Sudarshan Chemical Industries Limited — Q3 FY26 earnings call

Call held 13 Feb 2026

Management summary

Sudarshan Chemical Industries faced a challenging Q3 FY26 due to subdued demand and customer destocking, resulting in a INR38 crore loss in the acquired group. Despite this, the company made substantial progress on integration, achieving INR40 crores in value capture and inaugurating a Global Capability Center. Management is confident in a Q4 turnaround, driven by renewed customer buying and strategic inventory reduction, though this will temporarily impact reported EBITDA.

Highlights

  • INR40 crores in value capture achieved in Q3 from integration efforts, with a healthy pipeline for future savings.

  • Global Capability Center (GCC) inaugurated on Feb 4, with ramp-up planned over the next year, enhancing productivity.

  • RIECO's 9-month EBITDA improved significantly from negative INR20 crores last year to negative INR4.2 crores this year, with Q4 expected to be a turnaround.

  • Management expects the acquired group's business EBITDA to improve to EUR 9 million to EUR 10 million from EUR 6.5 million.

  • Customer trust has been rebuilt, and global accounts have started buying to the full extent in January and early February, signaling demand recovery.

Concerns

  • Q3 FY26 was a very tough quarter for the specialty chemical industry, with significant demand issues in Europe and North America.

  • The acquired group reported a loss of INR38 crores in Q3, primarily due to a INR116 crore impact from selling price variance, volume, and mix drop.

  • A one-time provision of INR46 crores was made due to Labour Code changes.

  • Reported EBITDA will be temporarily impacted by EUR 9 million to EUR 12 million over the next three quarters due to inventory reduction and overhead absorption.

  • The acquired group has a high fixed cost structure, which exacerbates EBITDA volatility during demand downturns.

Key financials

  1. Acquired Group EBITDA ₹-38 Cr
  2. Labour Code Provision ₹46 Cr
  3. RIECO Q3 Revenue ₹51 Cr
  4. RIECO 9-Month EBITDA ₹-4.2 Cr
  5. EPS (9 Months) ₹-1.4
  6. Net Debt to Equity 50%
  7. Net Working Capital 25.6%

What they filed

Q1 FY27: revenue up 5.4%, net profit up 87.3% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue696 666 1,349 2,507 2,387 +243%2,103 +216%2,790 +107%2,642 +5%
EBITDA94 79 127 192 132 +40%38 −52%227 +79%259 +35%
Net profit30 1 0 55 19 −37%-116 −11700%82 103 +87%
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.

Capital allocation

high confidence
  • Debt Net ₹1,153 Cr Cost 5.8%
    So, in terms of the interest cost, it has 2 elements. One is the interest cost on the borrowings, and also, as per the IndAS accounting standard, we also need to account for the finance cost on the leases etc. So, if say only the normal run rate of the bank finance which we have taken for this acquisition and overall debt level, we are in the range of 5.75% to 6% as our interest cost. Balance effect is because of the IndAS accounting on the lease and the other fair valuation of the acquisition.
  • M&A Heubach's global business (including Clariant's pigment business) Acquisition · Integrated

    To create a new pigment global leader, combining Heubach's legacy with Sudarshan's agility and customer centricity.

    Acquired group saw a loss of INR38 crores in Q3 FY26; integration efforts yielded INR40 crores in value capture.

    We completed the acquisition of Heubach's global business, which included Clariant's pigment business.

Guidance & targets

Value Capture

  • Value Capture Savings Value Capture · Q3 FY26 · High confidence INR40 crores
    We already have captured INR40 crores of this which we have realized in our Q3, if you compare it to Q1 and we also have a very healthy pipeline going forward.

    — Rajesh Rathi, Chairman and Managing Director

SAP Harmonization

  • Single SAP System Implementation SAP Harmonization · December 2026 · High confidence 1 SAP

    From 4 SAPs today

    We were working on 4 SAPs. And we are progressing very well to harmonize this into 1 SAP by December '26. This is a very important initiative.

    — Rajesh Rathi, Chairman and Managing Director

Profitability

  • Acquired Group Business EBITDA Profitability · Q4 FY26 · High confidence EUR 9 million to EUR 10 million

    From EUR 6.5 million today

    I want to clarify here that we expect a EUR 9 million to EUR 10 million of a business EBITDA.

    — Rajesh Rathi, Chairman and Managing Director

  • Reported EBITDA Impact from Inventory Rationalization Profitability · Next three quarters · High confidence EUR 9 million to EUR 12 million reduction
    on the P&L, rationalization of production volume in the coming quarters is likely to have an impact on the reported EBITDA due to the release of capitalized overhead or inventorized overhead in the range of EUR 9 million to EUR 12 million.

    — Rajesh Rathi, Chairman and Managing Director

  • Overall EBITDA Profitability · 3-4 year target · Medium confidence EUR 90 million to EUR 100 million
    the entire thesis of what we are looking at the long-term 3- to 4-year target, where we are going to deliver EUR 90 million to EUR 100 million comes a lot from assuming that there is normal sales going on comes from cost reduction.

    — Rajesh Rathi, Chairman and Managing Director

Inventory Management

  • Inventory Reduction Inventory Management · Next three quarters · High confidence EUR 30 million to EUR 40 million
    Our target in the next three quarters is to reduce our inventory in the range of EUR 30 million to EUR 40 million.

    — Rajesh Rathi, Chairman and Managing Director

Revenue Growth

  • Legacy Sudarshan CAGR Revenue Growth · Long-term · Medium confidence 10% to 11%
    I would not like to give, but I'm saying in the long term, we should be back to 10%, 11%.

    — Rajesh Rathi, Chairman and Managing Director

Cost Management

  • Employee Cost as % of Revenue Cost Management · Long run · Medium confidence 12% to 13%
    So, I think our aim is to get to 12% to 13% of employee cost in the long run.

    — Rajesh Rathi, Chairman and Managing Director

What to watch in Q4 FY26

Customer Buying Resumption

Next quarter (Q4 FY26)
Current Customers started buying in Jan/early Feb 2026.
Target Sustained buying momentum and improved sales volumes in Q4 FY26.

Why it matters

Verifies management's confidence in demand recovery and the end of destocking, crucial for revenue growth.

Our confidence on the demand is, as I mentioned, the customers promised that they would start buying after January, and we are seeing that already in January and early February, as I mentioned. So, that gives us the confidence that Q4 demand is coming back.

Risks & concerns

  • Subdued demand in Europe, North America, and end-user industries

    high

    Q3 FY26 was a very tough quarter for the specialty chemical industry with big demand issues in Europe and North America, impacting household, paint, and automotive markets.

    Management acknowledged

  • Customer destocking post-Heubach insolvency

    high

    Customers built high stocks during Heubach insolvency and are now depleting them, contributing to subdued sales in Q3.

    Management acknowledged

  • Temporary impact on reported EBITDA due to inventory reduction

    medium

    Strategic inventory reduction of EUR 30-40 million over next three quarters will temporarily impact reported EBITDA by EUR 9-12 million due to overhead absorption.

    Management acknowledged

  • High fixed cost structure in the acquired group

    medium

    The acquired group has a high fixed cost structure compared to variable costs, making its EBITDA more volatile during demand dips, an area management is addressing.

    Management acknowledged

Q&A highlights

8 direct
Benzene Price Impact on Margins Direct
I think the first one is on the benzene side, we do on certain raw materials, we do see increases. But I think we are well covered on the raw materials, and we should not see any impact on Q4. Secondly, with our larger portfolio, our dependency, the impact which could have, especially if you refer to benzene would be quite minuscule.

Addresses raw material price volatility and the company's ability to mitigate impact due to a diversified portfolio and coverage.

Asked by Sanjesh Jain

Delay in Inventory Liquidation Post-Merger Direct
As you may recall, our most important aspect was to build customer trust. At the same time, all our supply chain processes were broken. We had to implement a common supply chain planning tool across the 3 legacies... We have built some of our processes, though we have to do some more work, but we now feel confident that we can start reducing inventories.

Explains the strategic rationale behind the timing of inventory reduction, prioritizing customer trust and supply chain stability over immediate inventory optimization.

Asked by Sanjesh Jain

Confidence in Q4 Demand & Profitability Direct
Our confidence on the demand is, as I mentioned, the customers promised that they would start buying after January, and we are seeing that already in January and early February, as I mentioned. So, that gives us the confidence that Q4 demand is coming back.

Provides specific, recent evidence for management's optimistic Q4 outlook, indicating a potential demand recovery.

Asked by Sanjesh Jain

Promoter Stake and Long-term Strategy Direct
We've transformed Sudarshan into more of a, I would say, professionally driven organization and our shareholding is quite substantial. The Rathi family owns substantial shareholding, and they will continue supporting us... I have warrants, which will come and that will help to increase my share.

Clarifies the promoter's commitment and strategy regarding shareholding in the context of the company's transformation.

Asked by Chetan Cholera

Fixed vs. Variable Cost Structure of Acquired Group Direct
So, one of the challenges, and that's where I think we are focusing on fixed cost reduction, the acquired group, the manufacturing cost fixed cost is very high compared to the variable cost... And that's why any dip in demand causes a much larger impact on the EBITDA on the acquired. And that's the area we are working on.

Highlights a key structural challenge in the acquired business (high fixed costs) that exacerbates EBITDA volatility during demand downturns, and indicates management's focus area.

Asked by Jignesh Kamani

Net Debt and Cost of Debt Direct
So, in terms of the interest cost, it has 2 elements. One is the interest cost on the borrowings, and also, as per the IndAS accounting standard, we also need to account for the finance cost on the leases etc. So, if say only the normal run rate of the bank finance which we have taken for this acquisition and overall debt level, we are in the range of 5.75% to 6% as our interest cost.

Provides clarity on the components of finance cost and the actual cost of bank debt, differentiating it from the higher reported blended rate.

Asked by Gagan Dixit

Impact of Inventory Liquidation on Future EBITDA Direct
And the impact of that in the short term could be EUR 9 million to EUR 12 million, and we must understand that this is only because of the overhead allocation. The inventory is not bad inventory. This is all good inventory The only thing what's going to happen is my production volumes are going to be much lower than my sales volume, and that's where it gets impacted.

Explains the temporary negative impact on reported EBITDA due to strategic inventory reduction, clarifying it's not due to bad inventory or discounts.

Asked by Rohit Kothari

Legacy Business Weakness & New Product Performance Direct
I think the products on the newly invested are performing very well. However, albeit given the slowness in demand, we have not seen the volume, but we are still so that part has worked. In fact, we see a demand much better for that compared to some of our regular products, from that perspective.

Provides insight into the performance of new product initiatives and the strategic synergy between the acquired and legacy businesses, despite overall demand weakness.

Asked by Dhruv Muchhal

3 min read 6 chapters

Detailed narrative

Challenging Q3 FY26 Performance Amidst Global Headwinds

Sudarshan Chemical Industries faced a very tough Q3 FY26, particularly in the specialty chemical sector, experiencing significant demand issues in Europe and North America. This led to low demand across key end-user industries such as household, paint, and automotive. The acquired Heubach group reported a loss of INR38 crores for the quarter, primarily driven by a INR116 crore impact from selling price variance, volume, and mix drop. Additionally, the company made a one-time provision of INR46 crores due to Labour Code changes.

Strategic Integration and Value Capture Progress

The company is 11 months into the integration of Heubach's global business and has made substantial progress on its strategic initiatives. Value capture efforts have already yielded INR40 crores in savings during Q3, with a healthy pipeline for future benefits. A Global Capability Center (GCC) was inaugurated on February 4th, with plans for ramp-up over the next year to enhance productivity. The company is also actively harmonizing its multiple SAP systems into a single platform, targeting completion by December 2026 for improved operational efficiency.

RIECO Business Turnaround and Financial Ratios

The RIECO business showed signs of improvement, with its 9-month EBITDA improving from a negative INR20 crores last year to a negative INR4.2 crores this year, despite a Q3 revenue of INR51 crores (down from INR60 crores last quarter). Management expects Q4 to be a strong quarter, marking a turnaround year for RIECO. Overall, the company's net debt to equity ratio stands at a stable 0.5%, and net working capital is at 25.6%, with a focus on further optimization.

Strategic Inventory Reduction and Temporary EBITDA Impact

Having rebuilt customer trust and stabilized supply chain processes, Sudarshan plans to strategically reduce its finished goods inventories by EUR 30 million to EUR 40 million over the next three quarters. This move is aimed at generating higher operating cash flow and reducing net debt. However, this rationalization of production volumes will temporarily impact reported EBITDA by EUR 9 million to EUR 12 million due to the release of capitalized overhead, as production will be lower than sales during this period.

Optimistic Outlook Driven by Demand Recovery

Management expressed confidence that the worst of the subdued demand is behind them, noting that global accounts have resumed buying to their full extent in January and early February. This indicates an end to customer destocking and a potential economic recovery. The company anticipates the acquired group's business EBITDA to improve from EUR 6.5 million to EUR 9-10 million, and expects a strong Q4, with the legacy Sudarshan business projected to return to its long-term 10-11% CAGR.

Cost Structure and Long-term Targets

The acquired group's high fixed cost structure was identified as a challenge, making its EBITDA more sensitive to demand fluctuations, an area management is actively addressing through cost reduction efforts. Long-term, the company aims to achieve an overall EBITDA of EUR 90 million to EUR 100 million within 3-4 years, largely driven by cost reduction. They also target reducing employee costs to 12-13% of revenue in the long run, supported by a lean organizational structure and streamlined management from Europe.

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