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Deepak Nitrite Ltd
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Ladies and gentlemen, good day, and welcome to Deepak Nitrite Limited Q4 FY '22 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. Akul Broachwala from IIFL Securities Limited. Thank you, and over to you, sir.
Thanks, [ Sejal ]. Good afternoon, everyone, and thank you for joining us on Deepak Nitrite's Q4 and FY '22 Earnings Conference Call. Today, we have with us Mr. Maulik Mehta, Executive Director and Chief Executive Officer; Mr. Sanjay Upadhyay, Director, Finance and Chief Financial Officer; and Mr. Somsekhar Nanda, Deputy Chief Financial Officer. We will begin the call with opening remarks from the management team followed by an interactive Q&A session. At the outset, I would like to clarify that certain statements made or discussed on the conference call today may be forward-looking in nature and a disclaimer to this effect has been included in the investor communication shared with you earlier. To begin with, Mr. Mehta will share his views on the operating performance and the growth plans of the company, followed by Mr. Upadhyay, who shall take us through the financial and segmental performance. The results documents have been shared with you earlier and also have been posted on 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 you on Deepak Nitrite Q4 and FY '22 earnings conference call. It feels pretty good to be speaking without a mask on for the time being. We shared our results documents, and I hope you've had the opportunity to glance through them. Given the developments of the last few quarters and the Russia-Ukraine conflict in February, we've witnessed an increasing amount of disruption in the global supply chain for crude oil, fertilizers, and also specialty chemicals. In many cases, we've seen the supply chain not just stretch, but in some cases broken as well, as major consumers working on building alternate supply networks. The focus is on partnering with world-class players with integrated business models who are positioned with the assured supply of key inputs. Deepak is well placed in such a scenario and our outreach with depend on Deepak's message has resonated extremely well with our prospective customer base. In this backdrop, I'll give you a brief rundown of our performance during the period under review and how we are preparing ourselves for the forthcoming year. Mr. Upadhyay will then provide you with granular detail on our financials. Now given the volatility brought about by these [ extense ] circumstances, DNI will start to become more nimble over the quarter and the year. The external environment is being monitored closely and every effort is being undertaken to maximize productivity. Despite the macroeconomic challenges, the company continues to operate at high productivity levels of its facilities. The DNL team is delighted to inform you that the company has reported its highest-ever revenue, EBITDA, and PAT despite facing the kind of challenging macroeconomic environment, we have been hearing so much about driven by volatile raw material environment, higher crude price, and supply uncertainties, which have been further accelerated by the ongoing war in Europe. We ended this year on a high note with a consolidated revenue increasing by 56% year-on-year accompanied by 37% year-on-year growth in PAT. Now reflecting on the company's [ teleperformance ] the Board of Directors declared a final dividend of INR 7 per equity share on face value of INR 2 per share. This is notably higher than dividends declared in the previous year. As a result, the benefit of sustainable growth are shared, and the focus remains on value creation for all stakeholders. During the year, the company delivered excellent performance on the back of a phenomenal fourth-quarter performance, the highest ever quarterly revenue in its vibrant history. The profitability trajectory remains strong, and all efforts are underway to solidify this even further with expansion plans for key products. Revenue growth was driven by robust volume for several products complemented by sharp realization gain. On the back of continued plant efficiency by the operational team, supported with effective material handling and logistics, the company was able to build on the present robust realization for Deepak Phenolics product portfolio. Given the challenging external conditions, our team and business divisions have been pushed through the limit. And I'm pleased to say that we have evolved into a stronger, more competent enterprise with better collaborative practices between them. This growth trajectory we anticipate will be sustained across all strategic business units supported by additional capacity and buoyant demand from end-user industries. On the operational front, we noticed growing demand for key products in the domestic market as well as specific export markets. In our domestic business, revenues grew -- revenue stood at INR 440 crores in Q4, resulting in a 47% growth year-on-year. While the export revenues came in at INR 310 crores in Q4 compared to INR 227 crores in the previous year, higher by 37%. On a consolidated level, domestic to export mix stood at 80% -- 80% to 20%. Now moving to our segmental performance. The basic Intermediates segment grew by 66%, driven by numerous debottlenecking exercises and capacity augmentation initiatives undertaken in key products. This allowed us to increase volumes towards the second half of the year. This was further aided by realization gains for key products in the BI segment. On the back of sharp rising, the rises in input prices through the year, the company was able to pass on most of the costs to customers with some time lines, resulting in sustained EBITDA without losing wallet share for all key accounts. Finance Specialty segment reported a 10% revenue growth. The performance was propelled by strong demand and an appealing product lineup that tailored to a broad and diverse area of applications. During the year -- during the previous year, price of finished products were high, but the raw material prices were abnormally low. These have normalized, but in many cases, raw materials are at all-time highs. Also, the cost of input utilities has gone up substantially in the year, thereby affecting the profitability of the segment as compared year-on-year. Since the company has long-term contracts, in some cases, annualized; in other cases, multiyear contracts, wherein price negotiation is possible at a certain percentage increase in raw material costs and on a quarterly basis, we do see an improvement moving forward. This is the nature of the business, and we expect to see positive impact of this pass-on in this quarter and the next. Cost of major raw materials, as I mentioned, have increased through the year, resulting in some all-time highs in Q4, and there has been some level of EBITDA normalization. As a strategy reset going forward, the company will increase its focus on annual and multiyear contracts signed up with leading customers who continue, as I mentioned earlier, to have a high dependence on Deepak. And in every case, as I mentioned earlier, we have maintained or grown wallet shares. Performance Products segment reported healthy revenue growth at 74% in FY '22, driven by positive demand trends for key products, resulting in a sharp rise in volume accompanied by improved sales realization. This has also helped to improve the EBITDA margin. However, prices are expected to normalize in the forthcoming quarters because there is some sort of a tepid demand with regards to the products in the European markets, which are currently experiencing some of the highest energy and utility costs ever. Overall, the wallet share with large customers, these are increased or was maintained. We have also increased our foray into new export markets, which were hidden or untapped. Deepak Phenolics delivered an outstanding performance with revenue growth of 68%, while EBITDA expanded by 35% year-on-year, translating into a PAT expansion at 48%. This was achieved despite a sharp increase in key raw materials such as propylene and benzene, combined with high rocketing prices of coal. Plant efficiency measures culminated in utilizations exceeding 118% of defined capability during the quarter. As a result of healthy demand, revenue realization for both phenol and acetone increased substantially from the previous year. During the quarter, DPL commissioned a new captive power plant as well as its second IPA plant, which will all contribute towards higher plant efficiencies, a stable and assured power source -- power supply will enable us to plan production schedules better without running the risk of cost and repairs and maintenance coming from shutdowns. We have also commenced on the expansion projects across segments approved by the Board of Directors, aggregating to some INR 1,500 crores, as we have mentioned previously. There is selective debottlenecking and capacity augmentation underway in addition to this, which will enhance our operations across all segments. Due to multiple projects of varied scale and complexity being undertaken, we foresee commissioning for these projects in batches with the first bit of commissioning coming in Q1 this year. On that note, we believe that we are very well placed to exploit opportunities in end-user industries as we embark on the next financial year. DNL is an excellent candidate to lead the India chemical manufacturing trend due to its diversified yet integrated product mix and decades of manufacturing excellence, which ideally plays to increase our wallet share and create value for all stakeholders as a result of contributions coming from our forthcoming brownfield and greenfield developments. Thank you. I'd now like to hand over the call to our Director of Finance and CFO, Mr. Sanjay Upadhyay to address this form and briefly take you through the financial performance during the period.
Thank you, Maulik. Good afternoon, everyone, and thank you for joining us today on this call. I'll walk you through the highlights of the financial results for the quarter ended March 31 and the annual results. During the quarter and review the company witnessed volume gains across most of the products signaling a solid recovery, capitalizing on an uptick in business growth and strategic efforts to elevate operations, the company reported burn performance stand-alone revenue expanded to INR 759 crores in Q4 FY '22. While EBITDA came in at INR 213 crores, translating to an EBITDA margin of 28%. PBT stood at INR 194 crores while PAT came at INR 143 crores in Q4 FY '22. On a consolidated basis, revenue grew by 28% to INR 1,876 crores in Q4 FY '22, going to a combination of high utilization level and focused pricing. This has enabled the company to report highest ever annual turn of INR 6,845 crores. EBITDA was at INR 414 crores in Q4 FY '22, lower by 10% year-on-year, higher, and by 10% quarter-on-quarter. EBITDA margin timed to 22% as a reason of enhanced plant productivity and increased operational leverage. Despite the continued challenge to logistics and movement of material the company was able to deliver higher margins on quarter-on-quarter basis, while also accounting for rising coal and RLNG prices, which impacted actually the utility posted earnings high input pricing for numerous key raw materials. PBT came in at INR 362 crores in PAT stood at INR 267 crores. Robust profitability was on account of strong operating results and a 0 debt position. Moving to segmental performance. The basic intermediate reported revenues of INR 399 crores in Q4 FY '22, up 63% from INR 245 crores in Q4 FY '21. The company's performance was supported by debottlenecking and capacity augmentation in key products in BI segment, which enabled it to increase volumes towards the second half of the year. EBIT increased by 37% to INR 97 crores, with EBIT margin of 24%. Finance Specialty segment revenue grew by 14% to INR 235 crores in Q4 FY '20 as compared to INR 207 crores in Q4 FY '21. EBIT is lower by 4% to INR 77 crores, with EBIT margin of INR 33 crores. This is partly because of the higher prices or renovations, which were absorbable in the last year. [ Performance ] segment reported revenue of INR 161 crores during the quarter and a review compared to INR 87 crores in Q4 FY '21, representing a growth of 85%. EBIT improved manifold to INR 40 crores, with EBIT margin of 25%. Deepak Phenolics registered a solid performance revenue growing by 20% to INR 1,122 crores in Q4 FY '20 versus INR 938 crores in Q4 FY '21. As a result of healthy demand, revenue realization for both phenol and acetone increased significantly over last year. During the quarter, plant productivity measures egressing utilization level going beyond 115% on the installed capacity. On the balance sheet, the company financial status is very strong and so aggressively reducing debt through cash flows. Deepak Nitrite has not only attained debt-free status with this fiscal, but also steadily built a surplus of INR 430 crores, which have been invested in highly secured debt funds. In the future, interest will be significantly due as a result of this. On a stand-alone and consoled basis, DNL is debt free as of March 22. Recognizing the discipline and improved financial position long-term credit rating of DNL has improved from AA stable to AA positive by ICRA and the same of Deepak Phenolics's long-term credit rating was upgraded from AA- stable to AA positive. These upgrades have been possible in less than a year's time. We continue to sustain the improved return ratios, and I'm glad to report that DNL has achieved ROCE of more than 30% on a stand-alone basis for more than 10 quarters now. The company has obtained all our missions from Board of Directors, shareholders and iterators for issue of equity, QIP and are now evaluating the market conditions for the approval time to launch the issue. With that, I would request the moderator to open the form for question-and-answer session, please.
[Operator Instructions] The first question is from the line of Naresh Vaswani from Sameeksha Capital.
Yes. Sir, congratulations on decent set of numbers in the current environment. So 2 questions. First, on the CapEx of INR 1,500 crores. Can you help us understand if you can break between the projects and what are the time lines and the revenue that we expect to generate out of this over the next 2 years? And second, some color on what steps you have taken internally to mitigate the current environment, especially the volatility in all the cost items, which one is witnessing. So what all steps have you taken in the last -- over the last 6 months, which has helped us perform decent reasonably well in this quarter?
Okay. I can answer this question. But sir, first of all, this was also the most respondent founding congratulations. Nonetheless, I will try to answer. Now as we have mentioned earlier, INR 1,500 crores of CapEx is what has already been announced. And that is spanning across products that are into the life sciences space from Deepak Nitrite downstream as well as from Deepak Phenolics. So there is some amount of investment here, which will go into downstream of phenol and acetone, which should go into the advanced solvent space and Deepak Nitrite's, which would go into the agrochemical and pharmaceutical space. This does not include the brownfield expansion and CapEx that would be required for small projects up to INR 40 crores, INR 50 crores each. Those will be separate, and they are not announced like this. Now with regards to the schedule, they are broadly on track, as we mentioned, one of our CapEx is, which is the capacity of which is already tied up for multiyear contracts part through pricing will commission over the next month or 2. And the others will commission between the next 12 to 18 to 20 months as normally these greenfield CapEx is up. Now by and large, this is on track with regards to -- in some cases, the civil work has already been started, and it's well in full swing so that we can take certain milestones that happen before the monsoon onset. In other places, we are at a very advanced level of tie-up with key technology suppliers or we have finished the tie-up and we are in the process of equipment ordering. Now construction, equipment ordering and delivery both happen simultaneously. So we are as excited as you about ensuring that these are completed without any undue delay. Keeping in mind also the kind of escalation that we see in the cost of commodities like cement and steel, we're ensuring that what we are paying for is being done at the right time. For example, if you had asked me to spend on a lot of nickel, which is one of the products that we have to buy for our equipment construction, and you'd ask me to buy it at $100,000, that would not have been the best decision. I could just have waited until the next day or the day after that to buy it at $25,000. Anyway, so this happens. And as we said earlier, by and large, the project execution is on track. Now of course, you have events that can derail this. For example, what we faced in the last couple of months was the chip shortage -- a semiconductor chip shortage. Otherwise, the project that we're looking at commissioning in the next month or 2 months would have been commissioned as we speak. With regards to your third question about what we are doing in order to manage our short-term and medium-term supply chain is we are working with key suppliers, not only in India but worldwide to ensure that our suppliers are coming in index-linked pricing with certain volume commitments coming from Deepak, where we're able to leverage our positive cash flows into offering -- into being able to get discounts against payments made upon delivery of the raw materials. Along with this, what we are doing is we're also ensuring that at various locations, we rent the kind of port facilities for storage so that we are able to buy the materials in the manner that is best suiting our consumption requirements. Like this, there are several steps that we are taking, including talking to shipping lines for annualized contracts with minimum container offtake over the year. And we are seeing that there is a positive demand and sustainable demand for our products, not only in the domestic market but internationally as well. So while these raw material price increases hurt us, the kind of relationship that we have had with the customers has allowed us to have very honest and open discussions with them. So they certainly are accommodative at least right now. Let's see how the situation unfolds. It is a competitive market space, but Deepak maintained its wallet share.
The next question is from the line of Andrey Purushottam from Cogito Advisors.
First of all, a great set of numbers given the situation. And a follow-up to the previous question, because of the peculiar situation that you inherited in these last few months, your profit growth has lagged behind your revenue growth. Now if you were to give some kind of broad guidance in the future, when do you think that this trend is likely to reverse, do you think it will take a couple of quarters for us before this happens? Can you just give us a flavor on when operating leverage, as we understand it will really kick in to give a profit fund supplier?
I feel -- this is really a situation where I don't really know what to say because we -- I mean, even today, even with what you call profit lagging in comparison to revenue growth, I think we have, over the last couple of years, set new standards with regards to the kind of EBITDA margins and bottom line as a percentage of top line. And yes, there will always be some movement up or down. But the reality of this is that with the kind of critical cost increases that we're seeing -- just to give you a couple of glimpses, ammonia, which is normally being bought at INR 30 -- sorry, INR 26, I remember that my procurement person came to me about 6 months ago and said, this is really -- it's a lifetime high we are paying INR 32 now. Just to give you a perspective, in Q4, ammonia prices world over were in excess of INR 100. Now other than that, [Audio Gap] toluene, benzene, xylene and also on products like caustic lye. So these are commodity products, which we consume to give value-added intermediates to our customers. We've been seeing price increases of more than 100% to 200% over previous quarters. If what you are seeing is a margin compression, what I can also tell you is that on an absolute basis, most of our customers today are paying almost twice for the same...
Sir, we're unable to hear you. [Technical Difficulty]
Yes. As I was mentioning, in many, many cases, the customers are paying almost twice as much for Deepak's products as they were just a couple of quarters ago. And they are continuing to buy the same volume. This is -- I mean, is this not a good example of resilience and there is need and their ability to depend on Deepak for their feedstock which they get from us. So if I were to actually ask you this question, what is the kind of margin that you would normally expect from a company in the same space? If this is margin compression, what is the target margin that one should look at?
I'm not an expert in this. I'm simply asking a question of when do you think that this trend might reverse. And this is not a reflection on departength, it's more a commentary on the environment that I'm asking. Is this likely to continue for the next 6 months, given the uncertainties of the Ukraine board et cetera? Or do you think that there will be some reversion to norm within a quarter or 2?
See, today, we are operating in such a volatile situation. To give you any indication is extremely difficult, whether you call it a Deepak [indiscernible] thing or the general, but yes, that is the [ trend ] industry. And maybe -- when situation will normalize, we don't know, but maybe it will take a couple of quarters from now. First of all, as Maulik was mentioning, we have never -- actually margins are -- margins can go up and down because situation is volatile, but we are not compromising on our market share. In fact, we are debottlenecking the capacity, increasing the market share because this is where the company's strength lies. We cannot control the external and internal environment very well on the production and productivity and all these things. And this is what is going to help us in the future. So we cannot comment how it will revenue growth will certainly -- it's a very good indication that we have -- in spite of such challenges, we have grown so much. Margins, we cannot comment today.
Right. So another thing that you alluded to in the presentation was the fact that you're expecting the lag in passing on the price tags to the customers should reduce in the light of new multi-year contracts. Can you explain a little bit more, have you have the highest portion of multiyear contracts? And what is there in the provision in this multi-year contract that enables you to reprice your product to the customer quicker as compared to the past?
No. So let me correct that misconception. There's no improvement in the lag. The lag is a lag and normally speaking, most contracts are built with a price review clause every quarter. Many of our customers are -- they are export customers. So they buy on a calendar year. We think of everything happening starting from April, but they think of it starting from January. So March is when normally, you would have this kind of a discussion with customers. Now what I said is that we have increased our bias towards getting into multiyear contracts, which is something that we earlier shied away from. These multiyear contracts or annualized contracts, whatever you call them, generally, as a clause, which says that if your cost of production goes up by more than 4% or 5% within a period of time, the price revision clause will automatically be invoked at the next review opportunity. Now customers are also aware that these are not situations that are unique to Deepak. For most of our raw materials that we buy today, let me tell you that we are best-in-class, even if we compare to other producers who might buy the same raw material for other products, maybe 3x or 4x as much as we buy. We are still matching or in many cases, lower than the price at which they buy -- and this has been by and large scale that we have developed. It's not an individual person skill, but it's a culture that we have been inviting over the last many years. Customers are also well aware that whatever happens, Deepak will work hard to ensure that they are as reliable as anybody out there in the industry. And they appreciate this. Now in fact, unfortunately, in Q4, we have lost some volumes in some of our segments because it didn't matter what the price of the raw material was. There was some volume that we were just not able to mark up. And therefore, we have been, in fact, engaged with customers and telling them that, don't worry. Moving forward, we will ensure that we buy -- we will work even harder. We will see what we can do to invest more in international import infrastructure if required, but we are there because they were ready to pay more. The problem is that we wouldn't be able to deliver more than how much we did even though the requirement was more. So this is the kind of honest transparent relationship that we have with our customers. And let me tell you, Q4, I would say that this is really dedicated to the customers of Deepak. This is how much they have trusted us despite this kind of raw material volatility and other volatilities that we have been able to maintain, in some cases, grow our market share -- our wallet share. So I'm very, very grateful to our customers and our internal team to be able to maintain a relationship in this environment.
Right. In any case, if you focuses on regaining wallet share as you have been consistently saying over the last 5 years, all of us including shareholders must be prepared to take some degree of quarterly fluctuation.
Let me also just point out that, yes, while there may be some degree of quarterly fluctuations, you can continue to bet that Deepak will be standard by which performance is seen. We are one of the leading companies in the chemical space with really strong ROCE, really strong order books, and really strong finances. I mean we are now at even a consolidated level debt-free. So our growth trajectory continues to expect this kind of fiscal prudence.
Right. Which is why we are shareholders of you, sir.
Thank you so much. Really appreciate it.
The next question is from the line of Nirav Jimudia from Anvil Research.
Congratulations, for the healthy show. Sir, I have 2 questions. So first is like last 2 years have been very eventful for us to 2021 being a demand-led problem in 2022 be supply-led problems. But if I can ask like from Deepak's point of view, what were the key learnings and the opportunities with reference to the probably products or the processes and the cost savings, which now we can say that it has now become a permanent for us and can create a base for us for our future growth. So this is question number one.
Sure. One thing that we have learned, which I think -- I hope that a lot of other companies in our space are also learning is in the past, we have always focused on things like raw material costs and consumption norms and [ these things ] never really focusing so much on things like freight costs or packaging costs and these things because they were always seen as the 3%, 4%, 5%, 6% at the bottom of our total cost pile. Whereas nowadays, this has increased substantially from most chemical manufacturers and has actually become a major cost center. So we have to see what we can do to really invest in the right kind of infrastructure, have the right kind of arrangement set up, whether it is on freight or whether it is on packaging material. This has been a learning for us this year. And going forward, we have also broad-based our action with regards to all of these things. But the value will be first felt in the level of consistency and sustainability. And then, perhaps over a period of time, will be felt also with regards to price improvements and these things. Second thing that we have learned is, at the end of the day, utilities, which has been, again, as I mentioned with regards to packaging and freight, it has always been something that was considered as a state of conflict. And you didn't think so much about it when the cost of power was INR 6, and you didn't think when the cost of steam was INR 1 and the cost of gas was whatever it was. But today, these have become huge problems, not just for chemical companies like Deepak, also for power companies all over the country and in fact, all over the world. So looking at how to optimize this, looking at how to significantly enhance the way that we consume energy, our energy footprint, our carbon footprint. These are things that we have been working hammer and tong on in the last quarter. We've actually seen already a substantial improvement over the previous quarter with regards to our consumption norms. But I can just tell you that we have just managed to touch the tip of the iceberg. We have further invested into conducting audits across all of our sites, energy audits, consumption audits with regards to leakages of power, steam, water, and we are working to tighten all of these things. That's the right thing to do for the environment. But luckily for shareholder is also the right thing to do with regards to the bottom line, and it will yield benefits as we move forward. These will, of course, be sustainable. These will, of course, be part of the new culture of Deepak.
There are many more learnings also here on supply side also because dependence on one supplier is actually very difficult today because anything that happen to him.
It cost us a lot.
Secondly, earlier -- we were managing earlier not far long back because it was only just in time inventory. Now that time has gone. We have to see that we run our production. We have enough inventory to carry because shipments are delayed, shipment ships are canceled, so many things. I mean, there are a lot of challenges in volumes, I think, in last 2 years. So a lot of learning from all this.
And sir, the second question is, we have been alluding in almost all the presentations or the press releases and the conference that our focus is on import substitution. So if I can ask, what can be our addressable market out of India's $50 billion of imports? And if you can correlate it with our downstream phenol and acetone or the stand-alone Deepak Nitrite businesses. So this is one, and in addition to this, if you can relate this in context with our new R&D center, which we are coming up with. So how this R&D center would help us to take a pie of this $50 billion of imports coming to India?
See, this import is coming into India anyways. When we invested in phenol and acetone plant, it was always with a plan of it being just the first step. Today, if I want to expand my capacity of phenol and acetone, it is at a fraction of the cost that it would be for someone to put up a greenfield plant. That's the value of the entry barrier. Now even the downstream of phenol and acetone and there are many, they are being imported into India. As India further develops a significant manufacturing prowess for a lot of things, which require solvents, epoxies and some such, which are anyway part of the government's plan to promote Make in India. What our goal is, every single time we look at this, our first target is not just Atmanirbhar Bharat, but anyways we look at Make in India, Make for the World. And for that, we are tying up with technology suppliers in some cases. In other cases, through our own internal processes, the right kind of technology that we can set up plants which will have global capacity and which will allow us to maintain a very small energy and water footprint. So these are the right steps, and we believe that there will be opportunities not just in India, but also for exports across the world. Nonetheless, the world does turn towards India more and more over the last few years as a good, dependable, democratic stewards for partnership for key raw materials in the chemical space.
So sir, suffice to summarize that we are probably, in terms of setting up the import substitute capacities here in India, try to grab those market shares, further capitalize on those capacities and be cost efficient to compete with the global markets. Is it fair to assume, sir?
Also one thing that we are seeing is, there's a lot of international players, MNCs, in many cases, in the life sciences space, that are looking at significantly increasing their investment and their base in India. So what we may have earlier assumed, we may start off with -- we have contracts with many of these customers, we may start off with exporting to them. But then over a period of time, they may also look at increasing their requirement inside of India for the same molecules which they will continue to depend on Deepak for. This is part of that discussion that we have anyways with our customers.
Next question is from the line of Rohit Nagraj from Emkay Global.
Sir, my first question is, you talked about the pricing dynamics on the RF front. How about the demand dynamics? Are we seeing any kind of slowdown in any of the segments because of several issues like geopolitical issues, high energy prices, logistic costs. So is there any demand side setback that we are observing currently? Or how the things are moving across our segment? If you could just give a broader perspective on this.
What we are seeing is, while demand -- in general, the demand is good. But for a couple of products, what I can tell you is that customers are unwilling to give us long-term visibility. What they were earlier gave for a minimum of 6 months, 1 year, now they are only giving us for like a monthly or 3 monthly I think, like that, because they are seeing a severe volatility in their environment. So today, the demand is good. But let's remember that many of our customers also require key coproducts that comes from China or other parts of Europe, which may be severely affected with energy cost increases. Now they are hoping for the situation to normalize. But until it doesn't, they continue to buy from us. There is a small risk that they have shared with us that the situation could get worse. Although more and more, it seems like Europe is becoming a little bit more resilient than it was. They are not in a position today where they can give us that level of confidence and commitment. And we appreciate that they are telling us this transparently well ahead of time. So demand remains what it has been in Q4. But in a few products, we are seeing a drop in visibility for a longer period of time.
Rohit, particularly this is happening in our commentary, we said 80% is our domestic sale and 20% is export, if you see the control. Now in domestic demand, we don't see much of an issue. We have clear visibility. This is happening in Europe, as Maulik was mentioning, and the 20% and that too in some of the products. So by and large, yes, there are -- most of the products are under control. Maybe few of the products, we are finding this, particularly in abroad and Europe.
Got it. This was really helpful. Sir, the second question is in terms of capital allocation. Now we are [ definitely ] on a consolidated basis, cash flow actually higher, and we have also got approval for QIP. So is there any inorganic initiatives, which is also we are currently considering, given that we are already having INR 1,100 crores of CapEx plan on track, and that there will be QIP which is coming hopefully in the next few quarters. So are we looking at [indiscernible] initiative is also one of the expansion plan for us?
Yes, we do look at these opportunities. I mean, we are not averse of any inorganic growth also. In fact, it works faster in case we get a good opportunity. Greenfield projects always takes time. So yes, if there are good opportunities, and as you rightly said, we have a very strong balance sheet. So we will certainly be interested in these kind of opportunities also, no doubt.
The next question is from the line of Dipak Saha from Savart.
Congratulations to the entire team for ending the year on such a strong note with robust revenue growth and a margin such as macro volatility. My question is, Maulik, specifically, if we simply assume that raw material prices are going to stay limited at this point of time and at least over the medium term, do you intend to continue being largely focused on growth with some hit on margin or we intend to focus on growth in a measured manner while -- toward higher margin? This is my first question.
So this answer is different for products that we're getting into, which are greenfield products and different for products which we are already well entrenched in. Raw material cost is at an all-time high right now. But at the same time, we are seeing certainly a level of improvement right now, which is not on prices, but which is with regards to availability. And normally what we see is availability, improvement receipts, price improvement. Nonetheless, our focus will always be on ensuring that we continue the quality of relationship that we have with our key customers who have remained on the journey with us even during this kind of price escalation. And we believe that margins, in some cases, should certainly improve. In other cases, they may, by and large, remain the same. But in this kind of volatility, it is really, really -- I mean, even claiming safe harbor is very difficult to give you any sort of confident answer. What I can tell you is, Deepak is very good at doing what it does, and it will continue to excel in doing what it does, rest assured on that. However, it would not be a responsible thing for me to answer this question and tell you that margins will substantially improve or there will be this huge new 20% addition to the ROCE, no. That is not going to be the case. We have good ROCE anyways in the organization across the board. The new products that we are adding will continue with those kinds of percentages, in some cases maybe a little bit higher. But as a company, we maintain the kind of philosophy that we have with regards to what we expect in terms of payback for new projects as well as brownfield projects.
But to answer your question, Deepak growth certainly will be there and should be there. I said in the first remarks itself that we will continue to grow. Margins can -- because the availability of raw material and these things can -- it's a volatile market, it can happen. But you cannot lose your customers. You cannot lose your market share. So these are all very important for us. There could be 1% or 2% margin here and there, that's a different thing. So growth remains our focus, no doubt on that. But [indiscernible] margin, that's a different thing. Otherwise, we are not ever so picking up the business.
Makes sense. That's fair. Sir, my second question is on the performance products. So if you can share some color regarding the levers that might play out in terms of performance products contributing much more higher to the overall revenue? And what do you -- and some guidance regarding the margins will sustain for our performance products business, we have done really good on the performance product front. So do we think that we'll be able to sustain these kind of margins going ahead? And also some color on the growth trend, sir.
Categorically, I can tell you right now, the visibility is, no, we don't expect the same kind of margin as a percentage. However, we are increasingly looking at a higher base. Now let me tell you why. The situation right now is, from the perspective of Q1, we might see that it maintains a certain level of trajectory. However, our customers are facing huge cost increases when it comes to energy costs. This is -- for us, it is one of the cost. For them, it is probably one of the top 3 costs. Now especially in the export market, especially in Europe and in a couple of other export markets like South America and in the U.S., energy costs have increased far beyond what they had originally thought likely. And for them, there is always going to be a much longer lag to be able to pass these prices on because they are B2C. So therefore, today, they have -- while demand is strong and while margins are good. Moving forward, we don't know whether they will be able to continue to consume product at the same rate that they have in the past -- in the recent past, simply because this demand resurgence that has come about in the last couple of quarters, as I mentioned earlier, it might be dampened if energy costs remain high. If they improve, as many of them are hoping but are not willing to commit to, of course, we will continue to see good demand in terms of volume. And as I've alluded to before, volume growth is always proceeded by margin growth. But today, I would say, we need to be very cautious on performance product.
The next question is from the line of Naushad Chaudhary from Aditya Birla Asset Management.
Just one question on the phenolic business. So I wanted to understand, sir. As we can see, there is consistently the margin of phenolic business are normalizing. So just wanted to check if we are satisfied with the last 2 quarters EBIT margin run rate and -- or do we see there is any scope for improvement from here on, assuming all the cost pressures gets normalized. So just wanted to have your comment on how do you see this margin of your phenolic business?
You're asking us if we are satisfied. I can tell you that we are always satisfied and we're never satisfied. There are opportunities to improve. In this case, most of that comes from further tweaking our operational excellence. That is already a very strong forte. Nonetheless, phenol as a business, the demand for the product is good, continues to be strong, but is very significantly affected by raw material prices, which are, of course, petrochemicals, as well as energy prices which come from coal and electricity. So while coal and electricity are challenging there, what we can tell you is that the cogen plant will allow us to have fewer shutdowns -- unplanned shutdowns, which create a lot of internal cost escalation for a short period of time and disruption in kind of our efficiencies of production. So once that gets normalized, I can tell you that our productivity will certainly improve. With regards to margin, too much rise also on the cost of things like coal and benzene and propylene, but demand for the end product is good.
Right. So can we assume with the existing capital deployed to your phenolic business, can we -- in a normal scenario, can we again do it INR 200 crores, INR 250 crores of quarterly EBIT business from this segment?
See, we will continue to have this turnover and our capacity is growing below 115%, 120%. So we'll continue to run. We can't comment on INR 250 crores to INR 260 crores because that is something which is an outcome of this. So I repeat, margin, we cannot give you anything that this margin will remain or that margin remains. Our effort will be to run the plant at full capacity. We are -- in fact, we can further debottleneck and increase the capacity, our wallet share. These things will continue, our efforts on this. Margins can be 20%, it can be 22%, it can be 18 also. So we will not like to comment on this aspect of -- because there is no control over the raw materials and prices can move up and down. We have no control over that, okay? So we should not answer some questions which are beyond anybody there.
Absolutely.
[Operator Instructions] The next question is from the line of [ Balkrishna from Axon Investments ].
I have a couple of questions. First question is, does any of our products have application in making batteries used in the e-mobility or maybe forward products or anything?
No. But this industry, which is nascent in India, has a lot of utilization of processes, which we are very competent in. For example, hydrogen reduction, for example, nitration, and moving forward, it's certainly not something that we have high level of competence in, but we'll work towards developing our competence in fluorination as well. But this is still a nascent market in India. And as it grows, we will be looking at it with interest to see whether there is a role that Deepak can play.
Okay. With regard to epoxy on the adhesive products, I mean, how much this demand because of significant government infrastructure spend can have on the demand of our products? I mean, how much significant it is to our market?
Significant to our downstream rather than currently phenol, because phenol or acetone or IPA, they go into a whole variety of downstream applications, some of which are linked to epoxies. Our downstreams will have a more direct interface with these products. So I think once we are close enough to commissioning or post commissioning some of our investments, this would be a very interesting conversation to have.
Okay. So do we make BPA or its related products which are used in adhesives?
We make acetone.
The next question is from the line of Samir Palod from AUM Fund Advisors.
Congratulations on a good set of numbers.
Sir, sorry to interrupt you. Your voice is echoing. May I request you to speak through the handset?
Is this better?
Much better.
Maulik, congratulations on a good set of numbers. My 2 questions, more sort of forward-looking in the sense that given that you already have a debt-free -- net debt-free balance sheet... [Technical Difficulty]
Hello?
What would be the use of proceeds that you have in mind, if you can throw some light on that?
Sir, sorry to interrupt you. We lost your audio in between. May I request you to repeat your question once again?
Sorry. Is this better now?
Yes.
So Maulik, my question was, given that you already have at a consol level a net debt-free balance sheet, why would the company consider a QIP? And sort of what would be the use of proceeds that you are envisaging for that?
We have plans in [ these QIPs ], of course, that's why we are waiting that will let markets settle down, but we have definite plans. Of course, our balance sheet is strong, our cash flows are strong, but no harm in making it stronger. So if you have a war chest, if somebody was mentioning if there is a right opportunity of inorganic growth or is the right opportunity to provide a major expansion, you are ready. You cannot go into the market when you need fund. You have to have war chest ready to go and expand or setup a greenfield facility. So this is just for -- it's so much stronger balance sheet, but we are expecting for further opportunities. In India, and in particular, in our kind of products, there are many opportunities. So there is nothing -- if you have a strong balance sheet, one can definitely go ahead with that at any time whenever we find an opportunity.
So what sort of -- given that you already have a -- you're saying you have a lot of opportunities, what sort of CapEx can we expect the company to do other than the INR 1,500 crores that is already mentioned in the presentation, which will come on stream over FY '23 and '24, so anything over and above that, that you can guide us, saying that these are the projects that you have in mind or from a quantum perspective how much would that be? And for these projects, what sort of fixed asset turnover are you looking at, given that they are likely to be far more downstream, et cetera? So are they going to be lower fixed asset turnover but much higher margin than the company's current averages?
It will be too early to comment on this aspect now. Let's first throw INR 1,500, we have already shared with you. We'll share with you all this information at the opportune time when we clear from the Board and other things. So today, it will be premature to tell you anything on these assets.
We'll not share until we have tied up our technology supply, whether it is internal or external, our customer interface, our raw material supply, and ensuring that we have the right team internalized so that, that team will be able to run it with the kind of safety and sustainability that we run all of our plants. So until these 4 pillars are properly tied, it will be premature for us to announce.
Maulik, then for the INR 1,500 crores that is going to come on stream starting in FY '23 in the next few months. Given that everything is already tied up, would you be able to guide us for what sort of fixed asset turnover ratios and margins will be for these products for this first phase of CapEx?
There are projects which are backward integrated in that. There are certain greenfield projects and brownfield expansions also. Normally we have asset turnover ratio of 2:1. Of course, backward integrated projects will certainly add to our margins as people are more questioning on margin rather than top line growth. So that will certainly add to our margins. And the balance -- when we look at any project, it will be 2:1 asset turnover, and our return on capital employed about 20%, 22%. So that's how we select a project [indiscernible] 3 to 4 years. So these are the numbers you can consider.
We've already shared that this will be our guidance for most investments that we make. These are some of our internal laxman-rekhas where we have to answer our question about what is Deepak's right to win. So these are some of the questions we ask ourselves. Do we have a payback of 3, maximum 4 years? Do we have an IRR target? Do we have an asset turnover ratio, which is between whatever 1.75 and 2? And what is the level of confidence that we have with regards to movement to customers? Of course, that's an easy answer when the customer is Deepak itself.
[Operator Instructions] Next question is from the line of Saurabh from Asian Markets Securities.
Sir, just wanted to clarify on the commissioning time line of the downstream project and the specialty project. Just wanted the update on the commissioning time line for the downstream projects, INR 700 crores downstream project as well as INR 300 crores, INR 400 crores of specialty chemical project. By when this plant should be commissioned? And will it be in a phased manner?
So we've already addressed that question. There will be 1 commissioning that happens in the next month or 2 months. There will be more that will be commissioned over the next 10 -- between 9 to 12 months, and then there will be some more that will be commissioned at a longer time line that, maybe between 18 to 20, 24 months. And in the interim, if there are opportunities for -- there are certain CapExes that we are already executing, which are smaller CapExes, which are more brownfield-related. But the ones that I have mentioned are more greenfield.
Okay. So which project is the immediate commissioning in next 1 quarter?
It's an agrochemical intermediate material -- I mean, the entire production has already been tied up with multiyear contracts.
Okay. And 12 months' time line would be for the specialty chemicals and then 12 to 18 months for the downstream. Is it fair to assume?
12 to 18 months -- sorry, 18 to 24 months for the upstream, and yes, 9 to 12 months for the specialty chemical.
Next question is from the line of Reena Shah from Elara Capital Plc.
I just wanted to ask you something on your fluorination project. Do I understand the permission that you are targeting to enter first? Will it be more in agrochemical space or in pharma space or in something else?
See, the bulk of the project is focused on the agrochemical space. However, there are assets included in it, which are multipurpose, which will service some pharma applications. However, if we look at it, it is biased towards agrochemical, both agro and pharma form part of what we call life sciences as a space. And so these are products, like a lot of Deepak's products, they have multiple end applications, but the fastest-growing ones today certainly are agro and a little bit of pharma.
Okay. So sir, by when do you expect this project to get commissioned, any time line?
9 to 12 months.
9 to 12 months? Okay. And sir, maybe you would have said but I would have missed, any CapEx guidelines for the next 2 to 3 years?
No, you haven't missed anything beyond what we have said.
Okay. CapEx guidelines, sir, for the next 2 years?
You haven't missed anything. I've only announced so far about INR 1,500 crores. We will announce more as and when the time is right.
The next question is from the line of Madhav Marda from Fidelity Investments.
I just had a quick question on the fluorination project that we are undertaking. Given that in India there are a few players which are backward-integrated in the fluorine value chain, how does that competitiveness stand versus them as they also address agrochemical as an end market in a good way? So just wanted to understand, is it a different product portfolio or do we have a different kind of process chemistry that we're doing here? I just wanted to understand that.
No, I think we would compare quite well. So what we are looking at manufacturing as a Phase 1 from these products are ones where we have a strong degree of competence in processes beyond fluorination. And the investments that we have made, we are confident about maintaining the kind of internal target -- the financial target that we put for any other business, which would not be fluorination. So if you were to invest in nitration or reduction or diazotization, et cetera, et cetera, et cetera, we would have the same kind of targets that we have here. And we're confident about being able to achieve them. So while there are other players in the space, that does not bother us too much. There are other players in the nitration space or in the hydrogenation space. But I don't know whether that's the conversation that investors have with them about whether they should invest in seeing that Deepak is already nitrating products.
No, actually. The reason I asked is because at least my mental understanding is that in the fluorination business, having access of the raw material is a bit of a challenge. It's a fairly concentrated sort of part of the market to get the raw material, which is why I asked that question to get a...
That's a good point, but it's a misconception. It's absolutely available. It's available worldwide also. You can happily import it. You can buy it from domestic sources as well. There's absolutely no problem with material availability. What one needs to be very careful about is with handling -- safety and handling. And that is one of the reasons why we took such a long time to announce that we're getting into this space because we wanted to make sure that we have the right people and the right SOPs to ensure that when we are handling this product, whether transporting it or consuming it or storing it, we'll be able to do it in a good way, seeing that we are going to be doing these processes in a site that is being an integrated site that will have a lot of other production. So we have [indiscernible], we have the right people and the right supply sources also. So I can assure you that availability of the raw material is not a problem.
And do you plan to use an imported source for the raw material or it's going to be domestic source?
We took a strategy to have both. We don't want to be dependent only on domestic, nor do we want to be dependent only on imports. So we have both import and with domestic sources.
And these are [ HFC-based ] or for emission products only or it's like a broader portfolio of products?
To start off with their HRs.
I now hand the conference over to Mr. Akul Broachwala for closing comments.
Thank you, Nirav. I would like to thank the management team for taking the time to participate on this call. And I would also like to thank all the participants for joining in. Thanks, again. And with that, we conclude this call. Thank you so much.
Thank you, everybody.
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.