Deepak Nitrite Ltd
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Deepak Nitrite Ltd
Earnings Call Analysis
Q2-2024 Analysis
Deepak Nitrite Ltd
Our company exhibited stable performance with revenues reaching INR 1,795 crores, maintaining the trajectory set in the previous quarter. Operational efficiencies led to an EBITDA of INR 319 crores, showcasing an impressive 18% margin due to cost reductions and recovery in certain product segments. Our commitment to financial health is evident with a robust net worth of INR 1,342 crores which strengthens our market position.
Investing INR 599 crores, we've fueled growth with strategic assets, including advanced facilities expected to bear fruit by next year's end. The influx of capital in innovative projects parallels our leadership ambition in markets like Oman, aligning with expectations of a volume uptick driven by global economic shifts.
Navigating complex market dynamics, we reaffirm our commitment to doubling turnover within 3 to 4 years, underlining a transformation underway. Our projects, though sometimes experiencing minor schedule shifts, remain steadfastly on track. Shrewd investments aim to eradicate dependency on China for raw materials, promoting self-reliance and assuring uninterrupted production.
Our analysis indicates that downstream segments for Phenol, acetone, and IPA are expected to stay healthy in coming quarters, pointing to a stable demand outlook. We also anticipate internal and external supply-chain adjustments, reflected by import requirements, as we focus on a robust new product pipeline over the next 2 years with demand looking strong, especially in Home and Personal Care segments.
Striking a balance between new product development and operational excellence, we will harness our internal talent and partner with seasoned players for technology-intensive processes, exemplifying our strategic use of partnerships and in-house capabilities. This adaptable approach secures our long-term commitments providing products with high value-add for our customers.
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Ladies and gentlemen, good day, and welcome to the Deepak Nitrite Limited Q2 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. Viral Shah from IIFL Securities. Thank you, and over to you, Mr. Shah.
Good afternoon, everyone, and thank you for joining us on the Deepak Nitrite's 2Q and H1 FY '24 Earnings Conference Call. Today, we have with us Mr. Maulik Mehta, Executive Director and CEO; Mr. Sanjay Upadhyay, Director, Finance and Group CFO; and Mr. Somsekhar Nanda, CFO of 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 views on the [indiscernible] performance and the growth plans of the company, followed by Mr. Sanjay Upadhyay, who will take us through the financial and segmental performance. The results documents have been shared with you earlier and have also been posted on the company's website. 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's Q2 and H1 FY '24 Earnings Conference Call. First of all, I want to wish everybody a very, very happy Diwali and a wonderful prosperous new year for not just you and your family and friends as well.
Our results documents were shared with you earlier, and I hope you've had an opportunity to glance through them. I'll initiate by briefly taking you through the key financial and operational highlights through the quarter and half year. Mr. Upadhyay will then present you with a more comprehensive financial overview during the period under review. And following that, we would love to hear your questions.
In the first half of this financial year, the global chemical industry faced significant hurdles. Concerns have been about destocking by Chinese enterprises uncharacteristic weakness in the eurozone and a transient production and discretionary income and expenditure, owing to a high in interest rates to common inflation in major economies. Despite these challenges, our business demonstrated resilience due to various factors that cost leadership initiatives, changes in product mix and geographies and strategizing procurement of certain key raw materials where possible.
In addition to skillfully overcoming challenges, we have progressed on key strategic initiatives, including growth CapEx, which will cater towards bringing in upstream as well as downstream products.
These projects have the capability of being both top line and margin accretive. In the current scenario, DNL has experienced a decrease in revenue due to the consent reduction in realizations. In Q2 FY '24, consolidated revenues were INR 1,795 crores, lower by 9% year-on-year and flat on a quarter-on-quarter basis. Sequentially, we witnessed consistent performance in the face of a challenging operating environment. This was primarily due to a strong growth overall, in the Phenolics segment and the steady demand for advanced intermediates products.
We have also observed a quarter-on-quarter normalizing trend with regards to volumes particularly in products geared towards specific end-user sectors like glass, [indiscernible], Home Care and more. We anticipate a normalized performance starting from Q4. While key export markets are grappling to demand pressures due to the global situation, the good news is that domestic consumption and demand remains largely intact.
Our strategy remains focused on products and geographies that enjoy stable to positive demand. Nevertheless, our market presence has remained steady across all product lines and geographies, thanks to enduring relationships with customers and the perseverance of our teams to maintain operational excellence. Hence, in all cases, we have retained and in a few cases, grown our wallet shares. However, in terms of profitability, EBITDA has been impacted by input costs and a migration to relatively nonnative markets for some of our products, which earlier had our [indiscernible] in geographies such as the Eurozone. In Q2 FY '24, EBITDA was INR 319 crores, up [ 52% ] quarter-on-quarter, translating into an EBITDA margin of 18%. Our EBITDA grew quarter-over-quarter, attributed to an uptick in Phenol production driven by an increased demand and optimized capacity utilization. Additionally, cost savings on raw materials, operational improvements have all enhanced profitability by the raw materials, all of this while maintaining healthy margins.
Consequently, PBT and PAT for the quarter grew by 37%. Thus, our primary focus continues to remain on enhancing productivity through our dedicated efforts and maintaining and growing our relationships with key customers and as well as ensuring that our products signed a good home, even if there is a migration in geographies, in some cases.
On the operational front, our domestic business generated revenues of INR 1,437 crores, while exports were at INR 341 crores during the quarter.
Coming to our segmental performance. In the first half, the AI segment generated revenues of INR 1,379 crores, lower by 3% on a year-on-year basis despite these challenges. Further, during the quarter, we observed a positive uptick in our sales volume compared to the previous quarter. We are actively working on establishing new relationships in both the short and long term with key customers to ensure consistent offtake. So the more we successfully maintained or increased our share -- our share in the market, as I mentioned, in new geographies as well.
Deepak Phenolics reported revenues of INR 2,188 crores in H1 FY '24. In Q2 FY '24, revenue stood at INR 1,120 crores, up 5% on a quarter-on-quarter basis, and EBITDA margins improved by -- grew to 17% from 10% last quarter. This quarterly improvement in profitability can be attributed to increased volumes margin improvement and an improvement in VOC owing to the establishment of the advanced process control systems that we've put in place.
We also see that there is a gradual improvement in demand in the Phenolics segment. Sustained high capacity utilization of 136%, so there continues to be a key sectors. Notably, our efforts to introduce new downstream products are also now materializing, indicating to promising growth prospects. Moving to some interesting updates about our projects. First of all, our asset project is steadily progressing and is commissioned -- is planned to be commissioned as scheduled. Other projects such as photoclorination, chlorination, MIBK, MIBC, hydrogenation, the new Research and Development Center and brownfield expansions are all progressing well and expected to be commissioned over the next few months.
In conclusion, Deepak Nitrite continues to be strategically positioned for comprehensive expansion continues to increase its integration within its value chain and new value chains. Our investment plans underscore our readiness to capture these opportunities as they come to our home market and we persistently aim to diversify our project portfolio. Rather on the customer base and enhance our overall value propositions. We have a firm and robust financial spending, very strong client relationships and a well-planned growth prospects.
This is trying to enhance our business proposition, market share and shareholder value. We've taken substantial steps to mitigate risks in our business model, ensuring a stable input supply established captive power increase the amount of generation of power and steel using sustainable meals and valorization of waste. Our ongoing and upcoming investments reflect our commitment to seizing opportunities in a responsible manner with an unwavering focus on innovation, customer expansion and value creation. I'd like to hand this now over to Mr. Sanjay Upadhyay, who will address this forum and take you through the financial performance.
Thank you, Maulik. Good afternoon, everyone. Thank you for joining us on this call today. First of all, let me wish all of you a very happy and healthy festive season. I'll now take you through the highlights for the financial intent of the quarter and half year ended September 30. During the period, it maintained a solid performance despite a challenging operating environment marked by volatile [indiscernible] a utility cost.
Despite this upset as the company managed to increase its market share, especially in phenolics and [indiscernible] and its topline across various buses segments. Consequently to operations remain highly capitalization resulting advanced return on capital employed in the overall ROC is 27% in Q2.
Coming to a financial performance on operating front, domestic business revenue stood at INR 1,437 crores and INR 2,869 crores in Q2 and H1, respectively. Export revenues were INR 341 crores in Q2 and INR 677 crores in H1. On a consolidated level, domestic trader mix stood at 81% to 90%. And in Deepak Nitrite standalone, it is remaining at the more or less same level, so around 60-40 or maybe 55-45. In H1 FY '24 consolidated basis, revenues are lower at 11% at INR 3,595 crores compared to [ INR 4,031 crores ] in H1 FY '23.
EBITDA stood at INR 561 crores in H1 FY '24 compared to INR 648 crores in H1 FY '23. Margins came a 16% in H1 FY '24 against 16%, almost at par with FY '23.
PBT and [indiscernible] INR 79 crores and INR 355 crores, respectively. In Q2 FY '24, on a consolidated basis, revenues came at INR 1,795 crores, again almost at par with INR 1,800 crores in Q1 FY '24. On Q-on-Q basis, EBITDA came in at INR 319 crores from INR 232 crores in Q1 FY '24. Margins at 18% higher [indiscernible] cost and other is allow the lower recovery and few products stood at INR 277 crores and INR 205 crores, respectively. Profitability was aligned with the operational performance of the company, which was impacted due to review here by the inflationary in and other [indiscernible]. In the [indiscernible] part of the [indiscernible] is predicted to improve in the second half of the year. [indiscernible] segment customers in an advanced internet segment, the revenue should have INR 670 crores in Q2 FY '24, while the EBIT stood at INR 103 crores during the quarter under the year. In H1 FY '24, revenue came to INR 1,379 crores and EBIT came in at INR 218 crores, translating into a margin of 16% despite the current environment and challenging circumstances. [indiscernible] enlistment delivery in performance revenue growth of 5%, INR 1,120 crores in Q2 versus INR 1,068 crores in Q1 FY '24. While INR 870 crores and EBIT margin came in at 15% in the quarter.
In H1 FY '24 revenue, [indiscernible] grew by 16% to INR 1,880 crores and EBIT came in at INR 258 crores translating into a margin of 12%.
Last year, [indiscernible] company's financial position is significantly enhanced, and the company continues to maintain [indiscernible] position with a net worth of INR 1,342 crores on a considered basis and INR 2,765 crores on a stand-alone basis, thereby strengthening the balance sheet for all future expansions. In the quarter, our community investment in volume subsite was around INR 599 crores of the INR 100 crores of investment in Q2 FY '24.
April projects are progressing well and in siding team is extremely developing new products aviation social edema facility. Once operational, these lands will enhance our sensor pain critical raw materials and boost our profitability. Additionally, we are considering the state of our R&D center. [indiscernible] And it will come up maybe towards the end of next year. And this will certainly certainly help in boosting our growth prospects in future, particularly in the finance sociality segment.
With that, I will now request operator to open the floor for question and session.
[Operator Instructions]
The first question is from the line of Nirav Jimudia from Anvil Research.
I have 2 questions.
So First, on our stand-alone business and with respect to 3 of ... if you can share your thoughts on 3 of our traditional products like sodium nitrite, DASDA and P&T part. In terms of the demand situation in H1 of FY '24 in terms of the capacity utilization, which we have clocked. And if you can just walk us through in terms of the situation for H2 of FY '24 and then next year in terms of where we can see the first line of improvement coming. So would it be DASDA because what we have seen is last 3 years after FY '20, DASDA had been a muted growth. So where can we see the meaningful jumps coming from DASDA and then you can share your thoughts on Nitrite well as the PBT change.
Maulik will answer this question, but I just want to know why are you calling these products only as a traditional product.
Yes, because these are the products which generally we come to know in terms of the market understanding because nitrite, we have the leadership position, P&Ts also and DASDA also had contributed good amount of profitability in FY '24. So probably, I'm aware of these 3 major products, there could be others also. But if you can walk us through other products also that could be also helpful, sir.
There are many. Let Maulik answer.
Okay. First of all. Happy Diwali.I'll take them one at a time. DASDA, the largest in application for this is optical brightness and they go into detergents textiles and paper. Now you're right in saying that the last couple of years have been muted. If you compare it to high point, that high point also, I would consider as noise because it was a one-off. But what I can see today is that while in Q1, Q2 and even before that has been muted, we are seeing, if you look at a lot of the announcements that are made from paper companies and some detergent companies about increasing their investments in India, increasing their capacities in India.
You will see that the October right industry certainly has bottomed out over the last couple of quarters. And sequentially, we'll start to see an uptick. Now as the only liquid discharge manufacturer and with a market leadership position when it comes to both DASDA and optical brighteners. We are trying to be able to take the largest share of this growth as it comes. What has happened over the last year, 2 years, in fact, is that there has been a malaise in the traditional geographies for these products, which were in the Eurozone, partially because of water cost, power costs, these things. And you have also noticed that over the last 2 years, there has been a steady stream of announcements about shutdowns in these, but also correlated to that increase in investments and the debottlenecking in Indian and Asian capacities outside of China.
So as these start to get commissioned, we will start to see an increase in volumes. And as we start to see an increase in volume, that will be followed by an increase in our margins. Now P&T, the largest home for P&T and DASDA. So they're not directly correlated, but there is a significant correlation. The other segments are more into the diet and the pigment segments. Now those have had depressed couple of years. But there also, we believe that the situation, by and large, has bottomed out.
So it is not going to get worse, so to speak, it is going to get better, how fast it gets better is also a very good question. Now when it comes to sodium nitrite because it is a so-called intermediate commodity product. It has many, many end applications and certain end applications are doing very well when certain traditional end applications like dives and pigments have been suffering, especially in places like India. But we -- there also, we are seeing that there is an expectation of improvement. We continue to remain the market leaders. We will continue to remain the market leader with the new capacities that we add in Oman as time moves forward. And we are very confident in these industries as well, but also in certain export markets where we have visited to in the last quarter too where earlier they were relatively unexplored.
We have increased our focus on that. We have started off while it factors in our overall export market because we are new into these markets, the margins may not have been as interesting. But as we develop our understanding better and work with the consumers, they are better, we are strongly under the impression that this will also improve. So in all these cases, I can tell you that the demand will certainly sequentially improve the rate of which we will see, but you are seeing also that there are lots of announcements made by other companies, which would be our customers. So that should give you confidence.
Sir, second question is, if we see in terms of stand-alone Deepak noted, most of the products which we have developed, we have a substantial market share in most of them. And over a period of time, we have either backwardly integrated or forward integrated in terms of the product profile and this has also helped us in achieving close to INR 3,000 crores of sales in the stand-alone side. So just wanted to understand your thoughts that in the stand-alone business, and I'm not -- I'm excluding the downstream portion of Phenol acetone part. When can we see such similar blocks coming in terms of, let's say, 3, 4 products or a block of 3, 4 products putting together or contributing to close to INR 500 crores to INR 1,000 crores of incremental sales. And if you can correlate it with acid plant, which we are currently putting on. So could the asset plan also give us an opportunity to develop some of the newer downstream products, which can help us to get a meaningful improvement in our stand-alone sales going forward.
So I'll answer this question now. While we are in process of commissioning our upstream, Naturally, it is sensible for us to expand our consumption as well. And that is also taking shape in line with our commissioning of the upstream. So you will see that value oppression there. Now with regards to the absolute numbers that you talked about, INR 500 crores, INR 1,000 crores, our priority is always on ensuring that we are growing our market share and growing our bottom line. The top line is a factor of the market prices. So it is difficult to comment on that.
I believe that as the demand situation improves, so will the prices. When that happens, it is your guess as well as mine. But we have not only increased the capacity utilization in brownfields. We are also going to be introducing new products which will take advantage of Deepak's existing core capabilities. Now there may be new value chains, but they have similar process profiles where we have a high degree of competency in. So these are investments that you will see coming into announcement and then into play over the next 2 years. We've already made certain announcements. We haven't made certain announcements even though we are at a pretty advanced stage because we're waiting just to tie up some of the last bit. But if you're looking at what Deepak Nitrite stand-alone business profile looks like over the next couple of years, and I don't see any challenge in achieving and crossing the numbers that you were earlier referring to.
Got it, And sir, just a last bit of thoughts on the commissioning of the various brownfield expansions which we have been talking about. So where can we see those CapExs coming online over the next 3 to 6 months. So what portion of the CapEx is from the brownfield side would get commissioned over the next 6 months?
I think all of them, all the brownfields. All the brownfields will get commissioned over the next 6 months -- sorry, sorry. Hydrogenation brownfield will get commissioned over the next 8 months.
Next question is from Bharat Gupta from India site Value Fund.
So a couple of questions. First, on the growth CapEx front. So we signed an NAU with Gujrat government regarding the INR 5,000 crores investment plan. So what's the progress on it. And if possible, can you throw some light with respect to the bifurcation of the CapEx across the specialties and all in [indiscernible] and probable time lines for the same?
So I don't want to break it down into specialty or non-specialty because all of this, at the end of the day, all depend on how you define specialty. So this cool notion of assuming the specialty margins be higher. I think now we may all accept that this is not always accurate. What I can share is that the MOU that we signed is for very specific products that those we are progressing along well on finalizing with regards to the technology suppliers. We are also clear about where we will be putting water and we should see these being invested in and commissioned over the next 4 years.
So this technology, as Maulik was mentioning, it's an advanced stage. We are acquiring land in very soon the other in a couple of months because that is also the prequel of going higher to INR 5,000 crore expansion. So things are in laser moving as per the schedule. There were some dealers in land areas, but yes, now we are progressing fast. So it should not be an issue at all.
So sir, if I look like going forward for the next 4 to 5 years, it will be a complete transformation from being to exchange of commodity to going venture into specialty kind of. So just wanted to get a sense, like whatever investments which we are making it. So where does China compete in? And particularly, it can be a big trade because a lot of investment will be going in this particular domain. So if this particular destocking in Chinese something continues for some more time. So can it have a delay on the time lines, which we are getting in.
No, no. I think you are mixing up to at least talking about China cannot continue for 2, 3 years. And then this is actually [indiscernible], we asked me is the right time to set up the projects because the world is seeing a very volatile situation today and the [indiscernible] is wanting that things are very -- is very difficult for anybody to comment what will happen in next -- suppose a [indiscernible]. I can give you a guess on my because nobody knows how is will take place of what is happening on interest and so. And so guess what can be done by anybody, but nobody can tell you.
So the point here is, if we are going at the codes now, we expect and how things will settle down in the next couple of years. And the world will again start though other countries to countries are doing well, many countries are not doing well. So it seems happen is for the next 2, 3 years, if you see there is a revival in the oil economy is the right time to end of the market also. So I think what we are doing is the right thing to do today and go ahead with the expansion plans and you are entering the market and there is a up cycle.
Right. Sir, just a [indiscernible] question was to the fact that the segments where we will be investing in, particularly, so is a China big play in that particular segment as well?
Let me tell you. Please understand how we are -- what projects you are setting up in this because it is making our company much more strong or going back or going forward and China may come or Europe may come or anybody can come we can't stop anybody coming. But the resilience, which the mode of what we are creating, if you see that I mean that is something which we can sell through any such crisis or any additional capacity.
Yes, there can be ups and downs in the business. But this remains on a very, very strong formation and fundamentals. Let's appreciate this. You see deposit stand-alone, Useful whatever announcement you have made. And the way the demand is [indiscernible] growing and the way we are entering the market and capturing. I think that is where -- let's appreciate that the steps are taken in the right direction. If somebody comes if they don't come, that's a different question altogether. And we basically strong, I think we can face any challenge each.
I just want to clarify, this whole concept about destocking. I think that the definition in the market is wrong, right? Destocking just to be clear, means that somebody will try to sell a product regardless of whether they are making a negative margin or not.
Now it doesn't matter what country you work from, whether it is India or China, nobody wants to sell at a loss. The reason that they believe that they are okay with selling at a loss right now is so that they can empty their inventories in order to make new product, which will be sold at margins which are better then the products which they currently are holding in inventory. That essentially is what destocking means. And it also assumes that for whatever reason, the market demand right now is slower than it will be in the future.
So they want to ensure that they are able to get a better part of the better market environment with their higher-margin product, which they will make freshly and put it in their inventories. So destocking is not desirable for anyone regardless of the capacity that are being put up. Let's be clear about that.
Second point is that the investments that we are making in call it specialty call it a semi-specialty what we call our right to win. And when we look at our right to when we compare ourselves, against companies that may have actually established plants with fully depreciated business models. So we don't make an investment, hoping that the market will improve and hoping that destocking will end.
We look at the situation where we are up against someone who has all of the warriors and we are investing fresh money. So I believe in Deepak and believe in the study that we have put in place. And I will not really want to get into other the specialty because what the specialty means? Is it about margins? Is it about SKUs, what is it? Is it about the length of the relationship with the customers because most of the products that we make, even in these segments, even if we're talking about polycarbonates, they are not going to be done with a sense of just putting them all in our department store and opening some on [indiscernible], they will be done with established long-term commitments with key customers who will also be putting up investments on their own side to consume Deepak's product. So I think we should realign with the idea of destocking and specialty chemicals as we see it not at the market height.
For the brief on Modelo on the same. Just last bit from my side in terms of the guidance. So I think in one of the calls you mentioned in the company will probably look to double the turnover over the next 3 to 4 years time frame. So currently, are we holding upon the same given out the headwinds with the industries we think?
And I see, you mentioned the right word transformation we are at a stage where it's going to be significantly different before like in next 5 years' time, 4, 5 years and you can study are still confident of this. And whatever you have said, yes, it's doable.
Next question is from the line of Anika Mittal from Investec.
Sir, my question is there is an update on the ongoing projects, specifically the [indiscernible] and Helix plant anticipated for completion in December '23. I am interested in understanding the strategic implications of this initiative in light of the evolving situation in China. If China does rally be opening. Could you average how the completion of this project aligns with our objective to mitigate the input supply dependency on China. And additionally, considering the change in dynamics, how do we anticipate the manufacturing cost in comparison to podcast? And what is the impact or what is the impact on our profitability? If you could also quantify the CapEx allocated to this project, sir?
So first of all, for those particular set of products, it will completely eliminate our dependency on China on every aspect, given the raw materials. So we will be completely derisked. We will also be the only company in the world with that kind of end to end integration.
Now our commissioning is by and large on track, maybe a couple of weeks here or there. But by and large, it remains on track. Now with regards to what we will do there, it will allow us to manufacture both our consumer products as well as new products because the assets have been engineered to be able to manufacture a much wider variety which is currently in advanced stages in R&D. And once we establish ourselves with base intermediate that we will be consuming, we will also be making these same assets more fungible in campaign manners. I wouldn't want to get into the numbers specifically about the CapEx element here.
And to a certain extent, they have already been clarified earlier. And I think that clarification continues to hold. So no new coloring on that point. But that is again on track and it dovetails very nicely with some of the other commissioning that we're going to some online over the next 3 to 6 months as well.
[Operator Instructions]
Next question is from the line of Rohit Nagraj from Centrum Broking.
And congrats on a very strong comeback on the final segment. So first question, in terms of the phenolics margin. So on a sequential basis, how things have -- can you ... So first question is on the phenolic front. So we have seen a very strong comeback in terms of margin sequentially. And so what is your assessment in terms of the domestic demand demand and the inventory situation. Have things come back to more or less normal and incrementally, we will see that the performance will be remaining similar for the next foreseeable future?
So first for last quarter, the performance was subdued, but we've also given clarity that we ourselves went into destocking because we anticipated a change in the raw material prices. Also, we had about 3 weeks of low production in Q1, which affected our EBITDA percentage as well as our absolute. So if you're looking at Q1 as a source of comparison, we had clarified them as well that it was an unusual performance. But by and large, we believe that the downstream segments for Phenol, acetone and IPA remain relatively healthy as we had in Q2. That's what we should be seeing in the next couple of quarters as well. We have, as I mentioned earlier, also completed our advanced process control commissioning, which allows us to operate more efficiently and operate at a higher capacity.
Same question again on the phenol segment. So one of the petrochemical players and domestic market that they have announced 300,000 tons of capacity. And in our MoU signed with Gujarat government, we also plan to go in for maybe a phenol acetone, [indiscernible] and downstream products. So how do we assess this particular development -- given that currently, obviously, we have more than 200 tons of imports in the country, and the new capacity probably will be able to absorb a significant part of it. So your assessment of the same.
We assess it by feeling so very confident about the growing consumption of phenol and acetone in India.
Next question is from the line of Ankur Periwal from Axis Capital Limited.
Wishing everyone a very happy Diwali. First question on the -- first question on the R&D side. The new center is coming up in the next financial year, and we already have around 100 plus manpower there. In terms of your thought and let's say, focus areas, given we have been doing R&D in the fine specialty as well as the final derivatives, how do you allocate the resources there incrementally?
So first of all, whenever we're looking at very, very large volume, for example, if we were looking at something like polycarbonates. Now there, we -- in our R&D, we work on formulations, but on the main facility, we would prefer to license it with an established and proven player. When we're talking about specialty chemicals value additions, where we're looking at things like waste valorization, that's where our R&D comes in.
So internally, our R&D is focused on -- 2 things. One is new product development and 1 is operational excellence. So both of these are given equal and importance. Internally, in our labs, we don't really discriminate between a specialty and non-specialty chemicals. That said, when we are directly interfacing with a customer to develop or codevelop a molecule for a long-term contract with them, we do assign special team, which works in lockstep with the customers' R&D and technology team. So they collaborate at every stage here so that at the end of the date, there is a great deal of clarity and confidence built even in the development process.
Just a clarification. If I got you correct, you mentioned that the polycarbonate compounding the formulation part will be outsourced to a specialized third party, not done in-house?
No, no, that compounding can be done internally using our own scale and talent. The facility, for example, something which would convert key raw material, for example, phenol into a polycarbonate. That is where we will go with established nature players where there is the option -- I mean there are multiple different technologies, but we will go with someone who has a proven track record.
Sure, sure. That's helpful. Secondly, on the stand-alone side, especially finance specialty, there have been excess inventory, China led issues, et cetera. So your thoughts in terms of demand outlook there and how are we seeing the product basket there in terms of new launches?
So the product basket with regards to new launches, the pipeline is clear. Now some of them, for example, maybe what we're considering a specialty, but they may have something like phenol as a raw material, right? And the end application because it goes through multiple stages will be "specialty chemical" with the characteristics of that, meaning long-term contracts, particular quality and spec, high value add, all of those things even if the feedstock is phenol. In the meanwhile, when we are looking at new products that are being added, they will be added over the next 2 years. And would we face with regards to demand -- with regard to demand, there is a selective soft demand in certain parts of the agrochemical space, whereas in other parts, the demand is relatively robust. When it comes to Home and Personal Care, the demand is strong when it comes to niche applications like thermal paper, the demand is weak.
Fair enough. And will it be fair to say that most of the plan specialty business will be largely contracted I mean client commitments, maybe short term or long term?
Yes. Generally, that is the characteristic. It's not always like that, but more often than not, this is the case. They may be annual contracts, there may be multiyear contracts or in a couple of cases, there may be half-early contract.
Just last question, if I may. From our China dependence right now in terms of RM sourcing, where are we right now? And post the expansion, where do we expect us to be.
We source from China. We will continue to source from China wherever we need. But for every single raw material, we have sources which exclude China as well. So our critical dependency on China is not there, I think, in any business. However, it doesn't mean that we will not take the opportunity to buy from them. Obviously, if we are going to be manufacturing the raw material ourselves does no question about it.
Next question is from the line of Vivek Rajamani from Morgan Stanley.
Happy Diwali to you and the team. If I may, just on the demand point. I think in your opening remarks, you mentioned that you saw a sequential increase in volumes across the board in this quarter. If I just look at the revenue line on the Advanced Intermediates, the revenues have obviously come down on a sequential basis, which implies that your ASPs would have obviously been lower. My question is, do you get a sense that the decline in ASPs is now maybe stabilizing and maybe going into the second half of this year, you start to see some pickup there in line with the demand that you're seeing. That was the first question. And just as an extension to that, obviously, we are in November for the first month and month and 10 days of this new quarter, do you get a sense that you're seeing an increased pace of green shoots coming through in some of these segments already?
Just to be clear, I didn't say that demand in terms of volume is normalized in quarter 2, I said that there is a sequential improvement in the volume demand trajectory that we are seeing as we move towards Q3 and Q4. So just to be clear about that. And Q2 did have some weak spots of demand. And hence, we chose strategically to migrate towards other geographies that are in applications for some of our products, which previously used to be sold in the more mature economies. Now when it comes to how we are seeing Q3, this is -- I think what we should look at is over a period of time, Q3 so far from October until now, has largely been occupied by the festival season.
So October and November, every single year not just this one but even in past years, should never be reflective of what you would see in the rest of the year. Just like in China, you would never look at a and as an indicator of the rest of the year because it was largely shut down because of its all new year festivals. But we are continuing to see slight green shoots with regards to stabilization, normalization worldwide. Nonetheless, it is premature to assume anything right now.
And just a second question, Obviously, on the phenolics side, spreads have been very strong this quarter, and I think they've continued to hold up pretty well. If you could just give a sense of the regional demand supply situation, I think last quarter, there were some shutdowns or so. If you could just give a sense of how the regional demand supply balance is shaping up into the second half of this year, that will also be very helpful.
See, we are running final plant at 136%, 135%. That answers your question that there is demand, and we are able to supply people will import because we are not able to meet the full demand. That's a different thing. But I mean you have seen how it is -- second quarter has performed, and we are very confident that second half of the year also will continue the same moving term in federal as well as Deepak Nitrite as well. So yes, there is a demand in the sense of discretionary spending and this, yes, there is I mean that is going for quite some time. It's not very decent. When the textiles and these are all last 1, 1.5 years, we are seeing this is a subdued demand and Overall, if you see the world economy also, there is people are maybe deliberately or maybe because of the excel situation. The demand is gradually slowing. So we expect this to improve, but it may not improve so soon. But our product, we are selling full volumes at an issue at all.
Yes, there could be pressure on the realizations because in this market, we are able to send full volume. But we are not worried about this thing. I think we are reaching the bottom of the cycle and things will go -- can go up only for the year.
Next question is from Rohan Gupta from Nuvama.
Sir, first question is on our phenol business, we are seeing a sharp improvement in margin. So I don't think that the spreads have improved so sharply. So it is definitely driven by the better cost management and maybe higher utilization or in sales. So can you give some sense that how the spreads have improved on a Q-on-Q basis? And how much growth in the margin or profitability has come from the better volumes?
[indiscernible] also because of the low base of because we had 3 weeks of no production. So the big of Q1 was, I would say, unusually low. Hence, it looks like a significant improvement. But by and large, we are seeing that there is a reasonable -- what we entered Q2 with and what we are exiting Q2 with and in Q3 with, it is by and large, along a similar track.
See, Rohan, we have been mentioning again and again the phenol normal margin would be in the range of, say, 15% to 18%. And this is what you are seeing now and these volumes, these are all here to stay. If it is going below that, around 10% and there is something abnormal in that quarter, maybe because of our power shutdown, maybe because of the inventory suddenly there is a volatility in the raw material pricing in this. But otherwise, PCs the margins, one should expect. So I don't -- we don't see any abnormally then going forward, this still may not continue.
So our capacity utilization for the phenol plant still stood at roughly 13% at H1. So with the commissioning of the advanced process on.
It is not H1, it is Q2 because it quarter 1 we had a shutdown.
We also had a brief shutdown in quarter 2 when we did in [indiscernible]. So 136, as you see, is the capacity utilization. It is not the capacity updated capacity. So we will be in a position to be able to cater even more to the demand in India and wherever it is. So I don't think you look at 136 as absolute ceiling. We have the capability to ensures that we are able to supply to the growing market as well.
Sir, yes, you say that was my exact question that with the advanced process control and which has helped us in debottlenecking. Should we expect the utilization level, I mean, on an increased capacity can go up by another 15% from here in terms of volume, additional volume?
Let so put this in terms of percentage, but yes, it can go up because there is a demand in the market. And we are -- our team is quite capable of delivering more. So there is no issue as such on that and the APC did not factor in Q2 at all. Other than, unfortunately, necessitated a very short shutdown for OCA. So it actually affected negatively in Q2. And the benefits of that in terms of plant availability will be seen now on [indiscernible].
Sir, recently, we have seen that the crude has gone up and which is likely to have some impact [indiscernible].
See, by and large market absorbs crude volatility has remained. So market absorbs these ups and downs.
Rohan, I think between -- when you started the question and now crude has totally gone in a different direction. So I think we are more concerned with our ability to maintain our appetite, pass it over and the demand in the market.
Next question is from the Abhijit Akella from Kotak Securities.
Yes. Just a couple of clarifications I wanted to seek. So 1 is with regard to the CapEx in the first half, it's about INR 310 crores or so. what number should we work with for the full year, please, this year? And maybe if there's a number for next year also if it's possible to share?
Abhijit, while now the things are moving to the second -- first quarter of last year and first quarter onwards, I would say, rather -- because every quarter, you will see new CapEx is coming up. So whatever CapEx we spend, say, around INR 1,500 crores to INR 1,700 crores, all is getting now not an entire year, but Q1, Q2, Q3, that it's progressing in next year, and it will commission from Q1 and onwards.
Except for the flow relation.
Except that you are saying that will be commissioned in Q4. This Q4.
Okay. But in terms of the fresh CapEx on the newer projects, when should we expect a major pickup in spending on that? Will it be this year or next year onwards?
[indiscernible] are you mentioning to the larger CapEx of INR 5,000 crore or what we have already said around INR 2,000 crores, INR 2,220 crores?
Yes, I guess -- well, more of the INR 2,000 crores, INR 2,200 crores in projects such as...
That's what I was mentioning that you will find this early quarter commissioning of 1 project for next year onwards.
Then there is no government incentive income this quarter in deeply. So just wondering what the reason for that might be? And whether we should expect some incentive income going forward?
Yes, of course, it's not going anywhere. Now it depends the government where if they have fund, then they will start distributing. These are all -- I mean our filing is already there, and it can come any day, the process season. It may take time, but yes, you can expect this incentive load. In some quarter, there some may not be there, but it is there and we have to stay.
One last thing is just on Advanced Intermediates. So last quarter, we had pointed to a normalized margin expectation of about 20% to 22% EBITDA margin for Advanced Intermediates. We are running a little bit below that, but how should we think about that say, the second half and then beyond next year?
This year, obviously, I think I think Q2 and Q3 will also have this kind of whatever we are achieving today. Most likely from Q4 or next year onwards things will change and will improve. I mean there is nothing wrong with the demand and in, but only there is a pressure on pricing because though we are able to sell, but yes, overall, things have slowed down. So there as there is an impact there. So next year, or we will definitely see, of course, we are not doing bad in is reasonably good. But if you're expecting still better performance, then you can expect from next quarter -- sorry, April onwards.
And I know that I also put myself out there saying that the normalized EBITDA should be in the range of 20%, 22%. It will be. We are starting to see anyway -- it's just that the rate of improvement sometimes you end up overestimating or underestimating, in this case, maybe are overestimated. But nonetheless, the factors that would go in that direction are all in place. And we are seeing those conversations with our customers.
Let's say, in disease certainly towards the end of the financial year, we should be coming back to those numbers, which we were used to.
Got it. So improving trajectory in Advanced Intermediates and [indiscernible] Phenolics to remain around these levels or maybe slightly improve in 3Q and second half. Is that...
Yes, you are right.
No, no, no. Phenol, you can expect by and large around this. So I would not look at a quarter-on-quarter improvement. Volume will increase. The percentage will remain around this plus 1%, minus 1% kind of thing.
I now hand the conference over to the management for closing comments.
Thank you all for joining this conference call of Deepak Nitrite. In case any further clarifications are required, our investment relations team under Mr. Nanda will reply -- reply to you all, wishing all of you a very happy probably very happy festive season. fine stay, stay healthy.
Stay safe, and we've enjoyed the time with your loved ones. Thank you. Take care.
Thank you very much. On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.