Neogen Chemicals Ltd (NEOGEN) Q2 FY23 Earnings Concall Transcript

Neogen Chemicals Ltd (NSE:NEOGEN) Q2 FY23 Earnings Concall dated Nov. 07, 2022

Corporate Participants:

Harin Kanani — Managing Director

Ketan Vyas — Chief Financial Officer

Analysts:

Nishid Solanki — CDR India — Analyst

Ranvir Singh — Edelweiss Wealth — Analyst

Archit Joshi — B&K Securities — Analyst

Ankur Periwal — Axis Capital — Analyst

Mihir Damania — Ambit Asset Management — Analyst

Sabyasachi Mukerji — Centrum PMS — Analyst

Nitin Tiwari — Yes Securities — Analyst

Yash Shah — Investec India — Analyst

Pallavi Deshpande — Individual Investor — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Neogen Chemicals Q2 FY’23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nishid Solanki from CDR India. Thank you, and over to you, Mr. Solanki.

Nishid Solanki — CDR India — Analyst

Thank you. Good afternoon, everyone, and welcome to Neogen Chemicals’ Q2 FY’23 earnings conference call for analysts and investors. Today, we are joined by senior members of the management team including Dr. Harin Kanani, Managing Director; Mr. Anurag Surana, Director; and Mr. Ketan Vyas, Chief Financial Officer. We will commence the call with opening thoughts from the management team post which we shall open the forum for question-and-answer where the management will be addressing queries of the participants.

Before we commence. I would like to share a standard disclaimer, certain statements made or discussed on the call today may be forward-looking statements. The actual results may vary from these forward-looking statements. A detailed disclaimer in this regard Is available in Neogen Chemicals’ Q2 FY’23 earnings presentation, which has been shared earlier. I would now like to invite Dr. Harin Kanani to share with his perspectives. Thank you, and over to you, sir.

Harin Kanani — Managing Director

Thank you, Nishid. Good afternoon, everyone, and welcome to our Q2 FY’23 earnings conference call. I hope everyone is keeping safe and healthy. We have reported our second quarter numbers on Saturday, November 5, 2022, and I hope you had an opportunity to go through them. I will be sharing the key insights and updates on expansion initiatives while Mr. Ketan Vyas, our CFO, will take us through the financial performance for the quarter under review. We demonstrated healthy overall performance during the first half of the fiscal year 2023 notwithstanding the challenges posed by inflationary trend in key raw materials, elevated utility costs as well as continued volatility in the foreign exchange rates.

Our revenue grew by 50%, while EBITDA improved by 35% and profit after tax increased by 13% respectively. Recently we have witnessed some cooling effect in raw materials barring lithium, which continued its upward trajectory, we think its highest level, and bromine, which continues to remain steady with moderate increase. However, we were able to pass on these lithium related cost pressures to the customers, thereby protecting the absolute EBITDA. The EBITDA percentage margin considers the impact of higher revenues and higher RM cost with preserved, absolute earnings. In H1 FY’23, we reported 19% growth in organic chemicals, growth in inorganic chemicals stood at 176%, which was largely driven by realization gains across products. Steady demand momentum with incremental benefits from recently augmented capacities Also contributed to the performance.

As planned earlier, we have started shifting our production into high-value customized products that enjoyed better demand visibility. These are complex products that require expertise in key chemistry, but are value-accretive and lead to customer stickiness given the nature of offering. We have further strengthened our R&D team to accommodate such complex products, and now have a 60-member dedicated R&D team to take advantage of these upcoming opportunities. Our expansion plans are progressing well across both lithium-ion battery chemicals and existing business operations, including CSM management and we are on track to deliver our stated revenue guidance for the next few years.

In line with our capex trajectory, we are also ramping up our teams across business development, operations, EHS among others to increase the management bandwidth. We have bolstered our in-house capabilities and process expertise in CSM and advanced Intermediates segment to accommodate complex products that require multiple steps. We have added five customers in last quarter in Europe and Japan across agrochemical flavors and fragrance and engineering segment where projects have moved from pilot to first commercial operation, with combined revenue potential of more than INR200 crore. We are now working with more than 15 customers actively and have started initial working with U.S. and European agrochemical companies to understand their requirements and identify projects where Neogen facilities and expertise can add value to their requirements.

Our our own six advance intermediates targeted towards pharma and agro end use have completed their pilots and/or first commercial run, which have a revenue potential of around INR150 crore and will start contributing to our revenue in second half and will allow us to reach peak by FY’25. We have also extended and demonstrated our capabilities of doing organometallic chemistry from carrying out Grignard chemistry to now being able to perform organolithium chemistry at commercial scale, further extending the commercialized technologies in our tool box available for our domestic and global clients.

On lithium battery material front, we continue to work with future lithium cell producers in India to test our electrolyte samples internally or with their global partners and discussion around long-term contracts and with several of them have been initiated and in progress. In addition, we have received positive feedback from global customers for lithium electrolyte salts and additives and sampling — sample testing and approval process has been initiated by these customers. We have also seen keen interest from several global technology providers to partner our shared technology with Neogen and we continue to evaluate these options.

I will now share some of the updates on expansion initiative announced till now. Based on timeline from the customer, we have prioritized our lithium electrolyte salts and additives manufacturing setup in Dahej SEZ. We expect commissioning to start by Q4 and trial production to start by Q1 next year. The electrolyte pilot facility will in parallel continue work, a smaller capacity for electrolyte trial needed for our customers’ immediate demand has already been installed and can support hundreds of kg requirement from trial to our customers.

In the existing business, work on increasing capacity for existing lithium business has been initiated and new streamlined facility will be ready by Q4 of this year. So additional capacity will be available for the next financial year. Work on increasing organic chemicals production capacity also continues and expect to be completed by Q1 or maximum Q2 of next financial year.

We have been in active discussions with key customers in lithium battery materials and have received positive response from them. Larger capex plan will depend on how the final discussions progress for the lithium-ion battery material space and will accordingly be announced towards the second half of the current fiscal year.

Overall these plant expansions will put us on a strong growth footing within the chosen areas of our expertise and help us leverage the positive demand opportunity in the Indian chemical landscape. Our FY’24 revenue guidance stands at INR700 crores to INR725 crores as was stated earlier, while by FY’25-FY’26, we will add another INR250 crores to INR300 crores at full utilization levels. All these estimates are based on stable lithium prices, and any large capex that we do in lithium-ion battery materials will be in addition to that.

Our inventory stood higher as on September 2022 due to change in product business mix and planned customer supply schedules for the forthcoming quarters. This will improve as new capacity gets added as well as some of these inventories are liquidated and converted into sales in the second half of this year where we see additional demand.

Looking ahead, I’m enthused with the abundant opportunities that are emerging for India and Neogen more specifically driven by greater focus from the global business. This along with gains from our planned upcoming projects will steer the momentum for the next few years. We will maintain financial discipline, while accelerating our performance traction through prudent capital allocation. That ends my opening thoughts. I would now request our, CFO, Mr. Ketan Vyas, to share the financial highlights for the period under review. Over to you, Ketan.

Ketan Vyas — Chief Financial Officer

Thank you, Dr. Harin. Good afternoon everyone and welcome to the Q2 FY’23 earnings call. I will now take you through the key financial highlights. Please note that these are on standalone basis and are based on year-on year comparisons. During the half year ended FY’23, revenue increased 50% to INR296 crores as compared to INR197.8 crore in H1 FY’22. [indecipherable] global demand momentum and saw gains from augmented capacities as compared to the same period of last year. We have been refreshing our product mix to offer products that enjoy better demand, thereby deriving higher value. We saw 35% increase in EBITDA which came in at INR48.9 crore. This was delivered despite continued integration-related cost pressures in the prices of raw material and key utilities, further aggravated by foreign exchange fluctuations. Favorable product mix as well as higher utilization levels at various plant levels fueled EBITDA performance.

Moving to PAT performance, it increased by 13% at INR21 crores in H1 FY’23. The performance was in line given the impact of higher depreciation and [indecipherable] cost due to newer plant addition and [indecipherable]. Now, let me take you through the quarterly numbers. Revenue in Q2 FY’23 increased by 31% to INR148.1 crores, EBITDA was higher by 8% to INR22.3 crores and adds to that [indecipherable]. I would also say the revenue breakup segment-wise and geography-wise. Organic chemicals saw growth of 9% year-on year as compared to INR99 crores in Q2 FY’23. Inorganic chemicals jumped 122% from INR22 crores in Q2 FY’22 to INR49 crores in Q2 FY’23.

Domestic and export mix for Q2 FY’23 stood at 50%. So that these were the key financial highlights. I will now request the moderator to open the forum for Q&A session. Thank you.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Ranvir Singh from Edelweiss Wealth. Please go ahead.

Ranvir Singh — Edelweiss Wealth — Analyst

Yeah, thanks for taking my questions. Sir, just on growth side, what has been the volume growth during the quarter in organic chemical segment?

Harin Kanani — Managing Director

Yes, so in our existing quarter, as I mean in both — for both the segments, there is a volume growth as compared to the previous year Q2. In case of organic, there is volume growth, in case, as compared to even Q1 of the current financial year, our organic revenue was also almost up by 10% — as compared to the — INR10 crores as compared to previous quarter. In case of inorganic, we reached the highest lithium prices in the current quarter, so the peak lithium price impact was in the current quarter based on which there were some customers whose volumes were a bit down. And like, you know, there was a resistance to accept these high lithium prices. Also, some of them knew that the peak is coming, so in Q1, they had like pre-booked material and were working off inventory, so therefore in terms of volume, as compared to last year Q2, there was a growth, but as compared to-Q1 of the current financial year, there was a slight decrease in the volumes. However, like most of the customers have now accepted the new price and we feel also lithium prices have now stabilized, earlier the expectation was that maybe this high-price is not sustainable and prices will crash but the high prices are more or less sustaining after about 10% kind of a correction, so now more and more customers are open towards accepting this price and, of course, there are few customers who are just not able to afford the high lithium prices, but as I mentioned in my earlier calls, we are adding more international customers to basically make up for the little bit lesser volumes in the whole year. So overall what we were expecting that in the current financial year, on a stable lithium price about INR100 crores plus kind of revenue from lithium, so that we are on track to achieve and also our new capacity for lithium will also come online, so that next year we can end up doing better.

Ranvir Singh — Edelweiss Wealth — Analyst

Yes, so precisely, can you quantify what has been the average realization in organic chemicals segment and inorganic separately?

Harin Kanani — Managing Director

So in case of organic and inorganic, the biggest challenge is that you know the product mix has changed significantly, so because of the product I mean, it keeps changing almost every year, so it’s very difficult to say so much quantity is more or so much quantity is less, right, so that’s why it becomes difficult for us to say okay in terms of tonnage what has happened, but like qualitatively what we can say is that, yes, like if you just look at trade difference, how much did it contribute to, okay, and when you look at from that point of view, you can say that that is a increase or whether decrease, so this is what I shared with you.

Ranvir Singh — Edelweiss Wealth — Analyst

Okay now — because if you just take the total revenue and divide it by the volume, which I assume on that particular capacity utilization basis, average per liter price coming exorbitantly high during this quarter, so just I wanted to connect the dots whether I’m calculating right or wrong? So in terms of capacity utilization, can you indicate something that of the total 407,000 liters total capacity we have, so what has been the sold volume during this quarter?

Harin Kanani — Managing Director

Okay, so like Mahape and Karakhadi continue to work at around 80% utilization levels and Dahej site was at around 60% utilization levels. But again, 50% is also not fully optimized yet because you know some of the new molecules were getting launched and again some of the material, which was made but was not sold yet, so this is the utilization levels of sites. Some of them, like you know, the profit will be generated when we make the final sale of the material not the revenue will be generated when we do the deal. But if you are talking of utilization level like know again Mahape and Karkhadi are around 80%, 85%, and Dahej is around 60%, 65%.

Ranvir Singh — Edelweiss Wealth — Analyst

Okay. That’s fine. And secondly, on INR350 crore additional revenue you indicated in FY’25, that will come from inorganic side or organic side or this is probably related to that new capex we are going up that INR150 crores capex we are doing in lithium side?

Harin Kanani — Managing Director

You mean the INR250 crore additional revenue from around INR150 crore capex which we are currently doing, right?

Ranvir Singh — Edelweiss Wealth — Analyst

Yeah you indicated in commentay that FY’24 guidance of INR700 crores and INR725 crores and further in FY’25 that INR250 crore additional revenue may come. So that INR250 crore revenue is related to the inorganic side, I mean that lithium side where the expansion is currently going on? Or there is contribution from organic side also?

Harin Kanani — Managing Director

Yeah, so there are three contributing factors for the additional INR250 crore to INR300 crore revenue which are coming. One is the additional lithium capacity which we are adding, which will be somewhere around, let’s say, INR50 crore kind of a revenue. The second is, we are adding 60 Kl of additional reactor volume, so that will be a second contributing factor, and the 3rd one will be though lithium-ion battery material salts which we are doing, so that together, three of them are likely to contribute between INR250 crores to 300 crores of revenue.

Ranvir Singh — Edelweiss Wealth — Analyst

Okay, nice —

Harin Kanani — Managing Director

And this we have targeted for FY’25 and FY’26, so like once we are in FY’24, we’ll have a exact clear guidance how much in FY’25 but somewhere between FY’25 and ’26 we can reach the full utilization.

Ranvir Singh — Edelweiss Wealth — Analyst

Understood. Yeah. Thank you. That’s it from my side. Thanks a lot and all the best.

Harin Kanani — Managing Director

Thank you.

Operator

[Operator Instructions] The next question is from the line of Archit Joshi from B&K Securities. Please go ahead.

Archit Joshi — B&K Securities — Analyst

Thanks, good evening, sir, and thanks for the opportunity. Sir, just needed some clarification that I’m a little confused about reading from the presentation. We have mentioned that 50 MT of capacity will be operational in FY’23 and 400 MTAs line which also will be available for additional capacity going ahead. Sir, so if you can just share the timeline of how these capacities will be commissioned and also since you mentioned that some bit of revenues will be derived from the new electrolyte plant of that we are expecting to commission by the end of FY’23, so if you can also share the quantum in the beginning how much we can expect and going ahead what would be the size of this once you know 400 metric tons of plant is operational and available for us.

Harin Kanani — Managing Director

Sure. So as I just said in my opening remarks, we have given priority to the 400 metric ton plant for the salts, the lithium salts and additive products because you know we see that the demand from the customers is present today. So most of the — this is basically targeted at lithium salt derivative requirement and the electrolyte requirement is going a bit slower on our Indian customers side, so we are giving priority to the lithium salt derivatives — lithium salt for battery materials electrolyte which just targeted for the international material. Also, you know, once this is available, so when we start our electrolyte plant, we have an ability to use our own lithium salt, so we don’t have to depend on external source, so because of this, we prioritize that first. So as I explained in my opening remarks, we are expecting that in Q4 of this year we will start the commissioning of the plant, so like final installation of all the equipment not I mean installation and there’s initial trial and by Q1 next year we are targeting that trial production can start, this is part of the 400 metric ton lithium salt derivatives plant and for the electrolyte we are working in parallel and we expect that it should be ready by Q1 or Q2 of next year. So sorry if it is still FY’23 in the investor presentation, we need to correct that, but it will be ready little bit later in Q1 or Q2 of FY’23 — FY’24.

Archit Joshi — B&K Securities — Analyst

Got it sir, Got it —

Ketan Vyas — Chief Financial Officer

And in terms of the revenue from the 400 metric ton plant, again, that is part of the INR250 crores to INR300 crores of additional revenue we have projected. It should be like at peak utilization it will be somewhere close to around INR100-odd crores. Again it will depend also on the final product mix, what — how it gets sold but this is approximately the idea, so out of that INR250 crore, about INR50-odd crore will come from traditional lithium, about INR100-odd crores will come from like additional organic capacity which we are adding and around INR100-odd crores will come from this lithium salt derivatives unit, again, on full utilization. now. I think lithium salts and organic derivatives like might get done sooner. But because of the new like we want first wait for approvals etc to give a guidance that by FY’25 or FY’26, by when we can fully utilize this.

Archit Joshi — B&K Securities — Analyst

Sure, sir. Sir just one follow-up on this, since you mentioned that there is a fair bit of visibility more on the salts front which is electrolyte salts than that of electrolytes that we are focusing on at this point in time. Sir, is that — shouldn’t it be in mind — shouldn’t be the other way round that someone would be looking for a more packaged material which comes in the form of electrolyte for say than buying the salts because you know electrolytes can be readily installed in a battery, so is there something that we are missing or is there an insight that you’d like to share as to why there’s more demand for salts than that of [Technical Issue] itself?

Harin Kanani — Managing Director

Okay. So I’m glad you asked this question so I could clarify, yes, so in terms of overall interest, especially when it comes to India, the interest remains electrolyte, okay, and electrolyte as you rightly said, customers would like to buy electrolytes and when it comes to India our focus is also to sell the electrolyte only, however, this electrolyte and Indian demand is likely to start somewhere in 2024, okay, so there’s still a lot of time but in terms of the lithium salts, the international customers currently who are making electrolyte or who are making other electrolytes, for them, that requirement is today because it is being consumed even today, so from that point of view like you know what I wanted to say was that there are customers who are ready to test the sample and let’s say if my plant starts in the month of April or May, they can start buying whereas for electrolyte the customers are still taking time for the — I mean the Indian customers are still taking time to basically like start consuming the electrolyte, they want right now only very small quantity which as I mentioned we have a small setup which can do 200 kgs per month and that requirement can be met with my small plant. So in terms of timing like we felt that the electrolyte salt is needed first and electrolyte plant can be slightly delayed still which should be okay.

Archit Joshi — B&K Securities — Analyst

Thanks for the clarification sir. That’s it from my side. and all the best. Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Ankur Periwal from Axis Capital. Please go ahead.

Ankur Periwal — Axis Capital — Analyst

Yeah hi sir, thanks for the opportunity. Just continuing with the earlier question. So lithium salt initially will be addressing the international market with — and given that Indian demand is expected to start picking up from FY’24, probably this will be shifted back to India or there could be another round of capex wherein you can expand the lithium salt capacity as well so that the international market and the domestic market both could [indecipherable].

Harin Kanani — Managing Director

Yeah so you know what we are basically planning to do is that right now with this trial plant of 250, 400 tons, the 400 metric ton of salts which we make we will supply this to international customers and in parallel we are also working out that what is the amount of capex I mean what is the size of the electrolyte plant for India? See, as I’ve said in my earlier calls, electrolyte is mostly a local business, so in India we have an advantage because we are locally situated and our target is to serve the electrolyte market within India and internationally we want to do lithium salts, so the other idea of preponing the salt is that one fact so is the salt and I know what is the international interest, so when I am planning my India electrolyte and electrolyte salt demand, if I have a feedback also of the international demand, accordingly, I can go for a larger capacity for the salt, which will take care of India as well as the international demand and electrolyte, which will be mainly for the India demand, so that’s how we see it happening, so if we can get this done quickly, we can do our planning more efficiently, go for a bigger capacity for the salt both for India — considering both India and the international demand and the electrolyte plant capacity we will plan based on what is the India demand.

Ankur Periwal — Axis Capital — Analyst

Sure. And just a clarification, this all will be based on our own technology, right?

Harin Kanani — Managing Director

Yes, I mean the technology which we have — so we have our own technology and we also keep talking to international customers, I mean international technology providers, or people who have technology to see if there is a interest in partnering with Neogen because what it does is that if there are companies or if we have people who have technologies which basically — which have a proven track record having supplied to let’s say cell manufacturers globally, so then this gives even further — it gives us even further credibility to Neogen. So we keep exploring both the options — our own tech — we are working based on our own technology but there are also international companies which have a interest which are working with us.

Ankur Periwal — Axis Capital — Analyst

Sure. That’s helpful. Secondly, in your initial remarks, you did mention new client addition as well as the inquiries that have been rising across Europe and Japan. If you can probably touch or maybe put some more light there, what sort of inquiries these are more short term sort of requirements for structural longer-term contracts that we are working on?

Harin Kanani — Managing Director

So these are again mostly with innovator or like innovator kind of like you know basically it is global leaders in their areas in Europe and in Japan. And as I mentioned, so yeah, these will be long-term requirements, however, each one like the size of this molecule is, let’s say, between INR15 crore to INR50 crore kind of a demand. So I don’t know whether we’ll get into ultimately a long-term supply contract but yes it will be definitely long-term and it will be long-term demand because they’re mostly we are working with global leaders in their particular areas or who have a global strong position in their final molecules. So yeah and like especially in flavor and fragrance it’s mostly euro and in agrochemical it’s mostly Japan and Europe and like you know we have just started working with the bigger agrochemical companies as we had said once we have a head site ready, we have started approaching them and we have seen good response during our initial presentation, so now we are identifying potential projects on which we can work together.

Operator

Mr. Ankur Periwal, do you have any further questions?

Ankur Periwal — Axis Capital — Analyst

Sorry yeah just one. Another question on the margin front. The gross margin pressure that we had seen some bit of it earlier and there is an improvement this quarter, will it be fair to say that most of the benefit is already there or probably there could be some further improvement there?

Ketan Vyas — Chief Financial Officer

You mean in the gross margins?

Ankur Periwal — Axis Capital — Analyst

On the margin front, yes.

Harin Kanani — Managing Director

Yeah so overall margins right now I see the biggest impact is like when you look at the percentage margin is higher lithium prices. So what I can see is that the worst we have now seen. Now we feel that the lithium prices reached its peak and what we are now is at a new stable price at least for next one or two years. It may eventually decrease a bit, but for now. I think at least for next one or two years the price would remain more or less close to where it is. So slowly my customers are also accepting this, I’m very happy to say that our team worked really well with right procurement at the right time and getting into back-to-back contracts wheRE we ensured that in spite of historical four times, five times increase in lithium prices, still we were able to pass on all the lithium prices to our customers and like you know basically protecting our absolute EBITDA margin — absolute EBITDA margin. So overall in this year we had targeted INR600 crore revenue with around 18%, 18.5% EBITDA, which is around INR100 crores, INR110 crores, so in the first six months, we have already done INR300 crore and have done EBITDA close to around INR49 crores, INR50 crores, so we are on track to basically achieve like our targets in this year. Overall the way we look at it, our final revenue will be somewhere between, let’s say, INR650 crores to INR700 crores depending on how lithium behaves in the remaining six months, so will be somewhere between INR650 crores to INR700 crores, and the EBITA should be closer to INR100 crores, 110 crores what we had targeted. So I think more or less, yes, there is a very strong lithium price which we have passed on to our customers and like you know but whatever was absolute EBITDA that we are protecting and then as lithium prices stabilize with our new customers and lithium coming in, we will try to work that even with the higher lithium price, however, EBITDA margins or percentage margins also can improve going forward in the future.

Ankur Periwal — Axis Capital — Analyst

Sure. That’s helpful. Thank you and all the best.

Harin Kanani — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Mihir Damania from Ambit Asset Management. Please go ahead.

Mihir Damania — Ambit Asset Management — Analyst

Yeah, hi, I have one question. So my first question is we’ve seen elevated levels of working capital, which has resulted in almost INR93 crores of negative [indecipherable] from operation in the first half. How do we see it panning out for the second half and maybe going for FY’24?

Harin Kanani — Managing Director

So. I think in second half, our working capital cycle will improve. And what we are — see because we are basically ramping-up from, let’s say, INR80 crores to INR150 crore plus kind of a revenue. As I mentioned earlier, we will end the year with a top line of somewhere between INR650 crores to INR700 crores, so ultimately with the elevated lithium price we are talking of revenues in the range of INR170 crores to INR200 crores, INR225 crores kind of a revenue target that we need to reach. So when we are doing this ramp-up, there is some addition to working capital requirements as debtors as well as our stock levels have to basically increase to support these business levels, however, in this particular quarter or like last six months it was a bit higher because we are ramping-up and we are preparing for some of the molecules, so we make the molecule, we keep it, so this was one reason and second reason was that some of our pharma molecules we see like abnormally low demand as compared to what we had seen, so like we basically — these were our regular products which we are making for many years, the demand was a bit lower, so like we still continued our production, we have some inventory, now this inventory will be sold-off because like the demand is now improving and we now planned our production in such a way that okay since we have this inventory there are other molecules which are in the pipeline, so use the facility for making that and again control our inventory. So I think in the second-half, like by end of March we will see like improvement in our inventory levels. They should be lower than what they are today and also overall it will be better like the six months from working capital point-of-view as opposed to the six months now. Also as we get into FY’24 as I’ve stated earlier, like our goal is to first reach around 110, 120 days of like the stock Inventory levels on net sales basis by FY’24 and then going forward once the new molecules which are more dedicated — coming from more dedicated facility to improve it gradually as we get into FY’25 and FY’26. So I think we continue to maintain that.

Mihir Damania — Ambit Asset Management — Analyst

Okay, got it. Just another question I have, it’s — how are we looking to fund additional capex requirements, which will be announced in H2 of this year?

Harin Kanani — Managing Director

So first, we need to figure out what is the total capex requirement going to be? Based on whatever we had estimated earlier, if we are going for the same capacity, then we already had some debt, some equity portion, which is raised and then the remaining we were basically planning to fund using debt as well as our internal accruals. Of course, if the demand exceeds what we have currently planned, then we’ll have to relook at it but currently the plan is it’s mix of equity, which we’ve already raised, our own internal accruals as well as the additional debt, which we’ll be taking so that our debt-equity ratio will still remain around one is to one maximum 1.25 for a short period of time but otherwise it stays below one is to one is what we are targeting.

Mihir Damania — Ambit Asset Management — Analyst

Got it. Thank you and all the best.

Operator

Thank you. The next question is from the line of Sabyasachi Mukerji from Centrum PMS. Please go ahead.

Sabyasachi Mukerji — Centrum PMS — Analyst

Yeah, hi, thanks for the opportunity. Just continuing on the last participant’s question on funding the next capex. So if I look at your balance sheet and cash-flow, so cash have almost been consumed, we are sitting at almost I think almost INR250 crores of net debt and given the huge increase in inventory, cash flow from operations has also been negative. So what kind of — are we looking at fund raising plan as well apart from taking on debt?

Harin Kanani — Managing Director

So feel that, again, so there is like a certain level of investment can still be managed with our own funds that we have, I mean as I mentioned the working capital will also improve and while we have not yet fully even utilized our working capital facilities. So we still have room available there, so we feel that like up to a reasonable amount of investment when we are making, we should be able to like we should be able to raise our own funds just with debt as well as company’s own operations but again the final decision we can take once we have the exact size of the electrolyte business and the lithium salt additives, which will come with that finalize.

Sabyasachi Mukerji — Centrum PMS — Analyst

Okay, so the next capex division will entail one the electrolyte capex and if at all we need larger salt and additive capacity, right? Both the capex decision will be taken.

Harin Kanani — Managing Director

Yeah it will definitely lead the salt capacity but whether the salt capacity will be only to the tune of what is required for our own consumption or also to take care of international? So that’s the decision which we still need to make.

Sabyasachi Mukerji — Centrum PMS — Analyst

Okay, and you will take this decision hopefully by next earnings call that you will be hosting?

Harin Kanani — Managing Director

So again, there are two — the thing which is pending is once we have the final confirmation from our customers, so most of my customers are right now just about to finalize their final equipment purchase contracts, some of them are finalizing their technology provider partners, so once we get the final clarifications, so our expectation is that by March — before March, we should get maximum clarity from them, so in the second half, we should get a clarity from them and based on that anytime between let’s say now and March we should be deciding on the capex. So whether it will be before the earning call or just after. I don’t know, it depends on how the customers finalize.

Sabyasachi Mukerji — Centrum PMS — Analyst

Got it. Got it. Second question. You know, If I looked at other players in terms of competition in electrolyte capex, you know, I see many players setting up their electrolyte capex. Gujarat Fluoro Is one such name. So what is your view on competition especially in the domestic market?

Harin Kanani — Managing Director

So. I think as I said in international in my previous calls that yes there will be some competition where the customers can say, okay. I would like to buy this internationally. Even though there are some challenges or there can be like know some international company coming into India and setting up a shop here but, nobody has announced or nobody has even started work on that. Or the third can be domestic competition, so like between all of these like we will divide the market share and then you know based on whatever we have done so far or the work we have done, we will get a certain market share of that because the business is big enough where like the final market will be divided in this three ways — three or four ways. So, how much market share Neogen is getting, 25%, 40%, 50%, 60% will decide the final capacity of the plant that we need to make because how much India is going to make, there is a good degree of certainty, when they will start making, there is a bit uncertain but what market share Neogen get is what is going to determine the plant size that we are. So I’m fairly hopeful with the work we’ve done with our track record IN lithium that we have, we are expecting a decent market share. But exactly how much it is. I don’t know yet. Once I know. I will have my plant size and then the investment plan.

Sabyasachi Mukerji — Centrum PMS — Analyst

Got it and any other chemistry other than lithium-ion we are exploring like sodium ion or any other chemistry?

Harin Kanani — Managing Director

Yeah, so sodium ion chemistry followers or the equipment required or the facilities required are very similar to lithium ion. So right now our focus is on lithium but yes at our R&D stage we also have started looking at sodium to take care of some of companies in India who have already announced their plans to work on sodium but again our main focus remains on lithium and the same facilities can with some modifications be also used for sodium.

Sabyasachi Mukerji — Centrum PMS — Analyst

Got it, last question from my side on the chemistry process. I hear many companies talking about continuous flow chemistry moving on to continuous flow chemistry from a batch process kind of a thing. Do you see any merit for our case and do we intend to move to continuous chemistry?

Harin Kanani — Managing Director

So we have R&D team, which has been working on continuous chemistry products like sometime. Like generally our experience is that molecules which are like large-volume so you have maybe one or two steps but you have a large-volume kind of a requirement that is where continuous chemistry is more useful, so we do have some bromine derivatives where we feel that which are like normal bromine derivatives which we have been making for a long period of time where the volumes are couple of hundreds of metric ton, so that is where we are currently trying the flow chemistry options. Although like bromine being corrosive, the tool boxes for continuous chemistry remain a bit more challenging for bromine as compared to others but we are learning that and we have a team which is working on that. But as of [Technical Issue] concrete commercial on which we can plant them.

Sabyasachi Mukerji — Centrum PMS — Analyst

Got it. Thank you. Thanks a lot, Dr. Harin. That’s all from my side.

Harin Kanani — Managing Director

Thank you.

Operator

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

Nitin Tiwari — Yes Securities — Analyst

Hi, sir, good evening. Thanks for the opportunity. My first question is with respect to the lithium salt business that we are discussing. So one is, I just wanted to understand that and correct me if I’m wrong, so lithium salts typically would be about 10% to 15% of the basically volume and cost of electrolyte asset, right. So today like the lithium products that we are manufacturing, so what percentage does lithium form as a percentage of both products, so I’ll tell you like the motivation and the question is that today lithium prices are fairly high I mean four to five times increase we’ve seen but we’ve been able to pass on that increase because my sense is that like the percentage of lithium being used as a raw material in the product is a very small proportion and therefore the cost pass on is therefore easier, so would that be the case in case of lithium salts as well? And then secondly, I wanted to understand that — wanted some perspective around the market for lithium products currently in India and globally and what kind of manufacturing facilities we already have in India and what’s coming up if you can give us some sense around that.

Harin Kanani — Managing Director

Okay, so I think two parts of the question the way I understood is the first on existing lithium molecules and how much lithium contributes in that, correct? So in our existing molecules which we make, the lithium, now when I say lithium consumption, it’s lithium like globally comes out as lithium carbonate equivalent and lithium carbonate and all the lithium is measured as lithium carbonate equivalent. So I will also say so in terms of lithium carbonate, we have a product where the lowest side it would require like 0.15 kg per kg of lithium carbonate and on a higher side 1 lg of lithium carbonate is needed to make 1 kg of the molecule. So we have the full range and like it all — it’s irrespective of that we have been able to pass on the increase. The main reason why we could pass-on the increase is that yes there are some customers for whom this price is a challenge but the fact that we are still able to source lithium at a competitive as compared to our competitors, okay, this is what is allowing us to be able to pass on the increase and like you know wherever our existing customers are not able to take to increase, we are finding new customers who are interested in like capability because there are many of our competitors who are just not able to get enough lithium. So the fact that Neogen is able to get this lithium and make this product and has been making for last 30 years is allowing us to basically either with our existing client or with, let’s say, finding alternate customers to whom we can sell the product in such a way that we don’t have to take a hit because of the lithium price increase and we are able to pass on the risks.

I think your second part of the question, also, you need to know what are the capacities which are existing for such kind of existing lithium salt production, so as I’ve shared in my previous calls, so there is a company in Korea, there is a company in Japan, there are two companies in China and there is one company in Europe, so these four or five companies do similar work as what Neogen is doing and there are some companies in India which like bromine, like sometimes lithium also comes off as a byproduct in some other reactions in pharma or like at the end-of-the life of the machine, so there are some companies which basically collect this lithium material and then from that they try to make molecules similar to our existing molecules, however, most of the OEMs don’t like to, work with them because the quality is uncertain and even the pricing and the demand availability is uncertain because they can only make so much as what they can get from the byproduct or waste product. So this is when it comes to our existing lithium business.

Now when it comes to let’s say the electrolyte business, the lithium electrolyte salts like as you mentioned they are between 15% to 25% by weight, but you said weight and value, so by weight 15% to 25% is correct, but by value, the contribution can be much higher and that will depend on what is the lithium prices and what are the other raw material prices at that time. If I were to say today it would be much higher as compared to 15% to 25% what you are mentioning, the value of the salt which is present in the final electrolyte in the electrolyte pricing. So I hope this answers your question.

Nitin Tiwari — Yes Securities — Analyst

It does clarify to a large extent. Sir, actually what I was trying to understand is that, has the increase in lithium prices anyway impacted the lithium electrolyte salt market? Has impacted the demand in anyway like what is the sense that you’re getting ongoing in your conversations, if you can help us understand that, and what could be a potential size of the market for the salts specifically in India? So you haven’t given an indication of maybe the electrolyte market size that you’re looking at given the battery capacity that we will be looking at by 2030. But any sense on the salt market size as well globally and within India?

Harin Kanani — Managing Director

Yeah so, you know. If you were to basically look at, so like let’s first say the India demand — first of all your question that has the lithium — high lithium prices affected the demand of the electrolyte salt? So to answer that you know the electrolyte salt requirement or electrolyte requirement will be driven largely by EV and to some extent by the energy storage requirements which are there, and at least when it comes to EV, it’s very clear that the demand and the projection still continues. I would — like long-term we would worry or let’s say sometimes you would worry that like especially when you are talking globally almost all the countries wherever EVs are getting made, there is a waiting between four months-to 12 months, 14 months, pre-booking is required to get the EV. So I think the demand still remains strong. I have not heard of anybody kind of getting down on the demand on the EV, so as long as that is remaining and like you know the desire to move to non-conventional energy which basically generates energy storage requirement also continues, so more and more countries want to move to solar, wind etc. And especially in Europe with what is happening with you know the existing problems of gas, it’s even more like know more they want to move to the renewable energy, which requires more energy storage. So therefore. I don’t see the demand for lithium-ion batteries going down and hence the demand worldwide for the electrolyteS remain same or similarly like when we are even talking of India, the projections which we have given for 2030 like which was made by IEFS and which is what we have used as a basis continues to remain. I don’t see like any delay in the plans or the demand going down from where it was. So therefore the demand which you mentioned of around 150,000 metric ton of electrolyte continues to remain.

In terms of electrolyte salt, it will be between 15% to 25%, so you can just multiply that number by 15% to 25% and you have the range of what is the electrolyte salt, which would be required for India, let’s say by 2030.

Nitin Tiwari — Yes Securities — Analyst

Right, sir. Staying on that topic, so I if I understand it right, there are a number of electrolyte salts which are used in lithium-ion battery, so are we planning to produce any particular salt or there’ll be a range of salts that we will be producing as such?

Harin Kanani — Managing Director

Yeah so we are planning to ultimately make the range of salts required.

Nitin Tiwari — Yes Securities — Analyst

Understood. Sure sir and lastly if I may push in one more for you, in your presentation, you had indicated like that CSM opportunities also looking. Very attractive, so if you can just throw some more light on making CSM operations as coming our way and like how we’re looking at that segment evolving over like next couple of quarters?

Harin Kanani — Managing Director

Sure. So CSM opportunities we had like basically two targets, first is once Dahej site started, our idea was that the CSM should increase from 10% of our revenue to 20% let’s say by FY’24, so if I looked at the first six months, we are already at 15%, so we are moving in that direction and as I also mentioned in my opening call now that Dahej site and the capacity was available we could go to customer, take POs and like you know there are four to five molecules which have now moved from pilot to a first commercial production across like three different industries. agro as well as flavor and fragrance as well as specialty chemical application in engineering. So these molecules have now moved again and on-top of that — so this will allow us that at least by FY’24 we are meeting our target of 20% of INR750 crore we are getting by, let’s say the CSM opportunity, in addition for growth beyond FY’24, we said that we will start now once Dahej site is available we’ll start working with global innovator companies in Europe which are Europe and U.S. which have a much larger requirement, so we have made our presentations, many of them have really appreciated our Dahej site, some of them have started visiting, some of them have just made the initial presentation and evaluating based on our chemistry expertise what is that which kind of projects which we can do. Also as I mentioned in my opening remarks, we also are working in organometallic, we were working with Grignard reagents which are magnesium-based organometallics whereas now we were able to also make use organolithium molecules which are even more difficult to handle and the reactions happen at even lower temperature. So with this increase in our expertise, there is a good interest and we hope that by the time we work with our existing 15 customers in the CSM space to meet our like short-term goals, we would have pipeline of bigger molecules coming in from global majors and hopefully that will give all the growth for FY25, FY’26 beyond.

Nitin Tiwari — Yes Securities — Analyst

Thanks sir. That’s very helpful. Thanks for answering all the questions and all the best to you.

Harin Kanani — Managing Director

Thank you.

Operator

Thank you. Next question is from the line of Yash Shah from Investec India. Please go ahead.

Yash Shah — Investec India — Analyst

Hi sir. Sir, my question was in continuation to the previous participant’s question which was about our competitors in electrolytes and you mentioned that we’ll be splitting market share. What I actually wanted to understand is as you’ve mentioned that we’ve been pioneers in the lithium chemistry for last 30 years and our ability to procure lithium sets us apart to our competitors which are not many in Indian space at least. So what. I really wanted to understand is having such kind of an edge, should we not be the market leader and why would we split the market share with our competitors when it comes to the electrolytes?

Harin Kanani — Managing Director

So you know I said there are three things. One is that customer can say I’m going to buy this directly from someone who is already making and supplying it to like it all battery manufacturers now, so that’s one sense of competition. The second sense of competition is some of the global companies coming to India and saying, hey, I will setup a shop in India and supply and these companies also are making electrolyte and selling electrolyte, right, which has not happened. And third is, other than Neogen some other company also basically setting up electrolyte. I would be very happy if I have 100% market-share but. I know my customers are considering all these options and maybe each customer even if they go with Neogen they might want to keep a second option, they might say, okay, split it between 80-20 or something like that. So, I guess it depends on my customers, I would expect that there will be some competition looking at the size of the molecule and size of the market of course you know-how it’s going to get split, how much market-share I will get, again, my effort will be to try to get maximum market share considering our abilities, but ultimately I can say more completely only as things develop, so like in our internal projection we have like a minimum case, we have a maximum case, so we have an idea that the capacity will be somewhere between here and like you know in a particular range, so it’s better that once I have more stronger confirmation or some contracts with my customers where we can like give a more precise number of where the market share will lie.

Yash Shah — Investec India — Analyst

Got it sir. Sir my second question was regarding employee cost and the tax rate. Regarding employee cost sir, is there any one-off this quarter because it has been at historically highest level at about 8% of the revenue and on the tax front sir like for H1 the tax rate has been significantly high at about 29% approximately. I was assuming sir that with the Dahej revenues ramping up, our tax rate will decrease, so any comments on these two factors?

Harin Kanani — Managing Director

So. I think on the first one yes, so basically we have reached our peak employee count already before we have reached our peak turnover from Dahej and other sites. So as utilization improves as our revenues because we have not like let’s say we say we have a capacity of INR750 crore so that’s roughly around INR175 crore on an average and with today’s lithium prices somewhere around INR200 crores, INR225 crores. So as we reach around that kind of numbers between INR175 crores to INR200 crores, as a percentage you will see that our revenue will come up — as a percentage, the employee cost will kind of moderate and yes this is relatively on the higher side but I feel it will improve as compared to this as our utilization levels improve.

On your second question about tax. We’ve been a bit more conservative, so Dahej operations are still ramping up, so we are kind of projecting on a higher side but like you know as we get closer to the year as you are very right that with the Dahej contributing more our overall tax rate should improve and like should be like at least 25%, 26% or below. Otherwise, we always have an option to go to a second region. So this is our expectation, so this has been a provision done up till now based on guidance from our auditors and our internal working but like it’s more conservative and we hope that by the end-of-the year it will be closer to 25% or so.

Yash Shah — Investec India — Analyst

Got it sir, thank you for answering all my questions sir, all the best.

Operator

Thank you. The next question is from the line of Pallavi Deshpande from — She is an individual investor. Please go ahead.

Pallavi Deshpande — Individual Investor — Analyst

Sir on the electrolyte salts, just wanted to understand what’s the number of customers we’re talking to and where they would be located which region?

Harin Kanani — Managing Director

Thanks for the question Ms. Pallavi. So we are talking to maybe 12 — around 10 to 12 customers in India for electrolyte and about two customers internationally for electrolyte and for electrolyte salts we are talking to several customers in like Japan, Europe and Korea markets.

Pallavi Deshpande — Individual Investor — Analyst

Right sir and sir you mentioned about — my last question, you mentioned about the pharma demand being low on some molecules, are those the large molecules that you are speaking about? And you also said the demand is coming back to normal, so any insight into that part?

Harin Kanani — Managing Director

Yeah so I think we have seen that some of the APIs which are very large-volume which are used in bulk quantities like which are — so which also the derivatives of that also for Neogen were on a higher side, so you know our highest molecule is also let’s, say about 10%, 15% of our revenue. So these are — some of these molecules have seen a bit lower demand. I think we are generally seeing pharma either people are saying inventory correction or because people are working from home and less travel, so people have become healthier but we are seeing a little bit lower demand on the pharma side for last two quarters. We have seen that like my sense is it’s more inventory correction which is happening that during COVID because pharma was essential, everybody kind of — like the entire supply chain had like basically built up inventory and now like people are doing that correction. Historically we’ve seen that such corrections come within one year’s time, we’ve already seen some improvement in these molecules, so in the existing quarter there is more interest than in like the molecules where the demand was low as compared to Q2 and Q2 was slightly better than Q1. So I think that trend is continuing and hopefully I feel by next year the demand should return to normal. Having said that, historically as Neogen we are used to such kind of demand like going down for a particular API for various reasons and that’s where the number of molecules that we have kind of comes to our help. So we already — like the regular ones we’ve kind of made and kept some inventory and now in current quarter and next quarter till the demand comes back to live, we have — now we are now using the facility to make some other Intermediates, so overall that will help us increase our organic revenue.

Pallavi Deshpande — Individual Investor — Analyst

Would you say that this quarter and next — I mean maybe the next quarter we should be — it should be cleaned up and next — fourth quarter should be normal?

Harin Kanani — Managing Director

Yes. So again, demand, let’s hope by at least, Q4 or Q1 it becomes normal. You see usually sometimes when this kind of slowdown comes in pharma, inventory correction take somewhere between one, one-and-a-half years. I think you’ve seen already six months of that, so between next six to nine months, things should start — I mean, things have started improving better but by — for it to be fully normal will take around let’s say between six months to a year from now but Neogen would like to utilize this facility for other molecules and from our site our performance will start improving using the other molecules.

Pallavi Deshpande — Individual Investor — Analyst

The agrochemical demand has been fine on that side?

Harin Kanani — Managing Director

Yeah we have not seen any decrease in demand in agrochemical molecules, yeah, however, one thing which is there across is that we’ve seen China like with the demand going slow and Chinese having overcapacity, they are becoming more and more aggressive when it comes to both pharma as well as agro. So sometimes we have seen prices from China, which are really difficult to believe like historically low. Sometimes we even believe that this is like a very good case for anti-dumping because they are basically selling at a very-very low-price which even raw material doesn’t make sense. So this is a business typically of China that when there is a capacity-constrained sometimes like overcapacity they go to sometimes very low prices and there are times when the demand the shortage there try to maximize the potential, so we’ve seen a bit of that but. I think more and more customers are aware of these kind of Chinese practices and they are still sticking but yes there is a very strong competition in general from China because of the overall lower demand from them.

Pallavi Deshpande — Individual Investor — Analyst

Is the Chinese competition more on the agrochemical than the pharma. Would it be fair to assume?

Harin Kanani — Managing Director

It will be there for both, but like in pharma it’s a little bit more difficult because they need to have a prior approval, so it can be only with people who have been approved. When it comes to agro, there is a bit more flexibility for customers who changeover, because there is no registration or USFDA approval or anything like that required. So in a non-regulated pharma and agro little bit it becomes more easier and in case of regulated pharma it’s not so much.

Pallavi Deshpande — Individual Investor — Analyst

Right sir, thank you so much, sir.

Harin Kanani — Managing Director

Thank you.

Operator

Thank you. As there are no further questions, I now hand the conference over to management for closing comments.

Harin Kanani — Managing Director

Thank you all the participants for joining the call. I hope we were able to address your queries. If you have any further questions, please feel free to reach out to our Investor Relations team and we will address them. Thank you once again. Stay safe and we look forward to connecting with you again in the next quarter.

Operator

[Operator Closing Remarks]