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

Ladies and gentlemen, good day, and welcome to the Q1 FY '22 Earnings Conference Call of Gujarat State Fertilizers & Chemicals Limited, hosted by Batlivala & Karani Securities India Pvt. Ltd. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Deepak Kolhe from Batlivala & Karani Securities India Pvt. Ltd. Thank you, and over to you, sir.

Thanks, Jennis. Good afternoon, everyone. On behalf of Batlivala & Karani Securities, I would like to welcome all the participants who have logged into this first quarter results con call of Gujarat State Fertilizers & Chemicals. From the management team, we have Mr. Nanavaty, Executive Director and CFO; and Mr. Vachhrajani, Company Secretary and Senior Vice President. 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 the Q&A session. Thank you, and over to you, sir.

Thank you, Deepak. Good afternoon, and welcome to this GSFC Q1 post result con call. And thank you, everybody, for maintaining your interest in the company consistently. You have seen the numbers, so I will not explain about it. Fertilizer has been somewhat affected because of the higher raw material prices of [indiscernible] ammonia, sulfur. And looking to the farmers, in fact, companies are not increasing the MRPs in line with the rising raw material costs, and government has also picked in form of higher subsidy. But still the spiraling prices have put pressure on the margin, so companies are taking a cautious call on the growth aspect of the fertilizer. We have also tried to sell maximum fertilizers in our primary market zone, which has helped in reducing the freight cost and the storage costs, et cetera. But as you know, the Industrial Product, all the products are in the supercycle mode and prices are going up since April, and July is still being better than the Q1, I would say. So last year, we locked in around INR 1,700 crores turnover in Industrial Products segment wherein we see a good growth this year of around 30%, 35%. It will take care of the top line reduction in the Fertilizer segment. The capro-benzene spread has been about [ $1,050 ] and has been maintained to that level from this year, and we hope it will continue throughout the year. For other chemicals also, we expect this value to continue throughout the year and which should help in improving the top line and bottom line, both. The methanol plant, which we started somewhere in September '20, is going on and the prices are also improved. As far as the subsidiary is concerned, government is paying the subsidy in time and due to which the working capital requirement has substantially gone down and interest cost has been quite low. In fact, we are earning the interest on the deposits. It goes as other income, so don't reflect in any segment. So we hope that will also continue throughout the year. So the good performance of [ IP ] with no interest burden, the [ contra ] earnings should improve the profitability of the company. On the downside, we had higher raw material prices, particularly for the fertilizer segment. And we had a plant shutdown during the quarter 1, so that also affected the production. As per our practice all the production and sales details are uploaded on our website, so you can see it. Some of the expenses have increased, that is mainly due to rise in the natural gas cost and [indiscernible] expenses because these are all the ultimate derivatives of the crude, so their costs have gone high. Over quarter -- on a Q-o-Q basis employee cost seems to be higher, but we have started provisioning right from the first quarter in line with the last year. So if you see the last year expense, it is not higher on a proportionate basis. So we continue to be a debt-free company and have deposits of more than INR 1,000 crores at present and with good profitability and good balance sheet, all the ratios have also improved. [indiscernible] all the ratios, profitability ratios are up. And the projects that we talked last time, they are continuing to progress. So that is ammonium sulfate, fourth plant; sulfuric acid, fifth plant; nylon 6 compounding plant; and solar -- 15-megawatt solar project; then urea revamp project to bring down the energy costs. They are all going on. And for the larger CapEx, [indiscernible] phosphoric acid, sulfuric acid, et cetera. The discussion and the detailing are going on. And we are positive that, that will also be true. So -- and they announce it when [indiscernible] comes. So this COVID is after us and GSFC is fully out of it, and we'll continue to grow as in the past. Thank you.

[Operator Instructions] We take the first question from the line of a [ Saket Kapoor ] from Kapoor & Company.

Sir, Hello?

Yes, yes, yes. Please go ahead.

Yes sir. Firstly, sir, about this raw material consumption part, sir. I missed the initial part of the commentary. What led to this increase? And going forward, sir, what does the trajectory look like on the cost of material consumed?

So all this raw material required for the fertilizers, particularly, that is natural gas, sulfur, phosphoric acid, ammonia, all have shown increasing tendency. So of course the crude, natural gas and sulfur is likely to soften going forward. But ammonia, sort of international factors are -- play, so it's difficult to say anything. And phosphoric acid is concentrated with few countries. So it's kind of a curtail. So difficult to say when the prices will come down.

If we look at the PBT numbers for fertilizer segment on a sequential basis also, that has gone up significantly from INR 45 crore to INR 85 crore. Was there any one-off for the March quarter, sir? I don't have the March detail. Or what is the reason for the sequential increase?

Last year, particularly, those raw material costs were not so high, like gas prices are also down, phos acid also was comparatively not so high and sulfur also was steadily increasing, it was not high right from the beginning. So raw material price has the last year's margin. This year, as I say, raw material prices have increased, but government has also increased the subsidiary substantially. So like DAP subsidy has been raised by 137% as compared to 2021, and all other subsidy, accordingly phosphatic fertilizers have gone up in line of the nutrient content. So that has helped. Plus, as I said, whatever was the past talk with lower raw material costs, that also immediately helped in this Q1 to improve the margins.

But it is totally operational numbers only, sir. There is no one-off item in this INR 85 crore PBT number?

There is no one-off item, but looking to the subsidy mechanism of Government of India, where we get subsidy on a POS sale, when the point of sales happens at the retailer level and the farmer actually buys the fertilizer, then only subsidy claim is generated. So whatever past talk, whatever we sold during, say, Q4 of last year, that cost really consumed or bought from -- by the farmer in the current quarter. So that can total us to the higher subsidy. So that impact is there. It is not a onetime, but it's a normal thing. It was from...

So for this quarter numbers will percolate to the next quarter, that is what -- that should be the way?

Yes. So this will continue because subsidiary has been increased at least for this financial year. So this is a normal phenomenon every time it happens.

Two very small questions, sir. Firstly, on the employee cost and the finance cost. What numbers -- sorry, employee expenses in power and fuel. What should we look at going forward? I think so for the employee benefit that has gone down from INR 227 crore to INR 164 crore. And the power and fuel cost has also gone down on a sequential basis. How do you explain it?

Yes, yes, yes. So you can say whatever the last year cost that will more or less remain the same for the full year basis, that is INR 684 crore. Power and fuel has gone down sequentially. But yes, so the current quarter truly reflects the power and fuel cost. So I think that can be taken at some basis.

Right, right, sir. And lastly, sir, the production number also, which have been updated on the website, I think so this quarter, the methanol sales have contributed to around INR 94 crore. And going forward, sir, this should be the order on a quarterly basis and the prices have remained firm sir, we can realize at INR 94 crore on a sequential basis also?

Yes. Mostly, we are hopeful. But recently, natural gas prices have gone up substantially. So some suffering may happen. But methanol prices have also gone up compared to Q1. Right now, in July, it is still higher compared to Q1. So yes, you can say INR 94 crores sequentially can be taken as a benchmark.

Okay. And lastly, sir, if we take the profile of our company, it is mentioned, chemicals, we are deriving a larger part of the EBITDA because of the uniqueness of the product portfolio. But other than that, when we -- if we go for a likewise comparison also with the other listed players or the other companies, we find there is a big gap in the valuation. We invested at GSFC are at a loss when compared to be invested in any other fertilizer company. And you can take a likewise comparison also or also any comparison if you want, sir. Why is this so differentiation for -- given the PSU part also, sir. PSUs are more efficient than other players, as it has been remembered. So I think the better utilization of the cash going forward and rewarding your investors should be the likelihood going forward because sir it's a long wait for investors from one cycle to other cycle. The returns from being invested in the company are -- has flattened out compared towards market and other companies in the same space as offered. You have the data in front of you. That is all in the public domain. So what is the thought process of the management going forward? And the way their -- the investors who have reports in the organization, an esteemed organization, if I can -- if I use the term, GSFC, that they are also adequately rewarded for the risk they have taken in investing, sir. That's the thought process, sir. How is the management going to deal with it? Because the phosphoric acid part of the story also is a big step, so it is taking a longer time than what is anticipated. So if you could give some color on the growth journey going forward since the subsidy part of the story the government have absolutely looked into the aspects? And so that should not be a cause of bother, which used to be earlier a cause of worry for us. A very small point from my side. I'll come in the queue for further question, sir. Please dwell into it and if any reply you want right now, please do explain?

Yes. So what you explained is correct, but management is taking this aspect into account. And apart from this work to large CapEx, we said, we are also thinking of going for the fourth melamine plant of equivalent 40,000 capacity. So that will improve the top line, bottom line. Similarly, we have a larger land in Dahej available. So we are also appointing international consultants to chalk out what are the good projects that we should do at Dahej. And after those reports are there and deliberations are there, we will go for those projects also. So management is very much into expand, and chemical has been a consistent -- giving a good profit. So we have a good experience there. So there is no second thought about chemical segment as such. So whatever is the right type of chemicals or industrial products that will be suggested, that will be going forward. So we are in that process of maintaining the growth cycle or improving the growth cycle, and the results will come in, say, the years to come.

The next question is from the line of [ Anup Nayar ] from Equity Intelligence.

So basically we have capacity of 55,000 tonne in melamine. What would be the current capacity utilization there?

See, right now, we are not running Melamine I. That is a 5,000 metric tonne plant. But with the higher production of Melamine III as compared to the total capacity, I think -- let me see the melamine production number you have this -- what is on the website that we have uploaded. So compared to -- yes, about 6,400 tonnes, that is the production. But as I said, there were shutdowns during this first quarter. So now for the 3 quarters, it will run on an efficient and normal basis. So at least, barring 5,000 tonne, we will have the -- some kind of 100% capacity utilization for the melamine plant. So that is [ 6,000 ] tonne.

Okay. So other than this 5,000 tonne for Melamine I, we are using 100% of the capacity?

Yes, barring that old plant, which is a very [indiscernible] so we don't run the plant. But of course, this -- whatever shutdown impact is there, that will remain. So...

So sir, what will be the current price for melamine? Can you share the price, sir? And do we sell at the market price or do we have any long-term contracts with our clients? Also sir, who will be the user industries, maybe that who are buying melamine from us?

Melamine, we don't have long-term contracts. So we sell it on a spot basis. And right now, melamine is a new champion product for GSFC. Its prices are ever high since we installed the first melamine plant in 1982. We have not seen such price. It is around $2,200 to $2,300, which used to be around $1,400, $1,500. So in rupee term, it is some INR 1,77,000 per tonne. And the -- mainly the laminates and paint industries use melamine for their production.

Okay. One more question, if I may ask, that is on the methanol. You said that the plant was started in September 2020. So I think we have around 1.5 lakh plus capacity there on an annual basis. So what would be your current capacity utilization there as well?

Right now, it is earning at 100%. But since I think in mid August or in September -- rather in September, gas prices are very high because of the seasonality. So there, we may cut a little bit of production to 70% or so. That can I think it will come down to 100% once the gas prices are back to normal phase.

Sir, what would our cost of production per tonne on a per tonne basis there? And are we selling all that we produce the market is buoyant, right?

Yes. So you see, methanol is -- [indiscernible] are 2 or 3 in the country only, GNFC, RCF and GSFC. And methanol is Imported to the tune of 20 lakh metric tonnes per year in India where the local capacities are just nothing. It's not 10% even all put together, all the 3 companies. So there is no question of any demand take a trend or anything. Whatever is produced is sold. And we don't comment on the individual product, cost of production. But industrial product, you can see the 15% EBIT margin instead. So that we are hopeful to maintain.

[Operator Instructions] The next question is from the line of [ Dhaval Seth ] from [indiscernible] .

Sir, congratulations, nice set of numbers. I just want to know the current capacity of caprolactam? And what is the price going on right now?

Capacity is -- I mean actual production is around 85,000 to 90,000 tonne, but some of it is captively used for making nylon 6. We generally sell about 60,000 tonne caprolactam in the market, which is priced INR 1,60,000, and that is around $2,000.

[Operator Instructions] The next question is from the line of Bharat Sheth from Quest Investment.

Coming to this fertilizer business...

I'm so sorry to interrupt. May I please request you to speak a bit louder. Your audio sound...

Hello, now is it clear?

Yes, yes.

Sir, on this fertilizer business, the raw material prices started increasing from April onward and again, it started substantially increase [indiscernible] ammonia recently as well as sulfur. So the subsidy which is remained, I mean stagnant for the first half, announced by the government, in view of that have you take, any price increase in this Q2? And if we have taken, what are the response from the market? Whether it has been absorbed or not?

Yes, our marketing officer is here. He will reply to you.

Yes. For texture of the products like ammonium sulfate, recently they increased its price twice. For rest of the products, as far as DAP is concerned, we have -- so far, it is not considered as there was indeed mandate from the government also to maintain the same price. But for non-DAP products, yes, now companies have started easing it upwards, and we may also consider it soon.

Sir, I mean non-DAP means all complex fertilizers. Is that correct?

Yes. NPK, yes.

NPK, okay. And sir, how is the -- earlier, I mean we have been also listening that China is putting a ban on export of the fertilizer. So whether it is on any urea or NPK or all kind of -- and what would could be the impact of that also in -- for the domestic manufacturer? whether remained benefited? Or if you can say -- give some more color?

No, rather, the ban is on all kind of fertilizers. Basically, it is with this perspective that -- China is also a large consumer like India. And with increased world prices, their domestic prices were also going high. So for their own perspective, we have just banned the export. Now India being the major importer, yes, we are almost 30%, 40% of DAP and almost 10% urea, it is coming through China. And that they are also the largest player in the world as far as exportable surplus is concerned. So it will have its impact on the prices moving forward. And it is expected that it will have other prices may still move upwards.

And now in this rising scenario, how do we see the import is taking place or not or it has come down?

If you consider Y-o-Y basis, yes, import has gone down. Like last year, in the first half, India has imported DAP 41 lakh tonne. So far, it is contracted hardly 26 lakh tonne. And with the provisioning price of some $625 and all, perhaps [indiscernible] be the question. So unless prices -- market prices go up or the subsidy reviewed, during these 2 months of August and September, the profitable imports can be a question mark. So yes, import has gone down substantially.

Okay. Sir, on input price, we said that phosphoric will remain -- has been fixed for quarterly now normally. So any color that kind of -- I mean with this high phosphoric price, whether some of the people who are not very veteran might have gone or so supply may ease and hence, the price may come down. And sulfuric, sir, we said that prices are expected to soften in couple of months. But ammonia, what you said, I could not follow. So can you give some sense on this input cost price outlook?

For Indian buyers, prices are contract prices on a quarterly basis. So it will remain the same until September end.

Correct. But post that second half, how?

Will -- everything will depend on how far these prices go up and how the market absorb it. Right now, yes, import -- Indian's have stopped imports because it is not viable. So likewise, in the rest of the parts where fertilizers are being imported or they are more dependent on the import, there is a limit for absorbing the increase in the prices. So like -- here, yes, the import has substantially gone down. Likewise, if it happens all across, then perhaps it may have an impact on the pricing.

And ammonia outlook, ammonia prices?

Ammonia, for last 2 quarters it is going upwards continuously and it is -- apart from fertilizer, it has more bearing with other sectors also. So ammonia right now, it also has upward trend.

And how much, sir, ammonia we do manufacture in-source, I mean source from in-house? We also buy 100% from the -- requirement from the market?

For the Sikka unit, we are importing only. For Baroda requirement, we have the captive provision.

Okay. On phosphoric acid, do you have any captive facilities?

Yes, at Baroda, we have the captive. For Sikka it is only import there.

Even for phosphoric acid also, PA?

Yes, PA, we are fully importing at Sikka, both ammonia and phosphoric acid. For Baroda, everything is captive.

So how much is the total percentage of the capacity between Sikka and Baroda?

It is -- right now, it is almost similar as far as production is concerned. It is 1 million tonne here, about 1 million tonne there. But Sikka, the capacity is much higher.

Okay. And I believe that we have also taken a stake in this TIFERT. So how that really helps us?

Yes. Part of the our PA requirement, say, annually, if will take -- it is around 2 lakh plus PA is coming through TIFERT.

Okay. So that we will may get some kind of a dividend also because TIFERT so far was not making money. So now from this year, do we expect will start generating a good amount of profit?

Right, TIFERT will take some time to generate profit because running at low capacity, so their cost of production is high. We have to wait for some time to get the benefit of dividend.

They have long capacity. So are we doing anything, I mean to increase the capacity or improving the capacity? Utilization is low or capacity is low?

No, utilization is low because the -- lot of run rate -- it is only Arab country, which has moved to democracy, all are dictators in different, like Iraq or Syria, Iran. So this is the only country which has moved to democracy. So a lot of people's expectation on job and the life standard are there. So they keep on social interest and social run rate keeps on emerging frequently. That hampers the production and logistics for this plant. So a few days before, there was a revolt and the President took the -- all the powers in his hand. For the Parliament and the Prime Minister was set, and now President is ruling the country since the new elected government is there. So all these things disrupts the production there. So they have not been able to achieve the full capacity. So that is where the cost of production is high. But with this good price of $1,150, now they should improve their financial position.

Okay. Sir, you might have answered, but I missed it. How is the spread that we are looking for caprolactam and demand and the spread for caprolactam product from a year onward?

So we expect $1,000 to continue throughout the year, capro-benzine space. It is also the present, I mean quarter 1 also, it was $1,050, and we expect $1,000 to continue.

In demand side?

Demand, because we are the only producer in the country, so there is no question of demand. Whatever we produce, it is sold.

100% capacity?

Yes, it is more than 100%. It is more than, 125% further.

And are we looking for expansion?

No, not now because these are all very costly CapEx kind of projects. And with kind of no large capacity is coming, the price become very volatile. So difficult to predict how -- what margin you can make.

The next question is from the line of Koushik Sekhar from Vermilion Advisors.

My question was regarding the current price of fertilizer and the kind of disruption in supply and also from China, the ban in export, et cetera. Are these new higher levels of fertilizer that we are seeing? Or this is just a temporary moment? And also if the prices are indeed going to remain high, what are our plans regarding -- do you have an investment in a company called Karnalyte. What would be the plans in that business? And also, last year, we had -- the government had announced that certain Athmanirbhar packages. They wanted certain things to be produced in-house within India, so what are the developments on that? Are there any opportunities for our company in that?

Yes. So fertilizer prices are high because of -- I mean accompanied by high raw material prices, so we don't see any time it coming down -- substantially down. It will remain a little high. Something may go here and there. But -- because worldwide phenomena where the demand for fertilizers have substantially increased and supplies are limited. Plus, some of the countries are experiencing COVID disruption, so supplies are down, so prices have gone up. So that is the -- we don't see anything coming down immediately. And recently, the potash prices have also increased. That was the last commodity in which price increase has started recently. So right now, Karnalyte Project is not viable because of low potash prices. But with the price rally also making there and if it is continues, then we will have the opportunity to revise the potash project there. So right now, we don't get anything in Karnalyte Project.

Sir, would it be possible to share what kind of potash prices permanent -- or rather level of potash prices at least these kind of projects would be viable? And if at all, there is opportunity to invest, what is the kind of magnitude of investment that the company would need to commit?

Potash prices right now CFR India price is $280. But -- and North America and Europe region, the prices have substantially gone up. Typically, we need some $350 [indiscernible] for making the project viable. So that is the kind of level that is required. But Karnalyte is a publicly listed, Toronto Stock Exchange listed company. So it will do its own CapEx and whatever funding requirements are there. They will be making their own efforts. So we have an offtake agreement. So we expect potash to be provided to us out of that project. So whatever will be done, will be done there in the Canada. Whatever support we will have to provide, that we will provide, but it will be a stand-alone kind of work to be done there. The potash projects are quite CapEx-heavy projects. So any project of a normal size, they come at $2 billion, that is more than INR 15,000 crores. But this is a modular project where small capacities are added as and when the viability permits. So it will start with, say, some 6,000 -- I mean 600,000 some where no CapEx will be around $600 million to $700 million. So that is the kind of requirement.

One last question. You had mentioned that India is importing less DAP in this season compared to last season. Is it that the consumption has come down? Or is that, that we are waiting for the prices to come down? And if indeed the prices don't come down, then how would the demand and supply be met within the country?

Overall -- so far, the consumption has gone down to almost 10% in the country. The -- can be -- one is that the rainfall -- overall rainfall is good, but the distribution was little erratic. And so far, we are right now into August, but still 10% of the area is not good. So on the demand side, yes, it has gone down by 10%. But normally, this season, as the backlog of the January to March, which is otherwise lull period here, so the availability has taken care. But the impact of this lesser import will be there in the next season, that is Rabi season, basically.

[Operator Instructions] The next question is from the line of Ahmed Madha from Unifi Capital.

Sir, just one question. There is increase in the realization across industrial products. So can you just explain what is driving the Melamine prices globally?

Yes. One is some of the European plants were under shutdown because of the COVID impact. So that was the reason. And as far as India is concerned the ultimate usage of melamine, that is in laminates and paints and all. So the real estate sector is growing in India. The -- if you see the population or the family numbers in India, may be 75% don't have their own house. So it is going to be a huge opportunity for -- in the real estate, which ultimately turn to the melamine as far as doors and windows and wooden things are concerned. Melamine is a must in the laminate industry. So we see a good demand for the product. And when the supply is not there, then that is increase it.

So do you expect to sustain for the next couple of quarters?

Yes, yes. At least to March '22, we expect good price to continue.

Okay, sir. And sir, there is any change in your CapEx plans other than you mentioned last time?

So as far as -- I mean the shelf of the project, if we consider, we are thinking of putting up another melamine plant of 40,000 metric tonne, which is fourth plant. And then for the Dahej land, we will be looking for good project opportunities in our niche area of chemicals. So there, we'll be taking international consultants help and of what products are falling in line with our kind of synergy. So there, further developments will take place.