Chambal Fertilisers and Chemicals Limited (CHAMBLFERT) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Chambal Fertilisers and Chemicals Limited Q1 FY '21 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Ms. Neha Patil from Perfect Relations (sic) [ Investor Relations ]. Thank you, and over to you, ma'am.

Thank you. Good afternoon, and thank you for joining us on Chambal Fertilisers and Chemicals Limited Quarter 1 FY '21 Earnings Conference Call. Today, we have with us the senior management represented by Mr. Anil Kapoor, Managing Director; Mr. Gaurav Mathur, Joint Managing Director; Mr. Abhay Baijal, Chief Financial Officer; Mr. V. K. Gupta, Vice President, Marketing; Mr. Rajveer Singh, Vice President, Legal and Company Secretary; Mr. Anuj Jain, Assistant Vice President, Finance. Before we begin, I would like to add that some of the statements to be made in today's discussion may be forward-looking in nature. We will begin the call with the opening remarks from the management, after which, we will have the forum open for interactive Q&A session. I would now request Mr. Kapoor to make his opening remarks. Over to you, sir.

Thank you. And welcome to the first quarter conference call for the financial year 2021. At the outset, let me wish you and your family good health in times of this pandemic. The challenges in the quarter were multifold. However, timely intervention help in their mitigation. Active social distancing, medical intervention, segregation and isolation strategy have helped us in maintaining near 0 spread in our environment. The credit for all of this goes to the team at Chambal. Due to their efforts, we have maintained -- we have remained unaffected in our production, dispatch and realize supplies to our dealers and retailers. Year-on-year basis, the profit after tax has grown by 33% to INR 314 crores from INR 235.9 crore. Urea sales volumes have risen from 7.29 -- 7.28 lakh metric tonne to EUR 8.94 lakh metric tonne, a gain of 22%. DAP sales volumes have risen from 1.99 lakh metric tonne to 3.02 lakh metric tonne, a gain of 51.7%. MOP has increased from 49,000 metric tonne to 61,000 metric tonne, a gain of 24%. During the quarter, market share in DAP has grown by 4.56% to 19.66% and in MOP by 3%. Other segments that is micronutrients, crop protection chemicals have also grown in volume and margins have also improved. The favorable monsoon and high reservoir level point towards continued momentum and higher offtake in rabi as well. To service the higher demand, the company has contracted significant amounts of DAP and NPK. As we have been maintaining in the past, this is in line with company's forward going strategy to significantly enhance our participation in the phosphatic and the NPK market. In addition, we intend to grow aggressively in other agri inputs such as micronutrients and crop protection products. Execution and results in this direction shall be visible progressively. Prices of gas have softened to around $7 per million BTU. This has provided significant relief in working capital. The policy environment has remained largely stable. I would now invite questions from our audience. Thank you.

[Operator Instructions] The first question is from the line of Tarang Agrawal from Old Bridge Capital.

Very hot news. Congratulations on a solid performance this quarter, especially in your trading business. Qualitatively, you seem to have substantially outgrown industry in not only your core urea business, but especially in your trading business where you deal in phosphatic and MOP. Quantitatively, this quarter also saw strong cash flows, where your debt is down almost by INR 600 crores despite subsidy levels being more or less at March 20 levels. Given the above background and the current construct of the business, I have 3 questions. One, what led you to significantly outgrow the industry? And how did you differentiate yourself? Second, your FY '20 performance and Q1 FY '21 performance on cash flows leads me to believe that going forward, you should be significantly able to reduce your debt. Would it, therefore, be fair to presume that in the next 3 years, we can see your long-term debt go down by anywhere between INR 3,000 crores to INR 3,500 crores? And third, you've given us this quarter gas prices, if you could also give us last quarter, I guess, Q1 FY '20 gas prices.

Tarang, you have asked a number of questions, I'll try and answer them along with my team as much as possible. Sales of DAP and increase in volume has not been surprised to us. We have worked tirelessly in doing this. If you see the telltale today, this year, we have sold up to July 29, and these are published figures. We have sold 4,14,000 tonnes of DAP compared to 2,17,000 last year, which is approximately 90%, 95% growth from last year. We intend to maintain this. What has happened with Gadepan-III, we have gone to new areas in selling urea. This has also increased our reach with all the dealers and farmers. As a result, other products naturally follow. And we have now contracted DAP from our old partners like OCP. So we are assured of volumes. And I do not see Chambal being stopped and sold. As far as debt reduction is concerned, your number is bang on. We will -- we should reduce the debt by that level in 3 to 4 years. Another point which I would like to mention, Tarang, is our strategy will also be to increase agrochemicals, micronutrients, et cetera. That's an area where, so far, we have not given too much attention. But going forward, that will be a focus area for us, and we will increase our market share in those products also. I hope I've answered all your questions.

Yes, sir. And the last one, sir, average gas prices in Q1 FY '20?

Rajveer, would you be -- Rajveer, would you be able to answer that? What was -- this year, we have given the numbers? What was it last year? Rajveer, will you answer that question, what was the number last year? We can't hear you, Rajveer. Rajveer, you're on mute.

Mr. Singh, we can hear you now. Please go ahead.

Yes. Sorry, give me some time, 5, 10 minutes, I'll dig out the numbers and say the numbers. Until then we can continue the call.

During the call, Tarang, will give you the number, what was last year first quarter.

[Operator Instructions] We take the next question from the line of S. Ramesh from Nirmal Bang.

So just a couple of thoughts. One is in terms of your growth strategy going forward, do you have any specific targets in mind in terms of share of revenue from micronutrients and crop protection? Because right now, presumably, the entire business is based on the subsidized business. So going forward, do you have any targets in terms of reducing the dependence on the subsidized business?

We have some internal targets, but it may not fair to disclose this on a public forum. They are aggressive numbers. And it's unfair to announce the competition right now.

Okay. And in terms of their return on equity, even now you have, I think, 20% plus ROE, if you look at your numbers. So is there any operating leverage you enjoy based on the operating efficiency and energy consumption which is not kind of utilized by the retention pricing with the subsidy formula. And is it kind of sustainable if you're able to continue to run your plant, let's say, close to 95%, 100%.

The biggest operating leverage we get is in cost of capital. If we continue to run and have performed in this manner, our cost of capital will be substantially lower and we would be literally be best in the class. Today, Mr. Baijal is able to borrow money at mouthwatering rate from commercial paper. Our long-term borrowing in the 4 capital projects is now at -- we have lost LIBOR. So it is at quite low interest rate. And going forward, the interest rate is going to be very low. Now the interest is fixed. On the dollarized is low.

The next question is from the line of Amit Doshi from Care PMS.

Sir, just a very small 2 question. One, on the proportion mix, you mentioned that you intend to increase this -- the urea and the proportion of the urea versus the trading goods, the complex fertilizer and the agri increase. So what is your long-term strategy target, the mix between the two?

See, as far urea volume is concerned, the volume is whatever the plant can produce. And there, we cannot grow. The growth mix in Chambal will come from decontrolled fertilizers. Phosphatic NPK. NPK so far is an untapped market for Chambal. This year, we have made a beginning for NPK, and I'm quite sure we'll grow going forward. Again, agrochemicals, micronutrient, crop protection. Those are areas which are very interesting. And with our reach in the rural market, I don't see any reason why we cannot create a major footprint.

But they are heavily kind of terribly strong and players already there in the market out there. So...

There is no player stronger in the rural market than Chambal Fertilisers. If you look at our reach, we will be -- we sell approximately -- we will be selling approximately 5 million tonnes of fertilizer. Look at that reach. Literally, every farmer in North India.

Okay. Okay. In DAP, we saw a lot of jump. And you also -- you mentioned that in your opening remarks as well. So how much more potential that is there, which was earlier untapped and now only we have started tapping. So how big is that market for us to grow from these levels despite we jumped almost 90% volume from last year to this year?

Difficult to say. I can only give you the market share -- market size.

Yes, market size is fine. Market size will do.

Market size approximately in North India, it's 6 million to 7 million tonnes in our territory and that is -- we have not even explored newer territories, which we may go in future. So 6 million to 7 million tonnes. We are just scraping the bottom right now. We are at 1 point -- we are talking of 1.2, 1.3, 1.4 somewhere there. So if -- and there is a growth of about 6% to 7% in that market. There's quite a good opportunity for a well-run company.

Okay. Okay. Okay. So sir, why did we never went earlier, I mean, prior to this? And why after this -- I mean why only last year and this year, we started after we Gadepan-III because that is actually not connected, urea, et cetera. So why the focus specifically started on this? And was is the change in the strategy or the mind or thought process of the management?

No, it is not change of mind. We all were busy in doing this project, right? That was very important for Chambal. Management time is very limited everywhere. And we did this project, we are very proud of what we did in Gadepan-III. We completed the project before time and below cost, rarely happens in India. And I would like to also mention one more thing. We have I'm -- I should not say that on a public forum, but we have taken purchase more 99.9999% equipment from developed countries. And we are very particular from where do we import for the project. As a result, we are quite certain of the quality of the projects we have done.

Okay. Okay. Great. Great. Just last one, I know I'm crossing my limit. Maybe fourth question, the special banking arrangement that we say, I mean, it could be a basic question, but just how does it really work in terms of interest cost income? So why is it referred to us special banking arrangement? And what kind of cost that we incur because of the subsidy nonreleased by the government, et cetera?

I can answer that, but I'll let Abhay Baijal take that question. Abhay, would you like to take it?

So special banking arrangement is nothing but a bridging finance, which the government has in order to go over from 1 financial year to the other financial year. So supposing, let's say, last year, there was a INR 10,000 crores subsidy. It was supposed to have been paid earlier. They could not pay. So they basically transferred their liability from themselves to the bank in the month of March, around March 15 we were paid. And then the financial year close, then they released the subsidy and squared off that subsidy. So basically, it's a bridging arrangement. It works for about 45 days at least and the -- what the government does is, it gives you the basic rate at the treasury rate of 45 days from the bond rate, they will take the market, RBI will give a rate. And if the bank is given close to that, then a differential will be very small, maybe 1%, 1.5%, which the company has to bear. And for 45 days, it is deducted upfront and given, so it's a very small -- small percentage, and it is only for a very small while for only about 35, 40 days. So either way, it does not make much difference. The only thing is it gives us liquidity towards the end of March. And otherwise, with the accounting treatment and everything which is standing as a loan. And the subsidy will also be shown as unscratched. So on the asset side, liability side, there is no change. Except that we have actually funds in our bank. That's all the difference...

Okay. So what is the differentiating costs? So for example, what our working capital requirement, et cetera, that we borrow? And this...

For you to understand, that the loan was given to us at 7% and by the bank and 6% is the subvention by the government. So actually, the cost was about 1%. Last year, in fact, there was no cost, more or less no cost. So -- but it is only about 45 days.

Tarang, on this question related to gas price, $7.1 per MMBtu is what Mr. Kapoor said for June 2020, as it is that last year, June 2019, it was 13.1 on NCV basis and like-for-like. At least they are talking quarter-to-quarter...

Okay. Carry on.

Yes, quarter-to-quarter, also, I can tell you quarter-to-quarter. This quarter, say, April to June '20, it is 8.4% is against that was 12.3% last year. I'm talking about first quarter of '19/'20.

[Operator Instructions] The next question is from the line of Deepak Chitroda from PhilipCapital.

So congratulation on good set of number. Sir, my first question is on the visibility towards the FY '21 and the rest of the quarters. So what is your sense in terms of kind of a volume growth we have already seen in the Q1. And of course, this maybe led to some sort of advanced buying also. So what is your sense? And of course, if I look at the inventories, inventories has been substantially over compared to last year. So do you think your confidence in terms of good demand is primarily led by the -- obviously, good kharif and the good rabi as well as the channel filling which we might see going forward?

We believe that what we have seen in the first quarter will continue going forward.

So do you expect -- so do you think that still will see kind of a strong year-on-year growth for the subsequent quarter for the year?

I do not see any reason why we should not see growth in phosphatic fertilizer this year.

Okay, okay. Okay. And sir, my second question is on the -- our IMACID profitability, which has grown substantially. So do you think that because of the -- obviously, the jump in the asset prices, do you think that, that possibility will continue again for the rest of the year?

This year should be better than last year. Let's see how it progresses. Prices are on the upswing right now. So asset prices should increase as we go forward. I imagine profitability should be better than last year. Let's see.

Sure. And sir, last question. In terms of Gadepan-III volumes, which we had this quarter. In fact, last year, we had almost about 3,30,000. But this year, we had almost about, I would say, around 10% decline compared to last year. So any particular reason for it?

No, I didn't get your question.

I'm saying, sir, this year, we had a Gadepan-III sales volume of around 3 lakh tonnes compared to last year of around 3,30,000, 3,40,000. So there was a minor dip towards it because if I understand, probably we might have prioritized Gadepan-III compared to Gadepan-I and Gadepan-II volume.

No, those are all basically the rakes must be in transit, et cetera. Ultimately, we will be able to sell everything going forward.

The next question is from the line of Pratik Tholiya from Elara Capital.

And congratulations on a very strong set of number. So just a couple of clarifications. Firstly, you said, maybe market share is around 90.6%. So this is in your home market, which would essentially mean Rajasthan, Punjab and Western UP?

Yes, that would be in our territory. That's pretty big but MP, Rajasthan, Punjab, Haryana, UP, Bihar, Chhattisgarh.

Okay. Okay. And so then you say that 1.2 million tonnes of DAP, this is again catering only to the home market. So when you go beyond that, are you expecting the volumes to grow further?

I'm saying approximate 1.2 million tonnes, and this is going to be in our territory only.

Okay. And so if you say the higher volumes, we are able to achieve because of the higher volumes in the urea, which allows you to different territories. So when we talk about this higher volume in NPK, we are talking again only in the old territory and we have further changes move to the newer territories, along with an additional urea. Are you seeing a further growth over there?

What I was saying was that this additional urea has given us confidence to go into newer territories. It's certain. We could not -- we did not have enough urea to increase our dealer base. Now we have increased our dealer base substantially. We have gone to newer territories. With that, naturally, sales of other products naturally follow.

Okay. So this should...

Extension for sale of urea.

Okay. Got it. And so, look, now we are seeing a good jump in our trading business. Any plans of setting up a manufacturing in this complex fertilizer since you already have a short supply of phos acid from IMACID. Would we look at a second set of expansion, which will come mainly in the complex fertilizer? Or are you comfortable more with your trading plan?

It's already depend on the economics. If I can make -- continue to make the type of money which we are doing today by selling material produced by somebody else. That's an ideal scenario. It's like a consumer market. All the consumer giants today, they also get the products manufactured by third party.

Right. And sir, then in the crop protection or any other businesses where we are looking at setting up our own manufacturing capabilities or we are again...

We will follow in future depending on how is the growth we get in agrochemicals and micronutrients, that can be a natural extension going forward. It depends on the growth we get.

Right. Right. So in urea, last quarter, you had talked about. You had to shut down the urea plant basically because you did not have the approval for the enhanced capacity. So that approval, you said, is expected soon. So any progress on that?

We have made the application. Government is reviewing our application. But let me be honest with you, as far as profitability is concerned, it will not make much of a difference because we are talking of an additional contribution of approximately INR 20 crores in a month. So it's neither here nor there.

INR 20 crores for the year.

For the additional production, even if we get the approval, it's an additional contribution of approximately INR 20 crores.

[Operator Instructions] The next question is from the line of Ateet Bansal from Nippon India Mutual Fund.

A couple of questions over to Mr. Baijal, I think. Any CapEx plans or any maintenance CapEx guidance would you like to give for the year?

Our normal maintenance CapEx is in the region of about INR 100 crores. So -- but those are continuing, some from the past, which has not yet been completed, some of their commitments have been made and advances will be paid. So it is around that number.

Sure. And the other question is on the debt. It is more housekeeping. Is there an SBA outstanding as on June 30 also in our books?

No, no. It was settled by 15 -- between 15th and 20th of April, I guess.

Okay. And what would be the short-term investment that we have netted off on the short-term debt?

No, no, I think on June 30, I will not be sure. Anuj can answer that question. I don't think there is very much in investment, sir.

In the presentation, there was some mention of SBA, net of SBA and short-term investments. So that's where the question was.

In the presentation, what we are saying is that when we say borrowing as on a particular day, we are saying that let's go to that number on the slide, you say 8926.67 crores. And we are talking about 31/3/2020 (sic) [ 3/31/2020 ]. So when we are talking about 31/3/2020 that loan of SBA is there in that. But I do know in 2020, it will not.

And there are no short-term investment, also?

Anuj, can clarify during the call...

There were some short-term investments in fixed deposits, but a short term of 7 days or so.

Okay. Okay. Okay. And what would be the contract volume?

I can tell you -- I will tell you that [ offline ]...

The next question is from the line of Madhav Marda from Fidelity Investment.

Sir, I had one question on the finance cost, that has come off quite a bit. So you did mention that our cost of borrowing is going down. Could you elaborate a little bit more in terms of what's the -- are you saying cost fixed versus floating expire member right or what it was earlier. So what's our cost of borrowing now for the project, for the Gadepan-II?

See, we are borrowing at approximately LIBOR plus 220 basis, and LIBOR is fixed at around 0.3.

Okay. So this cost of debt, it used to be, I think, 4%, 4.5% 2 years back is down to about 2.5% now?

For project.

For the project. Correct. Correct.

Yes.

And basically, if the interest cost environment remains where it is, there's a one-off in the finance cost, right? The INR 97 crore, INR 98 crore is like a sustainable number, unless interest rates start in...

Sorry, I didn't get you. Could you please speak a little soft -- slowly?

Is there any one-off in the finance cost, it has come substantially lower versus the quarterly run rate last year?

No, there is no one-off. Last year, you see we had an interest cost reduction in the second quarter, where our project interest cost was reduced. And LIBOR was also high in the first quarter. This year, the LIBOR was lower. And the fixed -- floating was also reduced. So to that extent, it was LIBOR plus 280, 285. This year, it is LIBOR plus 220. So to that extent, there was a reduction in the spread also and LIBOR also has come down.

Understood. Okay...

Secondly, commercial paper also this quarter is substantially lower than first quarter of last year.

What's our borrowing cost there in the commercial paper?

This year?

Yes.

This year, Abhay, would you like to share that number on an open forum.

It's currently on old and new taking place, if I'm not wrong, it would be around 4.25, 4.2 and going forward is sub 4.

And last year, what was it, Anuj?

I think 7%.

Last year, it was about 7%.

You can see that there is a substantial reduction in interest cost.

Average reduction would be about 1.5%, 1.7% average reduction in short term.

Okay. Okay, sir. One question on the subsidy side, I think we are demonstrating because gas costs are lower. So to that extent, the subsidy that gets accrued is lower for us. But obviously, the government finances are a bit stretched on the other side. So how should we think about subsidies remain for absolute value of subsidy coming down or staying the same? How should we think about that?

See, right now, it's a work in progress. Government is working out on a number of alternatives. While Abhay was mentioning about special banking arrangement for 45 days. What we understand is they are trying to take some special approvals and do a special banking arrangement as early as possible. So the ministry is working on a number of fronts. And we are very positive that some amount of -- I mean a decent amount of subsidy will be released for the industry. That is why it is too early to tell you what's going to happen this year.

Okay. And the budget that the government usually has for urea subsidy, when we put out the budget number, do you think they can meet that number this year or it could be lower? Any thoughts on that?

Yes. On the subsidy front, I would not like to comment because it is a work in progress right now. The government is, you see, it's not only Chambal. It's the entire industry. And in Chambal, we are able to borrow at quite a reasonable level from the market. Some of our other colleagues, they are struggling and that is why the government is looking at a sort of a relief package for the industry.

I think this last question, you mentioned about expanding going forward in the nonsubsidy business, such as agrochemical, micronutrients. I think a few quarters back, there was also a discussion around material acquisition for any fertilizer units that could be up for turnaround. So is that something that we're still considering? Or what's the strategy there?

Chambal will always be open to acquisition of a good fertilizer plant and at reasonable levels.

Okay. And is there any opportunity in the market you see right now that could come up in the next year or so?

Those are -- if at all there is, we would not like to discuss on an open forum.

The next question is from the line of Ankit Tripathy from Kotak Asset Management.

So a couple of questions on -- at the current production level of urea, when do you expect your plant to go under maintenance shut down? And the second question is at the current gas price, how much of impact will be on the absolute EBITDA, not on relative terms? And on the third part, what will be the margin on the complex fertilizers?

Ankit, I'll have to take you in my finance department. Firstly, shutdown is now part of a routine cycle. We take shutdowns of plants once in 2 years. And with 3 plants, and if we have to take it once in 2 years, 1 shutdown will definitely come once a year. In certain years, there may be 2 shutdowns. So that is something which is going to be a normal behavior. This year, we'll have some -- but normally, we take shutdown in the month of March because that becomes an off-season. Moreover, I'd just like to clarify the contribution which we make with that additional production over 100% is only at INR 1,600 a tonne. So it's not a great number. It doesn't really matter much on the balance sheet. That is one. We got to your second question, on margins...

Yes, on the absolute terms, not in relative term because the gas prices have declined substantially.

2 things happened with that gas price reduction. One is our energy gain to that extent, we get a lower energy gain when gas prices fall. But it is compensated by reduction in working capital. So it's a sort of a contra-entry and this really doesn't affect much on our profitability. It's always better to have lower gas prices. There is a less strain on the government, the subsidy burden reduces substantially. So it's always good for the industry if the gas prices are lower.

Sir, that's fair enough. But you said your interest cost is around 4%. So working capital to that extent and your EBITDA margin, that would be a substantial difference. So...

Today, what happens is government also does not pay us within 45 days. Government also takes its own sweet time to pay the money.

Understood, sir...

We have done the calculation. It doesn't affect much.

Okay. Fair enough. And the margins on the complex fertilizer. How -- what would be the impact there?

You can't be asking me margins on an open forum, but they are pretty good. If we have achieved this number in this quarter, margins will be good.

The next question is from the line of Varshit Shah from Emkay Global.

Congratulations for the management for a stellar delivery...

Thank you, Shah. Thank you.

And also congratulations on big bank gains in market share. I think that we all should appreciate. My question is, sir, around 2. Is the increase in market share of phosphatic because -- more due to the fact that financial position of most of other competitors is sort of weaker than us in lesser terms, and we were able to capitalize more on this jump in demand? That's my question number one. And second is more strategic long term that, let's say, some couple of years down the line, your balance sheet lightens up even further, and you have opportunity to do further CapEx. Would you like to do within urea itself or you would like to mention phosphatic? These are my 2 questions.

Can you repeat your second question?