DCMSHRIRAM — earnings call

The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.

Prepared remarks

Moderator · Conference Operator

Ladies and gentlemen, good day and welcome to DCM Shriram Limited Q2 FY23

We will now begin the question and answer session.

The first question is from the line of Nilam Saha from Ventura Securities Limited.

Please go ahead.

Nilam Saha

Sir, my question is some of your capacity data is in TPD format.

As per you, what is the acceptable number of days I should multiply it with to get annual capacity data?

Ajay Shriram

Generally, we look at approximately 330 days.

330-335 days can give you an idea what is the annual expected production level

Nilam Saha

Your PVC compound comes from your PVC resins business, right?

Ajay Shriram

From the PVC compound was a joint venture business, which we had with the Westlake for the last 5 years and we bought out the share from Westlake and now this is 100% subsidiary of the DCM Shriram Limited.

Nilam Saha

And its raw material comes from the PVC resin business, right?

Ajay Shriram

It comes from our PVC business as well as comes from outside.

We buy some materials from outside also where we require different grades of PVC for making particular types of PVC compounds.

Nilam Saha

Okay.

Is there a certain percentage of your PVC resin that you send to PVC Compound and certain percentage that you send outside?

I just wanted to know how much of it gets transferred to PVC compound.

Ajay Shriram

Let me put it this way.

I think the amount we send to a PVC compounding plant would be maybe 10% or 15% of our monthly production, even less than 10% because we buy material from outside also.

And we sell approximately 90% plus minus in the open market PVC.

Our total PVC production, around 90% we sell in the market and around 10%, we use in our PVC compounding because we buy it from Formosa Plastics also and other people for our PVC compounding plant where you require grades of PVC.

Nilam Saha

Thank you and have a Happy Diwali.

Ajay Shriram

Thank you.

Moderator · Conference Operator

The next question is from the line Ahmed Madha from Unifi Capital.

Please go ahead.

Ahmed Madha

Sir, my first question was regarding the caustic export volume.

So if I look at the sequential numbers, they have more than doubled, right?

So how should we interpret this number?

Is this because of lower domestic demand or we see better realization in exports or we are setting up the export markets now so that when next year the new capacity comes up, we can export significant quantities, How should we look at those numbers?

Ajay Shriram

It’s a good question.

See, I think there’s multiple reasons.

One of the reasons is that in Europe, because of energy prices being high, their production has come down.

So, demand has risen, because of that we are able to export caustic as I said, it was 1.39 lakh tonnes compared to 0.13 in the corresponding period first six months of the last financial year and this year.

So, this is opened up as an opportunity and of course, the price is also satisfactory compared to the Indian situation.

And you’re right Indian plants are also coming up.

So, if they get the opportunity to expand, it’s sort of put less pressure on the domestic market.

So, we are looking at exports and wanting to grow that.

Ahmed Madha

So, it will be assumed that going forward our export volumes will be close to 20% of total sales?

Ajay Shriram

I’m not sure it will be close to 20% of total sales that is a little high.

See all the things depend so much on what is the market position in the export market and the domestic market.

It’s a swing which happens.

Yes what India is trying to do is couple of the large aluminum manufacturers, whether it’s Vedanta or a couple of others on East side, who used to import caustic soda, we as industry is trying to get into contracts with them.

And rather than their importing caustic soda, Indian manufacturers will supply caustic soda.

So, that will then put less pressure on the domestic market.

So, we are working on that direction.

Exports at the moment is gone at 1.39 lakh tonnes in the first six months.

And we are attempting to increase it but depends a lot on the market.

Ahmed Madha

So, I’m repeating again, if we look at the new caustic capacity which is coming up in Q1 or Q2 of next year, how will the ramp up of this capacity will be?

Ajay Shriram

See the ramping up is happening there are new plants coming up.

So, that is going to add to the total capacity, India’s capacity will reach almost 70 lakh tonnes if you take the next three months or four months, it’s coming in.

But everyone at the moment because of the demand specially for chlorine, chlorine demand is fairly low and that is sort of pegging the manufacturing levels of the chlor alkali plants.

So, it depends a lot on the chlorine how that moves and that will determine what will be the capacity utilization of the plants.

Today everyone is a little apprehensive because of chlorine price.

And chlorine prices as you may be knowing is going negative.

It’s almost minus Rs.10,000 per tonne of chlorine.

So, that is having an impact on the total caustic soda, chlorine production.

Ahmed Madha

Okay, got it.

So, coming back to the chlorine part and the PVC part.

So, this year, this quarter we had minus 10 crore EBIT loss.

Now, if we assume that your volumes will ramp up because the breakdown in power plant has been restored.

So, does that mean that we will break even or there will be negative contribution margin?

Ajay Shriram

See, PVC difficult to say because as you’re saying internationally PVC pricing also have become soft over the last couple of months.

That’s having an impact, as I mentioned has come to sub $1,000 per metric tonne.

It was about $970.

And going forward we’ll have to see how it moves because China demand has also come down.

Europe demand has come down, in America because of the high inflation and interest cost the economy is pulling back.

The housing sector is not doing as well.

So, all that reduce the demand for PVC.

Ahmed Madha

So, my question is that in the sugar business, we have some high-cost inventory from last quarter.

So, with cane prices further revised upward and domestic sugar value is not going up.

How do you look at the sugar business margin, that’s first part and the second part is with increase in the sugar capacity by 4000 TCD does this mean that we have sufficient molasses for our 350 KLD ethanol production, these two questions.

Amit Agarwal

So, just to answer your first question in terms of carrying the inventory, we currently have about 14.6 lakh quintals of sugar inventory, which is at about Rs.

3300 is the cost.

So, the prices have been reasonably good.

However, they have not been able to cover the increased cost, the cane cost and the consumables cost which happened in the last season.

So, the only good part in sugar is that because the exports are happening, the inventory is at reasonable levels, so sugar prices are expected to remain stable, or depending on how the export prices are it might inch up a little bit, but we don’t see the prices coming off from current levels.

That is point one.

Also, just to add that, whatever investment we are doing in this sugar, there we are increasing our refining capacity.

Now that’s going to add straightaway about Rs.80 to Rs.90 per quintal to our margins, along with the ethanol capacity we are putting in, all and all the way you need to look at our sugar business is that we are looking to grow volumes not just in sugar, but we are complementing the volumes with ethanol, with value adding on sugar through refinery, with getting into the products like sulfate of potash which is from waste, and we continue to look at it.

So, that’s our thought process.

Near term plus-minus will continue but as a strategy will grow well in this business.

Ahmed Madha

Yes.

So, my question was that with 4,000 incremental TCD capacity coming up this season.

Do we have sufficient molasses for our 350 KLD ethanol production capacity?

Vikram Shriram

Yes, so our existing capacity is 350 KLD on C-molasses basis, or B-molasses it is about 450 KLD.

And so, we are short of molasses for the entire season.

We are short by about 15%.

Now, if you remember when we were putting up when we announced this project of 120 KLD grain-based distillery, there the tandem that we’re putting is 260 KLD grain.

So, the strategy is that we will be able to process grains to meet up the shortfall to some extent not fully although but to some extent we will fill up the shortfall in the availability of molasses to distillery at 15% of the existing capacity.

I hope I made myself clear.

Moderator · Conference Operator

Thank you.

The next question is from the line of Saket Kapoor from Kapoor and Company.

Please go ahead.

Saket Kapoor

Sir as in your opening comments you did mentioned about correlation between PVC and the caustic prices.

So, if you could dwell slightly more into it, how historically has been the correlation with now PVC prices on a continuous slide over the last one quarter, what should now be the impact on the caustic, are the dynamic aligned or are the geographies would be different this time sir.

Amit Agarwal

See, the way it works and the correlation that CMD sir was talking about, is essentially that when the construction activity is low and we all know globally construction activity has come down given the high interest rates and therefore the PVC consumption goes down.

And the key ingredient or one of the key raw material for PVC manufacturing is chlorine.

Therefore, the chlorine, so once the chlorine goes down which means the operating levels of global chlorine plants are coming down, which again as a consequence the caustic available is a little less globally.

And therefore, the prices have gone up.

So, if you see global prices which has gone down to close to about $500-550 I would say at the beginning of let say in the month of July now they are supposed to run $750 a level.

So, that’s some exact correlation is difficult to give you, but then those are some of the factors which help supporting the prices of caustic.

Saket Kapoor

But sir currently there is the glut because of more chlorine there in the market, that will not be allowing the caustic players to run at optimum levels going ahead.

So, that would directly put pressure on the utilization levels and hence the profitability for the domestic players would also be going down however, exports may support the volume up take, but the glut in chlorine needs more management rather than lower utilization level.

So, that understanding is correct sir?

Amit Agarwal

What do you are saying is right there glut in chlorine, and going forward at least for the new plants, I’m sure it will affect the operating rates, for the existing plant it is okay.

And therefore, with the new plants to ramp up my sense it will be a little slower than what would have been the expectation, but for the existing plant it should be okay, like so currently, we are operating at almost 95% capacity utilization for existing plant.

Saket Kapoor

Okay.

Vikram Shriram

I would like to just add that ultimately, chlorine demand is also growing because a lot of our customers are also expanding with this China Plus One story plus the whole chemical export story from India, a lot of our customers are also under expansion mode.

So, they may be temporary for some quarters or some periods, they may be a mismatch.

But the expansion and demand is also expected to be strong.

Saket Kapoor

Right sir, correct on that part so it will be transitory in nature going ahead as we maintain.

Moderator · Conference Operator

Thank you.

The next question is from the line of Pratiksha Daftari from Aequitas Investment.

Please go ahead.

Pratiksha Daftari

If you could just quantify the impact of breakdown the captive power plant and how much of the losses that we’ve reported, how much of that could be attributed higher cost could be attributed to the power plant?

Ajay Shriram

This is of the breakdown with Kota power plant?

Vikram Shriram

How much can we attributed to that.

Amit Agarwal

So, because of the break down in Kota power plant.

It was there for almost three, three and a half months.

The total loss would be in the range of around 25 crore to 30 crore for it this period.

Pratiksha Daftari

Okay, understood.

So, in the presentation we’ve seen that the international prices have gone up, but the domestic prices for caustic even adjusting for the chlorine hasn’t really moved up.

So, is there anything particular in the domestic market that is impacting the caustic dynamic, demand slowdown?

Ajay Shriram

I would put it this way, one, there’s always a timeline because you have contracts already which are there. so, that’s one and secondly also it depends a lot on supply demand, maybe some international deals which are done at a higher price.

But ultimately, the average price in India we are actually happy that it’s at least stable, it is looking that way for this quarter.

And the price impact also happens after a little time lag so it can’t happen overnight.

Pratiksha Daftari

So, is it fair to assume that the caustic prices have gone up in October vis-à-vis September for domestic markets for us?

Ajay Shriram

Marginally they’ve gone up, but unfortunately chlorine prices have gone down further.

Pratiksha Daftari

Okay.

And chlorine you said negative 10,000 a tonne vis-à-vis about four to 5000?

Ajay Shriram

Approximately.

Yes, it goes approximately that because depends deal to deal but approximately around that much plus minus.

Pratiksha Daftari

Okay.

Any particular change in demand outlook in the domestic industry, especially from alumina, textile and paper?

Ajay Shriram

That’s what the domestic demand is quite stable and it’s moving well.

Pratiksha Daftari

Okay.

So, basically the capacity utilization is being dragged, the constraint is only chlorine utilization not demand?

Ajay Shriram

Chlorine is a major factor which is impacting definitely there is no doubt on that, that is having an impact, but world economy we are seeing the geopolitics of the world.

And that is affecting each industry in a different way.

So, what’s happening today, something maybe more positive tomorrow or little less positive tomorrow we can’t comment or commit anything going forward.

But at least it looks like in India, the caustic soda, chlorine balance and demand as we are moving today will continue for the quarter.

Pratiksha Daftari

Okay.

On the sugar segment front, these rains off late the recent rain, has that impacted the crop in UP.

Amit Agarwal

So, it’s a little early to say, sugarcane is a very hardy crop.

So, however, the real impact, will have to be seen.

Pratiksha Daftari

Okay.

And if you could just share the cost of inventory valuation for as on 30th September, for that 14.7 lakh quintal?

Moderator · Conference Operator

Thank you.

The next question is from the line of Pratik Tholiya from Systematix.

Please go ahead.

Pratik Tholiya

Just wanted to just check what was the chlorine prices during the quarter.

If you’ve answered that I actually use that.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, as this was the last question for today, I now hand the conference over to the management for closing comments.

Ajay Shriram

Thank you.

Ladies and gentlemen, thank you very much for your participation at Q2 FY 23 earning conference call.

We will continue to work on our strategic direction of growing our businesses using scale, multiple revenue streams, enhancing efficiencies, furthering innovation, and moving further on a circular economy and sustainability.

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

We are conscious of our responsibility towards the environment, to our community welfare, and our employees who are the true assets of the company.

We believe in working towards planet, people and profits together.

We thank you for taking our time during the onset of the festive season.

And we take this opportunity to wish you and your family’s very safe and Happy Diwali and healthy and prosperous year ahead.

Thank you very much.

Moderator · Conference Operator

Thank you.

On behalf of DCM Shriram Limited that concludes this conference.

Thank you for joining us and you may now disconnect your lines.