Tata Chemicals Limited (500770) Earnings Call Transcript & Summary

Thank you. Good day, everyone, and thank you for joining us on Tata Chemicals Q2 and H1 FY '21 Earnings Conference Call. We have with us today Mr. R. Mukundan, the Managing Director; Mr. Zarir Langrana, Executive Director; and Mr. John Mulhall, the Chief Financial Officer. Before we begin, I would like to mention that some of the statements made in today's discussions may be forward-looking in nature and may involve risks and uncertainties. I now invite Mr. Mukundan to begin proceedings with the call.

Thanks, Gavin. Good morning to everyone and thank you for joining us today. Hope everybody is safe and healthy. I'm joined by my colleague, Mr. Zarir Langrana, our Executive Director; and John Mulhall, CFO, on today's call. I will broadly give some outline to our quarterly performance and how we see the trend going forward is, especially in this situation we are in the COVID-19. And John will also highlight certain key financial highlights for the quarter. Firstly, I think we've had a very steady quarter. The performance has steadied a lot more from the previous quarter, and that has been on the back of the business environment becoming more stable. And with the business environment becoming more stable, the utilization levels have kept up. And as we exited the quarter, they are getting very close to near normal across all geographies. While we will have certain difficult moments to navigate through this period, I think we are now in a much better situation as the future in terms of the direction of the economic trends we see going forward. I will go through the discussion broadly in terms of the 4 verticals, which I spoke to you last about, which is Performance Materials, Nutrition Science, Agri Science and Energy business. Energy business is still in a very nascent state, so will not make any major commentary on it, except to say that the trend towards electrification, energy storage, is a long-term trend. But in the short term, I think many of these plans are being pushed forward. So we will have to wait till a couple of more quarters for us to make any major point, except to say that our lithium battery recycling business has resumed. And in this quarter, they did do some business, although milder, because those operations did start. Agri Science business is primarily done through our subsidiary Rallis, whose results have been released, and I will go to that a little later. The 2 broad businesses, which are within the stand-alone and within the unlisted subsidiaries of Tata Chemicals are the Performance Materials and Nutrition Science. As far as the Performance Material, it has broadly 2 branches of the business, which is Soda Ash and Silica. The performance of Indian Soda Ash division is much better compared sequentially to the preceding quarter. Volumes were higher. And the demand from the market has been fairly steady. The key issue for us in this quarter was not market demand, but actually, the capability to have a steady run of production, especially with very heavy rains, which happened, it was because of depression in Arabian Sea, which impacted our operations for some time, and which has also been notified as a one-off, which we've taken in terms of certain impact on the business by about INR 11-odd crores. I think they came in this quarter in terms of the actual P&L impact. There are certain other material damages for which we have actually claimed from insurance, and those have not been accounted for, but we will account for them going forward. So clearly, the volumes have improved. The market demand is fine. There is a bit of softness in the realization, which we saw in this quarter. But with the implication of ADD, we think that softness is going to slowly give way to more steady pricing, which will flow through in the coming quarters as we move forward. As far as the other big performer within this vertical, which is Tata Chemicals North America, it was rated with a pickup in volumes. And not only have the domestic volumes improved, also export volumes have improved, and that trend is likely to continue going forward. And I think [Technical Difficulty] well for that business, as the volumes pick up, even the pricing power comes back to the business, and I think both of these put together would only couple this in a very positive trend, but it will play out in my view in the next 4 to 6 months, and we will have to manage that period carefully, but will be continuing improving trend. As far as Europe is concerned, it has been a steady quarter, and they have very marginal materials moving out of the island of U.K. And they are fairly protected in that way, and they continue to perform with minimal disruptions. On Africa, the volumes and realizations were marginally lower. And realizations were lower mainly because the big market, which got impacted on realization softness was Southeast Asia. But since -- towards the end of this quarter, realizations even in Southeast Asia has started to move up, with lower availability of Chinese material. And I think that trend is likely to continue. So overall, on the Soda Ash, we probably have seen the worst of the period in terms of both realization and volume. And as these will trend positively, they will continue to move forward. As far as the contracting for next year is concerned, Zarir can add a bit more color to it. There is pressure from customers, which is to be expected, because their businesses are also under pressure, but we will manage and navigate that with as best as we can. And if the economic environment turns better, the volume benefit, which we'll get will be much bigger than any of those sacrifices, which may have to be made. And the costs are also trending down, so there could be some margin for us to play on that. As far as Silica business is concerned, we continue to see good traction, and we've also had a few OEMs of the tire OEMs, which have come and audited our plant and have given a good response, and we should commence with prior orders in that business. In fact the business is now beginning to have gathered steam. And as the plant operations move forward, I think we will also be expanding capacity from the current 10,000 tonne capacity, which we have there. Going to the second vertical, Nutrition Science, which is mainly salt, bicarb and Nutraceuticals, the performance continues to be strong, aided by the consumer demand. British -- in U.K., again, British Salt, volumes are very stable. The bicarb operations in India were very good and consistent, and sales were maintained during the year. U.K. also had very consistent bicarb operations. And we will be increasing the sales mix of U.K. more towards bicarb and soda ash going forward. And this should be margin accretive as the plan for bicarb is undergoing implementation and should be getting commission very soon. The Nutraceutical business in Nellore, Mambattu, has had a very good traction. The growth has been good, actually better than our expectation. And the demand from companies also remains strong. On the Agri vertical, on Rallis, their commentary has already been received by you. But domestic seed business, domestic crop care and seed business performed well. Their international business had some challenges. We believe that things will improve going forward. And the CapEx plan and the new product portfolio improvement we had announced, that is well on track, and that should keep the growth momentum going forward. A quick word on our CapEx. As mentioned, we have decided to realign our CapEx in light of COVID, which focus on ramping up capacities on those where demand visibility is good, which is things like salt, bicarb, nutrition and agri science. For the rest, we have decided to calibrate and scale up the capacity in a calibrated manner, and that trend remains even today. So overall, I would say business performance continues to improve steadily across geographies. Our efforts are mainly focused on improving the product mix right across all the geographies. And all the 4 verticals are shaping up well. And we are undertaking requisite steps to strengthen our balance sheet and cash position by rationalizing CapEx spend. In fact, the operational cash generation has been excellent. And the conversion ratios have been good, and John will speak about it. And we are well positioned to navigate not just this environment, but as we come out of this environment, come out much stronger than what we are today. With that, I now invite John to give his opening remarks.

Thanks, Mukund, and good morning, everyone. Before we get into the Q&A session, I'd just like to add some details, as Mukund said, to results that we published last night. As I mentioned in the last call, the timing of annual dividends from IMACID and Rallis was going to move into quarter 2 this year from quarter 1 last year.

Sorry to interrupt you, John sir.

Hello? Please go ahead, now.

Is that a question?

Yes, sir.

Okay. Good. Okay, thanks. Thanks, Mukund. So before we get into the Q&A, as I mentioned in the last results call, the timing of the annual dividends from IMACID and Rallis was going to move into quarter 2 this year from quarter 1 last year, and that was the case. This led to nonoperating income on stand-alone results being up INR 45 crores over last year. That's INR 64 crores on the last quarter. And the main drivers of this were the timing of dividend receipt, as mentioned earlier. Overall dividend receipts were up INR 46 crores over last year. We had reduced bank balance and mutual fund and fixed deposit interest. Our stand-alone cash at INR 1,930 crores is down INR 770 crores on last year. But remember, the ECB loan was repaid in October last year, which accounts for the majority of the difference. Our average return to mutual fund and fixed deposit market were also down markedly. In fact, the mutual fund yield in the quarter was down 150 basis points, and that led to bank and mutual fund income being down INR 19 crores over this quarter last year. We repaid the ECB loan, our bank interest was up -- sorry, the bank interest expense was down INR 11 crores as well. That was an improvement. On consolidation, our nonoperational income is an expense of INR 15 crores this quarter, down from an income of INR 3 crores last year. Again, this just reflects the reduced fixed deposit and mutual fund income. And income was limited. There were some offsets between interest income, provisional leases and some rental income as well. Operationally, as Mukund said earlier, while the reduction against last year remains -- the rate of reduction has reduced this quarter compared to last quarter, although pressure does remain on pricing and on margins. For the stand-alone business, India Soda Ash sales were down only 3 crore -- 3,000 tonnes in the quarter compared to 44,000 tonnes in the first quarter. There was a reduced NSR, with limited offset in manufacturing cost because we had the flood situation in Mithapur, affecting overall contribution from Soda Ash by about INR 49 crores. On the flip side, sales of salt were up 37,000 tonnes from last year, and we continue to see strong pull from that segment. Sales improved from our mutual business, up INR 23 crores, and from our Silica business up INR 6 crores over last year, these are all volume related. And our freight cost management remains a priority. Of course, this piece is worth highlighting. 2 charges in the quarter in India, INR 14 crores relating to gratuity resettlement is a onetime expense provision and INR 11 crore material damage relating to the Mithapur floods where, necessarily, we've taken the expense in the quarter, the full resolution of the insurance claim as claims under process just now. Internationally, Kenya continues to suffer in Southeast Asia through market pricing and excess volume in that marketplace. So both NSR and freight costs have been impacted at best in the quarter. Contribution is down against last year by about $2 million. In the U.K., salt and Soda Ash operations were down in volume terms, bicarbonate is slightly better. But better pricing in soda ash and improved energy costs across the piece, both in coke and gas improved the contribution by GBP 1.5 million over last year. And even though we had a INR 25 crore one-off income last year, we still delivered a similar EBITDA number to last year, which the one-off income kind of held and hit the improvement this quarter over last year. The U.S. did suffer from volume and pricing pressure and our manufacturing August and September through some unseasonally cold winter storm that came through in September. Overall, that probably impacted performance by around $10 million. But for the year, and I think it's important to make a point here, in quarter 1, our sales volumes were 30% below last year; in quarter 2, 17%. So year-to-date, we're just 22% below last year's sales performance. From a balance sheet perspective, our working capital has improved. Stand-alone working capital is 17 days in the quarter. That's a 5-day improvement over the first quarter. That's worth INR 32 crores as in cash. Consolidated working capital is at 28 days, and again, a 9-day improvement, and that translated INR 217 crores in operational working capital improvement. Our India cash position, both cash mutual fund and bank deposits moved to INR 1,817 crores in September compared to INR 2,000 crores in June. It's a reduction of INR 182 crores, although CapEx in the quarter was INR 128 crores, I guess, INR 188 crores last year, mainly through our major projects in Mithapur. Year-to-date CapEx number is INR 232 crores against INR 260 crores. Last year, just remember, we had INR 694 crores as the full year CapEx. On a consolidated basis, we had INR 3,039 crores of cash at the end of September, down by INR 219 crores against June, and that's after INR 315 crores of CapEx in the quarter. Relatively, CapEx spend is INR 544 crores against INR 622 crores last year and INR 1,196 crores for the full year to March '20. With that, I'll draw the financial comments to an end and then pass it back to the moderator to open up for questions.

Sir, shall we open the line for Q&A sir?

Yes, please.

[Operator Instructions] The first question is from the line of Sumant Kumar from Motilal Oswal.

So my question is regarding the U.S. business. So we have seen a different performance in U.S. domestic space of [Technical Difficulty] So can you please give us more about the export business of [Technical Difficulty] is doing -- is not doing well? So would like to know about that.

Zarir, do you want to address that?

Sure. Let me take that. And thank you for that question. You're absolutely right. If you look at U.S. domestic sales compared to the prior quarter, we are significantly up. In fact, getting even higher than the similar quarter last year. Export sales still need to recover. While it is about 60,000, 70,000 tonnes more than quarter 1 of FY '21, we still do have ways to go before we get back to normal sales. With your specific question about where U.S. exports take place, there are really 2 key markets. One is Latin America, which includes Mexico, and the second is Southeast Asia. Both these markets were fairly significantly affected in Q1. I think across both markets, demand is coming back but at a much slower rate than the whole markets of, let's say, North America or regions like India. In Southeast Asia, container demand glass is more or less back. The flat glass sector is still to pick up in most of the markets. In China, for example, flat glass is back on track, container is back on track. But in the key markets of Indonesia and Thailand, I believe that it might take a few months more before demand comes totally back. An encouraging sign is that there are new flat glass lines that are under commissioning and shall open up within the next 2 or 3 months in the markets of Malaysia and Vietnam. So the trend is certainly positive. In terms of timing, I think you probably need to be a little more patient. As far as Lat Am is concerned, the largest market is Brazil. And as you might be aware COVID cases in Brazil were among the top tray in the world, leading to significant contraction in those markets. Those are also [Technical Difficulty] back, albeit at a slightly slower pace than Southeast Asia. Western -- the western part of South America, Latin America, is almost back to where it should be. And Mexico is again coming back strongly, especially on container glass, which it manufactures and ships across the border to North America, the United States. So long story short. I think a few more quarters before U.S. exports get back on track. Trends are very positive. So we're not seeing any customers cancel or defer orders, but there's slow natural progression before we get back to where U.S. exports used to be a year, 1.5 years from today.

Yes. I think -- just to add to what Zarir said, I think the trend is continuing to be in the positive side. And as the volumes keep coming back in the next 2 quarters, the pricing power also will come back. So it is going to be a benefit of both volume and price moving up as both these 2 come in. But it's much better than before. But it's trending towards normalcy, which we had indicated even during the last call. Towards Q3, Q4, we should be getting back to where we were. Q1 of next year will have a huge base effect. So we should not consider that. But if we take quarter-on-quarter, I think we are trending to where it's up to be.

So [Technical Difficulty].

Sorry. I can't hear.

Sumant, your audio is breaking a bit.

Okay. So what I was talking about the overall USD realization of [Technical Difficulty] Y-o-Y and 5% Q-o-Q. So can you talk more about the price scenario going forward in U.S.? And also for India Soda Ash.

The India Soda Ash is slightly different. Zarir can speak about it. I think the fact that the ADD has come in and that itself is going to lead to forming of prices because that is very specific to Turkey and U.S. So I think that's a very different situation in India. So I think Indian prices will -- they had come down a bit, but they will trend up, and they're already seeming to be trending up. So that's the story. As far as U.S. is concerned, it is pretty much a market mix and a customer mix story through the period as far as the domestic market is concerned. And next year, on contracting, what I mentioned was there could be a bit of softness in pricing. But that softness in pricing should also get aided by the softness in the input cost. So overall, I don't think there's going to be a big issue on margins. Zarir, do you want to add anything to that?

No, no. Let me start with India. You're absolutely right, Mukund. With the announcement of provisional anti-dumping duty on soda ash, I think it would be normal to expect that pricing would improve once the formal notification and the segment of that duty comes through, which should be fairly soon. It's just a cost. We are certainly to see signs of that happening. But once the duty comes in, I believe the pace of that price improvement would improve. As far as North America is concerned, like buyers across the world, buyers are expecting price declines to take place and softness. That's their job. And while there might be some price sacrifice that producers might need to make, I think the relief on the input side and the cost side, whatever we are doing in terms of adjusting our cost base to the U.S. should keep margins where they are, if not a little better.

My next question is regarding salt business, we have seen [Technical Difficulty] improvement. So can you discuss about the key drivers for that [Technical Difficulty].

We can't hear you.

Your audio is slightly muffled.

[Technical Difficulty] So can you discuss about what was the key reason for that apart from the [Technical Difficulty]

Sorry?

Sumant, I would request you to be a bit loud please as your audio is breaking, so we are unable to hear you clearly.

Okay. So I was talking about overall sales, salt business sales growth was -- volume growth was 14%. So what was the key reason for that?

There is no key reason. We tend to be supplying to customers. We supply to all the brands, all the companies who want salt, bicarb, everything. So I think they'll continue to get the product. And in terms of -- I also told that in terms of prioritization of product mix, if the plant has a flexibility, whichever plant in U.K. and India, all these plants have a little bit of flexibility of flexing between soda ash and salt, while the consumer markets are doing well. So we flex them towards the salt business that's about it.

I don't think you should underestimate the power of brand and also the distribution strengths that our, say, customer for salt has. So that's a contributing factor.

[Operator Instructions] The next question is from the line of Abhijit Akella from IIFL.

I have a couple. First on the specialty chemicals business. If you could please talk a little bit about both the Nutraceuticals and the Silica businesses in terms of where they stand exactly right now in terms of customer acquisition and volume scale up? And how we should expect this to trend over the next couple of years? Are there any financial targets that we should keep in mind in terms of, say, revenues over the next 2 to 3 years?

Yes. So I would say between the 2 of them, I think we should be crossing 3 digits this year. I think that is our first milestone, which we want to do. And that is despite a very poor first quarter when these 2 plants were actually shut. So that's really our target and ambition to move. And clearly, the Mambattu plant, our aim is to at least exit this year with 75% utilization of the plant. So the average number may be lower, but exit rate is about 70%, which is a good exit point. We had targeted that to be about 60% to 70%, but we've upped the number because of the strong demand. As far as Silica business is concerned, both these businesses are going through their prod approval process from key customers. The Nutraceutical plant needs approvals from the pharma and from the food companies. At least it is in the last leg of a couple of pharma companies clearing that factory for approval. That would bump up the demand immediately post that in terms of the deliveries. And as soon as we get close to about 80% utilization, we will be certainly kicking in expansion of that unit broadly to keep in line with the market demand. So that as the demand moves up, we have the next line of capacity coming on stream. As far as the Silica is concerned, I think that 2 of our key tire customers have already approved the plant, and we are awaiting the first initial orders to come in. And there, our intention is not to wait for the factory to fill up to 70%, 80%. We are going to be embarking on expansion shortly. We have just finished acquiring land nearby. The Tamil Nadu government has allotted the land, process is just about finishing. As soon as that land is in our possession, I think we will embark on scale-up of that plant from 10,000 tonnes to at least 5x the current capacity as a Phase 1. And as far as Mambattu, Nellore is concerned, Nutraceutical, the step will be to double the capacity going forward from the current capacity to drive the number of capacity. And we have land and other elements already set in place to go 4x the current capacity on the current site. The Silica business was constrained with respect to land and utility, which is why we had to wait for the approvals to come through for the next phase of expansion.

And sir, just a quick follow up on that. If I am right, then the existing capacity that we have right now in these 2 businesses, the INR 565 crores that we've invested, that itself suffices to drive about INR 1,000 crores of revenues at peak, is that correct?

I think the figure of 500 -- with the figure which we have, we have not invested the full money in the Silica business. It's still -- I think, out of the INR 270 crores, INR 250 crores or INR 270-odd crores, which we were to spend on that, we have only spent about INR 140 crores, including the land, which was acquired. The balance will be spent when we expand the capacity. And I think that's the status on that. So we already have the approval to move forward, which is why we are moving forward, but we are not moving forward to 20,000, which was our initial plan, we've upped the number to 50,000 straightaway in the first go itself. So that is why we have to acquire the land. So we'll come back with specific, but it's going to be a little more than around INR 300 crores, INR 350 crores there, which is what we would end up spending. As far as Nellore is concerned, we have already spent INR 250-odd crore, but the doubling of the capacity will be at a slightly lower cost because the utilities have been built for almost 2x the capacity already that will not be in place. So it should probably be at half the number, which we spoke about as we move forward.

Great. And my second question was just on the North America value addition plans that you had alluded to on the last call. If you could highlight any specifics that you've sort of moved forward with on that?

The studies are over, Abhijit, and I think what we are intending to do is to come towards the end of this year to sort of give you specific plans on that. And clearly, we have to do something with our North American asset. It just cannot be left to just spent out the quantities, which it needs to do. One thing that's very clear to us if we had a choice between expansion of capacity there versus -- I'm not speaking about expansion of capacity versus moving up the value chain. I think our choices are very clear. We have made a choice to move up the value chain. The study is complete. Initial study is complete. It is going to be the same set of chemicals we make everywhere, sodium bicarbonate, sodium silicate, those sort of materials, which have been made, which we have good expertise in. And the teams have put together the initial plan. We're also looking at what are the other options to move that chain. But we will come back to you with specifics by the fourth quarter of this year.

The next question is from the line of Ritesh Gupta from AMBIT Capital.

I just wanted to check on, you said that CapEx plan has been delayed. Was it for Soda Ash as well? Or like do you see that Soda Ash is the [Technical Difficulty] in the India business?

I think that's right. The postponement, we've actually accelerated the CapEx for all, which is needed for the Nutrition business. So that is moving as per schedule, and we were constrained more by availability of labor. John gave financials, the entire project teams have left aside. We are getting them back on stream. So we have lost about 3 months of execution time on the Nutrition Science. As far as the Soda Ash is concerned, certainly, both in India and in U.S., the debottlenecking, which had to happen in the U.S. through the implementation of the 13th drawer is being put on hold. And we will relook at that when we come to the fourth quarter. As far as metal goods debottlenecking is concerned, that is not on hold. In fact, there, we have said that we should catch up going forward. All the approvals, all the elements are in place. And it's a delay, which is a combination of us trying to conserve cash, and at the same time, also nonavailability of labor. Both these constraints are now out of the way with near normalcy coming up in terms of volumes by the September end. We do expect that we will gather data. But I would acknowledge that, in some cases, we have lost 3 months. In some cases, we lost about 5 to 6 months of time.

Understood. And then just on the stakes that you have on the balance sheet into the Tata Group of companies, including Tata Family, is there any way you can monetize it at some point in time? Or is there any purposes because now you have your own CapEx plans as well? Is it a possibility that you can -- I mean, some of them are listed, some of them are not. So any comments there from John or from you on how can you ever monetize it given that it's a group company?

See, I think we have -- if you take our balance sheet 5 years ago and when you look at the balance sheet today or even 2 years ago and look at it today, it is fair to say that the monetization has happened. If you look at the entire acquisition of the U.S., such has happened because we actually monetize the TCL shares to pay for the equity, which we had to put equity into that business it was, of course, the leverage buyout. But whatever equity we put in the business came through TCL's share sale at that point of time. If you look at the current cash holding in the company, a large part of that also is the monetization of Tata Global Beverages shares, which we hold. So the group has been bringing that down. Currently, if you see the biggest chuck which we own is of Titan share, which I think is something which everybody is looking at, and if there is an opportunity, there's a need, I think all these things are addressed, but it has been calibrated and moving in the right way from the group perspective. And we are today sitting on cash. We are deploying all the cash we have. So I would only say, look to the history of what has happened, that tell you the -- what will be the guide to you about the structure.

And anything on the Tata Salt stake, can that be monetized at any point in time [Technical Difficulty].

I have read the reports as much as you have. And I think we can only say that how much we own is publicly owned. And I think it's about 2.5%, John, am I right?

Yes, 2.53%. Yes.

Around 2.5%. I think it's an accurate segment, but that's what we have. And there are other group companies also, which we have, so Tata projects and various other entities. But they all fall in the same bucket. I think the intent is to deploy these over a period of time, and that will be deployed. And to be fair, all these investments, which the company holds, have paid also -- have also strengthened the balance sheet rather than anything else.

The next question is from the line of Sarvesh Gupta from Maximal Capital.

I joined a little bit late. I saw that your India volumes Q2 to Q2 have more or less normalized. I think it was 151,000 tonnes against 154,000 tonnes or something like that. But I wanted to know how has the pricing behaved to you because this certainly looked better than one of your other listed competitor in terms of the volume recovery. But I wanted to know the pricing trend in this quarter as well as the outlook for prices in India going forward on the Soda Ash business.

So just to -- we had already highlighted the pricing pressure was there in Q1, Q2, but I think the pricing pressure is coming off because of ADD being imposed. So it is not an internal issue. It's basically an external event. And Zarir has already explained as that gets notified, the normal trend has been, there's a tightening in pricing regime, which we have seen in the past, which is what we -- which is what the expectation of everybody is. As far as the volumes are concerned, Indian volumes are back. Our constraint has been mostly our internal operations. We have reported already that we have taken INR 11 crores hit on the loss of material due to heavy rains, and there is additional damage, which has happened, which we have claimed for insurance. And that broadly explains the issue why there was a bit of a pressure on volume. The volume pressure was not from market, but from our own operations.

Okay. But if the ADD does not come then, excluding the ADD, what is the outlook for the pricing going forward?

So I think, overall, let me give you a broad guide. In any product like this as volumes come back, the pricing comes back. And if you were to ask me, is the volume coming back? Yes, it is coming back. And the April, June quarter was the worst hit. July, September is better. October to December is looking even better. And we expect by the time we get to quarter 4, things should tend towards normalcy across the globe, barring a few places here and there. And as you know, this market is getting, again, very close to balanced, and it will tend to move in that way going forward. So by the time you hit middle of next year, the market should be tightening up if this trend continues. That's all I can say. Beyond that, we don't have any indicator. So it is improving. And the best indicator of price improvement is actually the volume improvement.

The next question is from the line of Tejas Sheth from Nippon India AMC.

Any supply side oversupply, are you seeing at the global level over next 2, 3 years per se, which can curb the realization even if the demand recovers?

A very good question. In fact, pre-COVID, our share was supply, our share was not demand because a lot of projects have been announced and about 4 million to 5 million tonnes was in pipeline. What COVID has done is it has completely stopped everybody dead on their tracks. I'm also very sure these are very high capital projects. People conserving cash is probably now are put in -- they're probably going to take some time before they can get to see that they're moving forward, both from a strategy perspective, also from a financing perspective. So I think this should play out in the medium term, the benefit of the industry.

Okay. On the input cost, can you just elaborate how you see that panning out in the near term as well as on the medium term? And the gross margin pressure is only a factor of lower realization or there's some input cost as well?

See, in India, if you look at it, there are 2 one-offs, which is the INR 11 crore and INR 14 crore, INR 11 crore on account of the kind of material losses we've had. It's not just material loss. There's also efficiency loss, which happens when material is wet you need more steam through, more energy to dry it and all that. So I think those are the impacts we had because of that heavy rain which happened because the depression in Arabian Sea, which is a one-off event. It's happened after 7 years now. It doesn't happen every year. The other one-off cost point is also that there's a INR 14 crore hit on gratuity, which is a onetime hit we had to take on the back of merging of DA and basic in one of our site. And that is an HR call because it helps us in the long run with lower impacts on cost structure, but it is a onetime hit on the P&L, which is the gratuity valuation process.

No. I was more alluding to the input cost, sorry, at the gross margin...

No, no, no, I'm covering that. I'm covering the ground.

Okay. Sorry.

As far as the input costs are concerned, the biggest element of input cost in this business is energy. And broadly speaking, India is on coal, and that energy prices have mostly tended to be stable and have not moved up. But world over, I think the combination we have in U.K. and U.S.A. is also a bit of gas. And the gas prices have tended to be slightly benign in U.S. And in U.K., they tended to be more or less flat. So we expect that trend to continue. Magadi is on HFO and HFO prices have been down. Of course, our prices come down a little bit more slowly than the market rate comes down because we are hedged. And I think the hedging is good because we at least don't have the spikes in the business, but that's broadly the situation. So energy cost is the biggest chunk of the cost is tending to hold or becoming benign. The other big cost is all fixed cost, operational cost. And I think on that, we have projects running to cut fixed costs out of the way, which should hold us very good next year and also during the second half of this year.

Okay. So with realization recovering, which may happen, let's say, 2, 3 quarters down the line, the gross margin, too, will normalize to the level, which we've see in latter part of FY '20.

That's the expectation we have. And the expectation also is in the medium term, it is good for the business because all the capacities, which were announced, are all now off the table.

The next question is from the line of Rohit Nagraj from Sunidhi Securities.

Sir, in terms of the current inventory in India and in global system, any thoughts on this? And how have the imports shaped up for the Indian market?

Zarir, you want to address this?

Sure. Could you just repeat the first part of your question? I missed.

It's on the inventory, Zarir, inventory.

Okay, on inventory. So inventory, which was at record high levels, let's say, in period of March and April, especially built up in China, has now come back to almost its normal level. So I think Chinese inventory has gone up to a level of almost 1.8 million tonnes, which is huge, but we also have the capacity to score that kind of volumes. But today, we believe that, that inventory level has probably moderated down to about 750,000 tonnes or may be even lower than that. And I think plants have taken this the opportunity to go in for extended outages, maintenance outages. So Chinese domestic supply demand position has become rather tight and caused a sharp spike in Chinese domestic pricing. Chinese domestic prices have gone up by almost $30, $35 a tonne. And [Technical Difficulty] has flown back into the Chinese export market as well. In India, industry levels are back to normal. I don't think any of the producers are holding large stocks and same can be said about the U.S. market as well where most producers today are producing to meet market demand, just like we are. As far as India imports are concerned, those have also moderated down, they're below during the pandemic obviously because of supply chain issues and port closure. When the ports opened up, a little bit of the pipeline started being refilled again. I think they're back to normal levels as far as imports are concerned. And I think with the notification of an anti-dumping duty, the imports should significantly reduce.

Sir, the second question is in terms of capacity. So you -- just now, you indicated that Chinese capacities are operating probably at reduced rate or relaxing their shutdowns. So any other fillers from other geography in the field? And the capacities, which were currently under expansion phase, so how much of those capacities probably will come online in 1 or 2 years, maybe brownfield expansions or greenfield expansion? You already talked about the 4 million, 5 million tonnes, which was under planning stage, probably currently is on hold and will come back sometimes later.

So I spoke that I think pre-pandemic, there was very little brownfield debottlenecking going on. Most of the announcements of a large greenfield primarily in North America and in China. The North American greenfields, I think very sensibly, producers have possibly pushed that out by at least 4 to 5 years because those were large expansions and also requiring large CapEx investments. And I think given current conditions, it seems unlikely that those would come up [Technical Difficulty] in the market before 4 or 5 years. In China, there was only one major capacity expansion that had been announced in Mongolia of actually soda ash. That also has been delayed. China, in fact, might see a reversal. We might actually see capacity coming off there permanently. There's about, in our estimate, 3.5 million to 4.5 million tonnes of Chinese capacity that's at risk, primarily subscale plants and plants that are facing increased environmental scrutiny and regulation. These are plants that are possibly also located in urban areas, which will be asked to relocate. And rather than relocate, we believe that they might actually shutdown permanently. Europe has seen no capacity announcement being made and unlikely that they will be made. And in India, there were some debottlenecks that were in progress. I think those debottlenecking activities finished actually prior to the health crisis. So really nothing that's on the horizon for the next 2 to 3 years.

Just to add to Zarir, what Zarir said, in our view, I think the market will not have issued from supply side. And as demand corrects itself, I think this market is well positioned now. I think our view is that with health issue and this whole shakeout, which happened, is actually playing out for better of the industry.

The next question is from the line of Padma Raju Mathi from SBI Life Insurance.

My question is specific to the Nutraceuticals business, sir. Since you said you are waiting -- awaiting approvals from pharma and food companies, so any time lines you are expecting for getting this sort of approvals?

I think we were slowed down by the pandemic. These teams were out with this. And they have since done the first line of audit and have given certain changes to be done, which is underway. So we will go to them for reassessment during this quarter. Hopefully, it should happen very soon. We are pretty much very close to it getting done.

The next question is from the line of Dhavan Shah from ICICI Securities.

So I have a question on the Soda Ash business for India. So if I look at on a quarter-on-quarter basis, the realization for Soda Ash from India was around INR 45,850 per tonne in quarter 1 '21, which came down to around INR 39,755 per tonne. And you mentioned that because of flooding also, there was some -- I mean, the sales impact in terms of the cement volumes. So as you guys include the cement revenue into the Basic Chem segment, so would it be possible to share that number for quarter 1 and quarter 2 from cement business and also in the quarter 2 FY '20?

Zarir, John, you want to clarify?

This number seems little off, but maybe John or...

Because I think all your numbers are a little off because I could not understand. We don't have such high realization. John, you want to clarify or...

Yes. I need to check on that number because it doesn't sound right. But there's a bit of a problem, and we'll come back, and if there's any commentary we'll make on the trends. So...

Okay. Okay. So secondly, about the Silica business. So you mentioned that there'll be a capacity announcement by around 5x. So what is the realization from that business? And what kind of top line do you foresee maybe within 2 to 3 years from this Silica segment?

Yes, we had already said that these segments play out in an asset turnover ratio of approximately 1.52. That's what we should expect. And that is that the normalized utilization and the CapEx fully getting deployed. So it will trend towards that.

Okay. And in terms of the CWIP, around INR 940-odd crores CWIP is there. So can you share it among the segments? I mean, this -- how much is for Soda Ash and the other capacity announcements, CapEx announcement, what you have done? So can you share it among the segmental breakup?

It'll broadly be within the 2 segments, which we have, which is Nutrition and Performance Material. And I think, John, do you have any split, anything specific site wise or something?

No, the CapEx this quarter has generally been sitting within the business potential for our products business. So that's where we are.

Yes. Yes. I think the...

The major CapEx, yes. The major CapEx we spent in the Nutritional HDS was really acquisition CapEx or development CapEx, which was all completed effect through last year. So there's no more -- the CapEx coming through this year is going to be, as I said, are focused on the salt side, and that certainly was for first part of the year, then it will spread back out towards the bicarb and soda ash and other processes later on the year. But it's only second in the BCP business of it, performance business sector, you've seen in the segment analysis.

Yes. And I think as we start reporting by the new vertical segments, you will get that split much more sharper. We are intending to do that at some point of time. At this point, it's all mixed up. Some is lying in Specialty, something is lying in Basic Chemistry. It's all not giving clarity. I think that will be clearer.

The next question is from the line of Harsh Bhatia from Emkay Global.

[Technical Difficulty]

Harsh, your audio is breaking, Harsh.

Yes. Is it audible now?

Slightly better. Please go ahead.

Yes. On the domestic front for both India and U.S. business, volumes have improved. So that is really good to see. Just trying proportionately where is this improve in demand coming from, on which downstream industry? And is it from the U.S. market and the India market, are we seeing same segments [Technical Difficulty]

I think both markets are seeing -- all the sectors getting towards normalcy. I want to tell you that in U.S., for example, the auto sales last 2 months were the highest we have seen. So I think the sectors are picking up and because of that their supply base is also getting back on stream. What is still not fully clear in terms of end-user segment is the construction segment. That's the only one which is a bit of a slow in terms of recovery. But otherwise, all other sectors are slowly getting back to where they ought to be. So we haven't seen any trend which is any different anywhere. This has been the trend right across every part of the world, including China, U.S., India. The trend has been very, very similar. Consumer comes in first, immediately following that is auto, and the last to come in are commodity. So when I say consumer, for example, it is both the soda ash used for detergent and the container, container glass because containers go into consumer. And then next coming on stream is auto sector and last is construction. And it's following the same trend.

It's really helpful. Next question will be on the -- you talked about plans for soda ash and salt. Last quarter, we had indicated that 6 billion is already done, and meaning 18 billion will be done by FY '23. So plans [Technical Difficulty] in this current quarter?

John, you want to clarify specifics on this? Nothing has changed on that plan. I think it's still on stream because bulk of it is also for the Nutrition and salt and bicarb. And a small portion was towards Soda Ash. So John, do you want to clarify?

No. Nothing. As I said earlier, with CapEx of INR 127 crores in a quarter, I'd say about INR 110 crores of that is all sitting within the BCP business units. And for the half year, about INR 210 crores of the INR 232 crores is going to be BCP as well.

The next question is from the line of Ramesh from Nirmal Bang.

Are you able to hear me?

Yes.

Yes. So if you look at the U.S. business, we continue to see losses [Technical Difficulty]

Yes. The audio is not clear from your line, Ramesh.

Is it better now?

Yes, please go ahead.

Yes. So I just want to understand in terms of the performance of the U.S., what are the reasons why the EBITDA was down and below the line, why was there a loss? Last time, we had a reversal of [Technical Difficulty] to the U.S.?

Zarir, you want to address this? The way I understand the question is specific to U.S., what is the reason why EBITDA is down. One is I think volume because the fixed costs are -- it's a high fixed cost business in any case in U.S., but breakeven points are high. As that number is -- as you move further up the number as volume comes back, these margins come back. And as Zarir has said, the volumes have been impacted mainly on exports. And secondly, I think the pricing in export also has been weak in the market, and that comes back when volume comes back. So it's all back to volume. As volume picks up, everything -- so if you want to add to that, Zarir?

Mukund, I think -- Mukund is absolutely right. It's really the volume link and the effect of volume on fixed cost and also on pricing, specifically pricing in the export market, which was weak as could be expected. But we don't believe, as we've mentioned earlier on the call that shares are certainly looking positive.

So I take that a little further, if possible to say, what is the volume [Technical Difficulty]

I'm really sorry, but your audio is extremely muffled. Perhaps if you're using a headset, if you could...

Yes. Or Ramesh, maybe we could request you to join back when you're in a network area because the audio is not clear.

Hello?

No, it's still the same. Maybe request you to join the queue for -- and rejoin the call, please. We'll move to the next question. That is from the line of Hari Shyamsunder from Franklin Templeton.

So my question is about salt versus soda ash production. And I wanted to understand what is the amount of flex which is there between the production of salt and soda ash? Could you quantify this in terms of range of outputs?

Hari, could you repeat the question? I couldn't understand the specific?

My question is about -- you mentioned that there is some flex between the salt and soda ash in terms of the manufacturing. Could you quantify what is the range of output which -- and if there is a flex? Flexibility?

Yes, I think it's mainly about how much -- where do we use our energy and where to use our volume. And I think the flex would be about maximum 5% here and there, but 5% is a lot when you talk about 1 million tonne.

Understood. Right. My second question was on the margins itself, which has reported for the Basic Chemistry in India. Do you expect the margins to return to closer to 28%, 30% in the coming quarter?

So I think I would just add an S to that coming quarters because I think it'll trend towards that and will settle somewhere close to it by the time we are completely out of this difficult situation [Technical Difficulty] The good news is volume is back. The second good news is the pricing power is seeming to come back. So I think both these auger well. I don't want to pinpoint by saying it will come in the third quarter or fourth quarter, but it's somewhere in that range, it should start to get to that point.

The next question is from the line of Hansal Thacker from Lalkar Securities.

On your press release, you've made a notation that this quarter, you've achieved 3 significant patents. Can you throw some light on that please?

All of them are in the area of Nutrition and the Materials business. The specifics, I think it's better that we disclose it properly at that point, and there is also a business opportunity coming out of them, okay?

Okay. And just it's more of an ambition statement. I'm just trying to understand if the Nutritional segment essentially continues to be based, like, chemicals or we have consumer aspirations in that as well?

So we are supplying to brands. So whether we like it or not, if you really look at our portfolio today, I think the portfolio in Nutrition Science is fundamentally going to consumer companies. It is Tata Consumer. It is going to all the food companies in India, all these companies are our customers where they all make branded food, they all need B2B salt. Some of them brand it further and sell in the market. Some of them use it in their production process. And fundamentally, it's going into that segment. Bicarbonate also goes to these food companies because they add it to their food products and sell it. So these are food ingredients [Technical Difficulty] vitamins and all the complementary products and premixes with it, all go to these companies, whether it'd be the milk companies, whether it'd be biscuit company, whether it'd be various other food companies, they are our key customers. So we are not getting into brand, but our products go into brands. And we have all the marquee brands as our customers. So -- and they have a very steady demand pull from the market, and it grows steadily every year. If you look at our even Performance Materials within India, a lot of it goes into detergents, which also is brands. So I think that is, again, a very steady growth segment. The segment, which has been impacted in this pandemic, has been mostly the one, which has gone into flat glass. Container glass, again, is fairly steady because that also grows and supports brands. So if you say that are you going to get into brands, no. Are you the people who are behind the brand, every successful brand, we have with almost successful brand.

The next question is from the line of Hemang Khanna from Kotak Securities.

Am I audible now?

Yes.

I just had one question regarding the Basic Chemistry segment. When we look at the segment as a whole, for the second half of this year, how do you see the margins moving? Because we came from, obviously, 1Q was impacted at about 7%, you've recovered to about 10% in this quarter. Over the next half of this year and probably into next year as well, do you see us coming back to that 17% kind of margin, which we did in FY '20? And just your views on how the recovery will be for the second half of this year.

So I can only say it will be on the road to recovery. I can't pinpoint. It's very unfair for me to do that, but we are all hoping it's faster than to be slower. The market signs are positive.

Sure. So basically, we can, going forward, at least into the next...

At some point, it returns to that same number because that's a stable number for the businesses.

Ladies and gentlemen, that would be the last question for today. I now hand the conference over to the management for their closing comments. Thank you, and over to you.

Thank you, everyone. I think all I wanted to say is that this [Foreign Language]. We had the initial overs, which the ball was swinging a lot, and we really had to navigate very hard. We have now entered the middle overs. And I think here, the basic act is to keep it steady, keep it going, not do too many things and keep the ship steady. And we know that the end of the game is coming very soon. And post that, I think it will be a steady run for all of us because end of this difficult period of pandemic is the beginning of the end. And as far as our strategy is concerned, that remains pretty much on track that we are going to be building this business with more specialty portfolio across our all verticals, Performance Material, which is Soda Ash and Silica, and the Nutrition Science, which is salt, bicarb, the Nutraceuticals and natural extracts and Agri Science. And all these verticals are -- the investments are ongoing, and the growth journey is intact, albeit a bit of delay of 6 months or so, 3 to 6 months. And we remain extremely confident, especially on the back of the steady bounce we've seen in the economy and outlook around the world. And also the fact that the markets are -- and the medical fraternity is taking control of this difficult period, and they are over the hump to say in terms of managing the crisis. And we continue to remain fully confident that as this -- as we come out of this, even the energy transition portfolio, which has seen a slowdown, would also come back with full energy, maybe on back of the fact that the shift towards renewable and the need to store energy is a need, which is not going to go away. And we are confident of that vertical, too. Albeit it is in a bit of a slow start than what we have anticipated. I thank you all for your confidence and your support, and we remain committed to our goal of moving forward in this direction with this company. Thank you.

Thank you very much.