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Deepak Nitrite Ltd
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Ladies and gentlemen, good day, and welcome to the Deepak Nitrite Limited Q1 FY '24 Earnings Conference Call hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ranjit Cirumalla from IIFL Securities Limited. Thank you, and over to you, sir.
Thank you, Don. Good afternoon, everyone, and thank you for joining us on the Deepak Nitrite Limited Q1 FY '24 Earnings Conference Call. Today, we have with us Mr. Maulik Mehta, Executive Director and CEO; Mr. Sanjay Upathyay, Director, Finance and Group CFO; and Mr. Somsekhar Nanda, CFO, Deepak Nitrite Limited. We will begin the call with opening remarks from the management team followed by an interactive Q&A session. To begin with, Mr. Maulik Mehta, will share our views on operating performance and the growth trends of the company, followed by Mr. Sanjay Upathyay, who shall take us through the financial and segmental performance. I now invite Mr. Mehta to share his opening comments. Thank you, and over to you, sir.
Good afternoon, everybody, and a warm welcome to all of you on Deepak Nitrite Q1 FY '24 Earnings Conference Call. To begin, we pay tribute to Shri CK Mehta, visionary founder and Chairman Emeritus of Deepak Nitrite Limited, who departed peacefully surrounded by family on July 3rd, 2023. Over 50 years ago, he ramped up Make in India, leading to the establishment of Deepak Nitrite Limited, a professionally driven organization at itemized a strong values, excellence and responsible chemistry. As legacy nation-building by serving society continues to inspire and guide the Deepak group. As we cherish lasts life filled with inspirational moment and fondly remember him for his contribution to the nation, to society, to the company and to our entire return of the stakeholders. Our results documents were shared with you earlier, and I hope you have had the opportunity to glance through them. I will initiate by briefly taking you through the key financial and operational highlights for the quarter ended 30th June. Mr. Upathyay will then present you with a more comprehensive financial overview during the period under review. Following this, we will open the forum for a Q&A session. As we stepped into fiscal year '24, we faced an area of challenges arising from global macroeconomic pressures and slower-than-anticipated demand from key customer segments. The Indian chemical industry, including Deepak Nitrite was impacted in Q1 by factors such as additional supply from China opening up a global destocking of inventory and a slowdown in the Eurozone. This has led to the softening of realizations and impacted the volume of take. In order to save our profitability and market share, the company proactively took several measures like exploring new customer opportunities, optimizing procurement and evaluated valorization opportunities of byproducts. Apart from continuous improvement around operational excellence. These have helped us to operate plants efficiently and consistently deliver supplies to customers while making progress on growth initiatives and strategic parameters. During May, we reported our highest ever production for some of our products, showcasing the solid business resilience. Notably, we have been able to export key pharma and agro intermediates to China during the last 2 quarters, and we will continue to do so. We have also successfully enhanced wallet share in each and every one of our products. Apart from carefully navigating its challenges, we made progress on strategic endeavors. We proactively derisked our business model by securing assured input supplies from alternate sources. We have recently commenced captive power supply and are driving value from waste. Further, the growth initiatives to enter into a substantial supply contracts in all segments ensures a clear pathway for sustainable growth. The development that I am personally excited about is the setting up of a world-class R&D center in Pedote. This R&D center is under implementation and will allow us to further deepen our capabilities and expertise across existing as well as new complex chemistries. We've also made considerable progress on all of our growth initiatives and CapEx plans, making Q1 a fairly eventful quarter on all counts. With this backdrop, I shall share an overview of the performance. In Q1, consolidated revenues were INR 1,800 crores, lower by 13% Y-o-Y and 9% Q-o-Q. The challenging industry-wide conditions amid opening up of China inventory destocking, et cetera. We believe that this is transitionary and have undergone several such cycles in our history. Our focus during the quarter was on factors within our control such as optimizing of procurement, operational excellence, exploring new opportunities with existing and new customers and new products that we have enhanced our valorization opportunities for. This has enabled us to partially mitigate the impact of prevailing weak industry trends, but we must also remember that many of these are sustainable improvements and will take us well into stronger quarters item. EBITDA for Q1 '24 was INR 242 crores, lower by 33% Y-o-Y, translating into an EBITDA margin of 13%. The changes in the global chemical landscape intensified by China's product dumping at lower prices resulted in lower sales realization. Sales at several key products, including Final, owing to a general sluggishness of market impacted our overall performance. Consequently, EBIT and PAT for the quarter declined by approximately 36% year-on-year. However, in most of the cases, we have been able to either retain or increase wallet share. Projects under implementation for brownfield of existing products and processes and CapEx for a short supply of inputs using various CapExes, including photohalogenation and complex Halex fluorination, as well as projects for asset supply are expected to be commissioned over the next 6 to 8 months. These will enhance our competitiveness and together with the cyclical recovery in prices will buttress our profitability going ahead. Now coming to our segmental performance. In Q1, the Advanced Intermediates segment generated revenues of INR 719 crores, lower by 3% on a Y-o-Y basis, anise decline in input prices and hence realizations. Despite inventory destocking by our customers, our margins in PI remained steady. As a result, segment PBT was resilient at INR 115 crores as compared to INR 131 crores last year. Deepak Phenolics reported a revenue of INR 1,089 crores in Q1. The decline in revenue and EBITDA is due to a sharp contraction in phenol spreads due to a supply drug arising from the opening up of China as well as the slowdown in global markets and spreads being at a multiyear low. We do have to also mention that the phenol plant was shut down for the first time in 4 years for its own regular maintenance change, and this was for 15 days in the beginning of the quarter. We also looked at the improving raw material trend to self-finished products at a much more accelerated rate and we entered Q2 with a multiyear low opening inventory to take the best advantage out of the improved feedstock prices. The Phenolic division aims to enhance downstream offerings to projects such as MIBC and MIBK, which will lead to higher capital utilization of acetone and attractive margins. Looking ahead, we are strategically positioned to capitalize on increasing demand and benefit from the trend of import substitution in India. The asset on derivatives remain significant process progress on ground for the project execution. The plant is expected to be commissioned in the first half of FY '25, enabling downstream value-added products. In a key development, Deepak Chem Tech Limited, our wholly owned subsidiary, signed a INR 5,000 crore MOU with the government of Gujarat to manufacture specialty chemicals, phenol acetone as well as bisphenol in the state. BCPL will invest approximately INR 5,000 crores across these projects will be aimed to commence the first phase in '24, '25 and complete the project by '26, '27.Just health indicators, I'd like to share because I know that this question will come up during the discussion. In Deepak Phenolics, we expect quarter 2 to be better on a Y-o-Y basis as well as a Q-o-Q basis. In Deepak Nitrite, we expect quarter 2 to be flat on a Y-o-Y basis and improved on a Q-o-Q basis. And on a consolidated level, we expect both Deepak Nitrite and Deepak Phenolics together to be able to deliver better on Q-o-Q as well as Y-o-Y. So closing, I'd like to emphasize that Deepak Nitrite is well positioned for expansion in various aspects with a strong integration in the value chain. Our investment plan, which, at the moment, appropriate -- the project under execution amount to about INR 2,000 crores plus or minus, reflect our enthusiasm to seize opportunities, both in India and worldwide. We continue to diversify our product offerings, expand our client base and enhance overall value propositions with a strong financial position, valuable customer relationship and when considered growth initiatives, we're poised to elevate our business proposition. Our expansion plans will improve our competitiveness, grow market share and generate value for all stakeholders. I'd now like to hand over the call to Mr. Sanjay Upadhyay, who will address this forum and take you through the financial performance and key updates during the period.
Thank you, Maulik. Good afternoon, everyone, and thank you for joining us today on Deepak Nitrite's earnings call. I'll walk you through the highlights of the financial results for the quarter ended June 30. Deepak performed interestingly during the quarter despite a challenging environment, which impacted most of the chemical industries all over the world. In Q1, consolidated revenues were lower by 13% year at around INR 1,800 crores due to declining realizations and lower volumes in light of inventory destocking by global customers. In spite of that, Deepak Nitrite volume -- volume share has not gone down like at 1 year. But the impact is largely because of the price realization, which were lower as compared to earlier period. EBITDA was INR 242 crores, down by 33%. Trade at a key product in phenols have reduced on the label business in past quarter. In fact, phenol witness felt multiyear cyclical lows this quarter as the real EBITDA margin has compressed to 13% during the quarter, PBT and PAT decreased to INR 202 crores and INR 150 crores, respectively. Our domestic business has generated a rogue of INR 1,432 crores and export revenues were at INR 336 crores during the quarter. Moving to our segmental performance in the Advanced Intermediates segment revenues decreased by 3% to INR 119 crores in Q1 versus INR 739 crores in Q1 FY '23, while EBITDA was down 9% to INR 136 crores during the quarter under review, the Advanced interment segment reported a resilient performance at the back of the diverse product portfolio and strong customer service capabilities performing very creditably despite the challenging industry back growth. Deepak Phenolics reported a revenue lower by 19% to INR 1,089 crores in Q1 versus INR 1,038 crores in Q1 FY '23. EBITDA was INR 7 crores, down by 51% in Q1, while EBITDA margin came in at 10% versus 16% in FY '23. The company's working capital position improved by INR 321 crores. Advanced intermediate were INR 41 crores and Phenolics by INR 82 crores. In Q1 FY '24, D&L witnessed exchange rate volatility ranging from a peak of 82.85 to a low of 81.61. To manage the ForEx volatility risk, the company employed dynamic hedging strategies, which led to a gain of 24 crores in Q1 FY '24. Lastly, on the balance sheet front, company financial ratio continues to be strong, being net zero date company and with solid cash flows, we are very placed to execute on growth plans. During the quarter, we effectively managed [indiscernible] to make advanced services to let suppliers seeing cash discounts and industrial remaining funds in safe investment revenues in the surplus funds are in the contest of being deployed in growth projects. As a result, we achieved an aggregate gain of INR 5.6 crores in Q1 FY '24. On a consumer basis, the company remains base and both for a substantial network of INR 4,340 crores. This will facilitate leveraging in balance sheet for potential expansion projects as and when needed in the future. This was explained in detail by our Chairman in the AGM last week. In the quarter, our community investment in its [indiscernible] CTL was INR 49.5 crores of this INR 94.5 crores was registered in Q1 FY '20 for itself. The total investment in CTL comprises of INR 9.5 crores in equity and INR 490 crores in CDs. After projects are being executed as planned. We are poised to announce commissioning of projects over the next several quarters in a phased manner. Once commissioned, the plants will help secure internal supply of critical raw materials and thereby elevate the profitability levels at full utilization. Further, the company is building world-class R&D centers as explained by Maulik to solidify its capabilities and expertise across complex times. While accelerating growth momentum while existing R&D setup keeps working on various product and processes. With that, I would like to now request moderator to open question and answer session please.
We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Madhav Marda from Fidelity International.
I just had one to question. I think in the initial remarks, you mentioned that you all have seen quite a few subcycles in the history of the company. Just wanted to understand, is there -- what are the key things which are similar and key things which are different in this cycle versus the past ones? And in your view, what could help in the cycle sort of correcting itself and things coming back to more normalized?
See, when we alluded to the fact that we have seen several cycles, what we mean is in a general sense, when new capacities are coming in, you will always have a short period of time when demand grows and demand grows at a relatively contracted base, 5%, 6%, 7%, 8% CAGR. But when capacities come online, we come online in a certain manner. So over a period of time, this normalizes, so the demand is able to match up to the capacity that has been commissioned. And hence, when we're talking about commodity chemicals where the phenolics plays largely, you have such situations of bull and bar cycle. But over a period of time, they normalize. Similarly, as China has always been over the last 25 years, a significant player, maybe the most significant player in the production of chemicals. Generally, what ends up happening is that the production comes online in a normal market situation. What we have right now is a perfect storm where there is low consumption in China and certain unlocking of COVID measures in China have pushed a lot of volume out. But globally, because of tightening interest rates, there is also the headwind with regards to long-term visibility on consumption. Let me clarify that in the short term, demand is there, consumption is there, but customers are not able to project a situation beyond the next 3 to 6 months. And wherever they are, that is simply because they may have their own downstream tied up in the consumption markets as well. So cyclicality on this sense in the chemical industry, whether it is in specialty or in commodity chemicals from the involvement of players like China and from the involvement of players like Europe, this we have seen. And we expect that Deepak is not only well positioned, but we'll be having an opportunity to be able to make significant strengthening of its moat as we move forward.
I would just add one thing to this. Though cyclicality affecting the prices, we are able to maintain I repeat our volumes. Even if you see some are there, we are confident that we will achieve last year's production level. Maybe we'll -- not production but the turnover and maybe we'll cross that also. So our -- the market share remains intact and the position in this Deepak fatalities, we are certainly once the change at the demand picks up, we are very confident we will do better than what we have done in first quarter.
Got it. And just a follow-up from my side would be that so the key thing to watch us for incremental is China's own domestic demand kind of coming back, and that should solve for a lot of challenges that the global chemical industry faces. Is that like one key thing to us for which are the other pointers that we should look at to sort of think about recovery?
So as generally, as the interest rates stabilize, as global consumption comes to a point where they are able to project over a longer period of time. As I mentioned, right now, customers also have a visibility of only a couple of months. But as they become confident that the global situation is stable, even if it is stable at a higher level, they are very happy to place a long-term commitment for volume. But at the same time, China is picking up its internal consumption as well. So whatever you see, which is a slowdown in terms of quarter month-on-month export as well as imports in China. A large part of this is prices, not so much volumes. Volumes are intact in that sense. And as we move forward, we expect that China will go closer towards its own health sufficiency and India will be more linked with the rest of the world in terms of global demand and supply.
So the India supply chain diversification, which has been a key driver for growth for the companies in India. That kind of still holds, right? This is more of a cyclical challenge than anything changing structurally on this?
Yes. But I will also caution that it is easy for companies and for investors to just bet on the same course. So this is certainly a key driver, but by no means is it the only driver. And there are other important factors at play too, including, but not limited to the Indian companies own resilience and competitiveness of things like Deepak are used to competing with China. So our performance matches China's ability to perform on the best of days as well as the worst of days. So we don't necessarily need to depend on China doing well or badly in order to have a level of resilience from our own operational excellence.
The next question is from the line of Nirav Jimudia from Anvil Research.
Sir, 2, 3 questions on the Randy part, which is mentioned in our annual report. Sir, one is we mentioned that we have successfully implemented a process for a chemical which is used as an eco intermediate. Further, it is written that this involves a process where a lot of new ideas across the chemistry and engineering was implemented to achieve that these are critical to quality parameters. So if you can just elaborate more on this with respect to the changing capabilities prior and now that the samples have already been approved by the customers. And how much of this rollout in terms of the opportunity, so the wallet share could come to us once the production is ramped up from Deepak?.
No, Nirav, thank you for the question, but I can't answer it. What I can tell you is that we have been able to not only have the product approved with regards to quality, but we have been able to achieve best-in-class item efficiency as well. So moving forward, what we have done is we have back not only in being able to deliver the product, but doing it with a degree of sustainability, which is higher than other industry peers. And more and more such products will come out from Deepak stable, which will not just be -- I mean, they may be me-too products. but they will be utilizing processes which are unique to Deepak. We may have taken an existing process, but we have significantly improved it. And in some cases, we have added new processes, which are not currently done by, I think, any company in the world at this moment. As we are able to commence commercial production, we will be able to give more visibility. Right now, it is very, very premature. But I can give you an example. What we have done, for example, in Phenol is we took technology from the best technology provider in the world. and the process that we have today is optimized to a level where the technology supplier even though other potential customers have gone to the same supplier, the supplier is unable to match the productivity and the efficiency which Deepak has on a day-to-day basis. So this is our in-house internal capability. And until now, we have only been using it to improve existing processes. Now we are applying it to improving novel processes as well. I know this all sounds very vague, but we will hope to add more color over the forthcoming quarters. So all of this will be done largely in-house.
Okay. But sir, one other reason ramp-up on the commercial production is on. It is safe to assume that we will be the few producers of this product in the world and suffice to say that we'll be the lowest cost producer of the product we supply?
Yes. That is for sure. And we hope to be able to take a -- so what we've done always is start off with whatever, but over a period of time, we have been able to become a dominant supplier for pretty much all of our products at least in Deepak Nitrite compared to any global scale producer, we are at world care. So hopefully, moving forward, we will not just be one off some, but we will be one of very, very cute. Also, I agree that we will have the best as an efficiency in terms of our conversion from raw materials to FG.
And we should see some contribution to the top line in second half of FY '24, right?
No. This will see value addition in the first half of '25. There are different CapExs, which will add revenue as well as PBT at in the later part of this financial year. But I think to be on the safe side, you should look at a full year starting next year, not this year.
Perfect. Sir, second observation is also on the one qualitative remarks which you have mentioned in the annual report regarding the pilot facility for the repo-based process, which we have restored. I think it supports very high pressure oxidation reduction for adipic acid as well as the salicylic acid. So if you can provide some insights qualitative would also help in terms of what is this actually and how this will help us in developing the further value-added products?
I would not like to comment on those.
Okay. Okay. Got it. Sir, last thing is on the spend onto post CapEx, which -- all the plans which we have commissioned. So if you can share the CapEx as well as the cost savings which could accrue to us with the commissioning of this plant.
So I mean, the plant has been commissioned, but cost savings are not the right way to put it because we have significantly reduced the volume of spend that we will push out and cost savings are always going to be in relation to the price of fresh asset. What I would like to, however, say is that this will add a significant core advantage to our scope on Scope 2 emission disclosures. And more than that, it allows us to have a more sustainable operation where we are less dependent on external vagaries. So all of these things have a cost of energy, a cost of fresh materials, and these things change. So it is difficult to give you an exact number. But anyway, what I can tell you is that the fantastic concentration plant fit well within our internal benchmark with regard to savings and has the significant added benefit of improving our ESG. So I look at it from not the bottom line but from the right thing to do.
Thank you. The next question is from the line of Rohit Nagraj from Centrum Broking.
Sir, first question is on the new R&D center. So we have been building capabilities over the last few years and that is also displayed in terms of the newer products that we are working on and the projects which are getting commissioned. So what are we incrementally working -- I mean, we plan to work on through this new R&D center. So is it that we now would be also focusing on exports market given that predominantly earlier, our focus was on import substitute. So your thoughts on the same from a vision perspective.
So we supply to the import substitution market. But more and more, the import substitution market has become a good oil for the global market because more and more of these multinational companies have started putting up their own investments into India or have tied up with converting partners in India. So now we -- I mean, we don't look from Deepak Nitrite perspective at just an import substitution, but we look at from the perspective of making in India and making it in order to be able to supply to the world, which, of course, includes India. So processes that we are building up in our R&D center. Some of these are the processes which we currently have in our technical toolkit, and we are adding new processes in this, which are at a very advanced stage. And what we are doing is we are ensuring that we have a very high level of integration, both software integration as well as hardware integration between our R&D, our scale-up facilities and what we would call our challenged product challenged capability plants, which are somewhere between many plants and pilot plants where we are able to demonstrate our capability. Now we do -- we are also getting into a lot of gas-liquid reactions and gas-gas reaction. And as I have mentioned earlier, we are going to be -- I mean, we are moving ahead with at least 3 life sciences products, which will be downstream of our existing product basket. And these are, as I earlier also mentioned, going to be tied up with strategic customers in multiyear contracts. And we'll have some small volume of sale into the market as price discovery also. So these will all be taking place on an accelerated basis in our new R&D center. What it will definitely allow us to do is it will allow us to do more of the same faster rather than keeping everything in a long line of projects that need based from the assets that are available. Along with that, it will also allow us to get into a couple of new processes, which I will not get into detail for right now.
Sure, sir. This is helpful. Sir, second question is on Phenol. So in your opening remarks, you alluded that there have been supplies coming from China. So does it mean that there have been significant capacity additions in China, which are over and above their internal consumption. And that will probably have some bearing on the spreads over the medium term? And a second, a light question to that. In terms of the capacity debottlenecking that we're talking about of 10%. So after the debottlenecking, our capacity would increase to 330,000 from 300,000?
Okay. So for the first part, we are not seeing any significant imports of Chinese in all into India. However, because China is the largest producer in the world, its presence on a global stage means that there is an increased pressure from non-Chinese Phenol suppliers to also participate in the Indian consumption. Nonetheless, as we alluded to in our opening remarks, Deepak has been able to maintain as well as grow its wallet share. So while these imports were there before we started, these imports continue even when we are running our plant. We expect that these imports will continue even in the future. Sometimes, this is because the new capacities that have definitely been commissioned in the last 6 months, has not yet had their downstream capacity is commissioned, which generally may happen with a delay of a couple of months. Nobody wants to be in a situation where they commission a downstream first and then the upstream. So this may have a transient effect, but all I can say is that, yes, there will always be this pool between what the changes in terms of RN and the changes in terms of SG especially for a commodity chemical like Phenol. But we remain confident that we will maintain or grow our wallet share in India as India as consumption continues to increase even compared to the rest of the world where consumption may be moderating or slightly decreasing, India is a bright spot on the global economy when it comes to the consumption. And Deepak is in a prime position to be taking advantage here. The second question that you asked with regards to the capacity rather than going into numbers, 33, 33 that, whatever. What we can say is that on a debottleneck basis compared to the design capacity, people should and will be able to produce about 50% of what it had invested to produce in 2018.
Actually, I would rather elaborate here also that, see, when you say debottleneck in the process is already on. If we have touched this capacity, say, 135, 140 a week. I mean this is not a one should go -- this is now devoting capacity will go up like this. It has gone up. If the last 1 year, we have definitely gone up from 220, 225, 230, 260, 270, 280. So this is how it is. And to put any number is digital as our team is capable of being much, much more than what we say anytime. So we are very confident that we will deliver, as Maulik mentioned, about 150% on a consistent basis that the approach, it can cause even beyond that.
The next question is from the line of Anas Dadarkar from Valuequest.
So actually, I didn't quite get the last one, you mentioned that the Chinese report. So if you could just repeat what you said because I understand, I think in the Q4 call, you mentioned that the company doesn't have competition from Chinese in all manufacturers. So it's still an interest just to you.
Now from China. There is some in India, but it is very, very small. But because China is a large player, it's applying into the global market disrupt other suppliers who then divert more volume to India. This is a normal situation. You have to think of in like any benign, where an ortho, if one place get occupied, it's a water, it moves into another location. Please continue.
Okay. Got it. So no, that's the promise. So basically, what you see is the second order effect other than coming into an...
Yes.
The next question is from the line of Ankur Periwal from Axis Capital.
First question on the advanced intermediate side. In your opening remarks, you did mention 3% Y-o-Y decline is largely led by realizations, while volumes have been largely intact. Just wanted to understand within the segment considering from, let's say, the basic product or the value-added segments, is there any significant diversion there? And how has been the competitive intensity in both of them?
Okay. So let me give an indication of what we are seeing in the end application industries. So I would -- and I'm telling you about the company as a whole, including Deepak, in all wood and construction, we are seeing an improving trend for sure. Although we are seeing somewhat of an improving trend. And what I'm telling you right now is on a sequential basis, just to be clear, Pharma is relatively flat or slightly better. Dais is flat, but it is flat at a low point over the last couple of quarters, dais has not picked up to what it was maybe about a year, 1.5 years ago. Hydro also flat. Paper and textiles also flat but also at a very low level. So where I am saying that we are seeing an improvement is on the basis of how we see quarter 2 going where there are certainly shoot green shoots that are visible, as I mentioned earlier, in the construction and the auto segments. And the other places where we see an improvement is because we are able to take wallet share away from other players who are in the same product.
Sure, sir. And from a growth perspective, given that we have been launching newer products earlier as well. And now also, there are plans of the new value-added products getting launched. How do you look at them, let's say, from a growth perspective in terms of your market share gains with the existing ones as well as the new customer addition?
So our guidance with regards to growth and the value that, that growth would bring in to our top line and bottom line remains intact. So even today, we see a similar top line as well as our bottom line to all of the CapEx which are currently under execution. There are a few other CapEx, which we have not yet started to execute, which are at the engineering level. And these are also being seen from the same life. Today, we expect a similar outcome from those, but we are -- I mean we are going into it with caution, talking to customers because they also need to be able to give us the same confidence not only on prices but also in terms of volumes because it will all be multiyear contracts. But today, I can tell you that there is no drop in our excitement about the existing projects as well as the ones that we have not yet announced.
Sure, sir. And just a follow-up on that. What percentage broadly of the business here will be more on the longer-term basis, more like a client commitment there?
So most of the new products that we get into products will be with a significant part of the volume -- majority of the volume being on a contractual basis. Some brownfield expansions that we do for existing products, we continue to have the same blend of contractual and noncontractual. I hope that gives clarity.
The next question is from the line of Abhi Takara from Kotak Securities.
Just had one question actually with regard to the project pipeline that is getting commissioned over the rest of this year, '23/'24. So while we are aware about the integrating to as well as the asset capacity, both of which will serve [indiscernible] projects, brownfield or fees that were commissioned in the past that we should expect to start contributing to the numbers over the rest of this financial year?
So at this moment, we have about give or take about 2,000 INR 2,100 crores, which is under execution. This does not include projects where we have not yet tied up everything. So if we have tied up everything, including the customer contracts, including the RM sourcing, et cetera, then we would add to this number. So when we're talking about that 5,000 and all that, that is a separate amount because we're still in the process of tying up with customers. So this 2,000 is well on its way and over the next, I think, 1 year or at least the next 5 quarters, pretty much all of these should be commissioned. And this will be a mix 50-50 of bottom line accretive as well as top line accretive. Let me highlight that anything which is top line accretive, is obviously also bottom line accretive.
Abhijit, if you're asking about the past brownfield, whatever we have done, the expansion and then the countries were fully sold. Only issue is that today, if you see the agro industry is not doing that well. The demand is subdued. So there is an impact on those -- I mean we are not gunning at 110 million side at double the CD. So if you ask the double capacity, are we earning fully then no. But then we are much higher than the earlier levels. That much I can tell you. The word capacity. Of course, we have done in past a full double capacity. But today, it is lower. And then say nitrite also, we have capacity much more that what we are. But yes, we are running a little lower than our capacity. So today, there is a subdued demand in the market, no doubt on that. We are running full selling higher volumes as compared to earlier years and even this year also. But we still have spoken to increase further capacity if the demand revives further.
No, that's very helpful. So just maybe one follow-up on the advanced Intermediates business. Sanjay, you mentioned the sodium nitrate coming a little bit subdued utilization levels. How about the other major products in that segment, like if we take microporous by, et cetera, OBA or the finance specialty side? Is pressure or sort of even across...
No, Abhijit, let's not get into product space but you know and we told also that the products going to dive and die into media. There, there is definitely an impact. So we're going to textile also. So there, you will this impact is demand slowdown is certainly felt anything there for past 1 year. I mean, things have not improved as such in those industries. And there, we are not able to do 100% due [indiscernible]. Normally, our tactic is to grow below 100%, which we are not able to do, though, we are selling the volumes higher than last year, but then capacity can be debottlenecked and the ELD bottleneck. But to answer your question, Abhijit, [indiscernible] that is possible because we might be subdued. And applications rather than product specific. You know where the application...
Yes, absolutely. No, that's clear. And one last thing on the raw material side, we've been seeing softening commodity prices -- but for us to sort of benefit from those, will we again need to see your demand recovery before we start to be able to hold on to those benefits or...
No, not really. In fact, if you see the first quarter having some impact of these inventories also because we are importing also for our finance specialty. Now if you import you on import in a very small parcel. So when the price suddenly fall in prices started volume, we were carrying inventories, and that was consumed in the first quarter. So second Q2 will not have much impact of raw material. So we should start seeing the benefit. As Maulik explained that this quarter looks better than consequential in Q1.That is largely because we in Q1 volumes here, but this impact is not -- will not be seen then you'll see a better number in Q2.
The next question is from the line of Rohit Jain from Tara Capital Partners.
Sir, one question on the outlook for global Phenol. You said that globally, the demand for Phenol is not growing and India remains a bright spot. So in that sort of context, this pressure that we have from grid getting imported from other parts of the world. Is that something that we should expect on a sustained basis in the future also? Or you still maintain that this is a transient issue and this is going to solve sendout.
Okay. Just to clarify, it's not that the demand for Phenol is not growing. We just said the supply of Phenol in in the last 6 months has been significantly faster than the growth in demand. And as I alluded to right in the beginning of the con call, this is part of the regular bulbar cyclical trend that one sees with commodities. Now India's demand is growing faster than the world's demand. And hence, just because of the gravity of India's demand outstripping world demand, there is more interest from international suppliers. But as I also mentioned, Deepak has been able to hold its own, has grown its wallet share and has ensured that we can be able to make product available from its plants. In Q1, we had a short 15-day shutdown. But this is the first time in 4 years that we've taken it, and this is a critical part of maintaining any capital invested chemical plant, which operates on a continuous basis. So yes, there has been an impact that was felt in Q1. Similarly, there has also been the impact of Deepak destocking its own SG in order to ensure that it is able to best take advantage of the lower-priced raw materials heading into Q2. And so both of these have been playing on the numbers that you see in Q1, which are both limited to that quarter and will not come into Q2. What this means with regards to global demand and supply is that, look, the global production of Phenol is higher than it was at the same time last year. And soon enough, we will also start seeing a significant increase in the consumption of phenol as the downstream capacities come online. So in the interim period, we may have a situation where the supply of Phenol is more than the consumption of Phenol and this will moderate over some quarters. So I would just urge all of our stakeholders to be patient with us, this is a normal situation. And there's nothing here that is particularly for turbine to the kind of strategy that phenol has to undergo. Nonetheless, as we have also mentioned that Deepak is investing in its own downstream capacity, which will be consuming both phenol and acetone at market prices. So any benefit that we see there is only accessed on the base numbers that we are seeing today. And even the EBITDA percentage will be slightly better than whatever we are seeing when it comes to the prices for phenol and acetone.
Okay. And just one related question to that. You've mentioned that you have seen the cycles earlier as well. One question is, how long do you expect this cycle to last? I mean, is it a 1- or 2-quarter phenomenon? Or do you think it could go on for slightly longer than that? And the reason I ask is there is a view that a few market participants have, which is that structurally, China's growth is now -- at least the capital investments are going to be much lower than it has been in the past. So a recovery in China, even if it happens, would be consumption led and not investment-driven. So with that sort of a context, how long do you expect the cycle of extra supply and lower demand to sustain? I'm going to answer your question on a consolidated basis, not just Deepak Phenolics Nitrite. But on a consolidated basis, we do believe that the amount of destocking that took place in the first half of the year. has softened, and we expect going into Q2 and then Q3 onwards, the destocking will still be there, but with a materially lower impact compared to the first half. Now whether this means that we are back to whatever -- what do we consider as a normal is a question. But all I can say is that Q2 and Q3 look to be sequentially better than the first half.
Primarily under pressure simply because of the destocking. That part will be slowly addressed. Now what happens with regards to macro interest rates and recession class, taxation and all that, those are in the hands of things like the federal reserve or the bank of invent or wherever else you look at it. So those are not in anybody's visibility. But we are seeing some level of cost correction there as well. The tightening of interest rates does not expect -- it's not expected to be something that continues for quarters at an end.
The next question is from the line of Vivek Rajamani from Morgan Stanley.
Just one clarification and one question from my side. So I just wanted to clarify, when you were talking about the end segment demand with respect to the trends that you are seeing like wood construction, autos, et cetera, you're talking about it from a sequential perspective, right, Q2 over Q1, right?
This is correct. No, sorry. Sorry, sorry, sorry. Yes, it is sequential. I agree there. However, I would also like to mention that a couple of them are seeing, for example, plywood is seeing an improvement even compared to the third quarter of last year. Right? So one where we are seeing an improvement, certainly, I mentioned sequentially, but it is also longer than sequentially. The rest of them, you are absolutely correct. Dais over the last 1 year has been down. Even last year, it was down. We waited for a long time for festival season to come, and it didn't clearly come. Nonetheless, we sold some of the highest volume that we have sold, and we will actually exceed that number this year. Primarily, this is because of taking market share away from other players. But if I'm talking about the demand in the end industry, we are yet to see die and colors get into a celebratory mode.
Sure, sir. classification. And the question that I had was, I think you mentioned in your presentation that you've been acquiring customers, and you have also talked about the commencement of exports to China. Just wondering, would it be possible to give any indicator sense of the margin profile from some of these new customers? Is it comparable to your existing isomer base? Or is it better? Or can you just give some color along those lines, that would be really helpful.
I can't give you a lot of details there, but I can say that it is actually a little bit better. So when we are selling to China, we are discovering that the margins are better. Now whether they remain better or not, I don't know. We will see how it goes. But right now, this is more exploratory. And I think it's too early to tell, but the margins are at least as good, if not better compared to our normal sales.
The next question is from the line of Rohan Gupta from Novama.
Sir, just a few clarifications. So first is on phenol plant. You mentioned that the consistent utilization rate will be 150% of the related capacities of 2018. Sir, this includes the kind of 10%...
Existing consistent capability rate, we will manufacture and we will sell whatever we believe is the right number. But our ability to produce consistently will be, as you mentioned, compared to the installed capacity, a significant improvement
Yes, sir. Fair enough. I'm talking about production on definitely selling will be dependent on the market conditions. So does it include the 10% kind of expansion in brownfield, which you are likely to go through our debt is on over and above this?
No, no. This is including...
Rohan I responded to earlier question, let's see when we talk of debottlenecking 10% and the from the last level. But we always close a what we achieved last. So actually, the capacity is going up beyond 3, you can assume, and that's what Maulik was mentioning that consistently achieving 150% that will be done once the debottlenecking is overlay, which is connected to be over in next couple over this month. So after that, you have an able to reduce 150%, it can go beyond that also, but consistent 150%.
That will be our new floor?
We can make more.
10% and please we cannot talk about it now.
Right. So this 15% will be available, I mean, from Q3 onwards, right?
Yes, for the current year.
In winter, we may be able to produce small because we have to do less Chile. We don't include that in any guidance.
No, so that is fine because those are the technical companion number. Sir, second question is on your new project of INR 5,000 crores investment commissioning. Sir, if you can give some more light on that. I mean, in terms of US talk to the government and the project has to tick off. But I mean, will it include phenol as its own -- all these are the -- in your existing line of products on the [indiscernible] chemicals also, you have mentioned that some of the new products and will be included there. So can you give some more sense that it is completely in the existing line of the business of the company or you are trying to add some more diversified revenue stream from the INR 5,000 crore, I know you [indiscernible]
No, so you've answered that question yourself, Rohan. While there will be some participation of phenol and acetone, most of the other products, including, for example, as you mentioned, ethanol, including the specialty chemicals that we will be putting up our products which are having a very tight level of synergy with our existing platforms, but these are new products. Ethanol also for us is a new product. When we get into manufacturing of polycarbonates, it will also be a new product. But as you can imagine, all deals will not spot from our -- these are upstream and downstream.
Yes. So these are all the products which you have already talked about. I was just asking that are we expecting any new completely new chemistries or new revenue stream be included there?
Yes, yes. Because see, when I say specialty chemicals, it gives me so much bandwidth to be absolutely vague pretty much all of the CapEx that is here is of products which are not currently manufactured by Deepak, which will be manufactured by Deepak and which will have a very tight level of integration with our core competencies as well as the new ones that we are adding. For example, we're just stepping into photo chlorination and fluorination. So these will now -- these now become part of our technical toolbox. And when we invest into this larger CapEx, they will become part of what we call our core competency. So something which we are not used to is it is an opportunity. Once we invest in something, we start doing it commercially, but it is only for a couple of products, we call it part of our technical toolbox. And once it is something that we are comfortable using from multiple products and in multiple states, when we call it part of our core competency, dieselization, nitration, hydrogenation, these are part of our core competency. Sulfonation, fluorination, chlorination, these are part of our technical toolbox.
Sir, just last question or clarification only, you mentioned that both our subsidiation all plant is likely to witness a Y-on-Y as well as a sequential improvement. I understand probably sequential because of your plant shutdown this current quarter and extremely low spreads, which we are seeing in all pearl in the stand-alone business, also you mentioned that still Y-on-Y kind of flattish kind of number. That business, as we have been consciously investing and last year, it has gone through a complete low cycle, our stand-alone business and the product there. It still not seeing any significant improvement there on Y-on-Y, we should be seeing some surge and uptick in that business.
See, on the stand-alone business there is a good amount of it which goes into the die and colors segment, right? So while this -- and so the 2 industries, which B&L on a stand-alone supply to, one is in the ties and the other is in to paper and textile. These continue to be underperforming the rest of the applications like Agro, Parma, Rubber, Dosing, which are reasonably good and our contractual agreements are well maintained. What we have is 2 end segments, which are slow, and I'm giving you a cautious guidance because if you speak to a lot of other companies who are in this space exclusively, they will give you on optimistic disability with regards to Dais. We are just telling you what we have being told, if this picks up well and good. Maybe it picks up in the tail end of Q2, maybe it picks up in Q3. I'd also mentioned that there is a sequential improvement that we are seeing. So being halfway into Q2, what I can tell you is that these are segments which have not seen as much of a bounce back as we had hoped. And hence, we have given a guidance of flat, flat compared to last year and better certainly much better compared to Q-o-Q.
[indiscernible] agrochemical business under final specialty, we were planning to launch a couple of AI technicals and also intermediate. As you mentioned that in agro chemical industry is going through a tough time, are there any delays in those product commission or they are all intact as from now?
No, no. There is no delay. In fact, as I mentioned last year, at the end of last year, we commissioned and then within a couple of months. So for example, if we plan to commission a plant to make 100 tonnes, we commissioned to 100 tonnes, and then we debottlenecked it very quickly to 150 tonnes. So when we debottleneck to 150, we are today selling about 100. So it is as per what we had invested in, but not as per the debottleneck capacity, we expect this to come back anyway. But here and now because there is destocking going on through the entire value chain, including at the farmers and, we are cautious about this based on the indications our customers have given. What I can tell you is that not only does the wallet share remain intact, but the long-term visibility for the growth of these applications also remains intact. So I would caution to say that agrochemicals is not doing well. In fact, on a longer-term basis, active, but on a shorter-term basis, there are headwinds, which I believe will culminate over the next quarter or 2.And then we should have something of a normalized situation.
The next question is from the line of Krishan Parwani from JM Financial.
I think you answered a couple of my questions in the previous answer, but just a couple of clarifications on that. So it is regarding the INR 5,000 crore investment. So just wanted to understand because in order to put up, let's say, or in order to kind of reduce the imports of this in all of India, you would have to also expand to some extent as you own capacity. Is that understanding correct?
Yes. Part of it is some expansion and part of it is from greenfield, correct.
Understood. I mean, have you kind of finalized how much of this INR 5,000 crore number would be towards the distil production? And how much would be for, let's say, penal expansion and how much for specialty cans?
No, we have an indication internally. Certainly, it is not right for discussing externally.
If you see the press release say 3,500 is towards [indiscernible] and 1,500 is towards finance specialty.
Noted. That is helpful. And have you kind of -- or are you okay to kind of, let's say, go into the detail of specialty? Or should I not ask at this moment?
No, no, not at this moment.
Because all of these are at a very advanced stage when it comes to engineering and planning. So while we are still discussing with customers for signing up of these multiyear legally binding contract, I would not like to go into more details.
The next question is from the line of Hitesh Agarwal from Fair Value Capital.
Yes, sir. My question was the CapEx, which we'll be doing under a deeper trend, is it exclusive of INR 2,000 crores announced for Deepak Nitrite and Phenolics?
Yes, what is ongoing is ongoing. This would be in addition to.
The next question is from the line of Veshna Videshmuk from HB Securities.
So I wanted to ask something on Deepak Phenolics. So do you see the demand side... So you see is on the demand side Deepak Phenolics, just wanted to have a light on the margin side. So you have to plan on doing on the actions that we're going to take to increase the margins of Deepak Phenolics, in all as compared to the first quarter? Or these are on the mean -- because you already said that the guidance for the margins are going to remain same as you have already said that before. So what are we going to do to improve the margins there in stone?
I would not like to specifically answer any questions about a product or big product, but let me give you clarity. We maintain a particular guidance that we have in Deepak Phenolics in the next couple of quarters, in Q2, Q3, we should see a range-bound EBITDA of about 12% to 15% as compared to whatever it was in Q1. And in D&A, we should see a range bound between 20% and 22%. On a consolidated basis, hence, we should see something between 15% to 18%. This is, of course, different from what you saw in Q1. And hence, I'm confident that in the rest of the year, we will be able to perform definitely better on consequential as well as on a Y-o-Y basis.
The next question is from the line of Hitesh Agarwal from Fair Value Capital.
Yes, sir, the CapEx plan, which we have signed, the INR 5,000 crore MOU, could you give us some guidance on what is the asset turns and how we are likely to fund the CapEx?
No. I think we have enough tools in our toolbox to be able to do it via a judicious mix of internal accruals debt. Right now, we are at 0.0 as well as raising of funds which required to other routes. In case we acquired. So we are very, very comfortable, and we have lots of this.
Thank you. Ladies and gentlemen, that was our last question. I would now like to hand the conference over to the management for closing comments.
Thank you very much for joining us on this call. In case you need further clarification you can talk to [indiscernible] or our Investor Relations team. Thank you everyone.
And have a great week.
Thank you. On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.