Gujarat State Fertilizers & Chemicals Limited (500690) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Gujarat State Fertilizers & Chemicals Limited Q3 FY '20 Conference Call, hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Deepak Kolhe from Batlivala & Karani Securities. Thank you, and over to you, sir.

Thanks, Reza. Good afternoon, everyone. On the behalf of Batlivala & Karani Securities, I would like to welcome all the participants who are logged into the third quarter results con call of Gujarat State Fertilizers & Chemicals. From the management team, we have Mr. Nanavaty, Executive Director and CFO; and Mr. Vachhrajani. And thank you, management, for giving us the opportunity to host this call. I would like to request Nanavaty sir to first begin with his opening comments, post which we will have Q&A. Thank you, and over to you, sir.

Thank you, and welcome to everybody for this post-result con call for Q3 results of GSFC. We had a bad quarter this time in terms of the margins, but we had a higher production on the basis of the higher phosphoric acid availability. So the fertilizer production, in fact, increased by 48%, mainly from the Sikka Unit, which is clocking good production on the basis of the better availability of phosphoric acid. The sales turnover was INR 1,717 crore during the quarter, which is a little lower than the Q3 last year, mainly because of the industrial product prices. We have uploaded our volume data on our website, production and the sales volumes, so you can refer to the data for better clarity. As far as the company's performance is concerned, as I said, production was higher and the sales volume was also more or less the same as Q3 last year. So there are no issues in the physical performance of the company. And the main pressure on the margin is from the Industrial Products segment with very subdued prices prevailing during the quarter, which affected the margin. So fertilizer value for the quarter was 6,30,000 metric tonnes, compared to the same as the last year. Industrial Products volume also more or less was the same; of course the prices were low. Full year -- I mean 9 months, we are clocking the fertilizer volume of around 19 lakh metric tonnes, and we hope that we'll be reaching the larger volume by the end of the -- March. Nine-month production volumes were also higher compared to the 9 months last year. And -- but on the back of the lower Industrial Products price prevailing, we expect the full year, they will need to be between INR 7,500 crores to INR 8,000 crores, that is around 90% to 94% compared to last year's revenue. As you know, the consistent fall in the price of phosphoric acid and the international price of DAP forced every fertilizer company to reduce their MRPs. So we had a 3 round of MRP reductions during the last 6 months from July to December, 3x, totaling INR 4,000 MRP reduction in DAP took place. And similarly, in other NPK, there is also MRP reduction had to be taken. As we've mentioned in the advertisement, we booked the wage settlement impact of INR 100 crores during the quarter, so that impacted the bottom line of the company. However, if we adjust the impact for the quarter and the 9-month period, in fact the Fertilizers segment will be showing a comparable EBIT as per the last Q3, that is almost INR 38 crores, it was INR 39 crores last year. Of course, the Industrial Product is in negative. So even with some adjustments, we'll still be negative. On 9-month basis, for P&K [ fertilizer ] manufacturer prospective fertilizer, we clocked around -- margin of -- an EBITDA margin of INR 2,100 crores, which ideally should have been INR 2,500 crores, but looking to the scenario of consistent price reduction, we had to follow the market and be satisfied with little lesser EBITDA margin on fertilizers. Subsidy pack. We have been receiving regular subsidy. So on the phosphatic fertilizer, we have received subsidy for almost up to November end. And of course, urea, it is until August. But with the Special Banking Arrangement being worked out by the Department of Fertilizers and that may be operationalizing next month, we expect 50% to 60% of our subsidy blockade to be clear under SBA. So we will receive some INR 500 crore to INR 600 crore. That will substantially reduce our working capital burden and will help in reduction of interest also. We had some other income in the form of insurance claim of INR 13 crores and income tax refund of INR 8 crores that increased the other income side. On the other expenditure side, we took the advantage of the amnesty scheme, and for excise and service tax, the Sabka Vishwas scheme and settled the old 5, 6 legal cases, which had a P&L impact of around INR 18 crores to INR 19 crores, but there is no cash flow impact because everything has been taken in the past while making the appeal. So there is no cash flow effect. As far as other expenses are concerned, the other item that increased the cost was marketing expense of -- by -- increased by around INR 10 crores. Packing expense increased by around INR 8 crores. And this is all due to higher production. So we had a higher storage cost and higher packing expenditure. And due to plant shutdown of the Caprolactam plant, we had a higher requirement then for around INR 5 crores. So that -- this expense in order to increase the other expense back from INR 44 crores. Capro-benzene spread remained subdued during the quarter, and it was around $650 as compared to $1,300 in Q3 last year. That impacted the margin in Industrial Products, but prices have started being stabilized and get back to improving. So we hope that some improvement in Q4 on this account. Our Melamine III plant, which was having some teething problems, has now stabilized at 80% production level. And you can see from the volume data that production and sales of melamine has increased compared to Q3 last year. And we hope this is also helping improving the bottom line in the Q4 results. I think these are the main operational things. Otherwise, we hope with the new budget coming tomorrow, some respite to the fertilizer sector in the form of the aid of fixed cost of INR 350 and some increase in urea MRP and some reduction in the custom duty on the raw material of fertilizer imports. If these things are implemented, that will really help the industry during the next year. Thank you.

[Operator Instructions] The first question is from the line of Dhavan Shah from ICICI Securities.

So you mentioned some capro-benzene spread of $680 in Q3. So what was in Q2?

Q2 was also in the same range, around $700. It has been falling since the crude prices have substantially fallen. And if the U.S.-China trade war keep on persisting so China is not able to do the, in particular the nylon 6 that they export to the U.S. And -- so the -- all the dumping takes place in India. So disturbing this trade.

And how do we see it right now? I mean is there any influence on [ to our dollars ]? Or is it also at the same growth?

I think it is getting bottomed out and stabilize. So -- because December being calendar year-end for the -- many, many suppliers all over the world, they want to part with the closing inventory. That's also therefore -- I mean they're dumping material at very, very lesser prices. And with this U.S.-China war also I mean the trade war affecting the Chinese exports. So this thing happened in a big way in this Q3. But I think now it is getting stabilized and prices don't go down now. It is just going up slowly.

And in the last annual report, you mentioned that the GSFC is coming out with the CapEx of methyl methacrylate with the capacity of around 50,000-odd tonnes. So is it still coming? And if it is so then by when it will be operational? And what is the methyl methacrylate price right now, if you can share?

Yes. So given the review, we have had the agreement -- license agreement with the Mitsui Chemicals of Japan for this technology of MMA. And the plant was for 64,000 tonne production and at a CapEx of around INR 2,000 crores. And the prices are around $1,500. Of course, due to other chemical price, it also keeps fluctuating. So then it is going to be dealing with the OPaL in Dahej. Both the things are under review -- OPaL will be in the -- ONGC being the major shareholder in OPaL, they are also reviewing the proposal because it's a joint venture. So we'll make announcements suitably when it is wound up.

Okay. But it will not be operational by 2022, as it was mentioned in the last earnings call, right?

But we are not -- I mean we are not saying no. But if a final decision is taken, it will be set up maybe in 2, 2.5 years' time.

[Operator Instructions] The next question is from the line of Keshav Garg from Counter Cyclical.

Sir, I wanted to understand that our operating margins were around 25% way back in 2010, '11. And sir, how, for the past 12 months, they have reduced to 4%, which is the lowest in more than a decade? Sir, so do you -- sir, first of all, what is the reason for this drastic fall? And just secondly, sir, what kind of average operating margin do you think our business can make? I think it will surely be higher than 4% that we have been doing now, I mean in the past 12 months.

Yes. So '10-'11, '11-'12 were the challenge years for GSFC. The capro-benzene spread we talked of around $680 was around $2,000 those years. So very, very high, almost standstill. And fertilizer also that will come under the -- I mean phosphatic fertilizer under the NBS scheme, this new subsidy scheme for phosphatic fertilizer that started from 01/04/2010, Nutrient Based Subsidy Scheme. So government had a very attractive subsidy rate for various P&K fertilizers the initial years. So that gave us also good margin in fertilizers. We feel government has -- I mean understood the nitty gritty over a period of this 8, 9 years, and they have been giving the subsidies on all the phosphatic fertilizers. So -- suppose if you compare the ASP rate of INR 10,000 per tonne now, I think it was more than INR 15,000 in those days. With phosphoric acid and all, price is more or less in the range down between $500 to $800. So those are details of these 2 factors help in a bump for profit. As far as the normal operating margin is concerned, in a normal -- these 2 segments are totally different. So in the Fertilizers segment, you can expect 5% margin on a normal basis because it is a very controlled business where government wants to see that farmers are supplied fertilizer at the lowest possible prices. And they are also now squeezing the industry by tightening the energy norms and other norms so that government has to pay less and less subsidy. So all the imports are under -- fertilizer imports are under OGL. So any dealer can import the fertilizers and can move it for his business and spoil the market and go away. But in turn, the permanent manufacturers suffer in resources. Like I said, 3x reduction in MRP in 6 months period. So that is too much. So this is like a telecom war in fertilizer sector, I would say. So this is the situation. So the margins fluctuates. Industrial Products, generally we have seen a quite -- some baseline margins over a period of time, but this particular year is unprecedented in the form that this China-U.S. trade war also lasted for long. We had these crude prices fluctuating on a large scale basis, and so many uncertainties in the trade that has prevailed in the Industrial Products. Otherwise, we will see a margin of 10% to 12% in Industrial Products, which really gives the profit to the companies. Fertilizer is a kind of a service activity only. So nobody can expect a good margin except 1, 2 companies, who are the star performers.

Sir, so in our Industrial Products, sir, which is now making losses, I think, sir, for the first time or for the first time in a long time, business is making losses. Sir, so basically, is there a demand/supply mismatch? Is there a overcapacity? Is there some supply led -- I mean what exactly has caused this fall in price? And sir, how does demand/supply look now? And sir, when do we expect prices to move up? And when do you expect new division to break even and to again make that 12 -- 10%, 12% kind of margin that you expect?

No, there are no demand/supply here. So there are no demand constraints as we see in some other sectors like auto or FMCG sector where they don't have demand or demand book comes down substantially. So we don't have any demand constraint, and we are selling all the products domestically only. We are not forced to export because we don't have domestic demand. So everything is sales in India only. So that is not an issue. As we said, we also maintained the production. So -- and nobody will increase the production if there is no demand, okay, so very plain book. Orders is not an issue. But as I said, one is, these are all international price parity driven products because if you keep your price high domestic side, then people can easily import with -- in some products now, we have free trade agreements -- India has free trade agreements with the -- all the neighboring countries like Korea and Thailand and Indonesia and all the things where most of the same chemicals can almost be sold in India at the same price as a local manufacturer can sell because of 0 custom duty. So -- and the surrounding countries, which are small countries, they set up plant specifically for selling to India because their own consumption is not so high. So they set up huge plant capacities and nature of that is that their economies of scale help them to keep the cost of production low and dump the things in India. So this is the situation. And definitely, caprolactam and benzene and melamine, they're all crude derivatives. So the crude oil prices also indirectly affect the prices of our finished products. Plus the various tensions on Iran-Iraq push them to sell these products at a cheap rate because they have to maintain their economies. So they dump many commodities in India at a much, much cheaper rate compared to other cost of production. So all these factors have a heavy impact on the prevailing prices. So -- but as I said, we see some silver linings from now that prices are not going down, but improving. And the Melamine III plant that we set up and had some teething problems in September has also stabilized from November, and now it is working at 80% capacity. And you can see from the volume data that our production and sale of Melamine has increased, and now their prices have also started increasing. So that should help in improving the volume, value and bottom line industrial for us, but it will not be substantial gains immediately. It will be a gradual process. So in Q4, still we will have some margin pressure definitely. So I don't see things will be all pink in this Q4.

And sir, what about next financial year?

Let us see how the budget comes and what exemptions, of sort, the support it brings to the economy. So that will also clear details going forward.

Sir, so basically, you are saying in the Industrial Products, there is no oversupply in India, but since there is 0 import duty and basically pricing is done on import parity basis. So basically, there is overcapacity globally and they are dumping their products, that's why the realizations have fallen. Sir, so -- that's what I'm trying to understand. I think internationally, what is the demand/supply situation? I mean how much excess supply is there, which is pushing down prices? And -- I mean what kind of balance is there between demand and supply globally?

Yes. So globally, the China factor weighs very well. So -- with this U.S.-China trade war, they have not been able to push their material in U.S. as they were doing earlier freely. So to sustain their production, they are dumping material in India. So that is what is causing the glut in the market. And also everywhere else, these chemicals plants operated some 80% capacity because they built overcapacity when they set up the plant. So whenever we set up more than 100 capacity our plants in India. So there is definitely a case of overcapacity building in various industrial products. And this happens -- and as you know, the time has -- the costing and everything stays supportive [ very OpEx ]. So you don't know how they can produce at such a low cost. So at best we have guesswork. You will never be able to know what they are doing.

The next question is from the line of Ayush B from Aequitas.

I just wanted to understand, you have -- you said that the DAP prices have gone up by INR 4,000 in the past 6 months. So how much of that have we been able to pass on later? Or how much -- and how much of the raw material prices that have fallen, the benefit has been factored in?

No, sir. INR 4,000 has been lowered in the -- I mean the market. The MRP has been -- the DAP MRP has reduced by INR 4,000 from July onwards until November. So -- I mean when prices fall, everything has to be passed on, all the inventory lying in the field plus whatever the stock we have in factories and post. On average, we have to pass on the price reduction. So that is the standard practice in the trade, that price revealing at the time of real sale that has to be met whatever advance billing or advance price has been considered. Like, we don't have real demand during, say, January to March, given [indiscernible] fertilizer. But we keep on letting the material in the market. But what we invoice right now has no meaning because what will happen in June, July, that is the real determining factor; the reduction in the price or additional discount or whatever form. So that has happened and whatever was the stock at that time, on all those things, we have passed on this reduction. But after that also as I said, from April to December, we had some average INR 2,100 EBITDA margin on the manufactured phosphatic fertilizers.

This is EBITDA per tonne, right?

EBITDA per tonne.

Yes. And -- so is this the lowest EBITDA per tonne? And on an average basis, how much can -- is the sustainable EBITDA per tonne?

Ideal should be INR 2,500 per tonne. So we are trying to reach that. But of course, in this now Q4, it won't be possible. So if at all this budget has any form of reduction in custom duty on raw material in force, that is phosphoric acid and ammonia mainly and the [ MRP ] so that will help in cost reduction anyway.

And then the last question, you had mentioned that the raw material prices benefit will come in H2. So has that started coming in from quarter 3 itself? Or is it still to come?

It is -- every quarter, phosphoric acid prices are falling down. So at the start of the year and through June quarter, it was $728 per metric tonne. And at September, it was $655. In October, December, $625. In January to March, until now it is $590.

Okay. So how much of this benefit are we taking?

So we are taking benefit, but there is some time lag because if I have some material made from the earlier quarter price or a little higher price, the MRP reduction takes place immediately, saying that phosphoric acid prices have reduced. I have made stock of earlier quarter production now, which was produced at a little higher cost. So I suffer a loss. I don't get immediate benefit of the current phosphoric acid prices. And that happens, that is why the -- this lower EBITDA margin is made.

Okay. And sir, coming to the Industrial Products division, sir, you mentioned that the main problem is that China and other players are basically dumping into the Indian market because of oversupply situation. Sir, isn't there a possibility of filing a petition for imposing antidumping duty?

Yes. So we already have antidumping on the melamine from China, and we hope that it will be continued as and when the sunset clause comes in. And government is now, on a broader term, thinking of bringing the quality standards in various chemicals that are heavily imported in India, like teflon or nylon. There is no -- because right now, there are no standards. So when I see us -- standards of all the chemicals are available, naturally low-quality products are available at low price. And so the -- that has -- I mean that hurts the real quality producers like GSFC. So they will be slowly bringing these BIS standards in various chemicals. So unless some products are approved, I mean preapproved for the standards, it cannot be imported in the country. So that will go a long way in protecting the genuine producers.

Right. But currently, there is no antidumping duty on caprolactam, right? It is only on melamine.

It is only on melamine. Right now, there is no...

Okay. So do we plan to file a petition for imposing antidumping duty on caprolactam?

It won't sustain because if you are making profit, then they won't allow antidumping duty. You have to prove the case that the court ask you and -- no, result in losses on a consistent basis. This is what we see on the quarterly phenomena, and the things may turn over maybe in 1 or 2 quarters. So that won't make a case for antidumping. Caprolactam, we don't see immediate escape.

And -- okay. And lastly on the melamine price, sir, how much total capacity do we have of melamine currently?

Right now, with this new plant over here, 55,000 tonnes.

Total 55,000 tonnes? Or this new plant was 55,000 tonnes?

No, total. So new plant is 40,000 and old plants are 15,000.

Okay. So -- and on this total capacity, what is our revenue or maximum revenue potential?

Right now, the prices are a little subdued, but it can be, I mean INR 400 crore to INR 500 crore.

Okay. And what margins can we -- on an average, we can expect from the same?

Right now, the margins are also under pressure, but we earn around some 15%.

15%. So are we the largest player in India for melamine?

Yes, we are the only producer, not only largest. Nobody produces melamine in the country.

So what would be India's requirement? And how much are we catering to?

Right now, it is around 1 lakh tonnes. With this new plant, we will have 50% market share.

And rest is imports?

Rest is imported. Yes, yes. But we'll be coming with a new melamine plant also further capacity addition, if this one helps in a good way. Because in the longer term, you can't keep on asking the antidumping support. One day, it will be removed. Plants have the old technology with higher cost of production. So those plants need to be phased out. We are going to build new plants having latest technology and reduced cost next to be in place.

Right. Sir, currently, the major CapEx that you are incurring is phosphoric acid and sulfuric acid plant in Sikka, right?

Correct, correct, correct.

That is the only major CapEx that you are currently incurring?

Yes, that is major. Otherwise, we are putting up small plants for different special fertilizers and all these things. They are small in nature.

Okay. So sir, did you feel that this quarter was the bottom for both our divisions, for Fertilizers as well as Industry as well? And things should look up from here, like they shouldn't....

They are up, definitely, a little bit in Q4. But no sudden improvements are expected.

Sir, some improvement but things can go more bad from here.

Yes, more bad from here. That is true. But now these are just like economy that -- well, again, you saw that -- as [ RBA ] I think and monetary policy cannot be mixed. It can be helpful in little way. So that way -- and the company also know we are planning to, like the Melamine I and II, we will be thinking of phasing out and bringing new melamine and a new caprolactam plant. And all these things are the future. And plus, though small but not specialty fertilizers and all these things, which have a better margin and grow volume and value may be less, but with healthy margin improvements. So all those things, if we are planning and will be coming out as and when things finalize.

Correct. And what is our outstanding subsidy currently?

Right now, it is around INR 1,500 crore. And we expect there to be Special Banking Arrangement, we will get some INR 500 crore, INR 600 crore next month. So that will help in capital and interest savings.

[Operator Instructions] The next question is from the line of Deepak Kolhe from Batlivala & Karani Securities India Private Limited.

Sir, there was a provision of INR 1 billion for the wage revision. So can you just give this some color on this?

Yes. So we do wage revision every 4 years. So this was due from 01/01/19. So -- and we have the Vadodara plant and we have Sikka plant for polymer and fiber in it. So we have different time periods during which this wage revision becomes effective. So Baroda is effective from 01/01/19, which is a major portion where the monetary impact comes. So we make the negotiations with the staff for the worker's category, and then we also -- based on that, we also -- for the officer's wage, we send a revision. And according to this, provision is made. But in the next 4 years, we have a lot of retirements. So we'll have a good savings going forward. So in 4 years, that is before the next settlement, some more than 700 people will be retired. And with the automization and computerization and all these things, we don't require to fill up so many posts. So hardly will take less than 10% of the retired people, there will be new recruitment. So that will save, on a full year basis, a good amount of -- in the salary employee cost.

Okay. And sir, what is the CapEx plan for FY '21? And how much we have already spent in FY '20 -- 9-month FY '20?

Yes. So right now, I don't have ready figures how much we spent, but it was not much. We spent mostly on the Ammonia IV plant and major equipment replacement of around INR 60 crore. And some portion of maybe, say, Melamine III payments pending and all those [ sale ] payments. Otherwise, major payments will be coming for next year only, mainly for this sulfuric acid, phosphoric acid plant at Sikka and DAP expansion and some CapEx at Baroda unit for setting up a sulfuric -- small sulfuric acid plant. And maybe government is telling about the urea revamping and energy reduction, so we may spend for some equipment in the urea plant. So all these things will be coming. But it won't be more than INR 200 crores for the next year. Then once the orders of equipment and all are placed, then it will go up for the Sikka project.

The next question is from the line of Deepak Chitroda from PhillipCapital.

Sir, Deepak here. Sir, just wanted to understand, what is your sense in terms of whatever we are hearing so far that government is planning to basically de-control urea or probably putting under the NBS policy? So what's your take in that?

We feel that the government may include the MRP of urea, which has the impact for, say, more than 10 years now. Right now, the per bag price is INR 267 with the new [ cope in ] urea. So that may include it mainly by INR 100 or INR 150 or so.

Sir, what do you think in terms of the structure? How they will formulate the entire thing, looking at the different cost structure for the different units?

Now, broadly, they have -- I mean 2 broad segments for the urea plants: one is new plant with better energy now of a 5.2 or so gigacalories per tonne. And the methanol plant, which have the target of 6.2 gigacalories. And there's been just this Madras fertilizer, which are awaiting the [ conversion ] to get. So as you said, unit. They are our buyer. So they don't need policy. It can be taken separately. These are the new 2 broad groups. We cannot be norm peak and then government don't have to bother whether you use more energy. It is up to you how to run the plant. They have their unique thing. They don't need -- they can now finalize the subsidiary date on a broader way. Other variable cost like [ add ] water. They are not so big so they can also maybe standardize on that path and then bring some unique priority in the -- all of you here again. So that will stay with, per se, NBA, so direct to farmers account like that. But definitely we expect some action on government part in this budget.

Okay. And sir, do you see in case of those urea comes from the daily base policy and probably, you might see maybe, say 10 or maybe [ multiply 20% ] kind of increase in the urea prices or MRP. Do you think there will be any impact on the urea consumption going forward?

Yes, it could impact it because it is all about [ so keep ]. So farmers are also using in that fashion. I think to pay good amount out of their pocket, they will think of probably using it in a proper way. So that could streamline the usage.

How much impact would you see? Maybe 10%, 20% kind of -- because we have around what, 32 million tonnes of consumption. Sir, it can come to be around, say, 28 million to 30 million tonnes?

[ So far ] I don't know, but it will definitely has been testing the conduction, which is continually the government want [ high touch ] with the land reforms and the type of crop farmer takes and all these things. So it's good that people on their own start making the proper use so that when government and first of all this thing, they don't feel the [ heat ].

Okay. Okay. And sir, lastly, what is your take in terms of affordability to the farmers? So do you think they will basically have very little amount left if the prices are increased?

What was that?

Affordability to farmers to consume urea and other fertilizer?

Well, everything is affordable. It's not question of -- I have been saying this many time, this -- and before this yearning for certain fertilizer, DAP MRP was INR 9,000. Until recently, it was INR 27,000. So it's 3x, but nobody has complained that DAP has become costlier or anything like that. People are buying, and there is no reduction in any prospective demand over a period of time. This is all they need, that farmer wants subsidized urea. It's not like that. I'm a heavily subsidized. And before 1977, there was no subsidy. We sold urea and other [ first applicable ] fertilizers from 1967 to '77 without subsidies. So everybody was buying. There is no problem.

Okay. And lastly, sir, if I can ask, if you can just briefly talk about the CapEx plan -- as we talk about [ phosphate ] and sulphuric acid in terms of capacity and demand?

Yes. So the -- I mean the sulphuric acid will be 3,600 metric tonne per day, and [ phosphate ] will be 12 metric tonne per day. So -- and that will produce steam and power required for this plant also. So that will be helpful. And sulphuric acid, we can get from the next door, to enable us to be finalized, analyzed and [ have that in ]. So far, for the transportation cost and everything will be quite slow. [ Up front place ] we have [ add it] as you see for our income slide, that will be coming to our [ in safety ] our own [ captive net big cut ]. There's probably more [ you can see ] the operational cost of the ship handling and all those foreign expenses. And already, it will be here, and therefore the assumption.

Sure, sir. And if you can just tell me their time line and CapEx amount for both tax?

CapEx will be around INR 2,000 crore. And time line, I think by March '22 it will be commissioned.

March '22, okay. And some work has already been started for this?

Yes. We have signed up for the technological sulphuric -- phosphoric acid plant. Sulphuric acid also we have add up the technology. And now we are working the standard for the contractor to make the [ forecast for this project ] building up this plant on an EPC basis. So we'll not be total -- real total cost of the tender and be short-lived.

So any indication how much saving we will be having with the integration of -- I mean backward integration of [ all this asset ]?

You see the international suppliers of [ phosphate ], they use [ the raw cost ] of $100, so 3.5%. So it has increase it [ $350 ] [ a crop ] and $80 up for conversion cost and some cost of sulphuric acid. So in all the -- make the processes within $500. So any price prevailing for phosphorus acid above that is a [ lead ] margin. So we expect minimum $100 margin in this process in production, that is a big amount for [ our converted to be $80. ]

The next question is from the line of Saket Kapoor from Kapoor & Company.

As the last speaker was speaking, sir, this planned supply of phosphoric acid is being [ contemplated ] correctly? Or are things are -- just we had to join the dots now and things will be a reality.

We have [ to drive in to ] back because work is going on since the last 2, 3 years. So now as I said, we have tie up for the sulphuric acid and phosphoric acid technology [ for supplier ]. And now we'll be coming out with these tender to impact the construction on projects of construction work and based on the [ quarters ] that we see. So then maybe shortly the [ morval ] project will start.

And for the funding part, sir, how have we worked it out? I mean what would be the debt:equity?

That we will be -- because right now, we have [ 0.14 ] as a debt as compared to equity. So anything -- any guidance will be coming by a very cost-effective manner.

And it will be in a JV patent somewhat or directly in-house with GSFC?

No, they can in-house only. It will be well [ I would say can ] on the [ cement ]. This plant will come up.

Okay. No, I was asking about the funding part will be through a JV? We'll be forming a JV for this venture? Or it should be GSFC as a standalone that will be executing and funding the project?

No. That will be standalone only. No JV. It is our own because if our core was one quarter here and [ that will all be at the end ] and all of this on there.

Sir, for the workforce increase of that -- salary increase of INR 100 crore, how many people have benefited, sir, in totality?

4,000 people.

4,000 people have been benefited. And you were doing this for a 500 to 600 that are going to get retired? Or by what -- by the next year?

700 by December '22.

December '22.

Yes. So this is some settlement is from 1/01/19. So '19, '20, '21 and '22. These 4 years that I mentioned will be effective. So when I start 1/01/23, the one will be less based on this [ workforce ].

And sir, the employee cost last year was INR 530 crore.

Yes, [ that is correct ].

Yes. And this time, sir, it would be increased, the 9 months is INR 515 crore. So that for the next quarter, what should [ we be seeing ] in the terms of employee cost?

I think it will be around INR 25 crores to INR 30 crores in each quarter, right.

INR 25 crore, INR 30 crore?

Per quarter.

[ So clearly ] there will be a proper increase of INR 25 crore in the normal [ total amount ]. I mean generally, we are [ spending ] around INR 138 -- INR 128 crore to INR 138 crore quarterly. We took a INR 100 crore hit for this quarter. I was trying to get, what will be the...

[ It will be calculated ] from the 12-month period from 1/01/19 to 31 December, '19.

But the [ idea of sizing ], this gap has been booked for this quarter only. The employee cost is INR 234 crore.

Yes. But for that, we have given the explanation that nontax [ part of ] INR 100 crore, INR 28 crore only pertains to this quarter and INR 77 crore is for the 9-month period, that is from April to December '19. And another INR 23 crore pertains to earlier, that is from 1/1/19 to 31/3/19. So INR 100 crore is a onetime effect. So from what you see from as a INR 138 crore in a quarter kind of things. So another INR 25 crore price will be the next quarter. So INR 158 crore [ from one day 1 ] [ 161 ].

How should we look into this -- how should we look into the change -- the inventory buildup so far. Is this seasonality factor? Or how should one take this into account? INR 400 crore inventory.

Yes. So we are -- I mean selling of the material on a faster pace. So inventory will substantially come down by [ March end ]. So because we had a higher production during the quarter so we had a high inventory.

In Industrial, [ can we cover what ] we are holding or the fertilizer [ will end if you did ] the breakup?

No, it's more in fertilizer. Chemicals, we have very small inventory. But fertilizer is a major inventory. It's -- we are selling through cost machine. So we get the subsidy, and we get the whole update inventory also. And of course, we are collecting the payment from the [ datas ] also in a very, very pressurized way so that by [ March end ] we will have less [ datas ] and less inventory.

Two very small points. On the cost of raw materials front, we have seen an escalation also sir. How would you explain this, sir?

It is because of higher production only.

Higher production only. And I think [ on that end ].

Inventory valuation because when [ the raw material] we consume has to be shown as their raw material consumption, but then finished products, they still have the inventory.

Sir, it is on terms of higher volume, and prices have not improved -- prices has not increased.

Prices has not increased. Prices are coming down.

Okay. And can you take the basket, sir, for raw materials in percentage term?

Like we have phosphate, ammonia, sulphuric and in sulphur and then we...

Major percentage-wise, you can give me a breakup?

Yes. So for the [ seen ], it is around 45%. Then [ GS ] is around 13.7%. And then [ meny ] is around 11%, 12%. [ Those are the major things ] in the raw materials.

Right, sir. And [ these ] prices are on a decline.

[ The market or full price. ]

[ These are ] on a decline.

Ammonia, benzene, all are on decline.

The next question is from the line of Anand Bhavnani from Unifi Capital.

I have 3 questions. One is, sir, to compliment you actually. You are the only [ India BSU ] who does con calls on a regular basis. So I'm very happy about it. But at the same time, I'm puzzled. Why do you do so? I mean you're not answerable like other [ BSUs ]. So what motivates you to do this call?

No, that is a -- one is that we are the oldest [ BSU ] of Gujarat. The Gujarat State was born in 1960, and GSFC was set up in 1962. So we have that original genes in our blood with no -- others are diluted. So that is -- that differentiates us from others. And no, it's good to share information in this age. No, I mean for digital information age, this knowledge age, so not [ talking out ] to the shareholders and the analysts is not good in this age. So even if we are not doing well, before people assume anything, we should come out and say what are the reasons, and what are the future prospects. And you may be remembering that -- I do not know, but in the old earlier years only 3 [ units ] were trading on the BSE. One is a Cisco, that are still -- there was [ DSSC ] and third was [ Inturyenka ]. We have that very old history of association with the stock exchange. So that prompt us to now talk to you all people regularly.

I wish more [ without biases ] and general shareholders. This brings me to my second question. My second question is about, you put so much effort in building value, but the way I see, whatever value that you generate, it goes into employee salaries. Your employee salaries are twice the size of -- twice the per head cost as compared to [ competitors ] -- compared to any other company. So whatever work you do goes into employee salaries. So my question is: A, have you considered, instead of doing cash shares to your employees that you -- instead of giving INR 100 crore worth of cash, give them INR 100 crore worth of GSFC shares will be probably more interested in making sure everything works -- functions very well. And at the same time, the cash cost will go down.

All right. But [ now we see stock ], are not very popular in [ the BSU itself ], so while the private sector [ envisage in a large way ].

Sir, don't your results [ get you ] the number of shares. You issue fresh share. And today, the price is INR 90, you issue 1 crore shares for INR 92 crore or maybe 1.1 crore rupees shares and give a INR 100 crore worth of shares. That way you will ensure that everybody comes on time. Everybody does the best to ensure the most productivity because their shares were -- their everyday bank balance will get impacted because they have these shares. And you can restrict the amount of time where they can sell these shares. So they can't sell these shares [ on the side ]. Certainly equity currently what happens is, whatever effort you put, the entire effort has gone towards employees. They're probably one of the best employees in entire India, GSFC employees. So please consider paying more in shares. At the Board, I think all the fellow call holders -- all the fellow investors on the call will agree, and we should propose a board resolution to pay at least 25% of totality in shares.

No, we -- for our officers, we do have a very valid pay scheme. And from now so that there -- I mean it is linked to their performance. And you will be glad to know that our bonus, they'll be valid bonus that we pay, it is also based on -- it's a PPPL scheme, Production, Productivity and Profitability Linked performance scheme, where as from Q1 to executive Director, everybody's [ performance is based on the ] 11 parameters we have framed, including progress on marketing, cash flow, profit, productivity, all those various aspects, benchmark against these block of 4 years. So that number in our performance keep on increasing every 4 years. So that will be employed. And as far as product on it concern, our -- all the plants are running more than 100%, somewhere around 125%. [ The old ] of these plants are almost 50 years or so more than 50 years old. So of course, management provides further replacement of equipment and regular upkeep of the plant. But to produce those kind of production is also and the new [ manu ] itself are also evolving in that way, otherwise you can't have this kind of consistent production from such old plant. Like no plant -- like sulphuric acid plant at Baroda, no plant at that year is available anywhere in the world, not only in India, nowhere in the world [ is all ] sulphuric acid plants are working. They have been trashed and thrown away, maybe twice or thrice after we set up these plants. So these are the possibilities of -- because of the -- one is more almost 0 return. I mean the retrenchment or the separation and the dedication of the people. So these are the factors. And as I said, we have PPPL scheme and also for officers. In fact is we were able to stay linked to that performance. So the only -- I mean the 2 aspects is the running cost and other with revenue. So we feel that the better the revenue are targeted so that the percentage of employee cost and a percentage of profit or whatever parameters reduce it, or will get down. So if you look -- because we have cost control and other measures. They create a negative mindset in the people. It is better to pay good salary than run around and get no higher turnover or profit or new revenues of business and products and all those things. So that is the effort we follow, where you see with the same almost last 4 years. You can see the average cost was almost around INR 500 crore. But with that same thing, we had a 32% growth in summer of last year. So it is same set of people who can do the miracles. It's up to the management to make it happen, so -- and we are expanding the ways to do that. So that will be [ completely cost run ] to go beyond a construction date. So that is our effort.

Sure, sir. But I would -- just let me give you a statistic that if you had...

If I may interrupt, Mr. Anand, you...

It's just a comment. It's just a comment, I don't want answer, it's just a comment. Sir, your salaries are -- if your salary will be [ equal on an enormous ] level, net incrementally INR 300 crore additional PBT. So that's how high your salaries always are. If you don't know, I just wanted to bring to your attention.

In fact our employees, they are the champions of the industry. So -- I mean we are in the -- competing with similar kind of operating companies like [ NFA or Asnefogia or NFC ] or maybe [ Duarne ] like that. So -- but we will revisit our plan coming up for certain chemical processes. These things will gain substantially because that will bring the consistency in the raw material prices for prospective fertilizer. And then with the good margin because $100 on savings on processes comes out to INR 7,000. So assets and process here are using DAP. So along with the present profit admitted, it will add INR 3,500 per tonne to net margins. That is a good amount in the fertilizer space. So this will be there, but we have to wait for at least 2 years for that. Then we will have a steady performance.

The next question is from the line of Abhijit Akella from India Infoline.

Sir, I just wanted to clarify the comment you just made in terms of the returns on this phosphoric acid investment. I -- the -- if I heard you correctly, you said INR 3,500 per tonne on the entire 2 million tonnes that you produced. Is that the right thing?

It's from the capacity that is 1,000 tonnes per day phosphoric acid that is equal to almost 2,000 per day of [ DAP ]. So shall we say it is about [ 6 to 7 lakh tonnes of the DAP ], but about [ if they have enhanced it then ] they consume less processes. So it is same 1,000 tonne for the processing. I can make more APs or more NPKs. So it will be -- right now, also we have the production of around 7 lakh to 8 lakh tonnes so this will be covering almost the entire current production with the support that margin will provide.

Okay. So is this the right way to think about it, basically, we save $100 per tonne of acid that we produce, and we are going to make somewhere about 4 lakh tonnes of phosphoric acid, right, I guess, if it's [ done ].

Yes, that is correct.

So that adds up to about $40 million, which is about INR 280 crores.

Correct, correct, correct.

And when we divide that by our, say, 7 lakh or 8 lakh tonnes, so that's the number you are talking about there?

Yes, yes, yes. So additional, and regardless, by buying the current processes from market and ammonia and everything from market, whatever I make that will be intact. It's not that it is going to grow. But this will be kind of a topping. $100 is a topping.

Yes, sure. Sir, so on the INR 2,000 crore investment, the return will be INR 280 crore. Is that the right way to think about the ROC or the IRR of the project? Or is that something more also that comes out of the -- on the return?

Like I said, we myself are -- we produce this team, so they are own captive production of enhancing anything the borrower's team or borrower's power cost. So these are the -- and not so of this plant. But if I have anything problem processes, I can sell the sulfuric acid also in the market. So because sulfuric acid is also a big market. And this plant [ is being acid so where we have this get in ]. We can do the export of sulfuric acid also because we'll have the liquid in from handling facility there. So these are but the other offshoots of the plant. It is not the main purpose. Main purpose to produce phosphoric acid. And of course, unlike what we do in Baroda and the value chain when we start from benzene to [ ed gas ] then [ enon ] and [ adex ] and [ adolecton ] and [ manonfri ]. I'm free to sell any intermediate products. So the same way, I can sell processes also if the fertilizer production would give me good margins. There are now most processes are most imported in India, almost 100% basis. So if that is a profitable retail sell process here also and as I said, we have the [ DAP ] so we can have these ship and hand it to any port in India. But these are the other options in case of difficulty for the main purpose.

Got it, sir. No, that's very helpful. And one last thing, if I may squeeze in. You -- a couple of times on the call, you alluded to a couple of star performers in the industry.

That is correct.

I just wanted to understand that other than the employee cost, what are the other aspects that enable them to make superior margins compared to the other companies?

So one is the farmers' attitude towards using fertilizers. So North India is only based on DAP. In South India, it based on NPK. So DAP is like a commodity where you have a lot of price wars and discount war and we saw 3x reduction in a short span. And then there is INR 4,000 per tonne. It's a huge reduction. But those kind of wars take place in NPK. And they were active plays that one makes so it does not allow any [ wars ] to take place because they are pursuing the [ particular ] material. They are [ place costing before everything ]. So they are isolated from, they are incubated from the imports. They can charge little higher price for the NPK grade that they make. And with certain states, in certain states, government is also very proactive and helpful to the farmers as we see [ in Andhra Pradesh ] referring on central government started the INR 6,000 cash bond. They are only quoting INR 4,000 in the active season, [ so maybe INR 8,000 ] per hectare in the year. So it was kind of support to farmers as the fertilizer companies connecting certain part of the country. So -- and of course, they are coming up with even more products and the R&D is very strong. And just like we have the whole value chain in chemicals or [ gas collection ], they have the support functions like farm equipment and [ exercise ] and for the retail aspect of the thing. So -- and of course they [ factor in ] fertilizer from [ 1906 ] for at least [ 60 ] years before we started so they were already there whatever small-scale [ does ]. But that understanding of the fertilizer and the agriculture definitely help. So hats off to them.

Ladies and gentlemen, that was the last question. I would now like to hand the conference over to the management for closing comments.

Yes. Thank you for the questions and participation. And like the Indian economy, GSFC also in the process of making the required personal kind of changes in the products, in the processes and the right kind of CapEx so that long-term stability with good margin is ensured. And til then we're in the transition period, we will keep fighting for the right kind of market share, right kind of margins. But Q3 are a part of the global play. Sometimes we'll be affected when there are no very large players on a countrywide. It is our loss. But as you saw, physical performance is not affected, so there is no basic next in line be working. It's only the market forces affecting, but that also we don't take it lying down and our management is making full efforts in the form of cost reduction, new projects, new methods of working, methods of processing the materials, so that we remain competitive and how we are confident. Thank you.

Thank you. On behalf of Batlivala & Karani Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.