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

Ladies and gentlemen, good day, and welcome to Chambal Fertilisers and Chemicals Q3 and 9 Months FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rishab Barar from CDR India. Thank you, and over to you, sir.

Thank you. Good day, everyone. Thank you for joining us on the Chambal Fertilisers and Chemicals Q3 and 9 Months FY '23 Earnings Call. We have with us today Mr. Gaurav Mathur, Managing Director; Mr. Rajveer Singh, Vice President, Legal and Company Secretary; Mr. Anand Agarwal, CFO; Mr. Ashish Srivastava, Vice President, Sales and Marketing; and Mr. Anuj Jain, Assistant Vice President, Finance. Before we get started, I would like to point out that some statements made or discussed in the conference call today may be forward-looking in nature and must be viewed in conjunctions with the risks the company faces. Chambal Fertilisers and Chemicals does not undertake to update that. The statement in this regard is available for reference in the presentation. We will begin the call with opening remarks from Mr. Mathur. I would now like to invite Mr. Mathur to share his views. Over to you, sir.

Thank you, Rishab. Good day, and a warm welcome to all of you participating in this call. We have already shared the presentation on financial performance of the company, which I hope you would have gone through. Overall, we are happy with the performance of our urea plants, where we have achieved better efficiency in operations. The Crop Protection Chemicals and Specialty Nutrients business continues to do well, and we have a lot of confidence to continue the journey of growth as we go ahead. We have substantially increased the sales volumes of DAP and NPK fertilisers with encouraging performance in the new geographies. However, the high prices of DAP and NPK fertilisers had impacted the profitability. As we look ahead, there is a declining trend in commodity prices, including prices of DAP, NPK and MOP fertilisers and also natural gas. This augurs well for the company as it will not only give stability to our P&K Fertiliser segment but will also help in substantial reduction of working capital requirement of the company. Moreover, the timely release of subsidy by the government of India is another positive factor, and we hope that this trend will continue as we have seen for the past few years. We are also happy with the execution of our Seed To Harvest program, which continues to provide desired momentum to our growth plans, especially in Crop Protection Chemicals and Specialty Nutrients and we are -- where we are directly engaged with a large number of farmers and we are continuously increasing this program as we progress. I would also like to share that corporate social responsibility, which has always been a high priority for the company. We have made focused interventions in different areas to make a perceptible positive change in the lives of the community at large and especially the community around our site in Gadepan. The highlights of our efforts on this front are also provided in the presentation. Our intervention in the area of education has received accolades over the years from the government and nongovernment organizations. Further, health, safety and environment is another nonfinancial indicator, which remains the focus area for the company. We continue to benchmark ourselves with best industry standards and strive to achieve better performance on a continuous basis. With that, I would be happy to take your suggestions along with my team. Thank you.

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Tarang Agrawal from Old Bridge Capital.

Three questions from my side. On the CPC business, if I look at your 9 month FY '23 performance, it's noteworthy. Just wanted to check, are we EBITDA positive in this business amount?

Absolutely, we have a very reasonable good EBITDA on this business. As a company, we are very clear that we will -- as we grow, we will have profitable growth. And we would not like to just grow the top line, but we would like to have profitable growth.

Got it. Got it. The second is the INR 237 crore write-off that was taken as a prudent measure in Q2. Any update on that?

No, there is no update on that yet. We continue to work with the Industry Association, FAI with the government. But as of now, there is no specific update.

Got it. And the third question is, what's happening in IMACID? I mean the contribution has been considerably low for 9 months. I understand that asset prices have come off significantly. So just an upstream on IMACID.

Yes. I'll ask Anand to respond to that, our CFO.

So there were 2 things which happened in the current quarter. One was that the prices of the phosphate reduced substantially in Q3. And second was that our sales quantity has been very high in particularly Q3. And third point was that the rock prices have not fallen coming to date with the finished good prices. So these are the 3 reasons. And one more point is there that they adjust the rock prices post the quarter, okay? So some adjustment for the previous quarters were also taken into account in this quarter.

So when you say they adjust the rock prices post the quarter, do you mean that -- I mean, if you could explain a little more.

Not really. I think we should see going forward, the differences will reduce in the next few quarters.

No. Sir, for instance, rock phosphate prices have gone down during the quarter, right? Would we see the impact of that at the end of the current quarter? And similarly, if rock phosphate prices were to go up, we would see the impact of that at the end of the quarter. So a downward trend we lose, but in an upward trend, we benefited. Is that how it works?

Yes, that is true. But we have to see how the market dynamic works on the raw material prices and the finished good prices going forward.

Got it. And last question, what's the working capital cost of debt right now for Chambal?

So for the working capital, it will be at somewhere around 7.25% to 7.5%.

[Operator Instructions] The next question is from the line of [indiscernible] Mehta from [ Sumeet Shah Capital ].

Hello?

Yes, we can hear you. Please go ahead.

Yes. So I just want to -- a couple of questions. One is about the nanofertilisers which you expected to be the main change for the industry. I just want to understand what according to you what is, what kind of opportunities, viable demand that you see from quarter 1. And how is that [indiscernible] over the next few years. If you can give any color on that?

Yes. Thanks. Yes, I suppose there's been a lot of news on nano. So we are doing trials with nano-fertilisers, ourselves as well as we are getting inputs from what's happening in the market. What I would say is that being the first sort of year, it's very early days. And so I think we will need to see the whole cycle across a few cropping seasons to come to a full conclusion as to the potential of nano and the impact it would have on the conventional fertiliser. So it is still quite early days actually. So it would not be fair for me to comment on this.

Okay. So I think we are still testing on the story that one bottle of this nanofertiliser may replace that one bag of bulk fertiliser that you are currently selling [indiscernible]. Correct me if I am wrong.

Yes. So those are the trials that are ongoing in the market, and I'm sure that the companies who have brought forth this the nano would be in a better place. But like I said, we are doing trials, but we want to make sure that we gather a reasonable data. So we are doing trials over a few cropping seasons to make sure that we understand what is being promised.

Secondly, on the traded fertilisers. I mean, how will you determine what kind of -- how do you determine the margin on the fertiliser area, is the fixed margin being the purchase cost that we do or is it early days on what would be our domestic market prices in the country and whatever you get out from a purchase price will be the margin.

So your voice is a bit muffled. You are talking about margin or what?

Sir, I was talking about margins on traded fertilisers. So I just wanted to understand how does the -- how do you determine the margin? Is there a fixed margin, which is charged on the purchase cost of this fertiliser or the margin is purely determined based on the purchase cost and the domestic price of the fertilisers that you sell at.

No, there is no fixed margin. It is determined by the purchase price, the market realization, the subsidy and other costs incurred in the process, whether it be handling costs, interest costs and so on. So it's not a fixed margin. It is variable.

Is there a kind of a normalized situation number or a sustainable number that you generally achieve 5%, 10% margin I don't know. Is there some kind of a number that you can share?

No, we don't share specific margin data as such, but the government has a cap. That's all I can tell you, they have a cap of a 12% return on cost of goods sold, which they have a cap. It is unusual for companies to normally reach that cap. And of course, margin will depend year-on-year. Right now, we are seeing 2 sort of second year of turbulence. Hopefully, in the next few years, things will stabilize.

[Operator Instructions] The next question is from the line of Vidit Shah from IIFL Securities.

Just wanted to understand a bit more on the finance cost line that we have. We've seen costs go up versus 2Q, but both working capital and subsidy levels are coming down. So what's the reason behind this sequential increase in finance first?

Yes. So what has happened that the subsidy payment started post October. So -- and still, for the quarter, it was the highest compared to the earlier quarter. So the finance cost was higher on that count. And second, due to increase in the interest rates also there was some kind of lift. And we see that now in the last 3 months, we have received substantial subsidy so that should start coming down.

Okay. Understood. And we've seen a very healthy improvement in EBITDA levels Y-o-Y, whereas urea volumes are, in fact, 2% down versus last year. So is this growth in -- while you don't disclose margins, I understand, but is this growth driven by the DAP or the trading business? Or is it driven by better efficiencies in the urea business?

Well, it is largely driven by better efficiencies in the urea business. We have implemented energy efficiency projects in our plants and that have shown the results this year. And that's something that we will keep doing going forward to keep on improving energy efficiency of our plants, which is good financially as well as good from an ESG perspective also.

Okay. So is there any CapEx that you all have in mind for these energy efficiency and improvement initiatives going forward?

Yes. We keep investing on an ongoing basis with it. So normally, we are constantly on the lookout and we keep exploring energy efficiency projects. So we keep investing capital in the range of INR 200 crores to INR 400 crores almost every year on energy efficiency as well as other capital projects to replace old assets health, safety and environment related and so on.

And any further discussions or have discussions move forward in terms of other CapEx initiatives other than the Technical Ammonium Nitrate project?

Not as yet. Once we have something, we will definitely share it with all of you.

Okay. Cool. And just one last question for me is on the tax expense. What's -- I mean, I think what's the timeline in which -- do you expect to move to the new tax regime where tax rates could come down? How much old losses or MAT credit do you have outstanding before which remove.

We hope to regain a couple of years.

So like by FY '26, do we assume you would have fully moved to the new tax regime?

Yes, somewhere around, I think, next to next year or year after that.

[Operator Instructions] The next question is from the line of Harmish Desai from PhillipCapital.

Sir, in the second quarter, we had this onetime loss that we -- the realization of DAP. So -- and there was just mentioned that we could get this overturned. So is that something that has taken place? Or can we stop expecting that to happen?

Yes. As I mentioned earlier, we are working with the Fertiliser Association of India, and the matter continues to be in discussion with the Department of Fertilizers. As of now, we don't have any specific update on that, but we do continue to pursue it, not us and selectively through FAI.

Okay. And sir, on this asset performance in the entire 9 months that we have seen, which has been impacted because of a lot of reasons. I mean in Q1, there was this -- so in Q1, Q2, Q3. So what are -- what can we expect from the performance going into FY '24. I understand there was issues with RM pricing and all that. But what can we expect from that asset from FY '24, given not considering the -- Q4 and FY '24.

Yes. Look, let me answer this in 2 parts. One is that it's given the volatile situation, which still sort of persists, right? It's -- the whole conflict situation is still there, et cetera. It's difficult to predict anything right now on this area, one. Second is that overall, if you look at in asset performance, we have to bear in mind that last year was a bit of an exceptional year because of exceptional circumstances, right? The previous year. So we need to sort of see what is a normal situation. So we may be closer to normal now than in last year.

Okay. Understood. And sir, one thing, so in the non-urea segment, we know that in the Crop Protection segment, we do not have any assets, but sir, what is our plan from this segment in FY '24? Do you plan to have any kind of CapEx and introduction of new technicals in this particular segment?

Okay. You're talking of a manufacturing facility in Crop Protection, et cetera. We continue to evaluate that, right? And obviously, if you look at CPC assets, there is a technical manufacturer, there is formulation manufacturer and so on. We continue to evaluate it. And as of now, we don't have any concrete plans to acquire or build any assets right now. We have a business model which seems to be working fine and is giving us a strong top line growth profitably. So no specific plans right now.

But sir, do we have any plans in terms of targeting some amount of CapEx for registration of off-patent molecules?

But for that, we need a manufacturing facility, we can't register off-patent molecules without having a manufacturing facility. So that is there, but we keep exploring various options in this area as we are now growing in size, and there are opportunities in various forms.

Okay. And sir, my last question, we have a urea business, we have a non-urea business. Sir, what can be the margin profile in the 9 months that you have seen the margin profile bifurcation between urea and non-urea just at the end of the year?

We don't really normally share that. And also, these are very, very unusual years. So these are not also representative of a stable situation.

[Operator Instructions] The next question is from the line of Prashant Biyani from Elara Capital.

Sir, what would be the breakup of urea production from G1 and G2, G3 for quarter 3?

So quarter 3 production from G1 was 5.35, G1 plus G2 was 5.35 lakh metric tons and from G3 was 3.46 lakh metric tons.

Sir, would you -- would we be taking any maintenance shutdown this quarter?

Yes. In quarter 4 this year, we have completed 2 years operation of Gadepan-III, and we'll be taking a shutdown in March. Hello.

Sir, the line for the participant dropped. We move on to the next participant. The next question is from the line of Dhruv Muchhal from HDFC Mutual Fund.

A question on the non-urea business. Now if I understand correctly, the government did not cut the subsidy amount significantly and the RM prices, the input prices are falling and your volumes have also increased. So based on my rough calculation themes, we should have benefited recently for the non-urea business this quarter, but it seems that's not fully reflected. So is it because we had the higher cost inventory or probably my understanding is wrong if you can probably help.

Yes. See, normally, if you see this quarter, this quarter is a key consumption quarter for Rabi and a reasonable amount of quantity arises by the end of September, early October, right, which has been contracted earlier. So what you said is right. When you look at the weighted average cost of goods, it does result in some positive movement, but not an exceptional gain.

Okay. So is this because you had already contracted the sale price or the input prices in the earlier quarter at higher prices probably because of the situation and hence, the full benefit is not getting reflected. Is that...

Yes. There's a lead time of 30 to 45 days, okay? So therefore, if you have to supply material in the peak Rabi season in October and November, we have to do the contracting in September, right? So -- and August. So the prices were still a little bit on the high side, and then they started to fall. And these are also linked to what's happening in the global situation in terms of Brazil and China and the U.S., et cetera.

The second -- 2 more questions, sir. Second is now that the global market is somewhat stabilizing and the prices have also started falling. I just wanted to understand, do you think the traded volumes will start increasing, given the availability is improving? And also wanted to get some sense on the domestic inventory or the supply situation. For the last 2 years, we were seeing the market was extremely tight. So do you think some relaxation can happen in the next 2 years from a market perspective? And how does that dynamic play out?

Sorry, what was the first part of your question?

So broadly, so the import prices have started to decline and there is some stability in the pricing, some stability, if I can call that. So do you think the traded volumes for us can increase because our trading -- there is more visibility to our trading now?

Look, if I go back a year, we had started to see the same sort of trend one year ago also, and then things again changed. So while we have seen a positive trend of decline of international prices, let us wait and see what happens over the next few months. That's one. Second is that in terms of the overall volume for the country, the change would not be very significant because with -- along with the Department of Fertilizers and all the companies put together, we ensure that adequate quantity of fertilisers was available. As regards Chambal, depending on what the international procurement prices, what announcement of subsidy from the government is, we will then plan our volumes accordingly.

Sure, sir. And sir, the last question is on the -- you mentioned there is a cap of about 12% in cost of goods sold for the non-urea fertilisers, if I'm not wrong. So that cap for you, the cap then reflects the cost of purchase of basically the imported cost of these NPKs or DAPs. Is that correct?

Yes. The 12% is based on the import price. There is a certain formula that the government uses. So they base it 12%, but it is essentially linked currently to the CFR price plus import duty.

Okay. So CFR -- and margin of 12% is maximum that you allowed.

That's right. That's the feeling.

The next follow-up question is from the line of Prashant Biyani from Elara Capital.

Sorry, my line got disconnected. Sir, this G3 maintenance shutdown will be there for a month?

Yes, it is close to a month. Yes.

Sir, in that case, in February and March can be -- in January and February, can we produce beyond 100%? Or what is the mandated limit by the government to compensate for the March production?

Actually, we run our plants at the full capacities. We don't reduce the output from the plant.

Okay. So this 12,70,000, which is the production limit, if I'm not wrong, then is that achievable in the 11 months broadly what I wanted to ask?

Yes. Once we achieve that, we will take the shutdown only thereafter, and we hope to achieve that in the first week of March.

Okay. And sir, what would be the closing inventory for urea for us during the -- at the end of Q3?

Around 24,000 tonnes.

And sir, what would be the oil gas price for Q3 and current gas prices?

It is [indiscernible] per MMBtu for quarter 3 and on NCV basis.

23.22?

Yes.