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

Good day and welcome to Deepak Fertilisers and Petrochemicals Corporation Limited Q1 FY '22 Earnings Conference Call hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhijit Akella from IIFL Securities. Thank you. And over to you, Mr. Akella.

Yes. Thank you, Nirav. So ladies and gentlemen, good afternoon and thank you for joining us on the 1Q FY '22 earnings conference call of Deepak Fertilisers And Petrochemicals Corporation Limited. It's my pleasure to introduce the company's senior management team who are here with us to discuss the results. We have with us Mr. Sailesh Mehta, Chairman and Managing Director; Mr. Amitabh Bhargava, President and CFO; Mr. Mahesh Girdhar, President, Crop Nutrition Business; Mr. Suparas Jain, VP, Corporate Finance; Mr. Debasish Kedia, GM, Corporate Finance; and Mr. Deepak Balwani, Head of Investor Relations. We'll begin the call with opening remarks by the management team. And thereafter, we can open up for a Q&A session. I would now like to hand the call over to Mr. Mehta to take proceedings forward. Thank you. And over to you, sir.

Yes. Thank you, Abhijit. I hope my voice is clear. A very good afternoon to all of you. I hope you and your family have taken the second COVID shot and are all safe and sound. I take the pleasure of welcoming all of you for the Q1 FY '22 earnings conference call. And I also hope you've had a chance to look at the financial statements and earnings presentation that was uploaded on the exchanges on our website. So at the outset, I'm quite happy to share that the top line grew by around 37.6%. The EBITDA moved up by 6.7% and net profit by 7.8%. And I would like to share that this is indeed a very good performance in light of the fact that in our raw materials, ammonia shot up by 102%, phos acid jumped up by 49%, our RGP propylene that shot up by 50%. And despite such huge hikes, thanks to better capacity utilization, cost optimization, product differentiation that we have been working at that we could enhance the margins and improve the fixed good pricing to pass on a good chunk of these, I would say, price hikes. Typically, the finished good pricing reflects the higher costs normally over 1 or 2 quarters. And so we see that positively play out in the following quarters also. Now the industrial chemicals grew by 12%. And the broad, I would say, shift that is happening of speciality chemicals from China to India continues to provide a good boost to our acid business. Though in the acid side, in our Dahej facility, we advanced -- we preponed our scheduled shutdown maintenance because we found a good pocket. And so that -- while this quarter had an 18 days kind of plant shutdown, in the next few quarters, we will be seeing the advantage emerging. As far as IPA goes, there was a certain impact emerging out of the COVID-related disruptions. But fundamentally, we see that for the pharmaceutical sector, IPA demand and requirements will continue to grow as the pharma sector grows. In the second zone of our businesses, as far as mining chemicals goes, we recorded a growth of 54%. And [ Alden ], which is our top grade premium product, also has improved. But we are seeing that the cement and infrastructure sector is yet to kind of recover back to the pre-COVID days, but it's a matter of I think a little time. And we are seeing that possibly the second half of the year, post the monsoon, will be something where we will see a positive traction. Monsoons, in any case, it's a little low season for the mining sector. As far as the crop nutrition business goes, we're -- here, we are seeing indeed another very good quarterly performance, and the segment grew by 66.6%. And of course, this is the seventh consecutive quarter of profitability that we were -- we had gone through a tough patch and with the highest ever on our nitrophosphate and our NPK production. And despite all these lockdowns because of COVID, we could manage over 4,000 digital webinars and reaching out to over 60,000 farmers with our product value proposition. And more and more, we are now fairly confident as we see the resonance on the marketplace that our conviction in our differentiated product strategy and the way we have put in various other strategies, go-to-market strategies that it was indeed something that is playing out and it will be something on a sustained basis that we will see good results. As far as our overall CapEx plan goes, the ammonia plant that we had planned and the TAN plant in the East Coast, both are all in good control, running as per schedule. And both these additions once implemented is going to solidify the strong foundations of the company and help sustain and enhance our leadership that has been built over 40 years. So now from a larger perspective, I might share that the 4-pronged strategies that we have put in place are something that we are working hard at and we are seeing very, very positive traction. One is to get our size right. And now with our fertilizer expansion all be done behind us and is doing very good acid that we had enhanced our capacities, there, we are seeing it turn very positive. And similarly, it would be TAN. And all of these are beautifully aligned with the India growth story. So getting our size right was the first strategy that we had planned, and that is something that is bearing fruits. The second is that we have invested a lot of energies into building a strong backbone of best-in-class systems and procedures, processes based on digital and IT powers. And that is giving us a strong grip on cost optimization as well as the grip on the marketplace. So that's the second, I would say, strong strategic drive that we had brought in. The third that we have been working on is the backward integration, which will ensure that we bring more value into the whole chain, which is something that we have taken up in terms of the ammonia facility. And that is going to be, again, something that will help enhance the leadership that we have in the downstream over the last 40 years. And lastly, and the most important one, is the shift from commodity to speciality that we have started or from just products to holistic solutions to the final end consumers. And so that in all the 3 businesses that we are into, industrial chemicals, mining chemicals and the crop nutrition business, all the 3 then try to move from customer to consumers and providing them holistic solutions that we are seeing a very strong, very positive traction and that promises to unfold an exciting future. So on that note, I would like to hand over to Mr. Amitabh Bhargava, our President and CFO, for a more detailed explanation on the performance of the quarter. 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 Q1 FY '22 results. Our performance during the quarter, as Mr. Mehta was explaining, remained strong despite pandemic-related challenges and significant adverse movement of input prices. This was supported by differentiated product value proposition, operational efficiencies, increased capacity utilization and proactive marketing strategies. So during Q1 FY '22, we reported a total operating revenue of INR 1,902 crores, an increase of 37.6% compared to last year. Our operating EBITDA stood at INR 290 crores, an increase of about 7% Y-o-Y. Net profit for the year recorded a growth of 7.8% to INR 131 crores, net margins of 6.8%. There has been a sharp increase in 3 key raw material prices Y-o-Y and even sequentially quarter-on-quarter. But Y-o-Y, if you see, ammonia prices have gone up 102%; phos acid prices, up 49%; propylene, [ or coffee bean ], that is RGP, 50%; and MOP, up 7%. In the short term, these higher raw material prices have created a headwind that we expect to stabilize over the next few quarters. Now here, government has also been taking proactive initiatives to support fertilizer manufacturers and farmers, for example, increasing NBS subsidy and allocating additional budgets. Overall, our net debt, we further reduced by approximately another INR 240 crores during the quarter. Finance costs reduced by 22% Y-o-Y driven by continuous reduction of short-term debt due to better working capital management. And our focus on liquidation of products in the fertilizer business from retailer shelves supported working capital efficiencies during the quarter. Manufactured mining chemicals business recorded a revenue of INR 389 crores compared to INR 253 crores same period last year. And volume grew by 11% Y-o-Y and reduced 12% sequentially quarter-on-quarter. And demand was subdued as the second wave of COVID affected demand from coal, from cement and infrastructure sectors. During the quarter, our manufactured industrial chemicals business recorded a revenue of INR 318 crores compared to INR 283 crores same period last year. The revenue grew despite having a high base on account of increased IPA realizations last year, which was in aberration. The growth was supported by 34% increase in nitric acid volumes. IPA sales volumes declined by 11.2% Y-o-Y. Due to the first COVID impact, as you know, IPA prices in the quarter 1 FY '21 saw an unprecedented spike. And as expected, the current quarter has seen an overall softening of IPA prices. Nationwide pandemic-related restrictions affected the industry operations and thereby demand of nitric acid products, particularly for the spot market customers. Dahej facility also, as Mr. Mehta was explaining earlier, we advanced the scheduled maintenance shutdown for a period of 18 days, which resulted in lower volumes in quarter 1. Our crop nutrition business segment continued its growth momentum. And in terms of volume, it delivered 25% increase in bulk volumes Y-o-Y. Differentiated NPK, that is the Smartek, their volumes went up 39% Y-o-Y to INR 1.31 lakh tonne that by, again, continued market development activities to create demand from the farmers. Overall, quarter 1 FY '22 CNB revenues increased by 66.6% to INR 993 crores. During the quarter, our IPA plant operated at a capacity utilization of 93% and both acid and TAN operated at 86% and 103%, respectively. In the crop nutrition segment, NP, NPK plants operated with utilization levels of 92%. And the bentonite sulfur plant operated at 76% utilization level. The available capacity across our plants, as we've been also mentioning earlier, gives us headroom for future growth potential. Overall, we remain confident of continuing our growth trajectory while extending full support to our customers, suppliers and other valued stakeholders. Industry is gradually opening with a reduction in new cases of COVID-19. As a result, demand scenario is likely to improve going forward. I think with this, we'll be happy to take your questions. Thank you.

[Operator Instructions] The first question is from the line of [ Naresh Vaswani ] from [ Samita Capital ].

So congratulations for a good set of numbers this time. First question, on the raw material side, I'm appraising that the costs would have increased during [Audio Gap] so full impact of this higher raw material prices would be reflected in probably Q2 and Q3 as well. So just I wanted to understand realistically how much of this steep rise in raw material prices can we pass it on to our customers? And in the fertilizer segment, these margins, is it high due to the subsidy hike? I mean what would be the normalized range which we can work with in the fertilizer segment?

So as far as the pass-through of raw material prices is concerned, as you know, say, typically 1 quarter, and I would say within 1 quarter also towards the end of the quarter or second half of the quarter, raw material prices hike very sharply. So in short term, it's very difficult to pass on the raw material prices. In fact, some of these -- even the contracts, which have a provision of pass on of raw material prices, typically tend to take the raw material prices of previous months. So as such, in the finished goods, it's difficult to get reflection of raw material prices in such a short time. In longer horizon, and I would say typically, when you look at Y-o-Y numbers in any of the products, you would typically see that if there is Y-o-Y increase has happened and not in a manner that most of the increase happens in a very short time frame, if it has happened over a period of 1 year, typically, the pass on of raw material prices also reflects in the finished good prices. This time, it's been an exceptional case in quarter 1. So we are quite hopeful. And we are seeing that in finished good prices where -- particularly where the prices are also linked with the international prices or import parity. Gradually, the reflection of raw material prices is beginning to show. And to that extent, over next few quarters, we should be in a position to get that pass through, I would say, of our raw material prices. That said, it's also -- right now, it's difficult to predict what happened to raw material prices itself. And to that extent, it's difficult at this stage to put any number to it. But it will be sufficient to note that on such hikes in raw material prices, sharp hikes, typically would take a little bit of a time to pass through. As far as the subsidy part is concerned, see, what happened during the quarter, there are 2, 3 different -- if you look at different sources, one is the subsidy, of course, went up. Particularly, the raw material prices went up. Also, we -- as government has increased the subsidy, food subsidy increased, we also reduced our MRP. So a combination of all of that is what is getting reflected in our numbers. Going forward, given the kind of increase that have happened, industry is also in discussions with government. So while government has increased the P subsidies, the N and K component has also gone up. And then to that extent, our discussions or industries' discussions with the government on the lines of looking at possibility of increased subsidy on the other component is also right and currently underway. So depending on what stand the government takes and what happens to the -- also raw material prices going forward, you would see that impact in coming quarters. The situation is so very dynamic that it is right now difficult to put any number or any trend to it.

So in absolute terms, actually, our EBIT margin -- EBIT number in fertilizer is very good. So I was just wanting to know that is it something which is due to our product mix change and internal cost-saving measures which we are taking in and the operating leverage which we spoke about? And is this something which is sustainable regardless of -- obviously, government is supporting on the raw material price hike as well. But I was just thinking that is it a sustainable increase which has happened due to our internal factors?

It's both. As you see, the volumes have gone up. And as we've been saying that with volumes going up, per tonne margins improved, also the general efficiency at plant as manufacturing efficiencies go up. So there is an impact of that certainly with increase in volumes. There is partly also an impact of a subsidy increase. So it's a combination of both.

Okay. Okay. Sure. And last question. In terms of growth, our capacities are now close to optimal utilization overall, if you see. So how do we plan to grow -- ammonia project is there, obviously. And -- but in each of the segments, if you can briefly explain how will those come in over the next 2 years?

So as far as fertilizer is concerned, we still have headroom not just in bulk, but even the speciality fertilizer, that is the bentonite sulfur segment. So there is some bit of a capacity utilization that is yet to be exploited. Also, as we've been mentioning that with the margins debottlenecking both on the raw material storage and the evacuation site, the NPK capacities can be enhanced from 6 to 8 lakh tonnes. So while -- vis-à-vis 6 lakh tonnes while we are -- our capacity utilizations are now inching up closer to 90% or thereabout, but 8 lakh tonnes, there is that headroom available. So that's without debottlenecking, which is marginal in terms of any CapEx that may be required. So that's as far as fertilizer. And in fertilizer, the other aspect also is that we've -- we are also launching cross-specific formulations [ that we can switch ], which is where, in terms of volume, we would still be restricted by the 8 lakh tonnes, I would say. But that's value enhancement products that we are going to be launching from this rabi season. And that should result in better margins even though volumes may again remain restricted to 8 lakh tonnes. Maybe I'll ask my colleague, Mahesh, also to add a few words to this. Mahesh, would you like to just...

Sure. Sure, Amitabh. Sure. Thank you very much for the question, and I will not repeat what Amitabh has said, I'll just give you perspective of the key question here was that how do you see sustenance of the -- such a great financial performance? So I mean, first of all, let's reflect. In the last 7 quarters, we have continuously grown our fertilizer business. It's basically based on our launch of differentiated NPKs, utilization of our capacity. And we also had spare capacity of NP. We also increased our NP share. We also enhanced our speciality business manufactured in [ the credit period ]. What has helped us is that we are actually becoming now a kind of not minor player, but a major player in terms of market share. Like, in this quarter, we should grew our market share by 6 points. In Maharashtra, we went up from 15% to 21%. And so number one, we are able to expand volume. Number two, we have been able to stabilize the growth of our differentiated product based on its value. So this is I see going forward sustainably because this is what we've demonstrated in the last 6, 7 quarters. Going forward, as we already started to mention about our new formulation. So we are going to launch a complete nutrition balanced products going forward coming through in the next couple of months. So we already got approvals. And these products would be launched in some specific crops. They are suited for specific crops better than others. And they would be also completely differentiated unique products in the market. They will help us further enhance value as well as utilization of our plants. And in the same way, even on our speciality side, we have already launched crop-specific products in grapes, in pomegranates, in tomato. So our strategy of going into differentiation and then consumer-based, crop-specific products is actually on the ground. And we are not just talking, we are actually launching those products and are able to scale up. So I can't make any specific comment on the financial outlook, but this is the strategic outlook of the business based on differentiation and based on solution to the crops and based on our working engagement with the consumers. As our chairman already mentioned that we already established a good business model. Even in the COVID period, we are reaching the next performance, we are able to engaged, we are able to demonstrate. So we set up a complete go-to-market strategy and a portfolio strategy well based on these factors that we mentioned. Thank you very much.

And as far as the other segments are concerned, TAN, as you are aware, we are looking for an expansion on the East Coast, 3-lakh 76,000-tonne capacity. As far as IPA is concerned, as of now, there is no plan for expansion. We are working the IPA in the entire environment in terms of what are the sustainability of long-term margins. In acid, we are -- I mean obviously, at this stage, while there is no capacity announced and expansion announced, but there is obviously the demand growth that you are seeing in the nitric acid downstream segment. That definitely opens the opportunity for expansion of nitric acid. We have sufficient sort of land available in the hills to do that. But as of now, we haven't taken any decision, but there are definitely growth opportunities on the nitric acid side given what's happening on the demand.

[Operator Instructions] Next question is from the line of Nishith Shah from Aequitas.

Congratulations on good set of numbers. Sir, I wanted to understand that -- so I understand that you are debottlenecking in TAN. So what kind of investments are we looking at and what is the time line over there?

No. What I mentioned is the 3-lakh 76,000-tonne capacity and new capacity on the East Coast.

Okay.

And we have, in the past, also given a guidance that we are trying to freeze the CapEx number, but it's likely to be in that INR 1,800 to INR 2,000 range in terms of INR 2,000 crores. That's the range. But the exact numbers are being finalized.

And sir, I was going through the...

[indiscernible] tonnes. Yes.

Sorry. Sir, go ahead.

Go ahead.

Yes. Sir, so I was going through the annual report. And in that, it states that you have initiated debottlenecking called TAN capacity expansion at Taloja with minimum investment. So I was talking in back records.

Yes. So that is still being studied from a technical standpoint as to what kind of additional capacity it can need and what are the CapEx involved. But there is definitely a prime opportunity -- opportunities to debottleneck Taloja at Deepak.

Okay. And sir, my second question is I wanted to understand that you said this nitric acid shutdown will benefit us. So can you elaborate what kind of benefits are we looking at?

Nitric acid shutdown?

Yes. So going forward, that will help us.

I didn't get -- I didn't make any such statement about shutdown. I'm not clear what -- what are you referring to?

Okay. Sir, so can you help me understand what are the current realizations of nitric acid? Are they trending upwards?

So nitric acid, what has happened is, one is the general trend in terms of what is happening in the Nitroaromatics segment. That is that we are now seeing a lot of these global supply chains showing inclination towards diversifying from China to India. And given we are in Nitroaromatics segment and various speciality chemicals, we are still -- in many of these segments have perhaps 115, 120 across China's capacity. Even a small, I would say, divergence from China could be a significant number on our base. So one trend that we are seeing is that -- with that, you would see expansion coming from existing players, some new players may also -- but then on the existing capacity, the capacity utilizations will go up. And that is resulting in the demand on the nitric acid side. But what has happened in Q1 specifically is that because of even second wave COVID-related restrictions, the phos segment has seen a reduction in demand. Also, what had happened is the other -- some of the other players who are into nitric acid segment, their downstream capacities are where the nitric acid goes. They were also because of COVID-related challenges were not operational. As a result, there was more acid into the market. So an impact of that has been felt in Q1. But directionally speaking, we are -- and I've said that earlier as well that we are seeing that nitric acid remaining short for foreseeable future. In fact, our estimate is that until '24, '25 and even beyond, given what is happening to the demand side and how we are seeing demand shaping up compared to the supplies, this product will remain short. And effect of that should reflect in the realization in the mining.

The next question is from the line of Lokesh Manik from Vallum Capital.

My first question was a clarification on -- which I required on the fertilizer business, we've seen very good margins. Has there been any impact of lower cost in inventory coming in from last quarter in this quarter?

Yes. That's what I mentioned, that the numbers are a combination of the capacity -- higher capacity utilization, higher volumes.

Right. Right.

And also benefit of subsidies. But like I was also mentioning that there were -- as much as there were subsidies, there was -- also, we reduced the MRPs post the subsidy announcement. And some of the effects of raw material prices has also got reflected. So it's a combination of all these 3, 4 things that's reflecting.

Okay.

But certainly, yes, that's the...

So going forward, if the raw material prices today are higher, which are -- Common talks about $500, if I'm not mistaken. Would they start reflecting in the second quarter almost in the fertilizer business?

So see, what has happened is, and this is a point I was earlier making, that the government has increased the subsidies in the P segment. Phos has gone up across NPK raw material cycle.

Right.

And at the discussion industry is currently having with the government are also in terms of what would be government's take or response on those increases and is there -- is the government -- would government consider an increase as far as the other nutrients are concerned. So depending on what stand the government takes, the industry will obviously look at passing on the prices of these increased raw materials in the finished goods. So we'll have to see. It's -- I think there are -- it's not just what we do and what industry does, but it's also what government does is the key answer to this question.

Correct. Correct. And Amitabh, can you share the -- what is the inventory or the working capital cycle on an average that we have for different products from TAN to nitric acid, IPA and NP, NPK? On an average, what is the raw material holding period or an inventory holding period that you follow for them?

See, for IPA and -- so there are at least 2 products which have a season involved, which is fertilizer and to an extent even -- and TAN is -- this is -- the second quarter is a lean season because that's the -- during this period. So the working capital cycle also changes quarter-on-quarter for these 2 products. In fact, in fertilizer, we -- like -- I think I already also said that post the lumpy season, you typically are building inventories until monsoon comes. And so therefore, if you see the working capital cycle during that period, it peaks just before June. And then we would get a big chunk of your payment and the numbers -- working capital numbers substantially change for CMB. For the other products, which is IPA and for acid, we typically have 42, 45 days of credit period. And sometimes, we collect faster than those -- particularly in the phos segment, depending on the extent of phos segments, your working capital cycle could be faster than 40 to 45 days.

Understood, Amitabh. Just a small request, Amitabh. If data disclosure can be consistent because this quarter, we are seeing that nitric acid revenue and IPA has been combined. So it -- in last quarter, it was between different industry, nitric acid revenue for the quarter and the IPA revenue for the quarter. In the investor presentation going forward, I mean whatever data you are showing...

Yes. We can further clarify that. Yes.

Yes. Because by plugging in data, it's becoming a little difficult than -- because we're following a trend and then suddenly, we see a clumped revenue profile for 2, 3 different products, it's becoming difficult to analyze.

Fair enough. We can clarify that.

The next question is from the line of Deepak Poddar from Sapphire Capital.

Sir, I just wanted to understand, you did mention that the pass-through of raw material to the finished good might take maybe over 2 -- next 2 quarters, right? So is that the time period when one should expect your margins to normalize maybe the impact that we have seen this quarter? So -- yes.