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Deepak Nitrite Ltd
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Ladies and gentlemen, good day, and welcome to the Q3 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 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 Deepak Nitrite's Q3 FY '23 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. 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 his views on the operating performance and the growth plans of the company, followed by Mr. Sanjay Upadhyay, who shall take us through the financial and segmental performance. I now invite Mr. Mehta to share his opening comments. Thank you, and over to you.
Good morning, everybody, and a warm welcome to you on Deepak Nitrite's Q3 and 9 month FY '23 earnings conference call. I trust you've had an opportunity to go through our results documents that we shared earlier. I'll begin by taking you through the key financial highlights and operational highlights for the period ended December 31, 2022, and some key developments and strategic approaches for the coming year. Mr. Upadhyay will then present to you with the financial overview about the period under review.The operating environment continues to be highly dynamic. The recalibration of global supply chains over the last year due to various points like the sanctions on Russia, China closing and then reopening, continue to play out. Further, as we have the Chinese economy reopening after very, very strict COVID protocols, it will continue to remain dynamic, at least for the next couple of months, as the situation gets normalized. Of course, these developments have certainly affected the supply and demand of key intermediates.This backdrop, we're pleased to share that DNL has demonstrated remarkable agility in capitalizing on pockets of opportunity during the third quarter. Our global competitiveness and strong customer relationships ensure that we are called upon by customers for the requirements, while a focus on operational efficiency ensures that plants can be consistently operated at high utilization levels.This quarter, we have set new benchmarks in production and sales volumes for several key products such as DASDA, OBA and Phenol. Consolidated revenue for Q3 was INR 2,000 crores -- INR 2,004 crores, higher by 15% on a year-on-year basis. Now, despite the recent cooling off in price on certain inputs, and by recent, I mean the last couple of weeks, they do remain elevated as compared to the same time last year.We had indicated that higher costs would be passed on to customers with some lag and the ongoing pass-throughs. Q3 EBITDA of INR 328 crores was higher on a sequential basis from the previous quarter of INR 283 crores by 16%. Consequently, the EBITDA margin too has risen over the previous quarter, though it remains below the elevated level of last year.Certain product margins were high last year, but have normalized this year, causing margin compression compared to the base period. We are taking further measures to pass on increased input costs, while also driving cost optimization in order to protect profitability. But I would also want to mention one important point that -- and this is the base effect.From a stand-alone basis, every single kilo that the company manufactures has been able to maintain or grow its gross EBITDA per kilo. Naturally, with the higher raw material price and a higher finished good price, the percentage looks squeezed. Anyways, going on to the performance of the strategic business units, the Advanced Intermediates business delivered strong revenue, despite inflationary pressures in the backdrop of strong demand.We have aggressively pursued opportunities both domestically and with international customers. There was a sharp rise in exports by nearly INR 100 crores in the same quarter when compared to the previous quarter. The segment is expected to continue to perform well due to the shift of global supply chains and positive demand trends. Further performance will be driven by new multiyear contracts, strong demand and the ability to pass on cost increases to customers.As prices of products and raw materials stay at elevated levels, per kilo margins, as I mentioned earlier, are better, even though the percentage looks deceptive. I would remind you that, out of 9 months, our Nandesari unit has operated for 8 months -- little bit less than 8 months, as 1 month, the month of June, was lost owing to a fire incident that took place.The Phenolics business has demonstrated encouraging results with an average capacity utilization in excess of 117%. I would like to say here that, while demand in India remains stable, weakness in global demand was observed. Many Asian phenol plants were operating at 60%, 65% capacity, and nonetheless, we were able to manufacture and sell more than 117% of our production capacity.We saw an EBITDA margin improvement compared to the previous quarter during -- owing partially to the moderation of raw material prices and partially due to the Indian demand remaining a bright spot in Asia. Deepak Nitrite stand-alone basis achieved for 13 consecutive quarters an ROCE of more than 30%, including the current quarter. The results should be seen in light of unusually high base of higher margin in Phenolics and recent supply-side challenges for critical raw materials like nitric acid.Now, while the world has witnessed volatility, Deepak's customers have not. The company has maintained or grown wallet share in nearly all its products, and its relationships with key accounts remain buoyant. As the domestic consumption in some segments has been subject to sluggish demand in the recent few quarters, the company has prioritized export markets and ensured that both production and inventory remain very much in control.We are also progressing well with our expansion plans with multiple projects in progress. The installation of capacity for our SAC plant is set to be commissioned this quarter. Our project for MIBK and MIBC, which are derivatives of acetone, are progressing well and should be on stream as planned. Just to highlight that between these products and IPA, the company will consume 80% of the acetone that it manufactures.We are constructing a facility for complex fluorination and photo chlorination that will go on stream, starting early H2. Our project to internally manufacture key raw materials is progressing well and towards commissioning, as planned. In addition, our Board has approved a capital investment of approximately INR 1,000 crores, which will help the company's growth plans. Out of this, we have approved a project for manufacturing polycarbonate compounding at a world scale, which will add impetus to our move towards the polycarbonate business. And this will help us in understanding the key marketplace, the niche players, the large players, and we will be manufacturing compounding products which will be used by growing demand in India, in applications like 5G boxes, EV batteries, medical devices and much more.With the Nandesari plant back into full operations and other plants running at high utilization, we are operating [Technical Difficulty] -- Our captive power supply enables us to do so consistently, and steps have been taken to create assured supply of critical raw materials, while we further de-risk the business.With multiple plants set for commissioning in the ensuing quarters, we're very well placed to continue to deliver on our growth aspirations. One point that I forgot to mention also is that, we continue to progress as per plan with regards to our plant in Oman that will manufacture sodium nitrite on a phase -- as Phase 1.Thank you, and I would now like to hand the call over to our Director Finance and Group CFO, Mr. Sanjay Upadhyay, to address this forum and take you through the financial performance. Thank you.
Deepak Nitrite reported an encouraging performance during the period under review. Despite the ongoing micro challenges, solid improvement demonstrating both our business segments, aiding DNL's continued strong revenue growth. I may like to mention here that, around this time, the macroeconomic situation of chemical in regards pricing of raw materials were not very supportive.However, in spite of such steep challenge, we could bring in a resilient performance owing to diversity in our product basket, reaching out to the customers not only at the time of their need, but always hence increasing the wallet share, constant negotiation of prices of major raw materials, making raw materials available at all times to see that we excel in our operations. All of these steps helped us deliver better and sustainable performance.While I take you through the numbers and the key development during the period, the company was awarded an Excellence in Financial Reporting for its Annual Report 2021-22 by the Institute of Chartered Accountants of India. We take pride in announcing this since this is a milestone achievement for us.On the operating front, the domestic business revenue stood at INR 1,574 crores in Q3, higher by 11%, and on a cumulative basis, INR 4,898 crores, higher by 30%. Exports revenue were at INR 417 crores in Q3 and INR 1,113 crores in 9 months FY '23.On a consolidated level, domestic to export mix stood at INR 79:21 for Q3 FY '23, while stand-alone DNL's export revenue was 45% of the total turnover. In 9 months FY '23, on a consolidated basis, revenues are up by 22% at INR 6,046 crores compared to INR 4,969 crores in 9 months FY '22.Robust revenue growth was achieved through increased volume accruals, and especially in Phenolics segments. Utilization level remain high with ongoing improvements throughout the year-to-date period. EBITDA stood at INR 976 crores in 9 months FY '23 compared to INR 1,232 crores in 9 months FY '22.PAT stood at INR 618 crores versus INR 799 crores in FY '23. In Q3 FY '23 on a consolidated basis, revenues grew by 15% at INR 2,004 crores as compared to INR 1,748 crores in Q3 FY '22. The impressive top line performance was fueled by higher production volumes in several key products.EBITDA came in at INR 328 crores compared to INR 378 crores in Q3 FY '22, and PAT stood at INR 209 crores. Profitability is lower on Y-o-Y basis due to high base in the previous year, but the company has improved profitability quarter-on-quarter in line with the concessional performance.Now moving to our segmental performance. In our Advanced Intermediates segment, revenue has increased by 19% to INR 829 crores in Q3 FY '23 versus INR 699 crores in Q3 FY '22. The growth is going to sustain healthy demand from key customers, while the rise in EBITDA was 2% to INR 172 crores during the quarter under review.As Maulik mentioned, growth in EBITDA was -- has not kept basic revenue growth due to a significant increase in input cost compared to the previous year. Although input [indiscernible] moderated recently the company, and the company is working to transfer the elevated cost to its customers. By and large, we are successful in achieving this. If you see on a per tonne basis, we have achieved higher contribution. But in terms of percentage, because the total revenue is also going up, you are seeing margin impact on the percentage.In 9 months FY '23, revenue grew at 27% to INR 2,263 crores and EBITDA came in at INR 470 crores, translating into margin of 21%, despite the current environment and challenging circumstances.Deepak Phenolics delivered an encouraging performance with revenue growth of 13% to INR 1,187 crores in Q3 versus INR 1,050 crores in FY '22. The company has operated all plants at high utilization rates. The phenol plant has clocked in average utilization of 117% for the quarter and achieved highest ever quarterly domestic sale and highest production per day of phenol.In spite of that and this achieving 117% doesn't mean that we are in a -- I mean, we are debottling the federal capacity further, and you can further -- expect some further growth in the volumes. EBITDA stood at INR 157 crores, and EBITDA margin came in at 13% in the quarter. In 9 months FY '23, revenue stood at INR 3,812 crores and EBITDA came in at INR 508 crores, translating to margin of 13%.During the quarter, DNL witnessed extreme volatility in exchange, which peaked at INR 83.03 and bottom rate INR 80.81, recording a volatility of 2.75%. For 9 months FY '23, the exchange rate moved between INR 75.33 to INR 80.03, recording a sharp volatility of 10.22%. The company implemented dynamic hedging strategies to mitigate foreign exchange risk, resulting in a gain of INR 3 crores in Q3 FY '23 and [ 4.62% ] in 9 months FY '23.The company continues to remain debt free with the net worth of INR 3,850 crores, thereby strengthening the balance sheet for future expansions.I will now request moderator to open the forum of question and answer session, please.
[Operator Instructions] The first question is from the line of Nirav Jimudia from Anvil Research.
Sir, I have 2 questions to ask. Sir, first of all, details on the expansion program. So I think we have got almost now all the details of the INR 1,500 crores CapEx, which is currently undergoing. So just wanted to ask, like, you have mentioned one of the point in terms of the backward integration in fluorination space and the plant. So if you can help us explain the rationale over here, like in terms of -- let's say, first on the fluorination side. So are we producing some of the products where entering into fluorination would be a first step to assist our current product profile, as well as the newer opportunity size, which we will be addressing with this foraying into the complex -- fluorination complex, which you just mentioned in your opening remarks? So this is on the fluorination side. And on the acid plant, if you can just give some bit of understanding like, what could be the size of the plant -- or, let's say, out of around INR 460 crores, INR 470 crores of raw material cost which we have reported in the stand-alone business for Q3, how much would be the contribution of -- or the raw material composition of acid out of this INR 470 crores? So this is question #1, sir.
I'll answer the first question first. So you rightly pointed out our strategy when it comes to photo chlorination and fluorination. About a few years ago, this was imported a 100% by us, not just the fluorinated molecule, but the downstream as well. And then, we used that as a feedstock for one -- for a few of our agrochemicals. Then we started facing pricing pressure from China, and hence, about a year ago, we stopped using some of our existing assets and repurposed them to make the upstream ourselves partially.
And that -- those steps required nitration, they required reduction, distillation, purification, those things. So those were processes which Deepak is intimately familiar with. So we shifted from manufacturing ABC other products and started using them here in order to de-risk our supply chain. We started with 50%. Today, we are manufacturing 100% of our internal requirement, but we were still at risk for the basic feedstock, which again came from China.Now with this, what we aim to do is have a 100% de-risk model all the way from the petrochemical source to the final Advanced Intermediate. More than that, we recognize that these are competencies which we are adding to our portfolio. So it was important that we start with products where we ourselves would be the anchor customers, and it would essentially not require a market discovery process.While we would sell a good amount of volume to strategic customers, we would also be our own customer. Nonetheless, this was never the end intention. This is the beginning. So all of the assets that we are putting up are up engineered in that sense, to be able to do a lot more, to be very, very flexible and fungible. And with that, we intend to get into more advanced processes, which require the same chemistries.But as I mentioned, the first step was to do something where we have a very, very high chance of success. And as we are succeeding, and as we have established the key infrastructure which is required, we are working with a strategic [Technical Difficulty] in order to develop products that they want, which would utilize some of these streams into supplying their requirements, which would be very different from the product that we are going to be making, which we will self-consume.So this gives you a good understanding of how we are looking at investments, first by either having an existing strong competency, or building a competency by targeting a strong customer, in this case, us, ourselves, and then building up that competency horizontally by ensuring that the process knowledge that we are able to gain, allows us to make more complex molecules with niche applications.So that answers your question about fluorination and photo chlorination. Both of these are built in multiple trains so that there is a level of flexibility. We have purification towers along all of these so that it allows us a greater sense of flexibility in making one set of product and another set in parallel, if we so choose, or we can make a higher volume of a smaller number of molecules. This choice will remain ours, and the plants are engineered to be modular in that fashion even moving forward.Similarly, as you asked about the backward integration, what I can just share rather than going into very specific numbers is that, the capacities will address not only all of our requirements today, but all of our requirements over the next few years, because, once we have our own internal supply, we will naturally work towards expanding its consumption. But there will be ample supply for us even with the expanded capacities.
So sir, if I understood your answer correctly, in the fluorination space, some of the products what we are already producing, 100% of that product backward integration we are doing, but we are going one step ahead and building up the capacities to assist the 100% backward integrated product also. And safe to understand that, that product, or the capabilities what we are building, can suffice newer number of addressable products, which then we may approach to the markets for agrochemicals or maybe pharma and a new stream of revenue could be opened up for us?
Absolutely. We are already in active conversations with specific strategic customers to develop products for their niche applications. They happen to be in the life sciences, the agro and pharma space. We're working with them. We cannot talk specifically about the products, but rest assured that these will be with a long-term focus in mind.
And this acid plant would also have a WNA plant for our CNA requirement, right?
Again, not going into specifics, let me just tell you that we will be no longer subject to the vagaries of the market. So the point is to de-risk, and we've been working on this for a while, and it is something that we expect to see very soon, and it will allow us to be very -- on very, very firm footing.
. Sir, second question is on putting up the sodium nitrite plant in Oman. So, I think we are a substantial player here in India for sodium nitrite. And our last quarter press release suggests that we'll be including something around $15 million as the initial amount for that JV where we will be holding 51% stake. So if you can just help us through the rationale of putting up a plant over there, why we have been putting up a plant in Oman, what could be the size of investments which would be happening? And let's say, if we -- if our current capacity x -- is, let's say, x, how much would be the addition happening to overall Deepak Nitrite's portfolio so far as sodium nitrite is concerned from Oman?
So, basically, this is something that we have been working on for a while, but we were doing it in a soft manner. As we saw the situation all over the world with regards to the energy crisis develop and become -- in the beginning, it was more of a short-term threat, but then it turned out to become more of a systemic challenge.We activated and we started fast-tracking a lot of the initiatives that we had been working on anyways in Oman. And hence, we -- the reason that we've targeted it is clear. Oman is a country where the energy that is available, is used both as a feedstock, as raw material in the form of ammonia, as well as an energy source.And it also has trade agreements with various countries of interest worldwide. Now, one thing that happened over the last 2 quarters or 3 quarters is, while the Indian domestic demand was temporarily subdued because of x, y, z reasons, we targeted more and more of the export demand, which was earlier maybe supported by European manufacturing, because we saw the systemic shift.Today, we have -- I think we have more than doubled our export volumes compared to the same time last year. And this will continue. But we are running our plants on full right now. So we cannot wait for this facility in Oman to come up. So we really needed to come up very quickly so that, as we see the Indian market also recovering, we don't need to let go of the export market which we have been able to capture. So that market will be serviced by our facility in Oman, whereas the resurgent Indian demand will continue to be met by our plants in India.Now with regards to size, today, Deepak is already a world scale manufacturer of sodium nitrite. And what I can say is that, the Oman facility, to start off with, will be of a reasonable size compared to the Indian plant. It will not be exactly as large, but it will have the capacity to ramp up production rather quickly depending on the demand. But we take a balanced approach. So we can say that the plant in Oman will be world scale, but to start off with in Phase 1, it will be somewhat smaller than the plant in India.It will also have ample room to grow in terms of the infrastructure, along with have the opportunity to set up other products in Phase 2 and Phase 3, which may have something to do with sodium nitrite -- nitrate may, not necessarily, but may follow a similar philosophy where we are able to use the Omani advantage to our benefit.
Sir, is there any timelines we have set internally for this project to start in the Phase 1?
We're targeting to see how we can do it in 2 years or so. The earlier the better for us.
The next question is from the line of Vivek Rajamani from Morgan Stanley.
The first question was on the Advanced Intermediates performance, and it's a bit of a 2 part question here. Obviously, it was -- at the end of last quarter you said that your Nandesari facility was now operating fully. And I think even during the comments, you mentioned that you've had high utilization rates. So the question was, if I see this quarter, it's obviously still quite a bit lower than the peak that you saw in the fourth quarter of 2022. Would it be fair to say that this is purely based on the margin and price compression that you've seen since then? And if you could just elaborate on which products are causing this, that would be great.And the second part of the question was, you obviously mentioned very high utilization rates across the board. Would it be possible to give a bit more specifics for some of your bigger plants? That would be really helpful. That's the first question.
I did not understand the first part of your first question. Are you comparing our quarter 3 performance to our quarter 4 performance? Are you talking about this particular quarter that we're speaking about, meaning Jan to March 2023? Because -- I mean --
No, sir, I was just comparing --
We barely know our internal numbers. I'm surprised that you know them.
No, sir, I was just referring to the December quarter performance and comparing it to the March quarter of 2022, which was obviously the peak for that segment.
Right. So let me also point out that, to a certain extent, last year, we had some of our raw materials on formula link, whereas that is not the case today.
He is talking about top line. Are you talking about top line?
No, sir, I'm talking about your EBIT.
EBIT.
Right. So that is one of the factors. The other factor, of course, is that last year, before the Ukraine war broke out, the price of several commodities like oil and therefore, petrochemicals, BTX, were definitely lower. Along with that, there was, generally speaking, an optimistic atmosphere where the domestic market dyes and intermediates segment, all of these segments were quite buoyant in terms of their expectations and outlook through the year.And also one thing that is always there is, while Q4 is, in that sense, a relatively normal year in any -- normal quarter in any year, the first 2 months of any -- the Jan and the Feb months are normally affected by uncertainties owing to China New Year's and all of those things.Beyond that, what ends up happening is that, a lot of customers of ours are looking at the year afresh. So they are done with the previous quarter, which would be on a calendar basis, the non-Indian customers. They have finished. So now they are looking at new volumes, new contracts, new this and new that. And in most cases, it has allowed us also to have slightly higher prices and slightly improved margins as per a renegotiated contract.So these things happen. And I would not read too much into this, to be honest. What I can say is that quarter 4 has just begun. It begins with some rays of optimism, but it's too early to call the quarter as a normalized quarter. Nonetheless, it does point to, generally speaking, greater consumer confidence in various countries across the world. So we see how it goes, but I remain cautiously optimistic.And with regards to our plant utilization, our plant utilization is good across the board in most of our plants. All of our large volume or high-value plans, we are doing well. I can give you one example. In the month of December when we commissioned -- in November and December, when we commissioned a facility that goes into manufacturing of an agrochemical intermediate. Now this was an expansion project.Now once we commissioned it, we were able to ramp it up to 100% utilization within a few days. And by the end of the month, we were able to ramp that up further to 120% of the design capacity. And we were able to do it with all due precautions in mind. And let me also assure you that the throughput -- even the increased throughput is all focused for several years to come as well because these are all tied up in volume contracts. And our customers have shown that there is a great degree of optimism with regards to the end application here.
And the second question was something you did also touch upon briefly in your answer. I just wanted to get a sense in the first month that we've seen, whether there've been any change in the trends in terms of the end segment demand? Or is it broadly similar? Or -- again, like you said, you are cautiously optimistic. So just wanted to get a sense if any segments are starting to show some signs of pickup or not?
Yes. So generally speaking, we are seeing compared to the previous quarter, slightly a greater sense of optimism. Now just to be very clear, optimism doesn't straightaway translate into more orders. Optimism translates first into discussions with a longer outlook in mind rather than just a few weeks or a month. It talks more about how we see the situation and the resilience of the end application, whatever the end application is. It could be textile, it could be paper or it could be detergent, it could be agrochemicals or pharmaceuticals.So our customers are having conversations, which include how they see the world improving in its buying sentiments over the next few months. And some -- in some cases, this has resulted in our customers being more willing to buy larger volumes, run their plants at a higher capacity, holding on to more stocks of raw material because they see their order books filling up.But as I mentioned, cautious optimism because this is still early days. A lot of new factors have to be considered. For example, China is reopening, Europe going through milder winter than anticipated, various countries' central banks also founding not dovish but less hawkish. So it's going to be end-to-end about whether every single part of the global recovery trends in the same direction or not. Therefore, it's -- at least it's enough to start a conversation.
[Operator Instructions] The next question is from the line of Naushad Chaudhary from Aditya Birla.
Firstly, on the power cost pressure in the last couple of quarters, it has almost doubled. Any outlook here? Any sort of relief we are witnessing here? How do you see in next 2 to 3 quarters, how should it be?
What has doubled?
Power.
Power cost.
See, when you say power cost, you mean power, coal, all utilities, correct?
Yes. So what we see in the P&L, sir. [ I don't want to dispute that ].
See, as volume, for example, in Phenolics as the volume and the throughput of the plant increases, you can anticipate that so would the power and fuel cost. On a per kilo of the final output basis, it remains fairly consistent. But I mean, we are still exposed to the volatility of the movement of prices of products like coal and natural gas, for example.So as these stabilize over a period of time, you will see the gross value of these costs also stabilize. One hand -- one thing I can tell you is, that because of our cogen power plant operating in Dahej, we were able to avoid any and every failure of the plant because of the grid being down.This allows us to maintain a consistently high level of production, and allows us to avoid any negative impact with regards to the specifications and quality of our phenol or acetone, because they're manufactured on a continuous basis. So this gives us more confidence, more product, better quality.Now let's see how the coal prices and the gas prices moderate over a period of time. Right now, it seems like in the last couple of weeks, they have improved, but it's again, as I mentioned, very early.
See, there is a one-time impact also because of fire -- our coal fire boiler was down in Nandesari, and we had to run our plant because we wanted to get production to run on gas, which was -- which you know it was very costly then. So these things do happen. And what you are saying is the total number, but the production volumes have also gone up in February since this. So this is also impacting. So we can't just compare the absolute number. But then, yes, it is fairly under control.
So the one-off impact, can you quantify that? And would it be there in the coming quarters as well?
No, but that was because of fire. Now why should it be there.
And would you be able to quantify that?
I don’t need to quantify this particular figure, but I'm just explaining to you that this is also there, because 1 month we had to run the boiler on coal -- on gas.
We'll quantify it when speaking with the insurance company.
And sir, just -- I have calculated it though, but just wanted to hear from you how you are seeing the phenol spreads slowing? Because I see the benzene propylene, these prices are softening. But if you compare it with the phenol prices, the phenol prices are relatively are stable. So how you see the phenol spread currently and any outlook if you would like to share?
But what does your calculation say?
Sir, it is --
I didn’t hear from you.
So, obviously the secondary market data -- and you have been sharing that your way of doing things is slightly different. So it won't match, but directionally, it's indicating that there is a positive improvement at least on the spread side. So would you validate that, sir?
Maybe in short term, not much. I don't know whether if you are saying -- but yes, in federal margin, I think by and large, will remain in the same range as of Q3, maybe 1%, 1.5% here and there.
And in terms of the -- last question in terms of the end user slowdown earlier you had indicated textile is having some problem. Apart from this, any other end user which is facing this problem in terms of growth?
No, but that's really -- so only textile and dye and dyes intermediate, where also we are seeing the improvement in the fourth quarter. That segment is really impacted. Otherwise, we don't see much of a fall in any of the other segments.
I will add, however, that the European paper industry is currently in quite a depressed state. But I mean, it's been low for the last 3 quarters. So any small improvements will also be a big improvement, and that's significant power cost and water cost and energy cost that it has to contend with. So this is -- as I mentioned earlier, this is a structural thing, but our customers certainly are looking at Deepak as larger player rather than their other suppliers who are also based in Europe.So this helps us because, when we are manufacturing in India and supplying to European companies, suddenly, they prefer Deepak rather than buying from other European companies, which might be facing their own cost of power and energy and water.
The next question is from the line of Chintan Modi from Haitong Securities.
So firstly, you have mentioned about a new investment of about INR 1,000-odd crores, which will partly also go for polycarbonate compounding business, and like kind of a furtherance to your polycarbon business. So if you could help us understand what exactly would this mean?
No, exactly that. As you rightly mentioned, so the compounding facility, which will be a world-scale facility, we'll be able to make small batch and large batch, so made to order and made to stock. And it will largely service India's very fast growing demand of these compounds. Now the compounds are manufactured based on certain properties that they are imbued with. It could be the ability to withstand temperature or pressure or a particular shape. It could be on the base of precision, a lot of different metrics depending on the end application.And all of these, therefore, have polycarbonate as a main ingredient with other additives, which are able to support that particular application. Now, in this case, what we are going to do is, with this facility, we will engage with key partners and start building those relationships, supplying and having our products approved at their end.And as we are doing this, we put up significant facilities that will manufacture polycarbonate, and its upstream all the way to phenol over a period of time. And then once that is done, it is essentially supplying to the compounding facility itself, which is then making the application compounds as the customers require.Some amounts may also be sold into the market and some amount will be moved via this compounding facility. So it is our effort to occupy a space way downstream where we are talking more about applications and more about long-term value creation with customers who are based on Indian requirements.
So basically, currently, you would be buying polycarbonate, compounding it and sell it into the market. And once you understand the market, you will be going more backward integration by setting up a polycarbonate plant?
Yes. So imagine building a bridge from both sides of the river.
And secondly, as you mentioned about all your backward integration projects, which are currently under implementation, once you are done with that, what level of self-sufficiency you will achieve in the Advanced Intermediate business, if you could give us some kind of a number?
I think we should see an EBITDA improvement of at least about 2% across the Advanced Intermediate revenue. So whatever is the EBITDA percentage that we get, we will consistently be able to add at least 2% to that more as we add more production and debottleneck and add more capacities. So that will be margin accretive. But in the meanwhile, it will be at least 2% on the current business.
And if we were to just see it from a revenue perspective, like how much proportion of that will be backward integration integrated to a large extent? How much would that be?
70% to 75% initially.
Just to be clear, we will -- I don't think I have understood your question, to be honest. But we will be internally consuming to start off with about 2/3 or a little bit more than 2/3 of the capacity with plans over the next year or 2 years to expand that to about 90%, 95%.
See the idea here is we are setting up the specialty with some extra capacity. We will expand parallelly in nitration business so that we consume entire production captively. It pays back very fast, maybe 3, 3.5 years. And this is a step in the right direction because, not only the price advantage, but it was also causing interruptions in the operations, which will stop now. So it is helping us on both the fronts, in EBITDA improvement as well as running the accounts smoothly.
Sorry to hammer on this. My question was a little different. Like out of the INR 100 of revenue that you are driving today, say, in Advanced Intermediates, how much proportion of that revenues would you be fully backward integrated, or say to a large extent backward integrated?
No, this is -- Advanced Intermediate is a large product portfolio. We are talking of only nitric acid here, right, and the fluorination. So the combination would not be -- I don't know how it matters to you in terms of percentage. That will not -- cannot be so large. There is only 2 products what we -- what Maulik spoke about in today's CapEx. Is it the right question or --?
I think there is a confusion about your question. Look, we manufacture a lot of products, which will use these feedstock. They have their own revenue and margin profiles. And because we're long in particular streams, it's very difficult to quantify because if I'm making a product which has nitration as a key step, I'm selling that, but I am also internally consuming that to go downstream into other processes, which may be hydrogen reduction or sulfonation or cyanuric chloride reactions and things like that.So it becomes very, very challenging for us to answer this question, because, everything that we are doing in the Advanced Intermediates business is part of a chain, one chain or another. So how do we go about answering this question? Most of them begin from the basic intermediates, building blocks and a large, large part of basic intermediates, the building block requires these few intermediates that we spoke about, which we are backward integrating into. They're not the only ones, but they're key raw materials.So as it supports the upstream cost and availability, so will it benefit all the way downstream as well. But the safer answer to tell you is that it will certainly have something in top line because we have not had the opportunity to manufacture consistently because of unavailability of some raw materials, as I mentioned.So now when we do it on a regular basis, it will add to the top line, but the significant impact will be an improvement to the EBITDA percentage. This is what Mr. Upadhyay has also emphasized.
The next question is from the line of Meet Vora from Axis Capital.
I just wanted to understand on phenol, acetone derivatives . So while you have said that we will be doing the MIBK and MIBC, and including IPA, the total asset on consumption captive be around 80%. So currently, around -- I mean we'll be selling the current asset on an open market. So will we let that market go up, or how we are planning on that once MIBK and MIBC come onstream? This is my first question.
I mean that's kind of left to us, right? Because we will see that we participate in the market depending on the value that we get, but it gives us that sense of flexibility because, when we make ISO-profile alcohol, IPA, it comes in a margin accretive manner compared to sale of just pure acetone. Similarly, MIBK comes in a margin attractive manner. Similarly, MIBC is margin accretive to MIBK itself, right. So all of the -- and in fact, MIBK, and MIBC will have margin profiles, which will be similar to what you would expect from, say, the [ AI ] business. So it is an effort to go downstream.Now if you're asking about vacating the pure-play acetone market, we'll need to figure out a strategy about how we can address that. But as Mr. Upadhyay also mentioned, we are debottlenecking our phenol and acetone capacities anyways.So when I refer to 80% of phenol production -- acetone production, I was referring to the current production. We will be able to add some through debottling exercises, which are extremely short-term. So you should see the result of that coming in maybe a couple of months from now, to be honest, maybe in Q1 of the next year, and that will add capacities of both phenol and acetone.So I think we will be well placed to have a significant market share of all the products, including acetone, even though we plan to internally consume higher and higher quantities. And as required, when required in the future, we do anticipate that we will need to significantly expand our phenol capacity far beyond what the current plant is capable of doing.So we will have to put up new plants. Some of those capacities will be consumed downstream as we move towards polycarbonates. And some of those will be available to the market as we intend to maintain a particular wallet share in India's growing story.
And secondly, as you rightly said that in the polycarbonate, we are doing -- like we are building a bridge from both sides of the river. So we -- I just wanted to understand whether we have cracked the phenol downstream products till we go up to polycarbonate like this phenol? I mean, entire route heavy track, or will the time we market for polycarbonate through just processing it and once we find the end consumers, then we'll start tracking, or how is it -- will [ to ] go about? And also, if you can quantify that --
Sorry, what do you mean by cracking? The technologies are widely available and well established.I mean, there are various different technologies, different routes. All of them are well established. All of them have advantages -- different advantages as it pertains to the Indian ecosystem. Now it is up to us to decide which road we want to take, but the destination is clear, and we have started to invest in the destination as well.
And, sir, if you could quantify the debottlenecking exercise that we are doing on phenol, acetone plant, that would be helpful.
Yes. We will add down 50,000 tonnes. We'll touch on 3 lakh tonnes -- about 3 lakhs.
The next question is from the land of [ Manish Shen ] from Money Life Advisory Services.
Wanted to understand the trend in raw material prices. Past few quarters the prices had increased drastically due to the [ risk ] factors. So are you assessing moderation in the prices, especially for nitric acid, ammonia and caustic soda?
So these prices are volatile now. They are at an elevated level, if I'm comparing to last year at the same time. And there has been -- I won't call it a moderation certainly, but I wouldn't call it a plateau compared to the previous quarter. And as and when we do find small pockets of opportunity, we take them, we are large consumers, and hence we are able to use that and leverage better product pricing. But beyond the point, this is also challenging.So in the short term, we do anticipate that even if prices moderate, they may not reach the prices that were prevalent last year. One of the reasons, of course, being that last year, we were engaged in contractual agreements with formula prices, and at this time, we are addressing the situation on our own.
Secondly --
I'll just highlight that what you see as a performance of this quarter, the last quarter and the quarters before that, is, despite having this as a challenge. So this is not a challenge that began last week. It's not just going to be in quarter 4. It has been the challenge for the entirety of this financial year. And as you can see, while it is a challenge, we take it in stride. We are up to the task and we work hard to maintain our margin profile. And while we are doing all of this, we do not lose wallet share.
Secondly, I wanted to understand, how are you looking to strengthen your employee base in the medium term for the upcoming projects and expansion? Also, can you give a sense on the number of employees you will be looking to add in the R&D department as you pour into more downstream products?
No, I won't go into numbers, but there will be significant additions. Nonetheless, we also have internal programs where we target to prefer internal mobility. Now, of course, in R&D, this is difficult because our teams are generally occupied, and normally for things like compounding and all, it requires a specialized skill set. So we have been looking out and taking talent and we have some good people who have joined us with this very clear vision in mind, and they're already working on that.It is, in that sense, quite similar to what we did about 2 years ago when we decided to enter the chlorination space. We announced it about 8 months to a year after we started recruiting, we started building R&D facilities. We started piloting. We ensured that we tied up our raw materials. We started hiring people who would be operating at the plant. Those people were also deeply involved when we were doing the piloting so that they would be confident that what they were getting when the plant is operational, is something that they were confident running. Their input and guidance has been invaluable to us while we have done this.So we recruit at the right time, not too early, but not only at a time where we need to operationalize. So whether it is at R&D level or it is at plant level, we start incorporating people and ensuring that the transition is smooth.
The next question is from the line of Rohit Nagraj from Centrum Broking.
Sir, my first question pertains to the CapEx. So INR 1,500 crores CapEx is what we have planned for FY '23 and '24. And as I understand in previous calls, we had indicated about 700 of this will go to phenolics. We have already invested close to about 400 in [ Clean Tech ]. So just wanted a broader bifurcation in terms of stand-alone Deepak Nitrite, how much of this CapEx will go, phenolics and Clean Tech?
Don't look at it from that perspective.
So this is actually -- Clean Tech is a vehicle. It's a 100% owned subsidiary. So all these expenses as through Clean Tech. So don't read too much into how much is going to Clean Tech and how much going here. It's all through Clean Tech only.
I just wanted to have an understanding -- okay, let me rephrase the question. So out of INR 1,500 crores of total CapEx, how much of CapEx will go for backward integration? And how much of it will go for capacity creation or growth?
So 50-50, you can take.
Yes. This, of course, does not incorporate the additional announcements that you would have seen --
Yes. That is --
-- in the investor presentation, which is approximately about INR 1,000 crores, which would be over and above this. And most of that would go into revenue generation.
And out of this INR 1,500 crores, how much we expect to capitalize in FY '23 and the rest will certainly -- FY '24?
FY '23 [Foreign Language] .
See, FY '23 is hardly anything, I think around INR 70 crores, INR 80 crores. This all will be next year.
Exactly.
Okay. So probably some INR 100 crores this year and the rest of INR 1,400 crores will be capitalized in FY '24.
Yes.
And other question --
Maybe beyond that also in the first quarter. Not everything is coming in '24 March.
I mean there could be a spillover by a quarter or so in that?
Yes. That's it.
And in terms of [ PC ] compounding facilities, so could you just give us a broader understanding in terms of capacities that we want to create here in the initial stage?
As I mentioned earlier, it is world scale. So to start off with in Phase 1, it will be about 35,000 tonnes.
Thiscan be broken up into small batch volumes and large batch volumes and all of those. There will be a tremendous amount of flexibility that is from day 1. And as we need to grow, we do it in a phased manner.
And initially, the PC will be imported?
Yes, yes.
Yes, yes.
The next question is from the line of [ Tarun ] , an Individual Investor.
So regarding the recent fire although minor, which happened 3 days back for the second time in the past year, we wanted to understand what actions have been taken now to ensure that the chances of this happening are reduced in the future?
Believe me, I appreciate your concern. We are significantly concerned as well. Investigations are definitely on the way, and we are working on this. Unfortunately, at this very moment, on this call, I cannot give you an answer, but we are working with our internal team. We have got an external team which is specialized in investigations and we're working with statutory bodies on this.One thing is for certain, it is really -- let's not get into about whether it is minor or major, we take everything equally seriously. What I can assure you is that the actions that are around the corner will be decisive in nature. And that will be the end of any such situation happening. That is the intention with which we are pursuing this.
Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to the management for closing comments.
Thank you all for joining this call. In case you need any further classifications, please do get in touch with our investor relationship team. We'll be happy to provide all the clarifications. Thank you once again.
Thank you. On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.