DCMSHRIRAM — earnings call

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Questions and answers

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, we will now begin the question-and-answer session.

We have the first question from the line of Ahmed Madha from Unifi Capital.

Please go ahead.

Ahmed Madha

My first question is on the outlook of sugar business.

Our FY ‘22 was relatively poor than the FY ‘21 because of the lower export volumes, also our domestic volume quota was relatively lower.

So, how do you see the next 2 fiscal years panning out with the new grain-based distillery capacity coming up?

And one more question on the sugar side is that even though we are increasing the share of refined sugar and ethanol capacity, how does it impact the realization and the profitability?

Ajit Shriram

Essentially the last season in Central and East Uttar Pradesh, there were adverse weather conditions, first with a long spell of drought and high heat.

And then subsequently, there were 2 spells of very heavy rainfall.

So, this decreased the yield both in central UP and also East UP and also adversely affected the recoveries.

So, that was primarily the reason for lower sugar crush last year.

This year, I think the weather patterns have been relatively decent and we do hope that our volume will increase significantly compared to the previous crushing season.

On the ethanol front, as mentioned in the opening remarks, we are doing an expansion which will be commissioned in Q3FY23.

And we’re also very hopeful with this Government's new push on ethanol for also bringing forward the 20% blend to 2025.

And last year average blend was roughly 10% plus.

We're hopeful that the coming year, the blend on an all-India basis will be about 11% plus.

So, we’re positive on the ethanol front as well.

Ahmed Madha

Last one, the refined sugar bit, if you can answer.

Ajit Shriram

Our percentage or refined sugar, as a Company, was much lower than our peers.

And we will increase our refined sugar production to roughly 60% of capacity.

And we do hope to get a premium of between 70 paise to 80 paise per kilo on the refined sugar vis-à-vis normal sulphated sugar.

Ahmed Madha

The next question is on the PVC side, the vinyl business as you call it.

So, Q4FY22 realization were close to 135 - 140, then current quarter it was close to 128 - 130.

What we see as of now is the prices are almost at Rs.

110 or may maybe below that.

So, how is your outlook on the PVC demand dynamics in this country and especially the increase in the imports of China?

I know that you may not have the longer-term view, but how do you see going forward for the next couple of quarters?

K.K. Kaul

Yes.

You're right.

PVC prices are seeing a very sharp decline.

In fact, the decline started somewhere in the month of February when the anti-dumping duty on imports from China was removed.

And then in May the customs duty was reduced further from 10% to 7.5%.

But in the last 2 weeks or so beginning of July, we have seen some very sharp declines in the prices.

And today, prices are pretty low.

But obviously, the demand is still holding.

But unfortunately, we have large imports coming from China.

The consumption in China has dropped because of the real estate.

PVC is a construction polymer.

So, the real estate in China is badly hit, and in turn, they are pushing large quantities into the markets in India.

But we expect that this reaction of sharp drop in prices is possibly a knee jerk reaction.

The fundamentals of the cost haven't still changed.

On a long-term basis even the exporters may not find it viable to export at these kind of prices.

So, the prices should look up then and that's really difficult to predict at this point of time.

But the consumptions are still holding.

Ahmed Madha

Last bit on the CAPEX front.

We have increased our CAPEX from Rs.

3,300 crore to Rs.

3,500 crore.

Now it is basically a request, if you can help us break down our CAPEX product wise and segment wise in the capacity if possible?

Amit Agarwal

Sure.

One, I think the increase is primarily because there were more Capex added like for Fenesta extrusion plant, which will be about Rs.

47 crore.

So, I am just explaining Rs.

3,300 crore to Rs.

3,500 crore first, right?

So, there are some Capexs which got added which led to this increase.

But otherwise, broadly in chemicals, we're investing close to about Rs.

2,800 crore to Rs.

2,900 crore.

In sugar, we're investing close to about Rs.

550 crore and the rest.

And in chemicals, the larger projects that we have is one is the captive power plant which is 120 megawatt.

And then there is caustic capacity which is 850 TPD along with a 600 TPD flaker.

Then we have epichlorohydrin which is about 52,000s ton per annum and we have hydrogen peroxide which is 57,750 tons per annum.

So, these are the major projects.

In sugar we have 120 KLD multi-feed distillery.

We are expanding the crush capacity by about from 3000 TCD, so from 38,000 TCD we will move up to 41,000 TCD and then the refining capacity.

So, today out of my total crush, whatever sugar I manufacture about 15% is refined which will move up to about 60% post these CAPEX investments and we also have a potash capacity.

We will be extracting potash from distillery ash, so that’s another new investment which is about 4,600 tons per annum.

So, these are broadly the capacities and the CAPEX.

Ahmed Madha

So, what will be our peak net debt by the end of FY23 or whenever the CAPEX gets completed?

Amit Agarwal

It will depend on the cash flows but my sense is approximately net debt should be around 1,500 crore by end of FY23.

Ahmed Madha

Just a simple question that chlorine so with the current capacity of caustic and then incremental 850 TPD, I am assuming that there will be some extra chlorine left after the use for aluminum chloride and ECH, so have we planned anything going forward for FY25 on this front?

Amit Agarwal

So, my current chlorine consumption if I look at Bharuch and if I exclude hydrochloric acid then my current consumption in Bharuch is about 5% captive and in Kota is about 30% captive.

In Bharuch I also supply at current level almost 40% of my chlorine is through pipelines.

Going forward this 40% broadly we should be able to maintain which is through pipelines and this 4% captive will move up to over 10% after the entire complex get expanded both on epichlorohydrin as well as 850 TPD.

So, that’s the current captive consumption.

But we definitely are looking at some more investments in chlorine downstream to increase our captive consumption.

So, those are being looked at.

Moderator · Conference Operator

We have the next question from the line of Pratiksha Daftari from Equitas Investment.

Pratiksha Daftari

My first question is on sugar division.

If you could just give the details of sugar production for the whole season that we finished in this quarter and what would be the valuation of the inventory at the end of 30th June?

Amit Agarwal

For this year our total crush was about 549 lakh quintals, our production was close to about 54-55 lakh quintals and our inventory valuation was at about 3,307.

Pratiksha Daftari

What was the recovery for this season vis-à-vis last year?

Amit Agarwal

Recovery was I think close to about 11.36 on C-Heavy basis.

Pratiksha Daftari

And how this is compared to last year?

Amit Agarwal

So, vis-a-vis last year it was lower by about if I remember correctly by about 0.4%.

Pratiksha Daftari

The Brazil crushing that is going on if you could give some highlight on that.

Ajit Shriram

The Brazil crop is undergoing stress and as mentioned in the opening remarks because of oil prices a large part of the crop has been diverted to ethanol.

So, the world actually is seeing India as a supplier for the world market and as we saw last year or in the ongoing sugar season our exports are roughly 9.5 to 10 million tons on all India basis andwe do expect that in the next sugar year also the exports will be roughly 10.5 to 8.5 million ton from India.

Pratiksha Daftari

My next question is on caustic, you mentioned that we expect margins to normalize in next two quarters, so just wanted to understand your perspective on demand scenario going ahead and whether do we expect any serious change in global supply in next few quarters?

Ajay Shriram

Our estimate as I mentioned was that the prices last quarter were about $700.

They are down by about 5% to 10%, but I think what good thing has happened is given the figures of the exports from India and that has gone up quite a bit.

So, that helps to bring some sort of a balance.

The expectation is that the industry and companies like us also are exporting and that will keep the balance.

So, we don’t expect the prices to go down more than 5%-7% over the next couple of quarters.

Pratiksha Daftari

And how about demand, have we seen any slowdown in demand specially from sectors like textile or paper?

Ajay Shriram

No, fortunately I think demand is quite robust.

I think that way if you see the Indian economy is doing quite okay, so demand is quite alright.

Pratiksha Daftari

And any change in global supply, which expecting China supply to be increasing going ahead or anything specific in Europe?

Ajay Shriram

The challenge always is one is in Europe one is seeing that the energy prices are going up a lot and that’s having a very major impact.

So, we don’t know what is going to be the outcome in the next couple of months depending on energy availability from Russia and from other countries.

In China frankly I think all of us know that the actual data availability is very low.

We are seeing the impact on PVC but as of now in terms of the caustic front yes, they are exporting more, there is no doubt on that.

But I think the export market has taken up in India they have to export also at the decent price, so I think that is moving okay.

Moderator · Conference Operator

We have the next question from the line of Anurag Dinkar Patil from Roha Asset Management.

Anurag Patil

For bio-seed business how do you see the Q2FY23 panning out because I guess some of the sales got postponed due to delayed monsoon.

Can you throw some light on that?

K.K. Kaul

Yes, because of the delayed monsoon, the acreage under paddy and the coarse crops has declined and its possibly that we may see a decline in this sowing in paddy.

In some states there is no longer any possibility of this being recovered but in some states, there is still a possibility that some of it would be recovered because of the decent rains that had happened in these states particularly UP and Bihar.

But paddy overall possibly be a decline in the crushing.

Anurag Patil

On cotton side, how is the acreage situation currently?

K.K. Kaul

Cotton has done well in terms of acreage and I think the final figures we should be seeing coming in the next month or so.

But as of now because of reasonably good rains in the cotton growing areas, particularly in south and center, the acreage is pretty good and because the prices are also good and therefore cotton has faired okay.

Anurag Patil

In the cotton illegal STBT how are they going on currently and have the volumes increased compared to organized players?

K.K. Kaul

Illegal cotton keeps on growing but there is also a new trend that farmers are moving into non-branded kind of cotton seeds.

So, cotton seeds apparently are also good in quality but there is a significant shift to that from the branded products to the non-branded so, the illegal cotton continues to be a challenge for us.

Moderator · Conference Operator

We have the next question from the line of Pratik Tholiya from Systematix.

Pratik Tholiya

Just if you could also highlight on the acreages and the crop quality of sugar cane because we see that UP especially has received below normal monsoon so far.

So, how is the cane condition and whether there can be any impact in terms of availability of cane or even the recoveries can go down because quality of cane can suffer due to lack of monsoon?

Ajit Shriram

Are you talking about the entire UP?

Pratik Tholiya

I’m talking about entire UP and specially I think East and Central UP is down almost 50% in terms of rainfall.

So, if you could just highlight on, maybe your catchment area also if you can just highlight?

Ajit Shriram

As I have mentioned earlier, I think last year we had very adverse weather conditions in terms of the heat wave and then a couple of instances of very-very heavy rainfall.

This year comparatively it’s been relatively more steady and also the farmers have got paid in time and the irrigation efforts by the farmers in the factories are going on well and we do hope that the yields will be as good as normal in the coming seasons.

Pratik Tholiya

What would be the current ex-factory prices for sugar in UP?

Ajit Shriram

Roughly 3,500 per quintal.

Moderator · Conference Operator

We have the next question from the line of Vighnesh Iyer from Sequent Investments.

Vighnesh Iyer

I just wanted to know what is the capacity utilization for the caustic soda and the related chemicals as well as the PVC, if you could give me percentage?

Ajay Shriram

As I had mentioned in my opening remarks in the last quarter, our capacity utilization for our caustic soda plants was 91% compared to 84% in the corresponding quarter last year.

Vighnesh Iyer

And the aluminum chloride and the PVC resins, if you could give me?

Amit Agarwal

For PVC it was 90% capacity utilization in line with what we had in the same period last year.

Aluminum chloride was almost 100%.

Vighnesh Iyer

Also, could you tell me quarter-on-quarter, how much have we exported caustic soda?

If you could give me a number, more or less to understand if there is an increase in export quarter-on-quarter as such, if you could give me some data at present?

Ajay Shriram

Again, as I mentioned in the opening remarks that in this first quarter of this financial year, exports from India were about 54,000-55,000 tons and corresponding quarter last year there were imports about 3,500 tons.

So, actually, the export was much higher as well, was almost 54,000-55,000.

I gave the exact figure when I mentioned that and even this month and future months the industry expects exports to be in a fairly healthy range.

Vighnesh Iyer

So, there is traction, from export market as well as domestic market for caustic soda?

We can more or less infer that way, right?

Ajay Shriram

Yes, I think frankly as one is seeing fortunately that the export potential and the export growth while industry also quite stable.

The industry is feeling quite confident that they will continue export at a fairly rate and if that carries on, I think it’s going to be helping in balancing out.

Moderator · Conference Operator

We have the next question from the line of Saket Kapoor from Kapoor & Company.

Saket Kapoor

Firstly, on the continuation to our last speaker only.

We are looking I think so for 1- million-ton capacity addition in caustic soda in phase manner especially in the Western part for FY23. So, taking that into account and currently the China factor; it is more inclined to the demand or whether there would be an oversupplies that we can anticipate going ahead with this capacity additions?

Ajay Shriram

The good thing is that the demand in India is also growing at a healthy pace and with the economy is having a GDP growth in the range what it is 7%-8%, that’s pretty good going and the demand in India is also moving quite well.

Export markets have also opened.

See the commodity business is we always find when new capacities come, there may be a couple of quarters of the little tightness because of excess capacity but with good growth of 7%-8% its evened out and the second point is in any investment, you may glad to agree now increasing our caustic by 850 tons per day and flakes by 600 tons per day, we are simultaneously looking at how to improve our efficiencies and reduce our cost.

So, that is again an advantage we get with expansions.

It is frankly in the long-term a win-win situation of expanding our capacity.

Saket Kapoor

In the earlier remark about the vinyl prices going down, Shriram sir did mention about that led to the China factor, the lockdown in China and therefore leading into a large import or dumping by them.

So, have we seen the same trend for the caustic soda prices also, post-June I think so in the presentation also we had mentioned about prices trending lower?

So, what’s currently the trend for the ECU, if you could throw some more light for the same?

Ajay Shriram

Caustic soda fortunately we are not having that sort of pressure coming in from China.

PVC as a solid is much easier to export and move around than what it is for caustic soda.

So, we are not seeing that.

In fact, India is a net exporter which is a very good situation we are in.

And we expect the exports to carry on, I don’t think it will be too bad.

Yes, the prices have come down by 5%-7% and as the commodity moving 10% up and down, industry has to accept that because you can’t expect always going up or always going down.

It doesn’t go that way.

The important point is our we competitive on a world scale and that is something which we are, we are giving a lot of focus in that in our operations and our cost of production, our customer relationships etc. So, that is a strong point and otherwise we are expecting next two quarters of caustic soda to be quite alright.

Saket Kapoor

Which markets are we targeting for the export segment, which geographies?

Amit Agarwal

Exports is going to Southeast Asia, that’s one big market and they are also going to some African countries.

Saket Kapoor

If I correctly remember, Japan-Iran have been importers to the country for India.

So, how are they positioned, what is the material movement from these two geographies Japan and Iran?

Ajay Shriram

Yes, you are right.

Japan also is in fact Mitsubishi; we are in touch with them also to import into Japan.

So, that is moving from there.

Iran I am not sure.

Amit Agarwal

Iran always would come to the market with certain you know in some pockets; they would come in export and probably depress the market.

It never a consistent supplier to India or globally it is not a consistent supplier so it’s more in pockets that they come and sell and off late we haven’t seen them coming in, at least not in India.

Saket Kapoor

When we give the 50,000 figure of export, what quantity should we factor in from the imports from Japan in the country?

Ajay Shriram

No, I don’t think it’s imports, I think India is continuing with Mitsubishi and all to export from India.

Saket Kapoor

So, there is no import as of now from the Japan continent?

Amit Agarwal

So, we have imports like in this quarter, our imports in the country the imports were about 11,000 tons and exports were about 64,000-65,000 tons.

Out of that 11,000 how much was from Japan; I am not aware of that.

Saket Kapoor

Coming to this value-added part of the story.

As you have told the chlorine has to be consummated in the value-added segment.

So, with the increased caustic soda production from our side, by what percentage will the chlorine consumption internally will go up and what percentage of value-added products increased in products, sales are we contemplating?

Amit Agarwal

So, currently we are at around 4% captive consumption excluding HCL.

With all the capacities coming up including 850 TBD of caustic, we will go up to around 10% and as I mentioned we also have 40% of our supplies going through pipelines to dedicate customers on chlorine.

Saket Kapoor

And currently chlorine spreads are positive or negative for us, for this quarter?

Amit Agarwal

They are negative.

Saket Kapoor

By what amount?

Amit Agarwal

In the range of around 4,000 to 5,000 negative.

Saket Kapoor

Coming to the Bioseed segment.

I think so last quarter, for the March I think to be spoke about this turnaround plant for the Bioseed segment for 2 years or 3 years down the line.

What is stored in for the Bioseed segment going ahead and what can we expect in terms of this business contributing to the total price and profitability including?

K.K. Kaul

In Q1 we have seen, in terms of the turnaround, the early signs that’s happening but obviously one quarter can’t be a complete representative but the early signs in terms of the acceptance of some of our new product pipelines, new products and new geographies that’s being good and we hope that definitely this turnaround has started and during the year we should be able to turn it around as we had anticipated in the previous year when we talked about it.

Saket Kapoor

Last year it was a course correction exercise I think so slow-moving inventory part and all which was articulated by you.

So, this year that is not going to play out so this year will itself look better for us?

K.K. Kaul

Absolutely, they look much better.

Moderator · Conference Operator

We have the next question from the line of Ahmed Madha from Unifi Capital.

Ahmed Madha

I had a question on the PVC business.

So, currently we are manufacturing PVC by calcium carbide route.

Do you think is there any incentive to allocate capital to manufacture suspension PVC via a VCM route?

K.K. Kaul

Currently the margins between VCM and PVC at the current prices are not very good.

On an average it used to be $150 but it’s gone down below $150.

So, we have been evaluating it quite a bit but for us we didn’t see any merit in following that VCM route.

Ahmed Madha

As of now also you don’t see any merit?

K.K. Kaul

See the economics are largely dependent on energy price.

The energy prices are high, the margin between VCM and PVC also goes down.

Moderator · Conference Operator

As we have no further questions, I would like to hand the floor back to the management for closing comments.

Please go-ahead sir.

Ajay Shriram

Thank you.

Ladies and gentlemen, thank you very much for your participation in our Q1 Financial Year ‘23 Earning Conference Call.

We will continue to work on our strategic direction of growing our businesses using scale, multiple revenue streams, enhancing efficiencies and achieving higher integration.

We will also ensure that our balance sheet and cash flows remain strong.

At the same time, we are also conscious of our responsibility towards the environment, community welfare and our employees who are our true assets of the Company.

We are focused on building sustained relationships with all our stakeholders.

Once again thank you very much and we wish you safety and good health.

Thank you.

Moderator · Conference Operator

Thank you members of the management.

Ladies and gentlemen, on behalf of DCM Shriram Limited that concludes this conference.

Thank you for joining us.