Jubilant Ingrevia Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Agrochemicals bottomed, recovery still pending: Management believes demand has bottomed, but the hoped-for Q3 recovery did not materialize. Volume pickup is now expected from Q1 FY25, with visible signs only now emerging.
• Non-agro portfolio held the line: Diketene derivatives, microbial control, CDMO, and pharma end-use all grew in volume, mix, or EBITDA margin, partially offsetting a 40-50% volume decline in some agro-dependent segments.
• Nutrition segment saw a pricing wobble: Volumes stayed healthy through the quarter, but pricing took a hit in Q3 after a strong Q2. A marginal uptick in Niacinamide and other product prices appeared in the last 15-20 days.
• Capacity build-out continues on schedule: The Rs 2,000 Cr modular capex plan stays on track, with one agro MPP plant commissioned in Q3, a second (4x larger) due in Q4, and a Diketene derivatives plant also slated for Q4 commissioning.
• What to watch next quarter: Whether the Q1 FY25 agrochemical volume recovery actually begins, the pace of order booking from ex-Vertellus customers, and any firm numbers on the new 5-year growth strategy.

Agrochemicals: The Overhang and the Turn

• The damage: Agrochemical-dependent parts of the Specialty Chemicals segment saw revenue decline significantly on both volume and price, driven by excess Chinese supply at very low prices. The agrochemical share of the business fell from 30%+ to about 20%.
• The bottoming call: Based on discussions with 10-15 CEOs and CXOs of global agrochemical companies, management stated "we have bottomed out in the last quarter from a demand perspective." Inventory de-stocking is believed to be in its last leg.
• The recovery that wasn't: Management had hoped recovery would start in Q3 FY24, which did not happen. Visible signs that it has started are only now appearing, with volume booked for the next few quarters providing some forward visibility.
• Chinese dumping stabilizes: Prices have stabilized at a certain level, and in some areas a slight uptick is seen. The dumping that was happening earlier has at least stopped, and in some cases started to reverse.
• Pyridine/picoline second-order effect: Pricing pressure existed because agrochemicals, a major end-user, saw volumes drop. However, a marginal price increase has been seen in the last few weeks, and management hopes prices should increase going forward as agrochemical demand returns.

Deepak Jain: "at least the general feeling in the market based on all the customer discussions we have done as well as what we can see in terms of our volume trajectory - that we have hit the bottom."

Portfolio Resilience Outside Agrochemicals

• Specialty Chemicals ex-agro: The rest of the portfolio (Diketene derivatives, microbial control solutions, CDMO) actually grew in volume, mix, and EBITDA margins. The Diketene plant operated at optimum capacity utilization during the quarter.
• CDMO as future engine: Management called CDMO the fastest growing business in the portfolio and expects it to be the biggest driver of the Specialty Chemicals segment in coming years. The new agro MPP plants are built on a CDMO model with contractual orders already in hand.
• Pharma end-use steady: Pharma end-use demand improved, with the revenue share from pharma customers rising both YoY and QoQ. 38 new customers were added to the Specialty Chemicals segment. Pricing, however, has yet to see recovery.
• Nutrition & Health: Revenue and EBITDA grew YoY, led by improved demand and price recovery in major products. Vitamin demand was stable but faced competition from Chinese suppliers. Niacinamide pricing remained under pressure through Q3, with a marginal uptick seen in January.
• Chemical Intermediates pressure: Revenue was lower due to a muted market environment in end-use industries, which maintained low utilization and lower inventory levels. Acetic anhydride volumes were higher YoY and both plants ran at 80%+ utilization, but spreads in Q3 were lower than the average of recent quarters due to demand pressure and slightly aggressive competition.
• Ethyl acetate discipline: Management is not chasing every demand because the margin structure has to make sense. In the last quarter, they prioritized demand where at least some margin could be obtained.

Deepak Jain: "It's the fastest growing business in our portfolio, and we are hoping that in the coming years, that will be the biggest driver of our Specialty Chemicals portfolio."

Vertellus Closure: The Uncaptured Opportunity

• The setup: Vertellus, a competitor, provided 6-8 months of inventory to customers before closing its US plant, where utilization was only 30-40%. That inventory buffer has now run its course.
• Current state: Customers have started reaching out for inquiries, and the company has mapped all of them and begun getting inquiries and smaller volumes from all of them. However, order booking in a big way has not started yet.
• The ambition: Management hopes to capture 70-80% of the volumes that went out of the market, calling it a "meaningfully large volume." The timing of this conversion remains uncertain and is a key watchpoint for coming quarters.

Deepak Jain: "There was a meaningfully large volume that our competitor was serving from their US plant, but their utilization was only 30% to 40%. And of those volumes, we are hoping to get at least 70% to 80% share."

Capacity Build-Out and Capex Discipline

• Modular capex on track: The Rs 2,000 Cr capex plan through FY25 remains on track, with roughly one-third remaining to be deployed in the coming fiscal year. Expected capex in Q4 is around Rs 190 Cr, majority in Specialty and Nutrition segments.
• Q3 and Q4 commissioning: One agro intermediates MPP plant was commissioned towards the end of Q3 FY24. A second MPP plant, at least 4x bigger, is planned to go live in Q4 FY24, along with a new Diketene derivatives plant.
• MPP fill rate: The new MPP already has orders on a contractual CDMO basis to serve at least a couple of customers. If 1 or 2 long-term contractual arrangements with global innovators get signed in the next few months, capacity could fill faster. Management expects to take utilization to 70-80% within 18 months.
• Debt and recovery scenarios: With Rs 600 Cr planned capex and market recovery expected in Q1 FY25, management does not expect to increase debt further. If recovery gets pushed out by a quarter or two, originally planned investments will not be delayed significantly, but new capex beyond the Rs 2,000 Cr plan can be pushed out by a few quarters.
• ROCE discipline intact: Management remains confident of achieving 20%+ EBITDA margins leading to higher ROCE on incremental capex. The internal hurdle of at least 20% ROCE is not changing.

Deepak Jain: "If the market recovery gets pushed out by a quarter or two, we will see what happens to our debt level. But even in that scenario, we are not expecting to delay any of our originally planned investments significantly because we believe in that and those are linking back to areas where we are already getting very good traction."

China+1: Strategic Tailwind Intact

• Customer intent unchanged: Despite low Chinese prices, every customer management has spoken to is explicitly talking about diversifying out of China. Not a single customer has said they will change their strategic direction and not add more suppliers because Chinese prices are currently low.
• Domestic share push: The company improved its share of domestic sales both YoY and QoQ by promoting sales with small Indian manufacturers and augmenting domestic market share with value-added product sales.
• New growth vectors: The company is leveraging its newly commissioned state-of-the-art R&D lab at Greater Noida to explore new products like electronic and semiconductor chemicals and fluoride-based chemicals. Initial-stage inquiries from 4-5 customers in the semiconductor space are in advanced-stage discussions.

Deepak Jain: "At least all the customers we are in touch with, everyone is very explicitly talking about diversifying out of China... there is not even a single customer which has told me in the last several months that because the China prices are low currently that they will change their overall strategic direction and will not add more suppliers."

Strategic Initiatives and Operational Levers

• 5-year strategy reset: The leadership team conducted an Ambition workshop to redefine a new compass and bold growth ambitions, kicking off an exercise to redefine the next 5-year growth strategy. Specific actions will be shared in coming quarters.
• Power cost reduction: A program has been activated to improve the power mix towards renewable power, grid power, and power purchases through exchanges in addition to captive generation. The share of renewable power is expected to increase 4x by FY2028, reducing average power cost significantly.
• Digital program 'Surge': Focused on enabling transformation of business processes across manufacturing, supply chain, and sales through digital interventions. Multiple initiatives to improve yield and efficiency have been rolled out, with full impact expected in the next financial year.
• Multi-skilled workforce: Initiatives are underway to have 50% multi-skilled manufacturing workforce.
• GMP facility for Niacinamide: Capex for a GMP-compliant facility for expansion of food and cosmetic grade Niacinamide is expected to commission in Q2 FY25.

Guidance & Commitments

Key Metrics