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

Yes, definitely. I mentioned that in my opening remarks. And that is visible from the way, for instance, fertilizers have been picked up as we speak today. I see from what was happening by middle June and to now in July, for instance. This month itself, we have had almost 3 lakh 80,000 tonnes of farmer sales of urea and almost 92,000, 93,000 tonnes of NPK sales in this month alone. So that means the pickup is close to 19,000, 20,000 tonnes a day, which is quite good in terms of how things are improving. And along with that, once you see that the sowing has proceeded to a certain level, and the shortfall is being made up, the subsequent sales of various other specialty nutrients and crop retention chemical shall follow.

Sure, sir. So overall, you are seeing that the Q2 will progress well than what we anticipated?

Yes. We feel that Q2 will also progress well, and the liquidation from the channel is also happening, which will create the second round of demand.

The next question comes from the line of Dhruv Muchhal with HDFC AMC.

Sir, a few questions. Sir, firstly, on the urea business, we see improvement in profitability despite the lower volumes. So is it because of the probably ammonia, surplus ammonia sales and probably also the currency? And if you can probably share what the surplus ammonia benefit?

No, let me first lead you to, I think when Anuj mentioned the relative quantities of Gadepan-I and II and III. Gadepan-III was a predominant factor in this quarter, so that was the first instance. The second instance was the fact that we had a currency uptick, which directly impacts margins as far as Gadepan-III is concerned. Thirdly, we had some amount of ammonia sales also with better margins. So these 3 factors have contributed to better margins.

And sir, we've seen that in the NPK, the subsidy rates are yet to be revised and the costs are high. And we also see the local production is at a very low level. So I'm just wondering what's probably delaying the subsidiary announcement? And if not, can it cause some challenges? Probably even from an import angle?

Yes, I'll put it this way. Yes, subsidy announcements were delayed. I mean it was -- normally, it will happen once and twice in a year, one for May for kharif and one for rabi. The kharif number is what it is. The industry, as I mentioned in my opening remarks, have been continuously engaged with the government to try and improve the terms, or otherwise, there will be demand destruction via much higher prices with the farmers. That is one issue, which is there. The second issue is that there has been a lower [indiscernible] in production because especially in sulfur availability, it has been an issue for most of the phosphoric acid manufacturing. And that has fed into a lower production for the phosphatic fertilizer industry in India. Thirdly has been the logistical disruption from Saudi Arabia and so on and forth in terms of the importation of materials, especially finished fertilizers like DAP and so on. So these 3 factors have combined. Nevertheless, there were opening stocks and [indiscernible]. And due to which, we are in some position of comfort, I think, which will need -- the stock will need replenishment going forward and quickly enough. So the feeling is that I don't know the government might be feeling that, yes they will definitely do something by October. There was an interim release that was thought, but that has not yet come through. As far as Chambal is concerned, we took calculated positions in our purchases starting from January onwards, and we, although -- it was not thought of that way, but it somehow has panned out. And we have, as you know, taken about 8.5 to 9 lakh tonnes of material, and that will flow into the system. And we are maintaining a good pace of sales, especially as I said, even in terms of new grades such as ammonium sulfate and so on, which we feel is a grade, which will have a lot of promise going forward. So all in all, I think Chambal has planned out its inventory and its sales, I would say, more rightly than possibly others. So this advantage will flow.

So basically, if I understand, the kharif season is done at least on the government side. The next action probably will have to be the rabi, and that will drive the further action, at least from you and the industry?

Yes, yes.

And sir, the earlier comment you mentioned an EBITDA of about the new plant, as it goes, plant for about 12,000-odd tonnes. I mean, is it the base earning or there can be upside from the retail savings or the ammonia savings? And also I'm a bit confused about the variable -- the clause of 12% to 15% variable cap on ROE. I'm not sure if it was there in the earlier policy also. So what I was trying to understand, say, for example, because of any of the savings or efficiencies that you try, if your reported ROE gets higher than 16%, does it get capped at 16% or there is a potential because of the efficiencies that you can get?

So I don't think there is a gap per se on the 16% because the government is not controlling your investment. So supposing you are to do it theoretically at INR 9,000 crores, the brownfield project. You can also work the math that, yes, it could go up depending on efficiency, we get prices, the energy gain, et cetera, that is there in the system. That is one part. The other part is that, yes, what I said is the most important thing variable in this product today is to get the capital cost at a level at which the numbers work for us, and which have to be seen from a plethora of actions that we have to do, managing the exchange, the taxes and so on and so forth so that we get the absolutely right combination of this. So that is the effort that is currently on in order to see that we get the best possible combination on this part. So I hope I have answered your question on that side. As far as 12% to 16% is concerned, that's only an indicative range of what the government thinks that there is a floor and ceiling system in this, which if you know it in the old policy, it was also there that you could earn a little bit more in case the [ IPP ] was beyond a certain number and some part of it flows into your profits. But that is subject to the fact that your gas price should not be more than $14. So as long as the gas price floats between $14 or $6.5 or $7, whatever the case is, you can get that benefit. That's a theoretical benefit. But the other benefit that is there is supposing you are able to get the project cost to a certain number and you are operating the plant more efficiently, those, they are not capped.

Okay. And sir, last question is -- so about how does the plan get allocated? I'm just trying to understand this process. You said you are in a good position. But what if there are multiple applicants for that because the quantum is restricted, if I'm not wrong, 8 million to 10 million tonnes. What if there are other applicants who want to also go ahead. So how does that process happen? I mean what gives you the confidence that you -- yes?

No, I would say that let's put this way, they have to put up the plant in 5 years' time, number one. There are a large number of greenfield applicants, there are a large number of brownfield applicants. Amongst the question is who gets off the block first. You must understand that in this business, there are not too many vendors, so to speak, who are qualified to provide plants of this type. If they get booked early or if the shops get booked early, then whoever has got the first mover advantage has a bigger advantage over the others.

Got it. So the time limitation in which the plant has to be done, which gives you the comfort?

Not only that, I mean, people who have to then put in INR 300 crores, INR 400 crores of bank guarantee have to think through whether they can actually deliver within that time frame because it's a financial aspect on that also that this is kind of an entry barrier, in case you are not confident, you might not go in.

The next question comes from the line of [indiscernible]

My question is regarding to the TAN business. So basically, the Indian TAN market is currently import dependent, but with upcoming capacities from Indian companies, domestic capacity could broadly match the demand by FY '28. Do you see any risk of temporary oversupply if demand growth or import substitution is lower than expected? And in such scenario, how do you see capacity utilization, pricing and industry margin over the medium term, sir? And also, there have been reports of Reliance Industry evaluating and entering into a TAN business. How do you view the potential impact of a large player entering in this market?

So you have got raised extremely pertinent point. To answer your first question first. Yes, we know that there is capacity expansion in the space. So Indian supplies are going to go up, although Indian demand is also going up. That's the good part. There is a continuous stress on infrastructure, roads, ports, bridges, and so on and so forth, which will all require -- and including, I would say, very large demand projected almost 86, I mean something like 3 lakh gigawatt or whatever that has been talked about in terms of expansion of thermal capacity and all that. So coal mining also infrastructure in terms of blasting requirements for infrastructure and all that. That's all going up, which is quite encouraging. So my own experience, I would say, my own assessment is that we will be short or slightly long in the market maybe for not more than a year or so, and which we will have to manage in this situation. But going forward, the market is again going to get short in terms of the demand exceeding supply. And in that sense, we don't have a problem in capacity utilization. Number two, it also depends on the pricing structure that you have in the plant in terms of both fixed and variable costs. I believe we do have a good mix there. Third part is, you rightly mentioned that Reliance are coming in, which means that they're going to bring a very large capacity should they plan to enter. Definitely, we'll see what happens then. I can't speculate right now what is the kind of capacity coming in, what is the time line for their execution and so on and so forth. So it means that is a little bit out into the future, hypothetical question. But as of now, I see no roadblock.

And additionally, with current TAN realization being elevated due to geopolitical factors, how should we consider?

Could you repeat? Should we consider?

How should we see sustainable realization and margin over the medium term, sir?

No, it is good. At the moment, I think is what my -- Mr. [ Mishra ] tells me is that we are better than budgeted margins as of now.

The next question comes from the line of [indiscernible].

Sir, [indiscernible] sometime that the ROI in the new investment policy [indiscernible]. But will still be able to make good savings in terms of benefit of single place and [indiscernible]. I just wanted to understand when you consider the [indiscernible] advantage, will that be the similar to the new investment policy?

[ Himani, ] could you repeat? I got a little muffled in middle. I didn't get -- you said something about the old policy and the new policy. Could you repeat?

Sir, I was asking that if we compare the new policy and the old policy, [indiscernible] ROI is a bit weak and diluted. However, the [indiscernible] advantages of [indiscernible] single place that is going to give us a lot of operational advantages. So I wanted to understand, will the benefit of operational advantage bridge the gap between the ROI?

No, not really. Not really. There is a difference. There's still a difference. But as I said, to be a skilled player in any commodity business is a strategic advantage in itself. So that is a very important advantage in terms of how the market is played through in terms of distribution and so on and so forth and the synergistic benefits that will come from it.

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

Sir, on the phosphatic side globally, due to Middle East war, how are you seeing the supply from North African market? Are they getting impacted due to ammonia or sulfur. Just wanted your views on the global phosphatic supply.

See, I would do, from whatever little I have an understanding of in terms of phosphatic markets. The North African market, which I think you are talking mostly about, [indiscernible]. We have, as I've reported in the -- in my opening remarks and what you would see in the results as well, we had a prolonged period of shutdown because of 2 reasons. One was nonavailability of sulfur and the exceedingly high price of it. So they are rich in phosphate, they're short in sulfur and ammonia, but ammonia is something somewhat manageable. They have got supplies coming in from Trinidad and Tobago and so on. So that is an alternate look for getting the ammonia. In any case, the ammonia is 22% or less in terms of certain grades. But in case you are going for constant, they also export a lot of TSP funds, which is the world of many ammonia. So that takes care of the problem of ammonia. But sulfur is an essential element. And sulfur is what is needed for manufacture of phosphoric acid. So there, my understanding is that of late, we have been able to source supplies from North America. And that has now started the production running. There were, I think, a few cargoes, which were available to them from the Gulf and Middle East during that period of lull. But at the end of the day, I would say that they are still a very strong contender for supplies to the Indian market as well as the world market. And as long as they have a lot of phosphatic reserves, as long as they keep on increasing their capacity and exploit their position, I'm sure they will be able to be capturing the markets in that sense because you know that China is more or less out of the phosphatic market for the last 1.5, 2 years. Saudi Arabia is stepping in with expansion. However, we are now bottled up due to logistical issues. For the short period, I would say that it is more or less North Africa is a big supplier in the market to that.

And sir, Chambal is sourcing broadly from North Africa only?

No, we -- as I said that the base that we have got -- we have a lot of Russian exposure. Most of the [ plot ] material come from Russia, some amount comes from North Africa in terms of DAP or TSP. So that -- in this mix of this year, particularly, we had a large amount from Russia for us because we did mostly the NPK side.

Our next question is from the line of Viraj Kacharia with SiMPL.

Just two questions. One is on the [indiscernible] you said that [indiscernible].

I'm sorry to interrupt, Mr. Viraj. Could you please use your handset?

Am I audible now?

Yes, please go ahead.

Yes. So my question is on the NIP 2026. You said that if you get the product cost right and if we are able to drive better efficiency then the [indiscernible] are not cap in the 16% ROE. So in the earlier policy, 2012, there was a certain sharing of that efficiency or -- does that continue in 2026?

So in the earlier policy, up to the 8 years as far as I know, there is no gain sharing in the efficiency gains. And it is the same, I think, in this policy.

Okay, I understand. And when you say we can get the product cost right? Is it because it's largely brownfield in nature? Or what will drive a better lower project cost for us vis-a-vis other players?

I will not compare it with other players because that is their business in the first instance and their strategy in that. It depends on the type of contract function, whether we are doing it ourselves or through our own project team as we awarded in an [ LSTK ] mode when we transferred some of the risk to the contractor who is doing it. So these are one or two important structural decisions. Apart from that, the timing of placement, the type of tax structure you use in terms of how we go about in executing the project, the time line to execute, the financing structure, which will define the interest during construction and so on. There are many, many factors which add up to the project cost. All of them have to be hit right in time. And most important is time execution. If we are able to -- and we have a track record there, as you know. So that's what gives us the confidence that, yes, we can definitely execute and get the required return.

Okay. And just second question was on the phosphatic. So you already have a JV with [indiscernible]. So just trying to understand because we seem to have a good amount of projects or opportunities in hand, whether be urea or the nitric acid value chain. What is the thought process behind exploring another JV in phosphate? Why not go solo, modern maybe in India, vis-a-vis overseas. Any thoughts or color you can give?

I can tell you this that we have evaluated even a full-scale granulation plant based on rock, starting from rock. And the issue that always stays with us us is the fact is, number one, that the time for execution in India. And the second part is the cost of putting up a project is not very dissimilar from what we would do if we were to go abroad and do it, number two. Number three, [indiscernible] has a certain structure in terms of priorities. They are already expanding their phos acid capacity from 500,000 tonnes to 700,000 tonnes, which would be operational, I think, by the middle of next year. April to June '27 or so. That gives us further capacities and scale. It is one of the largest phos acid capacities in [indiscernible], one of the largest. That opens us with certain other opportunities in terms of exploiting the asset, not only for supply to India but also for getting it into maybe some value-added segments and so on. So those are other issues, which are also possible for the market. So this has a different kind of a structure with the thought process and the objectives of that particular JV. The other JV that we are talking about is linked only to supply of materials to India on the granulated [indiscernible] and where we will be both sides in terms of selling as well as purchasing or rather producing as a partner somewhere. So that it is the logic of doing that particular JV.

My question was on the [indiscernible] project. I think when last few quarters, the expectation was that if you look at the year as a whole, we should be able to the ramp-up the utilization pretty high very quickly. So FY '27 as a whole, we could see more than 70%, 80% utilization. Does that fair hold given the dynamics in the market?

I would put it this way that whatever I had -- little I have seen in the last 1.5 months. We started in earnest in ammonium nitrate [indiscernible] around 15th of June. And we have almost completed a month in terms of volumes. So I would say that the market has responded well to our product in terms of the quality, in terms of delivery schedules, in terms of pricing. So that gives me the confidence that despite this being a lean season, it definitely can go forward and look forward to a better season coming from the third quarter beginning sometime in first week of October and so on as the market picks up. And as you know that our -- I spoke about the [indiscernible] capacity nearing completion, also going to start very soon. So that -- it tells us that the 3 products in the pipeline in terms of [indiscernible] as well as [indiscernible]. So we run the combination in the most profitable manner. And we have, as you know, also started putting up warehouses and so on, two are near in completion. One is already complete. And that gives us the capacity to place our material advantages with the users. So all that mix, marketing mix, I think, is coming together and which should be completed by somewhere end of December, all the marketing mix elements as the large product elements. So that gives me the confidence that we would be able to generate the necessary numbers and the volumes.

The next question comes from the line of [indiscernible]

Just one quick question now with this big CapEx, potential CapEx coming up. What are your views on capital allocation with regards to dividends or buybacks going forward?

I think dividend, we -- whatever numbers we have done is we will definitely maintain the numbers that we've got. I don't see any difference. We have a policy in any case. There is a profit number. There's -- we have declared that there will be a 25% or so that we will pay for that. So that, I don't think that is an issue. As well as buyback is concerned, I think we have always said that buyback is subject to the fact that if we are not able to, we don't have a visibility in terms of projects and so on. In that case, we will definitely step in. But otherwise, I don't think a buyback is in the horizon.

The next question comes from the line of Darshita with [ DSP Asset Manager. ]

My first question is regarding the higher costs for setting up a cannulation plant in India versus internationally. If you could just throw some light on what part of the entire process is higher cost in nature? And what would be cost differential be roughly.

No, we did a theoretical exercise somewhere in the West Coast of India. And all the elements in terms of land and development and so on, port facilities and all that. What happens in this plant, Darshita, is that the main plant, which is the sulfuric acid plant, the phosphoric acid plant plant and the granulation plant. Beyond that, there are many other costs in terms of storages, in terms of just some disposal and in terms of raw material storage and so on. So the outside battery limit, [ OSBL, ] that cost sort of overweighs even the cost of the [indiscernible], which is inside was battery limit cost. We have done these numbers a couple of times in terms of you have to put up infrastructure to transport the rock, to stores the rock, if you are doing potash grid, you have to have a potash kind of storage, you have to have a lot of stuff to store the ammonia, because [indiscernible] you don't have ammonia backup, [indiscernible] ammonia at times, they are very expensive items. So all of these taken together, it is the outside battery limit that causes a lot of cost increases plus, of course, the -- and we did that number, and we had engaged some consultants for that. Numbers, which was not once taken into account and when you do the numbers, you take the higher limit plus 20%, not the minus 20% on the quote. So it was coming out to be more costly doing that than a JV outside.

Got it. And secondly, I think someone already asked as to what is causing the delay on announcing the subsidy by the government. We've been going around and around about it for a while now, but your best guess on why so much of the delay when we've already seen the NPK production coming down significantly around the last quarter, and we are anyway facing issues with respect to procuring that.

My assessment is that the government was watching, are still watching 2 things. What is the stock? What is the progress of El Nino, what is the situation of depletion of stock? And do they have enough pipeline for the next or first month of the rabi season and all that. I would guess, if I were sitting in some position in the Department of Fertilizers, this will be a thought process. So it's a balancing act. The government also has to look at its fiscal situation. They have already a policy, if you see for urea, where there's a cost plus, all costs are absorbed. They have a policy for DAP, where all costs are blocked. So the question is only this that what is their focus. Is this only there are 2 grades and the other are sort of supplementary grades or maybe other grades, which they may not have that sensitivity I don't know. I mean this is my -- I don't know, my assessment is that possibly they are playing a balancing act on the NPK subsidy. DAP is open in terms of advantage and disadvantages. So it's more or less like urea now.

And sir, just one last question on the e-token that has been announced, I think in a few states so far, where there is a restriction on how much urea and DAP can be bought by the farmers. Have you seen this? Could there be -- I mean, what is the government's thought process here according to you, firstly? And secondly, do you see the consumption for DAP, urea coming down in any case if this is implemented in pan-India?

Darshita, as of right now, there was an agitation 2, 3 days back in [indiscernible], and the government has suspended the e-token system.

Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for their closing comments.

Dear friends, I would like to thank you all for joining the call today, and I hope we were able to address all your queries. If you have any other questions, you we reach out to our IR partners at Valorem Advisors. Thank you once again for participating in the call.

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