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
The next question is from the line of Pritesh Vora from Mission Holdings.
Please go ahead.
Pritesh Vora
First of all, congratulation for super milestone, which you achieved in this quarter.
I want to understand, is there any specific one-off in terms of like our finished goods prices have moved up in light of raw material price movement, and we could have sourced the raw material at cheaper rate somehow.
How do you look at the spread between the raw material price and the finished goods?
And do you think that the spread may come off in coming quarters?
Amitabh Bhargava
Fundamentally, I would say, it was a mixed bag as far as the raw material prices and the finished goods prices are concerned during the year.
So, on one hand, increased raw material prices particularly ammonia, phos acid, MOP impacted us on our fertilizer segment.
One is of course production was low and also in terms of the margins, it resulted in squeezed margins.
But in other segments, like nitric acid, for example, where generally our pricing passes through the raw material prices.
And also, there was an impact and we've been talking about this for last couple of quarters that because of China Plus One kind of inclination of global supply chain, we are seeing the speciality chemicals segment showing strong sort of growth and impact of that on the demand for nitric acid has been very strong.
So, we're seeing better realization in the spot market and that we believe is so long as I think the industry believes and so do most of the players that this impact of China Plus One is something which is here to stay, because as we understand some of our customers also have fairly long-term supply contracts with their customers.
So, we are going to see this nitric acid strong demand continuing and therefore, these prices or the margins should largely sustain not withstanding the movement in ammonia prices, which is the basic raw material for nitric acid.
As far as TAN is concerned, I think obviously as the raw material prices went up, so, did the finished goods prices.
So, to that extent TAN could not just pass on the raw material prices, but overall the margins expanded during the year.
Let me also say that in IPA for example, while overall demand came back as some of the challenges that pharma sector was facing on their supply chain started normalizing, because the oil prices went up so did the propylene prices, margin squeezed during the year.
So, I think we had both sides of this raw material price increase in our numbers.
Some products face headwinds, some had a bit of a tailwind, giving us better ability to pass on the raw material price.
Pritesh Vora
My next question is about the CAPEX, which we're doing where you're saying that mid of next year, this project should come online.
What is the amount of CAPEX we have spent and what is the asset turnover we see in that particular project?
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Moderator · Conference Operator
The next question is from the line of Abhijit Akella from Kotak Securities.
Please go ahead.
Abhijit Akella
I just had two or three clarifications to seek.
One is, in the context of the improvement in the debt number that we've seen already by the end of this year to about Rs.1,400-odd crores net debt I believe.
Given the CAPEX program that is yet to be undertaken over the next year, year and a half, where do you see the peak debt ending up for the company now -- is it substantially lower than what you had originally anticipated, say a year or two years back before the numbers turn so strong on the earnings?
Amitabh Bhargava
Abhijit, this is a question that if you recall, I've always been a little I would say hesitant in pointing a number here.
The case is that while both of these projects from a financial closure standpoint, we have a base case where we are looking at, I would say, Ammonia we used to earlier look at 60:40 debt-equity, we are possibly looking at 50:50 debt-equity ratio now.
Likewise, in TAN while from a financial closure standpoint, we are tying up 70% of the project cost as debt.
But given the kind of cash that we are generating internally, we are quite confident that the debt requirement in both these projects would certainly be below the base case that we have planned.
To give you an example, in ammonia, we have already spent about Rs.2,500 crores, we require another Rs.1,850-odd crores and let's say another Rs.2,200 crores in TAN.
So, put together let's say another Rs.4,000 crores of additional CAPEX that is required in these two projects.
We ended this year with almost Rs.1,150-odd crore of cash.
We generated roughly about Rs.1,200 crores through internal generation.
So, if you look at very conservatively also, the run rate is somewhere around Rs.250 crores per quarter.
Now, TAN is some project that we would be implementing over the next 30-odd months.
So, if you look at the numbers, our current cash balance and the kind of cash that we are generating quarter-on- quarter, we do believe that we would not grow the debt that we are looking at from a base case perspective.
Equally, we are amortizing our existing operating debt.
So, the numbers we believe will remain fairly within control, whichever metrics you apply, debt-EBITDA or debt-equity.
To that extent, while I'm not giving you a number, but I think you would have got a sense, we are not going to go up to the levels that one would have envisaged in the beginning when we had announced these projects.
Abhijit Akella
Other thing was just on the debottlenecking. benefits that you had alluded to earlier on the call.
Any further colour you could provide please what sort of impact this might have say in fiscal '23 or fiscal '24, how much capacity can we expect and how it might benefit us?
Amitabh Bhargava
You're talking about the debottlenecking?
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Moderator · Conference Operator
The next question is from the line of Yogesh Bhatia from Sequent Investment.
Please go ahead.
Yogesh Bhatia
I have the question for the gas, which we need for the ammonia plant.
So, if you go for the spot pricing, and if the prices are very high, how does it affect the economics -- is it like pass-through or how does that work?
And my second question is in mining chemicals, we've seen the volumes are lower year-on-year, but realizations are very high.
So, how sustainable do you think these realizations are?
Amitabh Bhargava
Thank you.
On your first question, see, gas today, even for our current operations, we buy certain quantities of spot gas.
And that gas today we are buying is somewhere around $20, $21.
So, at $20, $21 also, if we were to buy gas, our cost of production would be in the range of $650-odd per ton.
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Moderator · Conference Operator
The next question is from Pritesh Vora from Mission Holdings.
Please go ahead.
Pritesh Vora
How big the revenue when you go ahead with the downstream journey for your explosive -- can you quantify in terms of revenue?
Amitabh Bhargava
There are a number of areas within downstream that we are working on.
So, the kind of work that is happening in coal mining is very different from the kind of work that we are doing in infrastructure side.
So, it is very difficult at this moment to predict what will happen to, but what we're essentially doing is that, whatever will be pricing of your TAN, you're going one step further, and you are charging your customer based on either the value-added explosive that you are manufacturing and supplying, or you are giving them a solution where let's say typically what happens in developed countries is where you take the entire blasting contract, where the whole coal blasting design is done by you, you take the product right down to the mine hole and blast it for the customer.
So, you in a way capture that next step.
And when you get into a solution-based approach, the pricing could also depend on not just a product plus, but it's more like the value add minus.
What value add you added in terms of reducing the overall cost of your customer or you reduce the time in terms of certain infrastructure projects, and your pricing could be linked with what value you are providing.
It would be early to say for us to make an estimate of what it would do to the revenue, but more than revenue, we are seeing this as a margin gain.
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Moderator · Conference Operator
The next question is from the line of Vidit Shah from IIFL.
Please go ahead.
Vidit Shah
My first question was on the margins of the fertiliser business which has significantly improved this quarter despite volumes being down YoY and even manufacturing revenues and given the challenges with input costs rising over last year.
So, what explains the growth in margins in the fertiliser business and are these likely to sustain in the coming years?
Mahesh Girdhar
So, as Amitabh already delved around that we are seeing significantly increase in the raw material, and you also would have noticed that twice in the last year, the government of India intervened by virtue of enhancing subsidy in the month of May, and again, there was enhanced subsidy in October So, raw material prices increases, the three avenues whereby you're looking to pass through, either through enhancing subsidies, as well as enhancing through the price changes, right.
So, subsidy particularly supported in the last two quarters, plus, you may also notice that we have done a significant portfolio development with crop-specific solutions called Croptek.
Most of our Q4 focus was on Croptek Onion, and Croptek Sugarcane, as well as in this period, we have significantly enhanced our manufacturing of speciality products, bentonite sulphur.
Last year, we had launched enhanced version of Bentonite Sulphur by the name of “Superfast Bensulf” with good assemblies and that gave us good advantage in the market, as well as overall impact on the margin also came from increase in our speciality product volume and pricing, which are non-subsidized, which grew by about 54% over last year.
So, coupled all these put together helped us sustain better margins.
Vidit Shah
So, any guidance you could give for margins in FY'23, '24?
Amitabh Bhargava
The million-dollar question for FY'23 is also how raw material prices would move, because as Mahesh was mentioning that realization are a combination of MRP and government subsidy, and of course, how raw material prices move alongside.
So, it's very difficult today.
To give you an example, we are almost in the May end, we still don't have the phosphoric acid prices for India for Q1 decided, because that's something which government is directly involved in negotiating with the suppliers.
So, as we would see what kind of raw material prices emerge in Q1, and then subsequent quarters, that perhaps would give us a better handle on given all these two, three parameters, I would say difficult to give any guidance.
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Moderator · Conference Operator
The next question is from line of Rohit Sinha from Sunidhi Securities.
Please go ahead.
Rohit Sinha
Two questions on my side.
One on I would say this ammonia price.
Just wanted to understand your thoughts on this green hydrogen thing which people are talking about and ultimately going through green hydrogen to green ammonia.
How does thing look viable for you as of now and going forward what would be your take on this in terms of your business?
Amitabh Bhargava
For us the ammonia projects that we are working on is grey ammonia, in a sense that we have manufacturing it through natural gas route.
The green ammonia which is where let's say through hydrolysis of water you produce hydrogen and also hydrolysis is used is done by renewable energy.
Now, what we understand is that as far as the cost structures of green ammonia is concerned, while there are players who have taken a view in setting up the capacities, there are others who are actually waiting to see what happens to the cost structure because in renewable energy and trying to hydrolyze water on a 24-hour basis, you need certain storage technologies and so on so forth.
So, today for manufacturing, the same level of hydrogen which is required for equivalent capacity of ammonia through gas route, you need a much higher renewable energy capacity.
And to that extent, the cost structures today are significantly on the higher side.
These are very-very initial estimates that we hear from our project team, that the cost of manufacturing ammonia through green ammonia 13 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited
Moderator · Conference Operator
The next question is from the line of Deepak Poddar from Sapphire Capital.
Please go ahead.
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The next question is from the line of Abhijit from PI Capital.
Please go ahead.
Abhijit
So, when you say China Plus One impact is here to stay, so does this mean when raw material prices go down, the realization will more or less remain around the current levels or it would also go back to the earlier level?
Amitabh Bhargava
When I say China Plus One function here to remain, I would say, one is based on the fact that a lot of our customers in the speciality chemical segments are either looking at capacity expansion, or from their order book standpoint, they seem to have order book tied up for a longer horizon.
So, that's where the comment that China Plus One is here to stay.
Now, long term, it's anybody's guess what happens because in any product, you could predict the demand/supply situation for a period which it takes normally for new capacities to come up.
And to that extent in short to medium term, the margin that we are seeing in nitric acid, for example, should remain.
What happens three or four years down the line in terms of the new capacity, it's hard to predict.
We ourselves may have depending on what happens on the demand side, we including other players may also think of capacity expansion.
So, then what emerges after three to four years on the demand/supply side is hard to guess.
But in foreseeable future, short to medium term, we are seeing that the demand side remaining strong on the nitric acid side.
TAN in any case, we are a net importer, and whether it's infrastructure, coal or cement, all of these sectors should continue to see the demand.
You may always have blip at least for infrastructure in last few quarters.
But on overall basis I think these three segments should continue to grow and see the demand from TAN's perspective.
And we being the only producer of TAN in solid form and our capacity expansions already in the pipeline, we should be in a position to capture that growth going forward.
Abhijit
Apart from challenge on raw material front, what other challenges we are facing right now?
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Moderator · Conference Operator
The next question is from the line of Ranjit Cirumalla from IIFL Securities.
Please go ahead.
Ranjit Cirumalla
Did I hear it correctly that the debottlenecking in the TAN was through a process improvement, the initial one?
Second is what would be the CAPEX that you will be incurring for this debottlenecking exercise for the phase-II as well?
Amitabh Bhargava
These CAPEX are fairly small compared to the Greenfield capacities that we are spending CAPEX, we would be somewhere from 50 to 60 crores I guess that's the number.
Ranjit Cirumalla
The initial 30,000 was through the process improvement?
Amitabh Bhargava
That 30,000 were through debottlenecking which is essentially improving the capacity of certain equipment in the process, which was sort of the limiting factor.
Ranjit Cirumalla
Second, in the press release you have mentioned that the improvement is also an account of the strategic initiatives that you have taken at the marketplace.
So, just wanted to understand whether these were more aimed at the volume growth or at improving profitability?
Amitabh Bhargava
So, I think all of these we spoke in bits and pieces earlier.
So, the whole downstream journey in TAN is one aspect.
As far as fertiliser is concerned, we are launching crop-specific formulation in the market.
I think the strategy that we have as far as fertilizer is concerned.
In nitric acid, we are looking at more and more having customer or consumer-specific formulation, whether it is solar grade, nitric acid or electronic grade, nitric acid.
In IPA, we are looking at IPA, which is pharmacopoeia-compliant and therefore, commands better margins and pricing in the marketplace compared to commodity IPA.
As part of our downstream journey in IPA, we also formulate a brand which is conceived, hand sanitizers and a number of other product segments, which are aimed largely at institutional clients, is also the other market intervention or market work that we are doing.
So, of these are what we meant by strategic initiatives at the marketplace.
Moderator · Conference Operator
Ladies and gentlemen, as there are no further questions, I now hand the conference over to Mr. Pratik Tholiya for closing comments.
Over to you, sir.
Pratik Tholiya
Yes, thanks, Steven.
On behalf of Systematix Institutional Equities, I would like to thank all the participants who have logged into this conference call.
I'd like to thank the management for giving us the opportunity to host this call.
Amitabh sir, if you would like to make any closing comments, please.
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Moderator · Conference Operator
Ladies and gentlemen, on behalf of Systematix Institutional Equities, that concludes this conference.
We thank you all for joining us and you may now disconnect your lines.
For further information, please contact:
Note
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Questions and answers
Moderator · Conference Operator
We will now begin the question-and-answer session.
The first question is from line of Madhav Marda from Fidelity International.
Please go ahead.
Madhav Marda
I had a few questions.
Firstly, I think your production was impacted because of ammonia unavailability in some of the segments.
Could you just help us understand like what is happening there exactly?
And is the supply now normalized or could we continue to see some volume impact maybe in 1Q and first half of FY'23?
Amitabh Bhargava
So, we did face issues with ammonia because one of our largest suppliers had certain disruptions, particularly on the logistics side.
And as a result, we had to then move to ad hoc supplies from some of the international players as well, we bought ammonia from local players who have had surplus ammonia.
But since I think, April onwards, we've been back on track in terms of supplies from one of our long-term suppliers.
So, as such, this year, we are not anticipating.
Of course, it's early days, but we're not seeing any challenges as such on ammonia.
That's the situation on ammonia.
MOP was another product or other raw material, which had challenges.
Again, I think, partly, it was logistics and partly also a good part of MOP also, globally traded, that comes out of Russia, Belarus.
So, that also we saw some disruptions.
As of now we've worked on some alternate sources.
And for the foreseeable period, we do have the required quantity, but we'll have to see as it goes in future.
Madhav Marda
So, our nitric acid capacity utilization in Q4 which have come to 77% and the fertilizer NP+NPK which is at 34, that should largely normalize and come back to a healthy level now onwards, right?
Amitabh Bhargava
Yes.
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