IOL Chemicals and Pharmaceuticals Ltd (IOLCP) Q2 FY22 Earnings Concall Transcript

IOL Chemicals and Pharmaceuticals LTd (NSE:IOLCP) Q2 FY22 Earnings Concall dated Nov. 16, 2021

Corporate Participants:

Monish Shah — Vice President, Research

Sanjay Chaturvedi — Chief Executive Officer

Pardeep Khanna — Chief Financial Officer

Analysts:

Ashish Rathi — Lucky Investment Managers — Analyst

Bherushankar Revashabnkar Vora — Third Eye Realty & Consultants Private Limited — Analyst

Muhammad — Aman Investments — Analyst

Bobby Jayaraman — Falcon Investments — Analyst

Chintan Chheda — Quest Investment Advisors — Analyst

Khushdil Virdi — ICICI Bank — Analyst

Bharat Sheth — Quest Investment Advisors — Analyst

Dhaval Pandey — — Analyst

Ashik Koshy — — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Q2 FY’22 Earnings Conference Call of IOL Chemicals and Pharmaceuticals Limited, hosted by Antique Stock Broking Ltd. [Operator Instructions]

I now hand the conference over to Mr. Monish Shah from Antique Stock Broking. Thank you, and over to you, sir.

Monish Shah — Vice President, Research

Thank you, Margaret.

Good afternoon and welcome to IOL Chemicals and Pharmaceuticals quarter two and H1 FY’ 22 results conference call. Today, on the call we have Dr. Sanjay Chaturvedi, CEO; Mr. Pardeep Khanna, CFO; and Mr. Abhay Singh, VP and Company Secretary. I now hand the call over to Dr. Chaturvedi for his opening comments.

Thank you, and over to you, sir.

Sanjay Chaturvedi — Chief Executive Officer

Thank you, Monish.

Good afternoon, everyone. I thank you all for taking the time to participate in this earnings call. Trust you’ve all had the time to read the earnings document, and I’m certain you will have many questions. But before we take up these questions, I would like to shed some light on the industry, what is our business and kind of share my perspective on the performance for the quarter that has gone by. And subsequently, my colleague, Mr. Khanna, the CFO, will provide a lot more granular details on the financial performance.

So this past quarter has been one of the most challenging times for the pharma industry. APIs in particular had been negatively impacted due to the increased raw material prices, the rising energy and logistics cost. Demand and volatility have further added to the woes. We believe that these to be temporary phenomena and this is not a structural change in the market. Therefore, we do expect that this will correct itself in the coming quarters. During this quarter, we successfully received the approval of the Korean Ministry of Food and Drug Safety, the Korean FDA, for the Company’s API products of ibuprofen and fenofibrate. The approval of the Korean FDA reestablishes the Company’s efforts in keeping the highest quality standards and to increase our presence in the regulated markets. This will strengthen our presence in the South Korean market.

Coming to financials. The Company had a muted growth during the quarter. The margins have been in stress on account of volatile input costs and a relatively flat demand in ibuprofen. Despite the strong headwinds, the Company made good progress in some areas. The Chemicals division continues to demonstrate a stable business with respect to volume. The business for non-ibuprofen APIs have delivered strong growth and overall we have regained business in export markets compared to the previous quarter.

With this, I would like to hand over to my colleague, Mr. Pradeep Khanna, the CFO, who will be talking more in detail.

Over to you, Mr. Pradeep.

Pardeep Khanna — Chief Financial Officer

Thank you, Dr. Sanjay.

Good afternoon, everyone. A warm welcome to IOLCP second quarter financial year earning call. I will take you through mentioned highlight for the quarter two financial ’22.

The total revenue for the quarter increased by 2% to INR548 crores as compared to INR538 crores in quarter first of financial year ’21. In quarter second of financial year ’22, EBITDA was at INR63 crores and in first half of ’22 was at INR170 crores. Similarly, EBITDA margin in quarter second of financial year ’22 stood at 10% and 16% for first half of ’22. Depreciation for the quarter was INR11 crores and INR21 crores for first half ’22. Profit after tax for quarter second of financial year ’22 stood at INR31 crores and INR98 crores for first half of ’22. PAT margin for second quarter was 5.6% and for first half of ’22 was at 9.1%.

With this, I would now request the moderator to open the forum for question-and-answer session. Thank you very much.

Questions and Answers:

Operator

[Operator Instructions] The first question is from the line of Ashish Rathi from Lucky Investment Managers. Please go ahead.

Ashish Rathi — Lucky Investment Managers — Analyst

Thank you for the opportunity. I just wanted to check on this whole raw material price increase situation. To my understanding, some companies are saying they had inventory and the real impact is not visible in this quarter and going forward, further and more serious impact will be visible in third quarter and fourth quarter. Where do we stand on that?

Sanjay Chaturvedi — Chief Executive Officer

Okay. So I would say, on the raw material front, there was some increase in raw material pricing. Some of that we have been successfully able to pass on to customers, and that will be reflected in the coming quarters. For some other areas, we are seeing a correction in the raw material pricing already in this quarter. So we do expect that this is a temporary blip that will correct itself within the next one or two quarters. And so your second part of the question was on inventory. So we don’t have any issues with inventory. It’s pretty much under control for us.

Ashish Rathi — Lucky Investment Managers — Analyst

Sanjay, what exactly do you think is the reason for this? And why do you think it’s a temporary blip?

Sanjay Chaturvedi — Chief Executive Officer

The reason it’s a — I call it a temporary blip is that even if the raw material prices continue to be high, we will be able to successfully pass along that cost increase to customers. So it will be a pass-through charge. It’s a bit like, if you look at ethanol, the ethanol prices have gone up, the acetic acid prices have gone up and so have the prices for acetic — ethyl acetate. And so we’ve been able to pass that along to customers. Similar things happen on the API front as well. So there was some products, for example, in pantoprazole, where the intermediate prices went up and we’ve been able to pass along that cost increase to customers. As the DCDA prices went up in metformin, we were successful at passing along the cost increase to customers. And there was some marginal increase in costing for ibuprofen that we were able to successfully pass along.

Ashish Rathi — Lucky Investment Managers — Analyst

Sure. If I look at your volumes ’21 versus volumes ’22 and the mix of ibuprofen, other pharma and chemicals in that, last year versus current year, the growth in the other pharma molecules, also on a percentage basis, is that the right way to look at it, because obviously the pace is much smaller, we see a INR90 crores number going to INR140 crores number assuming there is [Indecipherable] that has been maintained YoY in volumes. So we’ve been indicating in the past that a certain reason that because of non-approval of facilities and no inspections happening, you’ve seen a delayed ramp-up in this. How will this shape up in the future? What kind of traction can we expect? Any update on timelines for inspection and approval?

Sanjay Chaturvedi — Chief Executive Officer

So some of those inspections have come in. And, I was alluding to customer inspections and regulatory. On the regulatory front, we’ve had quite a few CEPs that we filed. Some of them have been approved. I would say that the INR90 crore number that you see ramped up to INR140 crores is real, and we are expecting certainly maybe INR330 crores to INR350 crore kind of top line coming into the non-ibuprofen business for us this year. And next year onwards, we are very confident that you will see a substantial jump in that figure.

Ashish Rathi — Lucky Investment Managers — Analyst

INR300 crores to — this is excluding ethyl acetate also I believe, right?

Sanjay Chaturvedi — Chief Executive Officer

Yeah, yeah. This is only the non-ibuprofen API. My discussion — my answer was limited to non-ibuprofen APIs for IOL.

Ashish Rathi — Lucky Investment Managers — Analyst

So roughly INR180 crores, INR190 crores is what you are indicating for the second half. There is not much pricing disadvantage on this slide. Only limited to ibuprofen? Because I have [Indecipherable] and other molecules have also seen the big raw material prices.

Sanjay Chaturvedi — Chief Executive Officer

You are absolutely right in that the pricing pressure has been across all product lines, and in certain products, we are able to pass along the price increase at a faster rate than we are able to do that for others. So we specifically keep ibuprofen aside because that is such an important part of our portfolio. Not that the pricing dynamics and the raw material dynamics are any different, but just because it happens to be a big chunk of what we do, investors are generally keen to talk about these two separately.

Ashish Rathi — Lucky Investment Managers — Analyst

And last one from my side and I will join back the queue [Indecipherable] ibuprofen, the raw material price increase, and [Indecipherable] that contributing now. And in terms of price increase, what we have seen from say last year’s quarter, so ’21 second quarter to this quarter. In terms of percentages, what has been the increase?

Sanjay Chaturvedi — Chief Executive Officer

Okay. I would say that ibuprofen has seen very modest price increases and cost increases compared to say metformin. And all in the single digits, I would say, in terms of percentage with this, whereas in metformin, the price increase for DCDA has been almost more than 200%, 300%, and that is now starting to correct itself. So there was a lot more volatility in metformin than in ibuprofen. And for intermediates in say pantoprazole and clopidogrel, the number was kind of in between.

Ashish Rathi — Lucky Investment Managers — Analyst

Just while you are at this point, so basically you’re indicating that ibuprofen gross margin dip is not exactly due to raw material price increases, it is mainly because of the pricing decline of the API itself? Is that the right way to look at it [Indecipherable]?

Sanjay Chaturvedi — Chief Executive Officer

I would say it’s a combination of multiple factors. One is, the raw material price that goes up, and as I alluded to earlier, the raw material pricing going up is marginal pricing cost increase. The second issue here is the pricing and the end price, which — and most important is the end demand, because if I look at the kinds of volumes that we did last year versus what we’ve done here, they’ve been off and therefore if I look at when you have a lower demand and you have lower production, your asset utilization goes low and therefore your cost of manufacturing goes up. So these are I would say a series of interlinked events. For our ibuprofen business to do well, really what needs to happen here is the demand has to come back. And we do see early shoots of that in Q3 and both Q4.

Ashish Rathi — Lucky Investment Managers — Analyst

But the gross margin doesn’t get impacted by the demand trends here. I mean it doesn’t impact the below the gross margin — it doesn’t impact the below gross margin line. Just asking for the gross margin. So I think there is a big pricing pressure on the selling price of ibuprofen also this one.

Sanjay Chaturvedi — Chief Executive Officer

Absolutely, yes, you are right.

Ashish Rathi — Lucky Investment Managers — Analyst

All right. I’ll get back in the queue. Let others ask the question [Indecipherable] come back. Thank you.

Operator

[Operator Instructions] The next question is from the line of B.R. Vora from Third Eye Realty & Consultants Private Limited. Please go ahead.

Bherushankar Revashabnkar Vora — Third Eye Realty & Consultants Private Limited — Analyst

Hello. So, I had one question. It was what characteristics except for backward integration make our operations so good that even bigger companies do not eat up our market share and will we be able to replicate this — replicate this success in other APIs manufacturing?

Sanjay Chaturvedi — Chief Executive Officer

So I think that’s an excellent question and a very insightful question. There are couple of things that we do that are different. One is of course the backward integration that I talked about. The second is the scale. For example if you look at clopidogrel, we typically put in capacities that are significantly larger than what our peers do. And the third of course is because of that high volume, the pricing that we are able to negotiate for raw materials with our suppliers, we get some kind of an advantage on that. So I think rather than look at it as what is the one thing that I do better, what I would focus on is what are the many things that we do better so that they all add up to something substantial. And the short answer to your question is, yes, we believe we are confident that we can replicate that success into other APIs.

Bherushankar Revashabnkar Vora — Third Eye Realty & Consultants Private Limited — Analyst

Okay. And I had one other question about our capital deployment. For all the cash we have sitting on the balance sheet and which is about INR350 crores, how do we plan to deploy it because in the earlier conference calls, we were expecting some guidance towards it in quarter three to quarter four conference call. So do you have any more insights on that?

Sanjay Chaturvedi — Chief Executive Officer

Yeah. So we are in very advanced stages of finalizing our investment plans. And I would say, by the end of this quarter or early January, we’ll make those available to all our investors.

Bherushankar Revashabnkar Vora — Third Eye Realty & Consultants Private Limited — Analyst

Okay. Thank you.

Operator

[Operator Instructions] The next question is from the line of Muhammad [Indecipherable] Shaikh from Aman Investments. Please go ahead.

Muhammad — Aman Investments — Analyst

Good afternoon, sir. Thank you for the opportunity. While seeing the investor presentation, I was seeing that the chemical segment has contributed the most in the revenue. But while on the EBITDA side, there was very less contribution. May I know the reason, sir?

Sanjay Chaturvedi — Chief Executive Officer

Yeah. So, on the Chemicals, typically the business with the margins to begin with a substantially lower than the chemicals. So therefore your ability to purchase raw materials is really what determines the profitability. And we had certain lots of raw materials that we had picked up at a higher price and that is what impacted our profitability. But we do expect to come back to more reasonable profit levels in the next coming quarters.

Muhammad — Aman Investments — Analyst

Okay. Thank you, sir. And another question is, you have in last conference call — you had told that the Q3 and Q4, we are seeing very good export and very good revenue from export. So, are you still — you are on your word still or there is some difference on the export side in Q3 and Q4?

Sanjay Chaturvedi — Chief Executive Officer

For now, there is no change in the guidance. We continue to be very positive on our exports and you will continue to see good numbers coming in both in Q3 as well as Q4.

Muhammad — Aman Investments — Analyst

Okay. And sir how much EPS or EBITDA you’re expecting in FY ’22?

Sanjay Chaturvedi — Chief Executive Officer

Right now, we are not giving out that information. A lot depends on — you’ve seen the volatility in this market. What we are really focused on right now is delivering top line, keeping our costs very tight under control, and that will really determine what the end profit levels will be.

Muhammad — Aman Investments — Analyst

Okay. One last question is, just I was seeing that we are having the single location manufacturing factory for both chemical and pharma. So do management have any think of company should have any another manufacturing plant at another location to derisk the single dependency at single location and to help export transfer — to help the transfer of the export to the foreign countries?

Sanjay Chaturvedi — Chief Executive Officer

Absolutely right. If I did know better, I would say you have bugged my conference room. So all those discussions are ongoing. And as I said, by end of December, early January, we will make some of these plans known and available.

Muhammad — Aman Investments — Analyst

My questions are increasing. But I would like to ask that what we are doing for the cash we are having in the reserves?

Sanjay Chaturvedi — Chief Executive Officer

So, we are putting together an investment plan for deploying the cash that we have. We certainly believe that by deploying that cash, we can give a better return than what we can get by putting that money into an FD. So I think those are the plans I was alluding to earlier that by end of December, January, those plans will be made available to all our investors.

Muhammad — Aman Investments — Analyst

Thank you very much.

Sanjay Chaturvedi — Chief Executive Officer

You’re welcome.

Operator

Thank you. The next question is from the line of Bobby Jayaram from Falcon Investments. Please go ahead.

Bobby Jayaraman — Falcon Investments — Analyst

Yeah, hello. See, demand for ibuprofen decreased because of inventory access or has there also been some sort of substitution? I do have a follow-up too.

Sanjay Chaturvedi — Chief Executive Officer

So two things have happened. One is, there was in the previous financial year and the first quarter of this year, there was a lot of overstocking. And if you look at the kind of volumes that customers picked up during the COVID year last year, it was unprecedented. That is the reason why the demand has been muted. The second reason why the demand has been muted is, as I’ve mentioned in my earlier calls as well, there was a report that came out from a French group that talked about ibuprofen not being very good at managing COVID and other products being better. So clearly, you’ve seen paracetamol has picked up at an unprecedented pace worldwide, and part of it is because of COVID management. Subsequent reports are suggesting that both ibuprofen and paracetamol are very good at COVID management. So I do believe that the demand for ibuprofen will pick up, but in the light of the report that came out, this demand went down at the cost of paracetamol picking up.

Bobby Jayaraman — Falcon Investments — Analyst

Right. So when do you think — are you seeing any signs of it stabilizing because COVID is more or less now — intensity has come down for COVID?

Sanjay Chaturvedi — Chief Executive Officer

Yeah. So yes, we have seen signs of that stabilizing. In fact, the previous quarter, Q2, was in terms of volume and demand offtake perhaps the lowest. And our numbers in October are good and based on our visibility for Q3, Q4, we are confident that the demand will pick up.

Bobby Jayaraman — Falcon Investments — Analyst

Okay. Thank you.

Sanjay Chaturvedi — Chief Executive Officer

All right.

Operator

Thank you. The next question is from the line of Chintan Chheda from Quest Investment Advisors. Please go ahead.

Chintan Chheda — Quest Investment Advisors — Analyst

Thanks for the opportunity. Good afternoon, sir.

Sanjay Chaturvedi — Chief Executive Officer

Good afternoon.

Chintan Chheda — Quest Investment Advisors — Analyst

So my question is related to Isobutylbenzene. So now, when we look into the current environment, the other API inventory in intermediates like your para- aminophenol and DCDA, their prices have gone up by 100%, 200% but relatively your IBB prices are fairly stable. So just wanted your outlook on the demand and pricing for this particular intermediate.

Sanjay Chaturvedi — Chief Executive Officer

You rightfully pointed out that the demand for other intermediates has gone up substantially more than IBB. IBB is very closely related to crude, and we don’t expect the IBB prices to have as much volatility as the other products. And in light of the other products, we are doing a lot of efforts in terms of backward integration and ensuring that we are sufficiently backward integrated and making the other intermediates where we can. So DCDA, right now I don’t see an option, not only for us, but for any other player, we continue to be dependent on China. But some of the other intermediates, we have alternatives to develop the intermediates ourselves.

Chintan Chheda — Quest Investment Advisors — Analyst

Also with IBB, is there a situation wherein there is an overcapacity globally for this intermediate?

Sanjay Chaturvedi — Chief Executive Officer

No, we don’t believe that. Right now, there are only two major suppliers of IBB and we don’t believe there is an overcapacity issue.

Chintan Chheda — Quest Investment Advisors — Analyst

Okay. And in terms of — so it would be fair to fix the prices of IBB continue to remain stable at these levels, even the ibuprofen prices will hover around say $10, $12?

Sanjay Chaturvedi — Chief Executive Officer

Yes, that’s a very fair assumption.

Chintan Chheda — Quest Investment Advisors — Analyst

Okay. Okay. Thanks a lot. All the best.

Sanjay Chaturvedi — Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Ashish Rathi from Lucky Investment Managers. Please go ahead.

Ashish Rathi — Lucky Investment Managers — Analyst

Thank you for the opportunity for follow-up. I have a quick question. One is, which all products do we have like a backward integration advantage in our kitty?

Sanjay Chaturvedi — Chief Executive Officer

Okay. So, other than ibuprofen, we are currently on — we are working on intermediates. So I don’t have that advantage today, but in the coming few quarters or years, I will have that advantage, where we have developed — some of the products except metformin. I would say, actually, our philosophy as a company is to develop backward integration in as many products as we can. So while what we’ve done is we have really secured the commercial and by launching the products, and we understand that we are currently doing business at lower margins, perhaps because we are not backward integrated. But as we get backward integration, say, pantoprazole as one example, you will see that benefit accruing into our P&L.

Ashish Rathi — Lucky Investment Managers — Analyst

Okay. What is the volume number for ibuprofen in 1H22?

Sanjay Chaturvedi — Chief Executive Officer

Can you repeat your question, please?

Ashish Rathi — Lucky Investment Managers — Analyst

Volume, the volume that we have done for ibuprofen in 1H22.

Sanjay Chaturvedi — Chief Executive Officer

So, our current volumes are between 60% to 65% of our asset utilization and we believe this number will go up in the coming quarters.

Ashish Rathi — Lucky Investment Managers — Analyst

And the other 12,000 NTPA capacity, right?

Sanjay Chaturvedi — Chief Executive Officer

That is correct.

Ashish Rathi — Lucky Investment Managers — Analyst

So this — how much will this — in, say, [Indecipherable] how much have we seen as peak in terms of utilization from this capacity of 12,000?

Sanjay Chaturvedi — Chief Executive Officer

So in terms of peak capacity, we believe that we can go to at least 85%, 90% utilization, and we’ve done that in the past.

Ashish Rathi — Lucky Investment Managers — Analyst

So 85%, 90% of the 12,000. So, we’ve said — we’ve sold around 10,000 on a run rate?

Sanjay Chaturvedi — Chief Executive Officer

Yeah, yeah. We’ve sold more than 10,000 metric tons on an annual run rate.

Ashish Rathi — Lucky Investment Managers — Analyst

So there is a 20% to 25% dip in that previous demand. Is that correct?

Sanjay Chaturvedi — Chief Executive Officer

That is correct.

Ashish Rathi — Lucky Investment Managers — Analyst

Okay. And what is the pricing now in terms of dollar per kg for ibuprofen?

Sanjay Chaturvedi — Chief Executive Officer

It really varies. I would say $11 to $12 is a reasonable number to assume.

Ashish Rathi — Lucky Investment Managers — Analyst

$11 to $12. Okay. And then the question is, though, that the every — almost every quarter or maybe every six months by investors are asking this question [Indecipherable] the price and we have been indicating that this is the bottom price and we’ve seen that from $15 levels to $13 and now we are talking $11 to $12. Despite being the market leader in the product, the pricing is kind of really volatile and not too much in our grip. Again, I’m asking the same question. Is this the bottom as for you?

Sanjay Chaturvedi — Chief Executive Officer

Yes, absolutely. We’ve done very extensive benchmarking in terms of the different processes, what are the manufacturing costs for each process. So we are very, very confident that this is the absolute bottom pricing that we are seeing today.

Ashish Rathi — Lucky Investment Managers — Analyst

And what is the reason why pricing stay this — that this is the bottom? What is the logic behind it?

Sanjay Chaturvedi — Chief Executive Officer

Two things. One is of course that there aren’t too many suppliers of ibuprofen to begin with. Ibuprofen as a product will continue to be a key product in the market. It’s very well tested. It’s one of the safest products in terms of efficacy and use, and millions of customers around the world rely on using ibuprofen. So there is a bottom demand. And if they’re as long as our demand remains as the bottom demand, we believe that they will continue to be a bottomed out pricing. Otherwise companies will be forced to exit the business and that is something the customers don’t want.

Ashish Rathi — Lucky Investment Managers — Analyst

So what is that bottom demand? It’s like 50,000 MTPAs, is that the bottom demand you see for this product globally?

Sanjay Chaturvedi — Chief Executive Officer

What was the number you said? I couldn’t hear that.

Ashish Rathi — Lucky Investment Managers — Analyst

50K.

Sanjay Chaturvedi — Chief Executive Officer

50,000 [Indecipherable] so 50,000 is actually much more than the world demand. We believe the world demand to be between 35,000 and 40,000 metric tons.

Ashish Rathi — Lucky Investment Managers — Analyst

This is the bottom demand you’re saying? In the worst case, this will be the [Indecipherable].

Sanjay Chaturvedi — Chief Executive Officer

Typically, this has been the market demand. This number might be off by 10%, to have the bottoming out effect. But really we don’t expect that to go below 32,000 tons or 33,000 tons a year.

Ashish Rathi — Lucky Investment Managers — Analyst

Got it. And in the US, are we selling ibuprofen now?

Sanjay Chaturvedi — Chief Executive Officer

Probably not still. So we’ve just started — some trials have been ongoing. This was the first year we received some approvals. So I think in the next financial year, you will see some commercial quantities going into US.

Ashish Rathi — Lucky Investment Managers — Analyst

Okay. And what kind of gross margin should we expect at a company level for the third quarter and fourth quarter? Because it’s been so volatile. We would really need some help on this front [Phonetic], please.

Sanjay Chaturvedi — Chief Executive Officer

Okay. I would say that, for all API companies in general as an average, companies operate at gross margins of between 25%, 30% and that’s the range that we certainly hope to meet or beat in the coming quarters.

Ashish Rathi — Lucky Investment Managers — Analyst

But ours was higher than that. Ours was at mid-30s zone. So this should be the new normal for us, 25%?

Sanjay Chaturvedi — Chief Executive Officer

This is not the new normal for us. It’s hard to commit to a number right now because I don’t want to look at it on a quarter-by-quarter basis. There are multiple moving parts here. As my asset utilization improves, my average cost goes down and therefore my profitability improves. As my ability — as my volumes go up, my ability to source raw material improves and my gross margin improves. So there are so many moving parts here that I don’t think that is the new normal. But yes, 30% is certainly something that is quite doable [Indecipherable] for us.

Ashish Rathi — Lucky Investment Managers — Analyst

Okay. And any color on the specific pricing on ibuprofen in US when we sell versus other countries?

Sanjay Chaturvedi — Chief Executive Officer

No, I think it will be similar to what we sell in Europe and other regulated markets.

Ashish Rathi — Lucky Investment Managers — Analyst

$11 to $12 is the correct number for Europe and other markets? Or it’s a mix for our domestic plus — so what is the number for exports [Indecipherable]?

Sanjay Chaturvedi — Chief Executive Officer

This is a blended price.

Ashish Rathi — Lucky Investment Managers — Analyst

So exports would be $13 or something [Indecipherable]? Is that the way to look at it?

Sanjay Chaturvedi — Chief Executive Officer

So right now, I don’t want to commit to that number only because, see, we are entering the US, we are late entrants. So as that business picks up and stabilizes, that will be the time to look at the new pricing. But on a blended basis, for the year, we will be between $11 and $12 a kilo.

Ashish Rathi — Lucky Investment Managers — Analyst

Sure. Okay. Thank you for patiently answering my questions. I understand it’s been a tough quarter. Wish you all the best.

Sanjay Chaturvedi — Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Khushdil Virdi from ICICI Bank. Please go ahead.

Khushdil Virdi — ICICI Bank — Analyst

Hello? Ma’am, I had the same doubt for the inventory as the previous person. So my doubts are cleared right now.

Operator

[Operator Instructions] The next question is from the line of Bharat Sheth from Quest Investment Advisors. Please go ahead.

Bharat Sheth — Quest Investment Advisors — Analyst

Hi, sir. Thanks for the opportunity. If you can give a little more color on — you said this ibuprofen demand is around 33,000 tons, 34,000 tons — around 35,000 tons annual demand. So how this demand is growing — at what percentage level normal and how is the supply situation? Is supply also affecting the pricing pressure?

Sanjay Chaturvedi — Chief Executive Officer

So there are roughly, you would say about four or five key suppliers of ibuprofen worldwide. You’ve got a Chinese supplier, you’ve got one US company and of course one European company and two major suppliers from India. Having said that, the capacity situation is that all the demand in the world can be met based on current capacity. So you don’t see any capacity additions being done. And I think it all comes down to asset utilization and pricing. So worldwide, ibuprofen as a business, the product is growing in single digits. So this is not — this is a commodity API that grows more or less in line with kind of global GDP. So we are very confident of our capacity, and based on our understanding of competitive capacities, we are confident that — we don’t expect any new entrants or new plants being built in ibuprofen to cater to the current demand.

Bharat Sheth — Quest Investment Advisors — Analyst

But as you rightly mentioned, recently, this new European player has just commenced a capacity which was not there. So is it — so how much that capacity has come up?

Sanjay Chaturvedi — Chief Executive Officer

I think no formal numbers have been released for that, whereas the capex that they have incurred for that capacity is something around EUR200 million.

Bharat Sheth — Quest Investment Advisors — Analyst

Okay. And that has just commenced recently in the last six months, correct?

Sanjay Chaturvedi — Chief Executive Officer

Correct.

Bharat Sheth — Quest Investment Advisors — Analyst

So is it causing a pressure on the pricing as well as on the demand side that some of the customer might have been diverted to them?

Sanjay Chaturvedi — Chief Executive Officer

So, it is causing some concern on the supply side, maybe not on the demand side. Having said that, as I just mentioned, EUR200 million capex for bigger capacity of your difference will add significant cost disadvantage because the fixed cost allocation on a per unit basis from a EUR200 million plant is going to be substantial. So we don’t believe that that will be — that will really add to the pricing pressure. But certainly, as new entrants, everybody wants to come in, but at the same time they also want to maintain certain margins. So you have seen what the typical margins are for the European player. It is reasonable to assume that they will not enter a new business and sufficiently sacrifice those margins.

Bharat Sheth — Quest Investment Advisors — Analyst

Okay. And can you give some color on the medium-term outlook for this ibuprofen whole demand-supply scenario? I mean, as you rightly said that, once the demand keep on increasing, again we may see after a couple of your pricing also improving.

Sanjay Chaturvedi — Chief Executive Officer

Yes. So I would say that for a market that is between 35,000 tons and 40,000 tons, this market has contracted in terms of demand to maybe around 30,000 tons. And in the next two quarters, it will be back to 35,000 tons levels.

Bharat Sheth — Quest Investment Advisors — Analyst

So that also — there is some hope of improving the price also, correct?

Sanjay Chaturvedi — Chief Executive Officer

Yes.

Bharat Sheth — Quest Investment Advisors — Analyst

Okay. Thank you very much.

Operator

Thank you. The next question is from the line of B.R. Vora from Third Eye Realty & Consultants Private Limited. Please go ahead.

Bherushankar Revashabnkar Vora — Third Eye Realty & Consultants Private Limited — Analyst

Hello. Thank you for taking another follow-up question. My question was regarding the domestic and export market. Our domestic sales have gone down in this quarter, but the exports have grown. What was the reason for the domestic sales going down this quarter?

Sanjay Chaturvedi — Chief Executive Officer

So, two things. One is that the domestic one in terms of volume — I’ve not shown that separately. Some of the pricing of the products was down, and that is what reflects in the domestic demand being down. Whereas in the exports, both my pricing and my volumes for us.

Bherushankar Revashabnkar Vora — Third Eye Realty & Consultants Private Limited — Analyst

So the volume was the same in the domestic market, right?

Sanjay Chaturvedi — Chief Executive Officer

Yes.

Bherushankar Revashabnkar Vora — Third Eye Realty & Consultants Private Limited — Analyst

Okay. Thank you.

Operator

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

Dhaval Pandey — — Analyst

Thank you for the opportunity. I have a more broader question. Where do we see ourselves three years down the line? I mean, what kind of revenue are we looking at? Because I remember like three quarters back when we had discussions with [Indecipherable] you did mention that we will grow around 18% to 20%. So maybe by FY ’24 we are looking at somewhere around INR2,800 crores, INR2,900s crores. Are we on track or is there a change or if you can…

Sanjay Chaturvedi — Chief Executive Officer

We are on track. I mean, 15% to 18% kind of growth is a reasonable number for us and we will certainly in the next two to three years we’ll be achieving or exceeding those numbers.

Dhaval Pandey — — Analyst

Okay. I mean what kind of EBIT margin were are looking at, I mean what range if you can clarify.

Sanjay Chaturvedi — Chief Executive Officer

I would say a 20% to 25% EBIT margin is a reasonable target for us to hit.

Dhaval Pandey — — Analyst

Okay. Okay. And then again, from three-year vision, I mean, what percentage of exports we are looking to target?

Sanjay Chaturvedi — Chief Executive Officer

So I will say that our exports are currently in the 25%, 30% range. In the next three years, we are looking at exports that will be well beyond 40%, 45%.

Dhaval Pandey — — Analyst

Okay. Okay. And then in terms of our segments, pharma versus chemical, what kind of percentage are we looking? Is it equal or how do we see that?

Sanjay Chaturvedi — Chief Executive Officer

So I would say, rather than look at the percentage of business that is A or B, it is perhaps more relevant question that, will we grow both. And the answer is yes, we will grow both the chemicals and the pharma. And needless to say that I am constrained on my capacity on the chemical side. Therefore, the only way for me to grow the Chemicals business is to either add more capacity or add more products into my portfolio. And those are the kind of discussions that are under evaluation. And by end of December, early January, we’ll roll out that path.

Dhaval Pandey — — Analyst

Sure. Thank you so much.

Operator

[Operator Instructions] The next question is from the line of Ashik Koshy, an Individual Investor. Please go ahead.

Ashik Koshy — — Analyst

Good afternoon. I had a question on — we have given three categories: chemicals and then pharma. So chemicals, we have shown in this quarter — as first half as 56%, 57% compared to 35%. So this is a volume based growth as well as value based growth?

Sanjay Chaturvedi — Chief Executive Officer

This is actually — you’re right. This is — our volumes are pretty static in this. We do about just over 100,000 tons of ethyl acetate as primarily contributing to this business. So most of the numbers that you see here are price related. So, as the price of ethyl acetate changes, that number changes.

Ashik Koshy — — Analyst

Okay. So what you mean to say is that production or the output remains static or [Indecipherable] but it is the pricing which is deciding your overall contributions?

Sanjay Chaturvedi — Chief Executive Officer

That is on the chemical side.

Ashik Koshy — — Analyst

Chemical side, that’s what I’m talking about. And in that scenario, how much Chemical has contributed to the bottom line?

Sanjay Chaturvedi — Chief Executive Officer

So, most of the contribution to the bottom line have actually for this quarter come from the pharma and not the chemicals business.

Ashik Koshy — — Analyst

Sorry?

Sanjay Chaturvedi — Chief Executive Officer

Most of the bottom line has come from the pharma side and not the chemical side.

Ashik Koshy — — Analyst

No, but can we get some number — breakup of that? I mean, say, chemicals, ibuprofen and other of our products, three categories you have mentioned, 57%, 29% and 14%. So that’s the revenue numbers or sales number, if you put it. So compared to that, on the bottom line, the net profit figure, if I to divide in these three categories, what would be that?

Sanjay Chaturvedi — Chief Executive Officer

So we have not released those numbers. And let me see the numbers I have in front of me. So in terms of the profits, the chemical was barely 10% of my total profits. 90% came from the pharma.

Ashik Koshy — — Analyst

So this chemical, 10% profitability, if I have to make and bring it at least somewhere around, just as a ballpark figure, 20%, 25%, to that level, if I want to reach, what kind of changes I do need to make in the chemical business? Because dependency on one product for profitability is becoming a problematic situation for the Company, right?

Sanjay Chaturvedi — Chief Executive Officer

Yeah, so historically, the chemicals business has been run at no more than 10% to 12% EBIT margin, okay? And that is the industry reality, not only for us, but all the players who are in this particular product line. And the way for us to improve our profitability to that level is essentially through better pricing and better sourcing of our materials and of course capacity utilization.

Ashik Koshy — — Analyst

What is our current capacity utilization in chemicals?

Sanjay Chaturvedi — Chief Executive Officer

It’s close to 100%, and we continue to — we continue to churn out as much volume as we can by improving our contracts, by improving our procurement rates and the ability to manage that volatility in raw material pricing with the pricing of our product to our customers. That’s really what will help us come back to those profitability levels.

Ashik Koshy — — Analyst

So product mix and chemicals, you will need to work on?

Sanjay Chaturvedi — Chief Executive Officer

Yes.

Ashik Koshy — — Analyst

And on the product application, what we have — what you have shown, food processing, flexible packaging, pharma, chemical intermediates [Indecipherable] ink, paints and pesticides. If I were to — under each head, if I were to give you the numbers, the sales numbers.

Sanjay Chaturvedi — Chief Executive Officer

No, we don’t break apart those sales numbers based on the segments that we serve.

Ashik Koshy — — Analyst

The reason for this is, which segment possibly would provide further impetus to the top line as well as bottom line, it will give an idea. Ibuprofen as of now is a major product and which would remain for maybe another couple of years. But further growth, if it has to come from which segment would do well which would give us an opportunity to grow faster.

Sanjay Chaturvedi — Chief Executive Officer

Okay. So I will say that ibuprofen has growth opportunities that we will certainly monetize. Ethyl acetate is pretty much plateaued out in terms of top line and we are in the process of doing things to improve the bottom line there. But to grow the chemicals business, I need to add more products into that portfolio mix. And as far as pharma growth is concerned, the growth will come from a combination of growing the ibuprofen business but growing the non-ibuprofen API is much more than the ibuprofen APIs.

Operator

[Operator Instructions] The next question is from the line of Muhammad [Indecipherable] Shaikh from Aman Investments. Please go ahead.

Muhammad — Aman Investments — Analyst

Thank you for the opportunity again. I was asking about — in last conference call you told that the shipping charge for the export has significantly rose. So those charges are normal now or still you are facing higher charges for that?

Sanjay Chaturvedi — Chief Executive Officer

So, we have started to see easing of that and I think going forward once the Christmas season is over, we do expect a significant drop in those prices.

Muhammad — Aman Investments — Analyst

And in terms of — just actually, we are investor. We are really concerned about our investment. So my question is how much margins you are seeing in Q3 and Q4 — EBITDA margins?

Sanjay Chaturvedi — Chief Executive Officer

You will have significant improvement. As I said, Q2 things have bottomed out and we are seeing improvements in there. Q1, our EBIT numbers were about what 19%, 20%. Q2, they went to about 10%. I think going forward, it is reasonable to assume that we will come back to an EBIT number of around 20% by the end of the year.

Muhammad — Aman Investments — Analyst

Thank you very much.

Operator

Thank you. The next question is from the line of B.R. Vora from Third Eye Realty & Consultants Private Limited. Please go ahead.

Bherushankar Revashabnkar Vora — Third Eye Realty & Consultants Private Limited — Analyst

Yes. So I had another question about the expansion we talked about. All the expansion we are thinking of doing, will it be from internal accruals or will we think about obtaining debt or any of the financing mechanism to expand the business?

Sanjay Chaturvedi — Chief Executive Officer

So most of our expansion that we are currently foreseeing is from internal accruals.

Bherushankar Revashabnkar Vora — Third Eye Realty & Consultants Private Limited — Analyst

Okay. And on the margin side, we are already doing great on the manufacturing and operations in the business. So do we look at any high-margin businesses like contract manufacturing?

Sanjay Chaturvedi — Chief Executive Officer

So, contract manufacturing, when you say, I’m assuming you’re talking in the context of CRAMs.

Bherushankar Revashabnkar Vora — Third Eye Realty & Consultants Private Limited — Analyst

Yes, CRAMs.

Sanjay Chaturvedi — Chief Executive Officer

Okay. So CRAMs is on the surface, it appears to be very similar to APIs. But if you look at the success factors in CRAMs versus generic APIs, it requires a very different skill set and a very different capability. So for us to do that even if we were to get into that area will require a significant investment and upgrading our skills. So if you ask me today, am I set up as a company to do CRAMs, the short answer is no. But if the question is, do I have the capability to upgrade viability to be in CRAMs, the answer is yes. And that is what is one of the growth option center evaluation right now.

Bherushankar Revashabnkar Vora — Third Eye Realty & Consultants Private Limited — Analyst

Right. And I had one last question. It is — in the long term, what part of the business do we see the most growth from? Whether it is from the API side or do we think of going into other business segments? Or what kind of molecules you’re looking for growth?

Sanjay Chaturvedi — Chief Executive Officer

We see a lot more growth for IOL coming from the pharma business as opposed to the chemicals business. Within the pharma business, we will grow in the non-ibuprofen APIs much more than the ibuprofen APIs. And the last question that you asked me was what kind of molecules will we be doing. We will be doing what I call relatively high volume APIs as opposed to low volume. So high potency APIs is not something where we look at growth because that’s not consistent with our skill set, background and experience. So we will look for molecules that are relatively high volume, good pricing, where we have an advantage of doing backward integration.

Bherushankar Revashabnkar Vora — Third Eye Realty & Consultants Private Limited — Analyst

Right. Okay. Thank you for answering all the questions during the afternoon.

Sanjay Chaturvedi — Chief Executive Officer

Sure.

Operator

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

Ashik Koshy — — Analyst

Thank you. My question again with regards to our — is the last gentleman asked — our expertise is more on high volume bulk production and going towards maybe a lower margin, but high volume. That’s what our expertise is and it will remain the same?

Sanjay Chaturvedi — Chief Executive Officer

No, let me correct. Yes, our expertise is high volume, but not necessarily low margin. So we will continue to look at products that are high volume products. We will continue to look at products that have the capability of delivering 20% plus EBIT margins to our overall business.

Ashik Koshy — — Analyst

And we do not have any major capital work in progress or major expansion in pipeline right now?

Sanjay Chaturvedi — Chief Executive Officer

No. The only capex that we have ongoing is the delayed project, unit number 9. That is a multi-product facility that should be up and ready by the end of this quarter, and that’s the only one.

Ashik Koshy — — Analyst

And then I would compare the first half results, where my profitability has gone down substantially with first half results of previous year, that breakup of fall in the numbers, I would appropriate towards logistic — this much raw material cost increase, this much — can I have some understanding if I were to divide that fall into multiple heads?

Sanjay Chaturvedi — Chief Executive Officer

I would say cost of goods sold as a broad bucket where my gross margins went from — went down by about 10 percentage points. Most of them — most of that was in raw materials and some of it came from fuel and logistics.

Ashik Koshy — — Analyst

So we assume that 80% to 85% or 90% is towards raw material price rise?

Sanjay Chaturvedi — Chief Executive Officer

I don’t want to give you a specific number, but most of the cost increase that happened was in raw materials.

Ashik Koshy — — Analyst

Thank you. Thanks a lot.

Sanjay Chaturvedi — Chief Executive Officer

Welcome.

Operator

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

Sanjay Chaturvedi — Chief Executive Officer

Thank you. So in concluding remark, this past quarter was a challenging period where despite strong headwinds, the Company has managed to grow the top line and sales by about 2%. The bottom line has contracted and is now expected to correct in the subsequent quarters. We are confident that the Company will be able to deliver industry level EBITDA margins of 15% to 20% on a sustainable basis. Thank you very much for your valuable time. Have a good day.

Operator

Thank you. On behalf of Antique Stock Broking Ltd., that concludes this conference. Thank you for joining us. And you may now disconnect your lines.