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

Ladies and gentlemen, good day, and welcome to the Q2 FY '21 Earnings Conference Call of Deepak Fertilisers And Petrochemicals Corporation Limited, hosted by BOB Capital Markets Limited. [Operator Instructions] Please note that conference is being recorded. I now hand the conference over to Mrs. Shaheen Chamadia Mirza from BOB Capital Markets. Thank you, and over to you, ma'am.

Thank you, Margaret. Good day, everyone, and welcome to the Q2 FY '21 Earnings Call of Deepak Fertilisers And Petrochemicals Corporation. From the management, we have Mr. S. C. Mehta, Chairman and Managing Director; Mr. Amitabh Bhargava, President and Chief Financial Officer; Mr. Mahesh Girdhar, President Corp (sic) [ Crop ] Nutrition Business; and Mr. Deepak Balwani, Head of Investor Relations. I would now hand over the call to Mr. S. C. Mehta, Chairman. Thank you, and over to you, sir.

Thank you. I hope my voice is clear.

Yes, sir.

Yes. Okay. So a very good afternoon, evening, and I hope you and your families are all safe and healthy. We still have some miles to go before we have the vaccine out. So we all need to be continually careful. It's my pleasure to welcome all of you for DFPCL Q2 and H1 FY 2021 results . And I trust all of you would have received the results in the presentation, which have been uploaded, and I will take the opportunity to share some further thoughts on it. And then, of course, more details will be shared by our CFO, President to Finance, Amitabh Bhargava. So during the COVID times, we saw some continued operational challenges in terms of somewhere the supply chain areas are somewhere getting sufficient number of people. And I think probably a lot of industries face that, but we are now seeing a gradual revival that is coming in as the lockdowns are getting eased. As far as the monsoon also goes, we had a decently good monsoon and the water levels in all the major reservoirs are up at a desired level. We did have some surprise from additional monsoon and which had a little bit of an impact in terms of delaying the rabi season. But going forward, we expect the rabi to be good. Now I'm very pleased to share that our company in terms of the financial operational trends has really done well. And the group trajectory has been better based on higher-margin businesses and cost optimization. And very frankly speaking, I'm indeed pleased to share that our H1 FY '21 has been the strongest ever in possibly the past 5, 6 years. So H1 revenue from operations increased by about 23% year-on-year to roughly around INR 2,786 crores, and the operating EBITDA doubled to around INR 465 crores in H1. Our PAT, I'm happy to share is up 4.5x to INR 2 crores in FY '21. And with the good collection and the business all around, our borrowings also reduced significantly with the net debt-to-equity ratio improving from INR 1.25 lakhs as on 31st March '20 to INR 0.9 lakhs as on 30th September '20. We also had our rights issue, as a lot of you would be aware, and we successfully raised around INR 178 crores, a little over subscription and both from existing and new institutional shareholders. Additionally, we also received our second tranche from International Finance Corporation in Washington of around INR 210 crores. And so all of it will ease, not only the liquidity, but improve the leverage profile. So one of the key aspects that helped us was the continued strong delivery from the CNB, our crop and nutrition business. And I would say this is the fourth consecutive quarter, where things have been going well. And as we saw some of these impacts coming of COVID even in the rural area, our field operators were really challenged due to movement and farmer meetings and all that. Is my voice clear?

Yes, we can hear you.

Good. Yes. Thank you. There are some disturbance. Okay. So despite these challenging time, I must share that the team came up with some very out-of-box ideas of digital connect with a whole host of retailers and farmers to webinars. And so our farmer touch point continued to be strong, and that has reflected in continued strong volumes or sale of our differentiated NPK product. And that is something which I'm seeing from a very positive light, that not only the differentiation is something that is being well understood at the dealer, retailer and farmer level, but it is also getting reflected in certain price premiums and it is also, I would say, reflected in the repeat sales. So to that degree, the promise that was made in terms of yield improvement, is clearly showing up at the field level and building up the confidence. As far as the IPA goes, Q1, of course, was an extraordinary jump because of the panic that the virus set in. And as was expected, we have seen the prices normalize. And this is something which was expected, and this is something which we are seeing panning out, and it should normalize to the pre-COVID areas. We are continuing to focus on the needs of the pharma sector. And we are also looking at somewhere gradually putting across our B2C product, the hygiene products under the brand name CORORID. And that is something which we are seeing. It's, of course, very small today, but we are seeing that with a good promise. During Q2, we also said the demand for rates of nitric acid gradually improve and our Dahej plant in particularly has witnessed -- now coming back into good performance. And this is something that also added to our IC business, our industrial chemicals business. And in the second half, we are looking at the gradual acid business for the intermediates and others coming back to normal the pre-COVID time. As far as the TAN segment goes, the customers were impacted, meaning the coal, cement and others were impacted by COVID and which did result into subdued sales. So also we saw exports getting impacted because of, again, a similar kind of a situation all around. And yet we continue to push at all sites. And what we found was at least our collections were really very good because of all that push. In the second half, we expect now the improved performance on the TAN business. In any case, in monsoons, normally, the mining activities are at the low end. And we now expect the -- expected typical H2 has been a good wicket for the TAN business. Going forward, we also see the central government's move of encouraging AtmaNirbhar initiatives, has also well aligned with our growth story and our CapEx outlay, which are very strongly going to bring in import substitution to us and to the country. Fundamentally, as I see it, even this crisis, the COVID crisis has shown that we are very beautifully aligned with the India story -- the India growth story, and that has stood this test of the crisis, where 1/3 of our business interlinked with fertilizer and food security, 1/3 into the industrial chemicals linked to the pharma sector and 1/3 into the mining sector for India's requirement of power derived from coal or its needs for infrastructure drawn from limestone cement. So we find that this crisis has validated our strategies and reconfirm to us with great degree of confidence that all the 3 sectors that we are into are beautifully aligned into the India growth story. And despite a variety of crisis that everyone went through, for us, these 3 fundamental areas of strength stood very strongly to support this H1 great results. So with this, now I hand over to Mr. Amitabh Bhargava, our President of Finance and CFO, for a detailed presentation on the financials and all the rest of the operational performance. Amitabh? Hello?

Sir, he is joining in a minute. The line got disconnected.

Okay.

[Operator Instructions]

Thank you, Mr. Mehta. Good afternoon, ladies and gentlemen, and thank you for joining the Deepak Fertilisers And Petrochemicals conference call to discuss the Q2 FY '21 results. During the quarter ending September 2020, we witnessed a much improved environment for business operations as overall economic activity revised to a large extent, particularly on the demand side, post relaxation of lockdown. However, as Mr. Mehta also mentioned, the operations and maintenance challenges at our production facilities increased in this quarter due to pandemic issues and its impact on availability of manpower and mandatory intermittent shutdowns undertaken by us. But overall, we continued our journey of delivering robust operational performance this quarter on the back of a very strong showing in the first quarter of FY '21. During the Q2 FY '21, we reported total revenue growth of 22% Y-o-Y to INR 1,404 crores, operating EBITDA increased by 66% Y-o-Y to INR 193 crores. Operating margin decreased to 13.8% in Q2 FY '21 as compared to 10.1% in Q2 FY '20. Net profit increased over 3x Y-o-Y to INR 81 crores in Q2 FY '21. The company has delivered staggering operational performing in H1 FY '21, which is indeed the best ever performance in the last 5, 6 years. Our Fertilizers segment delivered 4 consecutive profitable quarters. Net debt reduced from INR 2,769 crores as on FY '20, it will be INR 2,201 crores as on H1 FY '21. Net debt to equity improved to 0.91% as on H1 FY '21, resulting in lower financing costs. In Chemical segment, manufactured chemical business reported revenue of INR 541 crores in Q2 FY '21. Our IPA revenue increased by 42% Y-o-Y to INR 149 crores in Q2 FY '21. And despite steep fall in IPA prices in Q-o-Q, the NSP were higher by 88% Y-o-Y, resulting in robust margins in manufactured IPA. IPA sale volumes were impacted by about 25% Y-o-Y, due to some plant constraints. Sales volumes of nitric acid during Q2 FY '21 grew 21% over the previous quarter as a result of normalization and business activity across downstream industry. However, it was lower by 8% compared to Q2 FY '20. Capacity utilization at the Dahej plant improved to 80% level during Q2 FY '21 as compared to 68% during the corresponding quarter last year. Our TAN revenues decreased by 21% Y-o-Y to INR 187 crores. Despite the seasonality and the low demand in Q2 due to the monsoons, the impact of COVID and the resultant lockdown were also felt across both the domestic HDAN, LDAN, AN Melt and export verticals of the TAN business. Demand from coal and limestone mining is expected to improve in Q3 as the economy continues to come back. Fertilizer segment delivered fourth consecutive profitable quarter led by a significant increase in volumes, favorable monsoon, surplus reservoir level, record high kharif crop and sowing and softening of raw material prices. Manufactured fertilizers reported revenue increased by 29% Y-o-Y to INR 540 crores in Q2 FY '21. Sales volumes of manufacturing bulk fertilizers, that is NP and NPK increased by 29% Y-o-Y. And fertilizer trading business increased by 65% Y-o-Y to INR 152 crores in Q2 FY '21. Overall margin improved significantly due 100% migration from plain grade NPK to differentiated grade Smartek. We successfully started production of new NPK grade N14 at Taloja and Superfast Bensulf grade at Panipat. The company has reached around 3.8 million farmers through social media and actively engaged with 1.9 million farmers until September end. Around 5 lakh plus farmers were directly reached through direct calling and webinar modes. Our H1 performance is the reflection of our focus on business improvement, better product offerings, numerous initiatives that we've undertaken to improve systems and processes to optimize our costs over the last few quarters. We remain confident of continuing our growth trajectory while extending full support to our customers, suppliers and other valued stakeholders in these testing times. With this, we will be happy to take your questions. Thank you.

[Operator Instructions] The first question is from the line of [indiscernible] Shah from [indiscernible] Management.

Congratulations on a very good set of numbers. Sir, just had a couple of questions. One was on the IPA division. As we are seeing, sir, the IPA prices have almost come to the pre-COVID levels. And in this quarter, we had a realization of INR 105,000 INR 106,000. So going ahead, how will our spreads pan out? Will -- and then how much will it impact our profitability? That is one. And the second question, sir, is on the CapEx. Any time line about it, sir, when it is going to commission?

So as far as the IPA prices are concerned while the market prices in terms of our sales prices would -- it's difficult to say where they would settle during the quarter. But what I can tell you is that the import -- imported cargoes that are now coming in when we -- pre-COVID, we started at about $800-odd a tonne, and it shot up all the way up to $1,400 to $1,500 per tonne. We are currently hovering in the range of $950 to $1,000 per tonne. And so -- and we've seen some bit of volatility in these prices, they had gone down and from the bottom of about $850 they have again formed up to these levels. So we'll have to see what -- how price behave. But that's the level of imported prices we are seeing in the market. As far as your question on...

Sir, just on the follow-up for the same. So INR 107 was in September. And is that this -- in December, it settled down as somewhat at INR 80, INR 85, hypothetically. So in that case, how will our spreads move, sir, in terms of profitability? How will that impact, sir? The propylene prices are kind of stable, right, those are not coming down.

Yes. So what I would say is that, one, is INR106 or INR 107 number that you're putting is for the quarter, which is the weighted average during the quarter not necessarily the September number. In fact, September numbers had progressively come down from July, August. So at -- you can do a back of the envelope calculation that if the propylene prices are remaining where they are, we do roughly manufacturing volumes of -- during the quarter, anywhere between 14,000 to 18,000 depending on our production level. And every INR 5,000 decrease to that extent, you could do that calculation, I wouldn't be able to hazard a guess as to what in terms of rupees or what impact would it have in the quarter. But I think I've given you an indication of what volumes to do and ...

I understand. And the second question, sir, was on the CapEx.

Yes. So in CapEx, as far as the projects are concerned, in the ammonia project, we have reached a stage where the entire land is acquired. We've also received approval from Maharashtra Pollution Control Board in terms of the consent to establish. And we are at the fag end of negotiating our contracts with EPC [indiscernible]. So the construction should commence very soon. And I would say it takes roughly 26 to 28-odd months to complete the project. So in that time frame, we would be completing our ammonia project. As far as TAN project is concerned, we are still at a stage where we are -- we have applied for environmental approval. And it's only after obtaining environmental approval that our CapEx would begin.

Okay. Okay. So currently, sir, in the next 1, 2 years, there is no commissioning as of now? The 2 projects ...

There's no -- completion of both these CapEx would be minimum of 26 to 28 months.

Okay. And on the Fertilizer segment, we've been doing very well in last 3 quarters, as you also mentioned. The raw material prices in the Fertilizer segment have also softened. Going ahead, what kind of margins do you think is sustainable in this division? And any pressure on the raw material prices or it's still at the similar level?

So while the ammonia [indiscernible] at that same level. There's been some increase in certain prices in this quarter. And as far as the margins are concerned, look, it's a factor of multiple variables. I mean in terms of our overall production, capacity utilization. So I -- all that I would say is that if you would have seen our performance in Q1 and Q2, our volumes of our Smartek product, which is the differentiated product has gone substantially up. And we've also, to that extent, this gives us this additional margins because this is a premium product. And we are quite hopeful that despite the variations in the raw material prices, we would be able to sustain our profitability going forward.

The next question is from the line of Hiten Boricha from Sequent Investment.

Sir, I have 2 questions. So my first question is on the -- what was the reason behind the auditor resigning? And can you throw some light on that? And the second question is like as IPA and other chemical prices are getting normalized now. So can we consider this earnings as a base now, this Q2 earnings at the base quarter now?

To your first question, I think we have submitted to stock exchange, the letter which B S R, our statutory auditor, had written to us at the time of resignation. It's the commercial reasons that they have quoted. So that's essentially the reason for them to -- this was essentially, as you know, commercial leap year, we had a debate in terms of our audit fees. We couldn't arrive at common page on that. As far as your second question is concerned, while IPA, like I mentioned that the weighted average price that we got in Q2 was about INR 106,000. Since then, the prices have come down. And while they have come down and they have again seen a climb up. So we'll have to see what -- in what manner IPA import parity prices behave. But that -- notwithstanding what happens to IPA, the significant improvement that we've seen in the Fertilizer segment, we believe that, that momentum will continue. Equally, as far as the TAN business is concerned, as you are aware that Q2 is typically a lean quarter because of monsoon. We also faced certain challenges on the production side. So TAN business, H2, we expect this to, both from a demand and production point of view, to be a better half. So it's a combination of all these sectors. So some sectors may work against us, but there are other sectors and other businesses which are expected to do better. So it is difficult for me to say whether this is a base quarter or not, but I've given you an indication on what's happening in each of the business.

Okay. Okay. And just a follow-up on this. The auditor question, there's a follow-up in. Why not we appoint an auditor with similar credentials like B S R, the new auditors are like unknown to us? So just a few color on that.

If you see the new auditor and the audit firm or the companies that they are auditing, if you see their track record, I don't see from where you're coming from on this question. Because practically, many large companies located in Pune are being audited by this audit firm. They have a strong presence. They are auditors which have been in business for several decades, if I'm not wrong, at least more than 18-plus years. So we -- our audit committee and Board has considered all these factors, while appointing the new audit firm.

[Operator Instructions] The next question is from the line of Dixit Doshi from Whitestone Financial Advisors.

Sir, just one clarification that you mentioned the current IPA prices are around INR 950 to INR 1,000 a tonne, and our Q2 realization was around $1,400 per tonne, right?

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

Yes. So I think the IPA prices currently are around $950 to $1,000 per ton. And our Q2 realization was around $1,400 per tonne, right? Is that right?

No, no, no. Let me clarify. What I said is that pre-COVID, we had seen the prices -- import prices of about $800 a tonne. During Q1 and Q2, and particularly in Q1, the prices shot up to as high as $1,400, $1,500, and then they started coming down. And current levels are more like $950 to $1,000 a tonne. And during -- given that this price moved during the quarter, the average realization in rupee term for us was about INR 106,000 INR 107,000 a tonne. There is no corresponding -- I mean, INR 106,000 is not equivalent to 1,400 tonnes. That's not what I meant.

Okay. Okay. And secondly, sir, still our new capacity utilization in fertilizer has been quite low. And we have seen a very good performance in H1 with the volumes upwards of almost 60%. And with a good monsoon and good rabi season, can we expect this growth momentum to continue even in H2? And with the further improvement in utilization, can we expect some higher margins going forward, maybe next year?

I couldn't quite hear your question, your voice was breaking, but let me try to answer your question is on capacity utilization. So we -- of NPK, we actually started our second train in sometime in July. So -- and since then, we have progressively, barring the disruption that we've seen due to the pandemic we have tried to increase our capacity utilization. So it is expected, given the demand that we are seeing of our differentiated products that we should be in a position to increase our capacity utilization in coming quarters.

Okay. And can we -- with the increase in the utilization, can we expect some more improvement in EBIT margins of NP fertilizer division, maybe H2 or next year?

No, with increase in capacity utilization, the margins are certainly expected to improve purely from operating leverage standpoint. At what stage in H2 or in next year? I won't be able to comment because I said it earlier that despite variations in the raw material prices, given the work that we have done in the market on our differentiated products, we expect and we are hopeful that we'll be able to maintain our profitability in the NPK segment.

Okay. And sir, what are the plans in terms of CapEx for this year and next year? How much we are planning to spend?

Yes. So I -- as far as the ammonia project is concerned, I mentioned that we are at almost the fag end in terms of getting all our approvals in place. So construction should commenced. Given that there are only 3, 4 months left, it's -- I mean, I would rather be able to have a better sense of what we would spend over next year. But in this financial year, whether we commence construction for 2 months or 3 months, that is not clear. But you can assume that roughly about INR 150 crores to INR 200 crores of CapEx in ammonia project would go from now on until March. TAN, like I said, is at a stage where we are obtaining environmental approvals. So we don't expect that any major CapEx would happen in TAN.

And how much do you expect in FY '22?

I didn't get your question. Your voice is breaking. Are you asking that -- next year?

Yes, next year. How much do you expect in FY '22?

Next year, ammonia, I would say, would be roughly about INR 600 crores to INR 800 crores depending on the progress levels in that project. TAN, it's difficult to predict, it's a function of when we would get the environmental approval. But in the first year of TAN construction, again, we expect similar kind of CapEx. In first year, right from the time it starts, it would have similar INR 600 crores to INR 800 crores kind of cost -- additional cost.

The next question is from the line [ Vachraj Nahar ] from [ Winning Consultants. ]

My question is that the Government of India has recently reduced price of natural gas. So our chemical product, how much is going to be the benefit on various chemicals, which you are manufacturing based on the natural gas? And rather there is plan to start methanol because the price of methanol has gone up quite substantially to 25% to 30% in the last 3 months. So are we planning to restart our methanol plant?

As far as gas prices are concerned, we typically buy a basket of LNG at market price. The gas price you are referring to is the gas which government has controlled in terms of the prices, which is in -- is the APM gas or whatever you -- whatever is the term right now for it. Earlier, it was called APM gas. So that's the market determined gas which is avail -- which is rather price control gas that is available only to certain sectors based on the priority allocation. We buy gas, like I said, based on these energy prices or basket of LNG that we negotiate with our suppliers. So there is no one-to-one link between what government does to the prices. And because the government formula is based on the price indices of some of these gas surplus countries, and they don't necessarily reflect the LNG prices. So that's -- but in general, to answer the question is that the gas prices, we have seen more benign sort of raw material prices as far as gas is concerned. To the extent we produce our own ammonia, which is anywhere between 270 or 280-odd tonnes to 310-odd tonnes per day. That's the dependence on gas and to some extent on the utility that we run with this gas. Rest of the ammonia or majority of the ammonia, we are purchasing or importing from various sources. So only limited to the extent of our domestic or our own manufacturing of ammonia that gas prices impact us. As far as methanol prices are concerned, I guess, we are watching the prices -- methanol prices. We typically need to take a view for 3 to 6 months because the gas contracts that we tie up are for a minimum period of 3 months. So we need to take a view as to what happens to our methanol prices in a 3-month time frame and at what price we are able to tie up our gas. Based on that, we will take a view. But certainly, your point that methanol prices are looking attractive for us to consider starting of our methanol plant. That is definitely the case.

The next question is from the line of Nishith Shah from Aequitas Investments.

Sorry, sir, I actually got disconnected in between. So some of my questions might be repetitive. So first, I wanted to ask you what is our current capacity utilization in TAN segment? And what are our CapEx plans for this? Because we see increased demand also coming from this commercial coal mining and everything going forward?

So as far as capacity utilization is concerned, we, as you know, we had -- in 2017, '18, we had actually crossed the capacity utilization beyond 100%. So we had actually in '18, '19 -- sorry '18, '19, it touched the capacity utilization of 105%. In FY '20, we -- because there were challenges in terms of flooding of coal mines and also some slowdown in infrastructure, which is what -- where our LDAN goes, our capacity utilization came down to 91%. In the first half, I think we've done about 74%, 75% capacity utilization. A lot of that is, I would say, also because of the pandemic-related challenges that we have seen besides some demand that had challenges that we saw in Q1. But Q1 was -- Q2 was not so much about demand. It was more about some production-related challenges. So we'll see how, like I said, H2, we expect it to be better, both from a demand and production perspective. So we are hopeful that we would improve the capacity addition from currently. And that's the capacity we are contemplating [indiscernible], the new capacity in the East Coast, as far back as in FY '19, that we have actually crossed the 100% capacity utilization in our Taloja facilities.

Okay. Sir, how much time does it take post, I think, all the environmental approval to set up TAN new capacity?

26 to 28 months.

Okay. And sir, coming to this Fertilizer segment, I wanted to understand how much market share did we get? So we do look at the market share gains or that is not how we look at our Fertilizer segment?

What's your question? Can you repeat that again?

Sir, I wanted to understand how much market share did we gain in the Fertilizer segment in our key states? And do we see that going forward also?

Market share, if you talk about the H1 as such, my colleague, Mahesh is also there, but as far as my knowledge growth, market share by and large has remained at the same level as far as H1 is concerned. But Mahesh, can you throw a bit more light on that, please?