Deepak Fertilisers And Petrochemicals Corporation Limited (500645) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Deepak Fertilisers and Petrochemicals Corporation Limited Q3 FY '20 Earnings Conference Call hosted by Dolat Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Archit Joshi from Dolat Capital. Thank you, and over to you, sir.

Thanks, Faizan. On behalf of Dolat Capital, I welcome all the participants on the 3Q FY '20 Conference Call of Deepak Fertilisers and Petrochemicals Corporation. We have with us today, Mr. Sailesh Mehta, Chairman and Managing Director; Mr. Amitabh Bhargava, President and CFO; and Mr. Deepak Balwani, Associate VP, Investor Relations. Without further ado, I now hand over the call to Mr. Sailesh Mehta, Chairman and Managing Director, for his opening remarks. Over to you, sir.

Thank you. It's indeed my pleasure to welcome all of you to Deepak Fertilisers Q3 FY 2020 Conference Call. I do hope you all had a chance to go through our results and the earnings presentation, which is available on the company's website and also posted to the stock exchange. In my opening comments, let me just share the perspective that I see in the 3 businesses that comprise of Deepak Fertilisers group. So the first is the fertilizer business, and that has been one which has been testing one for us. So let me start with some of the macro aspects, which has positively impacted this business. So as you all are well aware, we had very good rains, though late, but finally, very good rain. And with the result, a couple of things that we see. One is the water levels in the ground have gone up, which is a very good sign. Second is the water levels in the reservoirs are also much better, and both of them indicate good extended rabi. It also indicates additional area under cultivation. And going a little forward, even in the case of good kharif. So from a perspective of the rains, at least, it's a very positive, I would say, support to the fertilizer business. Second, in the macro aspect, I might share that in the FM speech while there was this pointer of not wanting to or wanting to discourage chemical fertilizers and also some lower allocation in terms of the subsidy, I would look at it from a very positive perspective that what we see is the excessive, I would say, push on urea, which had caused imbalance in the soil in the NPK balance is now gradually likely to get corrected from what I read. We see these as indications which may lead to urea coming under NBS in a gradual fashion. And with that, we also see at the marketplace, finally, a correction of the imbalance in terms of, I would say, the much lower prices of urea, which was tilting fertilizer usage towards -- excessively towards urea, now will bring a balance towards NPK. And in short, medium, long-term, I'm seeing this as a very positive step that FM has announced. At the micro level, that is at the company level, firstly, all the hard work that was put in by the team over the last, I would say, 3 seasons, with a focus on a specialty or a crop-based technical selling orientation, it is now bearing fruit, and we are seeing, I would say, good green shoots emerge. Which is telling us that we are in the right direction. This is reflected in terms of the market share, the premiums that we see in terms of our products and, of course, even the liquidation. We have also seen that from an earlier some 35%, 37% of the Smartek product, which was emerging out of our NPK basket, it -- we have now seen it cross almost 68%, 69%, and which is giving us the confidence that not only the product efficacy has been accepted, but it is something which is now catching routes, as we say. As far as the other product goes, Technical Ammonium Nitrate, which, as you know, is focused on the mining sector. There, in this quarter, we did see some dampeners emerging out of excessive rains and extended rainfall in the key mining belts and which had repercussion of slowing down the exclusive consumption and then the consumption of TAN. However, we see that as a temporary phenomenon, and as we go forward with the large infrastructure development, organization and other aspects, as we can see in terms of the allocations in the budget, it is going to have a positive medium, long-term impact on the TAN business, which is linked with the mining, infrastructure, limestone sectors. Moving on to the Industrial Chemical. There, the acid business has seen additional volumes emerging out of now our Dahej complex gradually coming around to running at capacity levels, efficiency levels that we had budgeted. And there, again, we see that this quarter, the Q3 capacity utilization had reached around 78%. And there, we see the downstream products also showing robust demand in terms of the capacity for Nitroaromatics sector and others. So we are looking forward to the next coming years, FY '20/'21 for a full utilization of the Dahej facility. On the IPA side, we did have lower volume, and IPA margins were impacted due to the subdued prices because of the Chinese dumping. However, now the IPA prices have improved, and we are seeing some steadiness emerging. Of course, currently because of the Coronavirus, the supplies of IPA from China has dwindled, but otherwise, also, we had applied for the safeguard duty, and the process initiation has already started. Even there, I recount the FM mention in her speech that the government is positively looking at safeguard duty to make sure that the Indian industry and Make in India is supported. During the Q2 conference call, I had also shared that there was the abrupt water cut that had hit us, which MIDC had put in on all the Taloja units. And despite the fact that we were nonpolluting unit and we continue to be such, they had lock, stock, and barrel applied water cut consequent to the NGT strictures on the CETP, the Common Effluent Treatment Plant. However, then we had approached them. We had also approached the Supreme Court. And now they have put a stay on the water cuts. So the water availability is now back to normal. We also saw, in this quarter, a lot of good efforts on containing and optimizing the fixed cost. And those also, we see that as we carry through in the next year that we will see a full-fledged benefit of all the efficiency measures. From an overall perspective, we also saw prices of major raw materials decline in comparison to Q3 in the previous year, and we expect that subdued kind of raw material prices to continue. So with this in a nutshell from the operations side. If I were to summarize in one line that we see clearly green shoots of a gradual turnaround as we see the next few quarters emerge and some of the challenges that we had faced seem to be receding in the background. And for the more details in terms of the working, I will now hand you over to Amitabh, who will take you through the details. Amitabh?

Yes. Thank you, Mr. Mehta. Good afternoon, ladies and gentlemen, and thank you for joining the Deepak Fertilisers and Petrochemicals Conference Call to discuss the Q3 FY '20 results. More specifically on numbers, during the third quarter of FY '20, we reported total revenues of INR 1,119 crores at consolidated level, with operating EBITDA of INR 109 crores. Operating margins improved from 7.4% in Q3 FY '19 to about 9.7% in Q3 FY '20. Net profit increased from INR 12 crore in FY '19 to INR 30 crore in Q3 FY '20. Depreciation increased by INR 10.5 crores compared to Q3 FY '19, mainly due to the commencement of greenfield facility at Dahej. Other expenses increased by INR 15 crore on account of new Dahej facility and other onetime nonrecurring charges, such as higher insurance costs due to the increase in burning rate and incidental charges relating to recent sale of land parcel at Dahej. In Chemicals segment, manufactured chemical business reported revenues of INR 544 crore in Q3 FY '20 as compared to INR 644 crore in Q3 FY '19. Segment margins have increased from 9.7% in Q3 FY '19 to 17% in Q3 FY '20. Acids revenue increased by 30% Y-o-Y to INR 126 crores in Q3 FY '20. Sales volumes increased by 35% Y-o-Y, primarily supported by additional volumes from new greenfield plant at Dahej and increase in SNA exports. Capacity utilization at Dahej increased to 78% for the quarter. The sales volume at Dahej increased significantly over Q2. The concentrated nitric acid was up 79% and dilute nitric acid by 46%. Our TAN business, as Mr. Mehta was also mentioning, reported lower performance during the quarter. TAN revenues decreased by 24% to INR 262 crores in Q3 FY '20. TAN sales were impacted mainly on account of 25% reduction in sales volume of LDAN and HDAN due to extended monsoon in the key mining wells, continued slowdown in explosives consumption and higher influx of imported ammonium nitrate. The volume loss was offset to a certain extent by a 15% sales volume gain in TAN solutions, AN melt. In IPA, revenues decreased by 34% Y-o-Y to INR 73 crores. IPA margins were impacted Y-o-Y due to -- due -- almost 16% decline in sales volumes and subdued price realization, which was down by 22%. However, the prices have improved sequentially quarter-on-quarter by 12%. In line with our strategy, we are consciously reducing chemicals trading business, and it has been reduced from INR 302 crores Q3 FY '19 to INR 99 crores in Q3 FY '20 and from INR 105 crores in Q2 of FY '20. The company will continue to consolidate its trading portfolio and focus on high-margin products. Our manufactured fertilizer business increased by 31% Y-o-Y to INR 404 crores in Q3 FY '20. Sales volume of NPK increased by 37% Y-o-Y. And the ANP nitrophosphate, grew by 33% Y-o-Y. Revenues of manufactured bulk fertilizer increased by 30% Y-o-Y to INR 387 crores. Revenues of specialty fertilizers increased by 57% Y-o-Y to INR 17 crores. This is pertinent to note that the Fertilisers segment margins have turned positive after 5 quarters, backed by a good retrieving rains, increased farmer confidence in our differentiated fertilizer, as explained by Mr. Mehta earlier. Smartek, which is our differentiated fertilizer, the volumes in total sales of NPK fertilizer increased to 69% in 9 months FY '20 from 46% in 9 months FY '19. The fertilizer trading business was reduced from INR 191 crores in Q3 FY '19 to INR 66 crore in Q3 FY '20. The reduction in traded revenue in CMB was also in line with the strategic decision to move towards differentiated NPK grade. The company has divested one of its parcel of industrial land in Dahej as part of the strategy to divest noncore assets for a total transaction value of INR 99.2 crores. The deed of assignment was executed in December '19 and transfer orders from Gujarat Industrial Development Corporation was received accordingly. The company's existing nitric acid plant is situated in Dahej, where it continues to have adequate unutilized area in order to take care of any future expansion in our nitric acid production there. During October 2019, IFC successfully subscribed to the first tranche of $30 million, approximately INR 210 crores, by way of CCDs and FCCB into DFPCL and its wholly-owned subsidy, Smartchem, respectively. Funding is part of their overall $60 million investment commitment by way of CCDs and FCCBs. And aligning with the capital requirement, the second tranche of $30 million is expected to be subscribed in the next 3 months or so. I would also like to inform here that as part of this transaction, our nondisposal undertaking has been provided by the promoters of DFPCL to IFC for CCD issued by Smartchem Technologies. This is, in fact, usually provided in course of such transaction. It's a very standard to see this kind of commitment from promoters in such transaction. And I would like to draw your attention that no pledge of equity shares of DFPCL shares has been created by promoters as on date. So it's been only nondisposal undertaking so far. Furthermore, as mentioned earlier, the promoter, they remain committed to subscribe to the warrants through preferential allotment. The balance of INR 125 crores we have time till mid-April. And it is expected that it would be fueled by the promoters within the stipulated time period. Warrants of INR 200 crores were issued earlier at the price of INR 308.79, out of which INR 75 crores have already been infused. With this, we would be happy to take your questions. Thank you very much.

[Operator Instructions] The first question is from the line of [ Nishit Shah ] from [ Aequitas Investment ].

Sir, I wanted to understand how is our Fertilisers division doing as per our expectation? Because if we look quarter-on-quarter, the revenues are down, but you were expecting because of delayed monsoon, it would be better.

See, fundamentally, if you see, while the rains were delayed and to that extent, the Q2 sales were down compared to what we had -- what our industry for that matter had anticipated. There was also a huge inventory -- at industry level, there was a huge inventory in Q2. Now what the good rains has -- or rather the receding rains of this monsoon, what it has helped is, overall, the kharif season has been good, and that you see reflected in our Q3 numbers. Q3 numbers, if you see Y-o-Y, our sales have overall gone up from -- if I -- if I'm correct on the volumes, from 95,000 tonnes on the bulk to 128,000 tonnes put together both NP and NPK. So as such, the volumes have gone up. And the effect of that overall effect of volume as well as to an extent as Mr. Mehta was also mentioning that in Q3, the raw material prices compared to previous similar quarter last year had been benign. So a combination of that, we have, overall, in, I would say, in last 5 quarters for the first time, we have reported a positive EBIT in the segment. So now -- as such, see, the -- given that we have now decided to focus only on the Smartek product, to that extent, I would say, we are also seeing encouraging results that our overall share of Smartek in our bulk fertilizer has also gone up. If you see 9 months numbers, we have gone up from -- I'll just give you the numbers, from about 46% up to, say 9 months, that's the share of our Smartek product, up to now 69%. So we are seeing overall volume improvement, also improvement of our value-added fertilizers in the overall thing.

Okay. Sir, what is our debt level long-term and working capital for this quarter and debt reduction plans going forward?

So as such while our -- we don't declare the numbers in December quarter. But I would say that our December numbers has been largely flat as compared to our H2 debt numbers. So we are actually overall marginally in fact down from H2 numbers.

Sir, this is [ Rithika ] here. Sir, I wanted to know what is the plan for non -- monetization of noncore assets in the next 12 months.

So right now, -- see, we have 2 large assets, which are material in a sense in terms of the noncore monetization. One is on Pune land. Now Pune land, we are -- already, we had mentioned earlier as well, we have already have intermediaries helping us looking for potential takers for these assets. As you know, the overall market in terms of real estate is not that buoyant. And therefore, the timing of it is there it's very difficult to predict right now, how long will it take us to find takers. But we are very clearly -- that management has clearly -- even earlier, we had mentioned in our interactions with investors that we are earnestly looking at divesting those assets.

So how much would the value of those assets be?

Well, as such, the independent valuations done of these assets have been in the range of INR 800 crores to INR 900 crores. But the value of that depends on what we finally -- it's really a -- as and when you are able to find a credible buyer, that's when you would have a real discovery of the price, I would say.

How much do we expect our debt to reduce by in the next 12 months?

Well, in the next 12 months, debt reduction would be largely a function of 2 things. One is, we are going to see promoters infusing about INR 125 crores. So that's one reduction immediately because assuming that the CapEx would happen over, let's say, next 24 months, there would be an immediate reduction in debt from the funds that would be fueled by promoters.

And how much would that be? How much of that INR 125 crores...

INR 125 crores is the amount. By and large, I would say, initially, it would straight away reduce the debt, let's say, short-term debt. In long term, of course, you are aware that we are implementing ammonia projects. So ammonia project would take more debt towards the completion of that project. But I'm telling you that immediately, there is no other CapEx as such. So to that extent, INR 125 crore that promoters will bring in will initially reduce that debt. The second is, as part of IFC's balance $30 million, half of that money, about INR 105-odd crores, would come in as a compulsorily convertible debentures in our subsidiary. That too, by and large, would go towards reducing the working capital debt. The third thing, which is where the timing is right now not clear, is on the noncore -- monetization of noncore. Monetization of noncore again would -- by and large as and when it happens, would go towards reducing the debt on our balance sheet.

Okay. And we do expect...

[ Rithika ] May we request that you return to the question queue for follow-up questions? The next question is from the line of Lokesh Manik from Vallum Capital Advisors.

My first question is on the segmental results. If I see, like you mentioned in your opening comments that Y-o-Y, our Chemical division margins have gone from 9.7% to 17%. And if I see the products in these segments, the realization and the volume growth of, say, TAN and IPA and acid, I'm just trying to understand where is this margin coming from? Is it due to the reduction in your trading portfolio?

That's right. So that's one. The second, I would say, is the volumes in acids have gone up. To that extent -- but they've been to an extent or to quite an extent have been compensated on the negative side by the IPA volumes as well as margins. So yes, I think by and large it's the sales or trading -- reduction in trade sales that has resulted...

The lower margin trading portfolio you had which you reduced?

Yes. It's been down from INR 300-plus-odd crores down to less than INR 100 crores now.

Right. Great, great. Sir, my second question is on -- it's just a follow-up to the previous question. On the noncore assets, so in the last call, you mentioned so we're looking at 3 of them, one is the Pune land, one is the land in Orissa and one is the subsidiary -- Smartek subsidiary. So the valuation for the Orissa land and Smartek subsidiary if you can provide ballpark, approximate?

See, Orissa land is perhaps would be in the range of INR 20 crores to INR 30 crores. So that's why I was -- -- when there was a previous question, what I was trying to say is that the material numbers are in these 2 assets, that is Pune land and the subsidiary of Smartchem in Australia. While we would, obviously, look at wherever there are even smaller assets, we are looking to monetize them. As far as your question on the subsidiary of Smartchem is concerned, very difficult to put a number right now. But what I can say here is that, a, that company has been doing well. In fact, last quarter was the first quarter in 5 years, nearly 5 years of our investment that company has distributed dividends. And we have appointed an intermediary investment bank to look at potential buyers. But given that business is doing well, we would, obviously, wait for the right value that we realize for those assets and our stake in that.

Sure. Do we have any other assets? Or we are dependent on the business of the company, I mean, for exiting the company?

No, it's -- so we have 65% stake in that company. So the monetization of that would be by way of selling part or a complete stake in that company.

Okay. That is a consulting company, if I'm not mistaken?

No, no. It is not a consulting company. It's a company which is into blasting business, and it provides blasting services to various mines in Australia.

The next question is from the line of [ Renu Bajaj ]. She is an individual investor.

Sir, my first question is during the quarter, TAN business performance remained subdued. Can you please share few factors affecting the performance? Should we expect this trend continuing in the coming quarter?

So one is, fundamentally, if you would recollect the way the entire rainy season panned out in last monsoon, the rains continued till October and mid-November. So what we saw is a number of Coal India mines were still inundated, and there was a flood kind of a situation there. So we saw a reduction in terms of the overall mining activity in -- normally, the mining activity comes back in October beginning. And therefore, we generally have a good Q3. But this time, it -- even mid-November, we saw a number of mines which were inoperational due to flooding, et cetera. So that impacted the volumes. Number two, I think the LDAN segment, which also has some of the demand coming from infrastructure segment, we've seen a slowdown on the infrastructure side also and that as such impacted. So these were 2 main reasons. As far as the Coal India or the coal mine segment is concerned, the activity has come back, and we believe that this is -- this was an exceptional situation, which is we don't see a structural any change in the demand as such. As far as infrastructure is concerned, it could perhaps take a little longer for it -- the demand to come back. But I think that is where it probably could be more like a 2 to 3 quarter kind of recovery. While in coal, it's pretty much -- was a passing phase, which we should not see any longer.

Sir, as per the recent shareholding provided to stock changes, it appears promotors have pledged their shares. Can you throw some light on this offset?

Yes. So this is exactly the reason why we also -- I don't know where this is coming from because we have, as part of our disclosure, we have only disclosed the NDU, that is nondisposal undertaking. And as you would know that in -- typically, any investor who comes in and in this case, IFC, they would want the current promoters to continue to run and control the business. So to that extent, NDU is a fairly standard ask from such investors. But what I can confirm to you is, so far, there is no pledge given by promoters in any of our agreements.

Okay. Sir, another question. Other income in Q3 FY '20 was INR 41 crores compared to INR 9 crores in Q3 FY '19. What is the reason? Is it due to recent sale of Dahej land?

I couldn't hear your question properly. Could you please repeat it?

Yes. My question is other income in Q3 FY '20 was INR 41 crores compared to INR 9 crores in Q3 FY '19. What is the reason for this? And is it due to recent sale of the Dahej land?

Yes. That's right. That's right. So about INR 35-odd crores of capital gains due to sale of Dahej land has come in as part of other income.

Okay. Okay. On similar lines, other expenses increased from INR 134 crores in Q3 FY '19 to INR 150 crores in Q3 FY '20. What is the background for a such an increase?

You are saying, other expenses? Your question is on other expenses?

Other expenses, those increased from INR 134 crores to INR 150 crores in Q3 FY '19.

See, one is that, as such, while what you see in the other income, there is INR 35 crores of [indiscernible] but nearly INR 6-odd crores of that Dahej land-related some transfer charges that we had to pay to government of Gujarat, that has come in as additional expense. Also, we had certain pollution control-related penalty imposed by MIDC, which is what Mr. Mehta was also mentioning that we have challenged that. But as part of the overall strictures from MIDC, we had to pay that. So we have taken those expenses. So nearly about INR 8 crores of those additional expenses. There is also some increase in ForEx loss Y-o-Y. I think so that also roughly would account for this increase compared to Q3 last year.

The next question is from the line of Bhavya Shah from Girik Capital.

Yes. Sir, broadly, 2 questions. One was, by when can we expect quarterly IPA volume coming back to 20,000 tonnes per annum, which used to be before?

So as you know, see, we had -- IPA has, in previous 3 quarters, have gone through some challenges, mostly from -- part of it was from the raw material side and also part of it because of the margin reduction. But we also lost volume both in Q2 and Q3 on account of this MIDC water cut in Taloja across the board to all units. Now there was -- I would say, to an extent, there were also some extraordinary breakdown in IPA plant. What we are hoping that this quarter, hopefully, we'll -- our run rate for manufactured IPA should come back, if not all the way, to 20,000. It should be somewhere between what we did last quarter and 20,000. And gradually, our plants would stabilize to start producing on an average. So I think we have -- maximum volume we have generally done is about 75,000 to 76,000 tonnes. So on an average, I would say, 18,000 to 19,000 tonnes per quarter. We are hoping that, that situation would come back on track in maybe another quarter or so.

On the backdrop of Coronavirus, should we expect this volume to reach 18,000, 19,000 tonnes per annum quarterly from Q4? Or will it take time to ramp up?

No. See, like I said, the issues that -- anyway, you know that we sell manufactured IPA. We also trade in IPA, whatever chemical trading that we are doing. So overall, we are actually supplying much higher quantity to our customers. And within that, obviously, it makes sense for us to maximize the manufactured volume. The challenges have been so far on water cuts, some bit of raw material shortage at some point in time. Also, there were some, like I said, an extraordinary breakdown situation. So as soon as these internal issues are under control, there is no reason why we shouldn't be producing at full capacity. Coronavirus would have more of an impact, I would say, on -- we see that impacting the overall import coming from China, which is what was affecting our margins. So if that happens and which we are seeing initial signs of that in Q4, that is not much -- almost 0 IPA has come from China. That should help us -- or maybe that should see better price of IPA of import parity. And to that extent, that should also help us get better price domestically.

Okay. Sir, my second question is that one of the chemical company was saying that DFPCL is having some plant issues in running its nitric acid facility in both Dahej and Taloja. So is this true? If you can throw some light on it.

See, Dahej, as you know, we have -- when we started the plant in April, and Q1 and Q2 also, if you see our presentations and investor call, you would realize that there were challenges, both technical challenges in bringing the capacity utilization at a high level. Also, there were rain-related challenges in Gujarat, whether in terms of evacuation or even in case of our downstream customers. There was also a challenge that we faced in Q2, if I'm not wrong, where the Gujarat Pollution Control Board had also stopped supply of water. And this was done across many units. So a combination of that we saw in our capacity utilization. Now in Q3, as you noticed, we have -- our capacity utilization has gone up to 78%. And I would say in December out of Q3, our capacity utilization was actually nearly 100%. So some of those technical challenges are hopefully out of the way. Therefore, we don't expect...

Sorry to interrupt. The company said that the issue has arised in Feb of this year, Feb 2020. So are the plants running normally currently? Or is there any issue?

Yes. No, plants are running normally as of now.

At both Taloja and Dahej?

At both Taloja and Dahej. See, Taloja, like I said, also had an issue of water issue in Q2 and Q3, September to October mid, almost 19 days of production was lost, even in case of acid across all products, but including acids. So to that extent, some of those -- so today, if you see between Dahej and Taloja, we are meeting the requirements of our customers. In fact, the growth that you've seen in Q3 vis-à-vis Q3 of last year pretty much demonstrates that we are meeting, in fact, the demand -- or if you see, the overall sales volume has gone up substantially. What is the percentage by which it's gone up in acids, Q3 to Q3? Q3 to Q3 Y-o-Y. Y-o-Y 36% growth in volume. So that -- you can't achieve that unless you are able to supply to your customers. That's a big jump even in terms of the demand growth.