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

Ladies and gentlemen, good day, and welcome to Gujarat State Fertilizers & Chemicals Limited Q2 FY '22 Earnings 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. Harmish Desai from Batlivala & Karani Securities India Private Limited. Thank you, and over to you, sir.

Good afternoon, and welcome to the second quarter and half yearly earnings call of Gujarat State Fertilizers & Chemicals Limited, hosted by Batlivala & Karani Securities. From the management we have Mr. VD Nanavaty, Executive Director, Finance and CFO; Mr. Vishvesh Vachhrajani, Company Secretary. I would like to thank the management for giving us the opportunity to host this call. We will begin the call by opening remarks from Mr. Nanavaty, post which we will have a Q&A session. Thank you, and over to you, sir.

Yes. Good afternoon, everybody. Thank you for joining this GSFC Q2 post results call. I hope you have seen the numbers. And as usual, our production and sales volumes are uploaded on our website, so you can see if you have not already seen them. So as you know, this quarter and this year, more or less is being depending only on the industrial product performance. All the chemicals in the country are doing very well. So GSFC is also one of them. So Chemical segment has posted very good top line and bottom line. On half yearly basis, you might have noticed that our profit before tax for H1 has surpassed the full year PBT of last year. So what we did last year, we have done it in 6 months period. So going forward, we look forward to still bright numbers. As far as Fertilizer segment is concerned, due to high input costs, starting from natural gas, sulfur, ammonia, phosphoric acid, rock phosphate, so all the input costs are on a higher side. So that restricted our production, particularly in the Sikka unit. So we only manufacture when it was economically viable. Otherwise -- and we're not running continuously. The Government of India also looking to the situation, increase the subsidy rate on P&K fertilizers twice during the year, apart from substantial rise in the May '21. But still, we see a cycle of pricing subsidy rising input cost is continuing, and it is very difficult to take coal on production or import of the fertilizers. As you may be noting that the processes side, which was $1,160 has been increased to $1,330 from 1 October. So again, it nullifies the effect of higher subsidies. Some shortages in the country has also been noticed particularly in the Rabi season. But government is taking top of the situation and monitoring it closely, so that must get the fertilizers at reasonable price and in required quantities. So we see that immediately there is not going to be respite from the higher input costs in March end. So till March, fertilizer volumes are going to be remain affected. And we feel that something like 20% volume decrease in this year as compared to last year may happen on a full year basis. However, since GSFC has got both the segments and we have seen this balancing effect in the past also when 1 segment is not doing good, other segments takes care of the revenue and profit. So accordingly, just for us if we're doing very good. We have started Melamine 1 plant, which was closed almost for last 2 years based on the very good price realization. Otherwise, if energy cost is high, so had to be kept on idle mode for a 2 years period. Apart from the good industrial products working, there was substantial savings in interest cost because of the good working capital cushion available based on coal subsidy block has been paid off by government on a onetime basis. And this year also government has been quite regular in payment of subsidy, so that helped in managing the working capital with the least borrowing. On the contrary we have more than INR 1,000 crores of fixed deposits with GSFC interest advantage. One good thing that has happened in Fertilizer segment is that, because of the lower volume or expenses of freight, storage, et cetera, have substantially reduced. And even after the leverage of looking at all those expenses closely and bringing some efficiencies there, so which will have in future also. As you might have noticed that we have the anti-dumping duty on caprolactam has been recommended by the Commerce Ministry and it has gone to Finance Ministry for final evaluation and then modification of the anti-dumping duty coming from various Asian and European countries. So that will help in improving the top line, bottom line for caprolactam business. For that, as we said last time, are on ammonium sulfate 4 projects, sulfuric acid fifth plant, nylon 6 compounding plants, solar power project of 15 megawatts and GDR e-banking within the energy norms of Government of India. So these projects are under implementation and company is also considering various projects under -- considered in past like M&A projects in Dahej processed sulfuric acid project in Sikka and the company is also looking at expanding in Melamine as well as coming out with various projects in the Dahej land, it has already acquired in the past. So the company is on the growth trajectory and we will see the results in the way to come. With this note, I now conclude my short presentation, and welcome you to the question-and-answer session. Thanks.

[Operator Instructions] The first question is from the line of Saket Kapoor from Kapoor & Company.

Sir, if you look at the Fertilizer segment, for the first quarter, our sales volume was 4.34 lakhs metric tonne and for the second quarter, it was 6.06 lakhs metric tonne. So more than 1 million we have done for the first half. And as you are articulating that we will be witnessing some reduction going forward. So what should be our next half target taking into account the inflationary trends?

Yes, good afternoon. This is S P Yadav. This situation has already been explained by our CFO, Mr. Nanavaty. But during H1, we are expecting 8 lakh to 9 lakh metric tonne more, and our closing volume will be more than 2 million metric tonne.

Sir, come again. I just missed -- 9 lakhs for the next second half?

Yes, second half. So it will be close to 2 million metric tonnes by March end.

And what was it for March 31, '21?

Pardon?

What was our last year volume, sir?

Last year it was 26.38 lakh metric tonnes.

Sir, keeping into fact the price trend increase in the raw material, there would not be any dent on the bottom line. If we produce less and sell less, if you make economies better for us as a company because there is an improved realization from the industrial products. So it makes good sense for us that to produce and sell less of fertilizer this year?

Yes. So because margins are suppressed in fertilizer and sometimes because to give fertilizer to the par market competitive rate is very difficult to meet all the high input cost and still maintain MRP even if there is a higher subsidy. So this year, it seems to be better than we have some reasonable volume if it was going full fledge unlike earlier years. So -- but whatever is loss, as you rightly pointed out, it will be build up at the Industrial Products segment.

Sir, with this volume drop, this will not lead to any problem with the farmers because they're dependent on us or whether there is sufficient stock, how would this math work sir, when we will be telling that how will this gap be filled up? Because there should be a requirement of fertilizer going forward in the same proportion as has been the last year case. So whether last year volumes are abnormal or this year reduction will flow through easily or because there is no chance of imports also since fertilizer availability globally has become an issue if our understanding on what we read from article is correct.

No. With the -- I mean, with the international price, fertilizer is available in whatever quantity it is required. There is no problem. Only thing is price is high. So -- now in this kind of a situation, 5, 6 years once in a while, it comes. So all the backlog inventory and general inventory gets consumed which used to be always -- pipeline was always filled up with new supplies from the company. So that is not being done. So whatever is there in the pipeline, everything is getting consumed. Of course there will be some shortage, but some demand may get contacted accordingly.

Sir, if you take the Industrial Products partners, as you told that there are things brighter even going forward. Sir, can you give some more color on what have been the exit prices for the key products of caprolactam, melamine, the nylon 6 and methanol, post September quarter and what have been the exit prices for the month of October for these major products?

Yes. So caprolactam prices are more or less stable, let's say, $2,050. But melamine price is increasing. So now it is more than $3,000. So it's almost double than say last October prices. So -- after Diwali there may be some reduction. But as of now, for the full month of October, it was quite high. And nylon 6 prices are also high at INR 2,05,000 which used to be a [ 175 ] or something like that. So all the prices are on upside and compared to last year, in Q3, they are much, much on higher side.

And for the methanol sir, this quarter, methanol contribution was also...

Yes, methanol prices also have increased from INR 20, INR 29 per kg to some INR 40, INR 45 per kg. But with gas prices rising substantially more than rising methanol price, we have shut down our methanol plant in the month of September. So because of mismatch in gas price and methanol price. So whenever again, gas price performs after this winter is over, we will again start in methanol price.

So for this quarter, there will be no contribution from the methanol segment?

So all that is being taken care by Melamine 1 plant, which was stopped since last 2 years and higher melamine and other product prices. So that will get completely from -- and it will be maintained.

Okay. Can you give me exit price for the September -- September average for caprolactam, melamine and this nylon 6?

Okay. I will have to see and then need to...

No, no, sir. During the call, you can give more try...

No, I'll have to see what was the price.

Okay, sir. Now coming to the inflationary trend, sir, so that these industrial product prices which have moved up -- the factors that have contributed to it, what are the factors that are going to wind down going forward, whether any new capacities are going to come up in globally? Or how is the consumer going to get affected with these high prices? So are these profitability number sustainable for the IT segment going forward? Or what factors are supporting them if you could throw some light on this?

Kind of structural problem when all problems get piled up all of a sudden at one point of time and this kind of situation arises like logistic constraints and shipping constraints and China production coming down because of environment and power shortage issue, and then Indian demand going up suddenly post-COVID relaxation. So you cannot have any capacities in the short term of, say, 3-month or 6-month period. So people are ready to pay whatever is the price because consumers are also ready to pay higher price for whatever, whether they buy a car or whether they buy a house or whether they buy a textile, they're ready to pay higher price. So -- I mean, few users also find it okay to pay better price to us. So this is a situation, but it will -- caprolactam is okay because the crude will not come down. So it will -- so at least caprolactam, we see the $1,000 -- somewhat a little $1,000 spread as we see it will be maintained till March end. Melamine will come down little bit because it is very much [ equivalent ]. So this is not sustainable over a long period of time. But still nothing will happen all at a sudden. Everything will happen gradually. So till March we will have a good profit in Industrial Products.

On top of what we reported for second quarter, I mean there is a scope of margin improvement even resources going forward on a [ gain ] basis, sir.

Our spot prices will be better than second quarter.

On the Industrial -- IP?

IP side. Yes, yes.

Right. So we have seen this increase in receivables also from the government subsidy head from INR 509 crores to INR 913 crores. So how is this going to impact liquidity portion? Or is this temporary only? And going forward, this would get liquidated in due course of time?

Yes. So as I said, the subsidy for every product has increased substantially, if you are knowing that for DAP. Last year, it was INR 10,000 per tonne. Now it is INR 33,000. So even if my 1 -- subsidy for 1 tonne is pending, last year I would have shown INR 10,000 outstanding. This time I will show INR 33,000 outstanding. So it is just -- numbers have increased all the numbers, and that is why shows off like this. But as I said, government is paying subsidy regularly. For urea, it is already paid, subsidy up to 15 October. So the subsidy outstanding of 15 days is pending. And P&K fertilizer, they have paid up to August to September, October of any spending. But because of the high numbers in every P&K product, even little bit subsidy blockage shows a huge increase compared to market.

Right, sir. Sir, for us, the main cause of worry is the power and fuel, the gas prices that are going to affect the business in -- having a more debt, what -- it is not a quick fix for any organization. So what are you seeing in terms of the power and fuel mix that affecting the margins going forward? And our investment in the renewable segments are currently -- what is our current solar internal capacity and further what are we investing? And also, sir, update on the new products under the Atmanirbhar Bharat part, I think to some soluble -- water soluble fertilizers you were talking about in some other products of calcium on that base? And what is the update on the same, sir?

So power fuel expenditure is higher mainly because of the gas price, because a lot of power gets generated through natural gas, instead of coal or in the form of energy. So that is why it is on higher side. So till the winter is over, the gas price is going to remain higher. So this will not come down immediately. But as you know, we have wind power capacity of 152 megawatts and already some 11 megawatts of solar power and 15-megawatt solar power is under installation that will be over in June '22. So we'll have a substantial renewable source of power, it should help in getting your power cost down. But power and fuels are together in this presentation. So as such our power cost is not high, but since fuel on the natural gas is there. That is why the overall cost seems to be on the higher side. But it should come down after February 22.

Yes. Right, sir. And also in the tax provision part lastly sir, why have we made the provisions such a higher -- on the higher base money. So on a profit of INR 340 crores, it is INR 104 crores. So what is the net outgo on tax check on the profits?

No, what happens, tax rate is dissembling on the yearly estimation. So quarter 1 profit was not so high. So we had estimated conservative yearly profit and accordingly tax outgo, but we did good profit of quarter 2. The yearly estimation is on higher side. So -- but it will come down in Q3 and Q4. So it is a onetime kind of impact of lower estimation of profit for the whole year. And with higher profit, what happens that whatever exemption, income tax exemption company has, that percentage comes down with higher profits in hand. So if you have say INR 10 income tax exemption and if you are making profit of INR 100, then your exemption is 10%. But if you make INR 200 profit then your exemption gets limited to 5%. So then when we make higher profit, you have a higher tax outgo because your tax exemptions are not so high in that scenario. So that kind of situation arises in our windmill and other API exemption with higher profit that in fact gets a little value care. So -- but again to some 35% tax rate, including surcharge and all, we will have a effective tax rate of around 29%.

All the best. So we can conclude that the Industrial Products segment is going to contribute in a much better proportion going forward, and that there will be some dent in the fertilizer margins going forward. Is this a fair assumption, sir? Is this a fair assumption, sir?

Correct, correct. Fair assumption.

[Operator Instructions] The next question is from the line of Deepak Chitroda from PhillipCapital.

Sir, I have 2 questions. First is especially in the subsidy side, how do you see subsidy situation panning out towards end of March? Because as I understand, I think government has allocated roughly around INR 80,000 crores to the industry. And that pace historically, if you see that large towards end of December or so. So how do you see situation coming up in the March in this year?

So there may be some difficulty of budgetary allocation in February, March. But unlike earlier years where government was getting into trouble because of the shorter tax collection and shorter income compared to their expenditures. This year they have received a very good tax collection in form of GST or direct taxes. And you must be reading their fiscal deficits is the lowest as on September end, may be historically low. So -- with all this good better income. So government never intended to delay subsidy, but they have this restriction. So they were not going beyond certain fiscal deficits. But with good income in hand, I think this time we should not be in a much trouble. And we are already in November. And as I said, for urea, they have paid a subsidy up to 15 October, which has never happened in the past. And for P&K, October and some imported P&K, they have paid up to first week of September. So this indicates that this year may not be so difficult like earlier year.

Okay. Okay. And sir, second question is about the availability of RM, as you mentioned in the opening remarks, especially if I talk about in case of potash, because I think that will be a key note to have a production for NPK going forward because I think the prices so far we haven't seen an increase because of the contract price. So do you think that producers will be restricted to also produce some of the NPK grades like 1,026 or 1,232 going forward?

Yes. Right now, government focuses on DAP because that is a popular product. And potash, as you know, the official price remains at $280, but nobody gets potash at $280, it is already more than $400 quoted informally. But however, since it is not official price, the government has also not increased subsidy on potash. So possible that some restriction on NPK production may come in. Of course government has increased subsidy by INR 2,000 for 3 NPK grades. So -- to broadly because for fertilizer prices also increased, ammonia price also have increased. So to broadly compensate 1,026, 1,232 and 2,020 [ 013] these 2 grades have been given additional subsidy of INR 2,000 from 1 October. So there will be some relief to the NPK manufacturer. But right now, government encourages DAP production and distribution.

Okay. And sir, in that sense, do you expect that probably you might get some other subsidy package or MRP increases possible going forward considering the recent spike in RM cost or overall finished products prices?

No. MRP, the government is different, I mean that MRP should bring in range bound. So farmer should not be burdened with higher MRP because of this input cost. So government has been insisting companies to limit their MRP -- rise in MRP. And to cover their defect, they have increased the subsidy, I would say 3x during this year. One is, of course, in May as compared to last year, then again in July and again from 1 October. So government is trying to see that there is no shortage in the country because companies would find it loss-making to make fertilizer, for import fertilizer. And at the same time farmer should also not be burdened with all this rising input cost. So government has been quite lenient in increasing the subsidy at the right time. So I think this is the situation.

Yes. So basically, going forward, it is very difficult for the government to give any additional MRP or subsidy going forward, probably pickup in [indiscernible] side. So to some extent, I think companies, they have to observe to some extent the high cost of production for NPK, including DAP.

Yes. Some compromise will have to be made in these 3 stakeholders in play. So sometimes it is better to run the plants instead of fitting it down, so maybe with some losses. So companies are taking their [ coin ] details for us in this regard.

Sure, sure. And in that sense, sir, what is the situation for our TIFERT joint venture? Are we getting any quantities of this phosphoric acid now from them?

Yes, we are regularly getting it from them because they are operating at some 40%, 50% capacity. So we and Coromandel both are getting regular shipments from them. And as there is no problem in processing supply, only problem is price. So if you are ready to pay the price, supply is not a constraint.

Because till last quarter you were saying that there were some unrest earlier in Tunisia, and were not able to get proper quantities. So I think that situation has been improved as you rightly pointed out.

Some improvement is there. Still -- it is not still our expectation because plants would run at 100% capacity. So still it is at half. But now with good PA prices, they also -- they intended to run it at higher capacity because price of $1,330. They can make the huge money.

Sure. And sir, in that sense then, are we adopting any strategies like just -- and also hearing 1 of the large producers calls, they were basically trying to diversify it into various products like SFP or other -- water soluble or micronutrients and all. So are we planning to do that probably in the H2O maybe that can be our long-term strategy going forward?

We are already in WSF and there of course we don't want to go in SFP. But WSF and other organic and micro fertilizers, we are already there. And we have good market share and we are expanding varieties of product that we manufacture. So that is always there and it is giving full margin also because the prices there are not controlled and farmer knows the value of this WSF and other fertilizers. So we are already there. So -- but this is a kind of a short-term issue. So once that is over then things will be back to normal.

So in that sense also, I just want to ask you then what is the status of our expansion plan, which we are talking about in terms of increasing the -- basically setting the 6 plant at Sikka. Is there any update in that sector?

Yes. So because of the COVID and all you know large CapEx naturally, anybody who would like to be cautioned on spending in this COVID situation. So there's a lot of uncertainty about everything was there. So now that is over. So now again we are looking at setting up this plant, maybe in some modular way. So earlier we used to go for 1,200 metric tonnes per day processing capacity. So we may go for 600x2 kind of things. So first 600 and then once it is stabilized we may again go looking to demand in all go for another 600 metric tonnes plant at Sikka. So company is definitely reviewing this and once some decision is made, we will be announcing it suitably. But we are not going back, that is for sure. Because with this kind of price you can recover all your CapEx in maybe 2 to 3 years' time. And India is in need of a process on continuous basis. So while the rock is pre available, I would say, or subsidies quite curtail products. So in this situation, it is good that somebody pushed up this CA plant for meeting its production.

[Operator Instructions] The next question is from the line of Mr. Harmish Desai.

Sir, can you give us an update on the CapEx for the first half and the CapEx for the entire financial year?

Yes. So as I said, we are doing right now implementing ammonium sulfate that will be fourth plant. We already have 3 plants. So this will be an INR 80 crore CapEx, and it will produce 400 tonnes per day of ammonium sulfate, which right now, GSFC is only producing. FACT and DGTR they are also producing, but sometimes they go off and on. So we are the regular producer of this product. And then we have another CapEx of sulfuric acid this will be our fifth plant. So it will be around INR 180 crores CapEx and will produce 600 metric tonnes per day of sulfuric acid. This will be used captively for fertilizer production. Then we have nylon 6 compounding for this INR 35 crores CapEx. And it will produce 848 tonnes of compounding nylon 6 production on a daily basis. Then we are putting up 15-megawatt solar power plant at CapEx of INR 84 crores. So that will commence in June '22. And then our urea plants are very old, [ '67 ] vintage. So we are revamping them to meet the dilution that government is focusing on. So that will be INR 300 crores CapEx. And this is being done in the live fan, so it is slow between coming quarter 4 of '23, '24 with the commission. So these are the things which are going on. Almost -- maybe half of the CapEx will be spent in this year, and maybe half will be spent in the next year so something around INR 100 crores, INR 150 crores will be this year CapEx and similarly next year CapEx. And [Technical Difficulty]

Sorry to interrupt you, but your voice is breaking.

Yes. So another plan at boardroom level phosphoric, sulfuric acid et cetera, that will be 600 metric tonnes phosporic and 1,800 metric tonnes sulfuric acid plant that will be at around INR 1,500 crores CapEx. And we have another plan to set up MMA that is Methyl Methacrylate and that will also be around 1,500 metric tonnes. But these are all under discussion stage at the board level. So as and when it is finalized, we will announce in -- from commitment of the company to go ahead. And we have a large piece of land at Dahej, where we for future also we are hired a consultant to suggest new products, so that also as and when we progress we will be announcing.

Understood, sir. And so the situation of the RM price is increasing. So what do you see -- what do you think of the situation going ahead the second half of the financial year, do you -- on the fertilizer side, do you see the situation to continue? And what is your expectation of this thing, sir?

Yes, I think majority of our raw materials are related to crude. So benzene, sulfur, even natural gas is associated follows of the crude extraction. So at least as far as crude is from around $80, $85, these prices will remain at least till March '22. But natural gas is also related to this winter season where western countries consume a lot of gas for heating purpose. So until February that gas price will also remain on higher side. And like phosphate ammonia news worldwide, and these plants are getting good price in Europe and Brazil. So earlier what is to happen that in India because of volume, they used to sell at a little less price, but that is not the situation now. So we don't see much reduction in March '22, something here and there will happen, but nothing drastic reduction is going to happen.

So sir, do we have any plans for increasing our prices? Any action on that? And have we taken any price hike in this particular quarter?

Yes. So our industrial products are based on the import parity price. So as and when international price rise, our realization automatically rises accordingly. And for fertilizer, government is increasing the subsidy to that the farmer gets the price and the fertilizer at the same old rate. So government is increasing subsidy to compensate for the input cost side. So -- and whenever there is some products which is economically not viable, we are not producing. So we don't see much reduction in margin.

Right. And sir, the run rate that we have seen in the first half of the financial year on the Chemicals segment, do you see this run rate to continue for the second half for the financial year as well?

Yes. At least new run rate will be there for H2, in totality. As I said, Q3 is still better, but Q4 may not be so good. So on an overall basis, what we saw in Q1 in chemicals is sustainable for H2.

Okay. Okay. And sir, our expectations from the upcoming Rabi season?

No. Demand is good because of late rain and reservoirs in the country are full. So demand fertilizer is there and accordingly sowing is also good. But on supply side, there are some constraints. So demand and supply will have to meet at some point of time. Some reduction in demand will have to not be there, otherwise, supply constraint is already there.

Okay. Okay. Understood. Okay. And sir, on this news that we are hearing now about the fertilizer shortage and the people cleanouts getting into a lot of trouble because of that. So how close is the situation? Is there really that big concern on this fertilizer shortage side? And how as a company are we countering it?

Yes. In fact, there are major 2 reasons of the fertilizer process. Government has already advised all the companies not to increase the MRP of diammonium phosphate. So now diammonium phosphate is just like urea. In phosphatic segment, it is the cheapest product as on date. So farmer is asking only for DAP. On the other hand, due to not announcing subsidy on time, fertilizer companies, they were not in a position to import sufficient stock or produce. So this is the major reason. I can tell you, a, [ 5.6 ] in country, it is 15% lower than last year from August to October. And the cost sales is only 6% less than last year. If we see the fertilizer production, it is only 1% lower. And if we see the stock, the stock is really 60% to minus as compared to last year for the period April to October. So this is a major reason everywhere even try there for DAP, not for any other grades in phosphatic sector. And as far as ours is concerned, we are obeying the instruction of our government. We are manufacturing DAP. And of course, in the past, we have also manufactured some of the other grades like NPK 12, and NPK 10.

[Operator Instructions] As there are no further questions, I will now hand the conference over to the management for closing comments.

Yes. So thank you, everybody, and happy Diwali to all. And as I tell on all post con call, that keep trade in GSFC, we are in the growth trajectory, but being maybe a little slower. But definitely, we invest only in the high promising products and high RWA products that gives maximum return in maximum 5 years. We don't go for anything that takes a long time to pay back nor do we have any person or indication to do certain things in any name. So we only work professionally and keep working in that passion only. So we hope we would maintain the trust in GSFC and thank you for the patient listening.

Thank you very much. On behalf of Batlivala & Karani Securities India Private Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.