DCMSHRIRAM — earnings call

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Prepared remarks

Moderator · Conference Operator

Ladies and gentlemen, good day and welcome to the DCM Shriram Limited

Thank you.

On behalf of DCM Shriram Limited, that concludes this conference.

Thank you all for joining us.

You may now disconnect your lines.

Disclaimer

This is a transcription and may contain transcription errors.

The transcript has been edited for clarity.

The Company takes no responsibility of such errors, although an effort has been made to ensure high level of accuracy.

Questions and answers

Moderator · Conference Operator

Thank you very much.

We will now begin the question-and-answer session.

The first question is from the line of Nirav Jimudia from Anvil Corporation.

Please go ahead.

Nirav Jimudia

Sir, I have two, three questions on the Chemical side.

Sir, when I see your presentation, particularly in terms of the production of caustic, I think we have clocked something around 1,920 TPD of production this quarter.

If we do some math and do the calculation, I think our chlorine production was close to 1,700 TPD.

If you can help us explain how much we have consumed internally for our SBP, Aluminum Chloride plant, how much was the sales to the pipeline customers and how much we have sold in the spot market.

And sir, if you can also share the market of chlorine within our area of operations predominantly Jhagadia because I was doing some sort of readings, and my understanding suggests that the market of chlorine within that Jhagadia region is close to 1,000-1,100 TPD of chlorine.

If you can share your thoughts, that would be very helpful.

Amit Agarwal

One, in terms of our captive consumption, see, we have two plants, one in Bharuch, Jhagadia, and the other is in Kota.

Put together, our captive consumption is close to about 18%, and through pipeline it would be another 35-40%.

Now in terms of market in Jhagadia, I do not have the number in terms of size of the market there right now, but what I understand is that the market is growing given that industries around us, whether it is Aarti, KLJ and other, they are also expanding and therefore we see the market growing.

Nirav Jimudia

Sir, in terms of the integration project what we have announced, I think that would further consume something close to around 235 TPD of Chlorine.

So, eventually when we will have or be in operating at close to 90% utilization, what sort of integration from current level of 18% of chlorine could go up to?

Any thoughts?

Amit Agarwal

So, that should go up from 18% to close to 32%.

Nirav Jimudia

On the 90% utilization assuming we continue to operate our plant at 90%?

Amit Agarwal

True.

So, see the major delta will come in Bharuch business, our Kota will remain more or less the same.

So, therefore, overall, as a chemical business from 18% will go up to 32%, and pipeline you can add another 35-40%.

So, more or less for the business as a whole, we will have 65% virtual certainty of supply and rest we are comfortable that we can supply in the market.

Nirav Jimudia

And sir, when we speak of selling our chlorine to the pipeline customers, how does the pricing work there?

Because in the spot market, I think prices fluctuates a lot, and it lot depends upon the production of caustic also.

So, when we sell through the pipeline customers, how the contracts, are there any fixed price contracts or are there formula-based pricing which is there and because of that the volatility in the Chlorine price is something like insulators from sales to our pipeline customers?

Amit Agarwal

So, Nirav, it is more about giving exit to chlorine.

I do not think it is so much about prices and the contracts are of all kinds, but mostly they are on spot basis.

Nirav Jimudia

Sir, second question is in the presentation, you have mentioned that though the capacities in India were increased and there were pressures on the realizations, but at the fag-end of the quarter, I think there were some spikes in the prices of caustic.

So, just wanted to understand from you like in between the quarters, let's say Q1 and Q2, the prices of caustic imported to India was close to $470, but our realizations have fallen.

So, our ECU has fallen from, let's say, 28 to close to 25.9 this quarter.

So, it is more related to the Chlorine prices and whether the increase in the prices in the international market very recently, what you have alluded in the presentation.

Similarly, do we have taken the price hikes also in the domestic market following the increases in the international market?

Amit Agarwal

One, I think the biggest reason why the prices have not followed international markets as in ECU is because of the chlorine.

Chlorine, if I remember correctly, Q1 was about 4,000 negative and in Q2 it was about 7,000 negative.

Currently, it is about 9000 negative.

Right?

And the other thing is there is always a lag in terms of international prices and the international prices went up only by September.

September second half is when we saw prices going up.

Ballpark, they have gone up by about $70 over the last 1.5 months.

And there is always a lag in terms of getting reflected in the numbers because there are always supply contracts for one to two months which are fixed.

So, therefore, they have impact.

Nirav Jimudia

But sir, safe to assume that how much, so the extent to which the Chlorine has gone negative from, let's say, -7,000 to -9000, that sort of price increases we have taken in order to maintain our ECU or slightly improve that.

Amit Agarwal

No, we do see our ECUs to be better in Q3.

Nirav Jimudia

And sir, last bit from my side.

So, when I was just going through our annual report, what we have clocked in terms of PBIDT for particularly the Chemical business was close to INR190 crore.

So, sir, safe to assume that last year was because of the pressure on the ECU and the other cost.

Was it more from the value-added products like hydrogen and aluminum chloride and SBP and less from the caustic chlorine business?

Amit Agarwal

From last year’s perspective, what you are saying is right.

But from this year’s perspective hydrogen will continue to add value.

It is the cost side where there has been a significant reduction in cost and therefore caustic also is going to be profitable.

On top of it, there are more volumes.

Moderator · Conference Operator

Thank you.

The next question comes from the line of Jainam Ghelani from Svan Investments.

Please go ahead.

Jainam Ghelani

Sir, my first question is on the anti-dumping duty.

The anti-dumping duty is with the Ministry of Finance.

So, if it is approved, how much benefit can we see in our profitability on the PVC segments?

Ajay Shriram

The anti-dumping duty ranges country to country.

The way the government has approved, or the Ministry of Commerce has approved.

The anti-dumping duty ranges in US, Thailand, Taiwan, Korea, Japan, Indonesia and China from the range of about $51 in Korea to China is between $82 and $125.

China would be an average I would say about $100.

So, it is ranging between this level, the highest band is in China, second is in US, $64 to $104.

So, I think with all these coming in, it is now with the Ministry of Finance, and this was just issued on the 30th of October.

It is very early right now.

So, it's gone to the Ministry of Finance and the industry is pursuing it with the Ministry of Finance.

Jainam Ghelani

And since our ECH plant will be commissioning in Quarter 4, we would need approvals from the customers.

So, how long would the approval process be for the same?

Amit Agarwal

The approval process ranges between, for domestic consumers, it will be anywhere between 1 to 2 months.

For overseas customers, it is a little longer.

It depends on application-to-application, but that's the ballpark range.

Moderator · Conference Operator

Thank you.

The next question is from the line of Parth Vasani, an individual investor.

Please go ahead.

Parth Vasani

My question is more related to CPVC resin.

I just wanted to know, is there any plan to make that special PVC, which is required to make CPVC resin which I believe most of the companies import?

Ajay Shriram

No, we actually have not talked about making CPVC resin in our company.

Parth Vasani

So, you are not planning to enter into the CPVC resin manufacturing?

Ajay Shriram

No.

Moderator · Conference Operator

Thank you.

The next question is from the line of Saket Kapoor from Kapoor Co.

Please go ahead.

Saket Kapoor

First a small clarification sir, you mentioned that the Chlorine price was negative for the 2nd Quarter was 5000 and currently it is trending at 9000.

Is this what you alluded?

Ajay Shriram

Chlorine in the negative pricing, yes.

Saket Kapoor

So, exit of September the negative has increased significantly.

What factors have led to this, and will this lead to lower utilization levels for caustic?

Amit Agarwal

So, Saket, this is the other way around.

One, this negative increase has happened more recently.

9000 I was giving you the number as on date.

For the quarter ending, I mean quarter ending September, which is 2nd Quarter, it was close to about 6,700 to be precise average negative.

And to answer your point that in fact, caustic utilization is the reverse.

The more chlorine, today what's happening, what is leading to lower prices is that more chlorine is being produced.

As new capacities have come up, prices are better for caustic, hence people are increasing their capacity utilization leading to more chlorine and therefore lower prices of chlorine.

Saket Kapoor

And for the offtake of chlorine, sir, I think you did allude to our steps we are taking for increasing the portfolio of value-added products.

Where are we in terms of the current captive use of chlorine and the external sales and what should be the number for H2 and next financial year?

Amit Agarwal

So, if I look at captive consumption including pipeline for the business as a whole located in Bharuch as well as Kota, I am at about 48% including pipeline and going forward once these capacities come up which is ECH, calcium chloride and enhanced aluminum chloride then I should be about 65% to 70% including pipeline.

Saket Kapoor

We have also heard about Reliance coming up with a big PVC complex.

They made this announcement sometime in their AGM in the month of August.

So, how are the dynamics of the industry going to change with this huge 1.5- million-ton PVC complex?

What's the thought process and how are caustic players aligned to this huge PVC and also the PVC market itself?

Your thought on the same, sir.

Amit Agarwal

Your question is on caustic or PVC?

Saket Kapoor

Both sir.

Amit Agarwal

On caustic, the way we understand is that Reliance as well as Adani both are coming up with their caustic project largely to feed chlorine into their PVC.

Now both of these projects will be in the coastal regions and looking at the global demand, which is about 106 million tons and growing at about 2%, we expect that the caustic that they are going to manufacture will largely be for the export market.

So, that is point number one on caustic.

It may cause some interim disruption domestically, but it is the intent what looks like.

As far as PVC is concerned, see the total domestic market size in PVC is about 4 million tons.

And today what we manufacture is only about 1.4 million tons.

So, there is a huge gap.

And they, I think, if I am not wrong, are coming up with about 225,000 kilo tons as a capacity, which is only a partial capacity.

So, we do not see any stress coming on PVC.

In any case, we are based out of North and these two plants are coming up in the Western region.

So, we do not see any challenges as far PVC is concerned.

Saket Kapoor

As for caustic as a whole, there are issues with demand globally also.

Amit Agarwal

I do not see any issues with demand.

PVC in India itself, as I mentioned, there is a big gap on demand and supply and on top of that it is growing at about 10%-11%.

Saket Kapoor

And for caustic?

Caustic soda globally we find demand restrictions especially for the European economy where in big players also mothballed their capacities.

That was my thought.

Am I correct in that thought process?

Amit Agarwal

There are two things happening here.

One, Europe is closing down capacities because of their overall cost structure and they are probably looking at more value add.

That's an opportunity for India to export.

And other thing is globally demand is increasing.

One example is new paper capacity, pulping capacity coming up in South America.

In India itself, the aluminum capacity is increasing from about 4.1 million tons to about 6 million tons.

So, I think demand is getting created.

But yes, it is only a matter of time when this new capacity in India gets absorbed.

Saket Kapoor

And lastly, on the P&L part, I find that the power and fuel cost on the quarter is up significantly to Rs.

428 crore if we take the QoQ increase from Rs.

373 crore to Rs.

428 crore, if you could just explain the key reason and I think we have also taken a maintenance shutdown.

What is the cost that we have incurred and what is the update on the realignment of the capacity post shutdown?

Amit Agarwal

Now we have taken a maintenance shutdown in vinyl business.

So, all that is back on track.

We are operating at nearly 100% capacity.

And the increase in cost of power and fuel is primarily led by volumes.

Saket Kapoor

And sir, on the new power plant in Kota, are we now accruing the benefit of the same completely?

Amit Agarwal

The new power plant is at Bharuch and yes, we have started accruing the benefits.

Saket Kapoor

And what was the annual saving we envisage from the same?

Amit Agarwal

I think it's reasonable.

I do not have the number right away, but it is something which we are happy and it's closer to what we had targeted as a benefit.

Saket Kapoor

And what is the thought process of the outlook for the sugar bioethanol story from us?

How are we going to pursue the opportunities?

If you could just throw some more light on this, sir?

Amit Agarwal

On sugar, see bioethanol is very futuristic right now.

We are also evaluating where these technologies are because the technologies itself are not very matured.

The market is not very mature and therefore the impact, you know, they are very expensive fuels.

So, we will keep a watch.

But yes, we are looking at how best we can make sugar as an ecosystem, right, where there are multiple products.

But they all will depend on how the technology is matured.

Moderator · Conference Operator

Thank you.

The next question comes from the line of Falguni Dutta from Mansarovar Financials.

Please go ahead.

Falguni Dutta

I just had one question that's on sugar.

What is the cost of sugar production for the season that just ended in September?

Amit Agarwal

So, our cost of production was close to about 3,600, a dash lower than that, ballpark.

Falguni Dutta

Does this include interest and depreciation also?

Amit Agarwal

Yes.

Falguni Dutta

And is it possible to tell me the number before interest, after depreciation but before interest if it's readily available?

Amit Agarwal

Falguni, I don’t have that number right away.

Moderator · Conference Operator

Thank you.

The next question is from the line of Surabhi from NV alpha.

Please go ahead.

Surabhi

I wanted to know more about Shriram Farm Solution.

I have been seeing that we have consistently been doing 17%-19% margins in the last couple of years.

What exactly is the hero product?

Is it the crop protection or is it the soluble fertilizers?

And also, what is the capital employed in this business?

Should we take the bioseed plus the fertilizers as the real capital employed?

Ajay Shriram

No, I think the Shriram Farm solution actually has three verticals.

One is the business of seeds, where they have hybrid seeds, and they have got research wheat and other products.

Second, they have got crop care chemicals, which is a sub vertical within SFS.

And third is where they have plant nutrients, which is the third vertical.

So, they're focusing on all three.

And there is a focus research going on in all these areas to try to get products which are unique products which are effective with the crops, products which the farmers want to buy.

So, the focus is very strong over there.

The manufacturing we have is for specialty nutrients etc. at Kota, which is not that large.

So, I do not know, Amit may be having how much money is involved there.

But the working capital requirement in the business is not too much.

It's quite small.

It's not really large at all.

And SFS is a separate vertical in our group.

Bioseed is a separate vertical in our group.

And they both have their own management teams.

They both have their independent CEOs.

And they manage the business independently and manage their own cash flows independently.

Surabhi

What kind of ROCEs do we make in the SFS business?

And also, would like to know if Q3 is seasonally the best quarter for SFS correct?

Amit Agarwal

So, one, yes Q3 will be the best quarter for this business because of research wheat that's the most profitable business in the Farm Solutions.

So, I think that is one reason.

And on your point of the ROCE, given that their capital employed is negligible and their EBIT will be in excess of Rs.

200 crore, so it's like abnormal number, it's very high.

Surabhi

And just last question, within like seeds and nutrients, what is the top selling product within the SFS segment?

Amit Agarwal

Research wheat in the seed segment, but I think your question is also on the plant nutrition, is it?

Surabhi

No, so like overall, because I see that in the footnote it's written plant nutrients, water solubles and seeds.

So, which of that is the higher contributor amongst the three?

Amit Agarwal

Seeds.

Moderator · Conference Operator

Thank you.

We have a follow up question from the line of Nirav Jimudia from Anvil Corporation.

Please go ahead.

Nirav Jimudia

One question on the urea side.

So, when I see the numbers I think our EBITDA per ton is close to around Rs.

2,000-Rs.

2100.

Just wanted to understand from you like are the numbers lower just because the fixed cost absorption or the compensation from the government has not been revised from last so many years and because of that there is some under recovery so far as the fixed cost compensation is concerned or our energy consumption Gcal per metric ton is higher and because of that we will not be able to materially improve our EBITDA per metric ton in the urea side.

Amit Agarwal

One, Nirav, we need to understand that our focus businesses are Chemicals, Sugar, Farm Solutions and Fenesta.

Farm Solution and Fenesta are the consumer facing businesses.

And these are the four businesses that define the future of the organization.

Now in terms of Fertilizer, I think it's performing reasonably well.

Last year, if you see the EBIT was about Rs.

53 crore, almost capital employed was not very high given the subsidy situation resolved.

So, we feel it has a ROCE of close to about 60%-70%.

Now that's very reasonable.

Yes, our fixed costs are a little higher given their size, but our efficiencies are reasonably good.

So, I think overall Fertilizer and we manufacture urea, so it's in pretty good shape.

Nirav Jimudia

The second question is on the chemicals that given the production of close to 1,920 TPD of caustic soda this quarter.

If you can share the mix of power between renewables-captive, how is the mix and let's say when we ramp up our production how this mix would look like?

Amit Agarwal

One our production I think at Bharuch it was close to about 1,400 tons per day and at Kota, it was close to about 500 tons per day.

So, that's about 1,900 tons per day ballpark for the quarter.

Now coming to renewable, see out of the total power requirement currently, our total power requirement is close to about anywhere between 125 to 150 megawatt at Bharuch.

So, out of that, about 25 megawatt on an average basis is coming from renewable energy.

Nirav Jimudia

And is rest from captive?

Amit Agarwal

Rest is from captive, yes, because my contract, peak is about 44-45 MW, average is 25 MW, so that will remain.

We are just adding another 6.6 MW which will start coming from next quarter.

So, peak, in Bharuch we will have about 50 MW.

And Kota, in another 1–1.5 years we will add another 68- megawatt peak.

Nirav Jimudia

So, currently Kota is entirely on coal-based captive plant?

Amit Agarwal

Yes.

So, the only thing is we are also using almost 15%-20% biomass there.

To that extent, we are using green fuel.

Nirav Jimudia

And how the things would look like when we will keep on ramping up our volumes of caustic soda?

Amit Agarwal

So, we are quite focused on seeing that how do we improve our green footprint.

As of now, we do not plan to increase our capacity.

There will be ramp up happening at Bharuch from, let's say, currently we are at about 1,400-1,500 tons, and we will go up to about 2,200 tons.

So, that will largely be met by captive sources.

And there also what we are looking at is the options of increasing our biomass.

So, our boilers are capable of taking 30%- 40% biomass, especially the new boiler.

So, to that extent, we would like to reduce the carbon footprint.

Nirav Jimudia

So, last two clarifications, so one on the Flaker plant of 600 TPD, has it started operating?

Amit Agarwal

Out of the total planned expansion of 600 tons per day, 300 tons per day has started operating.

Nirav Jimudia

So, that would help our exports possibly in order to improve our utilizations, right?

Amit Agarwal

Yes.

That's what Chairman mentioned in his opening remarks.

Nirav Jimudia

And the last clarification is on is on the PVC plant at Kota.

So, there possibly we may be converting chlorine to HCL for our PVC or does the chlorine directly go to the PVC plant?

Amit Agarwal

Chlorine goes into HCL.

And then HCL goes into PVC.

Moderator · Conference Operator

Thank you.

The next question is from the line of Vignesh Iyer from Sequent Investments.

Please go ahead.

Vignesh Iyer

Just one clarity that I needed, again on the power side of it, so, if I understand it right, you are spending Rs.

76 crore to increase your peak capacity from 44 megawatt to 68 megawatt.

That is the addition of 24 megawatt, right?

Amit Agarwal

We are investing close to about Rs.

73 crore to Rs.

74 crore.

That is, we are doing a new tie-up for our Kota facility where we are tying up 68 megawatts.

Vignesh Iyer

That is over and above the 44 megawatts, that you already have?

Amit Agarwal

Exactly, that is over and above.

See, 44 megawatts is at our Bharuch facility which is in Gujarat.

Vignesh Iyer

So if I understand the average, you have done around 25 megawatts in your Bharuch facility, what would be like the average utilization possible out of the 68 megawatts?

Amit Agarwal

So, just to add here, one in Bharuch we are currently at 25 MW, we will go up by about 2 to 3 megawatts because we have tied up another 6.6 megawatts in Bharuch.

So, there we are spending close to about Rs.

3 crore as our equity participation.

Now out of this 68 megawatt, I think it is about 32–33- megawatt average.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, that was the last question.

I would now like to hand the conference over to the management for closing comments.

Over to you, sir.

Ajay Shriram

Thank you.

Ladies and gentlemen, thank you very much for your participation