Rossari Biotech Limited — Q2 FY25 earnings call

Call held 21 Oct 2024

Management summary

Rossari Biotech reported a steady Q2 FY25 performance with 3% YoY revenue growth, driven by strong export performance and HPPC division. Despite headwinds in the Textile segment and softer domestic growth, gross margins expanded significantly. The company is strategically focusing on global expansion and capacity enhancements, with several CAPEX projects underway to support future growth and improve return ratios.

Highlights

  • Revenue increased by 3% YoY to ₹498.4 crores in Q2 FY25.

  • HPPC division grew 6% YoY, reaching ₹390 crores, contributing 78% to total revenue.

  • Textile Specialty Chemicals revenue was ₹84 crores, down from ₹96 crores last year, facing headwinds.

  • Animal Health and Nutrition (AHN) division revenue was ₹24 crores, up from ₹20 crores last year.

  • Exports grew 21% YoY in Q2 and 32% in H1 FY25, now constituting almost 25% of overall sales.

  • Gross margins improved by 253 basis points due to product mix optimization.

  • EBITDA increased by 3.6% YoY to ₹65.9 crores, with EBITDA margins stable at 13.2%.

  • PAT rose by 7.3% YoY to ₹35.3 crores for the quarter.

Concerns

  • Geopolitical Issues Impacting Exports (Bangladesh & Egypt)

Key financials

2 periods

Headline

  • Revenue
    ₹498.4 Cr
    YoY +3%
  • EBITDA
    ₹65.9 Cr
    YoY +3.6%
  • EBITDA Margin
    13.2%
  • PAT
    ₹35.3 Cr
    YoY +7.3%
  • Gross Margins Improvement
    253 bps

H1 FY25

  • Exports Growth
    32%

What they filed

Q1 FY27: revenue up 28.1%, net profit up 2.9% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue498 513 580 544 586 +18%582 +13%685 +18%697 +28%
EBITDA66 65 69 68 72 +9%69 +6%77 +12%81 +19%
Net profit35 32 34 34 37 +6%33 +3%46 +35%35 +3%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

Share of Revenue
₹498 Cr Total
  • Home, Personal Care and Performance Chemicals (HPPC) ₹390 Cr 78.3%
  • Textile Specialty Chemicals ₹84 Cr 16.9%
  • Animal Health and Nutrition (AHN) ₹24 Cr 4.8%

Guidance & targets

Revenue

  • Overall Top Line Growth Revenue · FY25 · Medium confidence 12%-13%
    I still expect that we will grow at that number around 12%-13%, I still anticipate that growth is going to be there, because if you see the H1 number, we are already around 11% top line growth. I think the second half should be better than that. I still expect that 12%-13% is what we will grow.

    — Ketan Sablok, Group Chief Financial Officer

Profitability

  • EBITDA Margins Profitability · FY25 · Medium confidence 13.2%-13.3%
    I think, we will stick to what we have done till now in H1, around 13.2%-13.3%. We will be around that between this and 13.5%.

    — Ketan Sablok, Group Chief Financial Officer

Sales

  • Animal Health and Nutrition (AHN) Sales Sales · Q3 and Q4 FY25 · Medium confidence 1.5x normal sales
    Going forward, Quarter 3 and Quarter 4 are traditionally the strong quarters for Animal Health, and we expect like our marketing says 1.5x the normal sales for Quarter 3, via-a-vis Quarter 2 or Quarter 1.

    — Edward Menezes, Promoter and Executive Chairman

  • Institutional Cleaning Sales Sales · FY25 · High confidence ₹250 crores
    Our take-off Rs. 250 crore, which we have said I think we are in line with that.

    — Ketan Sablok, Group Chief Financial Officer

Working Capital

  • Bangladesh Payment Situation Working Capital · December onwards · Low confidence much better
    It's still a little sticky over there, but from what our teams in Bangladesh tell us, I think probably another month or so and we anticipate December onwards it should be much better.

    — Ketan Sablok, Group Chief Financial Officer

  • Receivable Cycle Working Capital · by March · Low confidence much better
    And in terms of the receivable cycle, I think the first half is generally higher given that we just passed the agro season where the payment stretches a little longer, probably towards the end of the year by March I think it should be much better than what we are as of September.

    — Ketan Sablok, Group Chief Financial Officer

Capex

  • Capex Spend (remaining) Capex · next 6 months · High confidence ₹60-65 crores
    We have already spent I think about Rs. 60 - Rs. 65 crore in this CAPEX. I think a similar amount will be spent over the next 6 months.

    — Ketan Sablok, Group Chief Financial Officer

Capacity

  • Asset Turn (new CAPEX) Capacity · post-commissioning · High confidence 3x-4x
    We should do an asset turn out roughly between 3x-4x.

    — Ketan Sablok, Group Chief Financial Officer

  • Loop Reactors Functionality Capacity · end November or early December · High confidence functional
    The loop reactors will become functional by I think end November or early December.

    — Edward Menezes, Promoter and Executive Chairman

Raw Material

  • EO Availability from Reliance Raw Material · starting Q4 · Medium confidence additional quantities
    we are already talking to Reliance for additional quantities of EO at least starting of Q4.

    — Ketan Sablok, Group Chief Financial Officer

Risks & concerns

  • Geopolitical Issues Impacting Exports (Bangladesh & Egypt)

    high

    Export plan for Textile took a hit due to very slow off-take in Bangladesh and Egypt, banking issues, and LCs not coming through, leading to a temporary halt in supplies.

    Management acknowledged

  • Textile Sector Headwinds

    medium

    The Textile business is still navigating headwinds, with recovery expected in the next calendar year.

    Management acknowledged

  • Raw Material Price Volatility and Pricing Pressure

    medium

    Drop in raw material prices (e.g., acetic acid, butyl acrylate) led to pressure on finished goods pricing, impacting domestic revenue despite volume growth.

    Management acknowledged

  • High Freight Expenses for Exports

    medium

    Freight forwarding costs have been significantly high, especially for new export customers, impacting overall expenses and negating some gross profit gains. Management aims to push these costs back to customers over time.

    Management acknowledged

  • Limited Ethylene Oxide (EO) Availability and Ethoxylation Capacity

    medium

    Limited EO availability and ethoxylation capacity constrained domestic growth, leading to a strategic focus on exports. New loop reactors are expected to be functional by Nov-Dec, and additional EO quantities are being sought from Reliance starting Q4.

    Management acknowledged

  • Propylene Oxide (PO) Availability and Storage Issues

    low

    Challenges exist with PO availability and storage due to the company not being a very large consumer, but this is expected to be manageable with increased scale.

    Management acknowledged

Areas of evasion (2)

  • QoQ pricing impact across portfolio
  • Specific value capture from backward integration

Q&A highlights

3 direct
Textile Segment Underperformance and Market Share Direct
on the domestic front in Textiles, we have not lost any market share. In fact, YoY volumes grew, like Ketan sir just now reported, that YoY volumes grew by 6%-7%. However, since you know that the prices of certain raw materials dropped like acetic acid, butyl acrylate, styrene or silicones because of which there was pressure on the finished goods product pricing and that is where you see a loss in revenue basically, whereas in volumes in domestic we have grown.

Analyst questioned sustained underperformance and potential market share loss in Textiles; management clarified it's a pricing issue due to RM costs and geopolitical export challenges, not volume decline domestically.

Asked by Sanjesh Jain

Discrepancy between Gross Margin Improvement and EBITDA Margin Stability Direct
The other expenses as you see have increased during this quarter. They are almost Rs. 59 crore in this quarter compared to Rs. 55 crore in Q1. ... The freight forwarding cost in this quarter has been significantly high while we have also had some professional expenses which have come up in this quarter. This is more resulting from some of the global restructuring that we are planning to do.

Analyst sought to understand why significant gross margin expansion didn't translate to EBITDA margin growth; management attributed it to increased operating expenses, particularly freight costs for growing exports and global restructuring.

Asked by Sanjesh Jain

Decline in Domestic Business and Strategic Shift to Exports Direct
there is limited ethyline oxide availability, right? And we also have limited capacity for manufacture of the ethoxylates. We saw an opportunity to gain market share in exports, and also realization in exports was quite healthy. That is one of the reasons why we have focused a little bit more on the export where we could grab some market share in certain geographies, whereas domestic has grown by say only 6-7%.

Analyst questioned the sharp reversal in domestic growth; management explained it was a conscious strategic decision to prioritize exports due to raw material availability constraints (EO), limited ethoxylation capacity, and better market opportunities/realizations in international markets.

Asked by Sanjesh Jain

3 min read 7 chapters

Detailed narrative

Q2 FY25 Financial Performance and Segmental Contribution

Rossari Biotech reported a 3% year-on-year revenue increase, reaching ₹498.4 crores in Q2 FY25. The HPPC division was the primary growth driver, with revenues of ₹390 crores, up 6% YoY, and contributing 78% to the total. The Textile Specialty Chemicals division faced headwinds, with revenues declining to ₹84 crores from ₹96 crores in the prior year, while the AHN division saw growth to ₹24 crores from ₹20 crores.

Strong Export Performance Driving Growth

Exports emerged as a key growth driver, increasing by 21% YoY in Q2 FY25 and a robust 32% in H1 FY25. Exports now account for almost 25% of the company's overall sales. Management highlighted successful targeting of new customers and increased wallet share with existing partners across various geographies, including Europe, South America, Middle East, and Turkey, with expectations for exports to continue outpacing domestic growth.

Margin Expansion Amidst Cost Pressures

Gross margins improved significantly by 253 basis points during the quarter, attributed to an optimized product mix. However, this improvement was partially offset by increased operating expenses, including higher freight forwarding costs for exports and professional expenses related to global restructuring. Despite these pressures, EBITDA increased by 3.6% to ₹65.9 crores, maintaining a stable EBITDA margin of 13.2%.

Strategic Investments and Capacity Expansion

The company is making key investments for future expansion, including establishing Rossari Global DMCC in UAE for export trading and acquiring Unistar Thai Company Limited for manufacturing specialty chemicals. An additional 39,101 square meter plot was acquired adjacent to the Dahej facility for future manufacturing capabilities. CAPEX projects at Unitop and Dahej, totaling ₹146.25 crores (including an additional ₹18.25 crores approved), are progressing, with approximately ₹60-65 crores expected to be spent in the next six months. These projects are anticipated to deliver an asset turn of 3x-4x.

Ethylene Oxide (EO) Availability and Ethoxylation Capacity

Limited EO availability and ethoxylation capacity were identified as constraints on domestic growth, leading to a strategic focus on exports. However, new loop reactors are expected to become functional by end-November or early December 2024, alleviating capacity concerns. The company is also in discussions with Reliance for additional EO quantities, expected to commence in Q4 FY25, further supporting increased production.

Outlook for Textile and Animal Health & Nutrition Segments

The Textile business continues to face headwinds, with recovery anticipated in the next calendar year. Geopolitical issues in Bangladesh and Egypt significantly impacted Textile exports in Q2, leading to a temporary slowdown in supplies. For the AHN business, Q2 was the weakest quarter seasonally, but Q3 and Q4 are traditionally strong, with management expecting 1.5x normal sales. A strategic shift to focus on specialty additives over feed components is expected to improve margins.

FY25 Guidance and Targets

Rossari Biotech maintains its FY25 top-line growth guidance at a low double-digit range of 12%-13%. EBITDA margins are expected to remain stable at around 13.2%-13.3%. The company also reiterated its target of achieving ₹250 crores in institutional cleaning sales for FY25, with approximately ₹130 crores already achieved in H1. Management anticipates an improvement in the Bangladesh payment situation and receivable cycle by December 2024 and March 2025, respectively.

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