Camlin Fine Sciences Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Stable revenue, margin recovery: Consolidated revenue held at INR 384 crore while operating EBITDA rebounded to 13%, aided by price pass-through, currency, and lower India operating costs.
• Diphenol capacity doubled: The plant upgrade to 15,000 MTPA is complete; production is expected to ramp to optimal levels over the next two quarters.
• Vanillin is the near-term catalyst: Mechanical completion is done, trial production is underway, and commercialization is expected by end of Q2 FY23, with initial output at 40–50% of a 6,000-ton plant.
• Guidance is deliberately wide: FY23 consolidated top line projected at INR 1,800–2,000 crore, but management declined to pin down an EBITDA margin number, citing raw material and selling price volatility.
• What to watch next quarter: The pace of the diphenol ramp-up, the vanillin commercialization date and initial pricing, and whether the gross margin catch-up holds for a second quarter.

Diphenol Capacity & Production

• Upgrade completed: Debottlenecking and upgradation finished in mid-May 2022, lifting nameplate capacity from 10,000 to 15,000 MTPA.
• Q1 production hit: The shutdown meant diphenol ran at 50% of capacity and downstream product volumes were about 20% lower sequentially; limited hydroquinone was imported from Italy to bridge the gap.
• Ramp-up timeline: Management expects to gradually reach optimal capacity in the next two quarters.
• India cost relief: Lower throughput in India (diphenol line ~15% less, other products ~20% less) reduced operating costs including power and labor, which contributed to the overall EBITDA improvement despite a INR 4 crore power cost increase outside India.

Vanillin: The Growth Pivot

• Plant status: Mechanical completion is done at the Dahej site; trial production is ongoing and commercial production is expected to start by end of Q2 FY23, meaning Q3 should see output.
• Initial utilization: Production will begin at 40–50% of capacity, ramping up over the following 3–4 months based on market conditions.
• Volume target: Around 2,000 tons expected in FY23, all from the second half.
• Pricing backdrop: The market remains short with prices still above \$20; management expects Camlin's entry (almost 20% of global capacity) to pull prices down toward \$20 from current levels above \$25, though the exact settlement price is unknown.
• Margin uplift: Vanillin gross margin should be slightly higher than current overall gross margins because catechol, when sold standalone, is sold at a loss; consuming it internally for vanillin improves the margin for that piece of the business.
• Competitive landscape: Management has heard of no other vanillin capacity additions in the pipeline.

Momaya: "The market scenario yet remains short. Value is short, prices are yet over \$20. So in that sense, the pricing scenario seems to be holding."

Segment Performance & Regional Mix

• Mexico record: CFS Mexico posted its highest-ever turnover at around INR 90 crore, up from INR 77 crore in Q4 FY22, and is expected to continue its stellar performance.
• Blends recovery: Blends revenue improved to about INR 125 crore from INR 110 crore sequentially, driven by customers opening up and easier interactions as COVID restrictions eased over the last 3–4 months; the trend points to further improvement.
• Europe energy and demand: Power costs in Europe remained at elevated levels similar to last quarter, but CFS Europe EBITDA swung to INR 17 crore from INR 7 crore sequentially by passing on hydroquinone price increases; demand remains strong and volumes are not expected to be impacted because the business is in the food and food chain.
• Brazil and North America: Expected to keep improving performance in subsequent quarters.
• Medium-term growth rates: Aroma will be the fastest-growing segment in the first couple of years (brand-new 6,000-ton facility); Shelf Life Solutions blends growing ~30% a year, TBHQ/BHA ~15–20% a year, overall Shelf Life ~20–25% a year on volume; Performance Chemicals expected to grow ~20% a year on volume with added capacity.

Margins & Profitability

• Gross margin catch-up: Gross margin improved significantly in Q1 because the company was able to pass on cost increases; raw material prices were quite stable in the quarter, allowing a catch-up that brought margins back to prior levels after a quarter's lag.
• Sustainability caveat: Management believes the current gross margin is sustainable for at least one more quarter; the next quarter will depend on raw material prices.
• EBITDA trajectory: The margin profile should improve from Q1 levels, and Q2, Q3, and Q4 are looking strong, but management refused to give a clear-cut number, citing volatility in raw material prices and economic situations across the world.
• Tax rate drag: Tax rates are elevated because subsidiaries in Brazil, the U.S., and Wanglong are making losses that cannot be set off against taxable profits in Europe, Mexico, and to some extent India; the overall FY23 tax rate is expected at 30–31%.
• Minority interest dynamic: The gain in owners' profit over PAT is mainly on account of minority interest loss shared by the Chinese partner (49% stake), where there is no revenue but costs for plant maintenance, minimal employees, and legal costs related to an ongoing case.

Momaya: "It's difficult to give an estimate of the margin because of the volatility in raw material prices, economic situations across the world. So it's difficult to give a margin projection."

China Subsidiary & Other Projects

• Chinese subsidiary: The plant remains closed awaiting an order from the Chinese Supreme Court; management envisages receiving that order sometime this financial year, but timelines cannot be determined.
• CRAMS with Lockheed Martin: Discussions are still in progress for supplying a proprietary chemical for a battery storage system; commercial product supply is generally targeted for around February 2024, with more information expected in coming quarters.
• Heliotropin: Applications have been made in China; no investment has started yet, and progress is awaited.
• MEHQ plan: The company is in the process of finalizing how much hydroquinone to divert to MEHQ; the decision will be based on TBHQ and BHA requirements.

Balance Sheet & Capital Allocation

• CapEx outlook: No new projects finalized yet; only maintenance CapEx of INR 60–80 crore is envisaged for the current year, with a similar trend expected next year if no new projects are taken up.
• Working capital: Net working capital is expected to increase by INR 30–40 crore by year-end, funded through internal accruals; loan repayments of INR 30–35 crore are continuing.
• HCCB optionality: If HCCB converts its INR 100 crore convertible instrument, the loan portfolio can be reduced by INR 100 crore overnight.

Guidance & Commitments

Key Metrics