I was expecting some improvements in margin. From last two quarters, you are telling that we will be back to double-digit margins, but since then I haven’t seen those kind of margins.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Yes. So, I think that recovery has been delayed a little bit. And you talked about some of the other players where their business model is somewhat different. So you talked about companies that are actually not in — they are not pure-play API companies, they are a combination of formulations and APIs, and some of them have a very strong CRAMS business. And as you know CRAMS and formulation businesses run at significantly higher margins compared to API businesses, but they also carry very different type of risks associated with those.

So, if you really compare us within — apple-to-apple, within the pure-play API segment, I think we are pretty much in line with the industry. And I’m very confident that in Q3 and Q4 — actually if you look at our performance this quarter also, at least the API business has already delivered double-digit EBITDA margin, and that’s going to improve significantly in Q3 and Q4. And what we also expect an improvement in the performance on the chemical side as well.

Shaikh Mohammed Ayaz — Private Investor — Analyst

The next question, sir, if you see investor-friendly company, there will be bonus, there will be split, there will be buyback, but when I see in your company, nothing has been done since listing of the Company. I think the price issue has been done once, but among others nothing has been done. So — and if I see companies which are really confident in their business, they are increasing their stake as a promoter, but I can’t say anything in your company, sir.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, we’ve not initiated any buyback, but I think there are many ways to look at confidence in the business, buyback is certainly one, but I would argue that the ability to put capex and the ability to invest money into R&D, the ability to invest money into human capital, there are lot of ways to look at management confidence in the Company. And this is actually a year I would argue that we spent more on capex than any other year. And in fact, a lot of the capex spend that we’ve done has gone into things like EHS to take care of the environment, into warehousing. These are investments into capex that don’t necessarily translate directly into revenue, but to me, they are as strong of an indicator as our buyback program.

Shaikh Mohammed Ayaz — Private Investor — Analyst

Okay, sir. Thank you.

Operator

Thank you. [Operator Instructions] Next question is from the line of Bezad Deboo from Systematix Group. Please go ahead.

Bezad Deboo — Systematix Group — Analyst

Yes, hi. So, what is — for this quarter, what is your utilization in ibuprofen and Iso Butyl Benzene?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Okay. So, I can tell you about the ibuprofen. My current asset utilization is about 75% of — between 75% and 80%. And next few quarters, I will take that to about 85%.

Bezad Deboo — Systematix Group — Analyst

Okay. And you are adding additional capacities on the chemicals front. So, when can we expect that to come online?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, that should come online by the end of this financial year. So, we will see accruals from that business in the Q1 of next financial year.

Bezad Deboo — Systematix Group — Analyst

Okay. Thank you very much.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Okay.

Operator

Thank you. The next question is from the line of Govindlal, Individual Investor. Please go ahead.

Govindlal — Private Investor — Analyst

Good evening, sir.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Good evening.

Govindlal — Private Investor — Analyst

Thanks for the opportunity. I got only one question, sir. In last call, closing comments, you have told that IOL have come out with a strong set of numbers, and these will only improve hereon. This is almost in middle last quarter, past the 40 days. So, now the results have come, EBITDA is 40% down, margins are down 4%, PAT is down 65%. So, how should we believe, sir, going forward, what you are guiding, it will be done? When middle of the quarter, you know your business better after 40 days have been gone in quarter, you don’t have visibility of another 40 days also. So, how should we believe management? That’s what I’m asking, sir. You know your business better, when you told that it will be improved from hereon, but it has degrown, that is also 40%, 50%, not 10%, 20%.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Understand. It’s a valid concern. And I would say, look at our business as a deconvolution of two different segments, one is on the chemical side and the other is on the pharmaceutical side. Most of the dip in performance has been on accord of actually the chemical front. That’s a business where not only did I lose profitability, I actually went into a loss for the quarter, because on account of a huge inventory of the raw material at a much higher price. That has since been corrected. And also the energy costs have gone up since the last quarter. So, my pharmaceutical business is still delivering double-digit margins. And now my focus in Q2 and Q3 is to completely turn around the chemicals business for which I already have the visibility.

And so, if I look at the pharmaceutical business through better control on costs and better utilization of the assets, but now as you’ve seen through our presentation, we’ve gotten regulatory approval for more and more products. See, the India business for most APIs is actually a very spot business, whereas the real money for API is when you export into regulated markets. As we grow that side of the business and the lead indicator for that are more and more approvals that you have on the CEP side and approvals from other European markets. So, those are lead indicators. And today, we are very confident that, as an average, we will come back into double-digit EBITDA margin from next quarter onwards.

Govindlal — Private Investor — Analyst

Thank you very much, sir. Only my request is that, as investors, we depend upon your guidance, all that, and we take investment decisions. So, better to be a little conservative in guiding us, that will be very helpful, sir.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Sure.

Govindlal — Private Investor — Analyst

Build in some all these contingency in your guidance always. Don’t built in rigid scenario, build some contingency also. Thank you very much.

Operator

Thank you. Next question is from the line of Mahesh Vyas from UTI Mutual Fund. Please go ahead.

Mahesh Vyas — UTI Mutual Fund — Analyst

Yes, just a couple of questions I have on our imports. What percentage of total consumption is from import? And what percentage of import is there from China? And the percentage of import excluding DCDA, because anyways — any which way we are dependent on DCDA on China?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Yes. So, I think if I look at on the chemical side, roughly 70% is imports, okay? If I look at the pharmaceutical side and if I take out DCDA, then I would say that number would be maybe 15%.

Mahesh Vyas — UTI Mutual Fund — Analyst

15%?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Yes, 1-5, between 15% to 20% would be total imports, not including the DCDA.

Mahesh Vyas — UTI Mutual Fund — Analyst

Okay. And any dependence on particular suppliers?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

No. For every product that we import, we have multiple suppliers.

Mahesh Vyas — UTI Mutual Fund — Analyst

Okay. And I mean, outside India, including China, what percentage of import of total business?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Can you repeat your question?

Mahesh Vyas — UTI Mutual Fund — Analyst

In total import percentage of business, including pharma and chemical, both? Total…

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Yes, maybe around 40% or so.

Mahesh Vyas — UTI Mutual Fund — Analyst

Okay. So, we are 40% dependent on imports.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Imports, yes.

Mahesh Vyas — UTI Mutual Fund — Analyst

Yes, okay. Sure. Thanks.

Operator

Thank you. The next question is from the line of Niharika from Aequitas Investments. Please go ahead.

Niharika — Aequitas Investments — Analyst

Hi. Thank you for the opportunity. I just had questions on…

Operator

Niharika, may I request you to speak a little louder, please?

Niharika — Aequitas Investments — Analyst

Hi, am I audible?

Operator

Yes.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Yes.

Niharika — Aequitas Investments — Analyst

Yes. So, my question is regarding ethyl acetate, the prices which were there in quarter two, and how are they moving now? And also for the acetic acid, how are they in quarter two, and how are you seeing it in current scenario?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, the prices of ethyl acetate in Q2 versus Q3 have been fairly flat. And the prices of acetic acid have shown a marginal dip, but the real change happened between Q1 and Q2, and not between Q2 and Q3.

Niharika — Aequitas Investments — Analyst

Okay. And how are you seeing the demand scenario? Because there was some con call, they said that China is dumping a lot of ethyl acetate in Europe, and that’s why the demand is going down. So, how are you seeing the demand in India currently?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, I’ll break down the demand into two geographies, one is domestic and the other is outside India. In the domestic demand, there is not much disruption. We don’t have too much ethyl acetate being imported from China. But clearly, in the overseas markets, the Chinese have been gaining market share, but that does not again impact us too much, because traditionally, historically, IOL has not exported a lot of ethyl acetate to Europe.

Niharika — Aequitas Investments — Analyst

And — so currently, how much of ethyl acetate are we exporting or it is negligible?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Our current exports of ethyl acetate is roughly around 20%.

Niharika — Aequitas Investments — Analyst

Okay. And once this capacity expansion is live and how are we seeing the — it to get absorbed in domestic market? Because…

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, we are very confident that roughly 70% to 80% of that will get absorbed to the domestic market, and the balance will go to the exports of our regular export customers.

Niharika — Aequitas Investments — Analyst

Are there any new players coming in for ethyl acetate? And do you think the demand would get absorbed, like the supply would get absorbed in domestic market?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

No, we are not aware of any new players coming into ethyl acetate with scale.

Niharika — Aequitas Investments — Analyst

Okay, fine, sir. Thank you. That was it from my side.

Operator

Thank you. Next question is from the line of Anupam Agarwal from Lucky Investment Managers. Please go ahead.

Anupam Agarwal — Lucky Investment Managers — Analyst

Yes, hi, sir. Good evening. Thank you for the opportunity. Can you hear me?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Yes.

Anupam Agarwal — Lucky Investment Managers — Analyst

Yes. Sir, you mentioned in your first question — the first participant’s question about higher inventory — high-cost inventory in our chemicals business. So, is it possible for you to quantify what percentage of margin we would have lost in that business because of high-cost inventory?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

No, that would be unfair for me to give you an exact number of how much margin I would have gained if I did not have that inventory, because that is a hypothetical question.

Anupam Agarwal — Lucky Investment Managers — Analyst

Or if maybe on an average basis, if our inventory would have remained at the same level as last year, then how much inventory or how much margin we would have made?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

See, it’s not just the inventory issue, it is the pricing of that inventory really, and what is the relationship of the raw material inventory versus the finished product pricing in the market. The challenge for me is not inventory management, the challenge for me is managing the price at which I sell the end products and the price at which I buy the raw material because that is done a few months in advance. It’s a timing issue more than inventory management issue.

Anupam Agarwal — Lucky Investment Managers — Analyst

Understood.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Believe me, if acetic acid was available domestically through manufacturers in India, none of the ethyl acetate manufacturer will be facing this issue.

Anupam Agarwal — Lucky Investment Managers — Analyst

Got it. Understood. Sir, you mentioned acetic acid prices were 40% down sequentially. How much is it on a Y-o-Y basis?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

On the year-to-year basis, roughly around the same, maybe 40% or so. But the thing is, these prices came down not over a period of one year. These prices came down over a period of weeks.

Anupam Agarwal — Lucky Investment Managers — Analyst

Understood. Sir, just a question on metformin. What is our capacity utilization? And have we seen some change in pricing on metformin?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, metformin is one of those dynamic products where you will see change in pricing, if not, month-on-month, at least quarter-on-quarter, depending entirely on what is the DCDA import price. So, if I look at historically, these prices used to be in the domestic market below INR300 a kg. And then they went up to INR400, even beyond INR400 a kg, then they came down to about INR330, INR340 levels, and they still continue to be in the INR320, INR330 levels even now. Our asset utilization is above 90%.

Anupam Agarwal — Lucky Investment Managers — Analyst

Understood. And any plans of expanding capacity in metformin?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

No, not yet.

Anupam Agarwal — Lucky Investment Managers — Analyst

Right. And what percentage of metformin is sold in domestic market versus exports?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, currently, most of it is domestic for us. I would say, about maybe 10% is into the export market right now.

Anupam Agarwal — Lucky Investment Managers — Analyst

And any price differential between export and domestic market?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Most certainly, there is a significant price differential and that’s the whole reason why we filed for regulatory approvals both in US as well as Europe. And our focus is to improve the share of our business. So, you asked about, am I planning to add capacity? No, I’m not planning to add capacity, I’m actually planning to shift the quality of customers and go more towards the regulated markets.

Anupam Agarwal — Lucky Investment Managers — Analyst

The price difference would be anywhere about 20%, 25% or higher than that?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Well, I would say it’s at least 20% depending on the customer and volume.

Anupam Agarwal — Lucky Investment Managers — Analyst

Got it. Understood. Sir, lastly, on the capex, are we still sticking to the INR100 crore, INR150 crore capex guidance per annum?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Yes.

Anupam Agarwal — Lucky Investment Managers — Analyst

Understood. Sir, lastly, any update on PAP project, if you can give some color as to what is the quality we are achieving right now, or…?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Can you repeat your question? I missed out that. I missed that out.

Anupam Agarwal — Lucky Investment Managers — Analyst

The update on the PAP project, Para Amino Phenol?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Okay. So, we are making our own Para Amino Phenol and the paracetamol that we make is through our captive PAPs. I went through all the quality issues. And there is no issue in terms of making our own PAP and making our own paracetamol from PAP.

Anupam Agarwal — Lucky Investment Managers — Analyst

Understood. Sir, what is your guidance you would be giving on the non-ibu side, what is the kind of topline you want to achieve, let’s say, two years down the line? We’re at about INR500 crores in FY ’23. What is your sense, given the new pipeline is largely non-ibu and higher-margin products, what is your sense there?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

I would say in the next two years, one should expect that the non-ibuprofen portfolio will exceed the revenues from the ibuprofen portfolio.

Anupam Agarwal — Lucky Investment Managers — Analyst

Understood. Any price change in ibuprofen we have seen? Or is there still about $11 or something?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, the price is still between $11 and $12 for the export market, and it’s slightly lower for the Indian market and that pricing continues to be stable.

Anupam Agarwal — Lucky Investment Managers — Analyst

Understood. That’s all from my side. And thank you, and wish you all the best.

Operator

Thank you. Next question is from the line of Gautam Gosar from Perpetuity Ventures LLP. Please go ahead.

Gautam Gosar — Perpetuity Ventures LLP — Analyst

Hi, thank you for the opportunity. I have a few questions on ibuprofen. So, I wanted to know your market share in terms of capacity and in value terms for ibuprofen?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

I can give you the market share in capacity terms. We have roughly one-third of world market share, so that’s roughly about 33% or so of capacity and market share. Because we are also backward integrated, we are supplying some of these intermediates to some other ibuprofen manufacturers. So, if I add that in, you can maybe add — I think it would be fair to say that through a combination of API and intermediates, we command maybe upwards of 50% market share.

Gautam Gosar — Perpetuity Ventures LLP — Analyst

Okay. Got it. And so, what would be a monthly run rate for ibuprofen currently?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, our monthly run rate is, we are running at about 75%, 80% of capacity. So, roughly around 800 tons a month.

Gautam Gosar — Perpetuity Ventures LLP — Analyst

Okay. And do we look to like increase it at a monthly rate?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, we are looking to improve the run rate, but I’m not looking to add capacity into a ibuprofen right now.

Gautam Gosar — Perpetuity Ventures LLP — Analyst

Okay. Got it. That is helpful. Thank you.

Operator

Thank you. Next question is from the line of Chaitanya Chinmayi, Individual Investor. Please go ahead.

Chaitanya Chinmayi — Private Investor — Analyst

Hi, good evening, Dr. Chaturvedi. My first question, the acetic acid raw material inventory, which is corrected right now, so are we for the current month or for the current quarter, our inventory is on the higher side of the what price or is it ready the corrected value we have right now?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, all the high-value inventory that we had for our chemicals business is exhausted, and we are in line [Technical Issues] inventory and be profitable in the chemicals business, not only for Q3 but also for Q4.

Chaitanya Chinmayi — Private Investor — Analyst

Okay. Thanks, sir. And another one is, you said the capex of the 20,000 ton a year for ethyl acetate, may I know when it will be completed? Apologies if you already answered it?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, the capex for ethyl acetate, the plant should be up and running by the end of the financial year.

Chaitanya Chinmayi — Private Investor — Analyst

Okay. And finally, the last one, sir. What is the overall revenue growth you are expecting for this financial year?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

For this financial year, it should be muted in the single digits. But for the next financial year, we are very confident of double-digit topline growth.

Chaitanya Chinmayi — Private Investor — Analyst

Okay. Thank you.

Operator

Thank you. Next follow-up is from the line of Venkat from 3sigma Financials. Please go ahead.

Venkat — 3Sigma Financials — Analyst

Thanks, again, for the opportunity. Sir, there is some energy issue in Europe, and our biggest competitor has closed one plant, which is in Germany, while he’s running in Texas. So, are we seeing any dynamics in different paracetamol where it has reached like $15 or something or the media information is wrong?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, your information is right. The difference is that the competition that you’re talking about, they do not make ibuprofen in Europe. The ibuprofen is actually made in the US. So, a plant closure in Europe does not impact that.

Venkat — 3Sigma Financials — Analyst

Okay. So, none of the APIs that we are actually manufacturing has any influence on power issues in Europe? Is my understanding right?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Well, not directly, but indirectly, they do, because the power cost has gone up in India as well. If you look at Q1 versus Q2, margins for all pure-play API players, and all API manufacturing requires a significant amount of power what you will see that margins have muted or gone down for almost all the pure-play API players and power has a huge role to play in it.

Venkat — 3Sigma Financials — Analyst

Okay. Sir, my second question is, when I look at our portfolio, the portfolio looks very good actually, when we look at the APIs, and those are like repetitive kind of medication that we take. So, when I look at the growth in our pharma business, plus the inflation, it is not such a substantial increment even in our pharma business. So, are we losing out some customers who are traditionally our buyers or what is happening? Because these are repetitive medicines. Most of the medicines that are — portfolio are kind of repetitive. Are they having kind of overstock, or can you throw some light on that, please?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Yes. So if I look at the portfolio — I mean, let me take the simplest portfolio that I have, which is really ibuprofen, metformin, paracetamol and clopidogrel. In all of these molecules, my current capacity is capped, okay? I have — with the exception of adding some capacity in paracetamol, I really haven’t added any capacity in the last one year. So, my way to improve the business is to actually improve the quality of the business rather than sell more volume.

Venkat — 3Sigma Financials — Analyst

No. Higher volume will translate to — so unless you increase the capacity, you cannot basically increase the revenue the topline. Is that what you’re saying, sir?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

No, what I’m saying is that without increasing capacity, I can improve the quality of the business by selling more and more into regulated markets where I have a higher price realization. So, my revenue actually goes up without addition of capacity. And my profits also go up because all the extra pricing that I get, gets directly into my bottom line.

Venkat — 3Sigma Financials — Analyst

So, coming to capacity. So, yes, one is the regulatory, what you call, approvals that you are going to get, probably you are work in progress, and I’m not going to ask you details on that. But what is the thought process on increasing the capacity of some of these medicines? In the last call, you mentioned there are some medicines which are almost like $100 as well. So, do you see challenge in demand or to increase the capacity, or do you see other challenges actually?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, our focus right now is — see, our bottleneck is not capacity right now, our bottleneck is higher volumes into the regulated markets. So, our focus entirely is on improving the asset utilization and selling the higher quantity that we manufacture into regulated markets, that will improve both the topline as well as bottomline.

Venkat — 3Sigma Financials — Analyst

Okay. But when I look at the medication, I cannot vouch about ibuprofen and metformin and paracetamol. But if you look at other medicines, these medications are expensive even in India. So, you mean to say that the formulations are having a better margin on this one compared to the API players?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Well, I can’t comment on the margin for formulations, but what I can tell you is that the API players in those segments, and I think you are referring to molecules like pantoprazole and a few others, which are higher — or clopidogrels. Here, the profit margins are certainly better when you export into regulated markets where they sell — rather than selling the IP-grade material to domestic formulators.

Venkat — 3Sigma Financials — Analyst

Even lamotrigine also is a higher price medicine.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Yes. Absolutely.

Venkat — 3Sigma Financials — Analyst

So — sorry, I missed your response to that. Can you just repeat that, please?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Yes. What I was saying was that I don’t want to comment on the profitability of formulators, but what I can tell you is whether you look at lamotrigine, you look at clopidogrel or pantoprazole, the API manufacturers in these products make more money when they export to regulated markets versus selling to IP-grade material in the domestic segment.

Venkat — 3Sigma Financials — Analyst

Okay. So, even gabapentin and all these also, these are like nice product, sir. So, the portfolio looks interesting actually, but at the end of the day, we need to start seeing those numbers translating and that would happen once we get the approvals. Are we looking at US FDA also as — in the road map? Or how are we actually looking?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Absolutely. We already have US FDA — our plants are already US FDA approved, and we have DMF for a couple of products. We continue to file more and more DMF. And as those approvals come in along with the CEP approvals, you will see the share of our business grow both in US as well as Europe, and that will improve both topline as well as bottomline.

Venkat — 3Sigma Financials — Analyst

Okay. So, any new molecules — yes, you mentioned that there are some molecules in pipeline. You want to share which molecules are those in R&D or you want to just wait till those are actually announced?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, we will wait for this announcement, but some of the ones that we’ve already announced is certainly paracetamol where not only have we introduced a molecule last year, but we are also expanding capacity on that molecule, as well as we filed regulatory paperwork for approvals in both US as well as Europe.

Venkat — 3Sigma Financials — Analyst

So, again, when we look at the portfolio and look at paracetamol — sorry for extending the conversation, and I apologize to others who are waiting for the call for their turn. Sir, when you look at the portfolio, the other portfolio looks like they are like high-value and high-volume business, but paracetamol is high volume and low margin business. So, why are we focusing on paracetamol? I’m just trying to figure out what is the strategy behind that.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

I think the strategy behind that is, you’re right, it’s a low margin business if you don’t have backward integration. But if you are completely backward integrated into PAP like us, we make our own Para Amino Phenol, and so, we don’t believe this is a low-margin business.

Venkat — 3Sigma Financials — Analyst

I see. Okay, sir. Thank you very much and good luck. Looking forward for next year.

Operator

Thank you. Next follow-up is from the line of Bezad Deboo from Systematix Group. Please go ahead.

Bezad Deboo — Systematix Group — Analyst

Yes. So, you said your capacity — ibuprofen capacity utilization is around 75% to 80%. So, what is the peak capacity utilization you can reach?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

I mean, in principle, we can reach a peak of about 95% or so.

Bezad Deboo — Systematix Group — Analyst

Okay. And can you give your shares in regulated markets and emerging markets?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

No. At this point, I can’t give you my shares. But what I would like you to understand is the nature of this business is evolving and changing very rapidly. So, a lot of customers in India are buying regulatory grade products that they are converting into formulations and then exporting into regulated markets. In other words, what I’m trying to tell you is even what calls as a domestic sale for me, not all of it is going into the Indian market as formulations, some of it is getting exported to US and Europe and other countries, of course.

Bezad Deboo — Systematix Group — Analyst

Understood. And my last question is on ethyl acetate. What is the reason for such volatility in prices?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Can you please repeat your question? What is the reason for…?

Bezad Deboo — Systematix Group — Analyst

The volatility in the ethyl acetate prices.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

The volatility related directly to the volatility in raw material prices, where the key one is actually acetic acid. So, ethanol has also seen volatility, but perhaps not to the same extent as acetic acid.

Bezad Deboo — Systematix Group — Analyst

Okay. Thanks.

Operator

Thank you. Next follow-up is from the line of Niharika from Aequitas Investments. Please go ahead.

Niharika — Aequitas Investments — Analyst

Hi. So, my question is on the patent which is granted for sitagliptin process from Indian patent office. So, just wanted to some more detail on it? And will we be able to get some share from other players, domestic players, from this of patent? Like how is it going to benefit us?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

See, it will benefit us because it’s a novel process, it’s a novel process that’s a greener process, it’s a novel process that will translate into a cost advantage, the cost advantage should translate into higher market share when we launch the product.

Niharika — Aequitas Investments — Analyst

And when are we planning to launch the product?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

This is still under development and validation. So, I think it would be a few quarters out.

Niharika — Aequitas Investments — Analyst

Okay. And on one thing you said that our current bottleneck is selling in percolating and regulated market. So, how are we planning to do that? Like are we very aggressive in filing or how is management pursuing that?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Yes. So, it’s a slow and steady aggression rather than going all out. And what I mean by that is if you look at historically we filed maybe one product a year. Since last year, we’ve increased our filings to at least four products every year. And we think that at a steady state, we can do five to six product filings every year.

Niharika — Aequitas Investments — Analyst

Okay, cool. And on this EBITDA for chemicals, you said that 6% to 8% is a sustainable range for chemical business. I just want to understand, considering our ROE, ROCs upwards of 12% and 13%, don’t you think buy back or something else makes more sense than for me to be okay with 6% to 8% of EBITDA margin? I’m just talking in front — like on point of our capital allocation perspective. I understand it is internal accrual, but it would have an opportunity cost.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Sure. It will have an opportunity cost. And as I was telling earlier that buyback is one of the ways to show confidence that the management has in the business. There are multiple ways to show that confidence. One is through capex. The other is through investment into R&D. Third could be investment into human capital. And all of these things — I mean, our R&D, we’ve more than doubled the expenditure in the last one year. If you look at our capex, this financial year will be the highest ever capex spend that we’ve had. We are in terms of human capital also, we’ve spent a lot of money training and developing and making sure that our leadership, first line and the second line is ready as well.

So, from a pure — what you are talking is a pure finance perspective. The challenge with the other things that I’m talking about is it’s very hard to put a dollar metric and see what the ROI on capex will be or what the ROI on R&D will be. But those are more long-term initiatives, and we believe that in order to build a sustainable business and a sustainability not just in terms of the environment, but sustainability in terms of business growth, in terms of business stability, in terms of the profits in the business, we believe it is important to invest in people, in technology, in R&D and also in capex.

Niharika — Aequitas Investments — Analyst

Okay. That is it from my side. Thank you.

Operator

Thank you. Next follow-up question is from the line of Anupam Agarwal from Lucky Investment Managers. Please go ahead.

Anupam Agarwal — Lucky Investment Managers — Analyst

Thank you for the follow-up. Sir, my question is on the intersegment line item. We were about INR25 crores, INR30 crores in FY ’21, which is now about INR115 crores in H1. What exactly is the line item? And if you could explain what — how should we look at the trajectory going ahead?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Yes. So, that is really — the internal line item is related to Isobutylbenzene, monochloroacetic acid and acetyl chloride. This is the business where we make on the chemical side and then do a transfer pricing to our pharma business.

Anupam Agarwal — Lucky Investment Managers — Analyst

Understood. So, should we — I mean, this should be around INR200 crores every year, or does it also depend on the pricing?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Yes. I think it depends on the pricing. It depends on the volume. But it will be in the INR150 crores plus/minus every year.

Anupam Agarwal — Lucky Investment Managers — Analyst

Understood. Sir, just on the REACH Certificate, I mean, congratulations to you for getting the certificate. What kind of spends are we making per annum on this REACH Certificate for getting approvals, product registrations in Europe and other regulated markets?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, the REACH certification spend is pretty modest, but it’s not something that is a very large number. But what it does is it opens up opportunities and doors for you to export into Europe. And if I look at today, the timing does not seem right because the Chinese have crashed the ethyl acetate [Phonetic] prices. So I think in the next one quarter or so, I would not be looking at any generating large volume business in Europe. But I think more than the spend what it demonstrates to customers is the intrinsic capability and the strength of the manufacturing team that is supporting the front end.

Anupam Agarwal — Lucky Investment Managers — Analyst

Got it. Sir, lastly, just trying to understand, I was going through numbers over the last three, four years, in fact, 15, 20 quarters. Our pharma business’s topline has ranged between INR250 crores to INR300 crores, but on the other hand, our EBIT margins have drastically fallen to single digits. You mentioned that incrementally, our pipeline is the higher-margin business, which is translated to non-ibu other API business. which is now accounting for about 22%, but it’s not really translating on the margins front. Does this signify that ibu business margins have fallen drastically to sub 15%?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, I would have two points you should focus on. One is certainly, in ibuprofen, because of the price decrease, there has been some fall in the profitability of the ibuprofen business. But the other point is that as we grow the non-ibuprofen business, I need to reach that asset utilization beyond the critical point for that to turn profitable. And the second part there is, I also need to turn a significant portion of that business away from just the plain domestic market to get higher profitability.

So, the challenge for not only for us, but anyone building API business from the ground up is, first, you build the manufacturing plant, and your first objective is to run that plant to as high asset utilization as possible. And that typically comes from the domestic business first, where your margins are actually very low. And as you parlay that volume more and more into regulated markets, that’s when the profitability of that plant starts to grow.

Anupam Agarwal — Lucky Investment Managers — Analyst

Got it. Sir, two questions related to this. At INR240 crores in H1, what is the kind of asset utilization in non-ibu business? And what is the kind of EBITDA growth even at INR240 crores?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, asset utilization is currently in the range of 50% plus/minus. Some plants are running at 70%, some are running at slightly below 50%. And I think going forward, once that number goes above 60% overall, 65%, that’s when the profit churn really starts to happen.

Anupam Agarwal — Lucky Investment Managers — Analyst

So, does this mean that we’re still at EBITDA negative in the non-ibu business?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, we are almost neutral now.

Anupam Agarwal — Lucky Investment Managers — Analyst

Understood. Got it. Thank you so much, and bye.

Operator

Thank you. Next follow-up is from the line of Mahesh Vyas from UTI Mutual Fund. Please go ahead.

Mahesh Vyas — UTI Mutual Fund — Analyst

Am I audible?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Yes. Yes, Mahesh, you are audible.

Mahesh Vyas — UTI Mutual Fund — Analyst

Yes. Sir, can you take me through your chemical business, I mean how you have been through to the business till now and what you expect from a long-term horizon point of view, let’s say, three to four years?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

Okay. In the last three to four years, I would say that my capacity — I’m again focused on the primary product, which is ethyl acetate that dominates my chemicals business. I do about 100,000 tons. So, if the price of ethyl acetate is INR1,000 — I mean, if at INR100, I’ll have a INR1,000 crore business. If it is INR80, I’ll have INR800 crores topline. So, that’s the range in which the chemicals business will operate. And what I’m doing now is I just expanded that capacity by about 20%. So, next financial year, you should expect a 20% higher number in topline from that business.

Mahesh Vyas — UTI Mutual Fund — Analyst

Okay. And what EBITDA margins you expect from here?

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So that business should consistently give me around 6% to 8% EBITDA.

Mahesh Vyas — UTI Mutual Fund — Analyst

Okay. Sure. Thanks.

Operator

Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to Dr. Sanjay Chaturvedi from IOL Chemicals for closing comments.

Sanjay Chaturvedi — Executive Director and Chief Executive Officer

So, thank you all very much for joining us today and listening to us on the second day of our quarter results season.

As we discuss the Indian economy is emerging as the green shoot amidst slowdown globally. However, the domestic pharma and specialty chemicals have their own challenges. And the companies in both these segments have their own armor to fight these battles. Here at IOLCP, we are dependent on derisking our business. We are adding more and more APIs to our portfolio and backward integration to really increase market share and build a robust and sustainable growth trajectory.

With this, I would like to conclude the call. Thank you all, and have a nice day.

Operator

[Operator Closing Remarks]

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