DEEPAKFERT — 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
Hosted by IIFL Securities · Management
2 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited
Moderator · Conference Operator
Ladies and gentlemen, good day and welcome to Deepak Fertilisers and Petrochemicals Corporation
Thank you.
Sir the line for the participant dropped.
We move on to the next participant.
The next question is from the line of Nishit Shah from Aequitas Investment Consultancy Private Limited.
Please go ahead.
Nishit Shah
Good evening Sir and congratulations on a good set of numbers.
Sir I wanted to understand that, so I understand that we are debottlenecking in TAN so what kind of investments are we looking at and what is the timeline over there?
Amitabh Bhargava
What I mentioned is the 3,76,000-tonne new capacity on the East Coast and we have in the past also given a guidance that we are trying to freeze the capex number, but it is likely to be in that Rs.1800 Crores Rs.2000 Crores.
That is the range, but the exact numbers are being finalized.
Nishit Shah
Sir I was going through the annual report and in that it states that we have initiated debottlenecking for tan capacity expansion at Taloja with minimum investments, so I was talking in that reference?
Amitabh Bhargava
That is still being studied from a technical standpoint as to what kind of additional capacity it can yield and what are the capex involved, but there is a prima facie opportunity to debottleneck Taloja capacity.
Nishit Shah
Sir can you help me understand what are the current realizations of nitric acid?
Are they trending upwards?
Amitabh Bhargava
Nitric acid what has happened is one is the general trend in terms of what is happening in the nitroaromatic segment.
That is, we are now seeing a lot of the global supply chain showing inclination towards diversifying it from China to India and given our nitroaromatic segment and various specialty 8 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited
Moderator · Conference Operator
Thank you.
The next question is from the line of Lokesh Manik from Vallum Capital Advisors.
Please go ahead.
Lokesh Manik
Good afternoon Amitab.
My first question was a clarification, which I required on the fertiliser business?
We have seen very good margins.
Has there been any impact of low-cost inventory coming in from the last quarter in this quarter?
Amitabh Bhargava
Yes that is what I mentioned that the numbers are a combination of the higher capacity utilization and higher volumes and also benefit of subsidy but like was also mentioning that as much as they were subsidy there was also we reduced our MRP post the subsidy announcement and some of the effect of raw material prices have also got reflected so it is a combination of all these three to four things that is reflecting, but certainly yes that is it.
Lokesh Manik
Going forward is the raw material prices today are higher?
Ammonia is at about $500 if I am not mistaken will they start reflecting in the second quarter onwards in the fertiliser business?
Amitabh Bhargava
What has happened is and which is a point I was earlier making that when the government increased the subsidy in the P segment cost has gone up across N,P and K raw material prices and that is the discussion industry is currently having with the government also in terms of what would be governments take or response on those increases and would the government consider any increase as far as the other nutrients are concerned.
Depending on what stand government takes industry will obviously look at passing on the prices of these increased raw materials in the finished goods.
We will have to see.
I think it is not just what we do and what industry does, but it is also what the government does will lead to this question.
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Moderator · Conference Operator
Thank you.
The next question is from the line of Deepak Poddar from Sapphire Capital Partners LLP.
Please go ahead.
Deepak Poddar
Thank you very much Sir for the opportunity.
Sir I just wanted to understand you did mention that the pass through of raw material to the finished goods might take may be over the next two quarter right so that is the time period when one should except your margins to normalize may be the impact that we are seeing this quarter?
Amitabh Bhargava
As simple as it may sound one is of course the finished goods prices have to start reflecting or the raw materials price increase, it needs to start reflecting in the finished good cycle.
There is also a play of a particular season so in certain season in tan for example is a lean season in Q2. Now in Q2 therefore even though normally if it was any other period the reflection of raw material prices and finished goods have been much faster.
If you have a lean season where the consumptions are low it could take a little longer, but if you compare Y-o-Y typically any increase in any of these segments you would see that unless there is a very, very sharp increase in a very short period you would typically see that the per 10 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited
Moderator · Conference Operator
Thank you.
The next question is from the line of Surabhi Saraogi from SMIFS Capital.
Please go ahead.
Surabhi Saraogi
Sir my question is that in your press release you had mentioned that you had received approval for nutrient based subsidy for crop specific grade by the government so can you quantify the amount of subsidy what would be the amount of subsidy.
Amitabh Bhargava
Mahesh would you like to answer.
This is more about our new product.
Mahesh Girdhar
Certainly, Amitabh I shall answer that.
The subsidy is complex NPK fertilisers are driven by the NBS, they are declared for N, P and K as well as for two micronutrients which if boron and zinc so they are the fixed rate depending on how much is the use of particular nutrient in the particular product formulation you can calculate that.
Like ph currently the highest subsidy and is NK lower subsidy in the same way.
There is a fixed subsidy by zinc and boron.
No other multi nutrient subsidy so the formulation which we are bringing in the market going forward are multi nutrient which are complete in their contribution.
We are providing balanced nutrition for specific crops, so accordingly they would be positioned, so I cannot calculate right now but I think the methodology is based on nutrient based subsidy.
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Moderator · Conference Operator
Next question is from the line of Vishal Prasad from VP Capital Limited.
Please go ahead.
Vishal Prasad
I have a question related to ammonia capex and cost structure.
I was trying to go through the conference call transcript for the last call that we had done.
There you explained very beautifully how the cost structure is somehow I got confused.
So what you said is if we get the natural gas at 220 and conversion at 40 so it will make it at 260 to 280 and the mandate cost if we are importing it from Middle East is $450 to $480 that is what understood, but if we are trying to import from Middle East then our competition in south India one of the fertiliser company, they said in the last call that FOB for ammonia is $260 to $280 and another part which you said is $80 would be the transportation cost so it comes to 360 or something is there something that I am missing if you could help me with that.
Amitabh Bhargava
First is any number that you take of ammonia whether it is 260, 280, 300, 350 that only reflects a point in time what the ammonia prices are.
Today for example ammonia prices are as high as $650 FOB Middle East so the way you need to look at this ammonia project is that is this from a cost perspective because we have a choice of buying ammonia or making it here, so if buy versus make decision what we believe making makes sense if you are one of the more competitive cost producers of that commodity at least in the region if not globally and that is where earlier I had explained this aspect that while ammonia would go through its cycle from 250 to now 650, it will go up and down but when we look at our gas prices if today when we move ammonia from Middle East to our plant we incur almost $80 to $90 of transportation cost.
You translate that into gas it translates to about $3 dollars per MMBTU gas price, this is from conversion standpoint.
We also have as I was mentioning earlier, Government of Maharashtra under their ultra mega project scheme has given us fiscal incentive where equivalent of state GST that is payable on the fertiliser that state GST portion would be reimbursed to us over a period of say 15 to 20 years till we recover 75% of our project cost that if you translate again into gas equivalent it translates to roughly about one quarter to one and half dollar, so what it means is that by producing this ammonia here you are saving roughly $4.5 of gas, and our estimate is even at the current level of increased commodity prices the landed cost of long term gas and one should not confuse with the gas prices that one keeps seeing on the spot segment which fluctuates quite a lot but on a long term basis 12 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited
Moderator · Conference Operator
Thank you very much.
The next question is from the line of Madhav Marda from Fidelity International, please go ahead.
Madhav Marda
Yes, hi good evening.
Thank you so much for your time.
I just wanted to understand that for existing products FY2021 was a good year in terms of margins in general across I think many of categories, which showed up in sort of overall EBITDA margins for the company.
Just your outlook for FY2022. If you could give us a qualitative flavor in terms of how the margins can shape up across tan, IPA, fertilisers, and nitric acid.
If you could give us some sense versus FY2021 that would be helpful.
Amitabh Bhargava
What is happening in FY2022 versus FY2021 is one fundamentally in FY2021 our capacity utilization across excepting fertiliser NPK by and large in every other segment we faced challenges in maintaining our plants, operating our plants from manpower standpoint, from evacuation, transportation standpoint, so there is headroom of capacity utilization that is sitting in our plant as we close FY2021 and some of it you are seeing the reflection of that in the Q1 numbers with the exception of IPA in every other product, the capacity utilization have gone up that is number one.
Number two we had certain challenges, operational challenges in the acid where Dahej plant for half of last year was running at low capacity.
There was energy inefficiency which we corrected by second half by Q3, Q4. If one were to remove Q1 performance in Dahej where we took our renewal shutdown, we preponed it.
If you take that both in Taloja and in Dahej our capacity utilizations have gone up, also all those anomalies which were there on the cost structure, those have been taken care of, so you would hopefully see better cost efficiencies as far as the acid is concerned because your capacity utilizations are better and also some 14 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited
Moderator · Conference Operator
The next question is from the line of Manish Jain from Moneylife Advisory Services.
Please go ahead.
Manish Jain
Thanks for the opportunity.
My first question is what amount of capex will we be looking at in the next 2 or 3 years and second is what kind of risk are we looking in the near future.
Amitabh Bhargava
On capex your point on risk is related to capex you are asking or is that general question.
Manish Jain
Just in general.
Amitabh Bhargava
As far as the capex is concerned, we have mentioned that ammonia is overall about 4350 odd Crores.
We closed the last year at about Rs.
1500 Crores so we have additional roughly in both years roughly about Rs.
1350 to Rs.
1400 Crores each in the next two years and in tan I just had mentioned we had yet to get the exact numbers but Rs.
1800 to Rs.
2000 Crores once the construction starts over the next three years about 36 odd months that is the way the capex would pan out.
As far as your question on risk is concerned, fundamentally in our business, one is because fertiliser is dependent on monsoon.
Monsoon remains an uncertainty.
Last two years and this year also monsoons have been fairly good so one has to see it year by year what happens to monsoon, so I think that certainly remains as one uncertainty or risk.
The second aspect I would say the nature of our raw material, particularly on the phos acid and MOP which are critical raw material for our fertiliser business.
In general from the supply side, it is sort of oligopoly or very limited suppliers are there globally because reserve of the phosphate are concentrated in certain regions and therefore what happens in those regions and when you have suppliers who are limited there would always be price as well as availability aspect.
What we have done from our side is obviously we have tried to diversify these sources and minimize the risk, but there is always a risk.
That is the risk we believe applies to a great extent to the other fertiliser players also, so that is definitely one area that is there and the third one in our cases we need to implement our projects in time and cost, the good thing is that a large project like ammonia is just a construction project now, 95% of procurement is all done, land is in place, all environmental approvals are in place, other statutory approvals are in place, so the risk of just the construction is in an overall project implementation risk is a limited risk and to that extent we believe that.
With Toyo as our contractor, they have done more than 70% of global ammonia project they have implemented with that and a capable in-house team we believe that we have fairly good hold on that risk.
I think those are the three areas that obviously believe are uncertainties or risk.
Manish Jain
Thanks for the explanation.
That is it from my side.
Moderator · Conference Operator
Ladies and gentlemen we take that as the last question.
I now hand the conference over to Amitabh Bhargava for closing comments.
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Thank you very much.
On behalf of IIFL Securities Limited that concludes this conference.
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Note
This transcript has been edited to improve readability
Reg. and Corp. Office
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Web
www.dfpcl.com
CIN
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Cautionary Statement
This release contains statements that contain “forward looking statements” including, but without limitation, statements relating to the implementation of strategic initiatives, and other statements relating to DFPCL’s future business developments and economic performance.
While these forward-looking statements indicate our assessment and future expectations concerning the development of our business, a number of risks, uncertainties and other unknown factors could cause actual developments and results to differ materially from our expectations.
These factors include, but are not limited to, general market, macro-economic, governmental and regulatory trends, movements in currency exchange and interest rates, competitive pressures, technological developments, changes in the financial conditions of third parties dealing with us, legislative developments, and other key factors that could affect our business and financial performance.
DFPCL undertakes no obligation to publicly revise any forward-looking statements to reflect future / likely events or circumstances.
Deepak Balwani Associate Vice President – Investor Relations [identifier removed] +91 20 6645 8733 Bijay Sharma/Ashok Negi Churchgate Partners [identifier removed] +91 22 6169 5988
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 Naresh Vaswani from Sameeksha Capital Private Limited.
Please go ahead.
Naresh Vaswani
Sir congratulations for a good set of number in tough times.
The first question on the raw material side, I am assuming that the cost would have increased during this so whole impact of this higher raw material prices would be reflected in probably Q2 and Q3 as well so I wanted to understand realistically how much of this steep price in raw material prices can we pass it on to our customers and in the fertiliser segment these margins is it high due to the subsidiary hike?
What would be the normalized range which we can work with in the fertiliser segment?
Amitabh Bhargava
As far as the pass through of raw material prices are concerned as you know typically one quarter and I would say within one quarter also towards the end of the quarter or second half of the quarter raw material prices hiked very sharply.
In short term it is very difficult to pass on the raw materials prices.
In fact, even the contract which has provision of pass on of raw material prices typically tends to take the raw material prices of the previous month.
As such in the finished goods it is difficult to get reflection of raw material prices in such a short time.
In longer horizon, I would say it is typically when you look at Y-o-Y numbers in any of the products you would typically see that if there is Y-o-Y increase has happened and not in a manner that most of the increase happens in a very short time frame.
If it has happened over a period of one year, typically the pass on of raw material prices also reflects in the finished goods prices.
This time it has been an exceptional case in Q1 so we are quite hopeful, and we are seeing that in finished goods prices, particularly where the prices are also linked with the international prices or import parity gradually the refection of raw material prices is beginning to show and to that extent over the next few quarters we should be in a position to get that passed through I would say of our raw material prices.
With that said, it is also right now it is difficult to predict what happened to raw material prices itself and to that extent it is difficult at this stage to put any number to it, but it will be sufficient to note that at such sharp hikes in raw material prices it typically would take a little bit of a time to pass through.
As far as the subsidy part is concerned what happened during the quarter, one is the subsidy of course went up, but equally the raw material prices went up as the government had increased the subsidy post subsidy increase, we also reduced our MRP so a combination of all of that is what is getting reflected in our numbers.
Going forward given the kind of increase that has happened industry is also in discussions with government so while the government has increased the P subsidy the N and K component has also gone up and to that extent our discussions or industries discussion with the government on the lines of looking at possibility of increased subsidy on the other component is also currently under way so depending on what stand government take and what happens to also the raw material prices going forward you would see that impact in coming quarters.
The situation is so very dynamic that it is right now difficult to put any number or any trend to it.
Naresh Vaswani
So in absolute terms actually our EBIT margins, EBIT number in fertiliser is very good so I was just wanting to know that is it something which is due to our product mix gain and internal costing measures which we are taking in and operating leverage, which you spoke about and is this something which is 6 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited