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Deepak Nitrite Ltd
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Ladies and gentlemen, good day, and welcome to the Q2 FY '23 earnings conference call of Deepak Nitrite Limited hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Ranjit R. Cirumalla from IIFL Securities Limited. Thank you, and over to you, sir.
Thank you, Rituja. Good afternoon, everyone, and thank you for joining us on the Deepak Nitrite's Q2 FY '23 earnings conference call. We have with us, today, Mr. Maulik Mehta, Executive Director and CEO; Mr. Sanjay Upadhyay, Director Finance and Group CFO; and Mr. Somsekhar Nanda, CFO, DNL.
To begin, Mr. Maulik Mehta, will share his views on the operating performance and the growth plans of the company, followed by Mr. Upadhyay, who will take us through the financial and segmental performance.
I now invite Mr. Mehta to share his opening comments. Thank you, and over to you.
Hi. Good afternoon, everybody, and a warm welcome to you on Deepak Nitrite's Q2 and H1 FY '23 earnings conference call. I trust you had the opportunity to go through our results documents that was shared with you all earlier. I will begin by briefly taking you through the key highlights for the second quarter and the major developments and strategic approach for the coming year. Mr. Upadhyay will then present to you the financial overview during the period in progress. Following that, we'll be open for question and answers.
Before we begin a quick update on the development, both the fire incident at Nandesari in Baroda on June 2, 2022. This incident led to the damage of certain property, plant and equipment, inventory and has interrupted business for which the company has completed all the necessary actions for restoration of the facility and to restart the operations at full capacity. The company is adequately insured for reinstatement value of damaged assets and loss of profits due to business interruption. The company has lodged a claim of this incident with the insurance company and the survey is currently ongoing. We are heartened of course, to keep in mind that there is no impact, no loss of life of any sort. The Nandesari plant of the company lost 100% of production for 1 month. And upon receiving direction from various authorities, operations has been resumed in a phased manner from the early July period and full production capacity has been achieved in October. Hence, the results of the current period are not comparable to the previous period into that extent. Also, I would like to highlight that for the month of July, operations at the Nandesari facility were made using the far more expensive natural gas rather than coal, which is historically the fuel of choice. While we had a well-planned and functional firefighting system in place before the incident, which contributed to 0 loss of life, we have further strengthened our protective systems with incremental upgrades, not just in Nandesari but across all of our locations. In the second quarter, we worked through challenges pulled by loss of production caused by the fire incident as well as a very volatile global environment. DNL has exhibited certain agilities and initiatives and adhered to its delivery commitments despite the sustained inflationary challenges in inputs as well as the higher operating costs and logistics. As global supply chains continue to get realigned, we have demonstrated to our customers that they really can depend on Deepak. As a result, our wallet share across all end user industries has either remained stable or increased in the quarter. On a consolidated basis, revenues were up 25% at INR 4,041 crores in H1. Despite the short-term concerns outlined, revenue growth was driven by strong volume growth in the Phenolics segment. We have operated all of our plants with the exception of Nandesari at optimal utilization rates. As of conveyed, a phased restart of Nandesari during the period under question makes this quarter not equivalent to the previous quarter. The Phenolics plant operated at a continuously high utilization throughout the entire quarter despite the regular monsoon disruptions that take place on power, thanks to the newly commissioned power plant. In the Phenolics business, we have witnessed declining pricing in the beginning of the quarter. As the global supply chains undergo realignment, one thing that we have noticed is that in Q2, Europe was more concerned with burning crude for energy rather than consuming phenol. So RM movement was not in line with finished product movement. Likewise, China saw a moderation in demand as the economy awaited the results of the CCP elections that take place once every 5 years. Overall, volume growth has been strong in the quarter, but cost of key raw materials and utilities have been challenging for the industry in general. Further, we witnessed cost pressures in utilities, and we also incurred cost for restarting the Nandesari facility in a phased manner without the benefit of the corresponding revenues. Of course, this will be addressed in time via insurance loss of profit. In Q2, FY '23 on a consolidated basis, revenues came in at INR 1,974 crores, up by 17% year-on-year. I would also like to add that last year's base benefited from above average realizations in key products, especially in the Phenolics segment. During the first half, revenues in Advanced Intermediates segment surged by 32% to INR 1,434 crores. Alongside significant input price inflation, there was a wild fluctuation in exchange rates. The company met its delivery commitments and achieved a good top line performance despite these difficulties. This was also aided by gains in key product categories as a result of increased demand. The company has been successful in passing on cost increases while maintaining and growing market share. Demand for key products in the Advanced Intermediates segment remains robust. Deepak Phenolics also delivered a strong top line performance during the first half, with revenues increasing by 22% to INR 2,625 crores. EBITDA performance tapered due to declining realizations. However, this was partially offset by better manufacturing efficiencies and active RM and utilities management, supported by cost control initiatives. Despite external headwinds during this period, DPL continued to achieve high average plant utilization. Nonetheless, profitability has been impacted due to a reduction in price of phenol and an unprecedented rise and volatility in the rate of key raw materials like benzene. We are expecting the margins to be better in upcoming quarters as these situations return to normal and the relationship between the raw materials and the finished product is re-maintained, where both of these are used for the same purpose. In key developments, all projects are progressing well and are being commissioned in phases. The first one was commissioned in the month of October. The entire volume for the next 5 years is tied up. All other projects that we have also clarified to the investor community are on track and will be commissioned in phases over the next 12 to 15 months. In the current month of November, another project is expected to be commissioned. This one is margin accretive and environment-related. We have further also commissioned and as of yet, unannounced medium volume, medium-value product targeted to the E.U. market, which replaces a recently banned chemical. Deepak is only the second manufacturer of this product worldwide, and we expect to see robust growth over a period of time. Right now, we're bullish based on feedback received from seed marketing activities. Our teams have successfully overcome significant challenges to achieve results while maintaining a level of agility and responsiveness with our customer base. We continue to progress toward our goal of becoming a diversified chemical company while maintaining our strong leadership position in key existing products and processes even as we innovate to generate new value. In order to deliver scalability in volumes, we also aim to develop stronger and longer-lasting relationships with strategic customers. As we do so, we will continue to prioritize process improvement and operational excellence. We have announced an investment into chemical manufacturing for products that use energy both as a raw material as well as utilities in the Sultanate of Oman. Since the cost of fuel-based inputs are generally lower and cleaner in the Middle East, we believe that this project will have a good future, giving us a sustained growth in demand for the relevant products, both in Asia as well as globally. Deepak proposes to invest 51% in equity in this business, which will manufacture products where we already have a very deep customer connect and market insight. To conclude, we're confident that DNL with its innovative product mix and pipeline of new projects coming in and decades of manufacturing experience is an excellent candidate to lead the Indian chemical manufacturing trend. Our continued focus is on preserving a level of agility, which allows us to capture opportunities presented by sudden shifts in the industry landscape. The contributions from upcoming brownfield and greenfield expansions with value-added forward and backward integration, we will strengthen our competitiveness and position ourselves to expand our market share to not only be globally competitive, but be leaders in our respective fields. Thank you. I would now like to hand over the call to our Group CFO, Mr. Sanjay Upadhyay to address this forum and take you through the financial performance.
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 and half year ended September 30, 2022.
During the quarter under review, Deepak Nitrite has delivered a steady performance amidst challenging operating environment that includes sizable number of days of production while Nandesari came into operation in phases on the top of the prices of [indiscernible] and the inputs of utilities remained high. Another steep challenge has been extremely challenging interest rate and ForEx market scenario, and it's all such challenges, it is hardening that company posted robust top line across business increased product share and market share, especially Phenolics, which has been constantly increasing its market share in the country. Our business capital expenditure is something we are looking working diligently to strengthen, we made a strategic decision to use cash flows to reduce debt and reduce business risk. As a result, our operations continue to be exceptionally capital efficient with enhanced ROCE. Despite the significant increase in the working capital cost with higher input cost. We achieved 48% ROC in Q2 FY '23 and more than 30% in previous 12 reporting quarters. Now on the financials. On the operating front, our domestic business revenue stood at INR 408 crores and INR 827 crores in Q2 and H1. Higher by 28% and 32% year-on-year, respectively. Export revenues were INR 277 crores in Q2 and INR 589 crores in H1. On a consolidated level, domestic to export mix stood at 83 17. In H1 FY '23 on a considered basis, revenues were 25% at INR 2,041 crores compared to INR 3,224 crores in H1 FY '22, driven by incremental gains in both advanced intermediates as well as Phenolics segment. EBITDA stood at INR 648 crores in H1 FY '23 compared to INR 855 crores in H1 FY '22. Margins came at 16% in H1 FY '23. PBT and PAT came at INR 550 crores and INR 409 crores, respectively. In Q2 FY '23 on a consolidated basis revenue grew by 17% at INR 1,974 crores as compared to INR 1,690 crores in Q2 FY '22. On a year-on-year basis, EBITDA came in at INR 283 crores from INR 395 crores in Q2 FY '22. Margins moderated at 14%, higher raw material costs and other utilities along with lower recovery for a few products, PBT PAT stood at INR 235 crores and INR 175 crores, respectively. Profitability was aligned with the operational performance of the company, which was impacted due to a review cleared by the inflationary pressures in RM and other utilities. In the ensuing quarters, the circumstance anticipated to improve. Moving to the segmental customers. As mentioned earlier, our strategic business units have been merged in accordance with AS 108. Due to this merger, the group's operations are now reported in 2 segments, Advanced Intermediates and Phenolics. In the Advanced Intermediate segment revenue has increased by 26% to INR 635 crores in Q2 FY '23 versus INR 544 crores in Q2 FY '22, while EBITDA marginally grew by 1%, INR 149 crores during the quarter under review. In H1 FY '23, revenue grew by 32% to INR 1,415 crores and EBITDA came in at INR 298 crores, translating into a margin of 21% despite the current environment and challenging circumstances. Deepak Phenolics delivered an encouraging performance revenue growth of 13% to INR 1,284 crores in Q2 versus INR 1,139 crores in Q2 FY '22. While EBITDA stood at INR 134 crores and EBITDA margin came in at 10% in the quarter. In H1 FY '23, revenue grew by 22% to INR 2,619 crores and EBITDA came in at INR 352 crores, translating into a margin of 13%. EBITDA has been considerably diminished as a result of high inventory carrying costs and drop in sell side and however things were written to normal in the ensuing quarter. Lastly, on the balance sheet front, company's financial position is significantly enhanced, and the company continues to maintain 0 debt position and a net worth of INR 3,651 crores considered basis and INR 2,415 crores stand-alone, thereby strengthening its balance sheet for future expansion.
With that, I would like to request moderator to open the forum for question and answer a session. Thank you.
[Operator Instructions] The first question is from the line of Nirav Jimudia from Anvil Research.
So I have 2 questions. Sir, based on Maulik bhai's opening remarks, so I was just trying to understand the stand-alone business, you mentioned in detail. So when we look from 2011 to 2018, we almost doubled our sales. So from INR 700 crores to INR 1,500 crores. So it took us almost 7 years to double. Then from 2018 to let's say, the first half of this financial year. If we take on an annualized basis, we again doubled our turnover, so let's say, from INR 1,500 crores to INR 3,000 crores. And these sales have been steadily going up even if we account for those onetime increases in the DASDA prices.
So all those have been accounted for and still we have doubled our turnover from FY '18 to FY '23. So I have 2 questions here. So one is based on the greenfield and the brownfield expansions, what we have announced, what could be the reasonable number of years where, again, we could see our sales doubling from INR 3,000 crores to INR 6,000 crores. And how much money we have to put in order to achieve this sort of increased turnover. So this is one.
And second is, based on the opening remarks, what Mr. Maulik bhai mentioned, we have been undertaking some of the backward integration projects, adding some intermediates also for our finished products, adding some customized products, where we got some 5-year long-term contracts with the customers outside India.
So how much margin reset could happen from the current levels considering the current global macro situations? Because if we see from FY '11 to FY '23 or first half of FY '23, our EBITDA margins have been from 8% to 20% before correcting from 32% to 33%. So it has come down from 32% to 20% and likely softer reasons what you mentioned like some of the raw material prices have gone up or the freight costs have gone up. So if you can answer these questions, that would be helpful.
Okay. A lot of stuff to unpack there. But first of all, I would just add that perhaps the same trajectory of revenue growth may not be there and that would only be because a lot of the new investments will not be coming into Deepak Nitrite as stand-alone, but into a new subsidiary called Deepak Clean Tech and there are different reasons for that, but the company continues to invest in high-quality growth as a group, you will see that.
Secondly, while you have seen a moderation with regards to the margins on a percentage basis, I would like to highlight that in Deepak Nitrite the stand-alone entity, we have not seen any general trend of a reduction in gross margins. Now unfortunately, in Q2, there was a lower percentage as well, and that was because of significant cost increase when in the month of July, we used natural gas, for example, as a raw material -- as a utility.
And along with that, we had a substantially lower volume that we were able to produce and sell into the market. A lot of people, because they look at Deepak Phenolics and a large capacity that manufactures phenol and acetone underestimate the size of the throughput of various different chemicals from the Nandesari site. So in Q2, we have seen a volume drop of about 15% compared to previous quarters. And this was because we were restarting our plant and throughput in a phased and a safe manner.
So in Q3 onwards, from October onwards, where all the plants are up and running in full swing, you will see, again, a volume pick up. So between the cost increases, unfortunately, due to the fire incident and the volume drop, we are seeing a severely contracted Q2.
We do believe that the volatility both in RM and in FG will continue to be a factor for the ensuing quarters, but we remain bullish about our ability to have our customers understand this and maintain a growing wallet share. So even though in Q3, there is a softening of demand in certain key industries, there are customers worldwide and especially in Southeast Asia, which continue to buy a lot of Deepak's products, so mitigating pockets of moderating demand. We remain bullish about all of our products.
So sir, this is about Q3 and probably the second half of FY '23. But let's say, if we take a slightly longer view of 4, 5 years where -- my apologies that I didn't include our newer subsidiary where we are also investing a lot of money apart from the Phenolic. So let's consider that subsidiary also is a part of the related CapEx for the Advanced Intermediate business. How do we see this business shaping up over the next 3, 4 years? Because we are doing a lot of backward integration stuff. We are doing some customized products also. So possibly, from current levels, there could be some margin reset also could happen over the next 3, 4 years. So could you share your thought process over the next 3, 4 years, how our business would look like, how our normalized EBITDA would look like based on your current assessment of the situation?
I would say that over the next 3 to 4 years, we should target to double our top line. And perhaps the growth in our bottom line may be a little bit faster because there's also a lot of backward integration that is taking place. So between the both of these, I think the next 3 to 4 years, there is a strategic balance between the both. But the company remains in a good leading position in all of its products. So it will continue to benefit from the downstream integration and brownfield expansions.
In the order of this thing, the margin improvement will be the first thing because, as you rightly mentioned about backward integration. So that will improve EBITDA certainly. And the top line, of course, will grow when we are setting up new facilities and in the existing business also. We are -- see all the products and all the businesses, we are doing some debottling as Maulik mentioned in his -- there is some sales marketing then for [ simple send ] which is a very good potential we have. And we have commissioned one more project this month, in fact.
So things are moving and things are happening. One thing is that we are doing whatever right to do for the business fundamentally. Outside world, things are very volatile, we all know, in Europe and China. And that certainly -- like for example, the textile business is certainly impacted. And so textile is impacted, dyes is impacted and parallelly then one of our stream of business.
Fortunately, Deepak Nitrite is in a business where we have end applications in several industries. So fortunately, we are able to sell our product, we are able to capture our market. But in some pockets, there will be negative some pockets will be positive. So this is how a resilient model is created, and we'll continue to do that.
And sir, my second question is on the qualitative side. So -- how much are R&D team currently comprising of? And because now we are also setting up a new R&D center at Nandesari. So how the team would look like once this new R&D center would be up and running?
Currently, we are having around 103 staff strength total. Although the PhDs will be in the range of 20, 25 PhDs. So it's a significant number. And they are working on a new site. Of course, it is going to take time, but they are like whatever products and -- Maulik was just mentioning, this is all coming out of our R&D only. So they are constantly on it [indiscernible] now, so we do not have a segment, but otherwise on those finance specialty and forward integrations further.
The next question is from the line of [ Asha from Met Capital ].
Sir, just wanted to note like for this particular quarter, what was the volume growth? And what was the growth because of the price hikes that were taken?
In Deepak Nitrite, unfortunately, there was no real volume growth on an average simply because of the fire incident in Deepak Phenolics -- what is the volume growth -- I think it would be close to about 10% in the Phenolics segment. So if it was a normalized quarter, then in Deepak Nitrite stand-alone, we would also have seen a volume growth of about 10%. So in quarter 3, you should see this coming in. Actually, a good representative quarter would be quarter 4, the Jan to March quarter of 2022, has an indicative volume because that's when we had the plant up and running, including the debottleneck capacities.
And sir, like from past 2, 3 quarters, you were talking about the price hikes taken. So has all the price hike been realized or still the headroom is left.
See, the price hikes as and when they come, they are always on a rolling quarterly basis. If the raw material prices hike, then with a quarter lag, in some cases, less in some cases about a quarter, we are able to pass the prices on in order for us to maintain a healthy margin. Now of course, this is not going to factor in when you look at it on a percentage basis because I cannot tell the customer that my cost has increased by INR 100 so please pay me INR 15 additional so I can maintain my percentage. Nonetheless, if the situation moderate in terms of the raw material prices, if they reduce, then of course, we pass that benefit over to our customers with a lag. And when the prices increase, the customers support us with that price increase.
And sir, just another thing I wanted to understand what led us to use more of natural gas apart from the other -- like the major crude-related derivatives that we usually use for our raw material?
See, every good plant in the country is by law, needing to have what is called a standby boiler. Essentially, it is one which can be used as and when the primary generator of steam is under maintenance for whatever reason. So you take permission and you run it at that point. Now while we were going through the plant restoration, we also identified areas of improvement in the boilers, which were affected because of the significant pressure that arose from the fire incident. And therefore, we addressed the safety aspects and the repairs of the boiler also. And in that period of time, the natural gas boilers that is always available as a standby was -- this was utilized. So this is not something which is a normal case. But in order to maintain our delivery commitments and to start operating our plants in a safe manner for that period of time, it was a natural gas boiler that was used rather than generally use coal boiler.
But this is covered under our LOP. So as and when LOP claim is settled, we will get back this.
Absolutely.
The next question is from the line of [ Sudarshan from Prosperity Wealth Management. ]
So my question is a follow-up question on the previous gentleman. So you guided for doubling the top end growth and within 3 to 4 years. Is this on a stand-alone basis? Or is this on a consolidated basis?
The was on stand-alone basis, consolidated cannot happen because the in phenol new capacity on that itself takes 3 to 4 years to set up.
And another question is on the phenol segment. So what is the price change in phenol acetone in the last quarter and the last 40 days and the same period, benzene and propylene price corrections?
So I don't want to give you prices, but the benzene prices have gone up. In fact, if you are taking the raw material prices, you must have seen -- the benzene prices have gone up significantly in the quarter. In fact, phenol, this quarter was a little subdued because of demand also though we are able to maintain our volumes. In fact, we have expanded, but then overall demand was down because of global situation, because of erratic monsoon also and plant industry not doing well, which they continue not to do well even today. So there was an impact of this. On top of it, benzene probably prices were higher, there was a shutdown from BPCL, which also led us to buy some cumin from the market. I mean all in all, there were several issues for the quarter. And in fact there is a shutdown in October also of BPCL continuing. So there will be some impact. So phenol business, what you are seeing is lower demand, but we are selling our volumes on top of it, this kind of I would say, disruptions in the market.
And another is…
I'll just add one point here that there are significant global disruptions. India, however, the disruptions are of a much smaller scale, right? There is -- India has a very different kind of consumption of phenol compared to what you have in Europe, in the U.S., in Asia. And therefore, whatever disruption you're seeing, especially places like China in places like Europe where there is destruction rather than disruption. In India, it is a disruption, it is transient in nature. And it remains a target market where Deepak will continue to grow its wallet share. And even if in the short term, there is a slowdown, it is a slowdown to a very brisk CAGR. India's demand of phenol is quite linked to GDP growth also because it has infrastructure spending associated with it, pharma associated with it, agrochemicals associated with it. So when we speak about slowdown in India, we have to keep in perspective that it has slowed down in a very high CAGR, which is still high and will improve as the global situation also improves.
And my question is on the CapEx front. So recently, in October, there has been a commissioning and November you are expected to commission plant actually. So can you just provide details on it, like in terms of capacity and products and margins, which we can expect from these commissions?
So there are 3 products which have been -- I mean there are 3 initiatives, which have been commissioned in the last month and this month. One of them is for an agrochemical, which I mentioned has already got all of its volumes booked under formula contractual agreements for the next 5 to 7 years. This is a product where Deepak has a leadership position. Will continue to have a leadership position. It is a challenging chemistry. And it is, I think, maybe the second largest player, maybe the second or the third largest player in the world.
The second one, which is being commissioned, as I have mentioned in my opening remarks, is a margin-accretive and environment-related project. And the third one, which got commissioned is a product which is targeted globally. But right now, we're prioritizing Europe simply because in Europe, it replaces another chemical, which has been banned by the agencies for its carcinogenic property. So our product replaces that has a very interesting CAGR, which is developing simply because the previous one is banned.
And this was something that we had not announced earlier, and we have seen very encouraging feedback from all of the target consumers. So it is something where I would not like to give guidance. It's very early. But all I can tell you is that at the moment, the feedback has been extremely positive, and Deepak has developed the product internally. It is also the -- it's only the second company worldwide that manufactures this. At what scale, what we will do over a period of time will come out as we see the product and its use case improving.
And seeing the benzene and phenol demand, can you just tell me that if the coming quarters will have pressures on in phenol segment margin pressures?
So let's put it this way, that normally phenol, benzene, all of these, whether they go up or they go down, they go down more or less together with some gaps. In the last quarter because Europe was actually burning oil rather than cracking it into petrochemicals like benzene and toluene, was using it for its calorific value. This was also not a time where it was going to use phenol for its solvent application.
So there was a drop in the demand for phenol and an escalation in the price of benzene, which is completely out of lock step, which it normally is. Now what has happened is owing again to more macroeconomic trends, the prices of benzene has corrected significantly. In fact, between the higher and the lows of the same quarter, quarter 2, there has been a gap of about 50% to 60% between the high and the low in the same quarter for benzene.
Now phenol has not seen that much of a rise and a fall. And therefore, we expect in Q3 to be able to benefit from a price correction in benzene which is more than any price correction that we may see in phenol. So the margins, we expect to have at least some level of an improvement compared to Q2, simply because the macroeconomic trends are moderating in terms of their intensity.
So another thing is you have said like 50% increase as there have been in the benzene prices. So at the end of the quarter and the end of -- the mid of quarter 3, is it still at this high or has it corrected?
No, I'm saying within the quarter, there has been such a volatility. But the prices for benzene are sliding. As we see right now, again, this is one of those things where it's difficult to predict what will happen 1 month from now, which new superpower is going to decide what. But at the moment, at least the general trend has been that the prices of a lot of these petrochemicals has seen some level of correction since mid-September onwards. This will get affected regionally based on certain startups or shutdowns as that may be.
Sir, if I can squeeze in another question.
Yes, sure.
Yes, sir. Regarding the INR 1,500 crores CapEx so you have mentioned like MIBC and MIBK are the 2 of the products which you will be coming in. So apart from this, is there any other updates on what are all the products actually be coming in and in terms of capacity, you have given guidance for 40,000 metric ton in MIBC and 8,000 in MIBK.
So we have deliberately not announced names of products other than this, simply because the other investments that are there, other than the upstream integration, the ones which are downstream integration are actually multiproduct platforms. Fluorination, for example, chlorination and photo chlorination are multiproduct. But these are assets that we are investing in and they are up engineered assets.
So while they can do one thing, they can also do a lot more things because the assets allow us to use significantly more pressure, significantly higher temperature. In some cases, instead of using a liquid, we can use a gas, vice versa. So it gives us a level of flexibility, which is not common to what we have done in the past where we put a plant with single product in mind. And therefore, it may have a range of different products that we will run in campaigns.
I would not truly call them multipurpose plants, but they are certainly in that line. And the investments would be, as I mentioned, into fluorination, into photo chlorination, we will also, of course, be adding significant investments into expanding our nitration capacity, hydrogenation capacity and some other unit processes that we will announce over a period of time. But they have already been -- I mean they have already passed the R&D phase.
I have mentioned earlier that some of these investments will be -- which we have not announced the value yet, will be using gas liquid reactions, which will be, in that sense, downstream of what we already manufacture and targeting the pharma segment in as an anchor application.
The next question is from the line of Vivek Rajamani from Morgan Stanley.
So 2 questions if you don’t mind. Would it be possible to quantify the impact of using the natural gas instead coal for that 1 month?
It would. I mean, we've already done it as part of the work that is required when we file it for the insurance claim. Give me a couple of minutes, and I will give you a specific number. But if you have a follow-up question to that, you can ask it while this number comes up.
Sure, sir. The latest question was barring the usage of natural gas and obviously, the 15% reduction in volume you saw because of the fire and the phase ramp-up. Would it be say that these 2 were the only externalities, which were affecting the quarter? Or do you see any other market-related conditions, which may have also played a part in the performance for that segment?
So when you're talking about the segment, you are specifically talking about Advanced Intermediates and Deepak Nitrite standalone, correct?
That is correct.
So there has been a moderation as Mr. Upadhyay also mentioned in the application of the textile industry in India. However, we have taken this opportunity based on geopolitical situation to target customers in Asia and in the U.S. who would otherwise have bought competing products from Europe. So because this opportunity has been available to us, I can say that the impact of the lower demand in this particular segment in India has been mitigated by the Deepak's marketing team. We remain also bullish about this segment recovering. But at least for the next couple of quarters, these international markets will remain extremely supportive to Deepak's products and good pricing, which allows us to maintain the same level of netback as if we had sold to the Indian textile industry.
With regard to your other question, with the first question, about the impact of natural gas versus coal for a month.
INR 4 crores is the impact.
The strength of impact in 1 month was INR 4 crores. This is the delta, which we would have been able to gain if we had used coal instead of natural gas.
And if I may just squeeze in one more clarification. I think you mentioned barring the Nandesari facility, you were running all your plants at optimal utilization levels. Would it be possible to give some color on what that optimal utilization rate is? Because obviously, on the phenol side, you've been able to run it north of 100% in the past. So just some color on that would also be really helpful.
So on most of the other products, we have run them at, I guess, it's something between 90% to 100% capacity. In a couple of products, we have challenged at 100% and gone beyond that to about 108% to 110%. One thing I have to say is that it is somewhat easier -- not easy. It is more challenging to do in Deepak Nitrite because the product output might be a solid product. So it is not as easy to go beyond 100%. We have managed in a couple of cases, but it is something where there's a good amount of work required. Nonetheless, as I mentioned, we generally have targeted between 90% to 105%, 108% utilization in Deepak Nitrite's stand-alone assets.
Yes. But to answer this, we are concerned with debottlenecking see when Maulik says it means in the current state, you can't do that. But with some debottlenecking, a little CapEx, you can expand and which we have been doing continuously. It doesn't require same investment. So with the margin investment, you can have a higher capacity. So that's why Deepak Nitrite's products and plants are multiproduct, multifacility barring 1 or 2.
And phenol would be north of 100% as per usual, right?
Above 100%.
Yes.
The next question is from the line of Abhijit Akella from Kotak Securities.
Most of my questions have been answered. Just a couple of clarifications I wanted to see. One was with regard to the Advanced Intermediates segment, would it be fair to conclude that perhaps you are back to normal margin starting the March quarter after a period of consolidation in the December quarter going on?
No, we will expect an improvement compared to Q2 because we had a lot of tailwinds because of the Nandesari situation.
Actually, Abhijit I would answer is I don't know what is the normal margin because in current situation, things are so volatile, like Maulik was just mentioning about the -- earlier expense in this -- so it affects a particular chain of products. So what is the normal is very difficult to say. But we are doing better. In fact, second quarter also had this impact of fire, where we lost production in this so all in all, this is not a normal quarter as such. But then Q3 will have its own challenges. So frankly, nobody knows what is normal, what we are doing. I mean we have done like we started sodium nitrate on 26th of -- or 22nd of October with full capacity. So you will see that in the third quarter, the results and when it comes.
Also, just to clarify the comment that was made earlier, the Deepak Nitrite's stand-alone business is what we are targeting to double in terms of top line in the next 3 to 4 years? Is it -- just to make sure I understood that correctly. And if so, if you could just elaborate on -- or just highlight the major drivers that we would have to do that in terms of the major growth?
Deepak Nitrite, I clarified that a lot of the investments, even for downstream or upstream will come in the new subsidiaries, Deepak Clean Tech, which will house not only Deepak Nitrite's related products, but also Deepak Phenolics related products. For example, MIBK, MIBC. So let's put it this way, that the business of Deepak Nitrite will certainly see significant revenue growth over a period of time as new projects get commissioned. Whether that is housed in one company or another company as analysts and investors, you will see the value coming. Deepak Phenolics as an entity, it is not easy to double the revenue of a commodity chemical like Deepak Phenolics overnight. And that normally will happen when there is either a significant new investment that is coming in with a new plant or with a significant downstream investment that is coming in. So that will be a different story. Deepak Nitrite and its associated products will certainly see revenue attractive to its current business over the next 3 to 4 years in line with what you mentioned. It will be housed in another subsidiary.
Yes. So MIBK, MIBC will come in this subsidiary Deepak Clean Tech, but possibly any other derivatives of Phenolics might come within Deepak Phenolics itself. Is that correct, understand?
Abhijit, as and when it comes, we'll let you know about how it comes and where we are housing that.
One last thing, just with regard to the Phenolics segment, just from the market's perspective, in terms of demand that you're seeing for India, have you seen a significant slowdown in the country's volume growth rate compared to the 10% kind of volume growth numbers we used to see earlier. Have things slowed down? And also, how are things looking at the global front, whether it be maybe in China or other important regions around the world?
So if you're talking -- I think, Abhijit, you should not focus so much on only the last couple of months as a sample size. So if you look over the last year -- last 3 years, last 5 years, you will see that there is a remarkable consistency in the growth in consumption of phenol in India. Now the last couple of months have been very volatile, also very uncertain because of geopolitical issues. And phenol as a product is something -- it's like water that it flows from the place where it is made to the place where it is consumed internationally, domestically, whatever. But in India, because it is very closely tied to the growth in GDP, barring some unforeseen circumstances, which would relatively remain in the short term, like how you've seen in the last couple of months or quarters. The growth story is intact. So is the growth story for the downstream applications of phenol where Deepak remains a very bullish investor. So I don't foresee a long-term slowdown from what we have seen in the last few years.
You see in the last couple of months, but don't base your perception about the future based on the last couple of months. Such things may happen. They may happen again. But this is India. There is always more optimism here than there is in most parts of the world, even at the worst of times.
The next question is from the line of Rohan Gupta from Nuvama.
First question is on Advanced Intermediate business, you mentioned definitely that the spillover impact was still felt in the current quarter, and we are expecting that from next quarter on the [indiscernible] expense or 10%, which was not achieved in the current quarter. So this volume growth which we are expecting in the second half is primarily in the nitrate business or you will see that it will be the -- the growth will in the broad segment the basket of all the Advanced Intermediate in the basket?
In the broad spectrum of Advanced Intermediate which will, of course, include basic intermediates, but which will also be seen in growth in volumes in the other segments. So you will see H2 having a broader improvement in terms of volume across all the segments.
And sir, it is [indiscernible] of the -- you also mentioned that some of the industries are witnessing the slowdown like textiles and all, which are also the key [indiscernible] so do you the volume with your targeting [indiscernible] of some industries witnessing slowdown, whether domestically or globally?
So we don't believe the slowdown is an endemic situation. It is here and now, and that is because of certain recessionary fears that are there worldwide. Because the Indian textile industry also supports the total textile consumption industry. Nonetheless, as I mentioned earlier, while this transient effect is there, which is leading to some consumers of our products in India being relatively cautious about the visibility that they give in the long term owing to certain geopolitical situations that we all know about that are taking place both in China and in Europe.
Coincidently, this has also opened up significant avenues for supply of our products to other countries, where normally we have had only a moderate exposure, countries like Southeast Asia, like the U.S., et cetera, where we are currently able to move a lot of material compared to what we were earlier and at margins where our netback, it remains similar to what it would be if we were selling to the Indian industry, without dealing with the freight and the duty impact. So today, we are able to do it.
This opportunity remains available to us over the next couple of quarters. But we also do anticipate that the domestic industry, at least the textile segment, will recover in a quarter or 2. So for us, we -- one channel or another channel, we remain confident about the demand -- the volume demand and the margin for Deepak's standalone business.
The next question is from the line of Dhruv Muchhal from HDFC Mutual Fund.
Against the earlier guidance of about INR 1,500-odd crores of CapEx over, I believe, if I'm not wrong 18-odd months. So if I look at the 1H numbers, it's about INR 140-odd crores of CapEx in the cash flow. It seems a bit low versus the run rate that we have probably guided. So is it -- are there some delays in the CapEx? Or it's just the cash flow that is likely to accrue and probably bulk up in the…
Cash flow, not the delay in the project.
A lot of these are engineering items. And in any chemical company, there's a lot of investment that takes place when you're talking about the civil structure and things like that. So those all happen at the right time. We don't front-load any of the costs unless we have to.
The next question is from the line of [ Mitra from Anubhuti Advisors. ]
Sir, just on the Nandesari plant, if you can give the -- what were the blended utilization levels for the second quarter because the plant was shut down for some part, and then we were running at lower capacity.
So exactly that. One part of the plant, I would say 30% of the volume -- 35% of the volume was, I would say, close to 50% of the volume was operated at 50% run rate for the duration of the quarter. And the remaining 50% of the plant was operated at close to about 80%, 90% run rate.
Also, I would just highlight one thing that one part of the plant was underutilized for a short period of time because it was going through hot work in order for us to expand the project that we already had announced for the agrochemical intermediates.
The next question is from the line of Rohit Nagraj from Centrum Broking.
Sir, my question is on the Phenolics. So last quarter, we had indicated a utilization of about 129%. So just wanted to have what was in this quarter? And if you can quantify the high-cost inventory onetime impact for this particular quarter?
The run rate was similar to what it was. It would have been less because of the multiple power trips that occur in Dahej normally during the monsoon, which we were able to avoid, thanks to the CPP. This is -- while it is also an advantage, we have to keep in mind that, unfortunately, right now, the price of coal is also so high that we were able to run it, but -- and we were able to save the costs that would be accrued in terms of the stoppage and the start-up and the safe startup of the plant. But coal being as expensive as it is did not yield the material benefit to the extent where we would have wished it did. But worth it for us to protect the quality of our assets as well as to maintain supply chain.
So in regards to your inventory this thing, we have to -- I mean, we imported -- the impact is in the same month. It's not carried forward from the earlier quarters, but in the same month, where you're importing the consignment comes late and because of the volatility in the prices, the prices can change in between, that's all beyond that nothing. So when BPCL is normal and when we have our own stream running, then this won't be that much.
And the expanded capacity to 300,000 tonnes debottleneck capacity that will be available from Q1 FY '24 onwards. Is that right?
Yes, that's right.
The next question is from the line of [ Kashish Kandotra, ] an individual investor.
[indiscernible]
Kashish, we cannot hear you, your voice is fading.
So Mr. Maulik [indiscernible] the Phenolics business is 20%...
We cannot hear you. We'll move to the next question, which is from the line of Karan from NYIS.
I want to ask one thing like you said that the textile sector is not doing well in the context. So by when do you see it's coming to the right pass on track?
It's difficult to say because we were expecting during Diwali festival things will normalize. It has not yet normalized. So I mean, very difficult to say.
So like at present also, you're not seeing any traction again, like the demand coming up?
No.
Just to clarify. It is not like there is no demand. It is that most of the consumers for our products that happen to be in the textile space are not able to provide a medium to long-term visibility because they are waiting to get this from their end consumers, which may be in Europe or the U.S. or wherever. So the problem is not that they're not running their plant. It is simply that they are not confident about whether 2 months from now, the capacity ramp-up will x or y or the demand will change from A to B. So the market is there. They are consuming subdued levels and they are also seeing how the situation develops.
The next question is from the line of [ Sudarshan from Prosperity Wealth Management. ]
Sir, any update on the QIP front? And any update on your polycarbonate product?
So QIP, nothing as on date. We will just wait for the right appropriate time and moment. So no update as such on QIP. Polycarbonate, we are working on polycarbonate. It is at a prefeasibility stage. Once we are ready with that, then we are going for the license application and parallelly, we will have to do other things before we go for the actual launch. So first and foremost is license.
So the QIP won't be used for this polycarbonate?
So I think it depends -- of course, it is for polycarbonate, but it depends -- I think there are other capacity also in pipeline.
Sir, then the QIP will be -- the timing from QIP is 1 year from the date of announcement. So how long is the [indiscernible]?
So up to February, I believe.
So it is safe to say that polycarbonate will be finalized between that date?
Yes. Provided we are able to complete the prefeasibility studies and everything.
The next question is from the line of Sabyasachi Mukerji from Centrum.
So my question is on Deepak Phenolics. So what is the stable margins we can expect both on the gross and the EBITDA margin?
See, again, I answered a few minutes -- there is no stable margin in the current volatile business atmosphere, right? And Deepak Phenolics is a commodity products. So it will -- you know how the commodity product -- commodities are actually now moving in the market. So you can't say that. But normally, you could -- you can expect around 16% to 22% that range in the Phenolics business normalized. Anything above 25%, 27% may not be sustainable, anything below 16% may not be the right margin.
This is on EBITDA margin, you are saying.
Yes, it is the EBITDA margin.
And a related question sir is, when we are done with the backward integration, so will there be stability in the margins as we go into more value of the product?
Of course, of course, more and more, you get into derivatives more and more your stable -- margins are stabilized.
Just to clarify, the backward integration right now is in Deepak Nitrite standalone.
When we go for phenol ACS, of course.
Yes.
So whatever we consume in MIDC, or MIBK or wherever, then to that extend, yes.
The next question is from the line of [ Mitra from Anubhuti Advisors. ]
Sir, just a follow-up question on, I think, Phenolics. So post commissioning of MIBK and MIBC will we still sell phenol or I think the whole quantity will be consumed for production of these 2 products only? And how are margins in these products?
No, no, we will continue to sell in the market. We will also be consuming a good amount. In that sense, you must look at what has happened with isopropyl alcohol IPA, where there's a good amount of consumption of acetone as well as market presence for acetone. So similarly, when it comes to MIBK, MIBC, we will retain our market presence in the upstream products as well as the downstream products. And the margins will be, I mean, right now, the margins look very good. Let's see how they develop monthly commission, but they will certainly be in addition to what margins we would get in the phenol acetone business.
So basically, we'll be ramping our phenol capacity over time also, correct?
Yes, we will be balancing both.
We just say now, we are expanding to 3 lakh tonnes. And these are all done with some [Technical Difficulty] how are we going to consume our captive, how much market is requiring. And accordingly, these steps are taken.
MIBK, MIBC should add about 30% -- 22% EBITDA. This is on the base of a normal phenol, which will have its own like 16% to 18% EBITDA.
And what capacities are we building on MIBC and MIBK?
Also, we have announced in the past, but I think MIBK is about 40 kt, and MIBC is about 8 kt.
Sorry, 40 kt and?
8 kt.
Thank you. Ladies and gentlemen, as this was the last question for today. I would now like to hand the conference over to the management for closing comments.
Thank you so much for joining this call Deepak Nitrite. For further clarifications, you can get in touch with our Investor Relations team they have done, so take a number. Thank you once again.
Thank you all.
On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.