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

Ladies and gentlemen, good day, and welcome to the Q2 and H1 FY '24 Earnings Conference Call of Chambal Fertilisers and Chemicals Limited. [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.

Good day, everyone. Thank you for joining us on the Chambal Fertilisers and Chemicals Q2 and H1 FY '24 Earnings Call. We have with us today, Mr. Abhay Baijal, Managing Director; Mr. Anand Agarwal, CFO; Mr. Anuj Jain, Assistant Vice President, Finance and Company Secretary; Mr. Tridib Barat, Vice President, Legal and Secretary; Mr. Ashish Srivastava, Vice President, Sales and Marketing. 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 conjunction with the risks the company faces. Chambal Fertilisers and Chemicals does not undertake to update them. The statement in this regard is available for reference in the presentation. We will begin this call with opening remarks from Mr. Baijal. I would now like to invite Mr. Baijal to share his views. Over to you, sir.

Thank you, Rishab. Good afternoon and evening to all, and a very warm welcome to all of you participating in this call. It is indeed a pleasure to have you on this call. Since the investor presentation and financial results has been shared by us beforehand, I will not spend time to repeat the numbers in my opening remarks. To give a brief, our urea business continues to progress well. All the 3 plants are operating at optimal capacity. Urea production stood at 9.08 lakh metric tons and sales were 8.38 lakh metric tons during the quarter. Energy efficiency of our production facilities continue to be amongst best in the industry. The supportive stance of government towards release of subsidy on time is very much appreciated. This has enabled us to efficiently manage our working capital cycle. Subsidy receipts stood at INR 550 crores -- receivables stood at INR 550 crores as on September 30, 2023, and the subsidy receipts amounted to INR 6,800 crores during the second quarter of the current fiscal. You will notice from this quarter onwards that we segmented our results into company-owned manufacturing and complex fertilizers, which we normally import and crop-protection chemicals and specialty nutrients. This move is aimed to provide a better feel of our business to our investors and stakeholders. International prices of phosphatic fertilizers that is DAP, NPK, MOP has been declining on the back of lower input costs, albeit lately showing a reversal. Sales volume growth were higher on sequential quarter basis. Our technical ammonium nitrate EPC contract has been awarded to Larsen & Toubro and the technology licensor is Casale S.A. The project is progressing well and is on track. Crop protection chemicals and nutrient business have been the highlight of our performance. And this quarter also was a sterling performance. During the period under review, we introduced a wide range of weedicides, insecticides and seed treatment products, which will hold great value for the farmers in the rabi season. We conducted 3,700 demo and 1,200 field shows at various locations during the year under the review. Our Seed to Harvest program, as you know, continues to deliver good performance during the half year of the ongoing fiscal. The Seed to Harvest operated in 1,500 villages touching about 2.3 lakh farmers. Many -- 43,000 soil samples were analyzed and 3,100 farmer meetings and farmer training programs were conducted. This has been one of the cornerstone of our policy to be closer to the customer, that is the farmer and has yielded us immense benefits. In the same light, I'm happy to inform you that we have introduced our existing toll free number as a digital interface, as a WhatsApp chatbot on Meta platform which provides the farmers knowledge about our products, and we are confident that this initiative will immediately benefit. It is multilingual and it's operational in all the territories [ we exist ]. It will immediately benefit and further strengthen our connect to the farmers. In the next phase, this will be extending to providing farming solutions. Our balance sheet continues to be strong. And as always, we continue to explore organic and inorganic growth opportunities. With that, I will now take your questions.

[Operator Instructions] The first question is from the line of Prashant Biyani from Elara Securities.

Congrats on good set of numbers. Sir, the energy savings schemes that you have laid out, you will achieve this -- you will achieve the financial benefits by way of lowering the cost of production? Or will this enable you to generate more surplus ammonia?

No. This is primarily aimed at reducing the energy, which is used in various machines. And therefore, it is not so much volume, but it is the margin improvement, energy efficiency.

Okay. So this surplus ammonia volume may not change so much?

No. Surplus ammonia volume will change with a little bit of the turbines being debottlenecked. The question is to how much that will increase. This will only be possible to be understood once our equipment undergo a change, especially we are changing converter basket in Gadepan-II. So those -- what exactly will be the result of that, we are not able to predict right now. But my own guess is that we will have an answer by May '24. Once our '23, '24 annual turnaround is completed.

And this INR 100 crores savings that we have estimated, can this change with the change in gas price?

Yes, definitely, it is staged at a gas price of $16, which I think is a number which we'll maintain for next 3 to 4 years.

Okay. And sir, these schemes will mostly be implemented in G1, G2 or all the 3 plants?

No, these are primarily focused in Gadepan-I and II. Gadepan-III, as you know, is in a different league of its own. We are still developing some schemes for them. Those schemes that are there are very minor. And we will look at a major scheme for which a study is being conducted, but I can't talk about that now.

And lastly, the urea energy efficiency norms are likely to be revised by government in 2025, will that have any bearing on the financial benefit that you plan to achieve by this investment?

It's a matter of conjecture as to what will be that in that time frame, so it is impossible. But we feel that the norms that the industry today has, if you compare it internationally, we are already amongst the best in the world. Further reduction in that number may not be the best interest of the industry and the government as well. Although on paper, there is a review. There are, of course, certain plants or there are 3 groups as you know. There are groups with 6.5 G Cal and groups with 6.25 G Cal. And there is a group with 5.5 G Cal. All our plants are in the 5.5 G Cal category, and we are below that number in any case. I don't think the first category -- that is the third category of 5.5 will be best of them. That is my personal impression.

The next question is from the line of Harmish Desai from PhillipCapital.

My first question is can you share the urea volume details between the Gadepan-I, II and III plant?

I will request Mr. Anuj Jain to answer the question.

We'll provide you that information later.

Sure sir, And sir, can you share the average gas cost for Q2? And the current gas cost?

Let Anand answer this.

Yes. So the average gas cost for last 6 months is 16.7.

Okay. And the current number?

This is on NCV basis.

The current number, what it is?

The current number is creeping up. The provisional number will exceed 16.7.

Got it, sir. Sir, in the Q1 call, you mentioned that there was some amount of business missed because of the Biparjoy cyclone and the Balasore train accident. So have we recovered that number in this particular quarter?

Very glad that you asked that question. In fact, if you see this quarter, this quarter has captured Chambal's execution skills. And we have not been found wanting. We have substantially segregated and spent most -- segregated between sound and unsound stock. The sound stock was processed and sent to markets. And we have achieved a considerable amount of -- in the soil sales despite problems in the weather pattern. You know that during August and even the beginning of September, we had deficiency of rain. So all of that having been done, the amount of soiled has come down by about 10% to 15% from what our initial estimate was. And at the same time, the insurance companies have responded, and we have got about INR 20 crores as the advance payments against that claim. So therefore the claim is established and we are now in the process of obtaining various approvals to sell the salvaged materials and settle this. We are fully hopeful to get our amount or the amount of insurance claims that we have put some time by December this quarter.

Okay. Sir, on this, the updated subsidy, the NBS for rabi, did we -- because the correction is so steep do we -- did we have any need for taking this amount of provision like we had taken in the past? So is there any update on that?

Yes, I can say that we have taken the necessary provisions and the hit that the steep fall, and that is baked into the results. And in case any inventory that we carry or any futuristic sales that have -- all have been brought down, converted with the current NRV position and that is baked into the results.

Yes. So can you quantify the provision, can you share it with us?

I won't like to say that, but it's a fairly large number.

Okay. Okay, sir. And sir, lastly, I'd like to ask on the performance of IMACID in the quarter? And how do you expect it to -- how do we expect the performance in the second half?

IMACID performance has been humdrum to say the least. They have been making profits, had problems. And this early, they were -- but adjustments in rock prices have helped. It is my understanding, although it is not fully confirmed that they will end the year with a reasonable profit and the third or fourth quarter for them will be good.

The next question is from the line of Darshita from Antique Stockbroking.

So my first question was regarding the NBS rate card, given that the number was so steep, are we expecting any kind of MRP increase or subsidy changes upwards most likely to take place in the second half of the year?

So Darshita, my understanding is government policy is what it is. They have been consistent from their point of view. And therefore, it is -- requires a very careful and calibrated response to the market and the policy conditions. So I, for one, feel that as per the notifications published, they have clearly mentioned that 31st March 2024 is the currency of the new NBS rates from first of October. However, there is a mention of the special INR 4,500 per metric ton insofar as DAP is concerned. Now that could be a subject of review in December. That is one of the things that could possibly happen because it isn't top provision number one. Although it is my sense that the government might not want to change it, given that there is a long period until the next -- necessary during this time frame. But everything is subject to review at the end of the quarter, that is one. So I think the NBS, that is the issue. And so far as the price increase as far as the MRP is concerned, I won't hazard a guess. So far, the industry have maintained the same INR 27,000. And I was witness to the press conference of one of the ministers very confidently said that we have controlled the price at INR 1,350 per bag, which means that the expectation of the government is that the prices should be held.

And with respect to complex fertilizers, can you expect any price increases or MRP decreases over there?

You're not very clear. I could not catch the question.

Okay. On the same stance, it remains for all fertilizers. So government doesn't intend to change any MRPs as of now, including NPKs.

Got that. Okay. Secondly, I wanted to get some understanding with respect to the channel inventory. What we understand is given how erratic the monsoon during the kharif, there is a lot of -- there is -- the channel inventory continues to be high for both fertilizers as well as crop protection products. So your view on that as to how are we seeing rabi panning out and will the volume growth will be impacted to that extent?

Okay, Darshita, if I have understood your question right, your second part of the question was about the performance of CPC in the rabi?

Is it better now? Am I audible?

Yes, I think we are not catching you correctly. Either you should speak directly to the phone. I think what could be wrong, you are speaking from a speaker phone.

Is it better now?

Yes, much better.

Yes, yes. So I was just -- I wanted to get an understanding as to how the channel inventory is currently. What we understand is that it continues to be high for both fertilizer as well as crop protection products? So how are we seeing it currently? And how will it impact our volume growth for the rabi season?

So Darshita, the channel inventory of fertilizers is not much, except for some NPK complex fertilizers. As regards crop protection chemicals, the inventory were very high for the kharif crops, but the inventory for -- the channel inventory for rabi crops is not as high as it was for kharif crops, it's almost 50% level what was there for kharif crops.

Okay. All right. And with respect to the prices for the crop protection, how are we seeing the prices panning out?

See, if you look at the kharif trend, the prices were down by 10% to 15%, then from post August, the prices started building up. Rabi molecules, the price trend, again, was down by 10% to 15%, now picking up with the same levels as it was there for last year.

And these levels would be similar to that of pre-COVID levels? Or would it be lower than that?

Similar level, yes.

And my last question is regarding the INR 1,750 crores topline expectation that you've given for our domestic B2C business by FY '27. If you could throw some light on how are we seeing -- like how will we scale up our business over here with respect to any acquisitions or new molecule launches, new product launches, if you could just throw some light on that?

Okay. So Darshita, you know we have mentioned in our presentation also that we have some long-term tie-ups with some American, European and Japanese companies already in place. We are in advanced stage of talks with some other Japanese companies to give them -- give us some molecules which are getting off patent in some years to come. So we have a product portfolio which is -- we are planning a portfolio which can stand these numbers for at least 5 years. So we are in -- the product portfolio is lined up. As regard acquisitions is concerned, we are not looking at that as of now.

Got it. And like just want on your view on this that there are already so many companies in the domestic space that already have long-term tie-ups with the Japanese counterparts to introduce new products in India. So how are we different -- what is our differentiation over there, if you could throw some light on that?

So okay. So if you look at the partnerships which these Japanese companies had, it was already with some established players. But now if you look at some 2, 3 molecules, which we have introduced in last year as well as this year, these have come from Nichino, these are coming from Nissan. So they're also looking beyond -- they are also looking at expanding their partnership beyond their established earlier players.

The next question is from the line of Rohan Gupta from Nuvama.

Sir, first question is on our going forward in near term, the trading strategy, given the recent cuts in the subsidies by the government. So what I understand so far that the current prevailing crisis of DAP, it may not be viable to do any kind of trading. I just wanted to share your view on this?

See, I have just told you that there is a portfolio approach that we follow as far as our business is concerned and complex fertilizers, urea, DAP, potash, as well as our CPC, SN, they are a complete portfolio in each -- which we present to our channel and use that channel and the -- from the various products, cross-sell or cross-market some of our -- all these products. Therefore, despite what the numbers may say, we may have to maintain a certain amount of product flow. But as I said, all of this is very, very carefully calibrated to see that whatever we feel or whatever our return expectations or margin expectations are. For instance, in this particular quarter, MOP is profitable, whereas DAP is not. So we have to see and balance the portfolio in such a manner the markets, the placement, the timing and everything in a very calibrated, coordinated setting, that is one part. Now as far as your question about whether this is viable or this is not viable. As of now the government's policy is what it is. And as I said, in the portfolio of which a certain amount of minimum flow of materials has to be maintained. We will see how this develops. Post-January, we do not know how the prices of material will behave. It could be that it may drop. It may drop as early as December as well, I do not know. We are already seeing softness in some of the NPK grades. And that is indicative of the fact that, yes, there may not be that kind of rapid escalation in prices post the Ukraine war and also what we are seeing in the Middle East. So it is my expectation that prices will cool in the next quarter, is my personal opinion. And should that happen to a sufficient extent then the game is on.

So sir, you are saying that in near term to have a balanced portfolio and not -- over the fear of not losing any market share, we may have to offer the product and even maybe at a very low margin or maybe if -- maybe in some cases, maybe even at losses as well, depending on the market condition, but we have to cater to the market and to maintain the market share. So maybe that we have to face some challenges in near-term?

I would put it this way that we have a return expectation on the business profitability expectation from our stakeholders. And we also have our budgets to meet. We also understand the constraints the market provides and the constraints of the government policy within the 4 corners. We have to design it in a way that we achieve to a large extent most of the objectives. So it is a kind of an optimization game between all these issues. I would like to say that this is where execution and efficiency plays a great deal. If we -- in material, for instance, if we have even brought material, which may have a loss on the books, we will at least liquidate it, so the timing, the placement that also is very important and this is where the efficient execution at the -- the Chambal team makes a big difference. So you can plan anything, but if you don't have execution, you may have very contrary results.

Okay. Sir, next is on -- you have further plans to invest in a nitric acid value chain though we -- our TAN plant is still under deputation by October '25. What kind of product portfolio we are looking into nitric acid value chain? What I understand earlier that the reason for getting into TAN plant was primarily to use captively our ammonia. While the reason for going into nitric acid value chain may be definitely the further investment and may require further more investment in ammonia and other assets as well. So what is the thought process on this further investments in nitric acid value chain?

Good question, Rohan. We -- as we -- somebody asked a question earlier whether your efficiency projects will result in an increase in ammonia production? So coming back and circling back from there, I would like to say that some of the projects that we continuously work upon and especially in the '25 time frame we have said about Gadepan-III, a special kind of equipment, which may need to be put there. Should those economics work out, we may have some technical surpluses, increased to some extent, which will enable us. And in any case, in the current scenario as well the design and the capabilities that we are building in the new plant, there could be surplus WNA, which can then take us into the next chain, as I said, in terms of nitric acid. And this is a value chain that will keep expanding in my opinion, over a period of time. Because we have sort of nucleated this business. And once you create a nucleus in a business, then there is expansion possibility going forward in the next 3, 4, 5 years. So I believe that this is a foundational project as far as nitric acid and nitric acid chain is concerned, and it will develop in time.

So but primarily focus here is, will still remain that surplus ammonia and how much more ammonia we can produce through the recent energy initiatives, which we are taking. There is still no plans for putting a complete dedicated ammonia plant chain to drive the nitric acid value chain including TAN business?

No, that is dependent on the volume absorption, which is possible. We continuously look at what competition is doing. We have to see the balances -- overall balances, the requirements. Our ammonia chain is pretty expensive, as you know, from -- I think Deepak Fertilisers, they have had to put a 1,500 ton plant. It's fairly expensive, and we feel that we can exploit capacity, which are available with us. And those capacities that will get exploited will give us reasonable volume in these products. We are designing the plants or we will design the plants sufficient interoperability or sufficient capability to look at from ammonia, WNA, CNA or going forward on to other value addition on CNA, et cetera. Going forward, those quantities that are there, they are quite sufficient in my opinion.

Sir, just last from my side. So sir, our Gadepan-III is going to lose its energy benefit under the scheme of new investments I think from 2026 or '27, if you can just comment on that? What will be according to you the likely change in the government policy and the normalized margins from that Gadepan-III plant?

That is too far out in the future for me to comment. I think we are talking about 4 years from now, I can make any number of speculations and all of them will be wrong. I do not know what exactly the government are thinking. In the past 1 year, I have been witness, before I demitted office as the CFO, has a very strong discussion on sort of deregulation or at least putting DBT in urea. I do not know whether those thoughts will be reconsidered or redone after the election and so on, so forth.

You think the current scheme will continue for another 4 years? I mean FY '28 -- I believe it was till '27.

No I -- '26 end. So that is something that I cannot envisage and there are so many things happening at the same time, it's very difficult to predict the trajectory of government policy. It depends on the incumbent. Who will be the minister? What will be the composition of all this? So I can't say, I can't say.

The next question is from the line of Himanshu Binani from Anand Rathi.

So sir, I have a couple of questions. So number one, on the provisions side. So sir, after this NBS rate reduction, so have we taken any sort of like inventory provisioning into our numbers in the second quarter particularly for the complex fertilizer. And secondly, connecting to that only. So we have been like witnessing some sort of like volatile RM situation currently, so on the crop protection side also have we taken any sort of inventory provisioning out there also? So maybe you can quantify on the both.

On the crop protection, there's absolutely no provision. It has been on low credit terms, I won't say 100% cash terms. Almost -- I wouldn't say how much percentage we have sold on cash, but still focus is -- there's a lot of disturbance in the line. And secondly, as far as the provisioning on the NBS is concerned, I've just told somebody who called up or who actually questioned me that the adequate and accurate provisioning has been done on the stock on whatever was remaining in the POS and also on anticipated arrivals on which we have made provision.

Got it, sir. Sir, secondly, my question was regarding the price hike for the second half. So we have been like hearing from the competitors also that maybe they would be taking some sort of like price hikes particularly in few grades, which in turn would be like partially mitigating the sort of this subsidy cut or maybe the industry is expecting subsidy revision during the quarter 4. So just wanted to have a sense that considering that we are like running towards the election, May '24 elections. So maybe if at all, the government would be allowing the industry to take any sort of price hike for this year? So any thoughts or any comments from you would be helpful?

So Himanshu, my sense is that the government announced in a press conference certain things. If you went to the YouTube of that or actually heard it. Their USP to the farmers or to the people was that look, we have managed to control the prices. And the farm level MRP and so on. Now if the industry feels that yes they want to break out or they want to do something different. It's a matter that I'm sure they would discuss internally and also not act unilaterally. There will be a group of people who would possibly go and discuss with the authorities before they took a step of this type. That is my understanding. And if there is sufficient weight and sufficient force in their argument, I'm sure the government will allow willingly and in that case, we are better off position than what we are for the industry, and we are part of the industry.

Got it, sir. And sir, the last question is on the inventory position. So maybe like if you can give any sense on the industry-wide inventory provision post 30th September, how the inventory provisions are, number one. And secondly, on your company maybe if you can give the RM inventory and the finished goods inventory with you in terms of months so maybe that can help.

I can't say for all grades because we have a limited number of grades that we work with. But for the -- my understanding only that -- one of the big grades that we follow is DAP and I think Ashish in his earlier intervention said that, there is some 22 lakh metric tons, which was opening on October the 1st...

1st of November.

Sorry, 1st of November. As far as MOP, that is potash or NPK, I would like to...

Okay. So to answer your question on the DAP inventory, DAP inventory in the current -- country is in 2.2 million tons on 1st of November. And when you're talking of how many months inventory if you can convert into the POS sales for past 2 years, it is equivalent to 2 months sale. So that's for DAP. NPK, the inventory is around 3.9 million tons. This is all grades put together, which is much, much higher. If you compare the next 2 months requirement in terms of the farmer sale, it's around 2.2. So there is a sufficient inventory of NPKs. With regards to potash, the inventory is around -- almost around 1 million tons in the country, and it is almost 4 months forward sale inventory in the country for MOP.

[Operator Instructions] The next question is from the line of Anmol Das from Arihant Capital Markets.

You said the rabi crops expectations are high. So we understand that cotton crops were not so good or demand-wise for the agrochemical side. So which crops are you expecting in rabi season increase your demand and prices?

Okay. So if I understood your question correctly, Anmol, you are asking about what are crops, we expect to be grown in the rabi season. Is that right?

Yes, sir.

Yes. So in our territory primarily -- in our territory, the crop rotation starts with mustard, then followed by potato, wheat and grams. So that is the standard crop cycle in our operating territory, and we don't see any changes in any acreages of these crops.

Okay. So no changes in acreages and -- so how -- I mean, how do you see the demand panning out? And any kind of risk with these crops like it happened with cotton?

No, I don't see any change in the demand factor because these are standard crops which are -- which have a standardized fertilizer and crop protection chemical requirement. So it would be as -- an average normal requirements. No upside and downside in that.

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

Yes. Sir my line got disconnected in between so I don't know whether you answered this or not. Typically, sir, our H2 complex fertilizer volumes have been in the range of 3 to 5 lakh tons with the exception of last year. So with the current change in subsidy, is it possible that we'll with continue the same volume trajectory? Or what would be your view on that?

See, we are halfway through the season more or less. I don't think it will be that much.

Sure. And, sir, some data-related questions also I had. If we can have the breakup of other expenses in power, packaging and freight cost?

Yes. I'll let Anuj handle that.

Yes. Power is -- this quarter, power is INR 944 crores and freight is INR 207 crores. And corresponding last quarter, it was INR 1,443 crores. Power and fuel was INR 1,443 crores. And freight and forwarding is more or less same, INR 214 crores.

So freight in this period is how much, can you repeat?

INR 207 crores.

Okay. And packing?

Packing is INR 34 crores this period.

Okay. And sir, urea's closing inventory after Q2 will be around 1,38,000 tons?

Yes. Around 1,38,000 tons.

And sir, lastly, can we get the traded fertilizer inventory, which would have been in the channel at the end of Q2?

You mean you're referring to the POS stocks?

Yes.

At the end of -- at the end of quarter 2, we had all put together around 1,19,000 tons of DAP, NPK and MOP put together.

I think you had one -- there was one question on what are the volumes of production for urea in all our key plants. So G-I we produced 2.8 lakh tons, G-II we produced 2.69 lakhs and G-III will produce 3.57 lakh tons in the current quarter.

Thank you. [Operator Instructions] As we have no further questions, I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Thank you very much, gentlemen, for the really penetrating questions that you have asked. I hope we have been able to answer you well. And since the festival season is ahead, I wish season's greetings and happy Diwali to all of you. Thank you so very much.

Thank you. Happy Diwali from the entire Chambal Team.

On behalf of Chambal Fertilisers and Chemicals Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.