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

Q1 FY2024 · July 28, 2023

July 28, 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.

We take the next question from the line of Mr. Vignesh Iyer from Sequent Investments.

Please go ahead.

Vignesh Iyer

This is regarding the fertiliser subsidy reduction that the government did and we have to take it in our books.

Just to get an understanding of it, whether this lower subsidy is extended for the second and the third quarter?

And what is the possible impact that we could see because of this just to get an idea of how does this pan out for the rest of the year?

Amitabh Bhargava

So, as such the revised subsidy announced by the government is valid or rather applicable from April 1st to September end.

The impact that we saw was about Rs.

161 crore odd is because of channel inventory.

So, going forward as much as the NBS has come down or will be lower NBS it would be applicable, even if the raw material prices have commensurately come down and as our MD was earlier mentioning that overall if you look at the product by product, per ton margins compared to what we saw last year, if we remove the impact of this subsidy reduction and the impacts that we have taken on our inventory, the margins are better, per ton margins in our products are better.

So, the impact could be a better sort of positive sort of traction both in terms of volume and margins going forward in the coming quarter.

Vignesh Iyer

Ok, and in the case of ammonia, let’s assume what the price that is running FOB $230 to $250, at what utilization level would we probably match this cost, I mean if we have to match the cost for our production what would be the utilization level that we would need to operate the plant at?

Amitabh Bhargava

The point I was making is that as opposed to running the plant at 70%, 80% it would always be better to run the plant at 100% capacity utilization, because the energy consumption norms are quite sort of perceptively better at 100% vis-à-vis 80%, but at 100% also current prices of gas and ammonia, we are in that negative sort of domain and to that extent the prices of ammonia need to recover for us to breakeven.

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Moderator · Conference Operator

Thank you.

We will take the next question from the line of Mr. Naushad Chaudhary from Aditya Birla Sunlife.

Please go ahead sir.

Naushad Chaudhary

Some clarification, firstly on as you mentioned that we are moving from commodity to specialty, especially on that TAN side of the business you said total cost offering kind of services we are now providing.

So, just wanted to understand the thought process behind it and what exactly we do here and what is the size of the opportunity we see in this kind of services?

Tarun Sinha

So, talking about the Technical Ammonium Nitrate business and the journey from commodity to specialty and the concept called Total Cost of Ownership.

So, there are two components of the term specialty, the way we look at it in our TAN business.

One is specialty products which are not commodity products and secondly is the customized solutions which make it special in terms of our offering to our consumers and the consumers being the mining industry, the mine owners, the mine operators, infrastructure projects so on and so forth.

So, those are the two components of specialty.

Now the concept of Total Cost of Ownership in simple terms means, if the cost of extraction of minerals or cost of extraction of rocks depending on whatever the case that’s what we are attempting to improve through these customized solutions and the way we are approaching that is there are essentially five value streams, the way we look at it in any mining operations, they are being drilling, blasting, excavation, hauling which is same as transport and then crushing if applicable.

So, these are the five value streams and the sum total of all the cost becomes the cost of mineral extraction for the mine operator.

So, we have started to build in capabilities in the form of tools, software, people capability, all of that over the last one and a half years to try and attempt to bring about improvements in each of these five value streams of a mining operation and thereby reducing the Total Cost of Ownership or Total Cost of Mineral Extraction for the mine operators which is going to be beneficial for them.

So, that’s in summary this whole solution based and specialty-based transformation journey of the Technical Ammonium Nitrate business riding on the concept of Total Cost of Ownership.

Naushad Chaudhary

And what is the size of opportunity we see here and how big can this be for us at least in the next two, three years?

Tarun Sinha

So, in terms of the opportunity the universe is quite large.

Effectively every single mine in India and every single infrastructure project in India has opportunities, if not in all those five values streams then at least in some of those value streams and you can just imagine how big is the 9 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited

Moderator · Conference Operator

Thank you sir.

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

Please go ahead sir.

Deepak Poddar

First , I wanted to understand the ammonia, our new plant.

Now you mentioned we are having $125 to $150 per ton of negative carry as compared to import parity prices, right.

So, as we stand, I mean on our overall capacity of 0.5 million tons if I have to just calculate so a Rs.

500 crore kind of an annual EBITDA impact could be there, because of this negativity with the import parity prices ?

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Moderator · Conference Operator

Thank you sir.

The next question is from the line of Mr. Jainam Ghelani from Svan Investments.

Please go ahead.

Jainam Ghelani

So, most of my questions have been answered, but I just have one more question.

So, have we signed any contract for gas pricing and if so what is the gas price that we have finalized on?

Amitabh Bhargava

So, we have signed contracts for the next three years of gas.

These are three different buckets of contract some contracts are related to Brent prices and therefore the prices of gas would depend on the Brent movement.

There are, balanced are linked with Henry Hub prices and also JKM, Japan Korea Marker, this is the domestic gas which is also capped by the government So, a combination of these three is going to determine our prices.

So, effectively we are, one is taking a view on Brent, Henry Hub and JKM put together.

So, it is difficult to say which way it could move.

What we have also done is we have taken a certain hedging position to ensure that if some of these commodities go up, we do have protection on the upper side.

Jainam Ghelani

And can we expect this to be the bottoming out of ammonia prices

Amitabh Bhargava

I think in our view the point I was mentioning about nitrogenous fertilisers and nitrates in general having seen the bottom, we are seeing demand recovery.

Also, the inventory which was there with producers is now getting exhausted.

So, nitrate prices in general nitrogen prices will go up from here and should go up from here and as the demand recovery happens the incremental cost 12 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited

Moderator · Conference Operator

Thank you.

We will take the next question from the line of Mr. Viraj Parekh from JMP Capital.

Please go ahead sir.

Viraj Parekh

Couple of questions on the debt side so what would be our gross and net debt as on date?

Amitabh Bhargava

Net debt is about Rs.

2,600 crore end of June and we were holding roughly Rs.

1,300 crore of cash, balance is about Rs.

3,950 crore odd of gross debt.

Viraj Parekh

And since we have seen a significant spike in the finance cost for the quarter gone by for Q1 vis- à-vis the previous periods should we work on this run rate in terms of the finance cost for the rest of the financial year?

Amitabh Bhargava

In general, there is an increase in NCLR and to the extent loans do get adjusted to or get reset because of the new NCLR on reset dates.

There is an increase or there would be an increase in interest cost, but incidentally for us compared to March 23, in June 23 our average cost of borrowing we have reduced by about 40 basis points.

We were earlier holding slightly expensive loans on ammonia projects which we repaid completely in this quarter and we are refinancing those loans with cheaper loans.

Viraj Parekh

So, just another one on this, so by the end of March 24 what should be our gross debt number, should we be at similar levels or there will be a spike?

Amitabh Bhargava

See fundamentally the ammonia project is now complete and particularly complete from the debt standpoint, whatever debt we needed to draw we have drawn an ammonia project.

The debt which would get added from hereon would be the debt on TAN in Gopalpur, roughly I would say Rs.

400 crore to Rs.

500 crore odd should get added on Gopalpur till March, equally through the year we roughly pay about Rs.

250 crore to Rs.

300 crore, we amortize the debt, and for the balance period whatever is the pro rata number that should come down.

I think that’s how we should look at the gross debt numbers and net debt would also in some sense would depend on how the business performs in the next three quarters.

Moderator · Conference Operator

Thank you sir.

We will take the next question from the line of Mr. Aditya Bagaria from Vision Capital.

Please go ahead sir.

Aditya Bagaria

Just want to get a brief overview on how the ammonia cycle works.

Now from what I understand there is a demand shortfall and because of that the markets are down.

But essentially all the in the world right now selling ammonia at a loss, because how does the ammonia end up being at the rate in spite of the gases being at the rate that they are.

So, if you can shed light on that, it would be helpful.

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Moderator · Conference Operator

Thank you sir.

The next question is from the line of Pinaki Banerjee from AUM Capital.

Please go ahead.

Pinaki Banerjee

I would like to ask some question on the Isopropyl Alcohol segment, in the presentation have mentioned because of that imposition of import restrictions by the Government of India has been one of the kind reasons for the significant jump in volumes this quarter and if you go back FY22, you had about 64,900 which had fallen drastically to 43,900 in FY23. So, how much are we expecting to produce for this fiscal considering the fact that all these import restrictions have come?

Amitabh Bhargava

So, this quarter our production has been around 19,000 odd tons, and our capacity utilizations were about 111%, and we produced about 19,467, we are quite hopeful that our run rates this year should be I would say extrapolation of what we have seen in Quarter 1.

Pinaki Banerjee

So, basically you are expecting to surpass your FY22 levels?

Amitabh Bhargava

I don’t know what the FY22 level as such but --

Pinaki Banerjee

It is around 64900

Amitabh Bhargava

Yes, I think that should be possible, though we will have to see how the prices on propylene prices vis-à-vis acetone prices also the overall demand side, we will have to see what happens in the next three quarters, but you know the signs in terms of what has happened in Q1 on turnaround in IPA are very positive.

Pinaki Banerjee

Actually, can you give us a breakup of in the segment with the ratio of B2B or B2C, is there any segregation in this segment --?

Amitabh Bhargava

We are largely or significantly still in B2B because pharma remains almost 80% plus volumes go into the pharma segment as solvent.

Even the other sectors that we service through IPA are largely B2B, which is the segment which in a sense is of the disinfectant we are focusing on institutional customers.

There is obviously there are product portfolio which cater to the retail customers, but our focus is also going to be in hospital segment as in disinfectant for our hospital segment.

Pinaki Banerjee

Just one last question regarding the TAN segment, actually since it is being used for manufacturing of explosives, are you supplying this products to any defense company?

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

Moderator · Conference Operator

Thank you.

We will take the next question from the line of Mr. Meet Vora from Emkay Global.

Please go ahead.

Meet Vora

My first question was, what would be our cost of producing ammonia, dollar per ton, including the current gas cost and the conversion cost versus the Middle East prices, where we breakeven, if we exclude the freight and customs duty that we pay while importing?

Amitabh Bhargava

I have already answered that question.

Meet Vora

The current gas prices including it should be around $380, our cost of producing ammonia?

Amitabh Bhargava

I mentioned that overall from an import parity versus our cost of production, we are in that $125 to $150 odd range depending on the prices fluctuation we are seeing in ammonia that’s the negative we are seeing currently.

Meet Vora

Secondly in terms of the contracts that we enter into, for our TAN and nitric acid business, how do we fit the pricing are these formula linked to ammonia or if you could just give a broad sense on what will be our spot, what will be our long term and how do we fix the pricing?

Amitabh Bhargava

Prices typically of any product, there is a combination of contractual customers and spot customers.

Contractual customers are typically on the basis of certain margin protection where we pass on increase and decrease in cost.

As far as the spot is concerned, we look at each of our customer locations, what is the next best alternative they have and typically our prices are to some premium over the other alternative given the quality of our product, given the kind of reach we have, the turnaround time in terms of reaching these products to our customers.

So, largely that’s the way any spot commodity or commodity we price on spot basis and we are not different.

Meet Vora

And what will be our ROCE for ammonia project that we would have initially worked on versus what would have changed now or just to know what will be the payback of this project that we were initially expecting versus what will be it now?

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Moderator · Conference Operator

Thank you sir.

We will take the next question from the line of Mr. Pallav Garg from Start Health.

Please go ahead sir.

Pallav Garg

The first question I wanted to know was the CAPEX plans that you have for FY24 and FY25, the TAN project is a one where you would be putting in most of your CAPEX, but apart from that is there any debottlenecking projects or assignment and apart from that any maintenance, so how should we look at?

Amitabh Bhargava

So, as of now the projects that we are working on after ammonia completion, TAN Gopalpur project is the only project that we are working on.

So, as such based on whatever decision Boards have taken so far that these are the projects, these two are the main projects that we are undertaking.

Pallav Garg

So, practically whatever remaining CAPEX for this project and additionally some maintenance CAPEX is what we should be expected, I hope my understanding is right?

Amitabh Bhargava

Yes, that’s correct.

See in the past if you would recollect we have also our MD has also made that point that the next round of growth that we see is also going to be from a potential opportunity that we would see in Brownfield expansion in Dahej acid project.

The timing of it or when does that happen, as and when that takes place, we would bring it to the investors but as of now these are the two projects we are working on.

Pallav Garg

And you mentioned a very interesting point that you have been taking some hedging positions to cover up for any spike in the raw material prices.

If you can divulge some details around what are these products, what index, what kind of percentage of your whole consumption menu and pricing levels if you can talk anything on that?

Amitabh Bhargava

Right now, we have taken position on Brent related contract.

We are evaluating the positions in other contracts as well.

Pallav Garg

And I believe the subsidy impact which we had for this quarter, Rs.

161 crore this is in a way there is not resulting in like any cash outflow rather it is just the impact on the P&L accounting statement items.

So, practically what the portion of the income which we registered for the fourth quarter of the last fiscal and one which is for this quarter, that is the impact which we have to bear, right?

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

Moderator · Conference Operator

Thank you sir.

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

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

Amitabh Bhargava

Well, thank you everyone for your insightful questions, for any further queries or clarifications please do get in touch with our Investor Relations team.

Have a good day and thank you so much.

Moderator · Conference Operator

Thank you.

On behalf of PhillipCapital (India) Private Limited that concludes this conference call.

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

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

Questions and answers

Moderator · Conference Operator

Thank you very much.

Ladies and gentlemen, we will now begin the question-and-answer session.

We will take the first question from the line of Mr. Madhav Marda from Fidelity International.

Please go ahead sir.

Madhav Marda

My question was on the ammonia facility, now that is about to ramp up, could you give us an update in terms of how the spreads are looking currently given there are RM costs for the gas and then the end market pricing?

If you could just share that, please that will be helpful.

Amitabh Bhargava

So, we are currently looking at FOB Middle East prices of about $230 to $250 odd in that range and given the current gas prices, I think overall we would somewhere be between $125 to $150 odd negative in terms of our import parity prices versus the prices at which we would be producing ammonia.

That said I think there are two other points I want to make one is that while the import parity prices of ammonia are obviously derived from $230 to $250 odd FOB Middle East, the domestic prices of ammonia, the ammonia that is created domestically we are still seeing significant premium over import parity and that reflects the cost of production because for all the producers of ammonia who trade into surplus ammonia, the gas prices still remain elevated and that gives us an opportunity to place part of our ammonia in the domestic market.

Also, the quarter gone by we saw almost 18, 20 days of disruption in ammonia and that’s again one uncertainty that we would once our plants start operating commercially that uncertainty around therefore the production of our downstream products like TAN and acid, that uncertainty 6 | P a g e Deepak Fertilisers And Petrochemicals Corporation Limited