DEEPAKFERT — earnings call

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Prepared remarks

Moderator · Conference Operator

Ladies and gentlemen, good day, and welcome to the Deepak Fertilisers and Petrochemicals Corporation Limited Q3 and 9M FY '23 Conference Call hosted by Dolat Capital.

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 star and zero on your touchtone phone.

Please note that this conference is being recorded.

I now hand the conference over to Mr. Tejas Sonawane from Dolat Capital.

Thank you, and over to you, sir.

Tejas Sonawane

Thank you, Seema.

Good afternoon, everyone.

On behalf of Dolat Capital, I would like to thank the management of Deepak Fertilisers and Petrochemicals Corporation Limited for giving us the opportunity to host their Q3 FY '23 Earnings Call.

From the management team, we have with us today, Mr. S C Mehta, Chairman and Managing Director; Mr. Amitabh Bhargava, President, and Chief Financial Officer; Mr. Tarun Sinha, President, Technical Ammonium Nitrate; Mr. Suparas Jain, Vice President, Corporate Finance.

Without further ado, I would like to hand over the call to the management for their opening remarks, post which we will open the forum for a Q&A session.

Thank you.

And over to you, sir.

Sailesh Mehta

Thank you.

So thank you, Tejas.

A very good afternoon to everyone.

I'm pleased to welcome you to the Q3 FY '23 earnings call of DFPCL.

I hope you've had the opportunity to review the financial statements, press release and earnings presentation available on the exchange and our website.

So at the outset, let me share that I'm once again very happy to share that for Q3, again, our top line grew by 40% over last year, and the bottom line also grew by 40% over last year.

On the 9 month front, we have seen a top line growth of around 50%, but the bottom line growth has been 138%.

Now, this has been in the face of headwinds coming from raw material, I would say, jumps.

In ammonia, we saw 84%, phos acid 80%, gas around 96%, potash 103%.

So, I mean, virtually every raw material, we saw a massive hike.

And this is something that we have been able to pass through and more.

So at the undercurrent level, what we saw that has been validated and validated quite strongly that all our three product lines, meaning the industrial chemicals, mining chemicals and fertilisers.

Now it is beyond doubt that they are very strongly aligned with the India growth story and which is why despite the finished product pricing also going up to accommodate for this raw material price hike, we have not seen any demand reduction, and in fact, to the contrary.

So that is one aspect that, that undercurrent level, very strongly, this has been established.

The second, of course, has been internally our operations, supply chain, management competency, So, all of that also has been very strongly validated, and that has helped to, in somewhere, right through some of these headwinds.

The third and the most important thing is that we are finding increasingly a very positive traction in our journey from commodity to specialty.

And if 3 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited

Moderator · Conference Operator

We'll take our first question from the line of Mr. Ranjit from IIFL Securities.

Ranjit

A couple of questions from my side.

First, on the volume front, just wanted to get a bit more granularity on the specific reason from the 10% decline, when we have seen at least on the coal production side, the volumes have increased, but for us, TAN volumes have seen a 10% decline.

We have also alluded as for the reason on the Russian imports coming through.

Incrementally, we do see that the newspapers only suggest that these things are only going to increase.

Yes.

So the question was mainly on the TAN volumes front.

We have seen a 10% kind of a decline on a Y-o-Y basis.

One of the reason that we have given is the rising imports from Russia.

And the newspapers suggest that this is only going to get higher during the calendar year 2023, given that there were very few imports in CY '22.

So how are we gearing up to address this?

So would the market share would be at risk?

Or would the profitability that we have seen is at risk?

So that's my first question.

Second, on the gas front, even though we have said that it is linked to the Brent and at a significant discount.

But it would be really helpful if you could some more granularity as to what slope is what been looked at since it is for 3 years, and how that would change over a period of next 3 years?

And ultimately, the benefits that we have been suggesting, at least, from the ammonia gas plant front, how that would change with the new gas pricing that we have entered into?

Amitabh Bhargava

Yes.

So to your first question, the TAN volumes were down 10% Y-o-Y not just for the Russian import, as I also mentioned that there was a delayed pickup of infra and non-coal demand.

Also, typically, what happens is that the demand also picks up in Q3, driven by Coal India subsidiaries tender process where explosive manufacturers also, we supply them through two separate routes.

One is through ENs, and there is a part that we supply to these mines directly.

So some of those tenders also got delayed.

So it's more of a -- we believe that overall from a full-year standpoint, the target that Coal India has for overburden removal or for coal production, that will remain.

And to that extent, we will see that improvement coming in Q4, and particularly once those tenders are out, which normally happen in Q3, this time it got shifted to Q4. Also, I think while Russian import has happened but fundamentally, the import volume remains within a narrow range, which bridges the gap that is there in terms of our demand -- country's demand of TAN and our local suppliers.

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Moderator · Conference Operator

We take the next question from the line of Jatin Damania from Kotak Securities.

Jatin Damania

Sir, just follow-up questions on the earlier participant's regarding the TAN volume.

Now since you've already disclosed a 10% decline because of a delayed demand.

Sir, what are the early signs that we're getting in month of January?

And second follow-up on the same.

With the raw material prices which are corrected on the sequential basis compared to the last quarter, have we seen any correction in the TAN realization in the month of Jan and Feb?

Amitabh Bhargava

So overall, I think while -- you are talking about Q3 in terms of volume reduction.

Overall, 9 months standpoint, we are -- our overall TAN volume, if I can just quickly, what the numbers 8 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited

Moderator · Conference Operator

We'll take the next question from the line of Naushad Chaudhary from Aditya Birla Sun Life AMC.

Naushad Chaudhary

Some clarification, sir.

Firstly, just wanted to hear from you, what was the thought process behind setting up our ammonia project?

If I understand this correctly, earlier we were importing ammonia, now we are fighting for gas.

So it is not helping us to at least reduce the volatility in the business.

In fact, it is creating a slight more problem because gas would typically be more volatile, plus the seller of gas, the supplier would be much more stronger than the ammonia suppliers and you have to sign a contract versus the TAN product, I believe, is a spot business.

So it's bringing more volatility to the business.

Can you explain this, sir?

Amitabh Bhargava

See, one is I just mentioned and I just explained in terms of numbers, the rationale -- economic rationale, financial rationale of going for an ammonia in-house as opposed to buying it from our Middle East sources.

So, we looked at the historical numbers and we have seen different cycles of both gas and ammonia.

And to that extent, it's kind of -- from an economic rationale, we could see that it makes sense, the kind of contribution margins that we make in ammonia.

That was one.

But more importantly, ammonia, see, when we are importing ammonia from -- largely from Middle East sources, we've been seeing significant challenges in the overall logistics.

As you know, even as much as we've seen volatility in commodity, we also saw a lot of uncertainty around the freight aspect of any commodity that you import, getting the ocean freight in terms of availability of ships and also the volatility we saw in the transportation costs.

So it's not as though the import of ammonia was without any uncertainty, particularly on the logistics.

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Moderator · Conference Operator

Sorry to interrupt.

Mr. Naushad, may we request you to join the question queue, sir?

We have several participants waiting.

Naushad Chaudhary

Just a follow-up on the previous question.

Amitabh Bhargava

The consumers who import 25%, we as manufacturers are not...

Naushad Chaudhary

Yes.

Is it because of the pricing benefit or because we don't have capacity that's why we import?

Amitabh Bhargava

No, we don't have capacity.

There is a capacity gap of 25%.

Moderator · Conference Operator

We'll take the next question from the line of Darshita from Antique Broking.

Darshita Shah

I wanted to understand what is fueling the prices of ammonium nitrate?

As you mentioned in your opening remarks, I think that we have seen an increase even on sequential basis.

So what is fueling the ammonium nitrate prices, A, especially when ammonia prices have fallen significantly in the recent time?

And secondly, what is the kind of differential are we seeing with respect to the domestic and international prices?

So if you could probably give some idea on the Russian imports that came in during the quarter?

What was the pricing differential over there?

Or was it largely the same as the price at which we are selling?

Amitabh Bhargava

Tarun, would you like to take that question?

Tarun Sinha

Yes.

I will answer the second question first about the pricing differential.

So basically, we need to just understand that the ammonium nitrate which is imported in India is of a different quality and that is called as fertiliser-grade ammonium nitrate, whereas what we make in Smartchem Technologies is called as technical ammonium nitrate, which is why it is called as TAN as an acronym.

And the fundamental difference between the two is the purity aspect.

So technical grade is a much more pure form of ammonium nitrate, which means it adds to the efficiency in the downstream operations as that TAN is being used compared to when the fertiliser-grade ammonium nitrate is used.

And there is a additional cost that the users have to bear and incur when they process the fertiliser-grade ammonium nitrate, which is imported.

Secondly, because of the reasons Amitabh mentioned earlier, the disruptions off and on that take place on the imported front compared to that as a domestic manufacturer, we provide 14 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited

Moderator · Conference Operator

Sorry to interrupt, ma'am.

May we request you to join the question queue, please?

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We'll take the next question from the line of Shree Krishna from JM Financial.

Shree Krishna

So in October last year, government had come up with this policy called One Nation One Fertiliser policy.

So, I just wanted to understand what is the impact on that in this quarter?

Amitabh Bhargava

Yes.

In this quarter, you mean Q3, what is the impact?

Shree Krishna

Yes, Q3. Yes.

Amitabh Bhargava

Actually, my colleague is not with me who is heading the fertiliser business.

So, I'm not very sure from which date that policy has kicked in.

But just to give you a sense that while, initially, I think there was a lack of clarity on what exactly it would entail in terms of the bag design, etc. But what we know and what we've implemented is that besides -- apart one side of the bag where there is a prescribed space where it has to reflect government's Urvarak Yojana kind of details.

There is roughly, if I'm not wrong, about 1/3 or a little more than 1/3 of the space is where the product specifications, the name of the company and our logo and brand is also printed on that.

So to that extent, in fact, while there is -- all bags carry one uniform kind of, I would say, the write up, which government has prescribed.

There is also a space where the companies are 17 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited

Moderator · Conference Operator

We take the next question from the line of Mr. Pratik from Systematix.

Pratik

Am I audible?

Amitabh Bhargava

Yes.

Moderator · Conference Operator

Yes, sir.

Please go ahead.

Pratik

Yes.

So, sir, on the TAN business, you had stated that we have to see the margin as a function of your product as well as solution.

So if the solution part will have a higher margin as compared to the product, is my understanding correct?

Tarun Sinha

So, I can take that question, Amitabh, if you want.

Amitabh Bhargava

Yes, please.

Tarun Sinha

Okay.So, as our Chairman again mentioned right in the beginning of the call, that as a group, we have embarked upon this transformation journey of products to solutions.

And this has been a journey which has -- in TAN business, which has been started about a year or 18 months back.

So, we are in the early stages of that.

We are basically helping our consumers to understand that this is another way -- one of the ways we can help them reduce their cost of mining or mineral production.

So in the initial stages, in the seeding stages of any new initiative technology, the margins are low.

But certainly, as we go along, the solutions margins are likely to become much higher and not just on a percentage basis, but also in the overall margin pie of the TAN business.

Pratik

Okay.

Sir, just a follow-up on this.

Do you have the bifurcation between how much solutions you have provided?

Amitabh Bhargava

We are not reporting our numbers.

We are not reporting any separate number.

Moderator · Conference Operator

We take the next question from the line of Mr. Abhimanyu Kasliwal from Choice Equity.

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Ladies and gentlemen, that was the last question for the day.

I would now like to hand the conference over to Mr. Amitabh Bhargava for closing comments.

Thank you.

And over to you, sir.

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Thank you very much.

Ladies and gentlemen, on behalf of Dolat Capital, that concludes this conference.

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

For further information, please contact:

Note

This transcript has been edited to improve readability

Reg. and Corp. Office

Sai Hira, Survey No.: 93, Mundhwa, Pune - 411 036, India

Web

www.dfpcl.com

CIN

L24121MH1979PLC021360

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.

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