Fairchem Organics (NSE:FAIRCHEMOR) Q2 2027 Earnings Call

0:01 Ladies and gentlemen, good day, and welcome to Q2 and H1 FY 'twenty seven Earnings Conference Call of Fairchem Organics Limited hosted by Valverum Advisors. Please note that this conference is being recorded. I now hand the conference over to Ms. Purwangi Jain with Valorum Advisors. Thank you, and over to you, ma'am. Thank you. Good afternoon, everyone, and a warm welcome to you all. My name is Purvangji Jen from Valorum Advisors. We represent the Investor Relations of Fairchem Organics Limited.

0:47 On behalf of the company, I would like to thank you all for participating in the company's earnings call for the second quarter of the financial 2027. Before we begin, a quick cautionary statement. Some of the statements made in today's call may be forward looking in nature. Such forward looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's belief as well as assumptions made by and information currently available to the management. Audiences are cautioned not place any undue reliance on these forward looking statements in making any investment decisions. The purpose of today's earnings conference call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review.

1:36 I would now like to introduce the management team joining us on today's call. We have with us Mr. Naosh Zariwala, Managing Director and Chairman and Mr. Bhavesh Shah, Chief Financial Officer. Without any further delay, I would now like to hand the call over to Mr. Bhavesh Shah to begin with the financial highlights. Thank you, and over to you, sir. Yes. Thanks, Purwangi, and good afternoon, everyone. Welcome to the earnings call of Q2 and H1 FY 'twenty seven. For the quarter under review, the revenue from operations was INR167 crores, reflecting 49.7% year on year increase from the corresponding quarter. EBITDA for the quarter was INR 700 with an EBITDA margin of 10.5%.

2:23 The net profit stood at INR 10.2 crores. We have processed 12,200 tonnes of raw material and have sold 12,300 tonnes during the quarter. For the half year, under review, the revenue from operations was INR343 crores, reflecting an increase of 41.4% against the corresponding quarter. EBITDA for the half year was at INR35.4 crores with an EBITDA margin of 10.3% and the net profit for the half year was INR $21.02 crores. We have processed 24,600 tonnes of raw material and have sold 25,800 tonnes during H1 FY 'twenty seven.

3:17 I will now hand over the call to our Managing Director, Mr. Naohaj Jariwala, happy to take questions during question and answer session. Thank you, Bhavesh. As we enter the second half of financial year twenty twenty seven, I want to share our operational perspective on the second quarter and the first half of the year as well as on the road rail. Coming to our performance during the second quarter and the first half of financial twenty seven, the business continued to benefit from the improved price realization, primarily reflecting lower raw material costs and higher prices of finished products. The domestic market environment remains supportive with lower imports of dimer acid helping improve the realization and supporting the company's operating margins.

4:12 Looking ahead, while we remain mindful of uncertainties arising from the ongoing Middle East crisis and broader global macroeconomic environment, we are cautiously optimistic about the outlook for the remaining part of the year. The reduction in U. S. Tariffs, along with the potential benefits from free trade agreements with U. K, European Union, could provide a more favorable trade environment for us to export our products. Additionally, the recent reduction in import duty on the crude soybean oil from 16.5% to 11% is expected to improve the raw material availability. We believe that better availability of key inputs, combined with supportive domestic market conditions, could help us enhance our capacity utilization over the course of the year.

5:06 We will continue to closely monitor developments in global trade, raw material markets and import competition as we navigate the coming two quarters. With that, I open the floor for a question and answer First question comes from the line of Ritesh Ramgandhi with Discover Capital.

6:05 Hi, Just wanted to understand this reduction in import duty, what kind of impact do we see it happening on margins? Because I think somewhere on some of the earlier calls, we had spoken of a potential 8% margin hit because of this inverse duty. Now that it's been reduced, what are the sort of benefits? And will we see this immediately from Q3? Or is there inventory that we have where we're to see the implications from Q4? Basically, the reduction in duty on soybean crude soybean oil will help the refiners to process higher quantities of soybean oil in comparison with the palm oil, based on which the raw material availability for us will improve substantially.

7:03 And that is the main reason. And once the raw material availability improves, obviously, there will be some reduction in the prices also. So that's the advantage what we'll get. So how much I mean, how can we actually quantify this? Like how much do we expect? And look, since we've obviously seen a new run rate starting from Q 1 of this year. Just wanted to understand, is this now the new base run rate which we see based on which we expect to grow? Or and how much would be the implication of that? Yes, you can say that it is the new run rate. Basically, we suffered, and we were saying time and again that we suffered badly because of the 27% duty on the crude oils, which made our raw materials too expensive.

7:56 That's the reason. And once the reasonableness has started coming in, we have started improving. Have not lost market share. We are not I mean, there's nothing negative about the thing. It was only the raw material costs had gone up substantially. No. But is that already in your numbers of H1? Or do we potentially see further saving We gap number in do have some reduction happened sometime back. We do carry some inventory of raw material. But then future already I mean, it has started softening. Market prices have started sharpening a little bit. Good. So if we are looking ahead, how should we be looking at the kind of actually the guidance for the rest of the year and then going into FY 'twenty eight?

8:52 So I mean, we are confident that we'll be able to maintain. If the situation remains like what it says in last six months, we are confident we'll be able to improve our capacity utilization further. So as top and bottom line, both. No. So we answered that, but how should we like quantify how much is the kind of capacity utilization now and where do we expect it to be? We cannot see that, I mean. Okay. Then right now, how much are we at in terms of the capacity utilization? So we have There is I mean, we are currently working around 65%. Percent, 65%. 60%, 65%, which is expected to improve with better availability of pharmacy.

9:40 Got it. Okay. Okay. Thanks. I'll just rejoin the queue for the next question. Thank you. Our next question comes from the line of Madhu Rathi with Counter Cyclical Investments. Sir, if you can help us understand what were the realizations during this quarter and how they were on quarter on quarter and Y o Y basis? So quarter two, the realization was 135 a kg, which was around INR 130 a kg in Q1 FY 'twenty seven. And in Q2 FY 'twenty six, it was INR 106.

10:33 And sir, so has the dumping from China and rebates, like have they we seen a substantial improvement on those fronts? Or was this more of a because of Dumping has gone down. Dumping has gone down. So the dumping has gone down because of the freight rates have increased or because the Chinese government has reduced the export incentive? I mean, to best of our knowledge, it is because of reduction in export incentive. And also depreciation has helped us. Understood. And sir, these products that we are exporting, so do they come in container or they come in like dry bulk or tanker?

11:23 No, containers. Okay. So since container freight rates have also like quadrupled, so I mean that must also be playing a role? Not from China to India. Not from China to India. Understood. And sir, if you... Can you help us understand, sir, that what is the import duty on edible oils in China? To be frank, next time, we'll check it out. Sir, what I'm trying to understand... China itself has a huge production of vegetable oils. So is it that their raw material is cheaper than us? Yes, obviously. Okay. Because they are growing edible oil in the country itself, whereas India is importing a large portion. Yes. We are importing 60% of our edible.

12:21 Sir, so one more thing I wanted to understand, sir, that normally, any product prices now for our raw material, whatever we buy from edible edible oil refineries. So basically, the alternate uses for that will determine the pricing or the price of the starting that is the No, alternate. Alternate will also be one of the factor determining the pricing, alternate application. Sir, so now, for example, with crude oil prices going up, the biodiesel, last time you mentioned is an alternate usage. What are the other alternate uses? Soap and biodiesel. Understood.

13:08 Sir, and also you mentioned last time that every quarter, are planning to increase the production by 5% and also increasing the exports. So are we online to achieve that? Yes. Yes, we are online. But now we have done all the speed work for our U. S. Exports. But we are I mean because of the too high freight cost to U. S. From India, it's things are not moving as expected. Once the due I mean, freight rates stabilize, we'll our exports to U. S. Should commence. Sir, in the second quarter, there was some new product that we were planning to launch.

13:57 So any update on that? No, that is what we said is going to happen in third quarter, end of second quarter. But now we are going to do it in third quarter. Sir, so that product, only the freight rates is an issue or that is for something else? No. No. No. That is a new tech. It's a new product. We are working with a novel technology. So we are taking our own time. It is in R and D stage. I mean, plant and everything is done, but certain based on some R and D suggestions, we are upgrading and modifying that plant. So that's taking So place for sir, in the third quarter, are we expecting?

14:44 Yes. Understood, sir. Sir, so is that the is this the same product, fat bypass from palm oil? Is this the product that we are speaking about? So, normally, it's a different product. Okay. So so this making it. Sir, I couldn't hear you. Can you please repeat again? Will the first company making it. Okay. And, this FAIRCHEMORT, so this product has commercialized? It's been commercialized. Yes, it's commercialized. Our next question comes from the line of Ritesh Ramgandhi with Discover Capital. Please go ahead.

15:35 Hi. Sir, with regards to the new products which we have, what is the expectation with regards to how large they can be and the implications it can have? If our process succeeds, then it's a very, very huge market. It's a huge, huge market. It depends on... Could you just speak a little bit about where we are in terms of the product? We have put up a small capacity plant, which we expect to commence in October December quarter.

16:24 After Diwali, we expect it to start. But at the same time, we don't expect that it will start functioning right from where to go without any cuts. Novel technology, novel process and so it's it is going to take its own time. And it's an import is it's an import Yes. Yes, yes. It's an import substitution plus it has export potential. Okay. Effectively it is derivative of the Temla acid only? Yes, it's one of the fatty acid only.

17:12 Okay. The other question is that, look, I understand that obviously because of the reduction and there's been less amount of the dumping happening. And then as we've also been helped by actually freight rates. Is there any reason that we believe that again China may not start dumping? And how should we be thinking about that? I don't think so. I don't think so they'll restart the dumping. Basically, maybe they tried to they tried the dumping part, but I think probably we were able to sustain the game. Were able to fast. Mean, that's what we feel.

18:00 Otherwise, there was no logic of suddenly stopping, sir. Got it. And so just because I understand so I understand it because I'm slightly new to company. Effectively, what will effectively, what has been the hindrances because the raw material has been has had a very high import duty, there hasn't been enough availability from the refiners, haven't been importing it, therefore there's enough availability, which is why our capacity utilization is lower. Yes, availability was low, price was high and there was dumping from China. Three things that we have. Got it. So here, if we look at it is that in actually H1 of this year, the impact we are seeing is primarily for the dumping which has come off. And now hopefully in H2 we should see some amount of the implications of the higher availability and the lower cost of raw materials, which hopefully should also give us your okay.

19:19 Yes, that's correct. That's your thought is right. That's correct. We also expect the same. Thank you. Our next question comes from the line of Ritesh Palladia with Greek Capital. Please go ahead. Yes, thanks for the opportunity. The company has bought some land worth INR 12 crore rupees. What are the plans for that, if you can explain? This land was already in use for our current operations. So it was I mean, we are already utilizing it in our current operations. It's just this transaction we thought of getting it through in the current period.

20:10 So it's already been getting used in our operations as well as our worker colony. So it's already been in use with us, and we thought of buying it from our promoter. Okay. And if you can again repeat the raw material throughput, I couldn't hear it properly. Okay. So the raw material consumption for Q2 was 12,200 tonnes and we have sold equivalent number 12,400 odd tonnes. And for H1, it was 24,600 tonnes of raw material consumption and the sales was 25,800 tonnes.

21:00 Thank you, sir. Thank you. Next question comes from the line of Shivam Parag with Valuevise Wealth Management. Actually, my question has been answered from the previous participant's question. Our next question comes from the line of Rohit Doshi, an individual investor. Actually, the question was around I'm really sorry, but your voice yes, your voice is breaking. We can't hear you properly.

21:47 Hello, is it better now? Yes, it's better. Yes, perfect. Yes. Hi. So actually, my question was about the trade receivables that we have showed in this quarter. So it does around 100 odd crores, and our inventory, as I can see, is also reduced a bit. I just wanted to get a ballpark idea about what the working days will look like as we scale up the sales. See, we will be adding a working capital cycle between ninety to one hundred days for domestic sales. For export sales, it will elevate further. So as of now, we should be seeing around one hundred days of working capital. Sure. Okay. Okay. And then my second question was about the exports that we have about isothermal acid.

22:33 But the countries we export to, we have already like they're already established. So like and we announced that we are also like getting into the cosmetic industry. Like and what are the progress about that? Cosmetic industry, we were concentrating on Europe. But as you are aware, European market has started slowing down. And now we are having some issues with some strife also going on there. So it's going to get I feel that cosmetic business will get affected in near term. But in the long term, it will be Yes. Long term, obviously, because you cannot make cosmetic without isostery.

23:20 And there are just four players in the world. So I mean, it's going to happen. Our next question comes from the line of Madhu Rathi with Counter Cyclical Investment. Sir, thank you for the opportunity once again, sir. I wanted to understand regarding this value added products of linolenic acid that is used in all the field drilling and distilled iron. Sir, how big is this opportunity? And sir, what kind of realization premium can we expect on these products? I mean, it's a big market, fairly big market. And obviously, we can expect price realization of improved price realization of more than 5%.

24:15 5% to 10%, anywhere between 5% to 10%. Got it. Now sir, coming out to isocele, as it's a CarGel is one of the I think one of the competitors in this market, and they have their plans globally. So sir, how should we look at the scale up of this product? Because our competitors are present globally so they can source or manufacture these products across No, they have plant in U. K. There's just one plant in U. K. Okay. Got it. Got it. Sir, just one final question. Sir, there is a company called Ritesh International, and they seem to be manufacturing stearic acid. So, sir, are they our competitors?

25:04 Is this is this industry also fragment? No. Isostearic acid and stearic acid both are different products. No, sir. Not about product. I was asking about are there some smaller players in oleochemical market only who might be competing for the same raw material as us? That was the... Yes. Yes. Possible. It's possible, absolutely possible. Got it. Sir, that was from my end. Thank you so much and all the best. Thank you so much. Next question comes from the line of Siddharjan, an individual investor. Please go ahead.

25:56 Hello? Yes, we can hear you. Please go ahead. Sir, I have one question. With the company purchasing cost optimization, product upgradation and new products with geographical diversification simultaneously, So how will management prioritize these initiatives during H2 financial twenty seven? And which projects are expected to deliver the earliest incremental contribution? See, we are concentrating on everything as regards reduction in energy saving work is already over. As regards the exports, practically lots of places for isosteric acid and other products, the approval cycle is over or is it advanced stage of getting over?

26:48 That is second thing. And third thing will be the new product launch. So this is going to be in this pattern. Next question comes from the line of Shivam Parag with Valuewise Wealth Management. Congratulations on a great set of numbers. So can we expect EBITDA margins to improve to 14%, 15% on a sustainable basis due to import duty getting reduced? I would love to see not even 14, 15. I would love to see the 15, 18%. So sir, like I wanted to know like yes, so you would be processing the thiamine acid from a lot of like refined products. But out of that, soya bean constitutes what percentage of our like raw material? We won't like to I mean, it would be good if we don't share our raw material combination.

27:59 Okay, sir. Totally understand that. And sir, like, what sustainable margin if you could give throw some light? Yes, we should be able to maintain these margins. We'll try to improve as much as possible. Our Our next question comes from the line of Pradesha Ramgandhi with Discover Capital. Please go ahead.

28:52 Hi, guys. Thanks again for taking the bigger question. So, just to understand, so like given effectively the increased utilization should add to effectively operating leverage, over and above that, our R and costs should go down. So, we should hopefully soon be able to go back to the numbers you're aspiring to, which is a 16% to 18% EBITDA margin. We would hopefully I would love to. I said I would love to see those figures. But obviously, with the capacity utilization, market That's would for sure. That's for sure. Yes. Will you see this happening immediately from Q3? Or it's slightly longer dated?

29:39 I mean, every year, have said earlier also, we would try to achieve 5% to 10% growth every quarter. Got it. And last question I had was that effectively, is there a risk if this war ends and oil prices come by down that again the important duty again is increased and then again it becomes a problem of availability and pricing? I mean, don't think so that's going to be possible because we need... No, I just want to understand that the actual rationale for this inverted duty and effectively there's a high risk that it kind of moves back again once oil prices go inflation to market? Is very high. Currently, is very high. We believe that government will still not take any risk to increase the basic increase in oil rates because it affects our common... Actually, the government tried by increasing the duty. Government might have tried out to so that less of consumption happens.

30:50 If the prices go up, the consumption might come down. That might be the idea, possible. So that might be the reason why they would have increased duties so high. Because for all, for eight, ten years, it was hovering in range of around 57% only. Underly... So the reason they increased it was because of what did you say? Sorry, I didn't quite catch that. Yes. The reason was that what it was, I mean, this is a guesswork. Government might be thinking that if we make the oil, vegetable oil more expensive, less consumption might happen. And also, they wanted to promote better MSP to the Indian farmer. So that was the two reasons.

31:37 But somehow, the overall inflation, the way how it is going on, I mean, we don't expect the government to increase the import duty in near future. Understood. Okay. Right. That's all for me. Thank you so much. Thank you. Next question comes from the line of Kiran with An Individual Investor. Please go ahead. Good afternoon. Sir, do we have any expansion plans in the next one to two years? And we have the production capacity spare production capacity. No, we'll be waiting for the new product what we are new product we are working on, we'll be waiting for that. Once that product once we are satisfied with that product, we'll go for it.

32:28 Sir. Sir, what is the current capacity utilization? It is close to around 65%. Close to around 65%. So in order to reach around 85%, 90%, what would be the timeline? Any rough estimate? Every quarter we expect 5% capacity improvement. Okay sir. Sir, one last question, since we do not have any immediate expansion plans, what is the plan like how do we plan to utilize the operating cash flows? So we have so once the business stabilizes at higher levels, we will think on think appropriately to utilize to the best interest of shareholders.

33:22 Because if the new product succeeds, then we need CapEx. We'll need to go for CapEx. Okay. Okay. So we don't have any plan to reduce the debt as of now? No, no, no, no. Thank Okay. You. All the best. Thank you. Next question comes from the line of Nishanth Bhatt with Equity Works Limited. Please go ahead. Am I audible, sir? Yes, you are. Yes. First of all, congratulations on a good set of numbers. My question was regarding the isostearic acid ramp up.

34:09 So like I think it's been a long time since we launched this product. And I just wanted to ask how is it progressing? You mentioned that there are some headwinds in the cosmetic industry also. Like how much more time can this take to actually improve our operating margins and have a real impact on revenues? See, I mean, the things we once we launched the product, first thing was that is going in cosmetics, the approval cycle was pretty long. Basically, it's more than two, two point five years. That was one thing. And once that thing settled down, we have started seeing issues happening in Europe.

35:02 Basically, the consumption is also down in Europe. And duties were going to be high. I mean, import duties in U. S. A. Went up. So I mean, all these things combined together, the marketing has not reached its full potential. We are hopeful that once things stabilizes, as the product has been approved and it's of good quality, it will start giving results. I mean, is no need for us to do anything on by knee jerk reaction. We have to replace the VAT. Right, sir. And regarding this cost optimization, you mentioned in your presentation that you have been running the cost optimization exercise.

35:54 So like how would this like impact our margins? Like how many by how many bps therein? Because we think that our fuel cost, salary cost, other manufacturing cost has remained stable even though with this inflation. Right, right. Everything is there still on value terms plus higher processing. We have been able to maintain that. That's the strategy, which is paid for. That's it from my side, sir. Thank you. Thank you so much. Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for the closing remarks. Thank you. And over to you, Tim. Yes. Thank you. Thank you, everyone.

36:42 See you in the conference call. Have a nice day. Thank you so much, sir. Ladies and gentlemen, on behalf of Fairchem Organics Limited, that concludes today's call. Thank you for joining us and you may now disconnect your lines.