Bodal Chemicals Limited (524370) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q1 FY '23 Earnings Call for Bodal Chemicals Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ankit Patel, Executive Director of Bodal Chemicals Limited. Thank you, and over to you, sir.

Thank you very much. Good evening, everybody. On behalf of Bodal Chemicals Limited, I extend a very warm welcome to everyone for joining us on our call today. On this call, we are joined by our CFO, Mr. Mayur Padhya; and SGA, our Investor Relations Advisers. I hope everyone had an opportunity to go through the financial results and investor presentations, which have been uploaded on the stock exchanges and our company's website. Let me give you a quick snapshot of the recent developments of our company, and then I will hand over the call to Mr. Mayur Padhya to talk about the financial performance. Our company, Bodal Chemicals, is India's largest integrated Dyestuffs and the Dye Intermediates manufacturer. In an environment where Indian suppliers are preferred as reliable partners globally, we have been able to leverage our leadership position. In domestic market our Dyestuff and Dye Intermediate market shares are around 13% and 20%, respectively. Globally, our dyestuff and dye intermediate market share are around 3% and 6%, respectively. I'm excited to share that over the last 1 year, we have successfully implanted the Chlor Alkali products in our product portfolio. We are expanding our product market and entering benzene chemistry products, and we are confident that we will be able to replicate a similar success in this new product as well. Coming to the performance overview during Q1 FY '23. Total revenue for the Q1 FY '23 stood at INR 463 crores, a growth of 8% on a year-on-year basis. Consumption of end-user industries has been on edge headed by many uncertain global events, although the rising raw material price has been positively reflected in our Basic Chemicals and Chlor Alkali business, which has partly negated the adverse performance of the Dye Intermediates business. We will now touch upon each business vertical and its recent developments. Dyestuffs and application industries of Dyestuff like textile, leather, paper have shown some moderation during the last quarter. The Dyestuff business for Q1 FY '23 stood at INR 150 crores compared to INR 131 crores in Q1 FY '22, a growth of 15% on year-on-year basis. Coming to Dye Intermediates. This segment has seen some pressure due to unprecedented volatility in key products like H-acid and vinyl sulphone prices. This quarter, revenue contribution from Dye Intermediate chemicals stood at INR 122 crores. The lukewarm demand from textile manufacturers due to the steep price hike in cotton has impacted the overall demand for dye intermediates to a certain extent. Average prices of key products, H-acid and vinyl sulphone have been moderated in Q1 FY '23 to INR 473 per kg for H-acid and INR 290 per kg for vinyl sulphone. More than 40%, 45% of these intermediate capacity is captively consumed resulting in a significant cost advantage for our dyestuff products. Given the healthy prospects for dyestuff, we strategically intend to move up the value chain and increase our captive consumption of dye intermediates. Moving to Basic Chemicals. Although our Basic Chemical division also reported healthy performance led by higher raw material prices, close to half of the basic chemical capacity is purely consumed for dye intermediates production. Our overall Basic Chemical segment contributed around 15% of our total revenue in Q1 FY '23 with a revenue contribution of INR 64 crores. Chlor Alkali business, this segment has come up well for us and has contributed meaningfully to our overall business. Since March, there has been a disparity in the price reported in India and China. The overall cost of production and the demand supply gap has been uncertain on the back of various geopolitical events. In India, the demand for key products like caustic soda has been healthy in FMCG, textile and paper industries. The Chlor Alkali business delivered a strong performance with revenue of INR 86 crores in Q1 FY '23. The upgradation of Rajpura caustic unit is on track and is expected to be completed by October '22. Post completion, our Chlor Alkali business will contribute a significant pie of total revenue. Our benzene derivatives and sulfuric acid, the Saykha GIDC project is progressing well and is expected to start a trial run Q1 FY '24. Indian manufacturers import a lot of benzene derivatives. Our main goal is to replace imports and capture business in the pharma and agrochemical markets where such benzene derivatives are used. Subsidiary performances. Our subsidiary, Sener Boya, has reported a notable performance, whereas the other subsidiaries have reported weak performance, especially the SPS unit due to the lower demand of dye intermediate products. In a medium to long-term view, we foresee these subsidiaries will improve in their respective region and will bring meaningful business to our company. In the last few weeks, we are seeing some green shoot events, and we anticipated a steady performance in the upcoming quarters. We aim to create a sustainable business model without losing the leadership position in our legacy business. In the coming years, we expect our business will be less volatile and more diversified as we will be serving a wide spectrum of end user industries. Thank you. And now I hand over the call to Mr. Mayur Padhya to walk you through the financial performance.

Good evening, everyone. Overall performance of the company has been steady for Q1 FY '23. Our consolidated performance for Q1 FY '23 is as follows: Total revenue stood at INR 463 crores for Q1 FY '23, a growth of 8% year-on-year basis. EBITDA stood at INR 54 crores for Q1 FY '23, a degrowth of 3% on year-on-year basis. EBITDA margin stood at 11.6% for Q1 FY '23. Net profit for the quarter stood at INR 23 crores for Q1 FY '23, a degrowth of 18% on a year-on-year basis. As highlighted earlier by Ankit, the sluggish response from end users has affected our primary business of Dyestuff and Dye Intermediates. Performance of the key subsidiary was healthy. Subsidiary, particularly SPS, posted revenue of INR 23 crores. Sener Boya has reported a total income of INR 26 crores. Total income from the China subsidiary was nearly INR 3 crores. Segment-wise performance on a consolidated basis for the Q1 FY '23 are as follows: Dyestuff revenue stood at INR 150 crores. Dye Intermediates revenue stood at INR 122 crore. Basic Chemical revenue stood at INR 64 crores. Chlor Alkali division revenue stood at INR 86 crores. TCCA revenue stood at INR 10 crores for the quarter. Total production volume on a stand-alone basis for the Q1 FY '23 are as follows: Dyestuff stood at 3,993 metric tons. Dye Intermediates stood at 3,442 metric tons. Basic Chemical stood at 51,594 metric tons. Chlor Alkali stood at 21,299 metric tons, of which caustic soda stood at 15,134 metric tons. TCCA stood at 299 metric tons. With this, I conclude the presentation and open the floor for question and answer. Anybody who has a question to answer can now start asking questions.

[Operator Instructions] The first question is from the line of Yogesh Tiwari from [ Aryan ] Capital.

My first question is regarding the Rajpura unit. So like Chlor Alkali, it's about INR 85 crores. So once this gets commissioned in Q2, what would be the revenue contribution of this unit in FY '23?

See, currently, the rates of, especially caustic rate is much higher than the average 5- or 10-year price. So if you take it at the current rate, then it will be more than INR 400 crores. But if I calculate it with a 5- or 10-year average prices of finished goods caustic soda, then it will be in the range of INR 300 crores to INR 350 crores.

Annually?

Annually.

For example, if like INR 300 crore additional revenue will come from only this Rajpura unit for FY '23?

It is not additional. It is going at that same rate. At a normal price, at an average price, it will be around INR 325 crores. So around INR 80 crores a quarter, which is going on right now also because of the extra higher price.

For your clarification, last year, this division has contributed INR 254 crores. So if we achieve INR 400 crores from this unit, then INR 150 crores is additional revenue from this division.

That is helpful. And if you can share what was the realization of caustic soda average realization for Q1 FY '23? And what is the current price of caustic soda in the market, the range?

The current price is around INR 55 delivered. So on an average, I think the manufacturers get around INR 53. That is today's market. For most of the August it has been around that, and we expect the price to be around that much for the month of August because there are a lot of exports happening from Gujarat. So August is going to be strong. September also, they are trying to take more export orders, so we can maintain the higher prices. And for this quarter, the average price was around INR 50, ex plant.

And sir, in terms of -- I just wanted to understand both Dyestuff and Dye Intermediates. So it's like there has been a slowdown in textile industry. And that was one of the reasons why Dye Intermediates revenues are down. But on the contrary, Dyestuff is on the higher side. So if you can help me understand if both are related to the textile industry, why is Dye Intermediates underperforming so much compared to Dyestuff?

So Dye Intermediates applications or customers are mainly in India. We have only few countries where we can export the Dye Intermediates like Taiwan or South Korea and et cetera. Whereas -- so basically, our Dye Intermediates happen mainly to the local Dyestuff customers here in India. But in Dyestuff, we have Sener Boya, which is our subsidiary in Turkey, so there they sell our Dyestuff. We sell in Turkey and surrounding countries market, which is one of the biggest markets in the world. Again, Bangladesh is a big market. And India, again, across India, there are many textile industries and paper industries. So that also -- so what I mean to say is it's a bigger international market for us. So the sentiment is different when it comes to Dyestuff. So it didn't affect us too much. And usually in the past also, whenever intermediates is slower, I think the same effect is not there in the Dyestuff, because customers are available across the world. Even South America, there is a big market, Vietnam and many other countries.

And sir, what would be your exposure to Bangladesh? Because -- and do you think that current crisis in Bangladesh can affect the demand for the products going forward?

No, our overall exposure to Bangladesh is very small in terms of percentage. And there have been some issues about payments, et cetera, but we are not facing any. So we have a strong supply chain. I think we are not affected. And also, our exposure is small because Dyestuff is only about INR 500 crores. It's about 25%, 30% revenue for the company, where hardly maybe 10%, 15% of that business. So at company level, our exposure to Bangladesh is probably not even 5%.

Sure, sir. And coming back to Dye Intermediates. There has been a very big decline in volume -- production volume. So is there a demand destruction or what would be the drivers for such a large decline?

There were multiple reasons why intermediates productions were affected, intermediate margins were affected because of these higher crude prices, because of this war-like situation, energy price is mainly co-related. It's still INR 10 plus, which on an average is available around INR 5. So intermediates is a very, very high energy-intensive industry. So that cost has really gone high. Comparatively, in China, I think it is available a little cheaper. I'm talking about coal. And the raw materials, which -- there are many raw materials that we buy from petrochemicals or refineries. So most of the raw material prices were at maybe 5-year higher or 10-year high, et cetera. So the input cost had also risen so much in a very short time, which we were not able to pass on immediately. Also, at the same time, there were some disruptions in China, where China had, in different pockets, COVID issues. So the Chinese productions are also affected of Dyestuff. So there was some extra intermediate export availability, which was dumped to India just temporarily. So because of all these reasons together, also there have been some -- not in the H-acid and vinyl sulphone but in other intermediates, there have been a couple of new units that have started. So some extra capacities have come up in some of the smaller products. So all these reasons put together, a couple of months where there was a lot of pressure. The margin were definitely impacted big time. But now -- so in fact, there were many plants, many facilities were shut. Even we had shut some of our facilities for time being. We had taken some maintenance work, et cetera, because it was not viable to produce. But we have recently restarted our plants, the main plants. And going ahead, a lot of the correction has happened in the raw materials also. So I think -- and because of that, because of many plants were shut for a month or so, all this inventory that was there in the pipeline, most of it is dry now. So what we are expecting is, we are definitely expecting a better time going ahead. I think we expect the Intermediate business to normalize going ahead now.

And coming to the benzene derivatives, which will be commissioned in about FY '24. Just want to understand if the margins on these products are more than the current margins which the company is making? And what would be the revenue potential in FY '24 from this product?

First quarter of FY '24 is the target to start the trial production. There's a lot of integration, and we are working with 3 international technologies. So I think commissioning this entire project will not be a very, very short job for us. It will take us a couple of months or more. And with such kind of processes and plants, it takes time to ramp up the utilization of the plants. So what I'm expecting is the first couple of quarters of FY '24 could be around -- could be at 50% utilization. And the remaining -- the last 2 quarters of FY '24 can be around 80%, 90%. So at that rate, I think we should do around INR 250 crores to INR 300 crores of turnover. At full pace in FY '25 when we utilize around 80% plus utilization of around 90%, I think we can do around INR 350 crores to INR 400 crores.

[Operator Instructions] The next question is from the line of Saket Kapoor from Kapoor & Company.

Sir, firstly, if you could give us some more color for this caustic soda partner. You were explaining that different geographies are behaving in terms differently, what the China market is and ex China. So if you could explain to us how is this playing out in terms of prices and also the capacity utilization levels globally. And for us as a country, I think INR 1 million is the addition that we will have in phases for our country caustic soda. So how is this addition is going to play out in terms of margins behaving going ahead? If you could give some more color.

I think caustic soda going ahead in the local Indian market is always going to maintain a very strong demand. It is not a recent development where new capacities are coming up. If you notice, the last 5, 6 years, there have been many new plants and many capacities have come up. So for example, DCM Shriram has gone from 500, 600 tons to 1,500 tons per day plant. This happened in the last 6 years. Meghmani went from around 400 tons per day to around 900 tons per day. Nirma also expanded. GACL and NALCO has the joint venture, which is called GNAL, that also recently started a brand-new plant. Also in north, there's a company called Punjab Alkalies, they have also recently in last 2, 3 years expanded. At the same time, in South [indiscernible] has expanded. So many companies have expanded. I think Atul Ltd. has expanded recently about 2 years back. So many companies have been expanding in the last 4 to 5 to 6 years. And I think still we are going through this patch. It's already been about 8 to 9 months. So overall, I think the many application for caustic is alumina, which is [indiscernible] aluminum, where the demand of aluminum in India and even across the world is very, very high. Especially after bouncing back from this pandemic, now all the infrastructure jobs, the pending jobs or the plans to develop infrastructure, et cetera, across the world is really going full swing. So because of these reasons I think I don't see demand of aluminum or even the other applications is like detergents or textiles or paper and et cetera, for caustic. I think going ahead, textile may be a little volatile. But other than that, I think all these other areas, the demand is going to remain very, very solid. China, which is about 50% of the world's capacity, is not able to set up new plants or increase capacities because there are many environmental challenges. There are reasons that they are not allowing thermal-based power plants, which is mandatory to bring down your cost because power is the most -- the main cost where you have to produce with cheap energy, then only you can complete. So that's the problem in China. Many areas are now getting banned to develop [indiscernible] industries, et cetera. So because of all these, there has been hardly any growth that has happened in chlor alkali capacities in China, which is the largest market, which is the largest producer. So because of these reasons, India was at around 4% global capacity. It has already gone -- I think, gone more than 6%. This has happened in a very, very short time. So India is placed -- it still has a very, very small share. But at the same time, there is a lot of consumption that is coming up in India because of all this good overall time that has been going on since last 5, 6, 7 years in agrochemical space, in chemicals -- overall chemical space. So there has been a lot of growth happening everywhere, especially in the western part of the country. So I think going ahead, I see this growth happening continuously for at least another 10 years. Because I think, right now, India is placed very, very well to grow or establish new products or do some R&D, develop some new products. So there has been a lot of transition of the products also that is coming from MNCs. There is a lot of opportunity already there and being grabbed by all these manufacturers like us to multiply our production, the China Plus One policy, like that trend is also helping us where MNCs and global larger companies are really now taking Indian supply seriously, and they are preferring to have India as a supplying partner. So all of these, I think, reasons put together, I think the demand of caustic soda is going to remain strong. India and China don't directly compete about caustic soda because caustic soda being a lower value product, countries or regions work in pockets. So for example, North America exports to South America or Europe or Western Africa. At the same time, India, because most of the capacities are in the Western India. So we work around Middle East and East Africa and et cetera, those markets. At the same time, China takes care of the Far East market or the Western U.S. part. So that is how the business works. And as I think going ahead something like a pandemic can disturb. Because of pandemic, the same caustic soda price was around INR 20 not too long ago. So if something extraordinary happens, then yes, it can go through a bad time. Otherwise, I think it's going to be a good demand overall.

Just to conclude, in terms of this increase of 1 million tons, which is going to be on stream for the country, and we are currently seeing that in the West due to the higher energy prices and because of this conflict of Russia and Ukraine, the cost of production has gone up significantly. So is this a good understanding that a good portion of this incremental capacity will be shipped out as you have already mentioned that the western part has good export order for the month of August also? Is this a good understanding that in earlier cases, when the capacity used to come on stream, there has to be -- there used to be pressure on margins because at one time, your consumption and your industries are -- the suppliers are limited only. And if you increase your production in incremental way, where would you sell because earlier there was jumping also from purchase order. So has that scenario completely changed, and that is adding to the advantage currently?

I think currently, this energy crisis in Europe is definitely helping because whatever markets Europe was catering, I think such markets are probably not getting enough materials. That is why those areas, those pockets have to buy from India or other markets. So that is why these extraordinary prices are there. I don't see these prices remain for a very, very long time. I think once the energy equation settles down in Germany and in other countries in Europe, then I think things will normalize. But still, at the same time, there's not going to be any growth. It's already been so many months of this war situation. So going ahead also, there is no creating. So one year of that growth that can come up from Europe is not going to happen. This is going to give us ideas. This is going to give Indian manufacturers to establish a good market. I think -- so it can definitely come down to those 32, 35, 40 levels. But again, that is again a very good market. I mean, so I think it's better to have a INR 35 price throughout the year, than have INR 50 or no certainty about price -- any price being maintained. So what I mean to say is I feel that it is going to remain in strong margin levels, but not too much in this range of 50 and all. So even the September is no -- there is no clarity about September at the moment because there's a -- literally a lot of exports being happened right now in this month. And literally, the Gujarat manufacturers who are exporting, they are short. They are so short that they are not offering -- some of them not offering material in the local market. So August looks good. I think September also, I think that because the things are not really changing in Europe and all, I think September also, there should be some exports, which would again support the local prices here.

And the price? The average pricing is above INR 50?

For this Q1, yes.

You mentioned...

Q1 it was around INR 50. The current price is around INR 53.

And sir, in your opening remarks, you did mention that with the commissioning of the new projects and with the derivatives production coming into play, we will have -- we will be reporting sustainable set of numbers. So on that aspect, if you could throw some more light. What are you trying to explain in terms of that? And also, sir, I have seen that the finance cost on a Q-on-Q basis as well as on year-on-year basis have gone up significantly. I'm not -- because the absolute number is still lower. So if you could explain the reason for the same? And how are the utilization levels currently for the different verticals?