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

Q4 FY2023 · May 19, 2023

May 19, 2023 2 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited

Moderator · Conference Operator

Ladies and gentlemen, good day, and welcome to the Deepak Fertilisers and Petrochemicals

Thank you.

The next question is from the line of Vidit from IIFL Securities.

Please go ahead.

Vidit

My first question was again coming back to the new ammonia plant. so, we have tied up around two-thirds of our procurement for the next 2 to 3 years at least have near-term procurement.

Can you guide how much this is and what cost we will be paying for at least in the near term?

And also, if you could give us an update on the current dynamics of the plant in terms of how much we will be making at prevalent rates of ammonia and gas?

Amitabh Bhargava

Your first question is in terms of the quantity of gas. so, we require roughly about 1.3 billion cubic meter of gas per day, and we have tied of about 68% of that.

That said, the balance 32% is also at an advanced stage in terms of finalizing the commercial terms and signing the gas supply agreement.

These gas contracts have different underlying price benchmarks, mainly Brent.

Some part of the gas is linked with Brent prices.

There are a part of the contract is also linked with the JKM prices, but at the same time, because it is coming from KG basin, it is also governed by the price cap that government comes up and revises every 6 months. so, it is JKM linked, but cap that the PPAC price ceiling that government determines.

The contract that we are looking to tie up, again from a diversification point of view could also be linked with Henry Hub prices. so, we are trying to create a portfolio where it is linked with different benchmarks, and to that extent diversification so that we are not dependent on or expose ourselves to volatility of one of the only one underlying commodity mainly oil or spot prices of LNG or Henry Hub.

Now at the current prices of ammonia, I think we have discussed this at length in terms of typically what is our economics.

We require of roughly about 33 odd million BTU of energy 9 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited

Moderator · Conference Operator

Thank you.

The next question is from the line of Chirag Shah from White Pine.

Please go ahead.

10 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited

Thank you.

The next question is from the line of Deepak Poddar from Sapphire Capital.

Please go ahead.

Deepak Poddar

Sir, I wanted to dwell more on the ammonia mechanics that you mentioned.

So, what I understood is that if I have to buy ammonia from outside, our landed cost would be close to about $700 per ton, whereas from our plant we would be able to manufacture at $500 per ton. so, $200 is the spread that we will get from this ammonia plant.

Is that right?

Amitabh Bhargava

No, I quoted last 10 or 15 years average number, and those numbers were more like $560 and $360, the gap of $200.

Deepak Poddar

No, as per current term I was just trying to understand.

Amitabh Bhargava

The current prices would be lower for ammonia because the $560 is based on 420 odd dollars of FOB Middle East. so, as the current FOB Middle East would be more like $280 to 300 odd dollars, gas prices are today on a higher side compared to the gas price that I mentioned from a last 10 or 15 years perspective. so, today, the margins are obviously more like, I think we are at breaking even rather than having that 200 odd dollars of margin, and that is where the point I was making is that one needs to look at it across the commodity cycle and not at a point in time in that commodity cycle.

Deepak Poddar

I got that point.

So, currently, the spread is barely anything, right?

I mean, that’s what you are saying.

Amitabh Bhargava

Yes.

Deepak Poddar

And from this plant, what would be the incremental depreciation and interest cost that will come in?

And we are going to capitalize it from the first quarter onwards, right?

13 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited

Moderator · Conference Operator

Thank you.

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

Please go ahead.

Vignesh Iyer

I just wanted to understand what was the spread of natural gas to ammonia in Q4, just to get an idea?

Amitabh Bhargava

Let me just correct one figure.

Depreciation would be around 110 odd crores.

Vignesh Iyer

So, I just wanted to get an idea.

So, from what I understand, now we are breaking even at today’s level.

Just to get an understanding, what was the spread if you could quantify in Q4?

Amitabh Bhargava

Let me just check that, please.

I will answer your question.

We can, in the meantime, go to the next question.

Vignesh Iyer

How is it panning out the new ammonia facility?

If you could just give an idea when it’s going to start on the timelines, are we on time to with that timeline and by when?

So, basically this facility is to backwards integrate, but our TAN facility will take some time to coming up, right?

Amitabh Bhargava

We are looking to commence operations in Q1 itself.

And therefore, roughly nine months of operation is likely to be completed in this financial year.

We need to still see what kind of capacity utilizations, but ammonia plant technically speaking can ramp up to 100% capacity fairly quickly, but we will have to speak whether we touch that capacity soon enough, but we are confident that this year we would run it at least average of 80% capacity utilization, and so overall I think 75% to 80% given that we are also losing 3 months, roughly 3 months in the year. so, Q4FOB Middle East prices were on an average of $670.

Vignesh Iyer

Sir, I just wanted to understand what the spread was?

I mean, was it at $200 in Q4?

Amitabh Bhargava

Q4 gas prices would have been given that these again were linked with Brent, Henry Hub, and JKM, JKM component would have been on a higher side.

So, on average, very difficult, but I 14 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited

Moderator · Conference Operator

Thank you.

The next question is from the line of Chirag Shah from White Pine.

Please go ahead.

Chirag Shah

Sir, on the fertilizer business, if you can just throw some light.

I have seen a very strong number.

So, how much of this is kind of sustainable?

That's the first part.

Is there any specific to note about it which could be a lumpy or a temporary event and some reversal could happen?

Amitabh Bhargava

Last year our capacity utilization in fertilizer in the bulk fertilizer which is where our Ammonium Nitro Phosphate, ANP, and the NPK both Croptek and Smartek capacities are, they were while ANP was roughly about the capacity utilization there was more like 65%, 70%, but the capacity utilization at NPK Croptek and Smartek were on the lower side partly because our Croptek products are at premium in terms of pricing.

Given the raw material prices were at a higher- level last year, we saw some challenges in terms of the demand size or affordability of farmers, but even in that kind of an environment, our Croptek, we clocked a total of 1.01 lakh tons of Croptek we sold.

In the previous year, in fact, it was about 40,000 tons. so, we have seen almost 2.5 times jump in our Croptek product.

One is fundamentally a capacity utilization, and we do have a headroom available in increasing our capacity utilization in both ANP and NPK, and given the raw material prices are going down, and therefore, in general, MSP of these products particularly the premium products would also commensurately come down.

We are quite hopeful that this year our Croptek volumes will grow further and by a good margin.

So, that's one commentary as far as the volume is concerned.

On the overall margin front, given that last year we had made some changes to our portfolio because some of the portfolio that we produced were seen certain lower margins. so, we did not produce some of those grades, but this year given where the raw material prices are and NBS, the recent NBS that has been announced by the government, we see all our grades making selling good margins.

So, even the volumes in non-Croptek NPK, which is in the Smartek category, this year we should see better volumes overall.

Overall, as far as your question of one-time kind of an impact, given 15 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited

Moderator · Conference Operator

Thank you.

The next question is from the line of Ranjit from IIFL.

Please go ahead.

Ranjit

The first question is in the opening remarks, Chairman has alluded to some headwinds in the domestic TAN business with the influx of imports.

So, just wanted to get a sense how do we see the profitability panning out over the next 1 year?

And that also with our own backward integration into ammonia, so we always have this decision to make whether to buy or make.

How that play out for our base TAN business over the next 1 to 2 years?

Amitabh Bhargava

TAN business, as Chairman was also mentioning that there has been increased imports in Q4, and there has been high opening inventory.

To that extent, we are going to see some pressure on the prices.

But fundamentally, as far as the demand sectors are concerned, whether it is coal or the infrastructure, we are not seeing any weakness.

In fact, if at all the kind of investment government has announced, we are likely to see better off take on the infrastructure segment.

So, demand-wise, in fact, volume-wise, we are hopeful that this year with our increased capacity which last year we utilized partially, but this year we have that available for the full year.

Our volumes should be better.

Margins-wise, if you see current prices and the current import situation is such that we may see some pressure on the margin side.

But we will have to see by the time the season again picks up post monsoon, we will have to see what happens to the prices of both imported TAN and ammonia.

So, buy versus make, at this moment, see, we were, anyway, even earlier, we were making roughly about 100,000 tons of our own ammonia from an old plant, which was it was actually far less energy efficient. so, we are going to, to the extent of our own requirement, we would actually see a better economics in the operations of the new plant because it's far more energy efficient.

Assuming the same gas price, our cost of production from the new plant would be better than what it was in the old plant.

That's one aspect.

The second aspect that in the event we produce more ammonia than what we consume, we are also seeing that the local graded ammonia or ammonia that is bought by players whose consumption is on a smaller level, and they don't 16 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, that is the last question.

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

Amitabh Bhargava

Thank you everyone for your participation.

There were interesting questions, and I think most analyst investors were focused on our ammonia plant which is rightly so because we are going to start our operations very soon.

For any further queries or clarifications, please do get in 17 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited

Moderator · Conference Operator

Thank you, members of the Management team.

Ladies and gentlemen, on behalf of PhillipCapital (India) Private Limited, that concludes this conference call.

We thank you for joining us and you may disconnect your lines.

Thank you.

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.

CA.

Deepak Balwani Head – Investor Relations [identifier removed] +91 20 6645 8733 Anvita Raghuram/Kavin Sadvilkar Churchgate Partners [identifier removed] +91 22 6169 5988

Questions and answers

Moderator · Conference Operator

Thank you.

The first question is from the line of Vishal Prasad from VP Capital.

Please go ahead.

Vishal Prasad

Amitabh, I think sometime in 2021, I had asked about our CAPEX, and you had explained in detail why we are doing Ammonia backward integration and the benefits we would have, but all has not happened during last 21 months. so, what we know today in terms of gas and ammonia price behavior, if today we have to take a decision on the CAPEX, would we come to the same conclusion, and you will choose to do the CAPEX?

Or will you be a lot more circumspect?

Amitabh Bhargava

Any of the long-term decisions which where you are building an asset for 25 - 30 years or even longer, you don't take those decisions based on what happened in last quarter or this quarter or the next quarter.

You need to look at the last 10 years, 15 years average number.

Now what has happened and you are right in that the gas prices have gone up.

And we know the reason why gas prices have gone up.

One of the factors has also been what has happened in terms of geopolitical changes that have happened in Russia-Ukraine war and therefore, suddenly Europe cramming for more gas.

Now those are the kind of events you would, no one would be able to anticipate, but that said, that still doesn't change the fact that in a matter of time, the gas prices will become and they have already corrected significantly from what we saw in terms of peak to we are looking at today, that we are JKM of around 10 or little less than 10.

So, we are seeing gas prices coming down.

We also equally are at a stage where barring our next 2 to 3 years which we have tied up, beyond those 3 years, next 15 years of gas that we are looking to carry upfront to 15 years is at significantly competitive rate because there are more capacities coming up globally of LNG.

Equally, on the ammonia side the fundamentals haven't changed that there are no significant investments have happened on Standalone ammonia plants globally, which is what typically would decide the prices of traded ammonia or the price at which we would end up buying ammonia.

Today, given ammonia what is happening to nitrogenous fertilizer and their demand, ammonia seems to be in excess.

It's overbought, and we would have to wait for this commodity cycle or this a low cycle of ammonia to kind of get through that.

And then because we are not building this asset for 1 year, 2 year, or a few quarters, it's a 20 years, 30 years or even longer asset.

So, I think, our decision certainly one does get influenced by here and now, but certainly in this kind of long assets, you have to take a 10 years, 15 years view, and you can't get a walk down by a high price of commodity or a low price of commodity those cycles would we always knew that low prices would come in 7 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited