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Ladies and gentlemen, good day, and welcome to the Q1 FY '24 Earnings Conference Call of Sudarshan Chemical Industries Limited hosted by IIFL Securities.[Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vidit Shah from IIFL Securities. Thank you, and over to you, Mr. Shah.
Thank you, Michelle. Ladies and gentlemen, good morning, and thank you for joining us on the post results conference call for Sudarshan Chemical Industries Limited. It's my pleasure to introduce the senior management team of Sudarshan Chemicals who are here with us today to discuss the results. We have with us Mr. Rajesh Rathi, Managing Director; and Mr. Nilkanth Natu, CFO. We'll begin the call with opening remarks by the management, and thereafter we go [indiscernible]. I would like to now hand over the call to Mr. Nilkanth Natu to take the proceedings forward. Thank you, and over to you, Nilkanth Jee.
Thank you. Thank you IIFL Securities and Mr. Vidit for hosting our earnings call. Good morning, ladies and gentlemen. Welcome to Sudarshan Q1 FY '24 Earnings Conference Call. Our investor presentation has been uploaded on the stock exchange for your ready reference. I would like to take you through the financial highlights for this quarter. On the overall basis, we commenced the current financial year with improved financial performance compared to the challenging previous year. Quarterly taking the fee to the quarterly performance. On a consolidated basis for the quarter, total income from operations stood at INR 608 crores as compared to INR 554 crores for the same period last year, higher by 10% year-on-year. EBITDA for The quarter stood at INR 70 crores as compared to INR 41 crores in Q1 FY '23. EBITDA margin is at 11.5% as compared to 7.5% over the same period last year. Profit after tax is at INR 21 crores compared to INR 7 crores for the same period last year. Now going into the details of our segment business. For the Q1 FY '24, income from operations stood at INR 536 crores as compared to INR 526 crores for the same period last year, a growth of 2% year-on-year. On a sequential basis, revenues grew by 10% compared to INR 594 crores of Q4 FY '23. India sales for the quarter is at INR 265 crores, marginally lower by 1% as compared to INR 269 crores in the same period last year. On a sequential basis, India sales is lower by 12% compared to INR 301 crores in Q1 FY '23. Exports for the quarter is at INR 272 crores as compared to INR 258 crores, higher by around 6% year-on-year. On a sequential basis, revenues rose by 7% compared to INR 293 crores of Q4 FY '23. Value growth has remained soft due to pass-through in the falling prices due to fall in the raw material prices and the logistic cost. In the Plastics segment, we are seeing relatively total demand and expect further improvement in the coming quarters. We have seen a good demand scenario from Coatings and Ink segment, majorly due to domestic players deferring buying decisions going to destocking and falling price regions. Demand in this segment is expected to pick up in the coming quarter in H2 FY '24, and we continue to be resilient towards international geographies considering the global macroeconomic situation. Specialty segment sales stood at INR 363 crores as compared to INR 352 crores for the previous year same quarter, 3% year-on-year higher. On a sequential rate, revenue is lower by 12% compared to INR 412 crore of Q4 FY '23. Nonspecialty sales for the quarter is at INR 174 crores, which remains flat as compared to the same period last year. On a sequential basis, revenue grew by 4% compared to INR 181 crores of Q4 FY '23. We see good engagement with the customers to be a healthy opportunity coming from recently commissioned CapEx. As guided earlier, revenue ramp-up will be slightly delayed due to the macroeconomic conditions. Gross margin of pigment business for the quarter increased to [ 40% ] %, [ 9 ]%, 40.3% for the same period last previous year. Comparing with the sequential quarter, gross margin has gone up by 140 basis points. Apart from raw material costs, we continue to see softening of coal prices as compared to the previous year. Logistic costs have also come off the peak levels seen earlier. In the softening price [ review ] , we will continue with the calibrated pricing decisions to volume growth in the coming quarters. EBITDA for the quarter stood at INR [ 64 ] crores in Q1 FY '24 as compared to INR 44 crores for the previous year same quarter. EBITDA margin is at 11.9% as compared to 8.3% over the same period last year. On a sequential basis, EBITDA is lower by 40 basis points, and this is due to lower operating leverage and annual employee increment [indiscernible]. Recent update on the land monetization. During the quarter, the company completed sale of renewal line listed at Pune, Maharashtra for a total consideration of INR 356 crores, net gain of INR 315 crores from the sale transaction has been reported as a part of exceptional win in the P&L statement. Profits from the land monetization are being utilized towards delivering in the balance sheet. To summarize, business environment has mixed quite some headwinds due to the macroeconomic situation and positive thinking from the external factors such as consolidation of top layers in the industry, China-plus-one strategy, et cetera, which are expected to cover Indian pigment industry. We are well prepared internally with all the CapEx projects being commissioned with wider range of product portfolio, cost-efficient operation and capacity to quickly ramp up.
To summarize, we are confident in our growth journey and look forward to continuing the same and delivering value to all our stakeholders. With this, I'll now open the floor for question-and-answer session. Thank you.
We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Sanjesh Jain from ICICI Securities.
First, on the domestic revenue growth. If you look at the plastic companies, pipe companies, they have reported a volume growth anywhere between 15% to 30%, and coating industry got benefited because of the delayed monsoon. While if I see our number, it really doesn't show that kind of increased volume. It is because that we have passed on the price benefit to the customer and volume growth has been healthier than what we see in the revenue growth. That's number one.
Number two, how have been our market share in Indian market because if that's not true, the earlier statement, and it looks like we are losing market share in the domestic. Can you provide some color there. That's my first one.
Hi, Sanjesh, and thanks for your question. So as I mentioned in my opening commentary, we are seeing the good sales growth in the plastic segment, and there is a good traction. While the coating company has reported a good number, we have seen the destocking there, and the full value growth was subdued there.
And we expect that debt should be transitionary and the demand revival in the India market should come in. As regards to your second question in terms of our market share in India. We are currently a market leader with 35% market share in the domestic industry. And currently, we don't see any degrowth in our market share we are not moving out on the market share in Indian market.
But we have invested so much into the high-performance pigments. We are expanding the portfolio. If I see this 35% number for last four or five years despite such a significantly higher investment, that hasn't been moving up. What are the other players who have been equally aggressive because we haven't seen too much of a capacity addition in the pigment segment, why our market share is not reflecting that?
Sir, this is Rajesh Rathi here. As Makadi mentioned, our -- we've seen a good growth in plastics, which the growth has happened with -- and as -- and the second is in the coating section, we've lost -- not lost anything, but we've not seen growth because of the destocking happening in the coatings industry. Our entire product portfolio was designed for a global market. And of course, India is also some products do go into India. And from that perspective, whichever were main designed for India, they are getting well intense in the product. And so I do not know how you -- why do you come to a conclusion that we are losing market share. That's not clear.
No, I got your point that volume growth could be higher and destocking could be a transitory phenomena. I'm just dwelling on this 35% market share, which has been stable for last four, five years, if I remember it right. Why is it not improving considering that we have been investing so much in the product portfolio and all, one would have anticipated it to go up materially.
So I think once you reach a certain product, certain market share, it's difficult to. And especially on some of the commodity sites, we have been -- we've not been able to, we've been losing some our products there, and that's been by design. And that's where this new product portfolio was designed that we gain market share there, right? There's a big -- if you see the [indiscernible], you see the chrome industry inorganic, there's a big, very big competition there, and margins are constantly falling in that region. So we don't -- so there is a certain level of market which we've lost there in the last few years.
Got it. Got it. So just to summarize, you're telling that we are improving on the product portfolio, where we are shedding some of the market share in the lower end or highly competitive product and moving up in the value chain. Is that a fair assumption?
Yes so, absolutely.
Okay. My second question is competition from China. We have generally heard from many chemical companies that due to the lower domestic demand in China, those products are flooding in the export market, and we do have a competition from China on the Azo portfolio. How has been our experience? What has been the competitive intensity, pricing margins in the export market for that part of the portfolio?
We have seen intense competition and probably some of the utilization has been at their lowest, right, for the Chinese companies. So we have seen intense competition. But I think last year also, we saw a huge competition there. So compared to last year, I wouldn't say that it has been -- it's become worse. So whatever we saw last year has been continued. And with our product portfolio and even in Azo we have been able to get back some of our markets, which we have lost in the export market.
Got it. Last two questions. One on the new product approval and the ramp-up. I know you have told that it will get slightly delayed considering the global demand scenario. But can you tell us how is the Yellow and [ White light ] Being accepted by the customer? How many have approved it? Some color, qualitative statement to give us the confidence that when the demand turns around, we should be able to gain that benefit. That's one. Number two, on the Phthalos side I think China antidumping on India is now anniversarized. It's already in the base. Are you seeing that continues to hurt us? These are my two questions.
So one question is, and Nilkanth will kind of look to it that our new CapEx change, we are getting good engagement, right? And what we had earlier given our guidance that earlier we had anticipated to utilize the full in three years, it will go to four years. That's what the guidance we had given you last time.
So currently, we are on track on this year's target also as per defined by that 4-year target, right? So we are on track on that. So if the macroeconomic situation changes, the team -- we all hope that we will go back to the normal, the 3 years utilization, what we had thought, right? So a good engagement on all those products are across customers and across [indiscernible] right?
And so that's one question if I've answered. The other -- the second question was on China antidumping. It's hurt the entire industry. The Pigment Manufacturing Association has decided to fight this together, and we hope that we do this. So coupled with -- so what has happened in the Phthalocyanine industry is the macroeconomic situation globally, it was majorly was an export market, right? So we've seen the depression in demand plus the China demand going up, right? So it's a double ban for the Phthalocyanine industry.
Okay. But the antidumping has been put beyond a year now, right? At least there is no incremental hurt from the antidumping for the Phthalos side of the portfolio. I can understand the destocking part of it, but from the purely antidumping, there is no incremental impact now because it's already in the base, correct?
Is it already in the base? I think, yes. I mean, I don't exactly remember whether it's 9 months or a year. But there's no incremental after the last incident of antidumping. Whether it was 1 year, I don't recollect exactly.
The next question is from the line of Ankur Periwal from Axis Capital.
So continuing with the earlier discussion on the overall demand scenario and given that exports are more relevant for us in terms of ramping up the newly launched products, capacities, et cetera. If you can share your thoughts on how you are looking at different geographies, both from a specialty as well as a nonspecialty portfolio perspective?
Yes. So Antoine, so as we guided in our opening commentary, in the short term, we may see the demand variation due to destocking of the inventory level and buying decision deferment due to the softening of the prices. However, we expect that this to be a transitionary phase. On the domestic demand, we expect the recovery in the coming quarter that is in H2 of FY '24. On the export front, as we mentioned, the uncertainty is due to the global geologic political scenario remains and with a tighter monetary policy, the demand is expected to be moderate. However, given the last year performance in the first two quarters, we expect the growth will be there in the export as well as the domestic market as far as our company is concerned, and we will continue to monitor that.
Sure. Secondly, on the RM deflation side now and since we have been improving on our gross margin front. This gross margin improvement is more optical because of the decrease in freight cost or there is a genuine full pass-through of RM inflation and probably the deflation is helping now?
So the current quarter gross margin is at 42.9%, which shows the improvement over the last year Q1 as well as the last year quarter 4. And if you really see that historically, we were operating at the similar level of cost margin, and we are excited to have this gross margin level only. However, the gross margin improvement, what we have seen in the current quarter is due to softening of the RM prices and also some part of the large effect of the pass-through.
Our endeavor is always to maintain the gross margin level at the same percent, and we expect that the gross margin should remain at a similar percent given the softening of the cost element in terms of the raw material in terms of the coal and all that. We expect that this should remain at around same level in the coming quarter. However, we will have to take the balance that [indiscernible] mentioned earlier between the volume and the price looking at the demand scenario in the coming quarters, given the uncertainty around, but we will try and aspire to have gross margin level around the same level.
Sure. So Natu jee, wherever coming from was the existing portfolio, if I look historically, our gross margins have been largely stable in that 42%, 43% range. But given the new INR 7 billion CapEx that we have done and over the next, let's say, four years, if we are looking at a ramp-up there, which is more on the specialty side, this number should move up materially.
So from a, not immediate near term, but let's say, from a 3-year perspective, we should see a decent improvement in the gross margin number? Or will it be a case that probably will have to offer our products at a slightly discounted or maybe lower prices to gain market share? And hence, the margin accretion may not be as high while revenue growth will be good.
So very good question, sir. So obviously, this product portfolio was designed from a -- that it receives a higher gross margin, right? There are two things -- two things happening is that given the current macro scenario and the levels which all the industries are operating on our existing portfolio also, we have to look at how to maintain the volumes and in many cases, we have to drop our gross margin. right? So -- and we are aggressively pushing our other portfolio also. So it's a combination. So this portfolio with a higher gross margin and a combination of our existing portfolio is kind of leading this. Directionally, once we come back to a normal scenario, our gross margin trend should improve in the long term. Once the microeconomic situation changes, the demand, the Chinese are not at the same level of utilization to what's happening today, et cetera.
Sure. Sure. And Rathi, just a follow-up on that. So from a product approval perspective, right, and all these products will have different time cycle in terms of approvals, et cetera. Where are we right now? And maybe when should we expect the full approval in place?
So we are absolutely on track on sales reaching our first year target given the 4-year horizon, right? So we are right on track on that. So Q1 also, we've been able to meet that target. And we'll continue to kind of -- there's a great emphasis in the company to drive that.
Okay. Great. And if I may follow up, just one on the coal cost comment that we had in the initial remarks, coal costs being lower earlier, there was a hit on the gross margin because of the coal cost being higher. So if the coal cost is coming down, the benefit stays with us on the margin front. Will that be the right assumption?
So coal will affect the contribution margin, not the gross margin. And you're absolutely right. So coal, we will try and maintain the margins which we had lost.
The next question is from the line of Madhav from Fidelity.
I think in the annual report of FY '23, you already mentioned that one of the key North American competitors for Sudarshan is facing major challenges. Could you help us understand like what's happening there? Is it part of the global consolidation, which is trade out? Is that part of that? Or what's happening there?
So one of the competitors based in Canada is facing financial difficulties, and they have been curtailing their product portfolio. And we've seen also in the market that supplies from them to customers have been disrupted for some areas.
Okay. Okay. Got it. How big were they? Like given we are like rank 3, I think today, within like a top 10 player in the pigment space. Or any ballpark were the very large player or small?
Yes, definitely among the top 6 or 7 players.
Okay, okay. Understood. And then the other commentary, which was then the annual report was you all said that China-plus-one in the pigments industry specifically is gathering pace now, and you'll expect the Indian pigment players to benefit. So is it something like the pigment space is now beginning to see that trend picking up where some of the other subsegments in chemicals have benefited in the last four, five years at least? Is pigment that coming through now? That's what I gathered from the annual report. I'm not sure if I read it properly.
So sure, I think China-plus-one has been a talking point for a long time. But first time we are seeing that customers are looking at alternative, and India is definitely in the focus area. So this is a great tailwind for us. That's what we see.
Got it. And just lastly, again, from the annual report only also that in Europe, there could be higher imports of pigments in the next few years given, of course, they have their own cost challenges. Is that the right understanding that imports into Europe of segments could pick up in the next like 3, 4 years?
So I think the second tailwind, which we talk about is the energy crisis in Europe, they've become uncompetitive, right? And also looking at the whole deindustrialization or what's happening in Europe, where they are reducing capacities, we are hoping that there is more opportunities for us to export [ yes ] into Europe.
The next question is from the line of Archit Joshi from B&K Securities.
Sir, I just wanted to seek your understanding on your geographical presence in Europe and U.S. specifically. This entire inventory destocking story that is playing out, which is possibly not -- we are not able to push our volumes incrementally because of that. So what is the exact situation there? How big is the level of inventory that needs to be corrected so that we start seeing some recovery in terms of volume, if you can speak on both the geographies specifically.
In general, I think the destocking in the inventory has been through the geographies, specifically to EU and U.S. I would say that EU, last year, we saw a worsening of demand. We see demand slightly better than last year, right?
Last year, we saw the worst coming in. In terms of U.S., so far, we -- one is the destocking. But the future demand scenario in U.S., given the economic situation, et cetera, customers are giving us a cautionary note in U.S. So that's the area where we are closely monitoring how to gain our stage with our new products.
Sure, sir. And in the supply chain, correct my understanding if I'm wrong here. So in the supply chain, while we are into pure B2B business, the inventories are stocked up at what end exactly? Is it that the customers bought in quite a lot in the last financial year? Or is it in the distribution channel somewhere if you are at all dealing with distributors because -- so there are two things, right?
So one is that the inherent demand that is weak then probably it will be difficult to push the inventory from any of the end. But if the demand is picking up, then the levels of inventory liquidation going ahead will be quite useful if we have to push that -- the volumes that we have produced in our facilities. So where exactly is the pain point, if you -- somewhat, from whatever interactions that you had, if you can throw some light on that?
So the -- I think the first pain point was the Indian market, especially coating industry where we saw . So that is destocking that we didn't see the muted demand. It now all depends on Diwali, how the Diwali season now picks up and the coating demand comes up, right? So that's one scenario.
The second scenario is also -- the second scenario is really Europe and North America, the macroeconomic situation where the demand itself is kind of subdued. But what we find is that it all depends on the reference to contact. So if you compare to last year, right? We are in a better position, even in Europe and U.S., right? But on to the absolute where we want to reach what we want to do, that's very subdued.
Understood, sir. Sir, one last question. So when we planned this new capacity, we've added INR 700 crores, INR 750 crores to our gross log. So while we plan these products, which are essentially, as you rightly said earlier, have a relatively higher gross margin profile than our existing tale of products which you are trying to curtail. So while we plan these products, do we immediately start getting in touch with our customers for qualifications of these products? And if at all, these products have already been qualified? Or is it that once demand starts picking up, we start this process altogether newly wherein we can expect some delays because of the gestation period so that is involved in approving those products at the customer end. So just wanted your thoughts on how the planning is done from your standpoint when it comes to introducing these new products? And just one supplementary information if you can provide, you have spoken about this earlier. But to what extent have we started citing these assets? And from these new assets, what would be the current capacity utilization like?
Sure. Absolutely, we don't wait for the demand to come back. We are engaging with customers for approvals, right? However, like the guidance we gave in the last call, we were expecting to utilize the capacities in three years. This has been right now given the situation, it looks like four years. And we are bang on target to achieve the target of four years today. And we will continue to push this given when the situation improves, we hope to bring this back to three years.
Got it, sir. So basically, we don't have to really wait for the approval. The engagement is ongoing, and that will not increase the gestation period of realizing the benefits from the CapEx. And sir, if you can also answer the utilization part that I asked.
Utilization part, as I mentioned, on the four year, we are on track to achieve the four year target, right?
The next question is from the line of Nitesh Dhoot from Dolat Capital.
So my first question is if you look at the reported segment assets, the net effect has increased by INR 270 crores quarter-on-quarter. Could you give some color on the same?
Nitesh, I'm not able to hear you clearly.
Mr. Dhoot, maybe request you to kindly use your handset to ask questions, please.
Yes. Is this better?
Yes, sir, please continue.
Yes. So I was asking that if we look at the reported segment assets, the net assets, what I see has increased by INR 270 crores quarter-on-quarter. So if you could just elaborate on the same.
This is Nilkanth here. So I think on the segment [indiscernible] the major increase, which has come is on account of, as you know, the investment in the mutual fund, which is based on the monetization. Since our monetization happened in Q1 and we have done -- so we utilize proceeds for repayment of the borrowings. And some part of that is passed right now in the mutual fund. So that is giving us an increased value in the asset side. Also, as mentioned earlier, there has been some efforts from the inventory slightly on a higher [ rate ] for the quarter. To some extent, that is also impacting. Third point is on also the Rieco side. The business has gone up to the aging also wins as well as unrisked revenue, which is also contributing increasing overall segment revenue.
Sure. My next question is on the segment business. So if you see that sequentially, the gross margin has gone up from 41.5% to 42.9%. However, the EBITDA margin has come down from 12.3% to 11.9%. So is this purely because of the weaker fixed cost absorption given the lower volumes sequentially? Or is there an increase in some overheads also?
So Nitesh, your understanding is absolutely correct. So if you see the EBITDA margin is down sequentially by 40 basis points, while if you see [indiscernible] it has come down by around 9% to 10%. So it is more of the operating leverage there. No increase in the overheads.
The next question is from the line of Dhruv Muchhal from HDFC Mutual Fund.
Sir, we understand based on some reports that the Chinese real estate market is weak and probably continues to remain weak. So I believe that would also be impacting the coating segment there?
[indiscernible] can you speak slightly loud?
I hope this is better. So we understand that the Chinese real estate market is a bit weak and continues to remain...
I'm sorry to interrupt. Sir, your mic is too close to your mouth and we are getting very distorted.
So sir, on the Chinese market, we understand that the real estate market is weak, and probably that is also influencing the coating market, the coating pigment segment. So is that the reason that which is impacting the overall supply-demand situation globally and they are exporting -- the Chinese are exporting more and more probably in Europe and U.S. market, which you only used to target and probably also the domestic market? Or is it that a lot of new capacities have come up, which is influencing your market? Just trying to understand what is causing this?
So China has nothing to do with the coatings market, sir. Coating market, what we saw was in India, where we didn't see growth. I think China is generally active in the printing ink markets and some lower end plastic market, where we have seen good competition, right, competition, yes. But that's not the main reason where we are seeing the -- we have seen -- in general, we are saying that the macroeconomic situation is such that we are not seeing that growth, which we used to see earlier in the market.
Okay. So you mentioned -- so this is related to -- the Chinese pressure is related to the domestic market in printing inks and plastics. But for the exports market like...
Nondomestic. This is the global market.
Global market. Okay. Got it. Sure, sir. This is helpful. And so the second thing is now that the RM prices are falling, I believe you will also take some adjustments in your selling prices to some extent probably. So your earlier guidance of incremental revenue from a new CapEx, I think it was about INR 1,500-odd crores. Does that remain? Or will that see some change given that the RM is now falling?
If you see a slight -- not a material difference, sir, probably a 10% difference. What the material difference is earlier guidance was three years, which is moving to four years. That's -- I mean that's the bigger difference.
The value broadly remains the same,[indiscernible] I mean, you had already factored in for this RM price fluctuation or the decline as such?
No, no. I'm saying the decline right now, we expect it to make an impact is 10%.
The next question is from the line of Chetan Thacker from ASK Investment Managers Limited.
So the question is more on the other expense line item. Just wanted to understand how will this move as a percentage of revenue over the next four years because some of CapEx has also gone into backward integration. So how should we expect this line item to move as capacity utilization inches up?
Chetan, it's Nilkanth here. Our CapEx has been predominantly on the revenue side, growth side. And as we guided earlier, we have not done any significant CapEx for the backward integration. That will be the next phase once we stabilize the current CapEx. So as regard the other expense, I see -- so these are two, three variables. The fixed cost, which I see in that particular bucket to remain fairly constant. The other part, which is a manufacturing as well as the selling variable will vary as we ramp up our capacity. But it should get reflected in our contribution margin. So I expect the margin should be at the similar level, we should keep growth compared to year-on-year basis.
Sure. This is largely coming from the fact that if I look at your more long-term other expense as a percentage of revenue, it would hover between 20% and 21%. While this quarter, it's 25% because utilization would be lower. So fair to assume you would start inching towards that number as utilization starts to inch up?
It is fair to assume that. So we had been predominantly in the range of around 23% to 24% as a percentage to sales. If I see the last year for the pigment business, we were at around 24%. And currently, I see over 23%. As we move along, and as we see the capacity utilization and ramp up, I expect this percentage to drop further. We should stabilize this on a lower end of the side.
And just a last bit on the interest expense line item. What is the current cost of debt? And given that we would have utilized to repay debt, we've done that. So what should we expect going ahead on the interest expense as well?
Also currently, if you really see our loan portfolio, it is mix of the [ USD ] and the rupee loans. So it is tilted more on the export commercial borrowing, which is the foreign currency borrowing.
And given the current there is management policy where majority of them are covered into the fixed rate. So I expect the blended rate on this should be around 5%, 5.5% given the foreign currency loans in the portfolio.
Got it. And whatever we repaid, so to that extent, that benefit will flow as we move ahead?
Absolutely. Whatever we repaid, you can see in the quarter compared to the sequential quarter, you see the reduction in the interest cost number. As we go along, further repayment also will have the impact on the reduction of the interest cost.
The next question is from the line of [ Hussain Barochwala ] from Carnelian Asset Management.
Sir, I just wanted to understand for the organic, so on the organic pigment side thinks you are moving more towards the export market. So can we see the gross margin increasing from year over? And what is the -- is there any target gross margins that we are looking at? So just wanted to understand some bit of that. And secondly, I wanted to understand, sir, you plan to increase the ROCE going forward. I think that was there in the presentation. So where are we -- how we'll be able to increase the ROCE. One thing I understand in the last call, you said that we look at working capital, bring on the working capital down. So is there any other means that we are looking at in order to improve the ROCE? How are we planning to do that? So that was the two2 questions from me.
So I look at the first question was on the gross margin. So rather than looking at organic, inorganic, I see the between the specialty and nonspecialty to play the important role. As we mentioned, our CapEx has been tilted more towards the speciality chemicals, speciality pigment side. So over a period, directionally, we should see the gross margin expansion. We have seen earlier the gross margin in the range of 43 to 44 [indiscernible] Q4 of FY '21. So we should expect that there to with expansion in the gross margin directionally not in the immediate future once we get along more taking of the current CapEx, year-on-year CapEx, which are putting to the EU. That is on the first part. Second is on the ROCE. So ROCE had a couple of levers wherein we are working. The last year, which we have seen a, is the drop in overall gross margin, EBITDA and which was listed in the EBIT percentage asset. With this current quarter with overall financial performance, we expect the margin trajectory to be maintained compared to the last year first three quarter performance. So we have seen that traction coming in, and we will where the management are focused how to expand our margins, which will [ replace ] better in terms of the EBITDA percent as well as the EBIT percent.
On the capital employed side, we are also working more on the net working capital. In last year, there has been a good net working capital release over a 1-year period, and we continue to do that. There may be some seasonality, which will be there as far as the net working capital is concerned, but over a period, I expect we should stabilize the net working capital around 21%, leaving further few crores from the capital as well. And third, as we move along in terms of the ramping up of the space from the new cap exposure. More weighting of those CapEx will give us the further benefits going forward. So as here, the growth has been followed the CapEx. We are in the initial phase. You will see the ROCE ramp up in the coming years. And these are the two, three major levers, which we are working at. Also one point I would think going also here, we have also taken a decision that there is not any further expansion of new CapEx to the team which we have seen except the maintenance CapEx. So this will also help us in managing our capital employed better.
Got it. And sir, your maintenance CapEx will be around INR 40 crores. Am I correct? That's what you guided earlier?
Yes, yes, around INR 40 crores to INR 50 crores. Yes.
The next question is from the line of Rohit Nagraj from Centrum Broking.
Sir, first question is on the European competitors. So given that the top, I mean, out of top 10 players, most of them are located in Europe. And on a year-on-year, the energy situation has been relatively lenient plus you also mentioned the raw material prices have been falling. So how is the competition shaping up over there? And is there -- are there any incidences where some of the mid or small size players have gone out of the system as you explained for one of the competitors in Canada?
So I think, like we said, in Europe, a consolidation has happened, right, in the large areas. And I think with consolidation pumps opportunities for independent players like us where we get an opportunity to grab a market share, right? So in terms of if you see Europe in if you [ stand for ] -- Europe, there are like two major players -- which are now two major players who are present, right, who are the top two people.
All right. So I mean, have we seen competition from the top people given that from the raw material side or from the energy side, the situation is also favorable for them as it is favorable for us?
So I think basically, I think two areas. One is obviously the energy in Europe is still, we have some advantage over that. So we are still in favor from a cost perspective. And given that consolidation is happening, we do feel -- we do see a more attraction towards better engagement for us with the customers.
Right. Got it. Sir, second question is that on the commodity pigments capacity. So you mentioned in one of the comments that we are driving ourselves from commodity to specialty. However, the market share has remained constant. So just wanted to understand from the operating point of view, the capacity that we have put for commodity pigments, the previous ones plus in the new CapEx, are those capacities fungible and can be used for specialty pigments or at any point in time, if we were to scale those down, we'll again have to incur some CapEx if we were to upgrade those capacities to speciality pigments?
We've not put in any new CapEx on the commodity side, right? Most of our CapEx has been on the specialty side. And so -- and our -- if you look at fungibility, it's very -- it's not possible to transform a commodity capacity into a speciality.
The next question is from the line of Yogesh Bathia from Sequent Investments.
Yes. So sir, like you mentioned that our target is to ramp up this new capacity in the coming three years. So is it a possibility that if things are better off earlier than we expect, so we can ramp it up faster? And my second question is, like you said that we have started utilizing the new capacity recently from Q1 and also. So is it fair to assume that some higher fixed costs must have been a part of the P&L in the last one or two quarters given the ramp-up has started in the new capacity?
So in regards the ramp-up, ramp-up in terms of the new CapEx. As we mentioned, we earlier estimated with ramp up should be within 3 years. Given the current scenario, we expect that this should be around 4 years, and we are on target to have the ramp-up of the new capacity by 4 years. As we move along, if we see the improvement in the macroeconomic conditions, our [indiscernible] is to bring back this particular ramp up to three years. But that will always depend on the external factors. That is the first part. Second part is in terms of the additional fixed cost. So this project has been commissioned in the last quarter. And the majority of the fixed cost in terms of the manpower and all that is already being there, I don't expect any internal fixed cost to come for this [ newly ] commissioned CapEx.
Okay. So basically higher fixed costs has been incurred in the last quarter and maybe this quarter also for the new capacity, right?
Yes. So I expect more of a normalization, no incremental cost, fixed cost due to the recently commissioned CapEx.
Ladies and gentlemen, we will take that as the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you, sir.
Thank you, Michelle. Thank you, Vidit, and thank you for participating for your time and interest in Sudarshan Chemical. We remain confident in the long-term prospects of our business, and we look forward to engaging with you again in the future. Thank you.
Ladies and gentlemen, on behalf of IIFL Securities, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.