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

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

Good afternoon, everyone, and welcome to the first quarter earnings conference call for Gujarat State Fertilizers & Chemicals Limited. The call is hosted by Anurag Services LLP. Present from the management team are Mr. S.K. Bajpai, Senior Vice President, Finance and CFO; and Mr. S.V. Varma, Executive Director Agribusiness and HR, along with other senior dignitaries. We appreciate the management for granting us the opportunity to host this call. Let's begin with the management's opening remarks followed by a question-and-answer session. Thank you, and over to you, sir.

Okay. So good afternoon to all, and welcome to the earnings conference call of GSFC for quarter 1 2024-'25. I hope that you have reviewed our results and the other presentations are loaded on our website and the stock exchanges. As you know, the company experienced a significant rebound from the subdued results of previous quarter, hosting increase in PBT from INR 23 crores to INR 118 crores and taking PAT from INR 21 crore to INR 93 crore in the current quarter. This increase is attributed to a lowest fertilizer volume of 4.4 lakh -- 4.46 lakh metric tons in current quarter and the optimization of product mix at Sikka Unit in accordance with cost economics of raw material prices and subsidiary rates. During the quarter, we partially switched from DAP to APS (sic) [ ASP ] and NPK production at our Sikka Unit. In current quarter, we have achieved the second highest sales in last 15 years, first quarter, that is INR 2,144 crore. Fertilizer sales increased by 7% in value terms on Y-o-Y basis and fertilizer sales volume witnessed growth of 30%, though the margins were under pressure. We anticipate that this trend will persist in future also. The acceleration of Kharif cultivation has been facilitated by the favorable rainfall that is being experienced this year. Improved seasonal prospects are expected to maintain the robust demand for fertilizers during forthcoming quarters. You may be aware that the government reduced the subsidy outlay for fertilizers approximately 13% in the current year budget against the previous fiscal. Our government has been very prompt in releasing the subsidy. For P&K fertilizers as well as urea, we have received subsidy in the first week of July. The same is reflected in our cash flow, as you know that we are a debt-free company with a strong balance sheet and healthy liquidity. Subsidiary rates for P&K fertilizers are significantly reduced during October 2023. The trend has persisted for DAP and AS while APS and NPK have experienced a modest increase. Contrary to this, the prices of basic materials have not reduced in the same proportion. While ammonia prices have decreased, [indiscernible] prices remained [indiscernible] per metric ton. [indiscernible] benzene and [indiscernible] prices have actually increased on Y-O-Y and quarter-over-quarter basis. The company plans to follow production with mix DAP and nonDAP products at Sikka Unit to optimize costs and maximize sales. Although caprolactam and nylon 6 were subjected to annual shutdown in quarter 1 current financial year, [ invested ] product also remained consistent. In IP segment, domestic prices remained subdued due to dumping of cheap Chinese caprolactam, melamine and basic nylon 6. Capro-benzene spread on Y-o-Y basis reduced from $730 per metric ton to $582 per metric ton. Nevertheless, we anticipate that overall Industrial Products turnover is likely to go as compared to the current quarter. Project details are also uploaded on our website. All projects are progressing well as per the schedule [ exception of delay ] in HX Crystal Project and Urea Revamping Project. However, we will be [ commencing ] this HX Crystal, Sulphuric Acid Project and Urea Revamping Project up to the end of this financial year. Full year impact on turnover margins will be seen in the next financial year. So with these opening remarks, we can now start the question-and-answer session, please.

[Operator Instructions] The first question is from the line of Nirav from Anvil Research.

I have a few questions. So first is, in the last interaction in the last con call, you have mentioned that for the ammonium sulfate fertilizer, we have to offer some discounts. And that was because of the leaner season. And on the top of it, from [indiscernible] onward, government has also increased the subsidies. So if can help us explain whether those discounts of INR 2,000 per tonne, which we have offered last quarter was withdrawn and there was a normalized pricing and over and above that, that INR 15 increase in the subsidy would have helped us in terms of the improved performance? And along with it, if you can also help us explain that was the improved performance because of some benefits coming to us in terms of the raw materials, especially the natural gas was converting to ammonia?

Yes. So as far as ammonium sulfate is concerned, the increase in subsidies [indiscernible] is very minimal. I mean this is on the -- I think there is no increase in -- only in the NPK and APS, there is increase in subsidy in [ April ]. So there is no increase in the ammonium sulfate. And as you know, the DAP and other NPK [indiscernible] fertilizer is not having that favorable margin and contribution. So most of the fertilizer companies are [ exporting ] for the ammonium sulfate. Only in India, we have only 2 producers, GSFC and [indiscernible], but they have a certain [indiscernible] these fertilizers companies are meeting and they are selling it in the open market. So as far [indiscernible] is concerned, [indiscernible] our marketing head will focus this. Nirav, yes, see the market of ammonium sulfate last time what we indicated a discount of INR 2,000 per metric ton has been softer and [indiscernible] because we wanted a change in MRP also of the product based on the cost of production. So some sales got reduced to certain extent based on that [indiscernible]. However, again, this first quarter is the lean season. It mainly starts in -- at end of June or July for pushing of the sales. So placement, we have to offer discounts. As [indiscernible] subsidy of ammonium sulfate, but there's slight increase in subsidy of APS but reduction in subsidy of DAP. So market has diverted towards NPK fertilizers like APS mostly. And this time, as we pointed out the -- our sales of the [indiscernible] were the highest because at Sikka we could produce APS, NPK at capacity levels due to availability of raw material, economics and demand also in the market. But in case of DAP, it was a lesser capacity because of economics -- this thing and raw material [indiscernible] sulphuric acid for DAP. So it is [ constant ] many times because we are 100% depended on the import.

Correct. Correct. So sir, like if we consider in terms of the ammonia what we produce through the natural gas [indiscernible] imported ammonia where the government uses that benchmark for the subsidy calculation, has our cost of production of ammonia fallen this quarter? Or if you can get us explain what was our average cost of natural gas for Q1? And what was it for Q4?

See, just one thing before Mr. Bajpai answers. In case of [indiscernible] we have NBS rates, so in case of urea, it's not the NBS rates. So cost of ammonia really impacts on the NPK fertilizers mainly like DAP, APS and other fertilizers. In case of Sikka, we are importing ammonia. So this question doesn't come. It comes only in case of Baroda unit where we have a capacity of NPK production compared to Sikka. So as you see, the natural gas prices are increased 6% on Y-o-Y basis. And in case of urea, the whole natural gas prices are passed through. So there is hardly any impact on the margins of the company. Very little ammonia goes to the -- in the production of melamine through urea and in the caprolactam. So that much increase or that much impact of the increase in natural gas is not seen in our total profitability.

Is it possible to give us the exact amount of our natural gas cost per MMBtu this quarter?

I think it is INR 45 per MMBtu in the current quarter.

Okay, okay. Sir, if we see our entire basket of fertilizer, let's say, sulfate and ammonium sulfate phosphate, DAP, NPK and the urea, what broad range of per tonne margins we should work with, let's say, for ammonium sulfate and ammonium sulfate phosphate as a basket NPK and DAP put together and, let's say, for the urea? Let's say if we segregate between these 3 divisions or 3 subsegments, what sort of per tonne margins we should work with? Or what the current level of margins what we are earning from these 3 subsegments?

We're talking about the average margins, it is nearly INR 2,000 to INR 2,500 per metric ton. [indiscernible] DAP, there is no margin available, even the contribution is in negative, so [indiscernible] fertilizers, the average margin we are running INR 2,000 to INR 2,500 per metric ton.

Okay. Similar is the case for urea also there because of the under recovery of fixed cost, the margins are lesser?

Yes, in the urea, the margins are really lesser because of the higher energy consumption by the GSFC and there is some penalty also attached to it. So in urea, the margins are lesser than this.

Got it. Got it. And sir, when we will ramp up our phosphoric acid production along with the sulfuric acid plant where our dependency on imports would start reducing? Would it be safe to assume that like before 3, 4 years when the margins were good, we used to produce around 7 lakh tonnes of DAP plus NPK put together. So once this plant is -- plant will be commissioned on -- the margins which are currently, let's say, 0 to negative for DAP, would start giving us the positive margins and along with it, we will also see the volumes of DAP, NPK also picking up, your take on the same?

Nirav, see -- see, there we have 2 manufacturing factory, one at Baroda and one at Sikka. In case of Baroda, we have our own phosphoric acid plant and our own sulphuric acid, which is running at capacity, and we are able to produce required phosphoric acid at smaller plants. In case of Sikka, we are still dependent on imports. We are working on the project, but it's not an immediate thing. It will be a short-term basis, 2 to 3 years' time gap.

Okay. So that plant, which you have highlighed in the investor presentation also, in terms of our phosphoric acid capacity of 198,000 tonnes and sulfuric acid of 594,000 tonnes, that would take 2 to 3 years to get commissioned. Is it where I should interpret it on?

Yes, yes, yes.

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

Thank you for a very detailed opening remark also, that answers many of the questions. Sir, when we read about this outlook part in your investor presentation, you have mentioned about market anticipation of increase in NBS subsidy. And thereby, we are accumulating sufficient inventory of DAP for the forthcoming Rabi season. So if you could just explain to us on how are the margins going to be affected by this strategy? And if I'm not mistaken, you mentioned that we had negative margin for selling DAP for this quarter, sir?

Yes.

So how will this work out for us? And what should be then the optimum number going ahead for DAP in terms of margin profile?

Actually, there are 3 production lines in the Sikka Unit. One is producing the SA, which we cannot change. And other 2 lines are interchangeable, either we can produce NPK, APS or DAP. So now presently, we are producing only one -- in one line, DAP, and in other 2 lines APS and NPK. So we have not stopped the production of DAP because of this little negative contribution because at any time, there is buzz going around that the DAP subsidy may increase a little bit. So -- and also in the interest of the market now, we are -- we cannot stop the DAP because DAP is in good demand, and there is a lot of pressure from the government side to make DAP available to the farmers. And GSFC company will never see only the profit motive, we produce and make available the required fertilizers to be farmers. So we have never stopped the DAP or never stopped the DAP actually. Now the season has started, and we have placed these material on the market. Now as soon as the rain -- now the rain has started and the farmers will come to [indiscernible] and we will start selling the products where this is available.

Mr. Kapoor, just to answer your specific question, how do you think about the NPS rate. If you see there -- on the [indiscernible] there was news about increasing the subsidy [indiscernible] INR [ 4,500 ] per metric ton for DAP. And from the government, still notification is awaited. With this increase in the NBS rate, DAP will not be negative. It will be just breakeven. So whatever we have been done is right for the farmer community and we are using a mixed approach for producing [indiscernible] NPK and DAP, all 3 at Sikka Unit. Yes.

Sir, can you quantify the impact of -- the negative impact it has for the quarter, the DAP sale on the bottom line? And then, sir, if you could give some color on the raw material basket, how are those shaping up going ahead?

I think in the current quarter, we see that there is a dent in the bottom [ earning ] amounting to INR 42 crores per tonne.

Okay. So which will be negative for the next quarter?

Yes, negative. Yes.

Negative.

And sir, you mentioned about some energy efficiencies loss -- due to some lower energy efficacy, we have to pay some fine also for the urea unit. So can you quantify that amount also?

No, for amount, it is difficult to quantify because it has only provisioned the [indiscernible] penalties this year. They will -- and we have already requested the government to reduce it up to [indiscernible] it was earlier 30%. But let us see how the government rates. And we are already putting INR 450 crores for revamping of Urea II plant. So this will be commissioned in this end of the financial year only. So we are representing the government that this is the last year so don't finalize this further. And anyway, we are putting this capital outlay of INR 450 crores for this purpose only. So there is no reimbursement from the government for this investment. So I think they will consider our case.

That means [Foreign Language] -- so we have made the provision to the P&L route only?

No, no, there is no provision mix. I have not made any provision for this penalty. So it will -- when it will come, then we'll decide. But in our system, that is already inbuilt whatever the energy consumption is there. So higher energy consumptions means the higher cost of production. So it is passed through by the government.

It will be?

Passed through by the government, I think.

Okay. So we will be receiving back all the underpricing, which what we have done for -- the entire subsidy will be released to us or there will be some dent on sales of urea on account of this energy norms that specification not been matched?

Our energy consumption, even after kind of taking into consideration the penalty, is lesser than that. So over -- if you look at in the contract, we get from the government a saving margin also because if we say that after the penalty, then 0 becomes 6.74. And if we are at 6.6, that's 0.1 also we get it. I'm just giving you a hypothetical example. So we get savings from the [ FICC ] also. So there is no impact with respect to the penalty.

Okay. So sir, I just got confused. And if there is no reason for that escalation, then why is it -- why are we discussing about the fact that we were looking for waiving of the penalty going ahead? Can you just explain once again, sir? I mixed it up.

It's not about waiving of the penalty we are just requesting about because earlier the penalty percentage was lesser. So they have increased it. So we were just asking them to keep it at the same level what it was earlier. But the point which I -- there's 2 points this year, I think. The one is that even after considering the penalty which the government have pertained, we end up in the -- the figure which comes up is lesser than what penalty that [indiscernible] government put so far. That's the one point. The second is with respect to coming of the new plant of the urea which is preventing and that will automatically reduce -- automatic in the test after making this effort to reduce our energy consumption, so that penalty issues would go up. So these are the 2 different points which you are missing.

One suggestion. In the presentation in Slide #5 and 6, so therein, we have given the capro-benzene trend also and the key input cost movement. So this is a very important data. If we could provide it in a tabular manner, that would suffice much better than the graphical part because there's a color mingling. And the one -- to get the numbers correctly, we have to get it on a tabular form. So if I request if the key input cost movement can be put on a tabular basis on a comparative quarter-on-quarter basis, that will be helpful.

Noted. Noted.

And last point, sir, just to get an understanding. Mr. Nanavaty is not present in the call. Any key reasons?

He's retired from the service of the company, and Mr. Bajpai has taken over the role as the CFO.

Sir, may I ask some more questions about the industrial chemicals segment and then join the queue?

Yes, yes, please.

Sir, on the performance for industrial chemicals, that looks much different. And also with the Chinese import, part of it is slowly getting momentum. The story going ahead for us in the industrial chemical looks bleak only, sir, going ahead?

It is -- presently, if you see the whole chemical industry internationally, it's sluggish and not very effective. So as you are seeing that in the past presentation also, the capro-benzene spread accounts down from INR 730 crores to INR 673 crores, then INR 674 crores, then INR 695 crores, and presently, it is around INR 582 crores. One good thing is there that in the July, it has improved a little, and it has gone up to INR 638 crores, but very hardly any impact of this increase. And we are still having a contribution now. But we are seeking some new step for -- to better the situation that we are putting one HX crystal plant, as you might have seen in our presentation. Yes, it is manufactured from the derivative from the caprolactam. And by this way, our old caprolactam having capacity of 20,000 metric tons will not produce there, and we will be diverting it to HX crystal plant. So there, the profitability and margins are quite good. So it will improve the IP segment. The second thing what we are thinking is that we are importing the C4 [ aniline ] and kind of has already been done [indiscernible]. Just in the imported aniline, in case of producing the higher aniline cost from the benzene because benzene prices have been like anything, there is 30% -- 13% increase on Y-o-Y basis. So that's to help really. Presently, we are taking, and I hope that there will be some impact on the next quarter or up to half year also remaining this year.

And sir, what would be the CapEx we will be spending on the project, the crystal?

So in this year, we will be supplying the project from amounting to INR 1,000 crores. Three plants are under the capitalization or in this particular financing year only. That is [indiscernible] plan. Then second is sulfuric acid. That is subject to plant of the sulfuric acid. We are looking at supply chain level. Third one is the urea revamping. And fourth one is power -- solar power plant. This solar power [indiscernible], it will increase efficiency or reduce the cost of the company because it is capital consumed. Our HX crystal project plan, that will be produced at -- that will produce HX crystal, and it will be sold in the market. It will generate INR 100 crores revenue and a good amount of margin.

For this HX crystal project, what are the CapEx next year? And how much we will out this INR 1,000 crores...

Yes, we are spending INR 100 crores. Yes, yes.

And the turnover will be also onetime?

Yes, yes.

And this is a downstream production?

Value-added product. It is formal integration of the capro-benzene.

Okay. And other than that, about the melamine part and other chemicals, industrial chemical basket, there also the same trend continues? I mean I think the lion's share is from caprolactam, the revenue profile for IP. If you could give us some understanding of the various products.

Various product is melamine. But melamine is also not doing great. And there is a lot of cheap materials coming from the -- China. So we are not getting much of the margins in the melamine, and we have sold on a lot of discount to meet the [ IPP ] base price of the melamine. So overall, IP product or the IP segment this year, if you see the segment, we have reported INR 4 crore loss in the IP segment. So there is hardly any margin available in the product, and that's why we are taking such an innovative step to cut down the cost and make the IP segment profitable.

Right. And lastly, sir, for this nylon 6 part also.

I don't think there are 2 compounding lines, and we are doing the production. However, the imported nylon 6, as I told, from the China is cheaper than the -- our production for nylon 6 and then the 66. So we are also importing the nylon 6 kit basically and mixing it with our kit and making the various kits in the compounding line. So that will again reduce the cost for this kit, and it will provide a better margin and the contribution.

Sir, although in the volume -- we are providing volume performance, by the site, we can also foresee the turnover also. That will give an understanding how the realizations have been for the quarter and the comparative number?

We have provided collectively sales and sales value and the quantum of sales also. If you see our Slide #4, you will see production and drop sales. So this is the quantum of the product, the quantum of the quantity produced and sales. And in total, we are getting the drop here.

Right, sir. But I'm looking at the realization part also, sir. You are providing volume metric part. But on the realization front, if you look at the capital at term sales of, say, closer to 14,000, how much has been our realization and the comparative number, that would give us an indication of what are the current realization.

This is some price, I would say. Gently, the management is thinking that, that would not be fair because it is required and then it will go to the [ completers ] also. So that's why we are not giving the product-wise pricing.

Sir, last point is taking into account how we have fared for the first quarter and the factor of the variables that you people are working with, what should be -- the investors should model in for the remaining part of the business? Because I think it's a very volatile environment for IP, but the corrective measures which you are already taking into place and the one-off item which will not be there, so taking that into account, what kind of margin profile can we do for the Fertilizer business? And I think the IP would be a difficult one.

Fertilizer business, the margins are more or less same. Until and unless there is any subsidiary division, I don't foresee any changes in the raw material prices presently. As you see, the DAP prices has crossed $600. So I don't think this [indiscernible] will be any cheaper. So there is hardly any margin. Only these volumes will create a total margin. How much quantum of sale by the better product mix we can make in the margin, as I told in the opening remarks, that will generate the margin for the Fertilizer sector. As far as IP segment is concerned, I've told that we are taking a step, and it will show some -- it should show some positive results in the next quarter or next to next quarter.

Okay. When we interact the next time for the second quarter, can I have a better understanding, sir, how?

Yes, yes, sure.

But this should be a bottom like [indiscernible] also things you've not done was compare because we have...

Definitely. We are taking all these steps. And as I told that all these things are in the very forward-looking, and it is -- plans are not completed. So we are importing like alone or we are stabilizing this. We are having one plant of the is HX crystal. So we know how it operates and who are the -- our buyers. So all in all, there is a very -- positivity we are looking at, and we are very hopeful to get better results in the Q2 and Q3.

And on the gas pricing, sir, I missed your comment. What types are we securing, the gasses?

Gas is already -- as far as India is concerned, so whatever the domestic prices are there, it is allotted. It is pass through. So there is hardly any impact. And energy prices are stable now, INR 45 per [indiscernible]. So I don't foresee any much division in the energy prices.

The next question is from the line of Nirav from Anvil Research.

Sir, one thing, when we will undertake the energy conservation measures for our urea plant, I think our current consumption is close to 6.5, 6.6. And once that is implemented, it will fall below [ 6 ]per metric ton. What sort of total improvement in the profitability starts accruing to our urea business once that energy conservation measures are placed into?

No. Actually, whatever the curtailment in the energy now [ 0.6 ] retail. So it will be within the targeted amount by the government of India. That is the purpose for the venting of this urea plant. And the government is focusing that it should be around 5.9 or something. So after 0.6 [indiscernible], it will be -- we will be meeting the [indiscernible] government one. And second, that urea plant is very old, 60-year-old plant. So there is also a lot of efficiency in the system and production process. So by implementing this, we will be increasing the capacity of the plant from 800 to 1,123 metric tons per day. So that is the advantage we will be having, additional production of around 323 metric tons. So that will be coming by way of additional margin and profit to whatever you get in the mix.

But sir, based on some rough understanding with this increase in the production and currently whatever losses we are making off because of the higher energy usage, what sort of ballpark numbers we should work with in terms of the improvement in our total margins for urea?

Again, we are not just calculating it in terms of margin. But when we approved our project, obviously, we are investing. Remember that around INR 30-odd crores will generate in the urea revamping project.

Okay. And sir, I missed on the increased capacity, what you mentioned on -- capacity is going to increase from how much to how much?

800 to 1,123.

TPD or it is 1,000 tonnes.

Yes.

Okay. Okay. Sir, second question is on -- you mentioned on the capro-benzene spread is being lower, and we are even losing money at the contribution level. At what level of spreads we could break even in terms of the capro-benzene as well as for, let's say, melamine? If you can give some understanding, that would be very helpful.

It will be difficult to project, but I think it is $700-odd figure, $725 or so from the extent that will make the breakeven from the caprolactam. And for melamine, we are generating the positive contribution. However, there is a margin loss. So there is no problem as far as the melamine production is concerned. We are meeting the contribution, and that's why we are continuing the plants.

All right. So $725 would cover our variable cost? Or it will also cover our fixed cost?

No, only variable cost.

Okay. And what levels of fixed cost we should work with for the capro plant as well as for the melamine plant?

Fixed cost is already fixed. So we do not calculate like this. Whatever the fix cost is there, so we are generating the losses whatever melamine is generating the profit. It is comparable negative margins of the caprolactam. So that's why the IP segment is getting only INR 4 crores loss. So that is the idea we can get that whatever the fixed cost is generated, it is breakeven at this level.

Correct. So let's say put together capro and melamine, is it safe to believe that our fixed cost won't be higher than $100 a tonne? Is it a safe understanding to make? Or probably it could be some notch higher than the $100?

It must be higher than the $100.

Thank you. As there are no further questions from the participants, I would like to hand the conference over to the management for their closing comments.

Okay. So thank you for the patient listening. And I hope that we could have given you the satisfactory replies up to our best possible manner. And I -- thank you to all the participants, and we will see you in the next quarter. Thank you.

On behalf of Anurag Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.