Neogen Chemicals Ltd (NEOGEN) Q4 FY23 Earnings Concall Transcript

Neogen Chemicals Ltd (NSE:NEOGEN) Q4 FY23 Earnings Concall dated May. 15, 2023.

Corporate Participants:

H. T. Kanani — Chairman & Managing Director

Ketan Vyas — Chief Financial Officer

Analysts:

Nishid Solanki — CDR India — Analyst

Saurabh Kapadia — Sundaram Mutual Fund — Analyst

Neelesh Ghuge — HDFC Securities — Analyst

Sabyasachi Mukerji — Bajaj Finserv AMC — Analyst

Sudarshan Padmanabhan — JM Financial PMS — Analyst

Rohit Nagaraj — Centrum Broking — Analyst

Aman Vij — Astute Investment Management — Analyst

Yash Shah — Investec — Analyst

Omkar Kamtekar — Bonanza Portfolio — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Q4 and FY23 Earnings Conference Call of Neogen Chemicals Limited. [Operator Instructions] 0 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.

Nishid Solanki — CDR India — Analyst

Thank you. Good evening, everyone, and welcome to Neogen Chemicals Q4 and 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 questions and answers where the management will be addressing queries of the participants.

Before we commence, I would like to share our standard disclaimer. Certain statements made or discussed on the conference 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 Q4 FY23 earnings presentation which has been shared earlier.

I would now like to invite Dr. Harin Kanani to share his perspectives. Thank you and over to you sir.

H. T. Kanani — Chairman & Managing Director

Thank you, Nishid. A very good evening to everyone, and thank you for taking time-out to join us on Neogen Chemicals’ Q4 and FY23 earnings conference call. Hope everyone is keeping safe and in good health. We reported our financial performance on Saturday, 13th May 2023, and subsequently circulated the result documents. I hope you had a chance to glance through them. I will take you through the performance highlights, update on expansion initiatives and several developments that occurred during the period under review.

FY23 was a landmark year for us, not only did we report a solid financial performance but also relentlessly worked towards executing several critical opportunities that would lay a strong foundation for our ambitious growth march. We entered the year on a challenging, mainly influenced by Russia and Ukraine conflict that disrupted the global supply-chain and resulted in steep inflation in RM cost, utilities and and adverse movement in foreign-exchange rates. I’m glad that we stayed nimble and navigated through these pressures to report healthy performance in a difficult operating environment. I would like to thank all our employees who displayed resilience and supported us in this endeavor.

Let me quickly summarize some of the key financial highlights for the year. Revenues grew by 41% to INR6 86 crores as guided earlier, while EBITDA came in at INR112 crores, higher by 29%. Profit after-tax stood at INR50 crore, an increase of 12% year-on year. Performance was steered by incremental contributions from expanded activities and demand for strong lithium derivatives, favorable product mix change towards value-added products as well as lithium price. We continue to witness sharp volatility in input and logistic costs, volatility in pharma demand and lithium prices, which we were able to pass on to our customers with some time lag, thereby protecting the absolute earnings.

For FY23, we reported 28% increase in inorganic chemicals revenue, which was largely volume-driven, while inorganic chemicals revenue grew by 90%, a large part of which was on account of significant increase in the prices of lithium raw materials and the balance was contribution by new customers that we added during the year. Having said that, RM prices linked to lithium have pulled off Post Q4 and impact of which will be visible in the current year.

I will now share some crucial developments that occurred in this quarter which will steer our performance momentum going ahead. Firstly acquired 100% stake in BuLi chemicals India, which owns the technology to manufacture n-butyl lithium and and other organo lithium products using lithium metal. This acquisition was completed on 3rd May 2023, pursuant to which BuLi Chemicals has become a wholly-owned subsidiary of Neogen Chemicals. The acquisition is expected to significantly boost Neogen’s portfolio by offering lithiation reaction to existing customers, as well as new pharma and agrochemical customer. In addition to this, we will further strengthen and help scale up the advance intermediate and CSM manufacturing business.

Secondly, in a major development, we signed a landmark agreement with f MU Ionic Solution Corporation Japan. MU isa Mitsubishi Chemical Group company to acquire technology license for manufacturing electrolytes India. This is the historical development for us as a MU, a global leader in electrolyte manufacturing has issued its first-ever license to anyone in the world and they have chosen Neogen Chemicals. This will bolster our growth initiative in the battery chemical space. It will ensure that our electrolyte plant needs the stringent global standards for quality, reliability, safety and efficiency, while helping greatly in reducing the approval time for lithium-ion battery makers.

Both these developments are a testament to our promise and commitment towards building a solid foundation for the future. I believe this will significantly strengthen our competitive position in the market as we expand our R&D progress across several chemistries to offer deep value to our customers.

Moving to our expansion plan, our capex initiatives are underway and well on track. We have increased our reactor capacity for specialty organic chemicals by 31 meter cube due in Q3 and Q4 FY23, an additional 29 meter cube will be added by September ’23 as per earlier plan. Within inorganic chemicals, we completed the expansion of our lithium salts to install up to 2,400 metric ton, which is coming from 30 meter cube of reactor volumes by March 2023, one quarter ahead of schedule. For battery chemicals, the new capacity for 400 metric tons per annum for manufacturing specialty electrolyze salt and additives will be commissioned by June or July 2023 as per our earlier guidance. While manufacturing plant for 1,000 metric ton of electrolyte at the Dahej is also expected to be ready by September 2023 as per our earlier guidance.

Further to this, we have started basic engineering work for the expansion project announced in the previous quarter and the same is being planned in a phased manner. However, post our announcement with MUI, some of these projections around battery chemicals, including the capacities and revenues will change and we will come back to you in couple of quarters to share further details around that.

Our planned efforts to increasing the contribution of advanced intermediate and custom synthesis and manufacturing is on right track and we are witnessing higher contribution from value-added products that require multiple steps,. In-line with this, we are strengthening our R&D competencies. During the year, we added 82 new customers which contributed 7% to our revenue, both within India and globally, taking our total customer tally to almost close to 1,550 customers — in advance intermediates 1,500 customers. Currently, we have totally 245 products in portfolio and additionally working on 25 new products in our R&D, which has a potential future demand potential of almost close to around INR2,000 crores. Let me conclude by say that we are prepared to embark on the next phase of expansion, showcasing our proficiency in multiple intricate chemistries and manufacturing capabilities at a larger-scale. The demand situation remain favorable and our goal is to sustain this profitable path of growth.

That ends my opening thoughts. I would now request our CFO, Mr. Ketan Vyas to share financial highlights for the period under review. Thank you, Dr. Harin. Good evening, everyone, and welcome to our Q4 and FY23 earnings calls. I will take you through the key financial highlights. Please note that this is on standalone basis and based on year-on year comparison. In Q4 FY23 revenues grew by 30% year-on-year to INR2,039 crores and in FY23 they grew by 41% year-on-year to INR66.2 crores. The company achieved its highest-ever revenues driven by higher contribution from expanded capacity, consistent demand situation and a positive shift in the business mix towards value-added products. Organic chemicals revenue growth of 39% year-on-year at INR130 crore in Q4 FY’23, whereas inorganic chemicals revenue increased by 14% year-on-year at INR crores. In FY’23 organic chemicals saw a growth of 28% year-on-year at INR463 crores, whereas inorganic chemicals grew by 80% year-on-year to INR223 crore. The domestic and export mix for Q4 FY23 stood at 55% and 45% respectively. EBITDA increased by 22% year-on year at INR32.6 crores in Q4 FY23 and 29% year-on year at underlying INR11.6 crores in FY23. The company-managed to achieve better EBITDA performance even though there were considerable fluctuations in input prices, utility costs and adverse forex movement. This can be contributed to a positive shift in the product mix. Although, there was increase in cost component, it was broadly in-line with expansion of revenue and when viewed as a percentage of overall revenue, the cost remained stable. Coming to the PAT performance, for Q4 FY23 it stood at INR10.3 crores and in FY23 it increased by 12% year-on year to INR15.1 crores. The company’s PAT performance remain robust despite several changes. The finance costs were higher due to ongoing expansion initiatives and higher interest rates compared to the previous year. Moreover, the depreciation was high related to incremental reactors added during the year, which has not yet reached full utilization yet. Net-debt after including current maturities of long-term debt stood at performance265 in FY23. In light of strong performance during the year, the Board of Directors has recommended a final dividend of INR3 per share for FY23 subject to shareholder approval. Those were the key financial highlights. I would now request the moderator to open the floor for Q&A session.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] We have a first question from the line of Saurabh Kapadia from Sundaram Mutual Fund. Please go-ahead.

Saurabh Kapadia — Sundaram Mutual Fund — Analyst

Yeah, thanks for the opportunity. So my first question on the BuLi Cemicals. So is there any seasonality in the business on the revenue should be equally distributed in the quarters?

H. T. Kanani — Chairman & Managing Director

Hi, so whatever we have seen so far, this should be more or less uniform because it goes to pharma customer. However, you know the BuLi Chem people were actually focusing only in the India market, whereas we have an opportunity to also sell this internationally in markets such as Japan, Korea and Europe. So we are still not yet aware if there is a seasonality or like if the revenues in the international market would be a bit lump depending on our business development activity. But at present we can estimate that, let’s say, maybe this quarter we just completed the acquisition and now getting ready to start operations, importing the raw-material and other things on our own, but from Q2, Q3, Q4 you should see more or less uniform revenues coming in.

Saurabh Kapadia — Sundaram Mutual Fund — Analyst

So what is the utilization level for that plant and what could be the peak revenue what we can achieve from this current capacity?

H. T. Kanani — Chairman & Managing Director

So this n-butyl lithium is heavily dependent also on lithium prices. So subject to lithium prices, it will be somewhere between INR50 crore to INR125 crore kind of revenue potential, depending on how much lithium prices move forward. For the current year I expect — now lithium prices have cooled down a bit. So I expect somewhere around INR50crore to INR75 crore revenue contribution coming in additionally from this business.

Saurabh Kapadia — Sundaram Mutual Fund — Analyst

Okay. Sir, coming to our business, so what’s the utilization levels organic capacity and by when we should reach optimum level?

H. T. Kanani — Chairman & Managing Director

So at our peak utilization with our existing installed reactor capacity was somewhere around INR150 crores — INR150 crores per annum, and we are at around INR130 crore, INR35 crore revenues as you see from our results. In addition to that, our new reactor capacity is coming online. So with this new capacities coming online, we should be somewhere around — like the total peak revenue potential would be INR175 cores, INR180 crores per quarter kind of organic revenue potential. However, I think our capacity is coming online by September and maybe some time in FY25 we can beat this peak revenue potential of, let’s say close to around INR175 cores, INR80 crores sometimes by FY25.

Saurabh Kapadia — Sundaram Mutual Fund — Analyst

Okay. Sir, lastly on the working capital. So, if we look at the working capital has further deteriorated compared to last year. So how we should look at improvement, by when improvement will come?

H. T. Kanani — Chairman & Managing Director

So basically as we have stated in our last two calls that, like we were going through a significant change and increase in our capacity, increase in product mix and due to that there was a higher working capital requirements especially when we are getting the capacity to full utilization levels. So if you see, for example, our inventory increased drastically from almost INR189 crores in March 22 to INr282 crores by September 2020, and in that first six months we did a revenue of around INR300 odd crores. Now in the second half we did, like we increase it further from INR300 crore to INR400 crores, but the inventory has remained more or less stable. So basically to sustain the current level of business we need somewhere around INR280 crores to INR300 crore kind of inventory. But as our utilization improves and as we reach our peak revenue potential in terms of number of days, we will improve. It’s our target that like — so if you look from, even September to March we have improved almost by 25 days and by, let’s say FY’24 our target was to reach inventories levels of around 120 days on-net sales. So we will again target the same that by FY24 we will reach peak utilization in our Dahej and other facilities, and we hope to reach about one 120, 125 days on the net sales basis inventory levels, more or less similar to what we had in FY21.

Saurabh Kapadia — Sundaram Mutual Fund — Analyst

Okay, thank you. All the best.

H. T. Kanani — Chairman & Managing Director

Thank you. Thank you. We have next question from the line of Neelesh Ghuge from HDFC Securities. Please go-ahead.

Neelesh Ghuge — HDFC Securities — Analyst

So my question is on the tax-rate. So in our earlier conversation you guided that for FY23 the tax will bein the range of 25,000 plus or minus. But if I look at FY 23 number, the tax rate is about 29% plus. So can you guide us on the how the tax rate will be in coming years?

H. T. Kanani — Chairman & Managing Director

So we have completed the majority of our CapEx in Dahej and when we do like higher CapEx it creates that additional depreciation, etc., which does not give us a tax level significant profit, which is basically contributing to a higher tax-rate. So since we have now completed majority of the CapEx in Dahej i Neogen Chemicals and now we have only limited CapEx remaining, our expectation and with Dahej now reaching full utilization level, over the next two years we expect to first start around 20% to 25% and then later on move to 20% to 22% tax-rate over let’s say next two financial years. This is our estimate based on our current projections for Dahej.

Neelesh Ghuge — HDFC Securities — Analyst

Okay, and on the guidance, when here are in the top-line guidance, I know that you continuously guiding us on FY24 topline, but with the recent acquisition of this Bu lithium 100% acquisition. So can you just guide us on the FY24 and then FY25 by topline number?

H. T. Kanani — Chairman & Managing Director

Sure, so. I think originally if you remember our FY23 guidance was around INR600 crores. And like we have done INR686 crore, but that was mainly driven by historically very-high lithium prices, which is what we basically passed on to our customers. So if I were to do a correction of that, we would be somewhere closer to INR600 cores, INR615 crores in that range. Now in the current year we have currently seen the prices have like reduced drastically and come down very close to what the original prices were, although they’re still higher than the original prices. So therefore we estimate — so previously we had given around FY24 target of around INR750 odd crores of revenue. So with the the acquisition BuLi Chem, what we estimate is at least INR800 cores, INR825 crore kind of a revenue coming in on a stable lithium prices and depending on how the lithium prices fluctuate about, it might be somewhere closer to aroundINR850 crores, INR875 cores in that range.

Basically what we are looking, like if we remove the — like lithium price correction, we are looking at a 25%, 30% growth in our regular business, including the BuLi Chem business, and similarly on the EBITDA also we expect around 25% to 30% increase over our current year revenue — our current year EBITDA performance. So the exact offline will depend upon how much lithium fluctuates during the year.

Neelesh Ghuge — HDFC Securities — Analyst

Correct. Absolutely. So is my understanding correct, just correct me if I’m wrong. On the current, as you mentioned in your initial comment that lithium prices are already corrected, but still on an elevated level. So with that current lithium prices you are guiding INR850 crores to INR860 crores, ex lithium.

H. T. Kanani — Chairman & Managing Director

Our base business was supposed to be around INR750 crore on stable lithium prices. So with BuLi Chem and with some slightly elevated levels of lithium, it will somewhere in the INr800 core to a INR825 crore range, okay. And again, if the lithium starts moving up significantly, then it might reach somewhere around INR850 cores, INR875 crores in that range.

Neelesh Ghuge — HDFC Securities — Analyst

Okay. Thanks a lot, sir.

H. T. Kanani — Chairman & Managing Director

On a stable lithium prices, we would estimate like the 25% to 30% increase and on both on the base revenue of around INR600 crore, as well as 25% to 30% increase on our EBITDA levels.

Neelesh Ghuge — HDFC Securities — Analyst

Hope. Thanks. Thanks, Harin.

H. T. Kanani — Chairman & Managing Director

That is for FY24 and for FY25, like again, as we reach full utilization level by FY25, ’26, as we have given a guidance, depending on the price of lithium we should be somewhere between INR900 crores to INR1,050 crore. And of course, this is based on the CapEx which we are committed till now for over regular business and BuLi Chem. Basically we consider BuLi Chem as a part of, like very similar to our existing business because the end-user industry is pharma, agro and similar to that.

Neelesh Ghuge — HDFC Securities — Analyst

Okay. And just one clarification I need. You mentioned that you will again revise your CapEx for your electrolyte, maybe after two quarters. It’s the correct way?

H. T. Kanani — Chairman & Managing Director

Yeah, I think in maximum within two quarters we should have a clear idea on the CapEx, how we are going to Phase to the 30,000.

Saurabh Kapadia — Sundaram Mutual Fund — Analyst

Okay. And after that you require minimum 18 to 24 months-to put up the plant and facility up and running?

H. T. Kanani — Chairman & Managing Director

Yeah, so after that we would require somewhere around 15 to 18 months.

Neelesh Ghuge — HDFC Securities — Analyst

Okay. Thanks, thanks, Harin. Got it.

Operator

Thank you. [Operator Instructions] We have our next question from the line of Sabyasachi Mukerji from Bajaj Finserv AMC. Please go-ahead.

Sabyasachi Mukerji — Bajaj Finserv AMC — Analyst

Yeah, hi. Thanks for the opportunity. Sir, my first question is on the gross margins. So if I look at the gross margins for the current quarter, you have been doing 43%, 44% percent gross margins in Q1, Q2, Q3, but it dropped to 40% levels. The inflated prices where there in Q1, Q2, Q3 as well. I understand that, — the math. But what is the exact reason for this dip? And how should we look at gross margins going ahead?

H. T. Kanani — Chairman & Managing Director

Sure. The main contributor for this is the peak lithium prices because lithium at its peak price in December, Jan, which is what the inventory that we consumed by March. So that was one of the factors driving. And historically as we have said that previously we used to always share our gross margin is 40%, plus or minus 2%. And in the last call what we had said — we see now more like 42% plus or minus 2%. So its kind of moved that 2%. So depending on a year-on-year or quarter-on-quarter. And again, gross margin and the manufacturing all goes hand-in-hand because depending on the product mix some products have slightly better gross margin, but then the processing cost could be higher. So overall, like, you know, we had — there is a 2% shift on that and we maintain that. It will be like 42%, plus-minus 2% in that range in a normal case, barring some large movements in lithium prices or other raw material.

Sabyasachi Mukerji — Bajaj Finserv AMC — Analyst

Okay. So there is a comment on the press release as well as in the presentation that you have seen a noticeable shift in the share of value-added products. And if just adjust the revenue of INR686 cores to, lets say INR600 cores or INR615 cores that we have been saying, just eliminating the insertion inserted part because of the lithium prices, gross margins of INR296 crores on a base of 615 translates to a gross margin of 48% and an EBITDA margin of again INR112 crores upon INR615 cores is around 18%. So on six INR615 crores this gross margin looks very elevated and the shifts of value-added products, the CSM business, if you can guide whether this is sustainable and 47%, 48% gross margin, are we looking at those margins in the near term?

H. T. Kanani — Chairman & Managing Director

No there few molecules which give us that and ultimately we’ll see as — I feel this high lithium prices is going to be like maybe one or two years more than it will kind of stabilize. But based on whatever I see now, I look at around — my guidance would be 42% plus-minus 2% would be the gross margin we should look at in the near-term. Till we have a certainty gross margin was better than that, will let you know.

Sabyasachi Mukerji — Bajaj Finserv AMC — Analyst

Okay, my next question is on the lithium salt and electrolyte. Just wanted to know about the manufacturing process. I understand that we will start with the lithium carbonate that we’ll import. But if looked at LiPF6, what are the other key raw materials? And fluorine is raw material, then how is your readiness in terms of having fluorine or a HF plant. Are we thinking of getting an HF plant? The thought process on that.

H. T. Kanani — Chairman & Managing Director

Yeah, so for the other raw materials, also they are domestically and we like to work with some of the domestic producers, sometimes multiple of them and like basically have basic understanding in place for a long-term supply contract or supply security with them. We can get into the final contracts just like we can do with lithium. Once our customers start signing up long-term contracts. But we have already reached an understanding with suppliers of other raw materials of HF and phosphorus raw materials required for making a LiPF6. Okay, lastly my question on BuLi chemicals. So if you can please explain this no need of this lithiation reaction and use this, because it is one of the few plant just outside of China and Neogen has now access to it, why the revenue is so low, Just INR82 crores. And that also I believe because of the inserted lithium prices, what is the kind of revenue potential you see next two to three years from this? So. You know, you have to basically remember that the existing plan which was set was setup by Livent and Livent had its own plant n US. They had a plant in UK., they had a plant in China, and this was their fourth plant. And originally they set it up in India as a trial facility with the plan that they will expand it in the future like as the India demand picks up, but currently they basically kept it at the level. So when it was Livent, they had like multiple locations worldwide which were taking care of the world demand, and this was only based upon India demand. So currently when we start with this plan with the existing capacity, as I said, depending on the price of the lithium it can be somewhere between INR50 crores to INR125 crores kind of a revenue potential. Now we are trying to do things to debottleneck, to get additional production permissions or, like you know, other like maybe also in future consider expansion if needed. But at present with the capacities which are in place, this is a revenue potential.

Sabyasachi Mukerji — Bajaj Finserv AMC — Analyst

And what would be the margin profile of this asset?

H. T. Kanani — Chairman & Managing Director

It goes more a little bit on absolute terms downs just because, like I said, price of lithium is one of the key contributors. So lithium metal is even more expensive than lithium carbonate. So in a percentage point-of-view — in a percentage point-of-view the percentage varies quite a bit depending on the lithium prices. However, we feel. I think we should be able to get existing EBITDA levels or better in that. And also as we operate this more, we should be able to give you better guidance on what is the future revenue potential. We are also exploring, as I’ve said, international markets, not just domestic market. So we will also see like, again, it’s again a complex commodity to ship worldwide. So let’s do some more trials to understand and then we can give you further better guidance on that.

However, the main interest that we also have is, if we can use this for making more complex or more value-added advanced intermediate. So basically we also hope that a significant portion of this is consumed in-house by our Dahej unit for the lithiation reaction and that will allow us to increase the. Contribution of either CSM or advanced intermediate and basically be the step stone on which, or basically the foundation on which we can plan our future growth. So just as we have been using our expertise in bromination and [Indecipherable] With this, we are becoming better expert of lithiation and then that will allow us to attract more projects related to lithiation and therefore you know had a more long-term growth – one more long-term growth area where we can base our future expansion and growth in our regular pharma and agro business.

Sabyasachi Mukerji — Bajaj Finserv AMC — Analyst

Got it, understood. That is very helpful. That’s all from my side and all the best. Thank you.

H. T. Kanani — Chairman & Managing Director

Thank you.

Operator

Thank you. We have our ext question from the line of Sudarshan Padmanabhan from JM Financial PMS. Please go-ahead.

Sudarshan Padmanabhan — JM Financial PMS — Analyst

Yeah, thank you for taking my question. Sir, my question is to understand a little bit more on the organic segment of the business. If you can talk a little bit more on — you talked about the supply-demand scenario being a little challenging for us, the China issue and the Russia issue. So on this side specifically, if you’re going through sub-segment in pharma and non-pharma, are we seeing a weakness in in terms of demand in all the sub-segments?

And second on the supply-demand scenario. We have actually seen a fair amount of volatility in terms of end prices as well as the raw-material prices. I mean, if I’m just taking kind of guidance either Albemarle or ICL, I mean they have called out for near-term weakness on — it might not be apple-to-apple but believing that the near some inventory that would be from a longer-term perspective. So just wanted your thought process on the raw-material prices as well as your lithiation products.

H. T. Kanani — Chairman & Managing Director

So we’ve seen lithium prices, as I’ve mentioned it like reached the peak in December and then even January was a bit uncertain, but from February-March onwards we have seen a step-by-step decrease and like we’ve seen — we even saw at least we had bottom in April And then now again we are seeing lithium prices and other prices again pickup. But again, we don’t know whether that will sustain. And if it again goes back because it’s very difficult to predict, like mainly what we feel is that just as India is a lot about all these imports and especially oil as imports, lithium at those price levels and with the contribution with the amount of business which happens for lithium-ion batteries in China, China’s import bill was also going very high because of the high lithium prices. And I think the country as a whole seem to have done collect inventory correction to put pressure on lithium miners and we believe that is what corrected the price. But whether they can sustain that, because the demand for the EV, the demand in the US for electrification for energy storage continues to remain high. So ultimately I feel again in near-term the prices should again move up for the next two years and like — I guess the next two years is going to be volatile and after that it should stabilize on a long on new lithium average price. So this is my view on lithium.

Sudarshan Padmanabhan — JM Financial PMS — Analyst

On the bromine side. I was referring more on the bromine side which you have already commented on.

H. T. Kanani — Chairman & Managing Director

Okay. On the Bromine side what we have seen is that worldwide, like the flame retardant market especially in China has become weak. So as you said earlier in our calls, 90% of the bromine gets used for — the bulk bromine use it. So at least from what we can tell or what we have got in feedback that the flame retardant market in China, the demand of flame retardant has reduced significantly. Part of it is because ICL and Albemarle have increased the capacity and part of it is just the lower demand because less exports are happening in the international market with the weak climate worldwide. So because of this high FR inventories and lower FR demand, the bromine prices have corrected significantly. So that’s been the major reason in my view for the correction in the bromine prices.

Sudarshan Padmanabhan — JM Financial PMS — Analyst

And, I mean, would we be able to take advantage and lap up. I mean, because if the inventory correction happen and the demand picks up, it could go up. So I would assume a part of the working capital would be towards this asset, right?

H. T. Kanani — Chairman & Managing Director

Our aim always is to basically pass on the benefits as well as the pains to the customer. So in this case also we will not look at benefiting from it and historically also we have been able to pass on — if we have some inventory, majority of this, like, you know, we are able to pass it on through the customer and make sure we average it out or something. So you might have some Q1, Q2, you may see some fluctuation, but overall when I look at the whole year, we should be more or less okay.

Sudarshan Padmanabhan — JM Financial PMS — Analyst

And on the demand side, I mean should I mean on the organic side given that, again on the pharma side we are seeing some kind of mixed commentary that t could be lower price and higher inventory, etc., [Technical Issues] how do we see the demand for pharma and the non-pharma part for the company?

H. T. Kanani — Chairman & Managing Director

So overall we do see, like there is a slight demand weakness, there is more Chinese competition. But this is what we have shared with you historically that at Neogen we always believe in, like having a visibility for a large number of business and then keep moving from one product to another. So if we see slightly weaker demand in one product, we then move on to another And also we are constantly having a pipeline of new products. So even last year the completely new products contributed to almost 7% to 8% of our revenue, which we made first time – 7% to 8% revenue coming from new customers. So these are the customers with whom we did business for the first time. And similarly completely new products also contributed to more than 10% of the revenue.

So we keep, like you know, the fact that we are not dependent on a single molecule and we have multiple products and we have a pipeline, more product and customer approvals. So that basically ensures that we can protect our margins even when demand is a little bit weak or cmpetition is a bit more severe.

Sudarshan Padmanabhan — JM Financial PMS — Analyst

Thanks a lot, sir.

Operator

Thank you. We have our next question from the line of Rohit Nagaraj from Centrum Broking. Please go-ahead. Mr. Rohit Nagraj. I’m sorry, we cannot hear you. No, sir. We cannot hear you. Your voice is sounding muffled.

Rohit Nagaraj — Centrum Broking — Analyst

Yeah, is this better?

Operator

Yes, yes, go-ahead.

Yeah, thanks. Thanks f

Rohit Nagaraj — Centrum Broking — Analyst

Yeah. Thanks for the opportunity. I was just taking the earlier question forward. So you had mentioned that for next couple of years we’ll be having 20% to 25% overall growth. So what are the user segments that we are looking at from a growth perspective for both organic as well as the inorganic business?

H. T. Kanani — Chairman & Managing Director

So in the organic business we continue to do, pharma, agro and as you mentioned earlier, we are seeing also good traction from flavor and fragrance industry. So we might have some contribution coming in from them also in the future. So these are the three areas for the organic segment. And on the inorganic, we added, as I explained to you, like you know, in our non battery lithium application also we added several new application of lithium salt related to ceramics, related to specialty water treatment applications and others. And also we sold more quantities internationally for the engineering or the vapor absorption industry. So I think this international vapor absorption and the new industries that we added, they will continue to remain growth driver in the non-battery lithium and also battery materials will keep adding as our plant for electrolyze salt and electrolyte will come online the current year. So this will be like some small — like revenues and some small sales which we will be doing of this. But the larger — the larger increase will come from, let’s say, FY26 onwards when, like you know, the majority of Indian chemicals are likely to start.

Rohit Nagaraj — Centrum Broking — Analyst

Right. So this 20%, 25% growth in legacy business is predominantly volume-driven?

H. T. Kanani — Chairman & Managing Director

Yes. So actually I said 25% to 30% in the next year — in FY’24. But yes, that’s from the legacy business.

Rohit Nagaraj — Centrum Broking — Analyst

Yeah, and second question is on the Mitsui collaboration. So will we be having access to the recipes as well apart from the technology access?

H. T. Kanani — Chairman & Managing Director

Yes. So actually its Mitsubishi not Mitsui. So it’s an agreement with MUIS Mitsubishi Chemical Group company. Yes, so currently the agreement is for manufacturing technology and we also have access to the recipes. But the recipe agreement will be combined because the customer has to choose it. So it will be Neogen, Neogen customer and MUIS will work together that which recipe is beneficial for that particular customers design. And if the customer so chooses, in that case we can use the recipes in the new plant.

Rohit Nagaraj — Centrum Broking — Analyst

Yeah, my apologies for mentioning Mitsui instead of Mitsubishi. Just one clarification. So effectively in this case they will have some royalty payment?

H. T. Kanani — Chairman & Managing Director

When we use the recipes, there will be a royalty payment.

Rohit Nagaraj — Centrum Broking — Analyst

Fair enough. That answers my question. Thanks a lot and best of luck, sir.

Ketan Vyas — Chief Financial Officer

Yes.

Operator

Thank you. We have a next question from the line of Aman Vij from Astute Investment Management. Please go-ahead.

Aman Vij — Astute Investment Management — Analyst

Good evening, sir. My question are on the electrolyte business only. So if you can talk about where are we at this stage? Are we through the lab testing stage, are we through the validation stage or are we at the qualification stage? And if you can also talk about what is the number of customers we have given the samples and all those things?

H. T. Kanani — Chairman & Managing Director

Sure, so. We currently have, like in the part of the cell, we worked with 15 to 20 potential cell producer who want to produce or who plans to sell — who plans to manufacturers cells in India. Like many of them who have an ability to test the samples have tken our sample and have started approvals. Some customers have completed first chemical evaluation and then moved onto electrochemical evaluation, and now some customers have even initiated like a small actual line trial. So instead of just testing in a lab, they’re actually going to make, let’s say, a few 1000 cells with it and do the trials on that. So that also is in actual is the capacity of what cells can make today.

So more or less our electrolyte production scale is happening to match as our customers get ready. We are like already before the customer demand exists. In fact, our September what we are planning the electrolyte plant to start 1,000 metric ton, so that can also support 1 gigawatt hour kind of a cell — 1 to 2 gigawatt-hours of cell production. So even that also will be ready, but before the customer demo plant starts.

Aman Vij — Astute Investment Management — Analyst

Yeah, yeah, so. I wanted to understand that part only because if you want to sell and 1,000 tons or eventually 30,000 tons will require India production capacities of somewhere between10 gigawatt, 230 gigawatt hours. So are you seeing the kind of capacity will be present in India in the next one-two years or maximum three years?

H. T. Kanani — Chairman & Managing Director

Yes. Yes. So as I explained to you, in our answer to previous question that we already had a plan and we already have a plan to reach up to 10,000 metric ton, which was announced before MUIS agreement. Now the license that we have with MUIS, we can increase up to 30,000. So already 1,000 was already put in motion. So 1,000 we are not stopping and we are going ahead and completing that contract, but we have some time to decide or fine-tune our 5,000, 10,000 and 30,000 ultimate what we want to reach answer. So that is what we are currently fine-tuning that when the 10,000 will happen, when the 30,000 will happen and that is what we said we’ll share in next two quarters. And as our previous question when I answered, it is two quarters for finalizing the plan and then after that it is around 15 to 18 months maximum of build time. So within next two years, technically, we can be even ready with 30,000 metric ton.

Aman Vij — Astute Investment Management — Analyst

Sure, sir. On this agreement which we have with MUIS, so I think you had mentioned clearly last time that there is some kind of restriction for us to export outside India or we have to take permission. So just wanted to understand your thoughts because of you already had some kind of technology and my understanding is export opportunities in US and there is lot of big opportunities coming in which wants to look at China plus one. So by coming into that agreement, any reason we are leaving out such a big opportunity and only — domestic is obviously good and it will also grow, but why leaving out a much bigger business outside India?

H. T. Kanani — Chairman & Managing Director

So I think Neogen strategy was very clear that lithium salt was a international opportunity because that’s been investment which we can do internationally anywhere, okay? And that’s something we are still looking and we feel that once our trial fertility start, there are many international companies with whom we have discussed, including MUIS who are electrolyte producers and to whom we can basically supply electrolyte salt.

Now electrolyte business, Neogen always felt that we wanted to do it domestically because there is a good domestic opportunity and this business is historically done always localized because of the need for special tanks and logistical complexities. So, therefore since our focus for electrolyte was only for India and electrolyte salt was international and this agreement in anyways did not stop us from both our focuses. So that’s why we are okay with that.

Aman Vij — Astute Investment Management — Analyst

My final question on this part. If, pricing of this electrolyte has gone up a lot from $50, $70 to almost $15, $20 now, and maybe it’s going up and down a lot. So are we thinking of entering into some long-term contracts so that our margins get protected, otherwise these kind of fluctuation might result in, don’t know how as a company we manage all the things. So if you can talk about our thinking in terms of long-term contracts with our potential customers?

H. T. Kanani — Chairman & Managing Director

We have seen that historically also most large-volume users would basically do a long-term contract or at least the long-term kind of a priced model. So we also worked on a similar — not similar, I would say a little bit less complex business on lithium bromide and which we’ve done for last 30 years with engineering companies who basically want to use this as, let’s say, 10% of their cost contributor. Just as in the cell production, electrolyte is also 10% cost contributor. So in some sense it’s very similar business and even that also worked basically on a cost-plus basis. And like with long-term understanding where we did not insist on a long-term contracts, but we feel because here we have to put significant capacity. So as our customers get ready with their plants, we will enter one by one long-term contracts with these customers and like most of them should be such that our, at least actual ROEs and ROCs are basically protected.

Aman Vij — Astute Investment Management — Analyst

Sure sir, that helps. Thank you for answering the questions.

Operator

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

Yash Shah — Investec — Analyst

Hello. Hi, Harin. Sir. Thank you for the opportunity. Sir, my first question was regarding our electrolyte capacity. So since we are already going to add 1,000 tons of capacity using our indigenous technology, will it be safe to assume that the rest 9,000 which we had formally announced or whatever the changes will be, the rest of the capacity will be from the new technology which we have acquired given that we have acquired global technology, we have the license for our global technology and will not really require the indigenous technology anymore? So just wanted to know your views on that.

H. T. Kanani — Chairman & Managing Director

So again, exactly how we are going beyond 1,000 tons is something that has to be done based upon the timelines for implementing the international technology versus the timelines of my customer requirement and like what solutions, if at all intermediate is required. So this is what Yash, we will shed a little bit more clearly over next one or two quarters that how we are going from 1,000 tons to 30,000 tons.

Yash Shah — Investec — Analyst

Got it, sir. Got it. Sir, my second question was regarding again — regarding the same tie-up which we had with MUIS. This has given us a significant advantage as compared to our peers or the new entrants who might want to enter into the segment. Sir, just one question was that why have — what was the reason we did not enter into an exclusive contract with them? What were the bottlenecks on that front? The reason I’m asking is because maybe the peers could also enter into some kind of a similar agreement with the other players, not the same ones with the other players, say number three or number four, about that.

H. T. Kanani — Chairman & Managing Director

So it was basically — this is the first time ever where MUIS basically decided to open and share their technology with anybody outside of their group. So convincing them for that itself was very tough. But as the Japanese company we and like it or whatever we have seen whenever we worked with Japan, whenever they give technology they are very like reluctant to get into exclusive contract because there’s always a fear that is if there is a nonexecution on the side of the technology recipient, then they kind of get bogged down. So this was something which was basically more like Japanese wish — MUIS’s wish which we had to agree on. Although there is a very clear — there is a strong understanding that they will always work in such a way that Neogen’s interest our prepared and their intention is that Neogen become successful and hopefully we together can convince our customers to use MUIS’s recipes also and they can have a future revenue source coming in from that.

Yash Shah — Investec — Analyst

Got it, sir. Sir, another question which I had was on the salt front. Even though we have mentioned in our presentation that we do not really intend to basically sell the salt outside, but then it is one of the options which we have. Wanted to understand your views on how do we basically expect to compete with the Chinese and the Korean prices on the — for LiPF6 of LITFSI salts?

H. T. Kanani — Chairman & Managing Director

So in the presentation we never said we don’t intend to sell the salt internationally. We just said that the capacities that we have planned are mostly keeping in mind our Indian internal requirement because we don’t have a number yet on the international demand. So our efforts are always to make sure to try to sell the salt internationally because that’s a bigger market in general.

In terms of competition against China and Korea, so majority of this is really China. Like, there very limited capacity in Korea and there’s very limited capacity in Japan and they are planning to expand very limited volume which will not take care of the rest of the worlds demand, especially in Europe and US. So therefore there is going to be additional electrolyte salts required. Now some of that may come from new clients in Europe, new client in US, although they will take longer than us because we have moved earlier our demo plants are getting ready. So we would have early-mover advantage as well as lower-cost advantage as compared to if at all any plants set the Europe and US.

Now, as compared to China, you know, historically what we had seen that between China and Japan the price difference when lithium prices and everything else was stable was roughly around 20%. So we feel if a Japanese company also could make with a 20% higher costs as compared to China, maybe with our cost advantages we should be somewhere around 10% or so more costlier, worst-case scenario as compared to the Chinese at a comparable volumes and level. So we are basically banking on that and we are also hoping that there is enough interest for a non Chinese source from a derisking point-of-view to basically get this 10% higher-cost of off-setted. And if you’re are able to do some process improvement or efficiency or, like give comfort on better-quality, just as we do in our pharma intermediates and other intermediate, similarly we can justify the higher costs or with the process improvement reduce the cost and match whatever is the Chinese price. So this is a long-term view. But again, we have to start making salt first. First target would be to match the global expectations on quality and then we would try to meet the other target so that we can establish a good international demand for the electrolyte salt.

Yash Shah — Investec — Analyst

Got it, sir. A final question from my end. This was regarding our organic business. From the last two quarters we have been mentioning — witnessing strong traction on the F&S front, our flavors and fragrances. So that has — now with the return of China, have you been facing any kind of pressure on that front? Also we had mentioned that we had five customers which — like we had added five new customers in flavors and fragrances and agrochemicals and engineering segment. How many new customers have we added in F&F space throughout the year in FY23? And how do you see the mix moving in the coming years? Like how much contribution do you expect from F&F?

H. T. Kanani — Chairman & Managing Director

So we don’t have a number for you yet. The only thing we’ve seen good number of projects and many are in the CSM space and many are in the advanced intermediate space. Basically, some places where they are transferring technology and from places where they are asking us to develop the molecule for them and then with a keen interest to buy these molecules. So all these projects are moving. So far we are at trial volume, like 500 KG, 1 ton level. But we feel in FY 24, it will move significantly. Although I would still say it will be clubbed in our other segment. I mean, it will not — I’m not expecting like a 10%, 15% because regularly our topline is growing. But yes, I mean one more — we are building new partnerships and over next two-three years whenever we do our next MTP plan or a major expansion in organic area, this is one more area which we can bank on to provide like further growth beyond, let’s say, FY25, ’26.

Yash Shah — Investec — Analyst

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

H. T. Kanani — Chairman & Managing Director

Thank you, Yash.

Operator

Thank you. We have our next question from the line of Omkar Kamtekar from Bonanza Portfolio. Please go-ahead.

Omkar Kamtekar — Bonanza Portfolio — Analyst

Hello, am I audible?

H. T. Kanani — Chairman & Managing Director

Yes.

Omkar Kamtekar — Bonanza Portfolio — Analyst

Sir, firstly I needed some granularity on the results. So in the the revenue breakup we can see that 45% are exports and 25% as domestic. So can you give us a region-wise breakup of how much of export in specific area?

H. T. Kanani — Chairman & Managing Director

So we have not said that I think since IPO days, but majority of our exports are consisting in Japan, Europe, some to USA and some is deemed export, which is basically to SEZ and BOUs in India.

Omkar Kamtekar — Bonanza Portfolio — Analyst

Okay, okay and in the revenue breakup of the inorganic, organic segment, could you give user wise breakup, so how much is for Pharma, how much is for agri? Is that possible.

H. T. Kanani — Chairman & Managing Director

So usually Pharma is between 50% to 60% in that range, it’s been like that and the agro business has been between 15% to 25% revenue contribution and the engineering around 10% to 15% and the remaining industry is about 5% to10%.

Omkar Kamtekar — Bonanza Portfolio — Analyst

Next sir, wanted to know what will be the approximate expenditure CapEx that you would incur for the battery businesses? So we have told in the previous announcements also that we are setting up our wholly-owned subsidiary and focusing — and we’ll be focusing on the battery business as one of the driving force for the growth. So approximate what would be that expenditure and over what timeline?

H. T. Kanani — Chairman & Managing Director

So we had shared in our investor presentation, you will get a little bit more detail from there. But we had shared our revenue — our CapEx of approximately around INR450 crores in our lithium-ion battery over a period, starting from, let’s say, we already have started and going up to, let’s say, FY26, so over next two years period. But I think this is the number for 10,000 metric ton per annum capacity. So we will again review this as we review our 3,000 metric ton.

Omkar Kamtekar — Bonanza Portfolio — Analyst

Okay, okay. So my actual point was I’ve got the investment that maybe the INR450 crores was up to the full the 30,000 metric tons. So I got the clarification for that, sure. Thank you. That’s it from my side.

Operator

Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to management for closing comments. Over to you.

H. T. Kanani — Chairman & 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 Relation team and we will address them. Thank you once again, stay safe, and we look-forward to connecting with all of you again in the next quarter.

Operator

[Operator Closing Remarks]