DMCC Speciality Chemicals Limited ($506405)

Ladies and gentlemen, good day, and welcome to Q4 and FY '26 Earnings Conference Call of DMCC Speciality Chemicals Limited hosted by TIL Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Mehra from TIL Advisors. Thank you, and over to you, sir.

Thank you, Ganesh. Good afternoon, and welcome, everyone. Thanks for joining this Q4 and FY '26 Earnings Conference Call of DMCC Specialty Chemicals Limited. The investor updates have already been uploaded to the stock exchange and on the company's website. In case you do not have a copy of the same, please feel free to reach out to us. To take us through the discussion we have with us from the management team, Mr. Bimal Goculdas, Managing Director and CEO; Mr. Sunil Goyal, Chief Financial Officer; and Mrs. Pallavi Pednekar, Company Secretary and Compliance Officer. will be followed by the Q&A session. As a reminder I would like to tell you all that everything in this call directing any outlook for the future, which can be construed as a forward-looking statement, thus be viewed in conjunction with the risks and uncertainties that the company faces. These risks and uncertainties have been mentioned in our annual report. With that said, I'll now hand over the call to Mr. Bimal Goculdas for opening comments. Over to you, sir.

Thank you. Thank you, Abhishek for the introduction, and good morning to all our investors and shareholders who are listening in on this call. Thank you for joining us. I'm Bimal Goculdas, MD and CEO of DMCC. And I'd like to give you a little introduction about the last quarter as well as the last financial year. After that, I'm open to questions along with my team here. So the biggest -- the event happening, of course, is the Middle East crisis. And a lot of changes have happened in the last quarter, which has affected overall performance of the industry in general and also lives of people around the world as well. And I think I'll take a minute to give a little background to what are the issues affecting us, particularly as a company. Most of the sulfur traded flows through the gulf of Hormuz. In fact, about 50% of global sulfur trade is through Hormuz. So that has affected availability and therefore, the price of the product not only in India but also in other parts of the world, including China. Prior to that, also, the availability of sulfur was short compared to the demand. So if you look at the last couple of years, the sulfur price has just been rising dramatically. Nothing to do with the wall by itself initially. But more because demand, particularly from a new nickel smelter in Indonesia, which requires sulfuric acid and therefore, sulfur, which pulled away something like 3 million tonnes of sulfur, disturbing the market even before the war started. After the war started, of course, the availability itself became an issue, not just the price. So as probably most of you have read our presentation, the price increase has been dramatic. In fact, we have 2 manufacturing locations, one at Dahej in Gujarat and one at Roha and Maharashtra. And at one of the locations, we did have to slow down the plant in order to ensure that we don't run out of sulfur. In the sulfuric acid operation, it's expensive to shut down and restock. And therefore, we try to avoid that, if at all possible, which also means that downstream products can get affected. Happy to say that, that situation doesn't exist now. We are -- although price of sulfur has gone up. For the moment, the availability is ensured. Not only for the sulfur business but also for the Boron Chemicals business. I'll also give you a little background about Boron Chemicals because last year in about in the financial year '25, '26. The first half of the year, we lost a lot of production because of disruption in supply of the Boron from our main supplier in Turkey. And this affected supply to India in general. And for a few months, we couldn't operate our plants. In the second half of the year, we started the plants at full capacity, and now we have adequate stock to run that as well. Some of you may have noticed in the results that there was a large increase in the top line. So we went from INR 150 crores in the previous quarter to INR 177 crores in the last quarter, which is a sizable increase. But again, most of this is connected to the price increase of the raw materials, which we were able to pass on to the customer. The overall year, we ended at INR 582 crores. which is one of the highest top line in the company. And again, some contribution of that was because of higher pricing of raw materials and therefore, also of finished product. So while we didn't expand our margins, we did manage to pass on all the price increase to our customers. Mathematically, it looks in percentage terms as if the margin has come down. But in absolute terms, even in a quite turbulent and difficult supply chain situation. We were able to maintain the absolute margin. Finance wise, we've also needed to expand our working capital requirement substantially. First of all, for the Boron business, which went from a situation of where we were getting credit and picking up material from stocks in India, to a position where we had to pay advance and got material 90 days to 120 days after paying the advance. So again, that blocks more money. And on top of that, the sulfur price increase results in higher debtor requirement, higher stock value requirement and therefore, overall working capital has gone up, which is why you will see the short-term borrowings being expanding substantially. Overall, we are still at a very healthy percentage of working capital to sales, I think less than 2 months overall which is well within the industry norms. And other Other parts of the business, Europe continues to struggle. So our speciality chemical business has reduced in Europe, but it is improving in other parts of the world. We are selling some product into China, a little bit in Japan and also developing new markets in Latin America. So overall, that's the picture and the moment and I'm happy to take any questions that you may have. Thank you.

[Operator Instructions] Our first question comes from the line of Arham Gandhi from Molecule Venture.

Sir, you have mentioned in the press release that Dahej continued to operate normally through the quarter while Roha faced raw material availability challenges. Could you give us some color on the extent of this disruption at Roha? Are we talking about a few days of lost production or something more prolonged? Any quantification, even directional on the volume or revenue for Roha would be helpful.

Okay. Do you have any other questions? Or should I answer that?

Yes, I have other questions, but one by one.

Okay. So the Roha plant essentially was affected in the month of March only. okay? So it is -- we didn't shut down the plant as such, but we slowed down the plant to about 60% capacity. And just to ensure that we didn't need to shut down. It took us a while to organize sufficient raw materials. The reason for this is that in Dahej, we are able to source enough sulfur domestically. In Roha, the plant is typically far away from the refineries. And therefore, we need to have imports on a normal basis. Of course, currently, imports are not available. So we had to -- it took us a while to organize the supply chain. And now it's again back to normal, as I mentioned. But for maybe 15 days, we ran at perhaps 60% capacity.

Okay. Sir, got it. Then on the Boron business, you've called out that while the boric acid normally the non-boric acid portion, so some softening due to disruption in use application industries. Could you help us size this impact? And what was the approximate revenue or volume hit to the non-boric acid business in Q4? And is this something you see persisting into Q1 FY '27 or is it normalizing?

So in terms of the non-boric products, which are things like ceramics, glass, all that, they depend a lot on energy in the form of gas. So CNG or natural gas is the main source of fuel, the most economical source of fuel which became a bit of a crisis and continues to be a bit of a crisis in all the consuming centers, like Morbi and other places where they're making the fits. So what happened is that they stopped consuming whatever raw materials they had, they were selling into the market. And this resulted again in disruption in the market in terms of pricing and oversupply in terms of volume. So while I can't exactly quantify the amount, it did lead to a bearish sentiment in that market because of a glut. And until the gas situation becomes normal, the demand will not come back. However, the glut will not continue because it was a onetime thing of when the consumers of, say, the borax pentahydrate, borax decahydrate they liquidated their stocks. So then they don't create a stock again. So the distressed sales does not continue. But the demand overall is less. I hope that is clear.

Okay, sir. Okay, got it. And the working capital requirements have strange meaningfully this quarter, and the interest cost has moved up quite sharply. Could you tell us at what rate this incremental working capital lines have been drawn? And what's your expectation on when this working capital intensity starts to ease.

So it's about 9%, 8.7% to 9% in that range is percentage of interest. It's not a question of borrowing at a high rate. It's a question of the absolute amount has gone up. And that's sort of in line with our top line #1 and also in line with the increase in the stock value. Now in the Boron business, as I mentioned, we have adequate stocks. We are well protected for any supply chain disruptions over there. And sulfur also now we are in a much better position. But the absolute value of the stocks debtors, everything has gone up. which is why we needed the extra working capital.

Okay. So Sir, in the Q2 call, you had spoken about encouraging early traction in the Latin American markets as part of your effort to replace the lost European business. Could you give us an update on where that stands? And have any of those conversations move to firm orders or commercial supply more broadly in the current environment of elevated commodity prices. Have you been able to pass on the raw material cost inflation to your speciality chemical customers as well. Or is the pricing dynamic and speciality different from what you are seeing in the commodity business?

So that's a good question. You have 2 parts to it. One is whether we have been successful in developing the market. And the answer to that is yes. We have been able to replace most of the European business with business in Latin America, and we are also looking at, as I mentioned, Japan, Korea and China. So what happens in the Speciality Chemicals business is there's always -- I mean, you are able to pass it on, but there's always some kind of a lag because these are not spot prices, they're not spot contracts. So you would give a contract on a quarterly basis. So what I'm supplying in, say, April, May, June is a price I would have negotiated in January. And if there's a sharp increase, temporarily, I will see a lower realization, but all these are long-term customers. And in the in the next quarter, I'll recover what was there. So overall, as the price averages out, you average out the margins as well. It's a much more stable business. But there could be a lag in passing it on. That you understood, right?

Yes. And sir, one last question that we have been wanting to ask while the company has the land parcel at Ambernath. Is there any active time to monetize this asset? Have you been auto formal evaluation than on the parcel and are there any steps that have been initiated in terms of finding a buyer, any update here would be appreciated.

So that is not at Ambernath, it is near Ambernath. A place called Nalindi, it was land, which the was declared as forest land. And then recently, there was a Supreme Court verdict in our favor. Not only in our favor, but several other litigants. The Maharashtra government has still not transferred the land back to our name in spite of the court order. So we are not able to monetize it as yet. We are looking at options for that too.

[Operator Instructions] Next question comes from the line of Sejal Kapoor with anti-fragile thinking.

Bimal, I think it's fair to say that -- Am I not audible? Hello?

Now you are audible.

Am I not audible?

I can hear you.

I think it's fair to say that DMCC changed its name before it changed its economic identity. What was the economic justification for renaming the company to include "Specialty Chemicals" when bulk chemicals still contribute the majority of revenues and sulfuric acid economics continue to dominate margins, continue to dominate working capital and profitability, of course. That's my first question.

Right. So if you recall, we had -- when we did the name change, we were about 30% in terms of commodities and about 60% to 70% in terms of the bulk chemicals. What has happened since then is we made the investment in Dahej to expand our footprint and our manufacturing capability. The price of the raw materials has gone up substantially, and the price of the sulfuric acid has therefore also gone up. Our volumes have also expanded in sulfuric acid because of the investment at Dahej. This has sort of correlated with a drop in the European market, which was entirely Speciality Chemicals. So that's the reason you are not yet seeing the numbers which we would like to have going back to, say, 30%, 40% of bulk and about 60% of specialties. And we do have the capacity and as we have newer markets, we will see the change going there.

I was yes, I was also coming from a point taken Bimal, I was coming from the gross margin perspective. So I mean even back then when we changed the name, our gross margins were hovering near 40%. And I'm sure you would agree to Specialty Chemicals should have a gross margin of 50% and above. At what point should investors objectively consider DMCC a true specialty chemicals company rather than a sulfur chemistry company with a small developing specialty segment.

So the correct time for that would be as we, of course, increase our specialty chemicals portfolio to at least 50%. I would say that is a fair number.

Sure, sure. And as we stand today in the business, I mean, would it be possible either in annual report or otherwise to demonstrate hard evidence that the Specialty segment is structurally improving the quality of the business. specifically through higher gross margins, lower working capital intensity and greater earnings stability. I don't know if would it be possible to split the margins and show the difference because there are certain companies in India who separately show ibuprofen and the non-ibuprofen business to just highlight the difference in the margin profile rather than simply adding more downstream products on top of a fundamentally commodity sulfur chain. And just a thought process, I mean because we need to showcase the evidence that, yes, we are heading in the right direction, we are increasing Specialty year-over-year. It may not reflect quarter-over-quarter.

Yes. We are -- we have taken the view, and we continue to take the view that we are in a single segment, which is chemicals. And so we are -- we do not wish to report individual segments in that sense. It's all interlinked for us. Because it's not that they are independent businesses. The sulfur chemical speeds into the specialty chemicals. We get a lot of the utilities from the sulfur business into the Specialty Chemicals business. So one without the other is difficult to visualize and any distinction that we might make in the -- can be quite subjective, not objective. So we'll continue to report a single segment. And you may think that we are getting margins from the sulfur chemicals business the bulk business, but in fact, and as we -- as the price of sulfur keeps going up, the pressure on sulfuric acid also keep increasing. And last year, we had multiple issues. I don't know if you read the previous conferencing. But even the Boron business was affected dramatically in the early part of the year. So we are seeing a lot of a lot of -- I mean it's a different problem all the time. It's been a very volatile year, continues to be very volatile year. Even this year. And Europe, exiting the market and Chinese taking over the European production and all is also has affected us and will affect a lot of other companies as well. So that's something we need to be mindful of.

No, absolutely I take that point. And these are external factors that are beyond our control. But what is internal and within our control is the R&D intensity. So would you be able to share some data points around R&D intensity, how much R&D we were doing 3, 4 years back. Off the top of my head, I think we have been no more than INR 2 crores annual R&D spend. And I'm sure you would agree that a specialty chemicals company cannot be created by doing such a low-intensity R&D. So have we stepped up our R&D efforts? Are there any plans to increase the R&D intensity? Because without R&D, there is no way a company can become truly a specialty player. Would you agree?

Absolutely. And most of our R&D is focused on process development and process improvements. And the cost you are seeing is essentially like a people cost but we do have some plans for increasing this, and you will see that in coming quarters.

[Operator Instructions] Our next question comes from the line of Tanmay from 361 Capital.

Yes. I wanted to ask my first question on the sulfur inventory. Could you tell us out of the INR 92 crores of inventory we have, what proportion of it is sulfur? And at what price did buy it and the current market price?

So sulfur inventory is normally not more than 15, 20 days at each location. So it's about, say, 1,500 tonnes at each location. I couldn't tell you exactly what is the price we bought it and what is the price now. I think that's not relevant to this kind of discussion. But just to say that about 15 -- about 15 days is the maximum inventory we would keep.

Okay. And can you comment on the capacity utilization that we would see in FY '27 for the Specialty Chemical part of the business?

So this year, again, it's too volatile to give a projection. But all I can say is that we expect it to be better than it was in '25, '26.

Our next question comes from the line of Henil Bagadia from Equicorp.

So starting with some of the macros. Sir, have you seen any seeding of contracts because I think, sir, some of the Chinese suppliers have also declared force majeure due to the government regulations there to stop sulfuratic acid directly and also some of the downstream chemicals of sulfuric acid and also they've got some shortage out there. So any color there, if you can provide?

So sulfer continues to be in short supply. And which has resulted in ever increasing prices to all-time high levels. So the Chinese are facing it as much as we are facing it. And while they have decided not to export sulfuric acid, that's more a decision to protect their home industry, particularly the fertilizer segment. And in India, also the imports through Hormuz have virtually stopped. And unless it restarts, the crisis will continue. So it's more a question of availability, of course, because of low availability, commodity, whoever has got the materials is able to push up the price. But there will be a point at which some consumers may not be able to pass on the price to their consumers. So that -- I don't know when that point is because I don't know all the business of all my customers or all other customers of sulfur products. But that will be the point when consumption may drop and therefore, result in again a more balancing of the pricing and supply situation. Also, we expect if the Strait open up, even then there's been so much damage and destruction that the supply chain will take a few months to come back to normal. So we don't think it will bounce back to old levels even if the fighting were totally stop right now.

We actually see the COVID situation where I think on the oil shipments had also stopped for a certain time and as the prices have shot up significantly. The situation is much different. But if we see that situation versus this situation, how much time -- or I mean, what kind of efforts were taken to normalize the supply chain back to the normalized levels? If you've got any understanding of that. And also have you got any onetime contracts because of any force measures from similar products that have been supplied to the Chinese, all the Koreans, any one-time contracts or any -- some medium-term orders that you're seeing there in any of the LATAM or the Japanese market out there?

So just coming back to your first question, it is not comparable to COVID at all. Here, there is a genuine crunch in supply because there's a lot of sulfur, which even if it was not made in the Middle East was coming through Middle East and through Hormuz. For example, sulfur from Kazakhstan, large exporter of sulfur, but using Iranian port. Now you can't get that. You can't get Omani sulfur. You can't get any of the ADNOC material. So the situation is very different. India does not have as much sulfur as it could because also of the type of crude being processed. And if you are processing Russian crude, that is generally lower in sulfur. If you're processing other types of crude, it's higher in sulfur, so you get more output. It's dependent on a very complex scenario and very difficult to predict, but there's no comparison to the COVID time. The second part of your question, there is always a move to try to buy all customers to try to diversify their supply source and even more so now. So I don't think we got any significant single order because of this but I'm sure people will be looking enough and will be more open to alternates to Chinese material now and in the near future.

Okay. Sir, and lastly, if I could just touch one more time on the sulfur part, sir, something back. When Kutch copper was actually coming up, people was scared because I mean the amount of sulfuric acid that was going to come from the meter and as the Adani's were going to raise it to about more than 1 million in some years as per as to 2030 ambition, that was actually going to rise the prices. So any understanding there that the supplies from there are coming? And I mean the Dahej can be run at a high utilization to comp up with Roha's low utilization.

So again, two different questions. I'm not preview to the actual operations of such copper, but it appears that they are not operating at capacity. And I think that copper smelter and the copper ore business has its own dynamics. So that you'll have to ask somebody there for it. But in terms of the quantities, which they could potentially sell, we are seeing a lower volume at this time. I don't know how long that will continue. And for us, most of the is running at 95% capacity and Roha is running lower capacity, you can't compensate that much delta. Number one. Number two, you can transport these products. at least the sulfur-based bulk chemicals very far. So it's not that you can make in Dahej and ship to customers near Roha. So it's difficult to compensate that.

[Operator Instructions] Our next question comes from the line of Anubhav Sahu from [indiscernible].

So my first question on -- again, on sulfur sourcing of sulfur. So I want you to understand, in current situation, how much of the sulfur we are getting from domestic sources? And what other options we are exploring internationally?

So, today, most of the sulfur we are getting is domestic. And we are continuously exploring whatever origin material we can get -- and if some comes to imports are coming at a trickle right now. But if they do come in, the Roha site would be more suited for the imports. In Gujarat, we have enough sources from domestic even in normal times.

Okay. And sir, if this situation continues and as you also indicated in your opening remarks that the situation of Strait of Hormuz resolved, it will still take time to normalize. So given that fact, what kind of utilization level you foresee for plants both at Dahej and Roha.

So as I mentioned, at the moment, now we are able to run at capacity, and there's no restriction right now. But it's a very dynamic situation and prices continue to rise. First, we have the supply restrictions. There could come a time when there are market restrictions. Because customers may not be able to absorb the price and pass it on for their products. So two dynamics to give a futuristic projection, I can tell you that currently, we are operating the plant at capacity.

Okay. And sir, could you also -- I mean, I understand the Roha plant has installed capacity of something 350 tonnes per day. If you just talk about sulfuric acid, what gases do we have at Bates? Or in total, if you could put in the numbers?

Yes. Both plants are very similar.

Okay. Almost 350 tonnes per day around that for Dahej as well?

Correct.

Okay. And also, if you -- sir, if you have the trends available for you for the sulfuric acid imports into India. In last 2 months, since the crisis came in Middle East, how is the picture there? I mean do Korea, Japan continue to be dominant suppliers. Is there an import deficit on that front, which you probably would be an opportunity for us, anything on that? And any trend which you can highlight?

No, we've never imported sulfuric acid ourselves, and we don't intend to.

Sorry, at the industry level. I mean...

So the -- most of the import of sulfuric acid was on the East Coast, very little on the West Coast of India. And I'm not familiar with what the end users there are doing. It's mostly the large fertilizer companies. So recently, whether they've been able to get or not, I don't know.

Okay. And sir, final question, just I think you tried to address this thing, but I'm still trying to gain more as far as the business thought process behind it because sequentially, we have seen bulk chemicals share has actually eased up. So are we kind of prioritizing sulfuric acid sales compared to captive consumption for specialty? Is that the case given the higher spot prices?

No, not at all because sulfuric acid by itself is a low margin. Although the price goes up doesn't mean we make a higher margin. But we have a limitation on the market side for the specialties. So it's not a production limitation. It's a market limitation.

[Operator Instructions] Our next question comes from the line of Tanmay from 361 Capital.

I forgot to ask if any of the specialty chemicals that are under research the past few years or now are going to be a commercial stage in FY '27 or '28. Can you comment a bit on that?

Yes, we do expect that. But difficult to -- if you ask me how much are you going to sell what is going to be the margin? Difficult for me to say that right now.

Can you describe the products a bit? So we are working on a couple of specialties in the Boron business, and we are working on one particular product, which is used in making a polymer, which goes into enhanced oil recovery and some other applications like that.

So Currently, we've started some commercial sales. But again, I can't give you any projection of how much it's going to be, et cetera.

Okay. Got it. And on the land that we have received, I know you said that the registry kind of name yet, and it's still in the hands of the government. Is there any time line that you can provide on and the proceeds of that land once monetized would be used for what?

We could use it for CapEx or debt reduction.

Okay. And on the time line?

Very much out of my control.

Thank you. Ladies and gentlemen, that was the last question for today. There are no further questions from the participants, I now hand the conference over to Mr. Bimal Goculdas for closing comments. Thank you, and over to you, sir.

Thank you. So thank you all for the patient listening. It's really my style not to give futuristic projections. I'll continue that way. I know may not satisfy all of you, but that's the way we've taken the company over the past few years and happy to discuss our performance past quarters, past year and look forward to I look forward to interacting with you all again. Thank you for the quality of questions. It's also a learning for us to see what angle you are looking at. And we look forward to further interactions. Thank you.

Thank you, sir. Thank you so much. Ladies and gentlemen, thank you so much for joining today's conference call. On behalf of DMCC Speciality Chemicals Limited, that concludes this conference. Thank you for joining, and you may now disconnect your lines. Thank you.