Camlin Fine Sciences Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Resilient quarter despite severe headwinds: Revenue held at Rs. 385 crores, down only 4.9% QoQ, while EBITDA margin improved to 8.4% from 7.8%, achieved against Chinese dumping, a European plant shutdown, and one-time charges.
• The pricing war is the central story: Chinese producers are selling hydroquinone and catechol below cost, crushing standalone India margins by ~5% QoQ; management sees early signs of HQ price recovery but expects pressure to persist for 2-3 quarters.
• Vanillin is the swing asset: The Dahej plant has commenced sales, targeting 130-150 tons/month from February, with FY25 utilization guided at 40-50%; success here offsets the European fixed-cost drag of ~Rs. 25 crores per quarter.
• Americas are carrying the P&L: North America revenue has scaled from Rs. 25 crores to Rs. 65 crores with improving operating leverage, and Brazil gross margins expanded from 25% to 31%; management expects at least 25% growth in FY25.
• What to watch next quarter: Vanillin volume ramp and realized pricing, the Lockheed Martin battery order delivery, the finalized plan for the idle Italy plant, and whether HQ price recovery from \$4.5 to \$5-\$5.2 holds.

The China Pricing Shock

• Predatory dumping underway: Chinese producers have brought new hydroquinone capacity online into a slowing domestic market, creating oversupply that is being exported at prices management believes are below Chinese production costs.
• Standalone India hit hardest: Gross margin fell ~5% sequentially as selling prices dropped across hydroquinone, catechol and all downstream derivatives; demand volumes actually grew QoQ, so the damage is entirely price-led.
• Cost parity, not advantage: Management asserts Chinese producers have slightly higher costs than India, meaning current pricing is unsustainable; European and US producers are also losing money at these levels.
• Early recovery signal: Hydroquinone prices have stopped eroding in the last 45 days and moved from \$4.5 to \$5-\$5.2; management expects broader pressure to ease in 2-3 quarters, contingent on Chinese government stimulus reviving domestic demand.
• Contract behavior has shifted: Large flavor and fragrance companies are delaying annual contracts, and vanillin contracts have converted from annual to quarterly as buyers hedge against volatility; customers understand the pricing is predatory but are exploiting it.

Momaya: "No, I don't think they have much of an advantage on cost of production because costs are slightly higher in China than they are in India. So, as far as the Chinese competition is concerned, I think they are probably selling at a loss at this point of time when you look at both combined hydroquinone and catechol."

Vanillin: The Ramp-Up Bet

• Production transition complete: The ethyl vanillin campaign at Dahej has finished; the plant is in a 3-4 week turnaround to shift to methyl vanillin, with sales having already commenced in substantial quantities during Q3.
• Volume target set: Management expects to sell 130 to 150 tons per month starting February, targeting 40-50% capacity utilization for FY25 as a minimum based on current visibility; real growth depends on scaling into a substantial addressable market.
• Pricing headwind on inventory: Inventory is carried at a slightly higher cost (~\$10/kg); average realization is expected below \$10, so margins on that initial inventory will be thin.
• India market on hold: The company is not pushing vanillin aggressively in India currently due to Chinese price pressure; it will become a focus market as prices improve.
• Destocking tailwind: The destocking cycle that depressed demand is almost complete, which supports the 40-50% utilization floor.

Momaya: "the market conditions are yet not very conducive because the Chinese producers are continuing to dump material across the world"

Europe: The Idled Asset Problem

• Fixed-cost drag: CFS Europe is carrying ~Rs. 25 crores per quarter in fixed costs while the Diphenol plant is shut; inventory produced before the shutdown is being sold at only ~10% gross margin due to high production costs and depressed selling prices.
• Cost reduction underway: Employees have been placed on furlough, targeting a reduction of Rs. 7 to 8 crores per quarter in fixed costs.
• Plan A is repurposing: The company is exploring manufacturing a different hydroquinone downstream product using alternative chemistry; a course of action will be finalized before end of March 2024.
• Plan B is hibernation: If repurposing proves unfeasible, the plant will be kept on hold until market conditions for hydroquinone and catechol improve, with a decision taken later.
• Italy conversion in parallel: Basic engineering and environmental clearance are in process for converting the Italy plant to produce MEHQ and Guaiacol from Anisole; by March end, management expects clarity on timeline and cost, with investment not expected to be substantial.

Momaya: "if, for some reason we cannot do this would be to keep the plant on hold till such time as market conditions improve for hydroquinone and catechol and then take a decision going forward"

Americas: The Growth Engine

• North America scaling rapidly: Revenue has grown from Rs. 25 crores to Rs. 65 crores, with fixed costs not rising proportionally, driving margin improvement; management expects at least 25% growth in FY25, calling it sustainable for at least the next few quarters.
• Brazil margin expansion: Gross margins improved from 25% to 31% on 15% revenue growth, reflecting operating leverage and mix improvement.
• Mexico product mix lift: A shift in product mix and cost focus improved gross margins by 4-5%.
• Blends business as near-term priority: The Blends business across the Americas is growing with decent gross margins and is being aggressively scaled as a short-term focus area with a reasonable margin profile.
• New products seeding: Several new products have been introduced across Central America, South America, and parts of Asia; management expects at least 10% of business to come from new products next year, with Q4 already showing initial contribution.

Momaya: "At this point it is, at least for the next few quarters, it is sustainable. We are also looking at some new businesses throwing in as well."

Strategic Optionality

• Lockheed Martin entry: The first order for battery materials will be fulfilled by end of March 2024; the next step is higher capacity, with more clarity expected next quarter.
• China subsidiary pivot: The Chinese plant is being converted to produce Heliotropin, a catechol downstream aromatic product; environmental clearance is becoming clearer after regulatory changes, and a restart is contemplated in the second half of next financial year with investment not expected to be substantial.
• Guaiacol integration: Guaiacol, a joint product with MEHQ from the Italy conversion, will in all likelihood be brought to India to convert into vanillin, creating backward integration.
• MEHQ market opportunity: The global MEHQ market is sized at ~5,000-5,500 tons, with target markets across the US, Europe, Southeast Asia, and China.
• Contract structure shift: Buyers, understanding that Chinese pricing is predatory, are nonetheless desisting from long contracts; vanillin contracts have moved from annual to quarterly or half-yearly, reflecting market uncertainty.

Momaya: "They understand that Chinese are selling under cost. They have made a lot of money in the past 2 years and now they are just doing predatory pricing, which of course the buyer understands is predatory pricing."

Guidance & Commitments

Key Metrics