Tata Chemicals Limited (500770) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen, and welcome to the Q1 FY '27 Earnings Conference Call of Tata Chemicals Limited. Please note that this conference is being recorded. [Operator Instructions]. We have with us today are R. MukunDanske, Managing Director and CEO; and Nandakumar, Tirumalai, Chief Financial Officer of Tata Chemicals Limited. Before we begin, I would like to mention that some of the statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. I now invite R. Mukundan to begin proceedings of the call. Over to you, sir.

Thank you. Thank you, Sagar. Good evening, and welcome, everyone, to our Q1 earnings call. I'll start the discussion with a brief overview of industry and move on to our operational highlights across businesses and services. Before I begin, I just want to say that this quarter, we made a significant accounting change, which Nandu will explain at the end of my overall presentation in terms of the segment change to align that with the way we are running the business that instead of 2 segments, which is basic chemistry -- products, we have now renamed them as living, industry and farm essentials. The Farm Essentials business is particularly comprising of [indiscernible] and also Morocco, which is reported as a JV income below the line. In terms of Living Essentials, it is mainly comprising of products, which are solved bicarbonate prebiotics and everything which goes into feed, food and pharma. The industrial products that especially lives around soda ash, silica and industrial chemicals, which includes things like bromine, chlorine and caustic, in addition to soda ash and silica. So let me start now highlighting the demand scenario across geographies across each of these 3 segments. In Living Essentials, mainly the food feed pharma, the core products, which are salt bicarbonate and [indiscernible]. They continue to have a stable demand to continue to grow it supported by premiumization in this segment. Also, prebiotics is expected to grow faster due to rising health and wellness consumption. Industrial Essentials, which is mainly soda ash, the near-term outlook, unlike the previous one is challenging due to global oversupply, especially coming out of China and also elevated raw material and freight costs, which are caused by the geopolitical tensions in Middle East. Despite these cost pressures, the market was adequately supplied in addition to which I think there were no major market demand disruptions, except in Avian Gulf. So while global soda ash growth, while it is subdued, it has not gone down despite all the other macroeconomic challenges. The long-term fundamentals remain positive, mainly on view of the focus on renewable as well as electrification. And India continues to demonstrate stronger demand momentum across in terms of the global market. China and U.S. remain flat, mostly flat. Demand in LatAm has strengthened, especially supported by rising lithium carbonate production. Exports to Argentina and Chile have increased by 53% and 32%, respectively. And Southeast Asian market, mainly demand declined marginally. However, this is also a place where there is a maximum pricing pressure coming out of Chinese exports. In terms of farm essentials, Indian farm sector outlook remains moderately positive, supported by improved irrigation technology supplies. There is, of course, a focus by the team on monsoon variability, potential El Nino conditions and higher input costs. But we do remain positive in terms of the outcome during the year despite certain pressures coming on the overall system, especially driven by higher commodity prices, which farmers will have, which will ensure that they will save all the crop and hence use the crop protection products to get those products to market. In terms of supply scenario, the bicarbonate saw additional supply coming in from competition. But overall, the supply scenario remains balanced. The -- in terms of soda ash, the market are more than adequately supplied. The Chinese inventories reached an all-time high of 1.7 -- and Chinese producers continue to operate at high utilization rate. The export volumes from China remain elevated. And with no significant supply curtailments which are announced, the market rebalancing will be mainly driven of supply rationalization, which we are closely watching. In terms of pricing environment, as I said, this demand supply environment, especially in soda ash in the industrial segment continues to compress the margin. Chinese soda ash export prices are in the range of 160 to 180 FOB, translating to 170 to 190 CIF in Southeast Asia, which is where the most -- which remains the most challenging markets for us. So in our view, global pricing is expected to remain subdued given elevated inventory levels. However, the several domestic markets will continue to have steady pricing and move in a steady -- on the back of steady demand. Now I'll move to operational highlights. Despite the challenging environment in one segment of our business, which is the Industrial Essentials, the company delivered resilient performance due to higher sales and production volume across segments, more especially in the Living Essentials and in Farm segment and strong operating efficiencies and disciplined cost management. The revenue from operations on a consolidated basis was up 14%. EBITDA was down by about INR 100-odd crores compared to previous year despite the lower realization -- sharply lower realization and net debt was INR 5,692 crores lower than previous quarter on account of monetization of assets. Stand-alone was a very strong performance. The revenue was up 10%. EBITDA was up 35% and profit after tax from continuing operations was up 12% compared to Q1 of last year. In terms of unit-wise performance, as I mentioned, the stand-alone has done well, both on higher volumes and stronger realizations with higher fixed cost control. We also capitalized some of the projects, which has led to higher depreciation. And the domestic demand has remained steady right across all products. However, the input costs have increased due to Middle East conflict. U.S. has a higher revenue previous year due to higher volumes, partially offset by slightly lower pricing during the quarter. EBITDA was impacted due to lower realization and higher fixed costs, which was mainly not -- fixed costs were fixed in U.S. dollar. However, because of the exchange rate impact in rupee terms, they were higher. Demand remained stable. Markets were well supplied, especially in most of the export market, especially in the Southeast Asian market. U.K. had higher revenue than the previous year due to higher volumes. There was a lower pricing in some of the product market segments. EBITDA was impacted due to higher variable costs on account of Middle East crisis, which was mainly due to higher gas prices they had to buy. Kenya higher volumes were partially offset by lower prices, especially in the Southeast Asia market, fixed costs were under control for the integration plan is going well, and rather saw an overall revenue growth due to higher volumes and higher pricing, EBITDA growth, primarily driven by better volume and cost protection and optimization of fixed costs. With this, I hand back to you for a Q&A session.

[Operator Instructions] Our first question comes from the line of Saurabh Jain with HSBC.

My first question is relating to the reclassification. Can you please give out more details what are the objectives that you wish to meet by changing this classification and are there any measured targets or outcome that you can expect because of this reclassification, which may affect on the P&L?

Yes. I think mainly, Saurabh, I think the whole objective here is to make sure that we can continue to focus on reshaping the portfolio towards what we would call as noncyclical products. And these also are the products which are sustainability led. There's a lot of application focus in these products and customer saliency and customer stickiness is very, very high and less volatility in pricing. So we are fundamentally focused on making sure that our portfolio moves in that direction. Our capital allocation will be done on that basis. We are also building deeper customer engagement here because the sales and marketing, the operational teams are all geared around following similar processes. If you look at food, feed and pharma, the regulatory environment under which that operates, especially the food regulatory environment, the pharma regulatory environment is very different from Industrial segment, which is why we have carved it out. As you know, the farm sector anyway is run in a separate subsidiary. So this effectively brings focus into each business to build its own capability over a period of time. This will also see -- show itself -- in terms of capital allocation, you're already seeing part of it, but this would be more sharply seen in going forward, especially with the investments being focused on the Living Essentials and pharmacies.

[indiscernible] to Mr. Mukundan on that segment here. See earlier we had got one basic industry segment having everything in that in terms soda ash or bicarbonate. And basically investors feedback over the last few years, the feedback was more in terms of having a different segment in terms of [indiscernible] noncyclical. This segment would give investors, analysts a better view on the company on what is the revenue towards noncyclical and cyclical [indiscernible] because earlier there was 1 big segment where you were unable to make out within that, what is driving the growth. Now we can look at the components of each of segments and see what's in growth for Tata Chemicals. So there's attempt towards that and based on what investors feedback given so far.

Is there an added cost also involved here when you try to restructure your sales marketing team or other processes? And possible, can you quantify it? And also, can you quantify any realizable benefits because of this resetting any synergies if some of these calculations have done on the back of the...

In fact, Saurabh, this was the way we were running the company. So the operations, the segmentation reflect the way our company structures and the benefits are greater administrative control and also greater ownership of the outcomes, especially from the customers, sorry. And in terms of financial and operational benefits, it is effectively, we will have one view of bicarbonate, one view of higher grades of salt, it becomes very easy to sort of look at a global view in terms of the overall specific products rather than geography view. This is just to drive one solution for every customer. Many of our customers are present in multiple geographies. If you take customers in the food area, customers in the pharma area, customers also in industrial area. They are present in multi-geography. So they also want a single point of accountability which is the way we have been structured. So now the financial reporting also is structured on that basis. But we will still be showing, we will still be relaying to all the analysts, the specific geography-wise P&L so that you also get a view of what geographies to be. And the way it has happened by -- because of restructuring, which has happened over a period of time. While the split is happening in India where there is a split of stand-alone revenue into living and industrial, U.S. and Kenya fall fully in Industrial and U.K. falls fully in living. So it already has happened because in U.K., we have shut down the industrial business 100% because they're unsustainable. And the reflection is also coming in the way that we are looking at the marketing. Singapore is folding into the Living Essential.

U.K. would be in the living, right? We have salt and bicarbonate business.

Yes.

Okay. Understood. So when I look at your CapEx plan, it shows a skew towards your Living Essentials segment. Now going forward from a long-term point of view also, once you're done with this [indiscernible] ae you able to focusing more on the living essentials trying to deploy more capital on that [indiscernible] is that like only for the next 2 to 3 years and then you might need incremental CapEx on the industrial side also.

Yes. So very clearly, our objective is to move away from cyclical business. If you look at the cyclicality of business, it's the highest in soda ash, not that we want to sort of reduce our soda ash operational strength today. It will continue to remain because when it comes back, it is going to be one of the biggest profit drivers. But within Industrial segment, our focus will be on focusing on silica, which is also slightly more noncyclical than soda ash itself. So we will be sort of focusing on OpEx more towards what we explained that we drive growth in Food, Feed, and Pharma, and also specific segments within the Industrial Essentials and try to decommoditize our portfolio as much as we can because that's a strategic [indiscernible] we have been undertaking for the last few years.

Okay. Any time line from your silica plant expansion 50 KT -- the timeline for all the projects because I see that the timelines are missing in the presentation.

Yes. I think if you look at the plant -- salt plant in India, IBSD 82.5. That should get operational by this year-end. So you should start supplying to market by first quarter of next financial year. The 210-kiloton plant in South India, which is mainly there has a 24-month execution time. Similar to the execution time line for 50 KT silica plant. So they will become operational early '28, sometime during '28.

[Operator Instructions] Your next question comes from the line of Sumant Kumar with Motilal Oswal.

My question is for India business, we had a significant improvement in operating level. So apart from whatever the reason you talked on the initial commentary, is there -- because of West Asia War the freight cost has increased overall because of that, the realization is higher salt business, I think volume is higher. So any other reason apart from that? Is my understanding correct?

I think the main driver of this India growth has been the volume increase. That's fundamentally right across all products. And also, there is a higher realization in soda ash because of the foreign exchange shift, which has happened. We had taken a pricing hedgement because the products are linked to -- especially potash is linked to import parity price.

Freight costs also played a role? .

The freight and forwarding costs did increase during the quarter, but they were more or less passed down to the customers.

Okay. Okay. And so when talked about the pricing for India business, how is the reason for contract? And how is the mix contract and spot market for us potash? .

I think India has taken a price increase of about INR 2,000 per tonne, which I think is a spot price, but the contracts are quarterly, as you know, and quarterly [indiscernible] review with the customers.

U.S. significant deterioration, how is the scenario export because of tariff war. Overall, the export market is unavailable and domestic is also subdued so any outlook for the U.S. business, how [indiscernible] 48 per kg -- is going to be reached at that level or it will take time? .

In terms of the U.S., I think one of the key approaches we have is that the biggest impact is the shift which has happened in terms of margin is on the export front. -- especially the export volumes, which we were sending to Southeast Asia, they are just a breakeven level or under remunerative. And that is likely to remain so at least through the year. And unless some capacity rationalization happens in China, it is unlikely to see uplift.

[Operator Instructions] Your next question comes from the line of Ankur Periwal with Axis Capital.

Continuing with the geographic performance there, especially in U.S. Last quarter, we did rationalize some bit of volume, saying that Southeast Asia was not as profitable. So we had taken a strict -- there. We are seeing good volume growth here, but your comment on Southeast Asia pricing being lower. So we are still supplying at lower margin? Or was it a tactical call if you can put throw some light there? And same question on Kenya. Good volume growth, but margin is not there. So your thoughts, please.

SNo. In Kenya, Kenya fundamentally has been because of the pricing as well as -- prices have increased. I think if you really see, there has been not so much the market price pressure, Kenya had very high impact of the war, and that's directly related to oil prices. So when oil price goes from $70 to $100, that clearly reflects in HFO pricing, which leads to compression in margin. And we will try to pass that increase to customers as we can, as much as contracts allow. But clearly, that's a tough spot there. And as the spot prices come down, I think Kenya would also adjust itself. There's -- they have since bought hedged HFO, which covers them up to October, but we'll have to see what happens beyond October, what drags on beyond that. In terms of U.S., while the input cost prices are more or less under their control, they have done well, mainly on back of higher exports to mostly the Lat Am and Northeast Asian market. There were some exports Southeast Asian market, but we have more or less vacated like most of the U.S. players, the Southeast Asian markets to Chinese.

Sure. And given the Chinese inventory being higher, probably that pain may continue, as you rightly mentioned. So the domestic part of U.S. is doing good?

Domestic part of U.S. is stable. And while there is no volume increased growth as such, the pricing levels are more or less stable, maybe $3, $4 ships here and there. the main pricing -- the cost pressure we are facing in US is on logistics and transportation. And we are engaged constantly with customers to pass it on to them. But that remains an open item in terms of customer by customer to ask them to change the logistic costs.

Sure, sir. And just lastly, the same question on the U.K. business as well on the profitability side, your thoughts given the ramp-up in the salt business there as well, but still the margins don't suggest so.

Yes. So I think U.K. had basically fundamentally 2 big events, which were one-off of adding up to about GBP 2.4 million, which is one was on loss on sale of UTS, this is likely to come back by October quarter because we go through a cycle. And second, there has also been a one-off issue related to some of the prior period adjustments. So that has led to fall. But overall, I think our expectation is the U.K. should be EBITDA positive as well as tending towards PBT breakeven.

Breakeven for the full year, that is -- just a clarification. .

Yes. So basically full year, but also in next quarter onwards because these one-offs we don't expect it to repeat.

Your next question comes from the line of Abhijit Akella from Kotak Securities.

My question is on the India business. So we are seeing soda ash sales volumes down about 12% sequentially and bicarb sales volumes down about 19% sequentially. So first of all, what were the reasons for that? And number two, despite this volume decline, we've seen real sharp margin expansion, EBITDA margins are 28%, more than 10 percentage points higher quarter-on-quarter sequentially. Is this some sort of maybe temporary because of some low-cost coal inventories that you were sitting on during the quarter? And in your view, is this margin sustainable next quarter? Or should we expect margins to revert back to, say, the 18%, 20% kind of reach in India EBITDA?

So in terms of the inventory benefit, which are there, I think there are 2 elements here. One is in terms of the overall plant itself, there's been a bit of an optimization done to deliver higher volumes sold to the market, which has led to certain throttling of soda ash production attention level, nothing to do with market demand. And in terms of bicarbonate, it's fundamentally some of the contracts getting realigned, especially some of the tendered contract on contracts we had to forward during the quarter because of certain pricing issues, which we hope to get back during the year. Certainly, in terms of inventory gains, we do believe that [indiscernible] certain inventory gain, which will happen in coal, which would come back to impact the cost in the next quarter because as the fast inventory of the coal goes out, the fresh inventory of coal is coming at pricing, which is elevated because of the basic price but more due to the higher freight cost. But we let this play out in the marketplace in terms of whether we can get better pricing from all the customers because the price increases also have not been transferred to everyone. It's been the only spot price increase which has happened. So we'll let it play out. But certainly, your point of view that worldwide volumes may remain more or less steady, there could be a marginal pressure on the -- driven mainly by the cost.

So just to clarify, I mean what would a sustainable margin range be for the India business, if it's possible to spell that out? And just the other one that I had was -- you made a comment about a reduction in debt because of monetization of assets. If you could please just help us understand what assets were monetized exactly and what the value was?

Nandu, do you want to address the monetization.

Yes. We have sold some land in Q1, and we sold some of the shares we are holding and that contributed to the debt coming down in Q1. That's the answer for that.

Yes. In terms of sustainable margin, it would be somewhere around 18%, which you referred to, I think that would be broadly the number I would pick approximately sorry, 32% to 33% GC margin.

Your next question comes from the line of Rohit Nagraj with 360 One Capital. .

Sir, the question is on the [indiscernible] search and development -- so a couple of things that we have stated here is on the electric battery recycling process. And we've also developed indigenous sodium and battery technology. Can you just throw some maybe more color on the same, how things are likely to shape up? Where are we in terms of the commercialization process and any time lines around that?

So on the battery side, I think we have certainly made the first factory pack and it's undergoing testing. And at the same time, I think we are reviewing the entire business [indiscernible] on battery, especially for the storage application. It will not be an appropriate solution for mobility. It will remain as a restored mainly for renewable power as well as data centers. That's the main focus of that. But we'll come back to you with the specifics of the plan. Right now, we are going through the phase of proven product and also piloting that itself should take better part of this year. After that, once we get through that, we'll come back with specific plans to enter the market and lost the market. Certainly, we can see that several strides have been made by the competition in China and the sodium battery. We remain very positive about it, especially since it uses soda ash as one of the cathode-active material, which is what we make as a product. So it has been patented, and we will be looking to commercialize as basically take it through a pilot phase as soon as our testing protocols are over. In terms of the cathode active recycling business, we are working internally to set up this entire unit. And no major CapEx is needed. It's more or less being tried -- we are trying to set this up in Mithapur. Initial lot is very small because the volume of vehicles, which are more than 7 or 8 years old is very, very small at this point of time. But this will be a business which will be built on OEM tariffs, especially with the auto manufacturers.

Just one clarification on the sodium ion battery. In terms of a requirement, any ballpark numbers in terms of 1 gigawatt or 1 megawatt battery, how much soda ash is required.