Tata Chemicals Limited (500770) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Earnings Conference Call of Tata Chemicals Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Gavin Desa from CDR India. Thank you, and over to you, sir.

Thank you, Margaret. Good day, everyone, and thank you for joining us on Tata Chemicals Q2 FY '22 Earnings Conference Call. We have with us today Mr. R. Mukundan, the Managing Director and CEO; Mr. Zarir Langrana, Executive Director; and Mr. Nandakumar Tirumalai, 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 of the call.

Thanks, Gavin. Good morning, and welcome, everyone, to the quarterly earnings call. I have alongside with me my colleague, Zarir Langrana, Executive Director; and Nandakumar Tirumalai, CFO. I will start the discussion with a broad overview of the businesses and the geographies and the environment we are going through in. Firstly, let me just say the demand environment is as good as it can get, and it's constantly improving for the better. The demand is strong. In fact, there's been a broad change in the demand environment, where I think the supply is extremely tight and that is, in fact, reflected by some of our current customer orders, which we are fulfilling. For the first time, we have started to book customer orders and shipments to China, which was never, never a possibility. And China, we expect, over a period of time, we will elaborate further on this -- we will be either balanced or will be a net importer going forward because of changes in that environment. Worldwide, there have been sharp price increases in spot prices, especially in soda ash, and they continue in that direction. And we do believe that as contracts keep opening up, these prices would be reflected in our contracting environment. But that's not the whole picture. There's been also a challenging environment on the input side, where input costs have increased sharply, especially on the energy side, where coal and gas costs have increased sharply. And also, there have been supply chain bottlenecks in some markets, especially in U.S. and U.K., where there's been a shortage of drivers and shortage of ability to deliver to customers. With this backdrop, I just wanted to now dive into our specific performance. Given this environment where I think the market has been strong, the revenue grew by 16% and we've been able to sort of contain the impact of the cost increases while not fully, and there are some challenges in 2 areas, which I'll come to specifically later, contained mostly in most of the businesses and to ensure that we are able to continue to deliver good performance. The soda ash business in India delivered good volume growth of 18%, and this is reflective of demand from end user industries. Besides the volume growth, we've also taken -- the market prices have improved. I think currently, if you compare it with April levels to where we are, I think we are about INR 6,900 on the list price. And of course, as contracts open, some of this will get translated into input -- into our pricing also. But there has been an impact on the input cost. Commodity prices, both domestic and globally have seen a sharp run-up in coal, natural gas and carbon. On the international business, TCNA has performed well. Their domestic volume has been flat. However, export volume, bulk of the growth has come from export volume, which was extremely muted last year, and this is also reflective of a strong trend in Q1. It continues into Q2, and the overall volume growth stood 29% versus previous year. We expect that we'll be completely fully, fully sold out in all our businesses. And we are going to make as many tonnes as possible to meet our customer requirements. In U.S., of course, the pricing on the export front, which is reset in markets quarterly as is getting reset, the domestic prices are mostly annual contracts, and that is reflective of almost a flat margin structure, which exists there. In terms of the U.K. business, this is where the bulk of the impact has been in the overall consolidated numbers. The soda ash volumes and all other product volumes, more or less, were constant. The key issue has been higher gas price and more importantly, the carbon prices. The U.K. ETS scheme, the carbon prices surged from GBP 25 to GBP 30 range to almost GBP 75 by September 21. And this suppressed margin in this business to almost GBP 30 per tonne in soda ash business, which has led to a sharp compression in the margin. And however, we are also pleased to say by the same token that our carbon capture unit was commissioned during the quarter. This will help us play a good role in improving not only our product mix also removing a part of the pressure in the carbon emission trading scheme because it does capture the carbon and reduce the intensity. In terms of Magadi, the business continued to deliver good results, with the revenue higher by 54% on back of good volume. They did undertake restructuring. I must add that U.K. is in the midst of its own restructuring process in terms of addressing fixed costs further. In terms of the other business in terms of our silica which is a new nascent business for us, the food grade silica remains stable. Now moving on to our salt business. The performance continued to be strong. Our volume in the current quarter was 3.2 lakh tonnes, registering growth of 8%. U.K. salt was fairly steady. The bicarb business in India and U.K. performed well. Here again, I think the pricing environment is fairly strong, and you would see that reflected going forward in the coming -- forthcoming quarters. But the current quarter has seen certain cost pressure, which has transmitted through the margin compression in the -- especially in the Indian salt business. Our focus on STS and nutraceuticals remains fairly clear that we have to get customer acceptance and reach full capacity and first deliver on making sure we are breakeven at EBIT level. Moving on to Rallis. The quarter 2 was tough for them, especially in the area of the seed business. The rising input prices did lead to margin compression in the crop care, which is the agrochemical segment. Their CapEx also is moving on schedule, and they have completed the formulation plant, and they've also completed 2 more expansion of debottling of 2 active ingredients was completed during the quarter. And the multipurpose plant is pretty much on track to complete by S1 FY '23. Rallis will continue to make progress on the stated objective of improving product mix and introducing new products to widen and distribution. Overall, I would like to state the following, that the project in Mithapur also is being executed on schedule. Overall, I would say the look ahead for us is going to be driven mostly by what we can produce. In this context, we have annual shutdowns, which are completed in the month of October in U.S.A. and Mithapur and they are back on stream. So you would see some quantity fall in quarter 3. In Rallis and Magadi, the annual shutdown is underway during this quarter. So all the units have taken the shutdown in the quarter 3, and this will be reflected in volume. However, margins will take an uptick because of the improvement in price. We do expect by quarter 4, we'll be back on full volume and the prices should reset to the level where margin improvements will be seen all across. And it will be fully reflective of the market condition, which is fairly strong and also fully account for the input cost as we move forward. So overall, I just want to say that our core business is in a strong footing, and we would continue to invest in them and our investment plan of INR 2,600 crores in TCL India. And also investments in Rallis would continue. Our new initiatives are shaping well, and we are confident that they will continue to make a positive contribution going forward. And we are also on track to ensure that sustainability remains a cornerstone of our businesses. The carbon capture unit in U.K. is reflective of the direction. With these broad words, I will now hand over to Nandu to take us through the financial performance.

Yes. Thank you, Mukund, and good morning, everyone. Let me just walk you through the performance for Q2 for Tata Chemicals. Before that, based upon the feedback from investors and analysts, we have added this time 2 more slides, one on ESG and one on the input cost, which is affecting us for Q2. For the quarterly performance, our revenues for the group grew by 16% over previous year, mainly on account of the higher volumes led by soda ash across all geographies, notably India, U.S. and Kenya. The EBITDA was at INR 501 crores, up 30%. EBITDA margin has moved up by 2% and PBT by 70%. Broadly, the profits were higher than previous year in India, U.S. and Kenya, offset by lower profits in U.K. and Rallis. Now I'll move on to business side performance, starting from TCL India business. The revenue has grown by 18% over previous year, mainly on account of higher volumes. The EBITDA margin has moved up 7%. If you remember last year, Q2, we had all dividends coming in Q2 because we had the AGM sales after the COVID quarter. But this year, we got all dividends from Rallis and Morocco in Q1. That's a skew in the other income compared to quarter-on-quarter. Apart from that, because of the higher input costs affecting our variable cost, our overall contribution margin has come down compared to last year's Q2. We also had a onetime write-back of INR 20 crores of old provisions on account of our fertilizer business. Now moving on to the U.S. business. As Mukund mentioned earlier, the volumes have rebounded from previous years. The revenues have moved up by 22%. There are also cost pressures because of increase in cost of gas and freight. The EBITDA has doubled for the US to 30 million to -- double for the current quarter. Consequently, because of the higher sales and operating leverage, the PBT has moved from a loss of INR 26 crores last year in Q2 to a profit this quarter. We are also able to reprice our debt in U.S. from [ L ] plus 4% to [ L ] plus 1.6%, which will help us by around INR 50 crores of interest savings year-on-year going forward. Coming, U.K., as Mukundan mentioned, the revenues were up compared to last year's Q2. But however, because of the impact of the carbon pricing and other factors, the PBT was a loss of INR 69 crores compared to a INR 2 crores profit last year. Coming to Kenya, the revenues have also moved up by 54% on better volumes, and we had INR 11 crores onetime cost because of the restructuring of the people there. Rallis revenues have been more or less flat compared to last year's Q2, and the revenue growth has been there in Crop Care, offset by a drop in seeds business. The margins were impacted because of sharp increase in input cost in the Crop Care business and a slight increase in fixed cost and the seed business not doing that well compared last year as Q2. On an overall consol level to summarize for the quarter, revenues have moved by 16%, EBITDA by 30% and PBT by 70%. For 6 months, YTD September numbers, consol level, the revenue has gone up by 21%, EBITDA by 48% and PBT by 150%. Performance of our joint venture in Morocco has been very good. They have given us good performance in both Q1 and Q2, and we've got good dividends from them this year. The net debt is a small increase compared to last year's numbers, mainly because of the rupee impact and because of certain short-term borrowings taken in Singapore for the operations there. With that, I conclude my remarks, and I move it back to Gavin for opening up the Q&A.

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

So the first question is on the India margin. So we've seen Basic Chemistry Products margins, EBIT margins, coming down to below 25% this quarter compared to 30% in the June quarter, 1 quarter ago. So I understand this is largely driven by the input cost inflation. But if you could please comment on do we start to see benefits from higher realization starting the December quarter? I believe we've taken a sequence of some 4 or 5 price increases since June this year. So do we start to see benefits of that? And will that help restore the margins back to the levels of 1Q? That was one. And a related question is just on the hedging strategy versus the gas cost and any other input costs, if you could please just apprise us on where we stand and how much you'll be able to withstand this inflation in input costs?

So firstly, Abhijit, I think what I want to say is that we have a mix of what we call as a hedging as well as a purchasing and just inventory stocking approach to manage the risk. And it is fairly dynamic as we speak. So I think we will continue to maintain that. So we are fairly comfortable with our position as we speak. And we are also comfortable with the fact that the -- if you look at U.K., where bulk of the gas is bought out and also in U.S., we have been in discussion with customers, and we have been able to sort of more or less work with customers in terms of passing on many of these increases back to customers. And U.K., especially the carbon cost, we've been able to engage with them and make sure that they are aligned to the shift in the marketplace and we are fully covered on that. So you would see this changing. I think as far as international business is concerned from, ,Q4 of -- which is the Jan-March quarter, you will see this switch happening and you would see it fully come in. Part of it will come in the quarter 3, but not most of it. Similar would be in India. In India, the contracts are every quarter. Some customers are actually annual contracts, but that is a minor number. So you would see every quarter the reset happening in India. In India, actually, the margin compression has happened because of a couple of one-offs, which were there during the quarter. There was some provisioning which we had to make because of certain past period issues of about INR 6 crores, which is an element. And secondly, I think in terms of -- as I mentioned, there is also pricing adjustment, which we do with our customers, especially both on salt and soda ash, I would not put this entirely on soda ash, which I think will probably come through in the Q3. So we do expect that quarter 3, the margin structure would come back, but you have to balance that, as I said, with the shutdown, which will happen during the quarter. So there would be volume dip, both in India and U.K., U.S. because both of them have taken their annual shutdown in October. But in terms of the margin price question, I think that would be back to normal levels. And in fact, by Q4, we expect them to be even better than where we are today.

Got it, sir. Just on that front, just one additional clarification. If you could guide us to what kind -- how many days of shutdown, and therefore, what kind of impact on production we should expect to see in 3Q? That would be really helpful. And the other question I just had was with regard to the groups, Tata Group's announcement regarding the electric vehicle plans. Tata Motor has recently made announcements. In that context, if you would like to offer any comments regarding Tata Chemicals' plans on that front?

Yes. So in terms of shutdown, I think rather than go unit by unit, I would just say, if you take a broad number of about a week, I think that should broadly cover it. And in some units, it may extend up to 10, nothing more than that. The second element was on the energy business. I think if there's any substantial, we'll come back to you. That's where we are.

The next question is from the line of Resham Jain from DSP Investment Managers.

So I've just a couple of questions. The first is on India business. In last 6 months, what is the net increase in the cost? And what is the net increase in the realization? If you can just broadly give a sense on that.

Yes, I can only give you a broad color. Let me give you -- rather than get into specifics, we have taken a price increase up to September end of about INR 4,000 broadly, am I right? INR 3,000. And at the margin level, in soda ash, this has led to a compression of margins by about INR 300 to INR 400 broadly per tonne. That's what I would say, of course. And if you see currently, where do we stand on pricing? We are 7,000 up from April. So by September end, we were about 3,000 up from April, and there was a margin compression of INR 300. And going forward, we are already at INR 7,000 up from -- this means another INR 4,000 has been taken. And in the quarter of September quarter, there was a compression by INR 300 in terms of margin. That's where we are compared to Q1.

Okay. So net-net, the [ open ] increase in cost is INR 7,000 per tonne. Is that right?

No, no, no, no. This is the price increase. I was saying broadly, the price increase taken up to September at INR 4,000 per tonne. What we have seen in the -- up to this period, which is up to October when we were speaking, already INR 7,000 has been executed in the marketplace. So another INR 4,000 has happened in the month of October. And we had a margin compression in the quarter September of INR 300, INR 350 per tonne broadly.

Got it, sir. And my second question is on to Mithapur project or the new plant. Are there any changes in the time line there?

Sorry, which one? No, I think it's fully on schedule. Nothing much to report about. I think the -- we have had excellent discussions with our -- some of our key vendors. And those who were impacted due to the oxygen shortage and all during the period second COVID wave, they've all worked hard to get back on schedule. So I think we are keeping a very close watch on that, not just because it's a project we would normally want to deliver on schedule. Right now, the market demand is so strong that we need every tonne we can get out of every phase of that expansion.

Okay. And lastly, just one point from the industry perspective, within India are all the plants running soda ash plants running like completely? You mentioned you had a small shutdown, but there is other than those current shutdowns, so no other plants having impacted in India?

The planned maintenance shutdown. But it's shut, yes. But only one issue that one of the unit is probably partly has been shut. But I think that's really the issue. Otherwise, I think all units are running flat out. But the demand is extremely strong. That's all I can say.

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

So we have seen a significant price increase, say, India business and across globe also -- and the kind of the demand supply scenario despite the lower demand in container and flat glass, we are -- demand supply is [ increased ]. So assuming this scenario and flat glass and container glass is going under full swing, do you think whatever the price increase you have gained because of better the demand-supply scenario, the -- whenever the fuel price is going to correct the overall margin level and the realizing level is going to improve for the company?

I don't want to make such a comment. All I'm saying is that, we know where we are in terms of demand. Certainly, the market is -- if you look at the forward or future price in China, it is already running in the region of $350 to $400. And so it's really at a very, very high level. And I think pricing would continue to be strong. The issue is in terms of cost. When the cost will come down, I cannot say. But certainly, the cost environment is also challenging. And I think what we should budget is that in terms of Q4, we should see that the suppliers are able to sort of have a better position than what they had in the past.

Okay. Can you talk about what are the key steps, initiatives we have taken for U.K. business? And we have seen a lot of margin [ preferences] in the U.K. business. So from here, what we should assume and what from the margin side?

So as I mentioned, I think the carbon cost is about GBP 30 a tonne approximately. I think we have gone back to customers and have engaged strongly with them to say this is something which is completely out of everybody's control because the carbon price is a traded product there, and you have to buy from the market, and we have engaged with customers, and most of them are fairly understanding of the situation we are in. And we do expect that most of them would accept those changes in pricing due to having carbon as a pass-through.

Sir, what are the key business initiatives we have taken to have an alternate fuel for the U.K. business?

In terms of business initiatives, one, as I mentioned, carbon capture unit is now already commissioned. About 40,000 tonnes of CO2 is internally made. So we won't be making external purchases anymore. And as you know, U.K. also had a very, very severe shortage of carbon dioxide, which actually impacted many of the food manufacturers. We will not be impacted in future because our -- we have our own internal carbon capture unit which has come in very handy. Secondly, it also allows us to avoid the expenditure of buying CO2 in the marketplace for about 40,000 tonnes. And of course, they are going through their fixed cost erosion program, which is underway already.

The next question is from the line of Anshuman Atri from Premji Invest.

My question is on the EV front. How will we be addressing the technology aspect, how whether will it be in-house, will we do JVs? And when can we expect a major plans on the EU front given that Tata Motors has highlighted in every call or slides about Tata Chemicals being one of their partners?

I think there's nothing specific to report. I think if we have, we will come and report.

I mean, what are the plans here in? Like, do we have the technology know-how -- like how are you going to approach the business?

Specific. I think we will clarify as and when we need if something substantive happens.

Okay. And on the soda ash, the contracts which we have for the annual, by next quarter, Q3 and Q4, will we be passing on all the increases or it will take some more time?

No, I think you should delink the 2. We are not into -- cost side, we will manage ourselves. The pricing side is we will also ensure that the pricing side, we'll be pricing the product depending on the market conditions. So clearly, as I said, the cost side, we will continue to manage our input costs, but the market conditions are fairly strong in terms of the output and selling. So I think I would like to sort of say that, in this sort of condition, our effort will be to maximize whatever we can do to ensure that the pricing remains appropriate and the pricing remains fully justified on the basis of demand-supply situation, and we will manage the input costs. I don't want to link that to -- all I can say is that we will, as we go forward, more or less fully cover the costs improve. But I think I don't want to say how much additional we'll get. But certainly, we don't want to link the 2.

Okay. And sir, I mean, on the soda ash side, there were reports of potential U.S. business sales. Are we fully committed again to the soda ash business or you are looking at new things too?

I think these are very speculative news. I think we -- and we have already said that we will not comment on any speculative news when this came out in the media. So I think that is where we are.

[Operator Instructions] The next question is from the line of Ritesh Gupta from Kotak.

Just on the supply side of things, we did see some supply outages, a few photos there in the media last or last 1.5 months from these China dual controls, et cetera. So if you could confirm or could you give us a sense that how much of capacity has gone away? And what is the current status, given that some part of those -- some part of that we get relaxed on gradually given the tightness in various commodities. So if you could just comment on the China demand situation as well as supply situation, if you could? And secondly, on the U.S. side, the exports have risen. I mean, -- could you just also give us a sense in terms of how much of the demand is lithium-driven and more contribution of demand comes from lithium side of things?

[indiscernible] Lithium is growing pretty close to double digit. And will continue to be supplied. I think at the low end, it probably is at about 7.5%. At the high end, it's probably is around 10% or 11% growth which we will continue to see spread over many -- coming many, many years. As far as the -- our assessment of FY '22 is concerned, the world is short by about 2 million tonnes broadly today. So that's where we are. So I don't want to get into a specific shutdown or opening. But if the demand environment continues where it is, at the low point, it's probably short by about 2 million tonnes.

But it improves any significance of [ lining ] apart from whatever debottlenecking and small marginal expansion here and there? [ Bari India, ] you don't see any new kind of greenfield getting announced as well across the globe.

Yes. So I think the way to think about this is even if a greenfield gets announced and let's say 1 million tonnes is announced, it's going to take 36 months to come. And with the current growth rate we are seeing in the market, the world will need at least somewhere around 1.5 million tonnes on -- at the low end, 1 million tonnes; at the high end, about 2 million, 2.5 million tonne every year, additional quantity. So I think this tightness is there, and I think that's a fact.

The next question is from the line of Gopal Agrawal from HDFC Mutual Fund.

Yes. Just wanted to understand the cost increase in prices. So if we look at in the quarterly results, we have seen like fuel prices have increased by roughly INR 90 crores, while the top line is increased at INR 50 crores. So I just wanted to understand how much of the quantity is contracted. And as you said, in September, we have taken INR 3,000 price increase, while cost pressure is only INR 300 crore to INR 400 per tonne. So can you be specific to highlight how much is contracted? And will it recover back as the time passes? So I just wanted to understand more clarity on this.

Yes. So I think for calculation purposes, I think I would say, in India, it's about 15% to 20% would be annual contract, rest of them are on a quarterly reset.

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

Sir, just a bit confused about the pricing and the cost pressures that we have seen. So while cost price increased a lot in H1, but costs also seem to have caught up. So is price increase majorly taken place as a part of pass-through? Or going forward, do we see them independent of each other because price being immediately determined by demand and supply of the end product rather than the raw material price of the impact being the same?

Yes. So I think in terms of the -- broadly, I would say that the cost increase would be close to -- as we exited September, we had close to about INR 1,500 per tonne cost increase broadly. And the effective price change once you factor that in and effective realization when you factor that in, it ended up with INR 300 of drop in contribution per tonne. So really, if you say your entire price increase of -- by the time the September quarter price increases were affected, they were towards the end of the quarter, so we didn't fully comment. And we do expect that the -- going into the -- going into the December quarter, that this increase impact would be almost to the same order again because the coal prices have been steadily increasing every month. So I think the -- if you ask, is there any correlation between our cost increase and market price? I think price is driven by demand and supply. Cost increase is driven majorly by the increase in coal cost as the energy costs. And fundamentally, that's the biggest driver in the whole equation.

Understood. So remind me, the situation where these 2 get somewhat independent of each other and they are...

Independent. They look to be running together in quarter 2, but I think they should run independently going forward.

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

So the first part is, if you're looking at the price increase for the third quarter, is this going to be margin neutral based on the current trends in our operating costs?

Yes, I think we should yes, as we speak today, it should probably trend back to the normal margin. But all I would say, they are not correlated. Please don't correlate them.

Yes. So the second question is, can you give us a sense in terms of what is the current customer utilization in the global industry, ex China? And what is the kind of capacity utilization number you have from China? Because China [ so ] calibrated their local production in the last 2 months. Please shed some light on that.

The global utilization is running at very tight levels. We are running at almost 94%, 95%. So we, in fact, are finding it tough even to take our annual shutdown because of the demand. So I think the utilization levels are extremely high. And we've been postponing that, but I think we took an inevitable call that when prices reset in quarter 4, we should be fully in line to produce, which is why we pushed it as far as possible to quarter 3. So I think that's really where we are. In terms of the -- in terms of China, I think, China should be importing, I think, close to at least 500,000 tonnes, 0.5 million tonnes approximately. From being an exporter per tonne to net importer now.

Okay. So this -- you're talking about a 94% capacity utilization, what are the base operable capacity you have? Because the number I have seen in consultant reports of the order of 73 million tonnes of capacity. So is that figure close towards what is operable today?

Of the plants, which can run, [ there are 3 of these, ] when these nameplate capacities come, there are also many mothballed plants and all they get added. But of the plants which can run, I think we are at about 94%, 95%. And 94%, 95% means that you've got a very little headroom to take your annual shutdown.

The next question is from the line of Alisha Mahawla from Envision Capital.

My question is also on capacity utilization only. And I just wanted a clarification, the 94%, 95% is what we are seeing is our current capacity utilization in the soda ash business? Just reclarifying it.

Yes, it must be exactly this. We will also be at the same level. I mean, if you account for our original account.

Okay. Understood. And there is no capacity expansion that we are looking in this segment that can be expected in H2, apart from the annual shutdown, whatever debottlenecking that entails?

Yes, we are expanding. In H2, it's still not even come on stream. In H2, maybe some minor additional volumes may come, but I think it's not going to be substantial.

Okay. Understood. And just 1 additional clarification. Specialty Products, the reason the margins have dipped is because of Rallis in Specialty Products? The margins have dipped...

The margin is driven by Rallis. I think we had a shortfall of -- we should just look at previous year performance and the current year, [ 30 ] crore reduction in seeds profits. The -- last year, the seeds in quarter 2 [indiscernible] EBITDA. This year, it's made a 20 crore loss. So I think that has led to 30 crores swing between previous year and the current year. And that's really the main reflection of what's happened. So -- and we are addressing that -- the issues in the seed business there.

The next question is from the line of Chintan Modi from Haitong Securities.

So my question is on the U.K. unit. You mentioned that you have put up this carbon capture unit. Can you tell what is the free allowance that you are taking today over there?

What is the -- Chintan?

Free allowance of carbon credits out of the total capacity?

So you want to explain?

Chintan, if you look at how the U.K. carbon works is that roughly, we emit about 5.5 lakh tonnes of carbon every year. And we get about 3 lakh tonnes as -- 3 allowances there. So which -- so we have around 2.5 lakh tonnes of exposure to carbon, out of which roughly half is a pass-through because we also sell power to the grid in U.K. and copper pricing includes the cost of carbon. Therefore, around 1 lakh tonnes is roughly the exposure we have every year on a count of carbon. It's after netting of the benefit off the CCU. So 5.5 lakh tonnes is the export, the emission. 50,000 tonnes is the carbon capture unit, [ highlighting ] the balance. 3 is the free allowances, 2 is the exposure. In that 2, half is passthrough and half is exposure to us. And that's what we've been hedging.

Okay. Got it. And is the carbon that you capture basically, you utilize for your internal particular usages or you sell it into the market?

More we use it internally. And if there are periods where we have a surplus, we will certainly sell in the market, but it is for making sodium bicarbonate, which is a very high-value product for us.

Okay. And should we expect that from the following quarters, we can see [ EBIT proposals ] for the -- of the initiatives that we have taken in the U.K. unit?

There's a sharp fall, which you saw this quarter, may not be repeated next quarter, because I think we've started to hedge. I think that will certainly pay. The carbon capture unit certainly reduces our cost because we are no longer buying CO2 from the market. But the real issue, the real driver of the bottom line this quarter has been the fact that the open exposure, which we had in quarter 1 when Brexit happened, then -- calendar quarter 1, okay, which is the previous quarter 4, that became an open exposure. And also the exposure of quarter 1 of the fiscal year, quarter 2 of the fiscal year. So broadly 3 quarters, we are completely open. And when the price spiked from GBP 25 to GBP 75, the prior period adjustment itself was almost 3 crores sorry -- INR 30 crores broadly. And the current year, exposure to carbon at GBP 75 was about INR 30 crores, INR 35 crores. So it's equally split between prior period adjustment from GBP 25 to GBP 75 as well as the current period. So broadly INR 60 crores has been the hit on the bottom line in U.K. despite all the best efforts.

Okay, sure. And just one last question. Sir, since you are the parent company of Rallis, if you look at the seeds business of Rallis, last 2 quarters, we have seen an influx of illegal products. Now my question is that considering the efforts that we put in, in terms of R&D and everything as an organized player, and there is a very easily some illegal products coming into the market and there is an acceptance by the farmers also. So just wanted to understand like any strategic decisions that we are taking with respect to seeds business? Because it seems like it's a difficult business to be in.

So I think Chintan, I think a good point. I think we are working very hard to -- very hard to look at our portfolio fully. And we are also making sure that we can at least make sure that we are in the products which are difficult to come under pressure from illegal products. So you will see some change in the approach we have in that business. You're absolutely right. This shift in the marketplace has hit us very hard this year, and we have learned a lot out of that, and we are going back to the drawing board. And this is why I said, we will make sure that, that business is brought back to at least a steady [ heel ] and not get into the kind of situation which we found ourselves move from INR 10 crore profit into INR 20 crore loss.

[Operator Instructions] The next question is from the line of Dhavan Shah from ICICI Securities.

So most of my questions have been answered. Just I have one question on the U.S. and U.K. pricing revision. So I think 80% of our contracts from these 2 geographies are on annual basis. And the revision will happen from the next calendar year. So considering the input price inflation and if there will be any fuel price hike from the next year or maybe in the coming figure. So to -- immune from that, cost price inflation, how much pricing revision are we expecting for these 2 geographies for the next calendar year? If you can share in terms of maybe relative terms or the absolute terms.

Broadly, I think we are more or less going to be covered on the input side. That's not going to be an issue next year. I think we've been working with customers that even for quarter 3, we need some support, especially in U.K. because of the carbon issue. Most of the customers are understanding of the situation which the carbon market has created -- there may be a few who are still in discussion, but we expect to close it with them because I think this is an unprecedented situation which U.K. has found itself. And we are in discussion. Even though there are annual contracts, we've gone to them to say, while we have annual contract, we need to have a discussion because of unprecedented situation. I think that's where we are. Next year, we should be more or less covered.

And can we expect some more positive delta because the market would be more in terms of the demand state levels -- so because China is also importing for the first time? So can you see some more positive delta in terms of the realization growth for these 2 geographies going ahead?

Allow us in the month of Jan to come back to you because we would have concluded all the contracts by then. At least we would be -- and we are also reworking some of the contracts to include carbon surcharge, energy surcharge all put in place, which was a learning we've had. Unfortunately, up till now, this spike in carbon had not happened, and it's an event which I think caught us on the wrong foot. We have corrected that. And in Jan, we'll clarify to you exactly where we've landed with customers. But the discussions are all in a very positive territory.

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

Yes. Sir, firstly, if I could recall just articulating what you said from April '21 to October on even date, we have taken a price hike of INR 7,000 per tonne, sir?

INR 8,900 to be accurate.

INR 8,900 crores to be accurate. And up to September, the hike was INR 3,000 and INR 4,000 is the cheapest hike, if I may use the word for the month of October.

That's correct. That's correct.

Okay. And for the inflationary part, sir, it is INR 400 for them? That is the total inflation cost? Or how should that be aligned for the 7 months, taking into account the coal and the salt prices?

No, no. I think for the 6-month period, while we have taken INR 3,000, the net flow into -- the net flow into our account because it was taken a different period of time, what we could reflect was in the quarter 3, an improvement in the pricing of about INR 1,500. But that INR 1,500 resulted in a shortfall of about INR 300, which means our margin compressed by INR 300 per tonne.

Can you come again, sir? I just missed the last part.

I said that if you take the full quarter period and you average all the -- because increase has happened at a different period of time, the September quarter. The improvement in pricing was INR 1,500, net realization, net of all the other transport, everything put together. But however, that did not cover the full cost increase. We were short by about INR 300 per tonne.

Okay. And this hike in the month of October will be far higher than what the impact -- it is more about the demand-led or will it have a different component with it, the hike which you took for October?

It is more supply-demand led because we don't want to say that our price movements are just led by the cost. Cost is only 1 of the facts, but also demand-supply is another.

This is more of a bottom line contribution. There's this hike the -- the October month hike.

Costs are also moving up in parallel. So I would not say entirely everything will come. And also all of them will happen at different periods of time because each customer has a different reset during the quarter. So I think all we have indicated is that demand environment is positive. The cost environment is a challenge, and we both -- we are managing both together. And quarter 3, there are also -- all of our units have gone through shutdown because we could not take them earlier in the previous period because of very strong market conditions. And we want to enter the new contract period with full capacity available for us to serve the customers.

The next question is from the line of Rohit Nagraj from Emkay Global.

Sir, the first question is in terms of the demand situation. So if you could just elaborate in terms of individual geographies, what are the driving factors because of which the demand has suddenly gone up? Supplies, you have mentioned that there have been issues. But which ones are all -- are the demand-led factors across different geographies?

So if you look at the demand side, essentially -- let me start with China. I think there's been a very strong bounce back in demand in China, propped up by increased demand from certain new segments, primarily solar glass. And I think that's been driving demand in China. Southeast Asia demand is back, and it's in the traditional segments of flat glass and detergents. Container glass in Southeast Asia is still a little subdued because of the tourism industry not fully coming back. We believe there could be headroom for demand growth there once that -- once some of those typically conventional tourist economies open up. In North America, we've seen strong housing starts. Consumer demand is back. flat glass is back totally. In India, of course, all of the sectors are running at full capacity, flat container, detergent, so is a bit of a dip for about a month or 2, which it sees every year in terms of monsoons, but that is back again. And of course, in Europe, all of the flat glass demand and container glass demand, some of which had been shuttered during the first and the second wave, have all reopened again. So we are seeing demand back to a little higher actually than pre-COVID levels and moving into 2022, we'll probably see demand growth globally at a slightly elevated level compared to what we've seen traditionally in terms of CAGR.

Right. That's very helpful, sir. Sir, the second question is we generally see some of the other restructuring costs in some of the geographies coming in a particular quarter. So any more such onetime cost, which may arise for any of the geographies in future quarters? Or we are more or less taken care of our -- most of the restructuring costs?

I think restructuring in Kenya is done. I think as far as U.K. is concerned, I think they are managing it, and they will take the appropriate action. But we don't expect a big heavy onetime cost structure.

The next question is from the line of Riddhesh Gandhi from Discovery Capital.

Just to clarify. So I think what we are saying is that in Q2, the average increase in realization blended although we took a INR 1,500 -- sorry, INR 3,000 per price hike. The blended higher realization is about INR 1,500 and the cost has gone up by about INR 1,800 a tonne. So therefore, effectively tells a INR 300 shortfall. Now we've taken an increment of INR 4,000 hike. So effectively, the net is a INR 7,000 hike, but the impact of the 4,000 will be even slightly higher because only 1,500 of that is reflected in Q2. So just wanted to understand, in terms of Q3, what is the expected hike expected over Q2 on a blended average basis? And how much is the inflation expected on a per tonne basis?

Yes. So I think as mentioned earlier, this is really a blended number that we are working on in the marketplace, driven both by supply-demand balances and by inflationary pressures that we have seen. And as we move into the next quarter and more so in Q4, which is calendar year Q1, you'll see all of this kind of flowing through.

I understand that demand is effectively speaking, given by the demand supply in soda ash, which is extremely tight, given high demand and low supply and your cost is driven to near-term implications around commodities, around coal, et cetera, which we expect to normalize. So I understand that while pricing will actually remain the same, potentially increase our -- hopefully, in Q4 as the commodities ease off, we'd expect a reasonable amount of enhancement in profitability. But just wanted to understand in terms of Q3, where do we expect to be in terms of EBITDA per tonne compared to, let's say, Q2?

I won't make a specific comment. All I would say is that I think we would not want to link the improved changes in the market price to cost increase alone. It is a demand-supply situation. That's where it is. And if you want to see a steady number flow through, what -- where will we settle down? I think Q4 will be the right quarter to check that piece because there are moving parts in Q3, but Q4, it should settle down more or less.

And the other question was that we understand that, I mean, on the demand supply side on soda ash, supply is obviously constrained given in the lead time to putting up incremental capacity. Just wanted to understand is that -- what is leading to the increase in demand? And is it -- and is that just the bounce back from COVID where people had a lower inventory level? Or is this something that is structural in terms of the demand?

Well, I think it's a mix of both. What you probably saw in the earlier half of the year was customers restocking and bouncing that. But as I mentioned earlier, there are also structural changes happening in the marketplace. We are seeing new centers of demand, new application centers of demand opening up for lithium and lithium carbonate for solar glass. And of course, there is the normal growth in demand that we are seeing across flat growth and container glass. So it's a mix of both. As I mentioned, 2022 demand globally is likely to be much higher than what we've seen traditionally. It should then ease back into its normal growth levels of maybe 2.5%, 3% per annum CAGR, globally but, of course, regional variations. That should continue into the foreseeable future for sure while price hike catches up.

Got it. And on the -- so I mean just sort of interpreting what you're seeing for Q4 onwards and the next year onwards, assuming commodity prices effectively speaking, normalizes because anyway, like because coal demand has been reasonably flattish. You would expect, I mean, numbers which are materially, materially higher effectively than where we've historically ever been.

I think you should wait for Q4, I would certainly say because I think we know that coal is now, more or less, stable at elevated levels. It has not come down. And natural gas, again, for example, in U.K. is holding at elevated level. It has not come down. In U.S., again, it is holding at elevated. So I think we have to wait for market signs to say when it will likely taper down, which is why I think I'm a bit reluctant to sort of give you some point about next year. But Q4 will be a clear indicator of where we are landing.

We'll take 1 last question, which is from the line of Abhijit Akella from IIFL Securities.

Just a couple of clarifications regarding a couple of data points mentioned previously. One is the carbon capture unit in the U.K. This 40,000 tonnes of CO2 that we save -- should we just interpret that to mean that we basically multiply 40,000 tonnes into GBP 75 per tonne, and that is the quantum of savings that we should expect to realize out of this?

That could be one method. I think the way Nandu has explained, I think, is the right approach, which is to say that our overall number, net of that carbon capture is about basically, we had the free allowance, the 3 lakh free allowance. We have a net number of 2 lakh tonnes of carbon, which we are to buy in the market, of which I think 1 lakh tonne is a pass-through and 1 lakh is the net amount for which we need to hedge and we need to buy in the market.

Understood. And the other one was on the U.S.A. interest cost renegotiation. So if I heard you correctly, it's going to lead to a saving in finance cost of about INR 50 crores a year. Is that the right number?

Yes, on this loan -- yes, Abhijit. Because a [ $25 million ] loan and [ L ] plus 4% was the earlier pricing outsets was [ L plus ] 1.6%, so 2.5% savings per annum on INR 205 million is around INR 50 crores per year.

And that will begin from the December quarter, is it? Or...

Yes, from December quarter onwards because this got done in end of Q2, so that will start flowing to us from Q3 onwards.

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

Thank you. And I think let me start by saying that we have been through very interesting times in the last quarter. These kind of market development, both on the demand and the supply side were certainly fairly unprecedented. But the team has responded well with agility to serve the customers and they've engaged well with customers to explain the situation. And we do expect that, I think in terms of the short term, we will be able to continue to deliver to the best expectation of all shareholders. In the long term, our story still remains the same. Our growth expansion in Mithapur continues on stream. And both in soda ash and in salt, I think the market demand -- market opportunity is fairly strong. Our approach to making sure that we get our 2 new businesses, at least to EBITDA positive, I think it's still our first step, and we are well on our way. And in Rallis, we have an additional task now of fixing the seed business, which we will continue to focus on and deliver. In terms of overall, I think the teams are enthused with the positive turn of event and with slight reduction in the waning of COVID. I think our teams are fully energized to deliver in the marketplace. I would like to end this call by wishing all of you a very happy Diwali, and see you all in the month of Jan, when we will come with a fresh update on where we stand. Thank you.

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