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Edited Transcript of SRF.NSE earnings conference call or presentation 6-Aug-19 9:30am GMT

Q1 2020 SRF Ltd Earnings Call

New Delhi Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of SRF Ltd earnings conference call or presentation Tuesday, August 6, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Nitika Dhawan

SRF Limited - Head of Corporate Communications

* Rahul Jain

SRF Limited - President & CFO

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Conference Call Participants

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* Abhijit R. Akella

IIFL Research - VP

* Atul Tiwari

Citigroup Inc, Research Division - VP and Analyst

* Bhavin Shah;ICICI Securities;Analyst

* Jignesh Kamani;GMO;Analyst

* Naushad Chaudhary

Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst

* Ranjit R. Cirumalla

Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst

* Ritesh Gupta

AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals

* Rohit Sinha

Emkay Global Financial Services Ltd., Research Division - Research Analyst

* Sanjesh Jain

ICICI Securities Limited, Research Division - Research Analyst

* Shaleen Kumar

UBS Investment Bank, Research Division - Associate Director and Analyst

* Sneha Talreja

Edelweiss Securities Ltd., Research Division - Research Analyst

* Tejas Sheth;Reliance Nippon Life AMC;Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. I'm Hanila, moderator for the conference call today. Welcome to SRF Limited Q1 FY '20 Results Conference Call hosted by B&K Securities.

We have with us today Mr. Ranjit from B&K Securities. (Operator Instructions) Please note, this conference is recorded.

I now like to hand over the conference to Mr. Ranjit from B&K Securities. Thank you, and over to you, sir.

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Ranjit R. Cirumalla, Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst [2]

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Thank you, Hanila. Good afternoon, everyone, and thank you for joining us on SRF Limited's Q1 FY '20 Results Conference Call. Today, we have with us Mr. Rahul Jain, President and Chief Financial Officer, who will represent SRF on the call. B&K Securities thank the management of SRF for giving us the opportunity to host this call.

I would know like to invite Ms. Nitika Dhawan, Head of Corporate Communications at SRF, to initiate the proceedings for the SRF con call. Over to you, ma'am.

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Nitika Dhawan, SRF Limited - Head of Corporate Communications [3]

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Good afternoon, everyone, and thank you for joining us on SRF Limited Quarter 1 Financial (inaudible) Conference Call. We will begin this call with brief opening remarks from our President and CFO, Mr. Rahul Jain, following which we will open the forum for an interactive question-and-answer session.

Before we begin this call, I would like to point out that some statements made in this call may be forward-looking, and that the statements in this context have been included in the earnings presentation shared with you earlier.

I would now like to turn invite Mr. Jain to make his opening remarks.

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Rahul Jain, SRF Limited - President & CFO [4]

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Good afternoon, everyone, and I would like to extend a warm welcome to you all joining us today on SRF's Q1 FY '20 results discussion.

I will initiate the call by briefly taking you through the key operational highlights for the quarter gone by, following which, we will have -- we will be happy to have a Q&A session.

I am pleased to inform you that during the quarter we have reported healthy performance in most of our businesses. In Q1 FY '20, consolidated revenue increased by 9% to INR 1,828 crores, EBITDA increased by 13% to INR 365 crore, and PAT increased by 41% to INR 189 crore. Growth was majorly driven by a robust performance in Packaging Films business along with important contributions from our Chemicals Business. This was despite a slower-than-expected recovery, post our Dahej site closure in April this year.

I'm glad to share that the Board of Directors have approved an interim dividend of -- at 70% amounting to INR 7 per share, which was higher by about 10% from the earlier quarter. This will result in a cash outflow for [INR 48.5 crore], including taxes.

Let me now share an update on the segmental performance beginning with our Chemicals Business. The Chemicals Business comprises of the Fluorochemicals and Specialty Chemicals Business. During the quarter, the performance was mainly impacted due to the closure of Dahej plant operations in April. This not only impacted loss of revenue, but also affected margins owing to higher fixed costs and a lower base and the negative flow on the operating leverage.

As discussed earlier, we continue to be hopeful of registering our growth number that we had indicated in our previous calls. And on a full year basis, we should be able to reach all our customers' requirements.

The Fluorochemicals business delivered a stable performance on account of higher sales of refrigerants as well as improved contribution from the Chloromethanes facility. We did see lower sales volume to the OEMs in the auto segment given the worst slump witnessed in the automotive sector in the recent times. However, demand from the replacement market remains healthy.

We achieved several operational milestones during the quarter. I am proud to announce that our R&D team has successfully developed our [460a], a refrigerant gas using in-house patented technology, which is an HFC and a nontoxic mildly flammable refrigerant designed mainly for the use in fixed air conditioning applications.

The gas received a certificate from the American Society of Heating Refrigeration and Air Conditioning Engineers, commonly known as ASHRAE. This further highlights our R&D capabilities in this segment, and as it is the first-ever gas from India to receive such a certification. The refrigerant will be marketed that under the FLORON brand in markets where our 22 quotas are likely to come in play.

The Board also approved setting up of an integrated PTFE plant, along with an R22 plant as feedstock. The aggregate cost of this is estimated currently to be about INR 424 crores.

With the proposed capital expenditure, we intend to enter into the fluoropolymers as a new business segment and enhance our value chain in the fluorine segment. As a long term effort (inaudible) to leverage our R&D and innovation capabilities in the PTFE segment as well. We believe that the project on a consolidated basis (inaudible) and payback thresholds. The project has roughly about a 2-year implementation schedule.

Our Specialty Chemicals Business delivered a stable performance during the quarter. Recently, commission facility at the [site] contributed positively to the overall performance. SRF is witnessing growing demand for its flagship products and has launched 2 new products in the agro segment. The company continues to expand in new geographies and product offerings.

In addition to the above, we launched 2 new molecules in the Pharma segment. Ramp-up of these will depend on how the final formulation for interactions. We continuously endeavor to expand our geographical reach offering a broader product portfolio. We constantly seek new product opportunities in both agro and Pharma segments.

As mentioned earlier, the performance of the Specialty Chemicals Business was significantly impacted in the month of April and May owing to plant closure in Dahej. As we operate a complex chemical plant, safe shutdown requirements were met and the plants were shut down as per the requirement of the Gujarat Pollution Control Board, GPCB. This was done in compliance with the notice. SRF filed a detailed and appropriate reply urging (inaudible) clarifying its position with regard to the issues that were raised by GPCB. A [revocation] order of the closure notice was received from GPCB on April 12, 2019. And in compliance with the said order, site operations started to resume normal operations in a phased manner. However, in some of the plants, some work in progress was taken out of the system in line with good EHS practices. This led to additional load on the (inaudible).

The situation was further compounded by the fact that Gujarat Industrial Development Corporation, GIDC, had restricted water discharge capacity from 24 hours to 12 hours, and therefore, resumption of operations of some of the plants at the site took more time than was initially estimated.

We believe that the loss of production and revenues that hit us in April and May 2019 is temporary, and we should be able to meet our customers' requirement on a full year basis. It is envisaged that we should be able to meet our budgeted numbers. SRF's chemical facilities have been audited continuously by global customers and found to be world-class. It will be our endeavor to work closely with GPCB to fulfill their needs.

Moving on to our Packaging Films Business. The segment performed exceedingly well, owing to better margins in the BOPET segment as well as some value-added product portfolio, augmenting the overall performance. During the year, we launched a new value-added product in the BOPET category. This is in line with our focus on expanding new product offerings, especially our value-added product offerings. We would like to inform that civil work in our Hungary and Thailand site is proceeding as per schedule.

However, going forward, we do expect an overall oversupply situation in the short term with 2 new BOPET clients expected to go onstream in the upcoming quarter. Also, BOPET market continues to reel under pressure due to adverse demand-supply scenario. This could impact our performance in the coming months. Demand in the BOPET segment is anticipated to sustainably grow in the range of 8% to 10%, which would hopefully lead to a normalized scenario by the end of this fiscal.

Moving on to our Technical Textiles Business. This segment was adversely affected (inaudible) a slowdown in the automotive sector. The business may also be affected by inventory losses due to falling (inaudible) prices during Q2 FY '20. We expect current slowdown to be cyclical in nature and hope to see a gradual recovery over the next few quarters.

Having said that, both our Belting Fabrics and Polyester Yarn segments have delivered positive performance with our [announced] volumes achieved during the quarter.

The other segment, SRF has been able to maintain its leadership position in the domestic market. In the quoted fabric segment, that [delivered growth] volumes. Despite the oversupply situation in the market, SRF has delivered same stable volumes in the Laminated Fabrics segment as well.

You are aware that we had announced last quarter, the company has entered into definitive agreements for sale of its Engineering Plastics Business to DSM India Private Limited. The business has been successfully divested effective August 1, 2019, and the results have been reported as discontinued operations for all the relevant reporting periods.

Let me also give you an update on our balance sheet position. Our debt as on 30th June 2019 remained flat when compared to 31st March 2019. However, our interest costs for Q1 FY '20 have increased 17% Y-o-Y to INR 52 crore as compared to the corresponding period last year. We see this reducing in the future quarters as the mix from India and overseas changes and cash from the sale of our Engineered Plastics business gets deployed to reduce our debt levels.

On the corporate social responsibility front, SRF Bhiwadi was conferred the 25th Bhamashah Award 2019 for the sixth consecutive year for a significant contribution in the field of primary and elementary education, along with infrastructural development of schools in the vicinity of its plant operations.

To conclude, I would like to state that we have seen challenges in some of our business owing to the (inaudible) slowdown and the general economic slowdown. However, over the years we have established a multibusiness entity, which help us face such varying environment. Strategic innovations across businesses through a robust R&D team have helped the company effectively face such external uncertainty. With major investments in place, superior R&D capabilities and our diversified business model, we are confident of reporting a healthy operational and fiscal performance -- financial performance going forward.

On that note, I conclude my remarks and would be happy to discuss any questions, comments or suggestions that you may have.

I would now like to ask the moderator to open the line for Q&A. Thank you so much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Naushad Chaudhary from Systematix.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [2]

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Hello? Am I audible?

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Rahul Jain, SRF Limited - President & CFO [3]

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Yes. Please go ahead.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [4]

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A couple of questions I have. First one, sir, on the -- in the opening remark, you mentioned GIDC have cut the water discharge limit from 24 hours to 12 hours. Can you elaborate a little bit more on this? Why did you design -- is it temporary or is it going to be a permanent from now?

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Rahul Jain, SRF Limited - President & CFO [5]

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Naushad, the GIDC had certain problems at their back end where, today, let's say, the capacity that they were operating with was full due to that, they had requested many industries in the area to limit their discharge requirements. We have effectively taken steps, one, to be able to kind of naturally recycle as much as we can and be able to discharge within the capacity that they were indicating. Whilst I don't believe this is going to be a permanent situation, as things go -- do go on, we will see much better traction on the GIDC going forward. As of now, things return to normal, but again, depending upon what they have influenced, this will be taken forward, Naushad.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [6]

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So as of now, on a near-term basis, how much this could impact to the production of our Chemical business, sir?

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Rahul Jain, SRF Limited - President & CFO [7]

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Well this was -- the impact came through because of the fact that there was closure. And as I said in the opening remarks, there was additional (inaudible), right? As things have normalized, this has come down to a much lower impact going forward. I am pleased that we have found countermeasures to be able to manage this even if there is, let's say, a certain negative that GIDC comes through with. But we are putting countermeasures in place is what I can tell you, Naushad.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [8]

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Okay. Second thing on the Specialty Chemical -- sorry, on the PTFE business. Apart from PTFE capacity, we are also setting up R22 capacity also, right?

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Rahul Jain, SRF Limited - President & CFO [9]

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That's right.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [10]

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Just wanted to understand, are we -- as of now, we also have the R22 capacity in-house and which is going to eventually phase out. So why not using the existing capacity? And why are we setting up the new capacity, sir?

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Rahul Jain, SRF Limited - President & CFO [11]

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Given the current contours of the position, we believe that both the capacities of R22 will be fully utilized. Fact of the matter is that even as of now, our R22 capacity are fully utilized. The requirements of R22, both captively as well as in a certain new segment we are starting to operate in, is higher. So given the current position that we have, we believe both the R22 capacity will be utilized from a PTFE perspective, a Specialty Chemicals Business perspective and external sales as well.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [12]

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Sir, would you be able to quantify how much of R22 capacity as of now we use in our Specialty Chemicals Business?

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Rahul Jain, SRF Limited - President & CFO [13]

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On an annualized basis roughly about 3,000 to 4,500 tons. Depending on the product mix that we are operating in.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [14]

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And right now we have around 11,000 of R22 capacity, right?

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Rahul Jain, SRF Limited - President & CFO [15]

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Roughly 11,000.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [16]

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Okay. Last question on [EHS] capacity, which we have expanded in FY '18, so just EHS capacity of...

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Rahul Jain, SRF Limited - President & CFO [17]

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Tell me what do you want from us then?

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [18]

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So we expanded this in FY '18, just wanted to understand, do we still outsource some of this capacity? Or are we...

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Rahul Jain, SRF Limited - President & CFO [19]

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Naushad, we have not expanded in FY '18. This is a part of the project on HFC under which we are expanding [EHS] capacity. This is has already been I think either capitalized or have been close to recapitalized, so that is something that is going on. But that's a part of the HFC project that we're doing where we're setting up newer HFCs. So it was not done in FY '18. It was done in FY '19. This is to meet our HFC requirements.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [20]

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Okay, that is in R22, 134 and 125, right?

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Rahul Jain, SRF Limited - President & CFO [21]

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Please don't confuse, not R22, R32.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [22]

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R32. So all these expansions have completed now or no? Any of these is still work in progress?

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Rahul Jain, SRF Limited - President & CFO [23]

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Most of these are still work in progress. Only components of these are now in full production capacity. But by the end of, let's say, mid of September, end of September, everything is likely to be completed.

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Operator [24]

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The next question comes from Mr. Ritesh Gupta from AMBIT Capital.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [25]

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Sir, the first one is on Technical Textiles, we saw almost 18% Decline on the EBIT side for TTB. Do you think that it kind of factors in most of the order slowdown that you have seen so far? Or is that the international business subsidies also have not reported their numbers? So is it that: a, what is -- like, what is the -- what are the challenges that international subsidiaries are facing? And secondly, I think, on an overall basis, do you think this quarter is the right reflection of the slowdown and -- because of the water sector? Or do you think it would be to -- because I think, still a few quarters back, you were saying that demand has kind of been surprising and you might have to take a debottlenecking [exercise], et cetera.

So do you still see that there are supply challenges, although demand kind of goes down, but there are still some supply challenges which can retain some of the profitability influence that you have kind of shown in Technical Textiles over the last few quarters or few years actually? So first is that one.

And secondly, I think if you could quantify where the major impact was on in the quarter 1? Was it more on the -- only on the specialty side or was there some impact from the -- on the refrigerant side also because it's [with the] facility itself? And how do we kind of -- and so was there any loss demand because of -- well you said you will be able to meet customer demands but the customer demand itself can go down because of, let's say, loss of 1 or 2 months' sales?

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Rahul Jain, SRF Limited - President & CFO [26]

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So let me try and answer all the questions that you asked, Ritesh. The first question that you had asked was regarding in Technical Textiles Business, in terms of saying whether this quarter is reflective enough of the future. So let me tell you that there were some demand challenges that we had faced in the quarter. The fact of the matter is that the auto slowdown that is very evident to all of us is kind of going out and hitting us on the Technical Textiles front.

We really do believe that this is probably more a cyclical phenomenon. There should be a demand pickup from the secondary market for sure. But whether that takes 2 quarters or 3 quarters is only time will tell. I can't tell you today whether third quarter or fourth quarter will be a positive. But yes, I would also comment that during the speech on this, before the Q&A session, that we are also looking at certain inventories in Q2 that will come through, because of the (inaudible). So whether this is a reflective quarter, or for quarters to come, certainly Q2 looks from a demand perspective, similar to what we have, but from an overall position, i think there could be some better things to look forward to. That's on the Technical Textiles. And second question was with respect to the chemicals business, I think you were commenting on the margin of the chemicals business. State of the matter is that (inaudible) customers, the fixed cost absorption that should have happened didn't happen. Some of the plants took more time to stabilize and come back. We have told you in our previous communication as well, that some of the really high specialty plants that we run have a position where it takes [more time for] certain products to come on. So to that extent the costs of cleaning up these plants, the cost of raw material, the fact that fixed cost absorption have come out to be very low, all of these have impacted the margin on the chemicals business. That was your second question. I don't know if you had a third one, if you could please repeat.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [27]

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Also, I think the question was also that let's say when you were not able to supply the material to your customer, you said that I think in the presentation, in your opening remarks, you mentioned that you would be able to make up for the loss of demand during the quarter, over the year. Now the question could be that, would could be the loss, or might have been completely lost or do you think that that demand still remains with you?

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Rahul Jain, SRF Limited - President & CFO [28]

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Well, (inaudible) the thing is we have not faced any situation where our customer has gone off and canceled the order. So the order still remains. And that it when we have to supply, let's say on the year as a whole, the order has not been canceled. So that's why we are saying there is no demand, but as it [gone down], but most certainly, to the extent, where the plant was closed for a certain period. You can't go back and produce that quantity or that product. And to that extent, let's say the demand gets out further in time. We have not experienced any canceled orders.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [29]

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Okay. And any impact of the kind of comments that some of these global guys have given, any impact of that side on your business? How do you see that particular piece…

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Rahul Jain, SRF Limited - President & CFO [30]

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I hear what you saying in terms of commentary you are hearing from agro majors. But again, we believe that our position is positive. And the traction for our products, newer and bolder, is building very significantly. We are sticking to the number we gave you in previous calls, in terms of 14% to 15% increase in turnover. All of that is still a positive.

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Operator [31]

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(Operator Instructions) The next question comes from Sanjesh Jain from ICICI Securities.

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Sanjesh Jain, ICICI Securities Limited, Research Division - Research Analyst [32]

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First question on the former side, we said that we have launched 2 molecules. I hope this is for the end product. Is this from the cGMP plant? And what could be the potential opportunity here? That's my first question.

Second question, carrying on from the earlier question, we are still seeing a good traction, which was good news. But if I go back and see in FY '16. So the global slowdown happened somewhere around end '14 and '15 and we saw a lag. That kind of scenario can still arrive? Or how has been our discussion and sales funnels with customers on the agro side particularly? Those are the 2 questions.

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Rahul Jain, SRF Limited - President & CFO [33]

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Your first question was with respect to the fact that what are the cGMP -- the pharma molecules that were launched.

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Sanjesh Jain, ICICI Securities Limited, Research Division - Research Analyst [34]

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Correct. Correct. Was it from cGMP plant?

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Rahul Jain, SRF Limited - President & CFO [35]

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So it was -- CGMP is a commercial scale plant. A multiple plant. So the product approval does not go out from a cGMP. It actually goes out from a pilot plant or large-scale plant. So those are the 2 new products that we have launched, but it is not from the cGMP, that I can tell you. So that's one.

The second is you're saying that could we see such a situation where in FY '16 there was [a lag] started to happen in the Specialty Chemicals Business, which came out with a lag as compared to what, let's say, the global majors were talking about. We seem to have a pretty good product pipeline that seems to be working well for us. I do believe that the global majors that are engaging with us are in a position to give us some more ability in terms of giving the -- a longer lead time or a longer road for us to be supplying products to them from a 12 to an 18 month perspective. So but at the same time I don't believe that is going to be the case. But again, there could be [adverse event]. There could be difficult times for them to come through, and to that extent, we may have to do an accommodation of -- for some of our key customers. But that's a product business, Sanjesh and that will happen -- it will happen over a period of time.

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Sanjesh Jain, ICICI Securities Limited, Research Division - Research Analyst [36]

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That was helpful. Sir, there's 2 bookkeeping questions. What is the CapEx number we are looking for this year?

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Rahul Jain, SRF Limited - President & CFO [37]

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So on an overall basis, between INR 1,100 crores to INR 1,200 crores. This includes all the new announcements that have been made. Despite the fact that there will be about INR 1,100 crores of CapEx, when I am saying INR 1,100 crores of CapEx, I'm including the PAT line that is (inaudible) as well. That's the number. But again, I (inaudible) discourage that, there will be reduction in debt, that will happen.

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Sanjesh Jain, ICICI Securities Limited, Research Division - Research Analyst [38]

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Okay. That is helpful. Just one question on the PTFE. I know it's quite early days, but any ballpark figure on the kind of capacity we're looking to add on this?

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Rahul Jain, SRF Limited - President & CFO [39]

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So when we have given that as a detail to [subleases] which is a requirement under the [LODF]. The -- and which has capacity of PTFE as of now, 5,000 registered.

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Operator [40]

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The next question comes from Mr. Rohit Sinha from Emkay Global.

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Rohit Sinha, Emkay Global Financial Services Ltd., Research Division - Research Analyst [41]

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First of all, congratulations for a good set of numbers. And my 2 questions would be on -- first on Specialty Chemicals side, or could be a follow-up like it. Are we still maintaining that guidance of 40% to 50% growth in Specialty chemicals? And what would be the...

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Rahul Jain, SRF Limited - President & CFO [42]

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Rohit, can you be a bit slower in terms of what you're saying? I'm unable to get you.

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Rohit Sinha, Emkay Global Financial Services Ltd., Research Division - Research Analyst [43]

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So sir, what -- I'm just mentioning and saying that, are we still maintaining the growth guidance for Specialty Chemicals of 40% to 50%, which we are providing earlier for FY '20?

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Rahul Jain, SRF Limited - President & CFO [44]

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In one word, yes.

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Rohit Sinha, Emkay Global Financial Services Ltd., Research Division - Research Analyst [45]

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Okay. Okay. And is this the mix of agro and pharma and the Specialty Chemicals? So what would -- can you share the mix, sir, what would be a share of agro and Pharma and our Specialty Chemicals?

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Rahul Jain, SRF Limited - President & CFO [46]

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Yes. Again, I'm saying you take countermeasures to various things. As of now, I may not be able to give you an estimate in mix because in some situations you have ended up planning something, but you ended up executing something else depending upon what the market requires. So it's impossible to give you a breakup of Pharma and agro. But again, let me tell you this is -- the focus remains as of now on agro. Pharma will be of late, that will come through over a period of time.

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Rohit Sinha, Emkay Global Financial Services Ltd., Research Division - Research Analyst [47]

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Okay. Okay. And just on the (inaudible) segment, so this quarter we've seen growth in domestic [Argas] also, I believe. And so this, hopefully in next quarter, we will see some impact because of the auto slowdown. So what could be the domestic and export growth guidance would be there in Argas ?

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Rahul Jain, SRF Limited - President & CFO [48]

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I don't give specific growth guidance on any of the products basis, but let me tell you, at least -- just hear me out a bit. We've increased our 134a production and our overall 134a sales have also gone up, both on a tonnage basis and on a (inaudible) basis. So I think that's a positive. The -- as the new plant, that gets commissioned by end of -- mid of September and end of September, sales [will start] to ramp up. But again, as new plants come up there, the timing ramp-up is between, let's say, 12 to 18 months. But I can't give you a specific guidance in terms of growth on [Argas].

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Operator [49]

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The next question comes from Mr. Atul Tiwari from Citigroup.

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Atul Tiwari, Citigroup Inc, Research Division - VP and Analyst [50]

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Congratulations on a great set of numbers. Sir, my first question is on the BOPET margins. So your margins have been very strong in this quarter and while obviously your commentary does seem to indicate that there's a bit of an overcapacity. So what is the normalized margins we should look at? I mean is the current quarter representative? Or the margins should come down slightly over a period of time? So that is the first question. And the second question is...

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Rahul Jain, SRF Limited - President & CFO [51]

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(inaudible), Atul.

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Atul Tiwari, Citigroup Inc, Research Division - VP and Analyst [52]

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Yes?

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Rahul Jain, SRF Limited - President & CFO [53]

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So you know the answer. You can go to the second question.

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Atul Tiwari, Citigroup Inc, Research Division - VP and Analyst [54]

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Okay. And does -- and can you talk a little bit more about this new gas that you have presented? I missed that part, your voice was breaking a little. So the new gas that you have presented, which gas is it -- is it a product patent by you, because normally, I mean, my understanding is that you guys have won a lot of process patents, but is it a product patent? And what is the -- its group of opportunity here?

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Rahul Jain, SRF Limited - President & CFO [55]

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Okay. So one, let me clarify this, maybe there was some confusion about it. We have developed a gas, which is now been registered by ASHRAE, which is the American Society for Heating, Refrigeration and Air-conditioning Engineers, which typically grants numbers to all of these assets. So let's say a 134a or a 22 or 32, 125 and any other gas the normal [classification] of this gas is done by ASHRAE. So we had filed a requirement of, let's say, a product which is called -- now called R467a. This is also an HFC, it's nontoxic, mildly flammable gas and designed it mainly for the use in [digital] air conditioning applications. So let me, one, tell you this is not a patent. This is a grant of a number by ASHRAE, and this will be marketed as our brand going forward. Effectively, it is likely to be used in markets where R22 quotas are getting established and coming down, so it will be a substitute to R22 largely, being used in the replacement market only.

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Atul Tiwari, Citigroup Inc, Research Division - VP and Analyst [56]

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Okay, sir. Okay. And any quick comments on the PTFE revenue potential? So this 5,000 metric tons was fully utilized out of what kind of revenue are we looking at, once the capacity is up and running?

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Rahul Jain, SRF Limited - President & CFO [57]

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See, Atul, it's unfair for me to be able to give you full capacity revenues and what will end up happening because all of this will depend on what kind of a product mix that you are operating with. And when you are operating with a certain product mix, the revenues could vary between, let's say, 10% to 25% from your best case scenario. So I may not be in a position to give you revenues, but let's say on a full utilization basis, our return or asset return could be anywhere between 0.75 to 1.5.

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Operator [58]

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The next question comes from Shaleen Kumar from UBS.

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Shaleen Kumar, UBS Investment Bank, Research Division - Associate Director and Analyst [59]

--------------------------------------------------------------------------------

Congrats for the great set of numbers, sir. So regarding the [plant], can you give us anything, any sense on the ballpark revenue loss or number of days lost because of Dahej plant being nonoperational?

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Rahul Jain, SRF Limited - President & CFO [60]

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Again, Shaleen, what I said earlier also, the fact is that we don't believe that there will be revenue loss because we will be able to meet all our customer requirements. But it could range between -- unfortunately, that's not possible to quantify. It's very, very difficult to quantify it actually.

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Shaleen Kumar, UBS Investment Bank, Research Division - Associate Director and Analyst [61]

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Is it possible to give a Specialty Chemicals revenue growth? Because that will really help us to understand that -- how much we should build for next 3 quarters.

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Rahul Jain, SRF Limited - President & CFO [62]

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Sorry, Shaleen, that's a number that you will get annually only.

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Shaleen Kumar, UBS Investment Bank, Research Division - Associate Director and Analyst [63]

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Okay. Okay. So what exactly is (inaudible) -- what exactly is happening...

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Rahul Jain, SRF Limited - President & CFO [64]

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(inaudible) from the fact that the -- certain chemicals business over CPLY is around 26%, let's say, it's around INR 400 crores to about INR 600 crores or INR 470 crores to INR 600 crores between June '18 to June '19. The growth, you have seen a certain number in Q4 FY '19 as well, which was roughly about INR 840 crores. So to my mind, all those products that were kicking in at that point in time are also giving us growth today. But because of the shutdown, some of that growth has tapered down. Over a period, that should come down actually.

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Shaleen Kumar, UBS Investment Bank, Research Division - Associate Director and Analyst [65]

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Okay. Okay. And impact on margin is largely due to fixed costs? Or is it because...

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Rahul Jain, SRF Limited - President & CFO [66]

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I already gave you the operating leverage, Shaleen, and...

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Shaleen Kumar, UBS Investment Bank, Research Division - Associate Director and Analyst [67]

--------------------------------------------------------------------------------

Yes. And just one bit, on refrigerant gas, since there is a kind of a slowdown we are witnessing, is there --is the pricing also softening? Or is it stable? Or is it still improving?

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Rahul Jain, SRF Limited - President & CFO [68]

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Depends upon the market that you are looking at, Shaleen? When we look at, let's say, from Q2, I don't think prices are softening, but mergers are in fact rising. From a R-134a perspective, again, we believe prices on an overall global perspective are rising. But it could be most likely a different ballgame as of now. Blends could be again a different ballgame depending upon where you are supplying, what mix you're supplying and what kind of blend you are supplying. So I think from an overall trend perspective, I would say the prices are either stable or rising. But depending upon what blend you're looking at, some of it may also be falling.

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Shaleen Kumar, UBS Investment Bank, Research Division - Associate Director and Analyst [69]

--------------------------------------------------------------------------------

And domestic level, in domestic market?

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Rahul Jain, SRF Limited - President & CFO [70]

--------------------------------------------------------------------------------

It is -- we believe it is rising still, Shaleen.

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Operator [71]

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The next question comes from [Chandra Mouli] from (inaudible) Securities.

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Unidentified Analyst, [72]

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Yes. Sir, the packaging business, is -- the margin is sustainable?

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Rahul Jain, SRF Limited - President & CFO [73]

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Sir, I indicated in the call earlier as well, we believe that the new lines that are coming up in the [built up] business will have an impact on the margin going forward. But I would really like to see them to be at similar levels, but rest assured, this was a good quarter that we had. But going forward, we have guided earlier also some of the margins may not be as much.

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Unidentified Analyst, [74]

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Okay. And but (inaudible) chemical, even when you look at last quarter, you talked about (inaudible) the top line and the segmentals which is a (inaudible) of INR [160] crores. At least, if you go back to that (inaudible) you are saying that the plant gets normalized now. Can we expect the numbers to go back to level at least?

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Rahul Jain, SRF Limited - President & CFO [75]

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You're asking from a Chemicals Business perspective, right?

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Unidentified Analyst, [76]

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Yes.

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Rahul Jain, SRF Limited - President & CFO [77]

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As I said, even in my last call, the operating EBIT margin for Chemicals Business roughly was about 20% during the last quarter. It really does depend on the mix of the product that we are selling at that point in time. And if you are, let's say, selling a good mix of the product, it's a batch that you are producing, some of that positive comes through. But again, we've said this multiple times. The business has to be looked at from an overall year-on-year perspective rather than a quarter-on-quarter perspective. So to that extent, we believe there will be some improvement in margins that will come through because of the operational leverage playing out that is better. But what will be that number is something that only time will tell.

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Unidentified Analyst, [78]

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Okay. And the last time, you said that the plant is going to get commissioned in June, July. But now there is a further delay and you are now talking about September in the (inaudible) that HFC?

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Rahul Jain, SRF Limited - President & CFO [79]

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Yes. So again, the duration (inaudible) happened, right? So we had lost some 3, 4 weeks because of that as well. So we had to concentrate our energies back on Dahej, which has led to some of the delay. I agree we had said June, July, but yes there is a -- let's say an 8-week delay that has happened on the account.

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Unidentified Analyst, [80]

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September, that will be good.

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Rahul Jain, SRF Limited - President & CFO [81]

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We are all hopeful like that.

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Operator [82]

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Our next question comes from Mr. Bhavin Shah from ICICI Securities.

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Bhavin Shah;ICICI Securities;Analyst, [83]

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Yes. I have 2 questions. Firstly, about the -- you mentioned that you had launched 2 molecules for Pharma and for agro business as well. So can you please share the potential of these 2 molecules? And what could be the revenue size or the market size, if you can share? And for which therapy it is related to in the Pharma business?

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Rahul Jain, SRF Limited - President & CFO [84]

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So as I said during my initial comment, we are unable to give you the details of that because that will effectively depend on my customers' final formulation gaining traction. This is more to indicate to you that our R&D efforts are yielding results. We are in a position to launch newer molecules for our customers' requirements. But what will be potential for each molecule is something that we are unable to quantify as of now and be able to give you any details on that.

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Bhavin Shah;ICICI Securities;Analyst, [85]

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But the operating margins would be more or less in line with our base business right, base chem business?

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Rahul Jain, SRF Limited - President & CFO [86]

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Overall, because it's a high-value product, it should be better from a molecule-by-molecule perspective.

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Bhavin Shah;ICICI Securities;Analyst, [87]

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Right. Right. And can you share some impact on the other expenditures because of Ind AS 116. Is there any impact during this quarter?

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Rahul Jain, SRF Limited - President & CFO [88]

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See, Ind AS 116 from a PBT perspective, has very little impact.

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Bhavin Shah;ICICI Securities;Analyst, [89]

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In other expenditure, is there any impact?

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Rahul Jain, SRF Limited - President & CFO [90]

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There will always be about INR 1.5 crore to INR 2 crore. There will be -- EBITDA will be higher. And yes, PBT will remain the same. (inaudible) also behind.

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Operator [91]

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Our next question comes from [Aditya] from Invesco.

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Unidentified Analyst, [92]

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You mentioned operating leverage will help the Chemicals business, but is it fair to assume that the specialty part is growing much faster than the Refrigerants Business, so even the product mix should help the margins in the Chemicals Business?

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Rahul Jain, SRF Limited - President & CFO [93]

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The product mix should help the margin in both, not just Specialty but in the other Chemicals Business as well. But again, I may not be in a position to give you details of each business separately, unfortunately. That's the number -- on a normalized basis, you will get that number when we do our annual call.

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Unidentified Analyst, [94]

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I understand. What is the R&D spend?

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Rahul Jain, SRF Limited - President & CFO [95]

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Roughly about INR 89 crores to INR 90 crores on an annualized basis, depending upon how much CapEx (inaudible) can be higher depending upon requirements. But yes (inaudible) about INR 85 crores to INR 89 crores on an annualized basis.

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Unidentified Analyst, [96]

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I see. This was FY '19. And FY '20 estimated?

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Rahul Jain, SRF Limited - President & CFO [97]

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It will be certainly higher than what we have reported in the past, but unfortunately can't give you exact number on it.

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Unidentified Analyst, [98]

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And the Packaging sales growth is just demand-led, right? There is a -- what is the utilization in those -- the capacity utilization right now?

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Rahul Jain, SRF Limited - President & CFO [99]

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From what perspective?

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Unidentified Analyst, [100]

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The Packaging Films business, what is our capacity utilization?

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Rahul Jain, SRF Limited - President & CFO [101]

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Well, absolutely full as ever, choc-a-block.

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Unidentified Analyst, [102]

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Choc-a-block, sir. But we are seeing -- we are still seeing growth in this business, top line growth?

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Rahul Jain, SRF Limited - President & CFO [103]

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Top line, it's clearly visible from the numbers. On an annualized basis, CPLY, we've grown around 11%. From a corresponding period last year, it's grown about 13%. So the growth is actually stemming from both being able to choose the assets that are better, being able to produce more, being able to produce value-added products and, therefore, get a higher sales realization as well.

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Unidentified Analyst, [104]

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I see. Number third, so you're through this kind of growth -- so you are running at full utilization, but of course, value addition, like you explained, is helping growth at the moment. But do you think this can slow down or be no growth in FY '21 or maybe even in the next few quarters or you think you can -- you will still be able to manage by these efforts that you mentioned?

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Rahul Jain, SRF Limited - President & CFO [105]

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Again, the fact is that we indicated a bit of a slowdown in the Packaging Films business going forward because of the fact that, as I told you, 2 new lines, one in India and the other one in Indonesia coming up. Because of which, there will be likely some erosion in price. To that extent, there will be lower margins as well. But the big growth will actually come in when our Hungary plant and our Thailand plant will get operationalized.

So we will look forward to seeing more growth in the business from a value or, let's say, sales value perspective once these plants come through. Whatever additional growth comes in from those plants capitalized, will be largely in the nature of some volume growth, which can't be very significant and some price-related growth that can come in. But obviously, when you look at price, because of the 2 new lines coming in, there could be some erosion of that as well.

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Unidentified Analyst, [106]

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Right. And our capacity will come in March and September, respectively, Thailand and...

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Rahul Jain, SRF Limited - President & CFO [107]

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(inaudible)

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Unidentified Analyst, [108]

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And there's no change on that?

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Rahul Jain, SRF Limited - President & CFO [109]

--------------------------------------------------------------------------------

Let's see. As of now, there is no negative news.

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Operator [110]

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The next question comes from Tejas Sheth from Reliance Nippon AMC.

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Tejas Sheth;Reliance Nippon Life AMC;Analyst, [111]

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Just one question. With this U.S. and China trade war worsening, how has been our inquiry related to R-134a for exports to (inaudible)?

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Rahul Jain, SRF Limited - President & CFO [112]

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So again, when we look at from an R-134a export perspective, I think our quantities have actually gone up very, very significantly. Our inquiries are also pretty full. But whether it is because of the trade war, I really am unable to say that, Tejas. Fact is that between Q1 FY '19 and Q1 FY '20, export sales of R-134a have been substantially high.

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Tejas Sheth;Reliance Nippon Life AMC;Analyst, [113]

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Any number you can share vis-à-vis the pricing between our exports to U.S. and China exports to U.S. how different they would be? Including the tariff they have implied on China imports?

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Rahul Jain, SRF Limited - President & CFO [114]

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See, again, the way a business happens in the U.S., there will be a landing price, you will give a small, let's say, tariff to discount on it and the price that you will return in. But again, you would also remember that about a month ago, I think there was some GSP benefit that used to come to Indians that was withdrawn by Mr. Trump. So -- but the, let's say, my landed price would have been slightly higher.

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Tejas Sheth;Reliance Nippon Life AMC;Analyst, [115]

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Okay. And hence, with the new capacity coming in and with higher realization and higher operating leverage because of the new capacity, would our margins be meaningfully higher in R-134a, maybe 12 months down the line?

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Rahul Jain, SRF Limited - President & CFO [116]

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So other than looking at it only from an R-134a perspective, we should look at the entire (inaudible) perspective. And when we look at that, most certainly that should be the case.

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Operator [117]

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The next question comes from Mr. Jignesh Kamani from GMO.

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Jignesh Kamani;GMO;Analyst, [118]

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Sir, just want to know on the PTFE segment, what kind of IRR and ROCE range we are looking on that? Because if you think about industry leader in the India, until now they're not operating in healthy (inaudible) ratio in IRR.

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Rahul Jain, SRF Limited - President & CFO [119]

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I mean when I was talking about the PTFE, Jignesh, I had commented the fact that our intent is to leverage our R&D and that technology capability in the business. The intent is not to produce a standard low-value grade. The intent is to produce a higher-quality grade. But when you get up in -- get, let's say, started with the business, you start with the base. I don't believe it is a short-term play. It is a more long-term play. We would really like to see ourselves positioned over a long period with the majors of the world. So again it will be that threshold requirements. On a most conservative basis also, it does lead to IRR (inaudible) requirements.

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Jignesh Kamani;GMO;Analyst, [120]

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Sure. But when you have much better value added mix, maybe you can say [therefore] higher down the line, it will be also in line with our Specialty Chemicals segment? Or it will be much inferior today?

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Rahul Jain, SRF Limited - President & CFO [121]

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Difficult to compare like that. But yes, let us say that from a PTFE segment on a specialized basis, we expect anywhere between 3% to 4% higher return on capital employed from our regular, let's say, commoditized businesses, looking at that...

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Operator [122]

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Our next question comes from Mr. Abhijit Akella from India Infoline.

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Abhijit R. Akella, IIFL Research - VP [123]

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I just wanted to check, first of all, in the Packaging Films Business, was there any one-off which is an -- any inventory gain or anything this quarter?

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Rahul Jain, SRF Limited - President & CFO [124]

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No.

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Abhijit R. Akella, IIFL Research - VP [125]

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Okay. And did I hear you correctly, you mentioned that in 2Q, in the Technical Textiles Business, there might be an inventory loss?

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Rahul Jain, SRF Limited - President & CFO [126]

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Yes.

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Abhijit R. Akella, IIFL Research - VP [127]

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Okay. And any quantification that you might be able to provide there?

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Rahul Jain, SRF Limited - President & CFO [128]

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Again, that will depend on how September closes out. So now the prices seem to have fallen about 15% to 20%. The amount could range between INR 7 crores to INR 12 crores overall. But again, we've given this to you earlier, also inventory loss, the way accounting gets done gets percolated quickly, and inventory positive only comes out positively for the margin. So we've had this discussion many times, Abhijit. So I don't believe this is something that you should go ahead and look, let's say, peer through the rail, and look at it. But this information that we wanted to give you so that next time it does not come as a surprise.

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Abhijit R. Akella, IIFL Research - VP [129]

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Sure. I appreciate that. On the PTFE capacity, how long do you envisage to ramp it up to the full 5,000 tons post the data for commissioning? Will it take 2 to 3 years to sort of stabilize the technology and gain market share? Or do you think it can be faster than that?

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Rahul Jain, SRF Limited - President & CFO [130]

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You know the answer pretty well. 2 to 3 years is a good judge of us to be able to ramp up that capacity.

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Abhijit R. Akella, IIFL Research - VP [131]

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Okay. And last quick thing, the 2 pharma molecules you mentioned in Specialty, so are these for newly introduced pharma drugs being introduced? So I mean essentially we have forayed into the patented...

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Rahul Jain, SRF Limited - President & CFO [132]

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,

Collaboration with, let's say, innovators. So I understand that they are in the process of filing their formulations.

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Abhijit R. Akella, IIFL Research - VP [133]

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Right. And if these come to fruition, then we have to set up a cGMP facility or something like that?

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Rahul Jain, SRF Limited - President & CFO [134]

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Only time will tell. As of now, I see cGMP is pretty much available for them to get serviced. But these are slightly longer-term requirements and longer-term plays.

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Operator [135]

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The next question comes from (inaudible) from [Alpha Accurate PMS].

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Unidentified Analyst, [136]

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I have 2 questions. One is, now this GIDC issue as well as the plant stabilization issues are resolved and can we, again, given in the Q4 '19 [run rate]...

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Rahul Jain, SRF Limited - President & CFO [137]

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Can you a bit clearer? I'm unable to get you.

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Unidentified Analyst, [138]

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Yes. Is it clear now? Hello?

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Rahul Jain, SRF Limited - President & CFO [139]

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Better.

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Unidentified Analyst, [140]

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Yes. I'm just asking for GIDC issue as well as the plant stabilization issue in Dahej. Is it resolved? And can we regain the Q4 run rate again by the Q2 of financial year '20?

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Rahul Jain, SRF Limited - President & CFO [141]

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So it is resolved.

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Unidentified Analyst, [142]

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Hello?

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Operator [143]

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Sir, I am so sorry to interrupt. Can you have your microphone a little away from you because there is some beeping noise.

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Rahul Jain, SRF Limited - President & CFO [144]

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It is resolved. And we are working with GIDC to resolve any data issue that are (inaudible) higher. But unfortunately, I can't tell you whether (inaudible).

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Unidentified Analyst, [145]

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(inaudible)

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Rahul Jain, SRF Limited - President & CFO [146]

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(inaudible)

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Unidentified Analyst, [147]

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On the CapEx side slowdown, you have seen some (inaudible).

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Operator [148]

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Your voice is breaking. Can we move on to the next question, sir? That is from (inaudible) from Edelweiss.

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Sneha Talreja, Edelweiss Securities Ltd., Research Division - Research Analyst [149]

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(inaudible)

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Rahul Jain, SRF Limited - President & CFO [150]

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I'm unable to get the question. The voice completely cracked.

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Operator [151]

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Your voice is breaking out, sir. I'm so sorry.

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Sneha Talreja, Edelweiss Securities Ltd., Research Division - Research Analyst [152]

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Can hear me now?

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Operator [153]

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Yes. Please go ahead.

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Sneha Talreja, Edelweiss Securities Ltd., Research Division - Research Analyst [154]

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(inaudible)

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Operator [155]

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We have the question again from Mr. (inaudible).

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Unidentified Analyst, [156]

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(inaudible)

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Operator [157]

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This concludes the conference call for today. You may disconnect your lines now and have a great day.