DEEPAKFERT — earnings call

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Prepared remarks

Earnings Conference Call · Q2 FY2024

Q2 FY2024

November 3, 2023 · Management

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Earnings Conference Call · Q2 FY2024

Q2 FY2024

Moderator · Conference Operator

Ladies and gentlemen, Good day, and welcome to Deepak Fertilisers and Petrochemicals

Earnings Conference Call · Q2 FY2024

Q2 FY2024

Moderator · Conference Operator

Thank you.

The next question is from the line of Nishit from Aequitas Investments.

Please go ahead.

Nishit

I wanted to understand that now since the TAN export ban is lifted, by when do we see the exports to start?

Tarun Sinha

Yes, you're right, the export ban for ammonium nitric finally got lifted a month or 2 ago from now, which is a great news and currently, I think you must have picked it up for the information available on the public domain, that our company is going through some corporate restructuring and one of them has been the name change of our previous company, Smartchem, which used to house technical ammonium nitric business and fertiliser business to another company called Mahadhan Agritech Limited, which continues to house the same 2 businesses as we speak today.

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Moderator · Conference Operator

The next question is from the line of Arvind from ValueQuest Investment Advisors Private Limited.

Arvind

Few questions from my side, some of them have already come up.

Now when we talk about the fertiliser subsidy going forward, this is obviously a backward-looking policy.

So, is there a possibility that any more could be hitting us around this coming, the election time?

And the second thing, that I would like to ask is, in some areas, we are talking about 118% capacity utilization.

Some light on this, what does this mean? and whether can a plant operate like this for a long time, or then, how would it reflect on the operations of the plant as well?

Deepak Rastogi

Subsidy part is difficult for us to predict anything, but we do not expect that any changes because this subsidy notification is applicable until March 2024 and hence, we are not expecting anything which will come in between.

The other question is on the account of our TAN capacity utilization, which is predominantly at 118% and obviously, we are taking steps to improve the capacity going forward till March and things like that and because we are debottlenecking it and hence, this position is going to improve going forward.

Moderator · Conference Operator

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

Deepak Poddar

I just wanted to have a few clarifications.

Now the subsidy impact of the last 2 quarters that has come, the subsidy rate remains same there's no further impact, right?

All the channel inventories impact has already been factored, right, in our P&L?

Deepak Rastogi

Yes, that is correct.

Deepak Poddar

You did mention that including the government benefit, at current price of $550, that is FOB Middle East price, right?

Deepak Rastogi

That is correct.

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Moderator · Conference Operator

The next question is from the line of Sharan, an individual Investor.

Sharan

My first question is, historically, how has been the price of ammonia fluctuating? and when do you see you are getting the benefit from the new plant with respect to price getting increased?

Deepak Rastogi

The ammonia prices, FOB Middle East, has been ranging from $250 to almost close to $1,100, and these are in U.S. dollars, FOB Middle East price.

Sharan

What factors, does this price fluctuation impact? and from when do you see getting benefited and from what price onwards Deepak will start getting benefit of it? and when do you see it happening?

Deepak Rastogi

So effectively, it also depends upon how the gas prices are moving up and down, so it is not a straight answer.

But as I said, currently, we have a positive spread of around $100, $150 based on the current FOB Middle East, and that will change over a period of time based on how the global prices are moving up and down.

Sharan

Other question is the new specialty chemicals for solar and the semiconductors.

From when do you see those getting into production? and also, what do you see from, like, from next 1 or 2 years, the revenue and the benefit from that, the profit?

Deepak Rastogi

For solar, as we have communicated in our press release also, that we will be starting production from October of this year.

As far as semiconductors are concerned, obviously, the market is still growing in India and it will take some time for us to get to a full-scale revenue level and for a solar perspective, since obviously, it's a forward-look statement, we will not be able to comment that how much and to the extent of the revenues, specifically for this particular request.

Sharan

The other question on the same is, like, basically, are there any other producer who is producing a similar kind of chemical in India? and what's the total market size for that chemical, and what is going to be your share in that?

Deepak Rastogi

Currently, to our understanding, there is nobody else who's actually doing this at this point in time.

Sharan

Okay, and what's the market size for Deepak in that segment overall?

Deepak Rastogi

So, we have just started that.

We are talking solar grade.

So, we have just started that and we are obviously landscaping because the solar markets itself is obviously in a nascent state and growing.

We basically are doing our own market studies to figure out how much that market would be and how much we will play into that.

Sharan

On the last question about the Pune real estate sale, just like noncore asset sale.

Any update on that?

Deepak Rastogi

As we have mentioned that we would be looking for such sale and take action, based on the Board approvals.

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Moderator · Conference Operator

The next question is from the line of Niraj, an Individual Investor.

Niraj

I just wanted to know what is the status on demerger, which was announced long back?

What is the current status of NCLT approval, and by when we can expect listing of these 2 businesses?

And second, what is the status of Gopalpur project.

Can you please share a tentative investment amount, which has already been done in this project till now?

Deepak Rastogi

Your first question on the NCLT approval.

We basically have got a hearing coming up for this NCLT order, which is fixed on 10th November and if the order is passed, then we will know the outcome.

The other question which had on the TAN Gopalpur right now.

So, we have currently spent close to around Rs.

525 crores worth of capex, which we will see WIP and that would be up and running sometime in the second half of FY2026, so FY2025-26.

So that is the currently COD dates which we are looking at.

Niraj

let's suppose if we get the demerger approval in November, by when we can expect the listing of these 2 businesses.

Is there any plan currently?

Deepak Rastogi

Whenever we firm up those plans, we will come back as a part of our statements.

Currently, there is no approvals which we have right now to go for a listing.

Niraj

Any plans of any strategic investors participating in mining business?

Deepak Rastogi

We continue to obviously have those discussions and whenever there is a right time, get the Board approvals and all, we will come back and communicate accordingly to all.

Niraj

One last question.

Recently, the government has lifted the ban on the TAN export.

So, you were sharing some information on that.

It'll take maybe a couple of months before we start exporting it.

Can you give the tentative numbers?

What would be the revenue breakup of TAN in terms of export, in terms of domestic?

Tarun Sinha

Right now, the ban, which has been lifted, it comes with a quantity.

So, it's a bit of a cap.

Because usually, when government of India imposes ban on certain commodities or products and when it starts to lift it, then it is not an abrupt complete lifting.

It is state-by-state lifting, which then determines what quantities can start moving out in the form of exports.

For this financial year, the quantity which has been allowed for export is 20,000 tons, and that's the sort of ceiling and then subject to how things pan out in the next financial year, in terms of the overall demand/supply of ammonium nitrate in the country, which is required for the mining and infrastructure sectors' growth, then again, government may review this and decide to revise the quantity.

So that's the kind of guidance I can give at this stage.

Niraj

Any understanding on Russian dumping?

Anything in foresight we can understand that this can stop by so and so time or any implementation of antidumping duty by Indian government?

Any update on these lines?

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Moderator · Conference Operator

The next question is from the line of Parshva Veer, an individual investor.

Parshva Veer

I have 2 questions.

First thing is what is your current TAN capacity?

Deepak Rastogi

So, we have close to 525 lakh metric tons.

Parshva Veer

If I understand correctly from that, only 20,000 tons will be exported.

The remaining will be used for domestic sales, and you're operating on 100% TAN capacity.

Am I correct?

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Moderator · Conference Operator

The next question is from the line of Dhaval Sanghavi, an individual investor.

Dhaval Sanghavi

Based on Chairman's comment side, where we are moving from commodity to specialized solutions, I just wanted to understand, from a broader perspective, like, from a 3 year perspective FY2027, where do we see ourselves as an organization, as a company, what direction addition we want to move, what kind of revenues on an average we should be expecting?

Deepak Rastogi

Moving from commodity to service providers is predominantly, we are doing in 2 businesses.

Actually, all the businesses but predominantly in TAN, so I would request Tarun to just give some glimpse on how he looks at the business, so over to you, Tarun.

Tarun Sinha

The way we are moving into the solutions business model, as far as our group's Mining Chemicals business is concerned, is we have come out with a concept, which we call as total cost of ownership, TCO as an acronym, in short.

In simple terms, layman perspective, what that means is when a mine operates, it is basically operating to extract some minerals or to extract some rock, whether it is a mine or an 13 | P a g e Deepak Fertilisers and Petrochemicals Corporation Limited

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Moderator · Conference Operator

Thank you.

The next question is from the line of Rishab Agnihotri, an individual investor.

Please go ahead.

Rishab Agnihotri

Because of the DAP subsidiary cut, there's like a margin shortfall of around USD 100 per ton on imported DAP, right? and we imported, like 2,950,000 ton in September 2023.

I think Deepak produces that.

So, do you see that as an opportunity going forward in the fertiliser market?

Deepak Rastogi

I can only say that we do not manufacture DAP for ourselves.

We generally have trading volumes there and based on the opportunities and the market, we continue to take those calls on a quarter-to-quarter basis.

Rishab Agnihotri

The second question is on the line of TCO.

So, I think you have executed some projects.

Can you give us some guidance on like the solar industries as a competing segment, and explosives, and then they cater to the same mining industry.

How does your TCO solution compete with solutions like them?

Tarun Sinha

Great question.

Thank you for that.

So, one way to look at this is, what Deepak is trying to do, as a solutions model, is completely different from any explosives manufacturer in India.

I'll try to explain it in simple terms.

All the explosive manufacturers in India, they supply explosives to the mining industry and the infrastructure industry.

They invoice the client for the inputs in the form of explosives, in this case, and they get paid on the basis of the inputs that they have provided.

What we are developing as a business model is, in order to impact all this Drilling, Blasting, Excavation, Transport and Crushing value streams in a particular mine, we are definitely putting in inputs there in the form of Products, Services, Technology, Solutions, People on the ground.

So that's the input, which definitely we also invoice for.

But in addition to this, and here comes the difference.

In addition to these inputs, we guarantee certain outcomes as a result of the inputs that we provide to the mines and infrastructure projects.

So, in other words, we agreed to a set of KPIs as outcomes coming out of the inputs that we are putting.

So, in other words, we are putting our skin in the game and in doing so, we also request the beneficiary, which is the mining company or the mine operator to share a part of that benefit, which they get through the inputs that we provide and through the outcomes that we guarantee and produce for them.

We share a benefit for those.

So, we also get paid for this output and the outcomes that we generate.

That's the fundamental difference between us and explosives manufacturing companies.

Input only in one case versus input and guaranteed outcome and getting paid also on the basis of the guaranteed outcome.

So that's how I will try to summarize it at a high level.

Moderator · Conference Operator

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

Deepak Poddar

The ammonia plant got commissioned, I think, in the first week of August somewhere, right?

So ideally 2 months of incremental depreciation and interest would have got factored in, in this current quarter?

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Moderator · Conference Operator

The next question is from the line of Jason Soans from IDBI Capital.

Jason Soans I just required a certain clarification.

When you look at the results and the notes to the accounts, you mentioned that there is a loss of Rs.

148 crores, emerging out of the initial stabilization period for the ammonia plant.

Now when you look at the presentation, this amount reduces to Rs.

87 crores.

So, I just wanted to reconcile what is the right number for this stabilization?

Deepak Rastogi

So, Rs.

148 crore actually is the PBT number.

Rs.

87 crore is the EBITDA number.

So that is the difference.

Both numbers are correct.

Jason Soans

Just one question.

I just wanted to know, I understand that you have announced the demerger of the TAN and the fertiliser business and have seen the structure of it.

But just wondered if you could just throw some colour on what you want to achieve through it, what is exactly your game plan to this restructuring, that would be really helpful.

Deepak Rastogi

So, are you asking the question, like, what is the game plan of restructuring of this demerger?

Jason Soans

Yes.

What's the objective of it?

Because I understand that you would want to move.

You've already highlighted that you would want to move from a commoditized business to a more specialized one, and you're taking steps towards it.

Now just in terms of the corporate structure, it was a little hazy to me.

Just wanted to know what exactly your objective behind this corporate structure.

The new one which you have, I can see it in your presentation, so I just wanted to know some colour on it.

Deepak Rastogi

Earlier, the structure was that Deepak Fertilisers, which is a holding company, was actually holding and it continues to hold the Industrial Chemicals business as well as the reality business.

Underneath, there was a company called STL, which has now been renamed as MAL.

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Moderator · Conference Operator

The next question is from the line of Shivnil Giri from Centrum PMS.

Shivnil Giri

Just regarding the Mining segment, the Mining business.

You mentioned that you'll be reducing the cost of ownership for the mine owners.

So, will this be coming from yield enhancements or changing the type of mix that is being used to complete the process?

What would that be?

Tarun Sinha

As I was mentioning earlier, and this is just a recap in case you may not have captured it at that point in time.

There are 5 value streams in an operating mine, usually, which are namely Drilling, Blasting, Excavation, Transport and Crushing.

This is how the rock is extracted and there are products in the form of different types of explosives that we are using.

There are different kinds of services, which is on-bench, last-mile execution services.

Then there are different kinds of blasting technologies in the form of software, tools also include artificial intelligence, using drone, doing predictive blasting models so that next blast gets better than the previous one, so on and so forth.

It's a combination of Products, Services and Technologies, which we depute and deploy and supported by people, of course.

Because this needs really high skilled people, which is a hard thing for any company to make overnight because its first thing is to recruit the right types of sort of people who understand the consumers' language, and then to train them up and then to hand them over all those tools that I was talking about, supported by products and services and then this team was to go and deliver all this mine.

So, it's a combination of all of this, which actually helps our consumers in terms of improving their performance.

Shivnil Giri

But wouldn't the cost of ownership increase be using these enhanced services over a period of time?

Because then you would have to offset that with certain improvements in their outcomes right now and our outcomes right now how much you can expect from a rock or from any mine for that matter.

How would that cost of ownership get?

How would they be able to compensate that with your enhanced services?

Tarun Sinha

The way it works is, we first do a baselining.

So, as we step into a mine, let's say, we do a baselining of their existing cost of extraction of mineral, which has got some benchmark levels of cost of raw material, everything included and then we take up some pilot blasts through our own design, software, all of that, that I was talking about, in some cases, changing products and different kinds of services and we analyse through the pilot blast which of the 5 values between drilling and crushing we can actually impact, and then we convert that in the form of a proposal to the mining companies.

So that's how we go about doing it.

Take the process, which works like that.

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Moderator · Conference Operator

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

I now hand the conference over to Mr. Deepak Rastogi for closing comments.

Deepak Rastogi

Thank you, everyone, for your participation.

For any further queries or clarifications, please do get in touch with our Investor Relations team.

Thank you, so much, and happy Diwali, to all of 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.

Deepak Balwani Associate Vice President – Investor Relations [identifier removed] +91 20 6645 8733 Anvita Raghuram/Bhushan Khandelwal Churchgate Partners [identifier removed] +91 22 6169 5988

Questions and answers

Moderator · Conference Operator

We'll now begin the question-and-answer session.

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

Jainam Ghelani

I want to check on the ammonia facility that now you said that the last quarter, we had an impact on the stabilization of the plant to the tune of Rs.

87 crores that we have already taken a hit.

Now with the gradual ramp-up of the facility, can you give us the update in terms of how the spreads are looking currently, given the gas prices contract that we have already entered?

Deepak Rastogi

The way the ammonia prices are currently, and they are in the range of around 550, the spread is closer to, give or take, around $75 to $100 is the spread right now.

Jainam Ghelani

But the $75 to $100 is including the benefit that we're getting from the government in terms of subsidy and the steam benefit?

So that means equal to almost $150 to $160 of this that we could get it in Q3?

Deepak Rastogi

Yes. closer to that.

Jainam Ghelani

In terms of the capacity utilization, how shall one look for the second half in terms of the ammonia plant?

Deepak Rastogi

We are already reach the 100% designed capacity.

So, we think we would be around 90% to 100% capacity utilized during the H2.

Jainam Ghelani

Second question is on the TAN business.

Now since that you have already indicated that our volume is growing in the TAN because of strong domestic demand, but there is a huge dumping by the Russia .

I just wanted to understand whether we are getting any measures or the protection from the government and how shall one look in terms of the margin of the TAN business when the imports are continuing at such a high level?

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