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

Ladies and gentlemen, good day, and welcome to the earnings conference call of Deepak Fertilisers and Petrochemicals Corporation Limited hosted by Sunidhi Securities. Before we begin this call, I would like to point out that some of the statements made in today's call may be forward-looking, and a disclaimer to this effect has been included in the earnings presentation shared with you earlier. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rohit Sinha from Sunidhi Securities. Thank you, and over to you, Mr. Sinha.

Thank you Robin. Good evening, everyone, and thank you for joining us on the Deepak Fertilisers Q1 FY '27 Earnings Conference Call. We would like to thank the management for giving us this opportunity to host the call. Today, we have with us Mr. Sailesh Mehta, Chairman and MD of the company; Mr. Subhash Anand, President and CFO; Mr. Tarun Sinha, President of the TAN business; and Mr. Suparas Jain, Executive VP, Corporate Finance. We will begin the call with opening remarks from the management, followed by Q&A session. I would now like to invite Mr. Mehta to make the initial remarks. Thank you, and over to you, sir.

Thank you. My voice is clear, right?

You are clear sir, yes.

Okay. So a very good evening to everyone. And once again, thank you for joining us today. Our earnings presentation and press release have been uploaded in the stock exchange. and are also available on our website. I trust you have had the opportunity to review them. Now I'm very happy to share that despite the volatility emerging out of the Middle East war, our Q1 has turned out to be our historic best with a 65% jump in the operating EBITDA and doubling in our PAT. Even our net debt improved from 2.86x to 1.4x. With the Q1 profits achieved, we have already covered over 65% of last year's full year's profits. What are the undercurrents behind this performance? Will they sustain? Could be fair questions in your mind. As we see it from our perspective, we see 3 clear undercurrent strengths, namely the core strength of our integrated value chain that we have built now from the 15-year LNG contract with Equinor, then having a world-scale ammonia plant facility next door and then Asia's largest building block chemical nitric acid and then the downstream end products. And all of them in 3 diverse risk-mitigated sectors: crop nutrition, mining chemicals and industrial chemicals. So this aspect of this value chain, we strongly believe is one clear undercurrent strength. And we see that giving us resilience, risk mitigation and of course, very good cost optimization. So this is something we see unique and sustaining. The second core strength we see is that repeatedly, we are getting a strong validation of the excellent alignment of all our 3 businesses with the India growth story. For the needs of power for India, coal or for India's infrastructure needs, limestone, metals, minerals, all are beautifully aligned with our TAN business, mining chemical business. The shift to horticulture, fruits, vegetables is giving us a great good tailwind for our crop nutrition business. And India's focus on the pharmaceutical sector, specialty chemicals is giving a lot of boost to our Industrial Chemicals segment. So this is the second cost that we see. And in view of this beautiful alignment, we see the strength in the demand drivers despite higher prices of our finished products. We saw this phenomena during COVID days, and we saw it again during this Middle East war phase. So this is the second core strength that we see. Last, but not the least at all, is our growing core strength emerging from our transformative shift into specialty and customized products for all our 3 businesses. And this we see is increasingly coming out to be very strongly reflected in our results by way of the undercurrent of customer stickiness, customer preference and above all, price premiums. So all these 3 undercurrent and strategic trends are here to stay and grow. What is more with our CapEx cycle now moving towards completion with our TAN Gopalpur project at almost 96% completion and acid's Dahej project at 93% completion, H2 promises to further solidify the top line and bottom line growth. Now in the near term, which is in Q2, we will see the typical slowdown on the mining activities due to the monsoon. But on the other hand, there will be a good pickup on the fertilizer crop nutrition business. Now that the worry of El Nino is behind us with very good widespread rains, especially in our geographies. However, with the Middle East war scenario still hovering and bringing along with it its own set of volatility, somewhere sourcing and prices of phos acid, sulfur and other raw materials for the fertilizer business will be under somewhat of a strain and we'll need for faster decisions on the subsidy corrections by the government. On the other hand, our cost-effective LNG supplies, firming up of ammonia prices and other chemical prices and our steadfast focus on specialties and customized products, all of it will continue to support our bottom line as we see the year roll out. On this positive note, I now hand you over to Subhash and the team to take you through the details of the results and also clarify any questions that you may have. Subhash?

Thank you... Thank you, Chairman, and good afternoon, everyone. Q1 FY '27 has been an important quarter for Deepak Fertilisers. We delivered our highest ever quarterly EBITDA and PAT despite a period marked by geopolitical disturbance, supply chain challenges and commodity volatility. More importantly, the results reflect the strengthening of strategic foundations we have been building over the last several years. At the consolidated level, revenue for the quarter stood at INR 3,256 crores, up 22% Y-o-Y and 8% quarter-on-quarter. This growth has been driven by stronger realization across ammonia, mining chemical and industrial chemical. What is noteworthy that this performance was achieved despite temporary volume disturbance, both in mining chemical and IPA during the quarter. Operating EBITDA increased to a record INR 845 crores, up 65% Y-o-Y and 139% sequentially, while EBITDA margin has improved to 26% compared with 19% in the same quarter last year and about 12% in the previous quarter. The improvement was broad-based and driven by stronger realization across TAN, nitric acid and IPA, along with the initial benefits of our integrated gas to ammonia value chain. Net profit for the quarter stood at INR 490 crores up 101% Y-o-Y and 252% quarter-on-quarter, reflecting both margin expansion and improved operating leverage across the portfolio. Let me now touch upon the performance of our businesses. Mining Chemical delivered a resilient quarter despite temporary disruptions from the changes in peso portal while the volume were lower at 130 Kt, stronger realization helped drive revenue to around INR 911 crores, up 37% Y-o-Y. Our B2C strategy continued to gain transactions with B2C revenue growing at 42% to INR 151 crore , and contributing 17% of the segment revenue, further improving the quality of earning and customer engagement. Industrial Chemical reported revenue of around INR 490 crore during the quarter. Nitric acid volume remains stable, supported by improved pricing arising from supply tightness and lower importing. In IPA, while volumes were impacted by propylene availability constraint, stronger pharma -grade demand and improved realizations spotted profitability. We expect IPA volume to progressively recover as propylene availability improves. Crop Nutrition's operated in a challenging environment due to delayed monsoon, elevated input cost and inadequate subsidy alignment. Despite these headwinds, the business remained resilient delivering revenue of around INR 1,367 crore, up 9% Y-o-Y. Manufactured NPK sales grew 4%. Croptek continue to perform steadily and our premiumization strategy remain on track with specialty and Croptek product contributing 40% of the segment revenue. On a balance sheet, continue to strengthen despite being in peak of our investment cycle. During the quarter, we incurred CapEx of over INR 500 crore as we progressed our strategic growth project. Even after these investments, net debt reduced to INR 4,719 crore and our debt EBITDA improved to 1.4x, reflecting strong cash generation and disciplined financials management. This place us in a strong position as we enter the commissioning phase of our major projects. Both of our projects are now in the final stage of execution. The Gopalpur TAN project is approximately 96% complete and the Dahej nitric acid project is approximately 93% complete. Commissioning activities are underway and both projects are expected to commence operations during Q2 FY '27. Importantly, both projects remain within the approved CapEx envelope. The total spending till Q1 is around INR 3,850 crore. These projects will strengthen our leadership positions, improve supply assurance, enhance operating leverage and support the next phase of growth for the company. On our -- one of our most important development during the quarter was the commencement of supplies under our long-term LNG agreement with Equinor, with the first cargo received in May. This marked an important milestone in our integration journey. The combination of long -term LNG sourcing, ammonia integration with our [ downstream ] leadership position, provides greater supply security, better cost visibility and improved competitiveness across the portfolio. The benefit of this strategy has already started becoming visible in our earning portfolio, and will increasingly important as we move forward. To summarize, Q1 FY '27 was more than just a strong quarter. It reflects the strength of our integrated business model and the strategic choices we made over the years. The growing contribution from B2C, specialty and Croptek businesses, continue to improve the quality and resilience of our earning, while the commencement of LNG supply under our long -term contract is further strengthening our value chains integration. During the quarter, we delivered record EBITDA and PAT, strengthened our balance sheet despite significant CapEx investment and brought both our major growth projects to the final stage of commissioning. Looking ahead, we remain constructive across businesses. Mining Chemical continue to benefit from strong market fundamental and growing B2C franchise. IPA is well positioned for volume recovery with improving propylene availability while Crop Nutrition should benefit from improving monsoon conditions and continue portfolio premiumization. With the new capacities coming on stream , integration benefit becoming increasingly visible and a strong business mix, we believe we are entering the next phase of growth from the position of strength. We remain committed to deliver sustainable growth, strong cash generation and long-term value creation for all our stakeholders. Thank you , and we should now be happy to take your questions.

[Operator Instructions] Our first question comes from the line of [ Hardik ] Shah with Brick Capital.

My question was in Q1 there was cash availability problem , so we wanted to know that what was the capacity utilization for our ammonia plant?

Okay. In fact, we need to see capacity utilization in two part initial part. Initial part, I'll say April, we do have a gas problem but post May with Equinor coming in the gas issue was no more there. But average for this quarter was 94% utilization.

And one more thing, for the ammonia plant, we had a shutdown in Q4 FY '26. So did we debottleneck the ammonia plant or it is still running at 5 lakh capacity. How is it we have to consider?

No, we have debottleneck and currently plant is running at what we desire. We have seen almost 10% capacity improvement in that plant.

Okay. And last question is both the CapEx nitric acid and the Gopalpur TAN project, are they on schedule? When are we considering the TAN production for that?

We are on track this point of time. We expect both the plants should be operational towards end of this quarter. So what we've spoken, we are broadly on track this point of time.

And we can expect good utilization from Q4 FY '27 for both the plants?

Yes, that's what we intend to, because being -- I'll say for us, this is not the new chemistry, not the new plant. For us the ramp up should be much faster.

So we can expect around 80% utilization around for Q4, if all things go well?

Everything goes well, yes, we should ramp it up. Exact percentage, let's see how things are. But yes, our ramp up will be faster.

[Operator Instructions] Our next question is from the line of Shubham Dhasmana with Asit Koticha Family Office.

Sir, am I audible?

Yes.

Sir, I wish to know about the Industrial Chemical side. How should we look at this business, let's say 2 years, 3 years down the line?

You're talking about Industrial Chemical, right?

Yes.

Okay. Industrial Chemical, when we see -- let's see in two separate part, there's a nitric acid business and there's an IPA business. Nitric acid business is more, I'll say majority of the capacity, which is CNA is at long-term contract driven business broadly linked to, I call it, in a -- linked to the feedstock. So it's more stable business, comes with a stable margin, predictable business. So we do see that business to continue in a stable and with a newer capacity, we'll able to improve the top line as well as EBITDA and overall EBITDA of that business. IPA has seen a challenge in past. Now recently the availability of RGP was a challenge, which is now getting improved and IPA is slightly more volatile. But Q1 onward, we have started seeing some recovery in that business. So we say we should be able to maintain the long -term average in that business with some volatility quarter-on-quarter in that part of the business.

Our next question is from the line of Pritesh [ Chedda ] with Lucky Investments.

Sir, I have two questions. One on the TAN volumes , which see a reduction on a Y-o-Y. So should we interpret as your inability to produce because of the raw material adjustments or it is the inacceptability at a higher price by the market to, you know, purchase that TAN? So which one is a more fairer assumption?

None of the statement is true. The volume loss, as I stated in my statement, during the quarter there was a new guidelines from peso and that has disturbed the supply chain more on a logistic side, logistic outward side of supply. And that led us to few days disturbance in the supply chain and loss of production. So it was neither a raw material issue nor a production issue, nor a demand issue. But more of a temporarily few days' supply chain issue that made us out that took us to loss of this volume.

So should we assume normalization now of the original capacity and the volumes?

Yes, that should be. Normally quarter 2, as you would have seen , typically monsoon quarter. But if you're looking Y-o-Y, it should be the normal volume.

Okay. And my second question is on the -- on TAN itself in terms of the improved realization and the improved profitability, which we know is a function of you being a lot integrated. Any comments there on, you know, how do you see the profitability, considering the global supply change, where how you are positioned in the business?

Yes. Tarun?

This is Tarun here. Essentially, and this is a similar question which we have addressed in the -- in some of the prior calls as well like this. We've always maintained that the medium-term to long-term horizon, you know, margin levels would be very consistent, as far as TAN business goes, it is like any other business, it goes through cycles. Besides the, you know, unforeseen situations, for example Middle East, in this case, Middle East conflict, just as an example. So excluding those situations, we expect to maintain our margins over the medium to long-term.

Yes. Short -term, we may still remain on elevated prices for some time, because of the Middle East conflict it's still not resumed. But if you're looking medium to long -term, we expect we should back to a normal margin or a consistent margin.

So near-term you're more favorably placed, right, considering you have the backward raw material plus the global supply crunch on the TAN side. So the elevated profitability, elevated pricing on the near-term may sustain, is the best guess that we can make, right?

Yes. Actually, right. Okay.

Our next question comes from the line of Adarsh Jain, an individual investor.

We actually had very excellent quarter in way back in June 2022, and kind of the same quarter which we just had now. And EPS was around 34 at the time. And what happened that things kept on changing drastically after that and down cycle probably started with multiple issues. Thereafter Russian dumping of FGAN and then fertilizer subsidy inventory loss and then stabilizing the ammonia plant and the issue with IPA and nitroaromatic dumping from China. So I mean to say that it took another four years for us to beat the EPS, the EPS which we had in June of 2022. So now going forward, do we see such issues panning out again? And how do you see -- I mean the things could change for the business again. I mean, are we entering into down cycle asking? Because see, we see a lot of volatility in stock prices. Okay. If we look at the results, the valuation looks cheaper. But I mean if we look at the stock movement then stock movement says something different. So would you share your thought on this, please?

Sure. I'll start and then see if Tarun will add value on that. Now fundamentally the things, if I see 2022 what you are referring and currently, 2026 June, fundamentally, there are few things which have structurally changed for us. I call it that way. Now that time there were no ammonia with us. Now we have built an ammonia and with Equinor gas, which is long -term contract put us in much favorable position what it was, it was never there with us, if I talk 2 years back. Now that's a structural correction , which has happened and going to improve the sustainability or I'll say sustainability and reliability or predictability of the delivery as a complete integrated value chain is concerned. So that's the one fundamental change which will happen. Second change which is going to happen is the two new CapEx, which is going to be operational towards end of this quarter. Now that will take us to the next growth lever state. We are operating at certain level, capacities are more or less used. We are entering into the next leap of growth and that is very straightway sitting in front of us for which CapEx has already been done. It's not the balance sheet is already carrying majority of that CapEx as a done money. Now it's only a question of realization phase, which is coming. Third thing, if you see last few years we have put in lot of efforts in differentiating models, focusing lot on B2C, focusing more on commodity to specialty, going to downstream side, talking about crop focus and specialty focus fertilisers. All these initiatives are towards margin expansions and also towards bringing stability, predictability in the business. Now with these things in place, what we are confident as a management we -- the kind of a volatility which business has seen in past will not have a similar volatility. Yes, some volatility will continue. That's the business, Tarun and the business do depends on international, lot of international factors which comes and impact. But the severe volatility what we have seen in past that may not be a reality for us in the coming future, and that's what we believe.

Okay. So basically we just have to assume that no downturn in business is seen in the near future?

No -- I'll say no severe volatility, typical business cycle will come and go in. But we are moving from, I say we are -- our base itself is now changing with the fundamental structural change, which is happening in business. We'll be moving from the current level to the next level. So we will be in a better place to handle that volatility.

Okay? And how long do we see this elevated ammonia prices at the current level?

Okay, this is anybody guess, I call it. But the way things are, it's already elevated and we do see this disturbance to continue at least for some more quarters.

2 quarters, 3 quarters.

Yes. Looks like scenario, because even if war stop, it won't fall to a same level so soon. Not expected to be, at least all international prognosis, it's reflecting very clearly. It will take time for ammonia to come back to a same level.

Okay. So June being the typical -- I mean , the best quarter for us in any of the financial year. So we can at least expect the next June quarter we'll be having two TAN plants with elevated ammonia prices probably.

Sure. Okay.

Our next question comes from the line of Ranjit with IIFL Capital.

Yes, sir. I hope I am audible.

Yes, Ranjit.

Yes, sir So firstly on the performance of the mining solution business. So here just wanted to give some color about the kind of contribution that would have seen from the PCL probably on a standalone basis. Was that a major driver for the profit or it has been the pure trend spreads?

Okay. We normally don't give very precise numbers of specific business. But if we talk about the quarter gone by, it's not just one factor which has given this elevated margin profitability. It's all across, whether it was a mining business, whether it was a industrial chemical or whether it was a IPA, not volume but pricing here, or whether it was in ammonia. So all businesses have contributed to this elevated profitability for us.

So within that, what would be the captive consumption of the ammonia for us? If you can just share a ballpark figure.

Approximately in terms of percentage, around 80% is captive consumption.

This is on an expanded debottleneck capacity, right?

Yes.

Yes, sure. The second question is to Tarun on the TAN front, basically two questions there. We have been guiding that we want to move towards some more value added products. And within the presentation I can also see, so we started mentioning about the explosive business and we did a recent small acquisition in that front. So if you can give some color about how do you intend to tap opportunities on the explosive front? And second, we have seen announcement, not yet announcement but at least an indication to get into TAN business for one of the major refiners in India. How do we see that front? Till now it was one or two capacity expansion, but a big player expressing intentions to getting into TAN. How are we gearing up for this thing?

Okay. So taking the first question first, that was explosives. So as you rightly mentioned, we completed the acquisition of an explosives company in May this year, which we had announced to the stock exchange as well. And the purpose of that acquisition is to complete our value chain, make it even stronger as we develop the mining solutions business, which in simple terms is helping the mine operators, the mining companies, infrastructure companies, contractors, to improve their cost of mineral extraction or rock extraction. And blasting plays a very important role there, hence the role of explosives. Without having that portfolio of explosives, we wouldn't have the full value chain. So that's the whole purpose, objective, you know, of that acquisition. We are upgrading that facility as we speak after acquisition to bring it to the required standards of safety, quality, so on and so forth. We will be making some investments in terms of putting in some new types of explosives plants in this facility. And once we have the full range available, we will roll out the products commercially to the market in the form of, if you have observed our previous conversations, it's in the form of total cost of ownership TCO business model, which is in simple terms, as I mentioned earlier, improving the mine's productivity. So that's in summary what this explosives acquisition is all about, and the journey has began as we had promised some quarters back on this front. On your second question, again repeat as well.

Just on this front, if I may, so how would we seen by our existing customers, would we be seen as a competitors to them or how would we be handling this?

It's a very different business model that DMSL is pursuing and that model is TCO model that I mentioned earlier. The key difference between this model and the prevailing models of explosive supplies in the Indian market is that the prevailing model is about supplying explosives, invoicing for it, get paid for it, job over. Whereas in the DMSL's TCO model, certainly it supplies explosives along with lasting tools, technologies, people, competency and things like that. But there is an outcome which we will guarantee. So it's an outcome based model and that's where the difference comes in. Rather than just being an input driven model, TCO model of DMSL is an outcome driven model. So there is no competition as such. It's a new space in which DMSL will be operating. And actually , it is a good move as I see it, because if more explosives companies can join the game and start working in that direction, it will only help in improving the cost of mineral extraction in the country, which means the mine productivity in India will go up, and that's for a good national cause. Now coming to your second question, we hardly have any information on that on the announcement. We don't have any details or timelines, capacities and things like that. So very early for us to comment on that.

Sure. Lastly, the two large capacities which are likely to commission. How should one see the depreciation going up? Would this be depreciated over 20 years or 25 years? If you can give some color on that.

So typically, these plants get depreciated over 25 years. So it will happen with them also.

[Operator Instructions] Our next question is from the line of Harsh Shah with Seven Rivers Holding.

Yes. Sir, my first question is on the expansion, the two facilities that are coming in Q3. So just want to understand how are we tied up on the feedstock side, given that we have 5 lakh tons of ammonia capacity. So with this expansion will we be procuring ammonia from the spot market? And to that extent, will the economics of the new plant will be different from what we are experiencing from our existing nitric acid and TAN facilities?

No. So far ammonia is concerned, we already have, I'll say supply assurance or supply contract tied up. We don't see that's a challenge in terms of thing and it will be long-term driven contract. It's not one-off contract, and we do have it. In fact, two years before till PCL was not there, we were importing ammonia. So it's not we are new in ammonia. We don't know this market. It's very well aware market and things are already tied up. Economics has concern even our current way, the way we operate, when we see a TAN business, we see ammonia at a market price and we evaluate TAN business as a standalone profitability business. Ammonia profitability is seen independently. So overall, TAN will remain like that only.

Okay. Sure. And sir, if we just step back a couple of quarters in Q3 -- till Q3 FY '26, we had on the nitroaromatic side we were facing issues from the Chinese dumping and on TAN side, we had the Russian FGAN coming in at a lower price, which were putting pressure on our realizations and margins. So now with this geopolitical event, which is clearly working in our favor. So once the dust settles, how do you think -- and plus with the new capacities that our competitors are adding. So if we take a slightly longer term view a year, a year and a half from now, how do you see the entire ecosystem working? I mean, would we again revert back to the averages or there could be some structural change in the overall supply chain dynamics?

Okay. There is always that, that's what I'm, in fact, last -- sometime back same question. There is always a short-term and mid and long-term. If you're looking short-term, yes, this disturbance is there and this disturbance will have an impact on pricing. The prices are elevated, supplies are restricted or somewhere I'll say disturbed. This scenario, although the war may stop, but the scenario will not come back to normal immediately. It will take time things to come back and it may be a new normal after this -- even after stabilization. So that's what we feel. Second question is about new capacity getting added. Yes, new --- this is known factors and internally we are working. If you're looking at demand supply, the entire thing is -- even with new capacities, the total demand and supply with the kind of a growth what we see 6% to 7% in the market, it still will not be a very, very long market. Maybe a year, it may be long and short or maybe a balanced market and then may again translate into a short market. So the scenario we don't see things changing very drastically or the demand /supply tilt happening very drastically in medium term. We don't see that thing coming up.

Got it. And just one last question. Since you have started receiving gas supply from Equinor, so what percentage of the contracted supply are we getting right now?

Okay. Now the way contract is, we have our existing contract which are getting phased out this point of time and Equinor is coming and balancing it. So this phase-in phase-out will continue this year. By end of -- I mean, I'll say by quarter 4 when the entire phase-in phase-out practically will get completed. Till that time both the contract and supplies are running parallel, and that's how we have tied up our supply chain and also the inward quantity accordingly has been tied up with Equinor. So [indiscernible] quantity will get ramped up in next few quarter and the current quantity will get ramped down during next few quarters.

So the 70% gas allocation from the government will continue and then we will top it off with the Equinor allocation, which will keep on increasing?

I'll not say 70% top it up. Some of the contracts are expired or getting expired. So the portion of government gas supply will keep coming down over a period of time and the Equinor proportion will keep going up.

And sir, Equinor pricing will be lower than what we are phasing-out, right?

Yes. It has commercial benefits.

Our next question comes from the line of Viraj Mahadevia with MoneyGrow India.