Tatva Chintan Pharma Chem Limited (TATVA) Q3 FY23 Earnings Concall Transcript

Tatva Chintan Pharma Chem Limited (NSE: TATVA) Q3 FY23 Earnings Concall dated Jan. 24, 2023

Corporate Participants:

Dinesh Sodani — General Manager, Accounts and Finance

Chintan Nitinkumar Shah — Managing Director

Ashok Bothra — Chief Financial Officer

Analysts:

Sanjesh Jain — ICICI Securities — Analyst

Nikhil Rungta — Nippon India Mutual Fund — Analyst

Nirali Gopani — Unique Asset Management LLP — Analyst

Padma Raju Mathi — SBI Life Insurance — Analyst

Yash Shah — Investec — Analyst

Rohit Nagraj — Centrum Broking — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Tatva Chintan Pharma Chem Limited Quarter Three and Nine Months FY ’23 Earnings Conference Call, hosted by ICICI Securities. [Operator Instructions]

I now hand the conference over to Mr. Sanjesh Jain from ICICI Securities. Please go-ahead.

Sanjesh Jain — ICICI Securities — Analyst

Thanks, Darwin. Good evening, everyone. Thank you for joining on for Tatva Chintan Pharma Chem Limited Q3 and Nine Months FY ’23 Results Conference Call. We have Tatva Chintan management on the calls, represented by Mr. Chintan Shah, MD; Mr. Ashok Bothra, CFO. I would like to invite Mr. Dinesh Sodani, AGM Finance, to initiate with the opening remarks, post which we will have a Q&A session.

Over to you Dinesh ji. Thank you.

Dinesh Sodani — General Manager, Accounts and Finance

Thank you. Thank you, Sanjay ji. Good evening, everyone. Please note that a copy of our disclosures is available on the Investors section of our website, as well as the stock exchanges. Please do note that anything said on this call, which reflects our outlook towards the future or which could be construed as a forward-looking statement must be reviewed in conjunction with the risks that the company faces in terms of uncertainty.

With that, I would like to hand over the floor to our MD, Mr. Chintan Shah for his initial comments. Over to you sir.

Chintan Nitinkumar Shah — Managing Director

Thank you, Dinesh ji. Good evening, everyone. On behalf of the management of Tatva Chintan Pharma Chem Limited, I welcome you all to the Q3 Nine Months FY ’23 Earnings Call of Tatva Chintan Pharma Chem Limited. Wishing you all a very happy, healthy and prosperous 2023. I believe you’ve got a chance to go through the investor presentation uploaded on the stock exchanges as well as the company’s website.

To start with, I would like to brief you with the financial numbers. During this quarter, the company reported a revenue from operations of INR1,206 million, a growth of 15% year-on-year and 34% Q-on-Q respectively. As anticipated, improved uptake in SDA segment is reflected in the numbers of this quarter. EBITDA during this quarter was at INR179 million, a decline of 25% year-on-year and a growth of 60% Q-on-Q, respectively. EBITDA includes Forex gain of INR0.7 million, so the operational EBITDA during the current quarter is INR178.43 million, which translates into EBITDA margin of 14.79%. Net profit-after-tax was INR116 million, a decline of 49% year-on-year and a growth of 63% quarter-on-quarter basis.

There have been few positives for the business this quarter, like a marginal decline in power and fuel cost and a significant drop-in shipping cost beginning late November. Also, since December, the solvent prices have started to rationalize. Though the price of basic chemicals and commodities still continue to remain very high. We have witnessed rampant currency fluctuations across various geographies this quarter, particularly adverse movements in Euro and Yen.

Keeping in mind our long-term partnerships and associations with select key customers belonging to these geographies, we opted to support them during these adverse times and try to return their favors from the past. In certain cases, we marginally reduced the prices and, in few cases, opted not to ask for price increase and absorbed certain increased costs ourselves. During the quarter, the inventory at consolidated levels have come down from INR2,030 million to INR1,762 million.

Now, let us talk about each product categories and the key developments that took place during this quarter. PTCs have registered revenue of INR325 million in this quarter and nine months revenue of INR1,054 million, contributing 35% of the revenue and a growth of 55% year-on-year basis during nine months FY ’23. Demand from PTCs from various user industries continue to remain robust, major suppliers of PTCs are in overseas market.

Electrolyte salts have registered revenue of INR41 million in this quarter and nine months revenue of INR156 million, contributing 5% of the revenue and a growth of 357% year-on-year basis during nine months. As informed earlier, the uptake from one of our large customers is on-hold, as they are working on debottlenecking their productivity and we expect them to resume their uptake from the end of June ’23. We have supplied multiple electrolyte salts samples for approval to a new global potential customer and are awaiting for their approval.

During the quarter, we have some significant achievements in this area of electrolytes. We successfully brought our first approval for high-purity electrolyte solutions from R&D scale, in current month, that is January ’23, we have shipped the first small-scale plan order from our pilot plant, successfully meeting the most stringent quality requirements. We anticipate getting a formal approval, followed by our plant scale trial order to be executed in June 2023. We have received [Technical Issues] for supply of electrolyte solutions, we shall be sending out R&D scale samples in February ’23. With increasing demand for super capacitors and energy storage systems, we are confident to deliver exponential growth in this segment over coming next three years.

Pharma and Agro Intermediates and Specialty Chemicals have registered a revenue of INR264 million during the quarter and nine months revenue of INR1,036 million, contributing 35% of the revenue and a growth of 36% year-on-year basis during nine months. In monocline, the final inspection of the pilots equipment for continuous flow chemistry is finally under process and we expect to receive the equipment by first week of February. Post installation, we will be able to finally start the most — much-awaited trials.

As discussed earlier, for our second product on continuous flow basis, we have received the quality approval from our small-scale plant trial material. Now, we have been requested by the customer for a full plant scale trial material. This has happened much faster than we anticipated. We plan to supply the plant scale trial material by the end of August 2023. Post successful trials, we strongly expect a very interesting opportunity to begin commercial supplies post April 2024.

Regarding a new products in application area of metal extraction, the production has commenced for commercial supplies and we expect the first shipment will happen in February 2023. As informed during my last call about the successful completion of development of our third product and continuous flow basis, which is the key base raw materials for multiple agrochemical intermediates, I am pleased to inform you that we have been allotted two projects to work on downstream agrochemical intermediates. The work on these molecules have already been initiated in our R&D.

Our team has a remarkable success in development of our fourth product on continuous flow basis, the development is nearing completion. We have undertaken development of two new products on continuous flow basis recently. By demonstrating our capabilities to run specialized chemistry, we are seeing a consistent rise in the confidence and comfort of large customers to work with our company. We are very confident about the strong growth in this product category over the coming years.

SDAs have registered revenue of INR571 million during this quarter and nine months revenue of INR728 million, contributing 24% of the revenue and a decline of 61% year-on-year during nine months FY ’23. As previously guided, the sale of SDA has seen an uptick in this quarter with demands coming from two customers. The overall demand in the market is not back to normal levels yet. We expect the demand of SDAs to remain at nearly similar levels of the next two quarters. As China companies have finally opened up with containment of government’s zero COVID policy, the market expects the commercial vehicle sales in China to rebound, leading to growth in SDAs demand from late FY ’24.

During the quarter, we successfully supplied plant scale trial material for SDA to a new customer, about which I had mentioned in my last call. Now, we have been offered an opportunity to supply the second SDA on a plant scale trial which will be executed during Q4 FY ’23. We expect the approvals for both the SDAs by September ’23. We are confident that the volumes in SDAs will rebound strongly from July onwards and we remain optimistic of the increasing volumes over the coming years.

Regarding flame claim retardants, after successful completion of plant trials, we are under process of approval with various customers. We have received formal approval from two customers and are awaiting approvals from few others. We are awaiting plants scale trial orders and expect to receive them by the end of this month. This will get us going commercially and eventually scale-up the volumes from Q1 2024. The key watch areas would remain how the European energy prices rolls out over the next few months and how the demand revival for heavy-duty commercial vehicle spans out. Also with the China economy opening up, it would be important to watch out how quickly that business rebounds.

Looking at the challenging global macroeconomic factors, it seems that business would be under demand and pressure — demand and price pressure over the next three to six months time, where the company is working relentlessly in optimizing the processes, working closely with key customers to enhance mutual benefits and creating a path for strong growth ahead. Despite of the challenging times, we expect that this growth for the next few quarters and are confident to deliver a decent growth for the next financial year. As guided earlier, this financial year has been a tough year. Despite that, we expect to close FY ’23 with a revenue in excess of INR400 crores, though with subdued profitability as compared to FY ’22, due to the known global economy status.

We are happy to inform that the capex at our Dahej SEZ plant is completed and trial runs are underway. Please note that nearly 93% of the IPO funds have been utilized so-far. The expansion of R&D facility at Vadodara is on finishing stage. We already completed — with already completed on nearly — nearing completion R&D projects having promising business potentials, dedicated infrastructure would be required to produce them commercially.

Over the next few quarters, we might be looking to raise fresh capital for expansion with the new greenfield land. The environmental clearance of the same is expected to be replaced over the next couple of months. It would take at least 24 to 27 months to execute a greenfield project. We will begin the execution at a correct time. We commit ourselves to scale up the already-approved or developed products at a fast pace to turn them into profitable revenue. We shall continue to work hard in developing new products using latest technology to ensure that we continuously provide high-purity products and innovative solutions to all our customers.

With this, I conclude my remarks and hand over the call to our CFO, Mr. Ashok Bothra, for taking you through the financial numbers.

Ashok Bothra — Chief Financial Officer

Thank you sir, and good evening everyone. I shall summarize our financial highlights for the quarter. Revenue from operation was INR1,206 million versus INR1,047 million during the FY ’22, that is an increase of 15% on Y-o-Y basis, largely due to a recovery in the uptake of SDA. Other income declined by 67% during Q3 FY ’23, mainly due to reduction in interest income on FDs. Additionally, there was a gain of INR28 million due to foreign currency translation during Q3 FY’22, which led to increase in other income in that quarter.

EBITDA was at INR179 million versus INR239 million in Q3 FY ’22, which is a decline of 25% on Y-o-Y basis. EBITDA margin was at 15% versus 23% in Q3 FY ’22. The margins have been largely impacted due to changing product mix, coupled with other factors, which our MD sir has just said. PAT was INR116 million versus INR228 million in Q3 FY ’22, a decline of 49% on Y-on-Y basis, impacted on account of housing finance cost due to higher utilization of working capital and higher interest rates, also due to higher tax on account of — and of 100% tax holiday on our Dahej facility now our Dahej SEZ facility is eligible for 50% tax exemption starting from Q1 FY ’23 for a period of five year, against earlier 100% exemption. PAT margin was at 10% versus 22% in Q3 FY ’22. During nine months FY ’23, exports stood at INR295 million, contributing around 70% of the revenue. Out of our net IPO proceeds of INR2.72 million, INR1,927 million have been utilized, which is 93% of the funds have been utilized as on 31, December 2022.

That concludes an update on the financial highlights of Tatva Chintan during the quarter and nine months. We shall now open the floor for question-and-answers.

Questions and Answers:

Operator

Thank you very much. We will now begin with the question-and-answer session. [Operator Instructions]

The first question is from the line of Nikhil Rungta from Nippon India Mutual Fund. Please go-ahead.

Nikhil Rungta — Nippon India Mutual Fund — Analyst

Yes, hi sir, thank you for the opportunity. Sir, few questions from my side. First is to start on the revenue side, you indicated that since China is opening up, we might see a good demand from SDA products two to three quarters down the line. Sir, earlier we had indicated that SDA demand to start post Q3 FY ’23 itself. So why delay of two to three quarters more? Further, China is — that is now opening up. So wouldn’t few of our customers who were not importing from us have started import?

Chintan Nitinkumar Shah — Managing Director

Okay. Good evening, Nikhil. Yes, so as indicated, see the uptick in demand of SDA is already visible. We have a decent sales of SDAs happening in the last quarter and we expect similar kind of performance driven in the next two quarters as well. The issue is that we have one of our very large customers from the China geography. And they are still struggling with the demand and piled up inventory, because of long shutdowns and very large drop in heavy-duty vehicle sales in China, which has impacted their sales. So they are still sitting on inventory and indicated by them. We are expecting them to resume their procurements from May. So we anticipate from May or June onwards we will have their strong sales also coming back and rest of the customers are definitely coming back on-line as it was anticipated and going strong now. So I don’t anticipate, except for the China customer, most of the customers are now falling back on-track and the demand is getting stronger, and this Chinese customers, we expect to resume sourcing from May 2023.

Nikhil Rungta — Nippon India Mutual Fund — Analyst

Okay. And sir, coming to the margin side, you indicated your viewpoint is that, we have absorbed few of the cost and not transformed to the customers, but by when do you think we would be in a position to start supporting our normalized margins?

Chintan Nitinkumar Shah — Managing Director

We are seeing. Let me explain exactly what has happened, so as you are aware, we were sitting on quite a piled up inventory on the SDA side. In terms of not only finished goods, but also — it’s a multi-stage chemistry, so there are inventories lying at various stages in production. So with the finished good inventory, we had no issue, because the price has not been reduced or dropped for the selling price is concerned. But when it came to converting the in-process materials to finished goods, that is where the higher solvent price and the commodities price definitely hurt us. And there was no significant reason actually going back to the customer for asking for a price rise for solvents or chemicals kind of stuff. So we had to absorb those costs ourselves.

We are sitting on this inventory even which should probably last in this quarter, the current quarter, the running quarter and post that, now again the solvent prices everything is falling back-in line and commodity prices also we are expecting to fall-back in-line. So with this, by — except for this, the next quarter, I mean the quarter Q4, we also expect similar kind of margins, maybe slightly increased margins like what we have reflected in this quarter, but more or less in the similar lines, but from April onwards we expect to come back to our normal territory. Once we have consumed our old inventories, then we are again back to zone one.

Also a lot of Phase Transfer Catalyst, and also what’s required for the SDAs, these are bromine-based products. And there was a very rampant momentum in bromine prices during this quarter. So until early November, the prices were pretty much stable. And then the prices shot up very sharply by nearly 25%, just in a span of six, seven days, so which was beyond our control and it was a very short time to ask for any kind of price corrections with the customer. So that is where also we had, because lot of our revenues comes out of bromine-based products. So that is where also we reached out our margins during this current quarter, but I think we will overcome this, particularly for the Phase Transfer Catalyst, we’ll definitely overcome this issue, but SDAs we will require one full quarter, because we are sitting on inventory, piled up inventory of intermediate stages, which would need to convert the finished product, so there we still continue to have some impact on profitability.

Nikhil Rungta — Nippon India Mutual Fund — Analyst

Okay. Sir, coming onto the revenue side, you indicated this year we might close at approximately INR400 crores of revenue. So if I had to look at three years target for the revenues, what type of revenue are we expecting, say, in FY ’25-’26? And in that with the share of electrolyte solutions increasing, what could be the share of electrolyte in that FY ’25-’26 compared to 5% now?

Chintan Nitinkumar Shah — Managing Director

So we are basically targeting by ’25-’26 with — see, basically — as I told you, we have four projects on continuous flow basis, which are on floor now, so out of them, two are getting into commercialization. One is monocline and one is the agro intermediate, which we have recently got approval. We have necessary infrastructure and space at our existing plants to execute both of these projects, then probably we will start running short on executing any kind of future projects. And with the existing infrastructure, flame retardants, these two continuous flow products going on-stream, we expect to fully consume our capacities by ’25-’26. So I would estimate a revenue in a zone of about 800 — upward of INR800 crores to INR850 crores by ’25-’26.

Nikhil Rungta — Nippon India Mutual Fund — Analyst

Got it, sir. These are the key things from my side. Just one pointer from my side. I mean, you indicated that trial runs have started in our Dahej facility, by when the commercial production will start?

Chintan Nitinkumar Shah — Managing Director

My first uptake role, that is what is the target.

Nikhil Rungta — Nippon India Mutual Fund — Analyst

Perfect, perfect, sir. That’s all from my side. Thank you so much and all the best for the future.

Chintan Nitinkumar Shah — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Sanjesh Jain from ICICI Securities. Please go-ahead, sir.

Sanjesh Jain — ICICI Securities — Analyst

Hey, good afternoon. Thanks for taking my question. A couple of questions from my side.

Chintan Nitinkumar Shah — Managing Director

Should slightly loudly, please.

Sanjesh Jain — ICICI Securities — Analyst

Yes, yes, can you hear me now?

Chintan Nitinkumar Shah — Managing Director

Yes, it’s better.

Sanjesh Jain — ICICI Securities — Analyst

Yes. First on the SDA part of it. Are there any price correction in the SDA, which we have taken or the end prices are stable, as we speak now. That’s number one.

Chintan Nitinkumar Shah — Managing Director

So far all the end prices are still very much stable. And we are also working on — see, basically we were [Indecipherable] chemistries. So we are working on some backward integration, so that we can also optimize our margins further, as well as pass-on part of those benefits to the customer and optimize their cost as well. So these are one — some of very good backward integration projects that we have completed on R&D scale and which we intend to start.

We have completed plant scales as well for this and we have submitted samples to our final customers for SDAs. We are awaiting their approval, probably it might take three or four months to get those approvals, it’s not — I mean, these are really time-consuming affair to get this approvals in place. But once we have these approvals, we might even see slightly upward movement in terms of margins with the peers going probably five to six months down the line.

Sanjesh Jain — ICICI Securities — Analyst

Fair enough, fair enough. And second, we are almost into ’23, nearing to ’24, how is the sanction on the Euro 7 norms and are we working anything on that? That’s number one. Number two, China was supposed to adopt China 6 emission b norms. Should these two even drive the higher SDA volume growth over next two years?

Chintan Nitinkumar Shah — Managing Director

Yes. On my — I mean, just I recently during my speech, I mentioned about getting an opportunity to approval of a second SDA, which we — we are going to supply this a commercial lot, a full container lot in this month and we expect to have this — if we are going through with the approval, and this approval should be in-place in September of ’23, and this is particularly for the Euro 7 application.

Also our existing large customer has already approved our product and started buying the SDAs for the Euro 7 application. Of course, the volumes are much lower compared to the Euro 6, but the Euro 7 application has already kicked-in. And with happening of this and also with the BS IV full implementation happening in China, yes, we expect this will have a very positive impact. And that is why I mentioned on my speech that we expect the sales to be robust over the next few years. This is particularly the [Indecipherable] environment agenda.

Sanjesh Jain — ICICI Securities — Analyst

Got it, got it. Second, can you help us understand segment-by-segment, what are the new products we are working and what is the timeline are we looking. So let’s start with an SDA, so we are working on Euro 7, which should start in a year or so. We were —

Chintan Nitinkumar Shah — Managing Director

We have completed the development part and also the commercial scale up of the Euro 7 SDAs and I mean, we supplied one of them, and the second one is now about to get dispatched. So with that, all potential candidates for Euro 7 SDAs are in-place with Tatva Chintan as of now.

Sanjesh Jain — ICICI Securities — Analyst

Got it. And we did mention few more products in SDA bucket. One is, high-purity product. When are we expected to see some —

Chintan Nitinkumar Shah — Managing Director

So that is what we executed in December, so that is for an plastic application, which I had talked about, recovering plastics. So that SDA has already been sent out for a commercial-scale plant trial, one SDA and lot of material. And this also we expect to hear back from the customer by August or September of ’23.

Sanjesh Jain — ICICI Securities — Analyst

Got it. And in PASC, how many products we expect to commercialize over the next two years? Say, in FY ’24 and ’25?

Chintan Nitinkumar Shah — Managing Director

So, one large product, as I mentioned is already getting into commercial mode. We have second product for which the — so this is the first large product which I’m mentioning is on a continuous flow chemistry basis. The second product, the samples have been submitted. We expect the results of the samples by end of January, just within the next week or 10 days time.

And if these are approved, then we will have an opportunity to supply for plant scale trial by, again, July or August of this year. And this will then go into commercialization in ’24. So two products, then we are again submit — we already submitted plant scale trial material for one pharmaceutical intermediate in last quarter, so that we expect to have commercialization by end of 2024, it’s a little long-shot, because the pharma approvals, endorsers and all those things are a little time consuming. So we expect this to be by the end of 2024.

And the one, which I’m talking about, the new success in the continuous flow chemistry part, which — under which we have got opportunity to develop two agro intermediates. So we have just resumed our work on developing. So we have completed our work on the continuous flow part. So now we’re developing on the down-link products, which we expect to start sending samples within next six months time-frame. So this, we can expect by end of ’24 or early ’25, and that should be the time when we should also be ready with our continuous flow equipments in-place. So the timing would be more or less precise for us.

Sanjesh Jain — ICICI Securities — Analyst

I was just asking, because consider that we are speaking of INR8 billion to INR9 billion kind of a revenue by ’25, I just wanted to understand, are we being more conservative on the revenue guidance?

Chintan Nitinkumar Shah — Managing Director

See, basically I don’t expect everything to go at a full-scale in next two years. When a customer says, let us say, for example, a potential of 1,000 metric tons. We don’t anticipate this 1,000 metric tons in a span of two years. So, it would be a gradual ramp-up in next three to four years time-frame. Of course the opportunity is much larger in terms of revenue, but we are looking at ’25, ’26, ’25, say, is a very fair number to estimate, though it is conservative, but it is a very fair estimate we are putting to this. And in any case, we will not have enough plant capacities to go beyond that. So for that, the greenfield project has to be developed and then only it can take us further beyond [Indecipherable], so. And to have that greenfield project, let us say, assuming from today, we’ll any case require 30 months to have that in place.

Sanjesh Jain — ICICI Securities — Analyst

Got it. And Chintan, on the margin side, last time when we did INR500 million plus in the revenue on the SDA side. We did an EBITDA margin in excess of 22%. Do you think on a steady-state, when we go back to, say, with the solvent issue getting resolved. Do you expect we — the company to go back to this 22% kind of a margin?

Chintan Nitinkumar Shah — Managing Director

We definitely expect to do that.

Sanjesh Jain — ICICI Securities — Analyst

Got it, got it. Yes, thanks. Thanks, that’s it from my side.

Chintan Nitinkumar Shah — Managing Director

And to even overcome this solvent — the fluctuating prices in this certain solvents, which we are using on a very large scale. So as I had mentioned, last quarter, we successfully implemented a technology, where we could make our — introduce one of our lab solvents, by which potentially we will reduce an effective uses of about 800 metric tons a year for this particular solvent. And now in this quarter, we have successfully run trials to recover our reuse our second-largest solvent which is in-place and this could also potentially have an impact of about 700 metric tons to 800 metric tons a year consumption. So instead of having to dispose off that solvents after used, we’ll be able to recover, reuse with same efficiency levels as a fresh solvent. So that is a technology and has been working very well for us.

Sanjesh Jain — ICICI Securities — Analyst

Fair enough, fair enough. So probably Q1 of FY ’24 we will be back to that normal margin run-rate what we were doing?

Chintan Nitinkumar Shah — Managing Director

But as of today, we have only one system in-place, which can run one solvent at a time. With our — this capex plan which is getting over and starting trials, so that is when we will start. So by mid of February, we’ll have the second system in-place which is already installed at this new plant. So then we can simultaneously effectively recover and reuse both the large-volume solvents from the Dahej plant.

Sanjesh Jain — ICICI Securities — Analyst

Fair enough. And have we started working on the new plant? I guess we have acquired a large land in a non-SEZ. Have you started the process of getting the EC approval and all those things?

Chintan Nitinkumar Shah — Managing Director

EC, we expect to have EC in place in probably next two months time-frame. So most of the groundwork obviously is done, so we expect to have this in-place by March of ’23. And internally also we have started applying designing, construct of how this plant should be and what kind of infrastructure we want in-place, so all those discussions have already begun.

Sanjesh Jain — ICICI Securities — Analyst

No, no, because I thought you said it will take 30 months, now it looks like we are running far ahead of the 30 months.

Chintan Nitinkumar Shah — Managing Director

No, no, basically — because, see, it’s a greenfield project, so once we have EC, only then we can break the ground, so post completion of this existing infrastructure going on, once we are free there, then we actually start seriously designing parameters for what kind of infrastructure designs we may need at new locations. So all those discussions have primarily begun, but the serious talk, I presume should happen from mid of February onwards.

Sanjesh Jain — ICICI Securities — Analyst

Got it, got it. Thanks. Thanks for all the answers and best of luck for the coming quarters.

Chintan Nitinkumar Shah — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Nirali Gopani from Unique Asset Management LLP. Please go-ahead.

Nirali Gopani — Unique Asset Management LLP — Analyst

Sir, thank you for the opportunity. Sir, I just wanted to share my thoughts on the margin side. Sir, in the last call we had mentioned that we are not passing the energy cost under freight cost and we are bearing this cost to maintain the long-term relationship that we have with our customers. So, my concern is how will we deliver on the margins? Because this quarter this chemicals and other raw materials that did not have price increase. So if you can just share some thoughts on this.

Chintan Nitinkumar Shah — Managing Director

There are multiple factors associated to that. So one of the good part is that freight cost has started coming down from early December. So that is one very good part. So, wherever we have not passed on the freight increases, we’ll have a leverage in terms of margin in those cases. Again, the solvent prices have started to kind of rationalize. So we have seen a sharp peak in certain solvent prices and then we have seen a drop-in solvent prices beginning from December as well. And this seems to be a continuous process and now solvent prices are kind of coming down to their normal levels. That is when you calculate the cost of the product or you negotiate the product pricing for a large-volume product to a customers.

Typically your pricing formula normally involves only the key raw materials. So, the commodities which you use, for example, let us say you are using caustic somewhere to maintaining your PH standard or certain sales or stuff like that, for example, or with solvents. So these are all kind of ancillary requirements to the main process. So this normally don’t become a part of your pricing protocol with the customer. And unfortunately, the raw-material prices more or less except for bromine is one exception, most of the raw material prices remain pretty much stable, whereas this commodity and solvent prices just shot up by probably more than 200% in so many cases, which had a definitive impact. Now with this prices of solvents at least coming back, will be a big re-price for us.

So with this, we are pretty confident that we’ll be able to again recover our margins back without actually going back to the customer for a price increase. And we have very important customer base coming out from adversely impacted foreign currency zones. So typically the Euro zone and the Yen. And they have seen a sharp appreciation in their currencies and which made it pretty difficult for them since they were import dependent for certain products, and particularly for our SDAs as well, so the cost was shooting up like anything. So it was definitely a goodwill gesture from our side is well.

Based on their request, we would have liked to support them. It’s a long-term relationship we are looking at and building up a good strength, a strong relationship with these customers for a long-term. So it was also kind of a moral responsibility from — on our part to kind of absorb, if it is possible. So we had taken that, and they have always supported us in our past issues whenever we had pricing issues. They have been upfront in supporting us, so now it was a time for us to step-up and support them and we did that.

Nirali Gopani — Unique Asset Management LLP — Analyst

Right. Actually, sir, the disappointment is, because in November we had guided like the H2 margins will be 20% to 22% and a difference then what we have reported and what we had guided is pretty huge. So that is a — disappointment is on that side.

Chintan Nitinkumar Shah — Managing Director

We will not disappoint you post April, that is for sure. And see, certain short-term sharp price movements are always very difficult for any manufacturer to handle. So if you go through my list of products, lot of products are based on bromides and the bromine chemistry. So a very sharp movement in a very short-time — span of time. I mean, typically it was roughly about 20% to 25% spike in bromine prices which was — came as a big surprise. And this is where it became difficult for us to manage certain things. But once we know that these are the stable high-price mechanism, then you have an opportunity to go back to the customer and negotiate for the next quarter.

Nirali Gopani — Unique Asset Management LLP — Analyst

All right.

Chintan Nitinkumar Shah — Managing Director

Typically pricing are governed more or less on a quarterly basis with most of the cases, so any sharp movements during the quarters always becomes difficult to manage. So sometimes you are at a gain, sometimes you are in a tough spot, so this quarter we were in a tough spot unfortunately.

Nirali Gopani — Unique Asset Management LLP — Analyst

All right. So Q4, the margin would also be in this range or we’ll see around 20% of EBITDA margin?

Chintan Nitinkumar Shah — Managing Director

We should see a couple of percentage gain in terms of EBITDA margins in Q4, because still we have — so this quarter, we already have certain orders in-hand, which will clear up our old SDA in terms of finished goods, as well as in-process material. And we will be completely done with all the old inventories that we have been holding. So, we may not have that significant margins of 20% to 23% in Q4. And this is what we expect to assume from Q1 of next financial year.

Nirali Gopani — Unique Asset Management LLP — Analyst

Okay, fair enough. And sir, my next question is on the guidance that you are giving for FY ’26. So in the last call you had mentioned that this four new products in pharma and agro side, do you have a potential to reach INR800 crore to INR1,000 crore in the next four years? So, am I missing something? Because this itself is, it is —

Chintan Nitinkumar Shah — Managing Director

No, no. So this products at a full-scale potential is at INR1,000 crores revenue. But you don’t achieve this in one year, so it will be a gradual ramp-up to that levels in next three to four years time-frame. And we will also require —

Nirali Gopani — Unique Asset Management LLP — Analyst

Then your guidance will be too conservative, right?

Chintan Nitinkumar Shah — Managing Director

Not converting, it is very practical, because I have only enough infrastructure in-place, where I can reach probably INR850 crores, INR900 crores, INR950 crores at max. Then we will run short on the infrastructure. So we’ll need a new plan to be able to achieve larger volumes and newer products to be manufactured. So that is what now we have seriously started considering. And with the kind of markets that we have seen over last six months, so it’s little jittery, so we are also very cautious in going ahead with our decision to that, but probably we have no choice, but we have to move ahead with that decision and go for a new capex in — probably in next couple of quarters is what we should definitely consider.

Nirali Gopani — Unique Asset Management LLP — Analyst

All right. And sir, in the last question, you just mentioned that the stable margins would go back to 22%, maybe in FY ’24. But can we go back to the original level of 25%, say, in a year or two?

Chintan Nitinkumar Shah — Managing Director

That, see, basically, see, even the issue when we say the drop-in margins, so even if this quarter if you realistically see, we have cleared lot of our inventories, rather than actually having larger volume of production. So once you have the rampant production in case, which is occupying our facilities, probably 80%, 85% in-place that is when you actually see a real margins sitting in. So, again, the reason why I’m saying Q4 we will have some subdued margin is again because we are going to clear off most of the inventories and product plant capacities with still being in idle. And that would not be the case from Q1, because then we have cleared all the backlog inventories, and then we’ll actually see a rampant production happening in place. So, of course, when you plant start getting occupied beyond 80% capacities is when your real margin start kicking. Most of the overheads, a lot of overheads, both — some of them kind of in their direct cost, but lot of them — most — most part of those direct cost are also kind of a fixed cost. So when your productivity goes up, that is where the cost starts getting distributed over various products and that is where the beauty of [Indecipherable].

Nirali Gopani — Unique Asset Management LLP — Analyst

Right. And sir, just last question from my side. Sir, you said that you have to raise funds for the greenfield capex. So, will it be equity, assuming that you’ll have to bring down your stake also to 75%?

Chintan Nitinkumar Shah — Managing Director

That is probably the most relevant answer because we will be compared to dilute by next — mid of next year, so that is definitely the option, which we would like to explore.

Nirali Gopani — Unique Asset Management LLP — Analyst

Great, sir. Great, sir. That’s it from my side. Thank you for answering my questions.

Chintan Nitinkumar Shah — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Padma Raju Mathi from SBI Life Insurance. Please go-ahead.

Padma Raju Mathi — SBI Life Insurance — Analyst

Yes, thank you for taking my question. I hope I’m audible?

Chintan Nitinkumar Shah — Managing Director

Yes, sir.

Padma Raju Mathi — SBI Life Insurance — Analyst

Sir, my first question is, like out of our total SDA sales, directly or indirectly, how much of that is dependent on China?

Chintan Nitinkumar Shah — Managing Director

I would say, indirectly, roughly about 40%, 40% to 50% is my best guess. I would — honestly speaking, I would not really know the geographies where the end product would be going. So we are the first in the chain, we make the SDA, my customer makes the zeolite, his customer makes the final catalyst, and then this catalyst goes to the chemical — to the automobile company, getting fit into the catalytic converter. So honestly speaking, I would not know the answer precisely, but my best guess would be roughly 40% to 50% dependence on the China market as of now.

See, when we started producing and when we started getting approvals, we were shielded from the U.S., Europe, Japan market, because those approvals were already in-place with my competitor. So we were less hit — and that is where we also got the opportunity of, honestly speaking, is when the India and China market opened up. So, probably 90% to 100% of the products, eventually made using our SDAs are finding an applications in these two geographies.

Padma Raju Mathi — SBI Life Insurance — Analyst

Okay, okay.

Chintan Nitinkumar Shah — Managing Director

And this geographical barrier should go away when we move from BS-VI to BS-VII, so we are already in queue for BS-VII approvals, getting — few approvals already in-place and commercial supplies already started. So BS-VII will remove all the geographical barriers for us.

Padma Raju Mathi — SBI Life Insurance — Analyst

Okay, okay. And my second question is on our costing side. Sir, you highlighted some of the solvents cost shot up towards in last quarter or so. So from a total cost perspective —

Chintan Nitinkumar Shah — Managing Director

Sorry, again you are not clearly audible. Please repeat your question.

Padma Raju Mathi — SBI Life Insurance — Analyst

So is it better now?

Chintan Nitinkumar Shah — Managing Director

Slightly better, yes.

Padma Raju Mathi — SBI Life Insurance — Analyst

So from the solvent costing perspective, you mentioned that solvents have shot up towards last quarter. So, out of the total cost, this solvents will form how much portion, approximately?

Chintan Nitinkumar Shah — Managing Director

Roughly about — see, basically the challenge is, we are into high-purity products. So when you say solvents typically is not a part of your product, it’s not a part of your key raw material, it’s an ancillary that you require to produce, but after one-time use your solvent gets contaminated with certain unwanted impurities, which because by virtue we want to produce high-purity substances, we are unable to reuse these solvents. So when I talked about the technology, which we have now in-place for one solvent and which now we have successfully established for the second solvent as well. See, this could be done by anyone, but the key part in these technology is, whether we can recover and make the solvent equally pure than we are buying fresh. So that is what we could establish and we could have our final or the finished product with the same purity levels and that was the biggest challenge which we overcame. So, ideally speaking, normally, we would say about 8% to 10% cost or 12% cost is the solvent cost, but when you are not able to reuse these solvents, then this becomes a significant part of your raw-material cost.

Padma Raju Mathi — SBI Life Insurance — Analyst

Okay. Sir, the reason why I’m this —

Operator

Sorry to interrupt, sir. Sir, the line for your sounds a little muffled, it’s not very clear.

Chintan Nitinkumar Shah — Managing Director

Yes.

Operator

May I request you to please use your handset when you are speaking, sir.

Padma Raju Mathi — SBI Life Insurance — Analyst

Yes, is it better now?

Operator

Yes, this is much, much better, sir. Please go-ahead.

Padma Raju Mathi — SBI Life Insurance — Analyst

Sir, the reason why I was asking this question is, out-of-the 800 bps gross margin impact quarter-on-quarter, how much would you actually quantify to inventory loss?

Chintan Nitinkumar Shah — Managing Director

I would have to work out that number exactly and I can give you that answer offline, probably tomorrow. Bothra, you can do that tomorrow?

Ashok Bothra — Chief Financial Officer

Yeah, we can do that tomorrow.

Padma Raju Mathi — SBI Life Insurance — Analyst

Okay, last question from my side. I think I missed the status on the flame retardants project. Can you throw some color there, with regarding our commercialization?

Chintan Nitinkumar Shah — Managing Director

Yes, so here — so now we have got full scale approval from two customers. Now, we are negotiating the price with them. And we are awaiting — we have four approvals still in queue, we are awaiting that. So we’ll start commercially producing them in this quarter, the current quarter Q4, and that would be to execute their plant scale trial materials, right. So, it would be a full-scale trial supply that would happen to these two customers in the current quarter, and then we should see commercialization happening from Q1 of ’24.

Padma Raju Mathi — SBI Life Insurance — Analyst

Okay, okay. Fine, sir. Thank you.

Chintan Nitinkumar Shah — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Yash Shah from Investec. Please go-ahead.

Yash Shah — Investec — Analyst

Hi, sir. Am I audible?

Chintan Nitinkumar Shah — Managing Director

Yes, very much, good evening.

Yash Shah — Investec — Analyst

Yes, yes, good evening sir. Sir, my first question was regarding margins itself. Sir, since we have such high gestation period, wherein we start from lab scale then pilot scale and then plant trials, very-high gestation period. So are we already in talks with few of our major customers to basically shift from three months to six months campaign orders and move to cost-plus model, since the fluctuation in the solvent prices hampers our margins significantly, so are we already in talks for that?

Chintan Nitinkumar Shah — Managing Director

No, no, most of our — the large customers business is already driven by a certain price model. But usually solvents or the ancillary chemicals or the commodities never become a part of — or not even the freight cost, okay. So freight cost or packaging material cost of the solvents or the commodities don’t become a part of their pricing formula. Usually the most — the key raw materials is where it becomes a part of the pricing formula. So whenever you have such severe adverse movement in solvent pricing, only then we are able to go and — go back to the customer and request for price increase.

So even as of today, despite of having this experience of last eight, nine months of having adverse pricing cycles in solvents or commodities, still it’s not a fair practice to include them in a part of your filing process. So usually the pricing is governed by a two or three key raw materials, which contribute, let us say, about 60% of the RMC, total RMC and that what you were negotiating platform which is set. And this prices can be probably governed or monitored on some internationally platforms, where it’s a fair play for us. So it’s not that I go and say that the price is increased, for example, the bromine price. And it is visible at most of the exchanges, chemical exchanges or prices is fairly available globally that what is a price increase in bromine kind of stuff. So, still solvents or the commodities are not part of the pricing formula and probably it’s never going to be that way. And not with us only, probably be with most of the chemical companies, speciality chemical companies, yes.

Yash Shah — Investec — Analyst

Right. So the only way we can mitigate that is by acquiring technologies like how we’ve done for the two key solvents and large solvents, right. Understood, sir. Sir, my another question was regarding the PASC segment. Now if you see quarterly, the segment looks under pressure. From which end-user industry did we face this pressure or is it just cyclical in nature?

Chintan Nitinkumar Shah — Managing Director

It is not actually cyclical, the — we are second supplier to one of the — there are two key products where we have seen some impact. One of them is a U.S. customer into pharmaceutical segment, which have postponed their orders up to April, so the November-December orders have been postponed up to April. And there is another large agrochemical customers who had some pending orders from their key Chinese supplier. This containers got stuck because of this lockdowns and stuff. So unfortunately, all these containers, about six or seven containers of product hit the Indian shores at that time in October, so then they had to actually stopped buying from us in November and December, which has again come back to a normal pace. So our suppliers, as well as our competitors, Chinese competitors supplies are now streamlined, so now we are seeing kind of a streamlined business have been back from January.

Yash Shah — Investec — Analyst

Understood, sir.

Chintan Nitinkumar Shah — Managing Director

It was just a timing phenomena that was causing this — little up and down.

Yash Shah — Investec — Analyst

Okay, okay, so we can expect to basically the revenue to go back to 40, INR40 crores, INR45 crores in H1 FY ’24, right, and that understanding will be right, sir? Hello?

Chintan Nitinkumar Shah — Managing Director

Perfect, yes.

Yash Shah — Investec — Analyst

Yes, okay. Sir, my next question was regarding electrolyte salts. Previous quarter we had mentioned that we had gotten approval from one customer which was from super capacitor batteries and we were in talks with another customer for energy storage, if I’m not wrong. Sir, has the — yes, so has there been any kind of update on that part?

Chintan Nitinkumar Shah — Managing Director

So the energy storage customer, we have already supplied the plant trial material to them. And we expect them to run these products into their energy storage systems and we should have a feedback in probably next couple of months. And see, basically, they have been awarded certain projects by the U.S. government to setup certain energy storage plants across multiple locations in the U.S. And they are also running their trials with whatever the U.S. Energy Department or XYZ, and they expect their approvals to be in-place from July-August of this current. So post that, they will have these projects in-place and this should start rolling. So we are expecting very good business from this customer post-approval, probably from September onwards.

And the second customer where we supplied the electrolyte salts which got fortunately approved. And they actually liked the quality and they insisted whether Tatva Chintan can actually help them to supply the electrolyte solution. So it’s the same customer where we got approval for the electrolyte salts for the super capacitor application is where we have now successfully supplied that electrolytic solution.

So this is the first time where we have successfully made and achieved the desired quality of this electrolyte solution. So until now, we have only been into the salt areas, never made any kind of solutions, and this is the first time where we have now successfully produced the desired quality of the electrolyte solution. And based on that, now we have a request from yet another customer in Far East, where they are also looking the products from Tatva Chintan in the solution form, not the salt form.

Yash Shah — Investec — Analyst

Great. So as it is, we had expertise in the salt, now all we need is solvent —

Chintan Nitinkumar Shah — Managing Director

And it has had — yes, solvents as it is, wherein a super — I would say a super special handling systems where — because we are talking of absolute dry products. We are talking about moistures below 10 parts per million, which is — even if you let it expose for five seconds to the atmosphere, then these products will not meet the quality requirements. So that is the kind of systems we have already successfully deployed on the pilot scale and now we are working on converting this into a plant scale, because we are expecting the — once we have this approval of the pilot material, which we have recently supplied and we are expecting to have a plant scale trail order for about 8 metric tons to 10 metric tons of this electrolyte solution, but we don’t have the necessary infrastructure in-place as of today and we are working in that direction.

Yash Shah — Investec — Analyst

Right. That was going to be my next question, sir. Right now, say in SDA, we have about four products, which are mostly in approval stage, which are in lab and pilot-scale, right. So do we have it in electrolyte salts and SDAs well, a couple of products? As we are going to basically commercialize new R&D facility, so that will accommodate the newer products where do you want to work on — the newer products, wherein you will get a request from the customers. So, don’t you see this becoming a challenge when you have to convert it to a plant scale from lack of infrastructure, because we targeted to basically raise money after a couple of quarters and then the commissioning will start which will take about — greenfield expansion will take about another year or so, 8 months to 10 months. So that will be —

Chintan Nitinkumar Shah — Managing Director

So, not for the SDAs, not for SDAs or electrolyte salts, that is not a challenge. We have enough capacities already in-place. The challenge is only for running the newer type of chemistries, particularly the continuation of chemistry that we are talking about. So we will have enough space in our current plant location, the existing Dahej plant location where we are. So we have enough space, probably to just include two continuous flow chemistries at a full-scale. So there could be a possibility to include a third one, but then this continuous flow chemistry products are not the final product that we are going to sell. So this becomes the key starting raw materials for the downstream products. That is where we will start facing challenges. That is the reason why we will have to start gripping for a new infrastructure, which you cannot probably accommodate on this existing site.

Yash Shah — Investec — Analyst

Understood, sir. Last question from my side, sir. If you can tell me the name of the solution, sir, the electrolyte solution, which we will be making. If you can provide some information on the chemistry and the additives and solvent if possible?

Chintan Nitinkumar Shah — Managing Director

No, that is not possible. It’s basically an NDA with our customer as well. So it’s a — the kind of — the additives that they require, it’s a shared information that we have from them, the solvents which is being used, so it’s a coded [Phonetic] solution that we are selling to them.

Yash Shah — Investec — Analyst

Is it, sir, like in the case of [Speech Overlap].

Chintan Nitinkumar Shah — Managing Director

This involves, for example, just to give you a brief, this involves chemistries like Quaternary compounds, which is then eventually converted to high purity SDAs. These high purity SDAs then converted into a high purity electrolyte salts, then this salt is converted into a formulation, which is electrolytic solution.

Yash Shah — Investec — Analyst

Okay, okay, actually I was trying to understand from the lines of the electrolyte salts, like LIPF6, which we make for lithium batteries. So, I was trying to understand on those lines like which chemistry will be used. I understood, sir. Thank you so much sir.

Chintan Nitinkumar Shah — Managing Director

And the challenge which you have in LIPF6 is a salt and then you have an LIPF6 electrolyte solution. So few companies would be able to make the salt, but very selective companies will be able to make the desired quantity of solutions. So, we are talking — right now we are talking of venturing into electrolyte solution part.

Yash Shah — Investec — Analyst

Understood, sir. Thank you. Thank you for answering all my questions sir, and all the best for the next quarters. Thank you.

Chintan Nitinkumar Shah — Managing Director

Thank you, sir. Thank you.

Operator

Thank you. We have the next question from Rohit Nagraj from Centrum Broking. Please go-ahead.

Rohit Nagraj — Centrum Broking — Analyst

Yes, thanks for the opportunity. Sir, my first question is, we have indicated about INR400 crores to INR450 crores of additional revenues over the next three years, what would be the expected composition of the same across our four segments, PTC, Electrolyte Salts, PASC and SDA?

Chintan Nitinkumar Shah — Managing Director

I’ll have to work that out precisely and give you a number offline, but typically the Electrolyte business is expected to pick-up really very fast, followed by a pick up in the PASC segment. So, with PASC segments, we are on the approval stages, we will be supplying few containers of products for plant scale trial, plant scale approval during this year of 2023. So probably by mid of ’24 is when we kick-in the commercial supplies and this would be a stage where this increase is going there, whereas in PASC, we see a very strong demand exponentially over the years. So this is something very difficult to digest, but that is what actually the industry is looking for. So that is one of the segment that will grow very fast over the next three years and PASC is another segment, which will grow. And of course the SDA is bound to grow with the new approvals and the BS-VII kicking in. So we will also see a decent growth in that area as well.

Rohit Nagraj — Centrum Broking — Analyst

Perfect. Got it, sir. Sir, second question is in terms of the potential new greenfield project. So what would be our focus area at least in the initial part? And any ballpark estimate in terms of the size of the project and maybe investments across different segments?

Chintan Nitinkumar Shah — Managing Director

Probably, this is more — we will have some kind of a safety production facility, offering the security of supply to customers for all the segments. So a part of this facility we will have SDAs as well, Electrolyte Salts as well, but more — the most focused area for these facilities would be to have continuous flow chemistries and downstream products made out of there. So that is what would be the key area of focus in the new facility.

Rohit Nagraj — Centrum Broking — Analyst

Right, right. And here again from a overall customer point-of-view, will it be predominantly for the exports market or will it be a combination of both domestic and exports?

Chintan Nitinkumar Shah — Managing Director

Combination of both, and that is the reason why we opted to buy a land, this new piece of land is not within the SEX, it is out — it is in the Dahej Industrial Park, but it is outside of the SEZ. But the idea behind that was, we — the products that we are into have potentials both in exports, as well as into the domestic area.

Rohit Nagraj — Centrum Broking — Analyst

Right, sir. Got it. Thank you so much for answering the questions and best of luck, sir.

Chintan Nitinkumar Shah — Managing Director

Thank you.

Operator

Thank you. Ladies and gentlemen, that was our last question for today. I would now like to hand the conference over to the Managing Director, Mr. Chintan Shah for the closing comments. Over to you, sir.

Chintan Nitinkumar Shah — Managing Director

On behalf of the management, I thank you all for joining us on our earnings call. We appreciate your continuous support and trust on Tatva Chintan. We commit to deliver and see the markets for our products improve going forward. We hope that we have been able to address most of your queries. You may reach out to Mr. Ashok Bothra, our CFO or our Investor Relation partners E&Y for any further queries that you may have. And they will connect with you offline.

Thank you, Mr. Sanjesh for hosting our call. Thank you and have a great evening, everyone.

Operator

[Operator Closing Remarks]