Acutaas Chemicals Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Volume surged 25% but pricing masked it: Revenue grew only 9.2% YoY to ₹166.5 cr because a sharp drop in raw material prices compressed realizations, even as underlying demand stayed strong.
• Margins are being rebuilt step by step: EBITDA margin fell to 15.9% from 20.2% YoY, but management clawed it back to 15% this quarter and targets 18-20% next quarter, with a path back to 23%.
• The electrolyte bet is now commercial and real: Commercial supply of electrolyte additives began this quarter with firm orders, and a CDMO partnership with a dominant global player locks in a secure, long-term revenue stream.
• Integration drag is temporary but real: Baba Fine Chemicals is in a consolidation year with name-change and customer re-approval cycles, muting near-term revenue from a business that can triple from its current ₹40-45 cr base.
• What to watch next quarter: Whether the 18-20% margin target is hit, the pace of Apixaban and electrolyte additive ramp-ups, and any stabilization in Chinese pricing that would unlock the 20% growth ambition.

Volume vs. Pricing: The Growth Mask

• 25% volume, 9% revenue: Overall business volume grew 25% YoY, but a sharp decline in raw material prices passed through to selling prices, suppressing revenue growth to 9.2%.
• No market share lost: Management was explicit that the subdued top-line performance is purely a pricing phenomenon, with no loss of market share to competitors.
• Spot strategy worked: The company's spot business approach enabled it to capture 25% volume growth even as Chinese competition pressured end users.
• Chinese pricing floor: Management believes Chinese pricing has hit "rock bottom" and is now stabilizing; the next one or two quarters should see normalization, and prices may even rise.
• Raw material stabilization: Raw material prices are now stabilizing, which management expects will allow a return to standard pricing levels and a growth rate back to 20%.

Naresh Patel: "if you look at volume growth, our overall business has grown by 25% year-on-year showing strong business traction. As pricing stabilizes, I am confident our growth will be back to the 20% level."

Margin Recovery Path

• The hole: EBITDA margin fell to 15.9% from 20.2% YoY, driven by lower gross margins (42.9% vs 46% YoY, on unfavorable product mix) and higher employee expenses from increments, ESOP costs, and hiring for the Ankleshwar unit.
• The climb: Management delivered on its prior commitment to focus on margin, bringing it to 15% this quarter. The next target is 18-20% in Q4 FY24, after which the journey resumes toward the previously announced 23%.
• Long-term ambition: In 3-4 years, management sees EBITDA margin "definitely between 23% and 26%."
• Finance cost headwind: Finance costs will stay at current levels or rise slightly due to additional capex and borrowing, creating a persistent drag on PAT margin, which was 10.7% this quarter.
• Working capital stretched: Lower payable days stretched working capital during the quarter, though inventory and debtor days remained steady.

Naresh Patel: "Last quarter we announced that we will focus on margin. In this quarter, we successfully bought it to 15% and our next quarter overall it has to go to 18-20%. So that will be our spot base in Q1 and from that onwards once again we start our journey towards the 23% which we had announced in the past."

Electrolyte: The Big Bet Goes Live

• Additives now commercial: The company commenced commercial production and supply of electrolyte additives this quarter, with firm orders in hand and six new additives developed for different customer formulations.
• CDMO with a dominant partner: A separate CDMO arrangement for the final electrolyte solution has been signed with a strong global partner who controls a high share of the world market. This is an exclusive manufacturing arrangement, making it a "secure business" for sales.
• Why they won: Having in-house additives capability was one reason the CDMO partner chose Ami, but management says the partner selected them for "several other parameters" as well.
• Toll manufacturing for India: The company has also started toll manufacturing for electrolyte solution in India for Indian consumption, structured as a JV-type arrangement with an Asian client.
• Capacity build-out: Current capacity is 500 metric tons each for VC and FVC additives; management plans to add 2,000 metric tons each, with total capacity potentially growing "4-5 folds" in upcoming years.
• ₹300 cr Gujarat MOU: An MOU with the Gujarat government for a dedicated electrolyte manufacturing facility with up to ₹300 cr investment is in process, with term sheets being finalized and a timeline in FY25; the plant would take close to 12 months to build.
• Revenue timing: Electrolyte additive revenue may begin in Q4 FY24, otherwise from Q1 FY25. The CDMO ramp-up is described as a "fast-moving project" because the partner already controls the global market.

Naresh Patel: "Final electrolyte is CDMO kind of business. So here, I can't speak more on that, but the thing is that whoever the partner is, is very strong. So, they just want to have a base over here. We don't want to go and sell directly. So, it is like a secure business for us in terms of sales because we are doing just a CDMO for them."

Pharma Pipeline: Fermion, Apixaban & Ankleshwar

• Ankleshwar inaugurated: The plant was completed in 12 months from groundwork commencement and inaugurated in December 2023.
• Fermion partnership expanded: On inauguration day, the company signed an agreement for two more advanced intermediates for Fermion's API, to be manufactured at Ankleshwar. Validation batches are underway this quarter.
• Fermion ramp-up cadence: After validation batches this quarter, there will be a muted period of one to one-and-a-half quarters for validation at Fermion's end, followed by a gradual ramp-up through the end of FY25.
• Apixaban coming: Supply has slowly started; it will gradually ramp up from Q1 FY25 and be in full swing by Q2 FY25.
• Ankleshwar capacity allocation: One-third of the facility is dedicated to the Fermion deal; the remaining 66% is for other pharma business, with active negotiations underway but nothing finalized yet.
• Asset turnover benchmark: Management expects the Ankleshwar facility to generate topline in the range of 3-3.5x of capex.

Naresh Patel: "it took us only 12 months for the inauguration since the groundwork commenced. This makes of a great achievement, and I would wholeheartedly like to congratulate our team"

Specialty Chemicals & Baba Fine Chemicals

• Baba Fine Chemicals integration drag: Now part of the Specialty business, Baba Finechem is in a consolidation year. A name change and end-to-end customer qualification cycles in the semiconductor industry mean revenue this year will be "either muted or a little bit lower."
• Baba Finechem upside: Current revenue is around ₹40-45 cr, and management believes it can be "incremental to three times from here" over 2-3 years.
• UV absorber product: Validation quantities of several metric tons have already been supplied; ramp-up begins from Q1 FY25.
• Specialty Chemical plant ramp-up: Volume is increasing but price is a factor revising the timeline; management expects full utilization by FY26.
• US Specialty Chemicals growth: The company is negotiating several large contracts for Gujarat Organic products in the US, expected to be incremental in upcoming years.

Guidance & Commitments

Key Metrics