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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good day, and welcome to SRF Limited Fourth quarter FY '23 Earnings Conference Call hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded.
I now hand over the conference to Mr. Ranjit Cirumalla from IIFL Securities Limited. Thank you, and over to you, sir.
Thank you, Zico. Good afternoon, everyone, and thank you for joining us today. We at IIFL Securities are pleased to host SRF Limited's Q4 and FY '23 Earnings conference call. We have with us today Mr. Ashish Bharat Ram, Chairman and Managing Director; and Mr. Rahul Jain, President and CFO of SRF Limited.
I would now like to invite Ms. Nitika Dhawan, Head of Corporate Communications at SRF to initiate proceedings for the results call. Thank you, and over to you, Ma'am.
Good afternoon, everyone, and welcome to SRF Limited Quarter 4 and FY '23 Results Conference Call. Joining us on the call today is our Chairman and Managing Director; Mr. Ashish Bharat Ram, and our President, CFO, Mr. Rahul Jain. We shall start today's call with our CMD's remarks on the company's performance in FY '23 and the overall strategy, business outlook and growth plans in the future, after which the call will be opened for a Q&A with Mr. Jain. Please note that anything we say that refers to our outlook for the future is a forward-looking statement and a disclaimer to this effect has been included in the earnings presentation shared with you earlier.
I would now invite our CMD, Mr. Ashish Bharat Ram.
Thank you, Nitika. Good afternoon to all of you. It is a great privilege to be able to share my thoughts on the business performance in the fiscal year gone by and the growth opportunities that lie ahead.
Financial year '23 has been a good year for the company. Our operating revenue increased by 20% to INR 14,870 crores. EBITDA grew by 18% to INR 3,708 crores, resonating to an EBITDA margin of 25%.
The company's profit after tax increased by 14% from INR 1,889 crores in financial year '22 to INR 2,162 crores in financial year '23. While our Packaging Films business and technical textiles businesses witnessed a drop in profits. The Chemicals business performed extremely well, which gives me a notable cause for optimism. SRF diversified business model continues to remain one of our key strengths. The opportunity ahead is significant and our strategy along with our execution capabilities give us a clear edge in our chosen space.
I think from the perspective of the capital markets, the quality of earnings has improved and our chemicals business is now contributing even more significantly to the overall performance of the company. Moving to my viewpoint on the future of each of our 3 market-leading businesses now.
I'll begin with the Chemicals business. During fiscal year '23, the Chemicals business grew around 41% and registered revenue of more than INR 7,400 crores, which is higher than our earlier guidance. Looking ahead, I'm fairly confident that we can continue to achieve a 20-plus percent growth in financial year '24 as well. The return on capital employed for '22 -- for financial year '22 and financial year '23 were 25% and 32%, respectively which have been extremely healthy.
Going forward, we believe that to keep growing this business at 20% top line growth, the ROCE levels may moderate a little bit from this level. We are seeing a strong traction from our customers, and our focus will be on expanding our product portfolio with new plants being scaled up at an even faster pace than before. As we speak, we have over INR 2,000 crores and capital work in progress at this stage with 7 plants coming up in the Specialty Chemicals business and 3 plants in the Fluorochemicals business in financial year '24.
We believe our CapEx intensity will remain strong going forward as well. Both specifically in the Specialty Chemicals business, we will continue to capitalize on the growing demand for key products. We are expecting innovators to bring more complex and downstream products for the business and we are currently working on a significant number of projects that provide future growth visibility.
To address some of the future product requirements and to keep pace with the market opportunities, we have invested substantially in people, assets and capability building and I expect approximately 7 to 8 active intermediate projects to certify in the next couple of years.
Our focus on the pharma vertical is to ramp up sales from our new intermediates plant in the near term. Subsequently, we would like to move into a contract development and manufacturing organization role in this segment. This could be through organic or inorganic needs in the future.
Coming to our fluorochemicals business. In the Refrigerant Gas segment, our focus will be on the domestic business in the first quarter and on the U.S. market in the next couple of quarters. Having said that, the cool summer in India hasn't been good for us, but we expect this to be a temporary setback. We are also looking at building our exports into the Middle East from quarter 2. As a result, we may have a weak quarter in our ref gas business in quarter 1, but are confident of making up lost ground later in the year.
On the projects front, our PTFE plant got delayed as the commissioning engineers could not travel to -- could not travel due to COVID-linked restrictions from China. With in-house talent and expertise, we are now going ahead with the commissioning ourselves and samples are being produced to the market. We see this actually as a positive step as we will only aid in talent development and experience building for all our future expansions to fluoropolymers. Our strategy on the next-generation HFO gas has shaped up well, and we will share more on the project as soon as ground work is complete. We expect to have globally competitive non-infringing processes in our portfolio by the time these plants come up.
We've also started work on our next range of industrial chemicals. This will open up a new area of growth for us beyond the fluoromethane chain and could be little opportunities arising out of import substitution. On the infra side, we are in the process of signing an MOU for a parcel of land in close proximity to our existing site of the age, which will create huge synergies for us.
Overall, I remain bullish on the chemicals business and strongly believe that this is India's decade. While minor blips may hit the market, the sectorial story is very strong, especially at SRF, where we have built robust capabilities. Having said that, the global economic turnout scenario is showing recessionary trends and we need to be careful of any unexpected bumps that can cause short-term demand blips.
Over to the Packaging Films Business now. The business continues to face strong headwinds with margins plummeting to all-time lows in the fourth quarter of financial year '23. As stated earlier, this has been on account of several new lines getting operationalized in both BOPET and BOPP from segments in India and overseas.
While SRF has been able to run its plants at reasonable levels, a lot of capacity has already seen closures happening due to cash losses. As an industry leader and one of the bigger players in the packaging space, our focus is for things to improve from here on as many players are dealing under tremendous pressure. Our operations in Hungary suffered heavily last year due to exponential increases in energy costs. We have still seen some moderation in the energy index and are confident of better performance this year. We have also de-bottlenecked the capacity in South Africa about 15%, which will give us some added benefits in the year ahead.
For SRF, our strong relationships with our customers, which stems from our easy to do business with mantra and a focused concentration on WAP sales has come to our rescue. The aluminum foil project is likely to start towards the end of quarter 2 and financial year '24. We have increased our capabilities to manufacture thinner gauge oils as well as improved quality parameters, which has led to some increase in project costs. However, the IRR of the project remains healthy.
With the aluminum foil project coming on stream, it will make SRF one of a handful of companies globally that provides 3 of the major substrates, BOPET, BOPP and aluminum foil. We believe that the ability to cross-sell all 3 will be unique to SRF. As demand pivots towards global suppliers with multi-location facilities and with our focus on operational efficiencies, cost reduction initiatives to mitigate volatility and our strong customer relationships, we remain cautiously optimistic about the prospects of this business.
Moving to our Technical Textiles business. Trends are showing a slight improvement in demand for nylon Tyre Cord fabric. This is based on our interactions with our customers, and we hope it is sustainable. Our focus will be on ramping up capacity utilization this year.
In the future, we will build on the non-tyre cord market in order to derisk technical textiles from NTCF. We expect the demand for belting fabrics to grow in the near future due to an increased government focus on infrastructure development. Sales of high-end WAPs and commercializing solid woven products will be a focus on the belting fabric segment. The polyester industrial yarn demand is expected to go up with key drivers being geotextile and seatbelts.
Overall, this business will experience moderate growth. Core to our purpose is a need to uplift everyone, and we lay equal importance of community engagement initiatives and constantly strive to get back to society. With the focus on educational transformation in rural India, the SRF Foundation is working on the physical intra growth, quality of academics and school leadership development as focus areas. Presently, we have reached 382 government schools across 23 locations in 12 states directly and indirectly by collaborating with like-minded partners, providing quality education over 150,000 students and training more than 2,500 teachers and head masters.
In conclusion, I believe that our chemicals business will continue to do well and become a bigger part of the pie. In that sense, we are becoming more of a chemical company. Our packaging films business is expected to have a tough year, but we will found -- find countermeasures as we go along. This is part and parcel of business cycles.
Depreciation interest will both grow substantially because of the high capitalization of projects and as a result of the elevated interest cycle that exists today. This is a reality that we will have to accept. If interest rates start falling towards the end of financial year '24, we can expect to see the benefits of this next year.
With a strong balance sheet, we will continue to invest aggressively in our chemicals business and work towards capitalizing the many attractive growth opportunities we see in this business. Overall, we are optimistic about the future growth opportunities and of our capabilities to deliver a solid performance and drive returns for our shareholders. Thank you.
[Operator Instructions] Our first question is from the line of Mr. Sanjesh Jain from ICICI Securities.
I've got a few of them, but I will restrict it for three. First on the Fluoro specialty, it has been another phenomenal year, 5 years in a row, great show. But what we are hearing in the market is slightly a mix spend innovator have maintained a positive outlook. While generic has seen a sharp dip in realization over 30% to 40% in few products. We are also hearing some inventory buildup in America market as well. Can you share how is your discussion with the customers are progressing, particularly for a few in 2023. I know you have given a 20% guidance that you earlier states that we are looking at a very healthy rate, but some more insight, like whether you're looking at a same product growth or it is more driven by the new product addition that will be appreciated.
Thank you, Sanjesh, for the question. Again, we've discussed this internally. What you are saying may be right to a certain extent in terms of generic products that are coming from China being priced lower today to a certain extent, linked to the fact that their work over restrictions in China. But majority of our business, and we've discussed about this internally, is largely 80%, 85% of the business is innovative.
From a customer perspective, from a new product perspective, from the positioning with respect to all of the majority of our customers. We are not seeing any let's say, demand reduction or demand burn that is starting to happen. In fact, would like -- our Managing Director pointed out, -- we are, in fact, looking at a position where we are capitalizing on new opportunities on the AI side that are coming in. Like he said, 7 to 8 AIs are the ones that we are looking at, we should get position over the next 2 years. So that's how we are looking at it. Again, not seeing any negatives on that side because we are more linked to the innovators rather than being linked to like generics. I hope that answers it, Sanjesh.
Fair enough, and this 20% guidance is for the specialty chemicals, right, not for the chemicals entirely?
So generally speaking, we give the guidance for the overall business is what MD has said. But yes, when we look at it from an overall basis, 20% plus is what we are expecting for specialty as well.
Got it. Fair enough. Second, on the refrigerant gas, again, a very strong performance. Prices continue to remain firm and strong. But going into 2024, there is a 30% consumption cut notified in the U.S. and India is adding another 30,000 metric ton in our '22 including 15,000 by us, how should we see the realization and probably geographical mix may change in FY '24 out of U.S. to more Middle East and other markets, which MD sir has highlighted in his opening remarks as well, so how should one see this realization on the blended basis for IFRS?
So Sanjesh, you are right that the U.S. will have a 30% cut in starting January 1, 2024. Two or three things to understand here. The first thing is it's not just the consumption cut, it's a production cut always. Based on our calculations, we believe that U.S. will remain a net importer of HFCs. Now it could be a change in mix. It could be a change in the positioning of HFCs that could happen. But net-net, U.S. still remains the net importer of HFCs. And therefore, that's a positive for us.
When you look at it from an overall perspective in terms of 30,000 ton in terms of the 15,000 ton new plant of 32,000 that is coming up for SRF. The way we've ramped it up is probably over the next 12 months to get to about 70% utilization. And in the second year, probably get to about 100% utilization. So we believe that there are markets for this available in the Middle East, which are already home market for us, where we have a position that we can create. So that's something that we are looking to do, Sanjesh. We are fairly confident of the fact that we should be able to ramp up our production of the new 32,000 pretty soon with, let's say, in 12 months' time post its initial commissioning, 12 to 18 months.
Got it. But Rahul sir, just a small clarification. I thought that we have to sell that entire capacity in FY '24 to get eligible for the quota for the baseline calculation?
The baseline calculation from an India perspective are not production based. They are total consumption based. And within those consumption, what you are selling into the Indian market.
Okay. So that will not pressurize to sell this 100%.
But again, Sanjesh, you have to understand, this is not just from a gas by gas perspective. It is a total GWP positioning there as well.
Got the point. Last is on the fluoropolymers. There's a slight delay in PTFE, but -- if we look at Europe is slightly, slightly going stringent as far as the fluoro piece itself is concerned on the polymer side. Are we worried? Or do you think none of those regulations will have any negative impact on the fluoropolymer business which we are trying to build. And how should we see this fluoropolymer business for us from an FY '24 perspective? Will it be more of a qualification and stabilization figure and '25 is the real right period for us to assess the performance?
So the first question, let me answer first in terms of listing of Europe. Now fluoropolymers for various applications, be it from a solar application, battery application or for that matter, other applications, which are more generic in nature or industrial applications is still a need. While Europe has started to talk about the regulation around it in terms of certain types of surfactant-free positioning that we have to create. It is something that is still in the pipeline. It has not come through. The need for fluoropolymer doesn't go away.
Our sense is that the market is large enough, the market is growing. We have a positive position in terms of the fluoropolymers that we have -- we will start PTFE soon. And the 3 others that we have announced is a 2-year project. We are fairly confident of our technology being PFOAC. So that's also something that's a positive for us. Hopefully, in the future, we can ramp that up at a significant pace.
Our next question is from the line of Amar Maurya from AlfAccurate Advisors Private Limited.
So first question is on the Specialty Chemical. I mean, I'm a little -- like you said that 20% guidance is for the whole chemical business as well, right? That is what you're saying, or 20% guidance is for Specialty Chemical.
Don't drill into too much of it. 20% for specialty as well. 20% plus is what we said. And 20% plus is what we are maintaining. You have also known our track record, so be positive about it.
No, that is what I'm asking, sir, last time you guided 20% and you delivered 29% growth. Now this time, you're talking about 20-plus percent. So basically, going by the track record, like should be like more than 30% growth this year as a whole?
The way we look at it and when we look at giving you our positioning in terms of growth, what we essentially evaluate is what are the kind of positions that we are taking on certain products? What are the kind of opportunities that we are seeing. What are the market scaling that we have done? Let's say, to a certain extent, what kind of orders do we already have on hand. Based on that, we calibrate that number and effectively give you a number.
As time passes, as our quarters go by, we also get a better sense in terms of what is happening in the market, which also then gives us the confidence to be able to tell you whether it will be higher or lower, right? So that's how we calibrate it and my sense is, again, it's better to be able to give you a smaller number and then outperform rather than the other way around. And I suppose you will agree with it.
Yes, yes. And secondly, sir, secondly, this new projects like 7 of these pharma products and 3 plants are likely to commission in the second half of '24 or in the first half of '24?
Which ones are you talking about, Amar?
So these new projects in Specialty Chemicals, something around INR 1,000 crores CapEx likely to commission in Specialty Chemicals. Let's say that will happen more in the second half of FY '24 or in the first half of FY '24?
Some of the products that were announced earlier will get capitalized during Q2 and to a certain extent, Q1 as well, some product will get capitalized. But let's say majority, that is 60% to 70% will get capitalized in H2 only.
And lastly, sir, in terms of the Specialty. Can give us profitability...
Sorry it is not clear, Amar. Could you repeat the question, please?
Answering for the overall profitability of the Chemical business. Like this year, the profitability was largely driven by the R gas. Now we are talking about in Q1 R gas is going to be a little weak. But are we confident on a full year basis, we'll be able to maintain profitability for the overall chemical business related to the FY '23?
Okay. Amar, when you look at numbers, pure numbers, again, Q4 was a phenomenal quarter for the Chemicals business as a whole. As we go ahead in time, we will see to a certain extent, some moderation happening. But again, with the 20% growth with ROCE at certain levels that we have seen, minor moderation is okay. It is still at very, very, very healthy levels that we've got to. We are fairly confident of the new product, let's say, positioning that we have created, both in the specialty chemical space as well as in the fluorochemical space. So those should add to volume growth and revenue growth, hopefully margin accretive as well.
Okay. And PTFE will come in third quarter?
No, no. PTFE should commission by end of May, mid of June, and subsequently, there will be products that will come out. We'll have to go for approval. Once that comes in, hopefully, Q3 and Q4, we'll start to see some revenue positives.
So this full year basis, at least you will reach some 30%, 40% utilization in PTFE?
If we get to 50% of available capacity in H2, we should be happy about it.
Our next question is from the line of Rohit Nagraj from Centrum Broking.
Congrats on, again, very strong set of numbers on the Chemicals business. First question is on the PFB segment. So in the earlier remarks and presentation, we have mentioned that margin pressure to continue in medium term. So will it be for the next couple of quarters or for FY'24, and will that be also accompanied by any volume impact too?
Okay. Rohit, to be very frank about it, it's a generic statement. When we see new lines that have got added, when we've seen majority new capacities that have got added. If you've seen the presentation that was uploaded, we are also seeing significant stress in the market where some of the capacities that have got added or are starting to get delayed. There are positions that are getting created. Whether it will be over the next 2 quarters or 3 quarters, I really can't tell you. But over the medium term, maybe this year, we should see some positives coming out of a very bad Q4. We should start to see some positives in this financial year is what we believe will happen.
And will there be any volume impact?
Okay. The overall capacity utilization for SRF has been in the range of about 92% to 95%. We don't believe there will be a volume impact, but there may be some minor volume impact that can come through. In fact, I would say with Hungary starting to perform better, our volumes should actually be slightly higher only. Also to allude to the fact that our South Africa plant has got debottleneck probably after -- with an increase of 10% to 15% in terms of the overall capacity available, we should see a volume positive in terms of those.
Sure. That is helpful. Second question is, in terms of volume growth for FY '23 and for Q4, can you spell out generally across the segments, what has been the volume growth?
Okay. So very difficult to do in that sense. But let me just give you an overall guidance around it. From a fluorochemicals business perspective, certain volume growth would have happened given the fact that we've commissioned our CMS plant, higher volumes from the CMS plant, had higher volumes in HFCs. So that's a positive. So there would be certainly volume increase that is happening.
On the Specialty Chemicals business, no doubt, new plants have got commissioned. New products have got, let's say, instituted in the market, and that's why we believe there -- I'm sure there is volume growth on that side. I can't give you exact numbers in terms of what's the percentage volume growth. Packaging film also, we had a line that got commissioned over, I think, in July or August of '22. So there is certainly volume increase on that side. But Hungary would have been a negative volume compared to FY '22. So that's the overall sense of this. Technical Textiles, again, we have said that the demand has been weak, and therefore, we've kind of seen lower volumes on Technical Textile which should improve going forward.
Our next question is from the line of Sumant Kumar from Motilal Oswal.
Yes, sir. So can you discuss -- talk about the agro globally, the higher inventory of agrochemical -- so is it -- is there any impact in our business and you have assumed a 20% plus growth of whatever the scenario currently in global industry?
So again, I think somebody -- Sanjesh had asked the question with respect to the generic play and the inventory positioning. I think the answer to that is similar, Sumant. We are not seeing any negative impact in terms of our overall volume. We believe a position with respect to AI that is being created is a positive. We believe that the capital expenditure, 7 plants that are currently under the works will be a positive going forward. So that's how we would look at it, Sumant. Again, the inventory creation is probably more generic in nature, which is not the innovator side and, therefore, are positive for us.
And for the chemical margin, we have seen in EBIT margin in FY '23 is around 31.6%. So do you think -- what you are seeing is a minor correction. So can we assume a couple of percentage decline in your margin? Or most?
So again, Sumant, when I'm talking about some, let's say, moderation happening, I'm probably talking more from a Q4 perspective rather than an annualized perspective.
Okay. And the last question is the CapEx side.
Just let me complete, Sumant. On an overall basis, we are fairly confident that the margin profile should remain positive for us.
Okay. So we can assume FY '24 will have a margin expansion Y-o-Y annually?
Okay. Sumant, I'll leave that judgment to you whether what you want to consider as margins. I can only give you some guidance around it.
And what is the CapEx for FY '24, '25?
So as of now, we have roughly about -- let's say, about INR 1,200 crores, INR 1,300 crores of overall projects that are on the ground for cash to be spent in FY '24. Our sense is that on an overall basis, we will get to about INR 2,500 crores in terms of cash spend on CapEx.
Our next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund.
Sir, my question was on going to be on CapEx, so let me just turn it around, given the fact that there are certain pockets where we are cautiously optimistic, would you look at pairing CapEx and indeed mandating debt levels extremely well to the long and large CapEx cycle. So what is the peak level of indebtedness that you see in the company going forward in the next 1 year?
So again, when we look at this, Vivek, the position is that we don't look at -- while we do look at the overall number on the debt, we are not looking at pairing the growth opportunities that we are seeing. So if there is a growth opportunity that is significant, we will certainly invest. Given the fact that our overall net debt to EBITDA on the balance sheet side is still at 0.89 or so, right?
With the CapEx cycle that we are running, we will probably get to a slightly higher number. But not very significantly different from where we are. It will, to my mind, certainly remain in the range of less than 1 for sure. So we are happy to invest. Again, it's best to invest to a certain extent when the opportunity is presenting itself, I don't see us pairing our CapEx growth for managing the balance sheet. I think the balance sheet is in fairly good shape.
Our next question is from the line of Abhijit Akella from Kotak Securities.
Just a few data points I was kind of hoping to get. One is on the fluoro specialty business, would it be possible to share the revenues for the full year FY '23 or at least the growth rate Y-o-Y?
I am sure you would have asked that question. So on the overall basis, my overall chemical business turnover was roughly about INR 7,400 crores, give or take, INR 10 crores here or there. Specialty chemical is about INR 4,200 crores this year and INR 3,200 crores was fluoro.
Got it. That's helpful. Also the CMD referred to this dip in ROCE potentially from 32% levels currently. So just sort of trying to get a sense of whether we should expect that to be driven by lower margins? Or is it just like increased CapEx, which will take its own time to sort of translate into revenues?
So again, see the fact is that these ROCEs are in fairly good shape when we look at it from an overall perspective in FY '23 and as well as in FY '22. The fact is that even if there is an opportunity to, let's say, drive out some other new products, which are if not ROCE negative, but will take more time in adding to the ROCE positive. We are happy to do it. Again, this is like in Hindi called [Foreign Language], we are happy with 28, 29 also. So that's how it is structured. So we are happy with ROCEs in excess of 25%, 27% for new projects that come in. So that's how we look at it, Abhijit.
Got it. Helpful. Then just one last thing from me. There was also a mention of plans to foray into the contract manufacturing, or CDMO space in pharma and there was a mention that it could be through organic or inorganic means as well. So I mean if you could just share some more detail around the thought process out there?
The way we are thinking about it, Abhijit, is that the PIP plants are starting to expand. In fact, to a certain extent, we believe while if we want to populate the PIP plant completely, we can do that today itself. We are looking at more complex products, products that add more value, products that are margin accretive and over a period of time in order to be a large player in pharma, we will also have to look at a contract development manufacturing system of data to be created, whether it gets created organically over a period of time, adding capabilities, adding assets, investing in people or through an acquisition, we are happy to look at both -- is what we alluded to.
Perfect, sir. Also, just the South Africa addition, does it add 10%, 15% to overall PFE volumes? Or is it basically South Africa?
No, no. Abhijit, it adds to South Africa value.
10% to 15% debottlenecking to South Africa. Got it.
3500 tonnes a month. Total annual monthly capacity at 3,500, annually.
Our next question is from the line of Rohan Gupta from Nuvama.
Background noise, could you come close to your phone.
Sure, sir. Sir, I hope it is better, sir.
Slightly.
Sir, I was saying that on our PTFE plant, which is going on stream in the second half, you mentioned. How soon we can expect the PTFE value chain product portfolio to improve? Because I understand that initially, we are definitely going to start on the commodity grade with a lower margin. So how you see that the ramp-up in the product value chain can -- we can achieve?
Again, Rohan, I think the way we look at it is to be able to ramp the plant fully, initially as the confidence with respect to the product come through as we get more approvals coming through, we will move into more specialty grades. It's not an overnight position to be created. My sense is as we take the PTFE journey, we will probably have to take 12 months to be able to start getting into more, let's say, specialty grades.
So first, we will ramp it up to 100% from 75%. And then next year will be the focus?
No, no, don't look at it from a sequential perspective. Look at it from a perspective that let's say, when we are getting to 50%, 60% and if the customer demands more specialty grades, we are happy to work on it and be able to deliver that. but it has to ramp up to a certain extent, existing product has to get approval before we, let's say, ramp up very significantly on the specialty side.
And if I just read between the lines that you are seeing that still in FY -- I mean, current year, we will definitely strive for growth. How are the headwinds are in packaging film where the scenario is still weak over the next couple of quarters. And we are also guiding about pressure in the gas pricing scenario. So only growth driver will be probably for the current year is Specialty Chemical business where we are confident about 20% plus growth plus.
So -- on an absolute level, the confidence which you are bringing us is still a growth momentum to be maintained, it shows not able to do the math better, how the profitability impact, which will be there in 2 segments -- large 2 segments in packaging and ref gases will be there. How we will be able to compensate from the other business, mainly Specialty because we don't expect anything going to change materially in technical textiles?
Rohan, to be very frank, I'm lost with the question. What is it that you are trying to ask?
Sir, I'm saying that in all your conversation, you're still guiding about that at the bottom line at an EBITDA level, we are still looking growth on an absolute number compared to last year, I mean FY '23.
To clarify When we said 20% plus, we were talking about chemicals business. Okay. Packaging films will hopefully grow from this level given South Africa addition and to a certain extent, Hungary coming back in terms of overall volume, which is what I had said earlier on the call as well. Again, on the technical textiles wise, I think we had alluded to it saying that we are seeing a positive trend in terms of demand from customers. Hopefully, that should pan out as well. That's how we are looking at it. But when we said 20%, it was more reference to the chemicals business rather than company as a whole. I hope that clarifies.
Yes, sir, I understand that 20% also we're talking about on the..
Revenue front, right?
I'm looking more at the bottom line or at EBITDA level performing for the current year. There seems to 2 big headwinds which we are going to face in the current year, which looks difficult to get compensated from the Specialty Chemical business improvement. So I just needed some clarity, though it's good to have ambitious target, but aren't we looking a slightly moderation or a degrowth kind of scenario in FY '24 with these 2 segment headwinds? That's what I just needed some clarity on that.
So Rohan, again, we've said that there may be some headwinds in Q1 for the Fluorochemicals business given that there is -- there might be -- it's not seemingly a very hot summer that we are seeing. But it is also to be pointed out that we've also said that we believe it is temporary and we will wrap let's say, in the course of, let's say, Q2 and Q3, we will ramp up our Middle Eastern sales we will ramp up our U.S. sales. All of that is a positive. So I don't believe that there are very, very significant headwinds either in terms of price, from a full year basis, the reference when we made to fluorochemical price was more from the cycle what we are seeing in terms of the weather panning out in Q1.
Okay. So it is more in Q1 rather than full year. Okay.
Our next question is from the line of Madhav from Fidelity.
I just had one question. When you said we want to enter the pharma CDMO space and could look at M&A., just wanted to understand what exactly -- what kind of capabilities or what is it that we're looking at in the target when we're evaluating various opportunities? Is it like we're looking for a CGMP plant? Or is it from certain other capabilities? Just wanted to understand it.
So to be very frank, Madhav, the way we are looking at is that we already have a CGMP. We already have a new PIP plant that has recently been finished. When we are looking at adding capabilities, obviously, in due course of time, if there is a specific AI which is a large requirement, we will have to put up that plant. And like I said, we are happy to put up that investment to be able to capture that growth. Now it could be a specific AI plant, it could also be to a certain situation where there are 3 products that are manufacturing, which are going into a single AI. I might be just doing a forward integration of that as well. So there are various permutations and combinations around it.
Could this M&A also be for certain like R&D capability or certain like chemistry capability of the target as we look at in Pharma CDMO or is it just more for the plant in specific?
No. It could be both ways. It could be capacity. It could also be, to a certain extent, R&D. It could also be providing a front. It could also be entry positioning into Europe. It could be multiple, let's say, opportunities. And it will depend on the opportunity that it presents.
Our next question is from the line of Arjun Khanna from Kotak Mahindra Asset Management.
Congratulations on a good set of numbers. Sir, just on this M&A activity, if you could just specify in sense may be more generic. Are we looking at assets in India, outside India? Do we have a ballpark in terms of capital to be deployed for the same?
Arjun, let me take this way. We said it could be both organic and inorganic. We've not laid out any specific capital for us to be able to go out looking. We will keep our eyes and ears open if there is an opportunity that presents itself. But again, like I said in answering to the previous question, it could be both on the capability side or the asset side. It's a bit too premature to be able to give you the details around it. I don't have details. We are saying that once, let's say, the Pharma piece starts to ramp up, which we are already seeing, we will probably have to become a larger player in the segment through CDMO -- that's what we are thinking about.
But in a sense, just following through the thought process, are we looking at facilities in India or outside India?
I'm happy doing both Arjun, if you give me the opportunity to buy, send me a target, and I will look at it. Be it in india or in Honolulu.
Sir, the second question was on the ref gas piece. You've been highlighting the Dymel pharma propellant doing well. So when we purchased it, I understand capacity was maybe 1,100 tonnes. Have we increased or expanded capacities there? And if my -- please correct me, this would not be impacted by the emmesive cut that countries may have and this -- given it's in the pharma grade could continue as long as this demand?
Okay. So let me answer the second question first. You are absolutely right. HFC 134a Pharma does not get impacted by it. So that kept separate because there is no known product that can be used in [indiscernible] So that's the answer to the second question.
In terms of the overall positioning on this, when can I look at it, the plant that we had set up was roughly about 2,000, 2,200 tonnes. We can do 2500 tonnes of diamonds. As of now, our total positioning around this is probably in the range of, say, about 1400 tonnes that we are doing. The plant has enough ability to do more. Whenever there is more demand on it, we have the ability to debottleneck to a certain extent.
Sure. Very helpful. Just a follow-up in terms of pricing. So we see a lot of variance. Would this pricing be at a premium to normal 134a? And could you just give us a sense of how much could that premium be?
In total, I think it is at a decent premium. The pricing premium on 134a has ranged between $4, to $8, $10, depending upon market size and market environment.
Sure. That's the premium over the HFC of 134a?
Yes. It will also depend on what pricing HFC
134a is selling at.
Our next question is from the line of Dhruv Muchhal from HDFC Mutual Funds.
Sir, you mentioned about 7, 8 molecules or AI's you are looking. If you can give some more details? Are these Agro, are there Pharma, what is probably the opportunity size, the overall opportunity size? What are you trying to capture? And are these contracted with your customers? Or I mean, what kind of launches are these?
So we are talking about active intermediates. So clearly, these are not Pharma, these are Agro. I will have to come back to you in terms of what is the total market size or the market opportunity on the overall Agro or overall, let's say, AI that we are talking about, I will have to do a market assessment of that and speak to business, we will come back to you on that.
And sir, are these -- I mean, contracted your customers, these are generics, these are patented molecules. What -- if you can give some more colon there, please?
So they are largely patented products. We are talking to innovators only. But the other question was, you said patended product, but contracted no. These are in the process of getting contracted.
Got it. And we have decent visibility that they will be commercialized over the next 2 years, very good visibility.
Very good visibility, yes.
Sir, the second question is, we have seen a good improvement in the Chemical segment margins on a Q-o-Q basis, which are already at a very healthy level. So if you can give some more color what's driving this? What's aiding to this and probably also mentioned [indiscernible] so some color, please?
So here I think to a certain extent, Specialty Chemicals added a positive. Everyone has been saying that there has been a positive that has been added by the Fluorochemicals HFC sales. That's another positive. So those are the two key elements of the business, and that's where the positive is coming through.
Okay. So the delta and the...
Margins during the financial year, both specialty chemicals as well as Fluorochemicals have expanded.
Okay. And particularly in Q4, it's in both the segments, both gas and the specialty.
Q-on-Q also, margins have probably expanded, but I'll have to just look at my numbers and come back to you.
Our next question is from the line of Vivek from Morgan Stanley.
Congratulations on good set of numbers. A couple of questions from my end. You mentioned earlier that the utilization rate at about 93% to 95%. Just wondering if you could...
Could you repeat it, please?
Sure, sir. You had mentioned earlier that your utilization rate was roughly in the range of 90% to 95%, if I'm not mistaken. Could I just trouble you to give a trend of...
That's what I was talking about, is it?
Sure, sure, packaging films. Could I just trouble you for the utilization rates in the other segments as well?
It's very difficult to be able to do that Vivek given Specialty Chemicals that it's practically impossible to give you utilization rate given the fact that we operate out of 4 multipurpose plants, and more 12, 13 dedicated plants. But let me also say it like this. Dedicated plants are almost pretty much full. NPV will always have spare capacity availability. There are certain new products that we have commissioned over the last 12 months or so. So those will be in a ramp-up phase. From a fluorochemicals perspective, again, I think let's say, the HFCs have ranged between 75% to 85%, 95% and overall capacity utilization. For chloromethanes, again, we had set up the plant probably in October of last year, that's also to a certain extent in the phase of ramp up. Other continued plants are the older plants are practically full in terms of utilization.
On Technical Textiles, utilization have been low, say about 75%, 76% overall.
Got it, really helpful. Just one clarification. Could I just check what is the utilization rate at Hungary right now, because you said it's going to improve in FY '24.
Exit was about 65%, for the whole year it was roughly about 69%, 70%, 69% as such.
Okay. The exit was 65. Okay, sir. And just a last question from my end. On the packaging side, I just wanted to check if there's any one-off items in this quarter?
No. There were no one-offs. This has just been the way business is.
So even no inventory impact or stuff like that. It's just a...
Nothing big one to report separately, Vivek.
Our next question is from the line of Surya Narayan Patra from Phillip Capital India Private Limited.
First question is on the Specialty Chemicals business, right? So we have launched 6 new products this year. And against that, we are talking about 7 to 8 product new launches over next 2 years. So how should we -- how should we see this because we have already done that 6 or these 6 of the current year is not the AIs.
Okay. So the way we are looking at it, these are 6 or 7 or 8 additional AIs that we are talking about. Our normal agro product launches, the pipeline is still pretty robust and those launches will happen.
One kind of thing that there is a graduation positioning that is happening for us to start to get it into AIs, which is probably more, let's say, how far should I say this [indiscernible] take in that sense.
Okay. Sir, is it possible to get a sense of this -- what could be the share of AIs in the overall Specialty Chemicals, revenue-wise?
In today's position, the only large AI that we do is 32. I'll come back to you in terms of the overall, say, about 12% to 15% as the overall contribution within the Specialty Chemical space.
Okay. Okay. Sir, one interesting trend that -- in terms of margin, so for the chemical business as a whole if I see the last 3 years, the margin has trended quite significantly upward. So let's say, in FY '20, '21, the average EBIT margin was kind of 19% to 20%, which has moved to 25% in '22. In FY '23, it is 31%. So almost like a clear 5%, 5% kind of jump that we have witnessed. Now with the kind of improving product mix in the specialty and the qualitative price -- qualitative volume as well as the price prove that in both the ref gas as well as the specialty and the improving product mix within specialty. Considering this, what is the kind of sustainable margin trend that once you trade to think about, sir?
Surya, if it would have been just a mathematical excel sheet, we would all have been able to create. Business is dynamic, right? It will always have some volatility around. We do know that there are recessionary trends that are playing out, right? Again, I would say we are fairly confident of the margins that we've been able to deliver. There may be some, let's say, tempering of the margins. When you look at purely the Q4 margin of the business to come through. But overall, again, like I said, if we are happy to grow the business at 20% plus margins even if they temper a bit, it's okay.
Okay, okay. And just an extension to the Chemical business, sir. See, here, when you said that you are looking at the CDMO opportunity. So what is the thought process here -- are we restricting ourselves to any intermediate so that there is no regulatory asset that would be required or even we are thinking about regulatory asset addition also.
You are confusing. CDMO is more on the pharma side.
Yes. So are we moving up to the API level so that the regulator set would be required, sir?
So in, if there is a need to get a regulatory approval for any of the products, which we start to manufacture, we will get that ability as well Surya, why not?
Sir, just 2 simple clarification. One is that what is the average finance cost for the current year, one? And secondly, you had talked about the HFO gas opportunity after a long gap so how quickly that we can see that is in the real revenue opportunity for us, sir?
So again, when CMD talked about it, he was more referring to the fact that the opportunity that is presenting itself is something that we are working on. We will look to enhance that opportunity. We are working in our overall, let's say, positioning from a company-wide perspective, looking at non-infringing processes that will come in. So that's what we are looking at. We are fairly confident that we will be able to ramp that up. Ground work is already being done around it. So that's how we are looking at it. In terms of overall average cost. Again, I think the way we need to look at it is that we've seen effective, let's say, benchmark rates, both globally and locally, move up more in H2 rather than in H1. So on a closing rate basis, March 23, annually was probably about 4.5% -- 4.2% as the average cost on a consolidated basis given various mix of products that we have.
The overall position -- sorry, it was probably in the range of 4.5% for India. So that's where it is. When we look at it, from a futuristic perspective, we also see that there is now starting to talk about, let's say, revision in interest rates, the Fed curve starting to think about cutting off interest rates. So those stories will play out probably more during FY '24. So that's how it should work out.
Sorry to interrupt. Mr. Surya, may we request that you return to the question queue for follow-up questions as there are several participants waiting for their turn.
Our next question is from the line of Dharmesh Shah from Marcellus Investment Managers.
Most of my questions have been answered. Just a follow-up question on the AI projects that company is working on. Are these fluorine-based AIs or are these completely non-fluorine based?
So I didn't catch a question. Could you repeat please?
Yes. So the 7, 8 AI projects that we are working on right now with the innovators. Firstly, are these fluorine-based active ingredient or non-fluorine based?
I think what we've said Dharmesh in the past also is that our intent is to move the value chain. Our intent is to move in complex products. Some of these products are actually -- the AIs are actually products that integrate into some of the products that we are already doing. Right? So that is how we are looking at moving up to value chain. Whether it is fluorine or non-fluorine, I don't think it matters at all.
Got it. Got it. And these are the projects from our existing customers or these are new inquiries that company has got?
Both in nature.
And just lastly, on the similar lines, are these products 7, 8 AI molecules. These are new for the innovators as well? Or these are already developed products, but they are looking out for manufacturing partner?
I will have to check and come back to you.
Our next question is from the line of Vishnu Kumar from Spark Capital.
On the U.S. restriction that starts next year, but a similar event happened in the EU, we saw there was a really good spike in Europe imports 1 year before the restrictions started. So what should we anticipate from our exports? Should we expect a spike in exports from the [indiscernible]
Again, Vishnu, we will have to look at it from a perspective where -- what happens to the overall market, not just in FY '24, but FY '25, '26, '27 and onward. So the 30% cut that comes in from January of '24 will be a GWP equivalent cut that comes in for the next 4 years -- sorry, for the next 5 years, that happened.
Now like I said earlier also, based on our calculations, we believe that it is not just a consumption cut that is happening, it is also a production cut that is happening. U.S. is likely to remain a net importer only. And given that as a situation, the demand -- while the production is cut, the demand can't get cut immediately like that, right? So the secondary market demand will remain, which will then lead to probably some price positive that should also come.
Also, what had happened during some of this is that they have all -- the Chinese that were manufacturing significant amounts. And therefore, setting that kind of dumping even at a very low price. Now given that their quota regime requirement is completed by '23, I think some of that sanity we should also return to the market.
Okay. Sir, when you mean GWB this 134a and 410, these are the higher GWB and 32 is probably something that at least today from an export market...
32 is the lowest.
32 is the lowerst, so 134a can't take 32 right? for replacement.
134a is mobile application, yes. So 134 is used in some brands, which are used for, let's say, REC applications.
Right. Now for pricing, sustainably in the last couple of years, ref gas pricing has been quite high. How long do you think this is going to sustain and do you expect this -- once the post this cut next year also we...
I can't comment on the price, Vishnu. But what I'm only saying is generically, right, demand is still rising. Regulatory environment is restricting the product. That is how the story plays out in all of these cases. So that's how it should play out. I can't tell you how long the price will sustain, market can be volatile. There could be certain market elements that play out. So all of that can happen, Vishnu.
Understood, sir. And finally, on packaging film business, at some point, the demand should catch up on the excess supply. I mean any internal assessment by next year, mid or any expectation there?
I'm not putting a date or a number to it, Vishnu. Again, there are new lines that have been ordered. Some of them will get delayed. That's what we've also mentioned over a period of time, there should be some -- we are probably at the worst of the cycle, how long does it continue? It's very difficult to be able to say, but we are fairly confident and cautiously optimistic around.
Our next question is from the line of Krishan Parwani from JM Financial.
Congrats on a good set of numbers. Two questions from my side. So when do you see this R32 coming from our new plant? Would it be beginning of July '23? Or are you expecting any delays?
So let's say, the plant capitalization currently, we believe should be July -- June, July. Product and availability should be starting August, September.
Okay. Okay. Perfect. And the other one is on -- I understand that you don't give the profitability breakup of the Chemical segment. However, kind of would it be possible to share the direction of the fluoro specialty chemicals. Profitability over, let's say, year-on-year and over the last 2, 3 years?
Again, I can't give you percentages. What I can only tell you is that during FY '23, what we've seen is margin expansion happened both on specialty and Fluoro.
Okay. And over the last 2, 3 years? I mean, direction, not the...
Directionally also, it's on an uptrend.
Perfect. And how do you see it going forward? The reason I'm asking going forward because you are commercializing, let's say, many projects on the specialty side. So would it be kind of lower yields could result in lower margins for fluoro specialty or not really?
So, Krishan, like I said earlier, the way we are looking at it is that the 20% growth is probably what we are targeting 20% plus growth, if to a certain extent, there is some tapering on the margin front that happened. That's fine, given we have, let's say, 2, 4 exit margins.
That's okay. Yes. Okay. Got it. Got it. I was more checking from the year-on-year point. I mean not...
Unfortunately, I can't give you any better color on this.
Due to time constraint that was the last question of a question-and-answer session for today. I now hand the conference over to the management for closing comments.
Thank you, everyone, for being on SRF's Q4 and FY '23 call. I hope we have been able to answer all your questions. If you have any further questions, we would be happy to be of assistance. We hope to have your valuable support on a continued basis as we move ahead. On behalf of the management, I once again thank you for taking the time to join us on this call. Thank you.
Thank you. On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.