Release Date: August 05, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sudarshan Chemical Industries Ltd (BOM:506655, Financial) reported a 4% year-on-year increase in total income from operations, reaching INR634 crores.
- EBITDA for the quarter increased by 15% year-on-year to INR81 crores, with an EBITDA margin improvement from 11.5% to 12.7%.
- The company's long-term external rating was upgraded by India Ratings from AA- stable to AA stable, reflecting improved financial performance and healthy financial ratios.
- Sudarshan Chemical Industries Ltd (BOM:506655) achieved an EcoVadis Gold rating, placing it in the top 3 percentile of companies in the chemical sector.
- The company reported a significant 41% year-on-year increase in EBITDA for its pigment business, with EBITDA margins improving from 11.9% to 15.3%.
Negative Points
- Despite the gross margin improvement, the EBITDA margin remained flat sequentially due to increased costs, including exhibition expenses and export-related costs.
- Rieco, a subsidiary of Sudarshan Chemical Industries Ltd (BOM:506655), faced challenges with losses at the EBIT level and a decline in revenues year-on-year.
- The working capital cycle increased to 73 days in Q1 FY25 from 66 days in Q4 FY24, primarily due to a planned increase in raw material inventory.
- The company did not provide specific volume growth figures for the quarter, leaving some uncertainty about the underlying performance.
- There are concerns about the sustainability of the Heubach opportunity, as the situation could change if the company is acquired or resolves its issues.
Q & A Highlights
Highlights of Sudarshan Chemical Industries Ltd (BOM:506655) Q1 FY25 Earnings Call
Q: Despite the gross margin jump of 320 bps, the EBITDA margin is flat sequentially. Is there any unusual or one-off increase in any cost item for pigments in Q1?
A: Nilkanth Natu, CFO: The increase in gross margin is due to higher sales in Q4, which is seasonally strong. Q1 saw higher costs due to exhibitions and export-related expenses. These costs are front-loaded in Q1 and are not expected to recur in the coming quarters.
Q: Can the current gross margin of 47% be sustained or even improved going forward?
A: Nilkanth Natu, CFO: We expect the 47% gross margin to be sustainable, driven by growth in specialty pigments and stable raw material prices.
Q: Any revision in the guidance for capacity utilization given the strong volume growth?
A: Rajesh Rathi, Managing Director: While it's too early to give a definitive guidance, we feel confident that we can achieve full capacity utilization within three years instead of four.
Q: What are the transformation plans for Rieco, given its challenging performance this quarter?
A: Rajesh Rathi, Managing Director: We are focusing on improving EBITDA through core process optimization and lean approaches. The transformation project will kick start in September, aiming for sustainable growth over the next two to three years.
Q: Can you provide more color on the inquiries from the international market for pigments?
A: Nilkanth Natu, CFO: The inquiries are mainly for coatings and plastics, particularly for high-performance segments and new products from our recent CapEx.
Q: How is the demand from new clients and expanded distribution networks impacting the specialty pigment portfolio?
A: Rajesh Rathi, Managing Director: The growth is driven by executing our strategy of expanding our product portfolio and engaging with existing clients on a broader range of products. The benefits from expanded distribution networks are expected to ramp up through the year.
Q: How are rising freight rates impacting margins, and can these costs be passed on to clients?
A: Rajesh Rathi, Managing Director: Freight and raw material costs can generally be passed on to clients. We do not see this as a challenge for margins going forward.
Q: What is the outlook for EBITDA margins in the pigment business as CapEx ramps up?
A: Rajesh Rathi, Managing Director: Directionally, EBITDA margins should improve to the 17% to 19% range as we benefit from operational leverage and ramp up volumes.
Q: What is the scope for brownfield expansion in the future?
A: Rajesh Rathi, Managing Director: We have enough land and scope for brownfield expansion at our existing sites, which will help leverage fixed costs and support future growth.
Q: How is the performance of international subsidiaries impacting overall results?
A: Nilkanth Natu, CFO: The international business is performing well, with higher export sales. Any perceived underperformance is due to intercompany sales and inventory stocking, which will reflect in future quarters.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
