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
Moderator · Conference Operator
Ladies and gentlemen, good day and welcome to Deepak Fertilisers and Petrochemicals Corporation Limited Q2 FY2022 post results conference call hosted by Antique Stock Broking.
As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes.
Should you need assistance during the conference call, please signal an operator by pressing “*” then “0” on your touchtone phone.
Please note that this conference is being recorded.
I now hand the conference over to Mr. Manish Mahawar from Antique Stock Broking Limited.
Thank you and over to you Sir!
Manish Mahawar
Thank you Kathy.
On behalf of Antique Stock Broking, I would like to welcome all the participants on the call of Deepak Fertilisers & Petrochemicals Corporation.
From the management, we have with us Mr. Sailesh Mehta, Chairman and Managing Director, Mr. Amitabh Bhargava, President & CFO, Mr. Mahesh Girdhar, President, Crop Nutrition Business and Mr. Deepak Balwani, Head of Investor Relations on the call.
Without further ado, I would like to handover the call to Mr. Mehta for opening remarks.
Post which, we will open the floor for Q&A.
Thank you and over to you Mr. Mehta.
Sailesh C Mehta
Thank you Manish.
At the outset, my very warm and bit belated best wishes for Diwali and the New Year to all of you and I hope you and all your family members are staying safe and healthy.
I take pleasure in welcoming you all for the Q2 FY2022 earnings call of Deepak Fertilisers.
I hope you have all had a chance to look at the financial statements and earnings presentation that had been uploaded so that we can have a meaningful conversation today.
At the outset, I am very happy to share that since we met last we have successfully raised Rs.
510 Crores to our QIP and what is more is the new set of investors are marquee long- term investors and that is clear testimony of the confidence that the long-term global investors have had on our operations and our growth strategy.
As far as this quarter goes despite massive hike seen in many of our raw materials, our quarter has withstood fairly well and we have recorded a revenue growth of almost 28% over the last year and our EBITDA and net profit grew by about 10% and 16% compared to Q2 FY2021. As you know we are performing in three different sectors and if I might share from the sector perspective then the first is where we as always pharma-specialty chemical sector and that has shown a growth of 46% year-on-year in Q2 FY2022. So, in the nitric acid business which is a part of the specialty chemical sector we have seen because of certain I would say curb in production by the Chinese government the demand for nitric acid has further strengthened for us and we are expecting prices also to remain pretty firm in Q3 onwards.
Within the same pharma chemical sector we have IPA where we did see capacity utilization to be more than 100% supported by good demand, but realization were somewhat depressed due to the plunge in the alternate feedstock acetone, however looking all these aspects the DGTR has recently recommended safeguard measures that is quantitative restriction on IPA import.
We are also looking at focusing on having a special pharma grade IPA as you go along and further in our specialty drive in the IPA business we are also seeing a good 3 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited
Moderator · Conference Operator
Thank you very much.
We will now begin the question and answer session.
The first question is from the line of Vishal Pratap from VP Capital.
Please go ahead.
Vishal Pratap
Good afternoon.
I have one question on technical ammonium nitrate I understand we supply ammonium nitrate to solar industry as well as TAN to coal mines and then I also understand that Solar Industries supply their products to coal mines so could help me understand what is the difference between what we provide and what Solar Industries provides.
Amitabh Bhargava
We have three different products in technical ammonium nitrate one is ammonium nitrate melt which is liquid ammonium nitrate, the second one is high density ammonium nitrate, high density ammonium nitrate essentially is in solid form and therefore it helps transport it for a longer distance, but for shorter distance to be extended the customer end also has the storage facility we supply the TAN in melt form so in a AN melt and HDAN are substitute of each other one is in solid and the other is in liquid form.
Both these products go in the emulsion-based explosives which our customers like solar and other they essentially covert the two products into emulsion-based explosives which in turn are used in for mining activity.
While the low-density ammonium nitrate can be directly put down the hole you can add right there the fuel oil on top of it and you can with the help of detonators you can detonate so in a way LDAN can be directly used in mines it also used and converted into certain explosives which are different from emulsion based explosives so essentially in summary HDAN and AN melt is used by or supplied to our customers to be in turn converted into emulsion based explosives while low density ammonium nitrate can directly be used as explosives in the mines you can directly use it as with the addition of fuel oil you 6 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited
Moderator · Conference Operator
Thank you.
The next question is from the line of Sharan an individual investor.
Please go ahead.
Sharan
Thanks for the opportunity.
My first question is regarding the ammonia which plant capacity is in progress whether it is the green ammonia or what is exactly because government is going to make mandatory that for fertilizers green ammonia should be utilized and green ammonia comes from the power used from the renewable sources.
Amitabh Bhargava
So our ammonia is from natural gas and to that extent there is CO2 emission now what we are trying to do is that we are talking to various CO2 users including the upstream oil and gas industry and to the extent the CO2 generated along with ammonia can be utilized for purposes where CO2 can be gainfully consumed rather than emitted in the environment reducing the effect on environment to the extent while it is not green ammonia it could get the shade of blue ammonia or whatever that term used but as of now our ammonia as much as the ammonia produced in the country is pretty much every where by all the players is based on natural gas and therefore is not part of green ammonia.
Sharan
In case in the future if required is Deepak ready consume renewable energy and produce green ammonia in the same plant?
Amitabh Bhargava
As of now it is green ammonia has two components to it one is the power that you are consuming the renewable power consumed is then used for hydrolysis of water and that’s how we generate hydrogen and then you take nitrogen from the air and that’s how you combine nitrogen and hydrogen to make ammonia so it has the element of not just using the power in renewable form but the power should be then used through hydrolysis of water to generate hydrogen while in our case the whole process KBR process through which are producing ammonia or going to produce ammonia is through natural gas route and therefore there is a fundamental difference it is not just the power consumed but it is the whole process end to end.
Sharan
Sure the second question is the ammonia capacity is going to be around 500 plus ton rate let us say a year, 500 thousand ton per year right, so basically and there was a mention that there is going to be savings of around 70 to 80 dollars just from the logistics so can I assume that 70 dollar is into the Indian Rupee whatever it comes and then plus into the 500 ton roughly it is going to be 200 to 300 Crores per year straight forward savings from that strategy?
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Moderator · Conference Operator
Thank you.
The next question is from the line of Rajan Thakur from Ruchi Oyster Mushroom.
Please go ahead.
Rajan Thakur
My question was with regards to the fertilizer business raw material prices fertilizer cost so how much it is to purchase a quantity of fertilizer before and how you can manage this?
Amitabh Bhargava
Your voice is not clear.
Can you repeat the last line I got your point that there is an increase raw material prices what exactly your question?
Rajan Thakur
My question was we know there is an increase in the raw material prices and subsequently our fertilizer product cost will also increase so will the farmers be able to purchase the same quantity of fertilizer as before and how we are managing this?
Amitabh Bhargava
Essentially as you know the increase in raw material prices typically there are government also depending on the raw material prices and looks at the NPK nutrient based subsidy the government did one increase in May of this year based on the some of the increase that had happened compared to the previous year raw material prices whatever other than the government nutrient based subsidy versus prices are essentially depending on the market depending on the competition and the way industry increases or passes on those prices we also increase our prices of our products overall a combination of the two is what government as well as industry tries to create a balance and to that extent for a brief period till the prices are passed on to the farmers there could be some absorption that industry has to do but eventually as long as the prices are sustainably at a higher level these prices do get passed on to the farmer but as you know the NPK, I mean nitrogen is also used in fertilizer and to that extent prices of other fertilizers competing fertilizer also tend to go up and that end the clarity between other fertilizers and complex fertilizer which is maintained.
My colleague Mahesh is also there Mahesh do you want to add anything to this.
Mahesh Girdhar
Sir I think you already covered that.
I think there are two, one is that the government announced nearly 14,000 Crores additional subsidy by virtue of NBS Nutrition based subsidy again there was a second infusion done in October which will impact next quarter so thereby in fact cost covered through subsidy as well as partial pass through in the market should be able to support.
The consumption has not declined as you talk about H1 consumption has been nearly as at previous year level.
We also deal into non subsidized fertilizer it is about 15% of total portfolio and in the nonsubsidized portfolio of the fertilizer we have been able to pass through the increased cost these are efficient fertilizer used through dip irrigation they are anyway lower used so there use water soluble fertilizer is much lower than the bulk fertilizer and high value cash crops are using those where we also know that India has got a huge vegetable requirement.
Farmers have been able to absorb the cost when the cost is increased for nonsubsidized fertilizers.
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Moderator · Conference Operator
Thank you.
The next question is from the line of Abhijit Akella from IIFL Securities.
Please go ahead.
Abhijit Akella
Good afternoon and thank you so much for taking my questions.
I had a question on the chemical business first in the context of your commentary about the robust demand outlook for mining chemicals as well as the pharma segment and specialty chemicals so in that context would it be fair to assume that we can more than pass on the increase of ammonia cost in the second half of this year as demands picks up and if you could just give us some help in understanding I mean how realization in those businesses are trending and how we should expect margins to trend in the next couple of quarters.
Amitabh Bhargava
Abhijit one fundamental aspects about this sharp changes that have happened in the raw material prices and I am sure you would also be observing that is that a lot of this has been very sharp in a very short time frame and therefore the first assumption before anyone can comment on H2 due to reason one has to come to a conclusion whether the prices though they had gone up already so much would they remain at this level or would they go further up that itself is something that today is very difficult to predict how further up these raw material prices can grow and so that is fundamental to any prognosis at one can estimate, one can make to the margin that said I think in general what we are seeing is that if you look at product by product acid has certain contractual reasons where the raw material prices are passed through in a long term contract.
In short term we are also seeing because of in general shortage and the China factor the acid demand has also gone up and to that extent in the spot market the price realization have improved and hopefully that would mean that the increase in ammonia prices our ability to pass that on the asset partly through contractual structure and partly through good realization in spot market should be better so that is as far as acid is concern.
As far as tan is concerned there again we feel that even the FGAN the fertilizer grade ammonium nitrate that comes into the country and competes with the local production has also seen increase as black seed prices have gone up now whether they keep in sync with the sharp increase that we are seeing month on month in ammonia or would they have certain level of lag would really decide whether the pass through is proportionate or more than proportionate very very difficult to predict at this stage how quickly each of these not just raw materials but their response in the finished good products prices will reflect but generally speaking I think in H1 itself raw material prices have gone up we have seen that mining chemical business TAN has withstood those raw material prices and finished prices seem to have reflected that increases.
IPA is the other product where we have seen obviously compared to the last year and even quarter-on-quarter there have been pressures on the margin because on one hand propylene prices are going up there is Acetone based IPA is coming into the country and to that extent there is a pressure on IPA margins and this is what we had anticipated as well in the beginning of the year also we said we do not expect the margins to sustain at last year’s level.
The DGTR’s quantitative restriction that DGTR has recommended that should help to an extent in getting better realization 11 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited
Moderator · Conference Operator
Thank you.
The next question is from the line of Bhavya Shah from Girik Capital.
Please go ahead.
Bhavya Shah
Good afternoon and thanks for taking my question.
In Q2 press release we have mentioned that we had a lower than planned production of fertilizer due to MOP shortage so just you can throw some light on are we facing the same issues in Q3 or are we facing shortage in any raw material other than MOP in fertilizer.
Amitabh Bhargava
No I think by now almost non-availability of MOP for a long period that phase is over so as such raw material availability is not hampering anything, the price of these raw materials and production cost and overall market pricing is the fact that we be tracking month on month.
So that’s still one area that we need to watch out for but as such raw material availability is no longer an issue.
Bhavya Shah
And my second question was that this quantitative restriction in IPA is already in place or is there any final order left to be published or anything like that?
Amitabh Bhargava
Implementation of that as to how that will be implemented is something is work in process.
Because it is said it has to be source specific restriction all of those integrities of implementation is something that is being worked up.
Bhavya Shah
Okay, understood that’s it.
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Moderator · Conference Operator
Thank you.
The next question is from the line of Vishal Pratap from VP Capital.
Please go ahead.
Vishal Pratap
Sir if I look at the history of Deepak Fertilisers in last 32 years except 1991, 1992 when we had unfortunate incidents of fire alarm where we struggled a few years we have been total capital allocated and we avoid taking undue risk but if I look at what we are doing now 4,300 capex for ammonia and then we are talking about TAN where we will have lot of capex so do you do not think 5,000 Crores debt on our balance sheet will be a risky proportion?
Amitabh Bhargava
I am not sure where the 5,000 Crores number comes from but yes the question I think which I get the essence of the question is that these two large capex has been done together whether that is the risk or not.
See essentially if you look at ammonia in fact I would flip the point and I would say that if we do not have our own ammonia given the large ammonia requirement because its fundamental nature of our business of fundamental raw material that is required in our business because we are in nitric acid and NP/NPK fertilizer and TAN all three of them require ammonia the scale is going to a level where relying on logistics particularly price from Middle East to JNPT.
JNPT infrastructure the transportation of that through road to our plant and all the not just the logistics uncertainty and issues in terms of frequent disruption but also the whole environmental footprint of this logistic is something which for a long time we have debated internally and we have come to a conclusion that is not sustainable operation for the size of operations that we have and therefore ammonia while the capex involved is large no doubt about that but without having our own ammonia we would have been running far more risk in terms of sustainability of our operations for the size of our operation.
As far as ammonia, now if you look at the current I think we have gone through in last two years certain delays in land acquisition but as we stand today we have all the statutory approval the progress on the ground is only now just construction part it is nearly 95% of the equipment is with us.
Land is with us, all the approvals are with us so it is only civil and mechanical construction that needs to happen on the ground so as such if you look at it just the implementation risk is now substantially behind us that said yes it would mean that there is a large capex and therefore proportionate debt.
Debt also it will be we are actually even today as we have almost about 1,800 Crore of implementation that we have done we have gone less than 50% of that by the way of debt and we have used our internal accruals or internal cash to fund the balance.
Therefore while in the base case yes we are planning to fund the project with 60:40 debt equity and TAN with 70:30 debt equity.
We may depending on the cash accruals and cash position we have we may improve on debt equity, number one.
Number two, if you see the profile of this main project any expansion one huge risk factor is there in any new project is the demand side of it whether you will be able to place that product in the market or not and what would be your capacity utilization and that is where 100% of this for captive consumption and I have already spoken about the reasons why we believe that without having our own 14 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited
Moderator · Conference Operator
Thank you.
The next question is from the line of Sameer Joshi an individual investor.
Please go ahead.
Sameer Joshi
Thanks for giving me opportunity.
What is the percentage of fixed price contract as compared to variable price contract across various business and what is the tenure of these fixed price contract and is there any chance that because of increase in raw material prices or decrease we can pass on the increase in case of fixed price contracts?
Thanks.
Amitabh Bhargava
One is fundamentally these numbers have not fixed they depend on the commitments that our customers want and commitment that anything we are committing to our customers but typically in let us say today we would be roughly about 50 to 60% as far as the contract and spot is concerned in the TAN segment and in the acid segment, these numbers in CNA varies from 60 to 70% and balance 20 to 30% and say 30 to 35% in the spot segment but I like said these are not numbers that one needs to take it on, this could be numbers which are dynamic.
Sameer Joshi
Okay because I was estimating by which quarter the increase in raw material prices will be taken care in pricing of final products?
Amitabh Bhargava
Spot typically in general is at premium over fixed prices at which we had committed to our long term customers, if fixed price contract are there we are willing to pass on raw material prices given that spot is premium over long term it also has the ability to pass on raw material prices.
Sameer Joshi
Okay.
Thanks.
Moderator · Conference Operator
Ladies and gentleman that was as the last question for today.
I now hand the conference over to Amitabh Bhargava for his closing comments.
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Thank you very much sir.
On behalf of Antique Stock Broking Limited that concludes this conference call.
Thank you for joining us and you may now disconnect your lines.
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