Valiant Organics Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Fire-hit quarter, margin recovery begun: Revenue fell sharply on lost chlorination volumes from the Sarigam blast, but EBITDA margin improved QoQ as raw material prices stabilized.
• PAP ramp is the near-term growth engine: Batch output crossed 400 MT/month and is on track for 500 by year-end; the continuous process, however, remains stuck on quality issues.
• Export and textile demand are the twin drags: Chlorination exports are down on European energy-crisis weakness, while ammonolysis volumes are stagnant because domestic textile-linked dyes and pigments demand is soft.
• Capex cycle is half-done, next leg under review: ~50% of the ~₹100 cr FY23 capex is spent; pharma intermediates is ~60% complete, OAP trials continue, and a potential ~₹40–45 cr next-year plan is still on the drawing table.
• What to watch next quarter: Whether Sarigam chlorination volumes track toward the promised Q4 recovery, any breakthrough on PAP continuous-process quality, and the pace of the H2 margin uplift toward the 17–18% full-year target.

The Sarigam Incident: Damage & Recovery Path

• Revenue hole is quantified: Chlorination volumes collapsed from 4,256 to 1,962 YoY, driven by the blast, a phased restart that took weeks to stabilize, a lag in fulfilling customer orders, and reduced export demand from Europe. (Note: The 4,256 to 1,962 figure was stated by an analyst, not management.)
• Utilization is the profit lever: The last 20% of capacity utilization delivers a major chunk of profit due to operating leverage; historically chlorination ran at 90%+ but current demand prevents reaching that level.
• Operational capability restored: The plant's ability to scale up is back and incident-related operational issues are behind the company.
• Volume recovery timeline: Management expects chlorination volumes to return to original levels by Q4 FY23.
• Export demand is the wildcard: Chlorination demand weakness is mainly from Europe due to the energy crisis and geopolitical issues, not a molecule-specific or competitive-intensity problem; management declined to name the specific molecules affected, calling it proprietary.

Mihir Shah: "...to reach the last leg on the capacity. It is difficult, and it is -- that is where the profitability lies. So just to give you some understanding, if you look at our previous years, chlorination has been 90-plus utilization even ammonolysis was somewhere around 85%, 90% utilization. So we have achieved those utilizations. But currently, because of lower demand, we are not able to achieve that utilization."

PAP: Batch Progress, Continuous Stumbles

• Batch process on track: Average production was ~365 MT/month in Q2, has crossed 400 MT/month currently, and is on track to hit the targeted 500 MT/month by year-end.
• Continuous process stuck on quality: Trials are ongoing but the product stabilization and required quality are not coming through; management acknowledged they are "repeating because that is the actual scenario" and are "trying our level best to achieve the quality, but we are not being able to so far."
• Pricing moves with raw materials: PAP prices reduced QoQ by almost 100 on average, but raw material costs declined simultaneously; the company prices at China parity and earns a small incremental benefit, so margins remain more or less similar.
• Continuous-process benefit pushed to next year: Once the batch process reaches 500–550 capacity utilization, the continuous process (1,000 capacity) is expected to achieve close to 2,000 volumes, with the benefit of more production in less time expected next financial year.

Mihir Shah: "We are facing the same problem that we faced initially, the product stabilization and the quality that we require is not coming through in the continuous one. So we are trying to resolve that."

Demand Environment by Chemistry

• Domestic textile weakness is a separate headwind: Unlike chlorination, which is export-driven, ammonolysis and hydrogenation demand is tied to domestic textiles, where demand is weak.
• No structural share loss: Management pushed back on the idea that chlorination demand issues reflect molecule-specific market-share loss, attributing it entirely to market demand, but declined to disclose which specific products are agro- versus export-driven.

Margins: Raw Material Tailwind, Operating Leverage Headwind

• Q2 margin improvement: EBITDA margin improved QoQ because raw material prices, particularly phenol and PNCB, have softened and stabilized.
• Raw materials near a floor: Management believes phenol and PNCB are close to bottom pricing and does not expect further reduction.
• Other expenses rose ~5–6% QoQ: Driven by higher power consumption, labor cost increases, freight and forwarding charges, and ETP costs.
• Freight costs turning favorable: Declining freight and container costs have already contributed to margin improvement in the current quarter and are expected to be a tailwind going forward.
• Full-year margin expectation: Management expects full-year EBITDA margin to average around 17%, dragged down by a weak Q1, with Q3 and Q4 margins being much better than Q2; the H2 improvement is expected to be sustained on stabilized raw material costs.
• Chlorination is the highest-margin chemistry: Among the three chemistries, chlorination carries the highest margin profile; hydrogenation and ammonolysis are at a similar, lower level, so the Sarigam volume loss is a disproportionate margin hit.
• Working capital stretched: Short-term borrowing has come down from March levels, but working capital was stretched because the Sarigam incident disrupted a good cash-flow business and raw material costs were high at the time.

Mihir Shah: "They've softened by now. They have also been stabilizing. So we don't expect it to reduce further. We are probably that close to the bottom pricing."

Capex Pipeline: Pharma, OAP & What Comes Next

• Pharma intermediates: Project is approximately 60% complete; CWIP stands at ~₹65 cr out of ₹132 cr standalone CWIP; the business will be completely captive to Aarti Pharmalabs.
• Pharma intermediates revenue: Management guided ~₹50 cr at full utilization, targeting full utilization by end of next year, with initial utilization at ~45–50%; however, management acknowledged this is conservative and sees upside.
• OAP: Still in trial runs with some capex still ongoing; plant and machinery is ₹15 cr with additional building and other items in CWIP.
• Current-year capex: ~₹100 cr total, with ~50% completed through Q2.
• Next-year capex under review: Management is still analyzing; focus remains on PAP stabilization, pharma and OAP start; new products are on the drawing table with potential capex of ~₹40–45 cr if successful.
• Capex evaluation criteria: Management looks for high-demand products with import substitution opportunity, or backward-forward integration within the company; no rigid threshold IRR is applied if the opportunity is judged good.
• ROC target: Aiming to return to 40%+ levels but still analyzing given ongoing capex and projects.
• Presentation vs. actuals gap: An analyst noted a ~2x difference between the presentation's pharma intermediates capex (₹60 cr) and the CWIP (₹65 cr already spent); management acknowledged there will be some changes in the numbers for pharma intermediates and OAP.

Mihir Shah: "No, arrangement. We're just being conservative on the revenue side. Even though I've said INR 50 crores, we see an upside having some benefit there."

Guidance & Commitments

Key Metrics