I G Petrochemicals Limited (500199) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to I G Petrochemicals Limited Q4 FY '23 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nikunj Dhanuka, Managing Director and CEO from I G Petrochemicals Limited. Thank you, and over to you, sir.

Thank you very much. Good afternoon, everybody. I warmly welcome everyone on this call on behalf of I G Petrochemicals Limited. On this call, we are joined by our CFO, Mr. Pramod Bhandari and SGA, our Investor Relations advisor. I hope everyone had an opportunity to go through our financial results and investor presentation, which has been uploaded on the stock exchange and on our company's website. We will give a quick overview of recent industry developments and how IGPL is moving forward. Post that, Mr. Pramod will walk through the operational and financial highlights. Industry overview. Over the decade, petrochemical industry has gone through a multiple phase transformation. The infrastructure and the ecosystem of Indian chemical companies have evolved rapidly over the last few years. In financial '23, the prices of many bulk and petrochemical products have remained unstable due to multiple headwinds and global uncertainties. Although many organized players with strong business foundations like us were able to sail through it, we are happy to say that your company IGPL has seen a marginal impact as a significant part of business and raw material sourcing is done within the Western belt of India. Traditionally, phthalic anhydride has been used in industries such as paint, plasticizers and CPC pigments. However, over the years, its application have expanded widely to multiple industries. Today, phthalic anhydride is indigenously used in production of plastic currency, paper boards, leisure boats, windmills, sails, aircraft wings and many more. It's important to note that this demand for phthalic anhydride is served by very few players like us. I'd like to give a company overview. Our primary product in phthalic anhydride, and we have, not only pioneered in it in India, but also established a strong footprint in the global market. There are many facilities across the world that produce phthalic anhydride through the naphthalene route with dated technology, whereas IGPL is one of the few organizations that produce phthalic anhydride through the ortho xylene route, which produces high-grade as compared to the erstwhile route. At our Taloja facility, we produced phthalic anhydride, maleic anhydride, benzoic acid and advanced plasticizers. At present, we have installed capacity of 221,000 metric tonne per annum of phthalic anhydride. The plant is managed by a highly skilled workforce and address to all required protocols to meet high-quality standards. Maleic anhydride and benzoic acids are key byproduct created through wash-water while producing PAN, the cost of producing these byproducts is insignificant to us and reflects positively on profitability. Despite the market conditions, we are pleased to report positive momentum in our operational and financial performance during the quarter, driven by steady state demand for phthalic anhydride and other products, our DEP business is also growing very well. I would like to bring to attention that our non-phthalic business has grown by 42% to INR 170 crores for this full financial year. Coming to the CapEx and expansion update. Expansion of our phthalic anhydride at PA-5 unit is on track and expected to commercialize before March '24. This will add another additional 53,000 metric tonne of phthalic anhydride and nearly 2,500 maleic anhydride, contributing to more than INR 500 crores of revenue. In order to expand our business in downstream, specialized plasticizer and UPR, we are evaluating a couple of land options for the future leg of expansion. We will share the required details as things progress. I'd like to add about I G Biofuels Limited. The Government of India has been pushing hard for strong energy security and low-carbon emission with a sustainable ecosystem, blending locally generated ethanol with patrol would improve India's energy security, allow local businesses and farmers to participate in the energy economy and cut vehicle emissions. We are delighted to inform you that your company will find a very interesting opportunity in the space and is looking forward to participate in the ecosystem. The company proposes to venture into biofuels, such as compressed biogas, base compressed biogas plants to maximize India's CBG potential. We will share more information on the same in the coming quarters. Way forward, our long-term vision is to become a well-diversified chemical company whilst maintaining a leadership position in the phthalic anhydride industry. In the past 2 to 3 years, we have made some strategic decisions to meet the rising demand of our products. These decisions are a part of our holistic strategies aimed at providing a better value proposition for our business partners. We are well positioned to sustain the business momentum in time the year '24. Given the company's strong performance, the Board has recommended a final dividend of INR 10 per share to reward our shareholders. This is from my side. I will now hand it over to our CFO, to give you a brief on the financial performance of the company. Mr. Pramod, over to you.

Thank you, Nikunj ji. A very good afternoon to all the participants. I will quickly share the highlight of the financial performance, followed by which you will have -- we'll be happy to respond to your queries. For the quarter ended FY '23, Q4 '23, total revenue, including the other income for the quarter stood at INR [ 681 ] crore, a growth of 18% year-on-year basis, led by the better product mix. The EBITDA stood at INR 70 crore, which is impacted compared to the previous quarter of last year, mainly due to the decline between the spread of OX and PAN, which is around $150 to $170 and declined -- some decline in the prices of maleic anhydride, and the repair and maintenance, which we have incurred during this quarter for shutdown of [ PAs ] due to change in the catalyst. The profit after tax stood at INR 38 crores for the quarter. From the financial year ended '23 -- March '23, the total revenue stood at INR 2,375 crores, which is a growth of around 26% year-on-year basis. The domestic market contributed around 85% to -- 80% to 85%, whereas the interest gain is around 10% to 15%. The revenue from non-phthalic business has contributed around INR 170 crores, which includes the phthalic anhydride, benzoic acid, the DEP and other income compared to the INR 120 crore of last year, a growth of 42%. EBITDA stood at INR 340 crore and net profit was INR 200 crore. The INR 200 crore net profit is first 2 quarters were very good. And then third quarter was impacted, as you are aware of that. And then we have seen the recovery in the last fourth quarter. The overall business performance during the year has been strengthened our balance sheet and the cash flow. We are happy to share that our strong balance sheet position continued to maintain where our net debt stood at a 0 level with a strong working capital cycle. With this, I would like to conclude this presentation and open the floor for question-and-answer.

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

Sir, I have 2 questions to ask. So one is, in your one of the remarks, you mentioned that globally some of the capacities have been running on the naphthalene and those are not that kind of efficient capacities, which we generally get while producing the phthalic through ortho xylene route. So my question basically is, once in our conference call, you have explained about the rationale of putting up an MA plan where the capital cost has been very high and this restricts a lot of players in terms of entering into the maleic anhydride market. So what can be the reason where the phthalic plans have not been coming up in large proportions globally? Is this because of the availability of raw material as a constraint or the application wise, the demand has not been growing that way globally? Because here in India, if we see we are expanding, our competitors have been expanding. Even one of our customers has also been going upstream where he is putting up a phthalic plant. So if you can just help this in context of the global phenomenon, as well as why Indian players have been expanding here? If you can just explain in context?

You see the thing is that, what you've asked is, number 1, in maleic anhydride, I would like to explain is that, number 1, the raw material for maleic anhydride is not available in India. There is no availability of butane to produce maleic anhydride, plus the CapEx to put up a maleic plant is very high. So that is the reason in India, there is no maleic anhydride capacity which have come in. Compared vis-a-vis to phthalic anhydride, the phthalic anhydride plants, which are there, there is a huge constraint on the raw material, which is ortho xylene and the only player in India or in this whole region, if you look at whether it's Middle East or whether it is in India, there's one producer, which is Reliance, which is producing. There is no other producer which is there. So if you look at even one of the customers which have expanded in the phthalic business is finding it difficult to get the source of supplier of. And import of is almost 30% to 40% more expensive than the prices what we are getting out of Reliance. So this is one of the reasons that a lot of players which would like to expand into phthalic is finding it difficult to get into phthalic, plus for sure, the CapEx of a greenfield project to put up a phthalic anhydride is very high compared to the IRR, which comes out of the phthalic anhydride plant. Today, to put up a 53,000 tonnes of phthalic anhydride plant, we're looking at a CapEx of about INR 600 crores to INR 650 crores. And the IRR, which is there is in the range of about 12% to 15%. So people are not very -- and then they see that there is not availability. So these are the constraints which are there, which is putting pressure on increasing the capacity and the players which are already producing phthalic anhydride are expanding the capacity to meet the local demand, which is there. As far as we are concerned, we are expanding our capacity and even Thirumalai, which is the -- our co -- another producer is expanding and a customer has put up a phthalic expanded his capacity. So this will take care of the requirements which is there. Globally, if you look at today, most of the PA producers which are there now are in this Asia region, which is China, Korea and Taiwan. Europe, it has become uneconomical to Europe and America to put up these capacities because of CapEx and the non-availability of. So I feel that -- I hope I've been able to answer your question.

Yes. Sir, just a small clarification on this. So 1, how we would be able to secure our OX for our future expansion? That is 1. And secondly, if you can, let's say, through various reports, if we read like globally, the capacities of phthalic is close to 6 million tonne. So how much would be that would be on a naphthalene route? And how much would be that on OX route?

So if you look at -- as far as we are concerned, we have been buying from Reliance from '98 onwards when they started their Ox production. So they have assured us that they will continue the supply to IGPL, even with our increased capacity. So we are totally secured to get our from Reliance. A balance quantity, which we need to import, there is a production capacity in Singapore, ExxonMobil, which is willing to supply to a small quantity to India, which is there. Apart from that, we are exploring opportunities to see if in Middle East, there could be some production, which can be established. But this is a big challenge to ensure that production capacity can be increased in this region, which is there. As far as going forward -- what was the second question you asked?

Sir, I asked about the split of capacities between the naphthalene...

Yes, naphthalene. So naphthalene, as far as is concerned, is a byproduct of steel capacities. So wherever steel production is there, naphthalene can be produced. But as far as naphthalene is concerned, mostly in China, they produce some quantity of phthalic anhydride through naphthalene route. So out of the 6 million tonnes, there will be only 3% to 4% of production of phthalic anhydride is through the naphthalene route, because most of the steel producers do not want to venture into producing chemicals which are there. So they use their naphthalene in other uses, which is.

Got it, sir. Sir, second question is on the operating costs. So if we see our quarterly results, if we add up your other expenditure as well as the staff cost, like it is close to INR 65 crores, INR 66 crores of run rate. One of the reasons you mentioned was the repair and maintenance we undertook in Q4 for our change of catalyst. So -- but sir, if we see over the last 1 and 1.5 years, some of the costs have gone up for us, and now the gas prices and the fuel prices globally have been coming down. So if there are some components of cost sitting in our expenditure where we feel that it has a scope for a downward revision because it has gone up for one time and now it is coming down. If you can just walk us through that?

Pramod, can you highlight...

Yes. So compared to the last quarter, the cost has gone up. There are 2, 3 reasons. The first is the shutdown. We have taken the shutdown twice during the last 1 year, which has increased the repair and maintenance expenditure. The second reason is, we need to provide for -- based on the profit, maybe CSR expenditures that we also provide. There are only one component which added to the cost, which is not really there in the M2M charges. So basically, the last quarter and this quarter, we have provided M2M charges, which is based on the credit liability in terms of the debt, which is going to -- we need to prepay to 10 years. So M2M charges are around INR 8 crores to INR 10 crores. If you remove that, more or less the charges, the FY '22 and FY '22 numbers are matching with each other.

Got it. So this Q4 includes this one-time charge of INR 8 crores to INR 10 crores, right?

Correct.

Okay. And all the best to the team.

[Operator Instructions] Our next question is from the line of Aditya Khetan from SMIFS Institutional.

Sir, my question was on to the non-phthalic business. Sir, this year, FY '23, we had clocked a top line of around INR 170 crores from the non-phthalic business. This is almost 7% of the total revenue. But I believe, sir, we have a target of taking this to around 25% to 30% by the next 2 years. And we are -- we haven't outlined any sort of a big CapEx into the downstream businesses. So does that guidance hold or now are we revising that from the non-phthalic business?

I would say that we are -- we hold what we are saying because we are today in the verge of completing our feasibility study of the downstreams of phthalic anhydride, which is a plasticizer and other businesses, which the phthalic business is concerned. And we are embarking on getting into sustainable products, which are more on the biofuels. And as you can see that there is -- the government is -- they're saying that the sustainable fuels and energy to be produced, which we are evaluating. But I would say that more or less, the feasibility study has been done, it's just a matter of executing these projects, which are there now. So this will, in the next 2 years will basically diversify the company into other products other than phthalic more than 20% to 30%.

Okay. Sir, just a follow-up on this. So considering your advanced plasticizers expansion, that would add another only around INR 80 crores to INR 90 crores to your top line with the expanded capacity also, if we go ahead. Apart from that, you are venturing into biofuel. So it seems that from the current levels of 7%, 10%, taking it to around 25%, this investment would likely be very big into biofuel. So at start -- so if you could...

I would like to correct you that the downstream which we are looking at on the phthalic anhydride business, which is a plasticizer -- advanced plasticizer business, that will actually add INR 1,000 crore to INR 1,200 crore revenue to the company. It's not about INR 90 crores. Currently, what plasticizer we are producing is going to bring in the revenue of about INR 90 crores. But we are looking to open a new site, which will add another INR 1,000 cores to INR 1,200 crores on the plasticizer business and the downstream of phthalic and maleic anhydride business.

So this is also would be completed by FY '25 or -- because we have not stated any sort of this expansion yet on advanced plasticizer of INR 1,000 crores.

So basically, the thing is that, the company is very clear that we are going ahead with these products, which are there. We have already done advanced study on the products, which we want to get into. It's a matter of time, and it takes about 16 to 18 months to get the production up and running. So we expect that by '25, for sure, we will be in production for the plasticizer business.

Got it. Sir, my second question was on this quarter. We have witnessed almost 17% jump in top line on quarter-on-quarter basis. So this is largely led by volumes or realization? Then what would be the spreads for the quarter, which we had reported for this quarter?

Pramod, can you reply?

Yes. The revenue has gone up because of the higher quantity of the products sold. And basically, the other income includes the maleic and benzoic acid and DEP. So another reason is the DEP, which was earlier operating at 30%, 40%, now we are able to achieve 80% to 85% from DEP. So overall income has gone up from INR 524 crores to INR 611 crores.

And sir, also the spread part, what should be the spreads for the quarter?

Spread, actually for the quarter is between $150 to $170 compared to the last quarter, it is almost $5, $10 here and there.

I believe in the last quarter, we have stated that -- so during that month, I believe in Jan or Feb, that time, the spreads were around $200. And then quarter-on-quarter, your performance has improved...

Last quarter it was around $140 to $150. This time, it is $150 to $180.

Okay.

Because spread is something which is changing every month and every 15 days. So when you take the average, you will get $180 to $200. But every quarter -- every month or 15 days, it is changing. So we are just talking about the average spread for the quarter. Jan and Feb bid was not good, but Feb end and the March was good. Right now, spread is around $200.

[Operator Instructions] Our next question is from the line of Bhavesh Chauhan from IDBI Capital.

Sir, in the last 1.5 years, you've seen our margins fall very sharply. So what is your outlook that when can we see our margin uptick?

You see the thing is that, what you saw a few quarters ago that the margins had really gone up drastically, that was something which is not sustainable. Those kind of margins where we were getting $300-plus conversion. We expect the industry to get a margin which is between $150 to $200. And that is what we are basically basing our profitability, which is there. So we must -- in the industry, if there is some kind of unforeseen or somebody -- some plants are closed, you might see a spike on that margin going to $300 to $400. But we must look at that with $150 to $200 is a good margin to operate a world-scale phthalic anhydride plant. So it is very difficult to say that we will see the margins of $300 to $400, which can never be predicted. But as far as the current margins what we are running at, I think it gives us a good IRR as far as with $150 to $200, and because of the economy of scale and our efficiency, we are making decent returns on our capital employed.

Yes, I got that, sir. And sir, on our biofuel expansion, if it is not correlated to our existing business, one, should we assume that in our existing business, we don't have any scope of doing further CapEx and growth, and hence, we are venturing into something that is very much kind of kind of unknown to the company?

There are 2 things. Number 1 is, I'd like to state is that, as far as the current business is concerned, we are expanding into a downstream products which are there. So that will actually create more value addition, which up until now, the company was nearly a phthalic producer, a sole phthalic producer. With the downstream, it will actually become what get more value added. The reason for us to diversify into these products, biofuel is because today, we see an opportunity, and there is a huge demand for the sustainable products, and it will make the company more ESG and sustainable going forward, which will actually get a better multiple and the company will be seen as a more of a zero-carbon company in the coming years. So that the whole concept is to drive and take the advantage of what is happening in the industry as far as biofuels are concerned. And this will actually take away from the fossil fuel into products which are more green and made out of food products, which are there.

Sir, but is there any correlation between existing business and that business? How are we, I mean, competed in that new business? Or is it more of an experimentation for us?

You see the thing is that, as far as we are concerned, we know that the downstream products which are there, which once we put in that with the strong cash flow and the balance sheet, which we have, we still feel that there is more room to expand into a more diversified industry. And we expect that the biofuel business is actually -- is just at the very tip of the growth which is going to happen. So we feel that if we are able to source the raw material for the biofuel, then the demand for these products are in India is going to only grow because the government is now asking all the fuel to be added ethanol, which is about 20%. And going forward, it could even increase looking at in Brazil, they add 50% of ethanol. And a lot of other areas like today, the ships which are there, their engines are now running at 100% ethanol, which is there. So we expect the ethanol consumption in India to continue to grow. So we are looking at getting into businesses where we expect that there is going to be huge growth. It is only a question of sourcing the raw material, and that is where the key strength will be. So if we are able to source the raw material, then I think that to operate the plant and to sell the product is very easy in India.

Okay. And sir, lastly, then, if we are expanding downstream products, then should our margin get a lift in FY '25 because of that?

Pramod, can you highlight on those numbers?

Basically, just to add what Nikunj ji has said, we, as a company, are a chemical company. DNA is chemical. When we are looking at ethanol and biofuel, we are looking at the downstream chemistry of that particular product. And when you are talking about the downstream of phthalic, we are looking for the various derivatives, including the plasticizer and that will add to our overall margin because that will be a complete integrated facility where the phthalic, plasticizer and other derivatives will be available seamlessly. So it will add definitely to our margin.

Yes, I got that. Sir, coming back to our ethanol expansion, I think there are a lot of players who are expanding the capacities in a big way. So we'll be directly competing with them, right?

Not exactly because --. Yes, sir, you can continue.

We are looking at, not only producing ethanol for fuel. As Pramod said that, we are going to produce ethanol, and we are even looking at downstreams of ethanol as chemicals, which are there. So we won't be totally reliant on selling ethanol to the oil companies, but we are looking at producing chemicals out of ethanol. And that is something which we are today working with some of these labs in India try to see what other chemicals can be produced out of these biofuels which are there. Going forward, I feel that the world is going more towards sustainable products, which are there. And there is 20, 30 people are talking about countries to get more green, products are going to come in demand. So we feel that, that is a trend towards getting into more greener chemicals than producing from chemicals out of fossil fuels.

Our next question is from the line of Yogesh Tiwari from Arihant Capital Markets Limited.

Am I audible?

Yes.

Yes. Sir, just wanted your thoughts on the near term. So our new capacity will come in around March -- before March '24. So what would be the drivers for the growth in the current financial year for FY '24?

Pramod, can you...

Yes. So basically, in FY '24, it will be similar to what it has been the last year. The only thing which has changed is our DEP, which was operating at around 30% to 40% will be at around 80% to 90%. Right now, we have seen the slightly decline in the margin. The main reason is, not only the phthalic, but also the maleic prices has gone down drastically, 40% to 50%. If there is a reasonable amount of increase in the maleic prices and the full capacity utilization of DEP, we will be able to see a slightly better performance for this year compared to the last year. Otherwise, the true performance will come in '24-'25 when we have the phthalic -- new phthalic unit starting operation, along with the maleic and the benzoic acid, which will add around roughly INR 500 crores to the revenue.

Sure, sir. So just an approximate number, like we did about INR 170 crores of non-phthalic. And if we -- like maybe 40%, 50% growth on non-phthalic going forward in FY '24 as well. So approximate the top line can grow between 10% to 12% until that is about additional INR 230 crores, INR 250 crores on the current top end. So about 10% to 12% growth we can expect from -- mostly coming for non-phthalic.

Correct.

And sir, on the margin side, so if I assume a spread of $150 to $170 currently, which is -- can we maintain similar margins which we had in Q4, operating margins?

Yes. I think slightly better than that, if the maleic prices improve, our run rate will be around INR 40 crore to INR 50 crore because right now, the maleic prices are around 50% to 55% of the actual prices. Historically, the maleic prices are 10% to 20% higher than phthalic this time, probably the last 1 year, that maleic prices are 20% lower than phthalic. That is the reason the overall revenue from the other income, as well as the margin has got impacted. So when it is balance it out, you will see the similar performance which we are maintaining over the last 8 to 10 quarters.

Sure, sir. And in terms of the shutdown which we had, I think so this was related to the catalyst change. So that cost would come in this other expenses of INR 44 crores, INR 44 crores, INR 45 crores?

Some in other expenses and some in the energy cost.

Okay. And sir, lastly, on the biofuel, which we are acquiring. If you can share some details regarding what would be the capacity? And like when are we going to ramp it up? And what would be the potential out of it some details on those lines?

So I think we are evaluating this opportunity, it will be too early for us to comment on that. We need to wait for probably 2 or 3 quarters before we completely coming up with the plan in terms of the CapEx and the setting up of the project. Right now, it is in the evaluation stage. It will not be correct for me to comment on this.

Sure. So we can expect some announcement in the next 6 months around what would be like...

6 to 9 months.

Our next question is from the line of Vignesh Iyer from Sequent Investments.

Sir, I just wanted to know what is the capacity utilization for quarter 4 and FY '23 for our PAN and MAN [ operations ]?

For PAN, it's 90% to 91%. And for MAN, it's 88% to 89%.

And this is for the entire year as in or quarter 4?

Almost same, there is no difference, except the shutdown.

Okay. I got it. And when was this shutdown initiated as in, which quarter of the year?

It was in Jan, which last for around 25 days.

This was for the catalyst change. This was for catalyst change.

Correct.

Right, right, right. So just coming to the biofuel part. We don't have any internal working as to how much CapEx we are planning to allocate to the sector as a whole, right? I mean, section of the business, any internal working as to -- rough estimate as to what we are planning to commit?

As what Pramod said that we are evaluating, and there is -- we've got agencies which are working on providing us the information on what the market size is, what the government is looking at on the products which are there. And the most important to really put the size of the CapEx, it all depends on the raw material availability because the biofuels are going to be produced through rice husk or maybe the molasses which are there. So the availability of the raw material is a key factor to decide what kind of CapEx we would like to invest into biofuels.

Right. So just to understand it, I mean, the ethanol segment is kind of crowded as of now. I mean, if we are planning to just sell ethanol to the oil companies. I mean, it is kind of crowded. I mean...

No. Our focus is not to produce ethanol and to sell to the oil companies. Our focus is to produce ethanol through the rice husk or molasses and then produce further downstream chemicals to create added value. So we have identified that there are a number of chemicals which can be produced, which can become green chemicals. It would go into more on the green chemical side. So that is where we are trying to focus on taking the company towards more on the green chemical sites, which is what we are working on.