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

Ladies and gentlemen, good day, and welcome to the Q4 FY '24 Earnings Conference Call of Gujarat State Fertilizers & Chemicals Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anuj Halakhandi from Anurag Services LLP. Thank you, and over to you.

Good afternoon, everyone, and welcome to the Fourth Quarter and Financial Year End Earnings Conference Call for Gujarat State Fertilizers & Chemicals Limited. The call is being hosted by Anurag Services LLP. Present from the management team are Mr. V.D. Nanavaty, Executive Director and CFO; and Mr. Sanjeev Varma, Executive Director of Fertilizer Marketing, along with other senior dignitaries. We appreciate the management for granting us the opportunity to host this call, and we can begin with the management's opening remarks, followed by a question-and-answer session. Thank you, and over to you, sir.

Thank you, Anuj. Welcome to this earnings conference call of GSFC. As you are aware of the economic and fertilizer industry situation, in particular, the government reduced the subsidiary rates for P&K fertilizers from October '23. And that trend also mostly continues in April '24 also except the APS, where some rise is given. In contrast to the reduction in subsidiary rates, input costs have actually been rising. And of course, of late, they have a little bit softened. So the industry margins were under screen during the last 6 months, which is reflected in this particular -- in this Q4 earnings of GSFC. The good thing government did was to announce subsidy rate for the FY '25 well in advance so that companies were able to plan raw material according to the cost economics of the various products and take decision how to proceed from April onwards. And that helps GSFC also in planning in advance, assuming that subsidy will continue or will be improved in H2 of '25. So we are glad to inform that we are targeting 20% rise in fertilizer volume in FY '25, based on the higher production in Sikka Unit as well as higher production from the -- for the ammonium sulfate plant, mainly out of ammonium sulfate 4 plant, which was commissioned in January '24. Subsidy received, as you are all following, government has been regular in clearing the subsidy dues. We received around INR 4,143 crores subsidy during FY '24. And outstanding is INR 1,106 crores, which has reduced from INR 1,760 crores from FY '23. Cash position, as you are aware, we are a zero debt company, and the total deposits are around INR 2,200 crores as on March end. Subsidies has been cleared, everything, for FY '23. And some portion for April '24 has also been paid. As you all know, government has good tax collection, direct and indirect. And this indirect tax election, GST, is making new records a number of times during the year. So government is equally fast in repaying the subsidy dues. Q4 particularly was a little suppressed because of the particular Red Sea crisis, and the whatever raw material inputs were ordered, they came late because they had to take a long route to avoid Red Sea route, and that disturbed the production planning in Q4. So resultantly, production sales, everything was affected and was not as per our plan or estimates during the year. However, we are taking care of the same in this current financial year. We are factoring in the long shipping routes into our procurement planning so that we plan in advance and are able to achieve the production -- higher production that we are targeting. As far as the industrial products are concerned, though we're expecting things to improve in H2, but it has not really improved, and the capro-benzene spread was lower than the last year. The details are in the -- given in the presentation uploaded on our website as well as the stock exchanges. Still, there are no immediate signs of improvement in this Industrial Products segment also. So I think there, we expect the margins to remain under pressure. Fertilizer input prices are in a range-bound manner. So phos acid, ammonia, rock phosphate are behaving in a certain manner, including natural gas. So we expect that they will be in this range during the year, and we'll be able to make the fertilizers economically. Dividend, all you have seen, we have declared 200% dividend, mainly due to lower PAT, and 5% of net worth would have led to a very high payout ratio, which is not good for any company, plus the CapEx plan that we have for the next 5 years demand that we retain the cash to meet this CapEx requirements. Salary expense has risen during the year. That was mainly because of the long-term settlement for the staff and offices done every 4 years. But it will come down in the current financial year. Because of the onetime impact will be eliminated, we expect reduction of around INR 90 crores from the FY '24 figures and going into FY '25. Otherwise, all the projects are going on as per the schedule. And as we discussed, we'll be commissioning for CapEx plans during the year. One is sulfuric acid fifth plant, then HX crystal plant, then a 15-megawatt solar installation. And last is the urea revamping to meet the energy norms as required by Government of India, so that will be commissioned by March '25. So we expect these 4 plants to start this year. And for full effect, it will be seen next year. So they'll be helping in top line and bottom line or by the way of cost cutting. And further details of the 5-year plans are already given in investor presentation, so you may go through the same. That's all from now. So we can now pick up the questions one by one. Thank you.

[Operator Instructions] We'll take our first question from the line of Nirav Jimudia from Anvil Research.

I have a few questions to ask. Sir, first is on the ammonium sulfate. So what you indicated in your opening remarks that the subsidy rates have revised from October. So what it seems like that the subsidy, which was INR 16,707 till September has been revised downwards to INR 10,309. But sir, on the cost side, if we see sulfur prices, which averaged around $156 in 3Q came down to $120. And even the ammonia prices, which averaged around $600 in 3Q, came down to around $465. But still we reported the losses in the fertilizer segment. So this is because whether our conversion cost has gone up like freight or power or any other cost increases because of which these losses were reported.

No. So at Baroda we make ammonia -- I mean, ammonia out of natural gas, so we don't buy ammonia. So natural gas prices have been stable. In fact, they have not reduced. So -- but subsidy has reduced. So that was the one major thing that was impacting the -- plus MRP also. Because of the competition we had to either reduce MRP or give large discount to the dealers because ammonium sulfate is a -- I mean, as you may be knowing, we and FACT are the only producers of. And steel-grade ammonium sulfate is quite popular in Bengal and [indiscernible] plants are there. So FACT is operating with very few products. And -- I mean, selling those volumes are kind of a survival issue for them. So they offer very good discounts, which we have to match it if we want to sell our ammonium sulfate. So all those factors also affect the margin. That is the point. And of course, Q4 is not a fertilizer season. So as you know, the season starts -- kharif season starts from April onwards. So in a dry season those who are lifting material they have a little upper hand in terms of asking for more demand and -- I mean, discount and all those kinds of things. So Q4, with, of course, long -- very long credit period because they pay when the rain starts and farmer starts paying through then. So we have a long credit period as well as -- and some discounts to be offered to get them receive our products. So all these factors come into play for reducing the margin.

Sir, 3 things here. So, one, I think the MRPs were close to INR 20,000, if I'm not wrong. So what sort of discounts do we offer, number one? Second, vis-a-vis the imported ammonia and our cost of production of ammonia through the natural gas, how much we have to sacrifice in terms of per tonne margins? And third thing is, was there any spillover of inventories of those higher subsidy returns, which we were carrying in our books or at the POS because of which those impacts in the Q4 results were reflected?

Yes. So our ED, Marketing, will clarify on this.

Yes. Good afternoon, the discount part on ammonium sulfate of MRP of INR 20,000 per metric tonne average out to around INR 2,000 per metric tonne. And it calls for higher storage charges and even also the secondary freight during the off season for placement. This was the first question which you asked. Ammonia price, I think Nanavaty sir will -- has given the answer already in some details.

I'll just make one more remark, ammonia price remains soft for a very little period of -- short period of time during the year; otherwise, it remains elevated. So comparing imported ammonia and ammonia produced from natural gas is not directly comparable. You cannot switch between the 2. And once you decide that you will use natural gas, then all the natural gas contracts are long term in nature, and there are dedicated pipelines made from the supplier's point to your factory. And then there are take-or-pay obligations. So it's a very, very tight arrangement in buying natural gas. Once you get into it, difficult to get out and definitely not possible to compare ammonia with the imported ammonia. Plus one cannot transport such huge quantity of imported ammonia for fertilizer production, so any ammonia purchase that we have through pipelines. So those kind of things are not in there. So only those who are having ports linkage can only buy imported ammonia. Those who are in the interline, they have to use natural gas or their requirements should be less; otherwise, large volume of ammonia cannot be transported through tankers.

And one question you asked for the stocks which are produced during the higher subsidy. This normal stocks of ammonia sulfate is higher than other phosphatic fertilizers because specific use, mostly during the rainy season for particular crops. So there is an impact, but this is a regular phenomenon which happens at both the sides, whenever subsidy increases, whenever subsidy decreases. So there was no abnormal as such stocks level.

So sir, given the current situation as it is as we stand now, would we making any profits at the EBITDA level for the ammonium sulfate business given the kind of situation what you explained? So one thing is that the gas price is coming down. And second part is the discounting thing, which you just explained to us. So if these 2 things are eliminated or, let's say, if these things are not there, would the ammonium sulfate be reporting the profits? Or what one should take a normal level of EBITDA per metric tonne given the current situation?

Yes, yes. So as we -- as everybody knows, there are hardly any rainfalls during January, March of any year and the season starts from April onwards. So definitely in these full season for the fertilizer on the back of good monsoon that is expected, we'll have a better position from now onwards, say, June to say up to November, December. So only during January, March, we are stuck up in this particular situation where production takes place all the time, 365 days x 24 hours, but consumption is limited to the season. And in between, as you say, subsidy changes, that inventory effect also takes place, that is also definite.

Perfect. So, sir, INR 2,000 or INR 2,500 is a fair assumption to take at the...

Yes. Yes, yes. You can take INR 2,500.

Got it. Sir, second question is on the urea plant. I think based on the presentation, what can we observe is that we operated our plant at the optimum levels. So...

Correct. Correct.

And as per the NUP policy of 2015, I think we need to bring down our energy consumption because then we were needed to paying some penalties also from the government. I think that was -- and policy document mentions that. So 2 things here. One, is our fixed cost higher than what is compensated by the government? What is our actual energy consumption in Gcal per metric tonne and how much did government compensate us? And once we complete this project, I think the savings would be close to 0.75 Gcal per metric tonne. So how much of our profitability per metric tonne could improve based on the energy consumption exercise which we are going to complete by the end of this financial year?

So right now, our actual consumption is close to 6.4 Gcal to 6.5 Gcal, It is mandated to be brought down to 6.2 Gcal. And so companies have been allowed to do it by December '24 or March '25. So that we will be bringing. But when we achieve that we will be reaching around 5.8 Gcal instead of 6.2. So there will be some savings once we achieve the new energy norms. So -- but you know India has committed in the Paris Agreement about the 2030 target, 2070 targets on energy reduction and 1.5 C temperature and all these things. So government is constant exercise of pushing the energy reduction for urea plants. So while we will be achieving or more than achieving the present mandate of 6.2 Gcal per tonne, by the time we do it in May '25, from April '25, they will come out with new norms, reduced norms. So this is an ever-going cycle, and hardly, you can think of not making any money in urea. So that is the situation.

But sir, at the normalized level, what sort of per tonne margins we should take? Because currently, we may be losing on the energy part, but there is some...

Yes. Some fixed cost, you said, that is still more interesting. That now government is calculating fixed cost at the base of 2023. So they have not revised the fixed cost base since last 2002-2003. Only, in 2014, they gave one ad hoc rise of INR 3.50 per tonne and further INR 1.50 for more than 30 years old plant. So for us, we got INR 500 rise in fixed cost from 2014 onwards, but that is an ad hoc exercise done. So fixed cost, everybody is losing heavily because you can imagine 2002-'03 and 2023-'24, so 20 years old data they are using for calculating fixed costs. So if you see overall, there is hardly any urea plant is making any profit. Only when there are other products, the urea being the most popular fertilizer, people are able to sell other products when they have urea in their basket. So that is the only purpose. That is all about the urea.

Sir, just to clarify, our fixed cost under absorption is close to INR 1,500 a tonne? Or is it even...

No, no. Government gives INR 3,600 per tonne, ours is more than double, more than INR 7,000, INR 8,000.

Okay. Okay. And on the energy side, we may be losing close to, what, INR 800, INR 1000 a tonne?

Yes, it is a small loss, really -- I mean, the penalty because of not meeting 6.2. Some few crores we lose every year. But now converting -- I mean, meeting those norms requires INR 450 crores of CapEx, that is the mix side of it. But since government is pushing that you have to meet this norm, so whether it is a viable proposition or not, you have to meet it; otherwise, you lose...

That also allows you to recoup also over a period of 3, 4 years.

No, they don't allow. The mop off all the gains. Only if you go below their norms, then there is some savings, which is allowed as per their calculation. So like suppose if they continue 6.2 after April '25, and we keep on producing at 5.8, then that difference will be compensated to us in -- based on the matter they adopt for compensating the savings. Otherwise, all the reduction in energy norms are -- all these savings are taken away by the government. There is no -- nothing is allowed to be kept with the fertilizer company.

We'll take our next question from the line of Saket Kapoor from Kapoor & Company.

Sir, firstly, when you spoke about industrial product margins to remain in this range, so for Q4, I think so, we posted the profit for -- under the Industrial Products segment, and the PBT margin is also in excess of 10%. So in this -- in the current likelihood of what March exit was, can we keep this as a base for now? Or what's the trend post March exit for the Industrial Products segment?

No. If you look at the full-year Industrial Products results for our future forecast, March was kind of aberration you can say. But what we saw for the full year is the real picture.

Okay. So post March, again, the margins have taken a hit. That is what you are alluding to.

This Industrial -- because you know GSFC is an integrated complex, so this Industrial Products and Fertilizers are really post segments or post bifurcation kind of thing. As you know, ammonium sulfate is produced from caprolactam plant. So whether I call that plant as caprolactam plant or fertilizer plant is a dilemma. But we are forced to recognize between either of the 2, maybe partly here, partly there. So in -- because this is a unique situation for GSFC and most of the fertilizer companies in this country don't have so much of industrial products in their portfolio with this kind of integration of plants, so when this NDS notification came for showing the segment result as per their method of working also. So we have to be -- remain in tandem with overall scenario that per Companies Act per SEBI, there is one nature of preferring segment results. Now you're saying I also want segment results presented in my way approved by the directors. So all these things, which are part of the costing principles, are now being brought into accounting perspective. So -- and this has to be audited by the auditors approved by the directors. So -- and this notification came in January. So its effect is seen in this Q4 result between Industrial Products and Fertilizers segment results. So really, chemical per se have not performed so good in Q4 and going down in Q1 next year, it is not like that. It is consistently not showing good margins, and that picture is still not improved.

Right. So we should not look at this quarterly number. This is what the explanation we have given. It is all because of the integration that we have between the fertilizer and the chemicals.

Correct. Correct.

Sir, this -- and then you explained that the INR 90 crore impact is one-off, and then, we will be again back to the -- to our number of INR 175 crores -- INR 170 crore for the employee cost from the next quarter.

1 minute. INR 170 crores, let me check. No, it will be more than INR 170 crores. So right now, it says INR 32 crores, so you remove INR 90 crores from them. So it's around INR 750 crores.

Okay. INR 750 crores divided 4, INR 185 crores, INR 190 crores should be the number on a quarterly basis...

Correct.

Sir, and the other expenses part has seen an escalation because of the freight cost only from the Red Sea on account -- rising on account of Red Sea issues?

No, some marketing costs because of higher volume, around 6% higher volume fertilizer sale has been done. So some parties because of that plus this PM Kisan Samriddhi Kendras were given to us for upgradation and modernization. So PMKSK upgradation costs were to be borne by the fertilizer companies plus [indiscernible] scheme. So [indiscernible] and all related expenditures. So all these things increase the marketing cost. Plus we had some interim stores and spares because we changed the catalyst over after a few years. So when the catalysts are changed, the number goes up for their repairment and all. And some rise in administrative cost was there because of the higher CSR spending, which is mandated as 2% of last 3 years profit. So last 3 years profit was higher, so we had a higher CSR expenditure. So that also led to rise in the -- this common expenditure, other expenditure.

Sir, can you quantify a number, the one-off number would be? Or is it difficult?

No, CSR, initially, it will be a little -- I mean, almost same, not little less. Volumes, we are going to do more, say, 20%. So marketing-related packing cost, freight cost is going to be higher. PMKSK is also a continuous program. Only store spares we can think of some reduction, maybe say, INR 5 crores to INR 10 crores when catalysts are not changed every year. So some relief may be there. But since you know our plants are old, 40, 50 years old plants, so -- and to run them at above 100%, we have to spend over repair maintenance, store spares adequately. And no shortcuts can be taken there.

Right. So lastly, sir, the only positive that we can factor in for this year is the 20% volume growth in the Fertilizers segment that you are setting. And that is what the only solace we have. Other than that, there are so many moving parts that it is very hard for investors to factor in what kind of earnings can be projected for this year. This understand is correct, sir, I think.

Plus some rise in ammonium sulfate subsidy has been made, some INR 1,500 per tonne from April '24, so that will be little bit helpful. And post election results, if they look at this industry's pain points and give some relief in subsidy calibrated to the input cost, then that will be further helping to improve the margin.

Right, sir. Other than that, sir, when I am doing what the sum and substance is that the moving parts are -- there are various moving parts, so very hard to factoring in how to factor what volume -- numbers are. Very difficult for investors, sir. Tough time, sir.

Yes, yes. There are no large things that can be categorized and put numbers to it. So we are taking so many steps. So cumulatively, they will be helping, but to say that this step will help like this, difficult to say. But broadly, to the subdued performance of industry products, we'll be going for the niche product value addition and kind of commodity type, like caprolactam has become a commodity now. So we'll be producing more HX crystal, which is a specialized product and substitute API in the pharma industry from China. So that will be in this product substituting imports and that is a good value addition. And plus some raw material we will be importing instead of making ourselves. So there also some margin improvement is expected. So like this we keep on changing product mix to achieve higher realization and better margin. So -- but as I said, there is nothing one-off kind of thing that can be pinpointed. So -- but our efforts are on, that's all we can say.

[Foreign Language] What are the additional revenue we will be achieving? Additionally, it will go to the top line from the commissioning of the CapEx, which we have outlined.

Correct. Correct. So directly, like solar plants will be helping in reducing the power cost, no topline assets contribution. Similarly, urea to revamp will be meeting the statutory requirement. There is no topline effect on the same. This sulfuric acid for plant will be -- also be captively consumption of sulfuric acid and steam generation that will help to reduce steam made from the natural gas, so that will be helping that. Only HX crystal projects will be directly contributing to the topline part of the year. Full effect will be in only next year. So I think around some INR 100 crores topline effect is to be seen on a full-year basis from this plant.

We'll take a next question from the line of Vipul Shah from Sumangal Investments.