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Deepak Nitrite Ltd
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Ladies and gentlemen, good day, and welcome to the Q4 FY '23 Earnings Conference Call of Deepak Nitrite Limited, hosted by IIFL Securities Limited. 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 results presentation shared with you earlier.
[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.
Thank you, Michelle. Good afternoon, everyone, and thank you for joining us on Deepak Nitrite's Q4 and FY '23 earnings conference call. Apologies for the delay. 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. To begin with, Mr. Maulik Mehta will share views on operating performance and the growth plans of the company, followed by Mr. Sanjay Upadhyay, which will take us through the financial and segment performance.
I now invite Mr. Mehta to share his opening comments. Thank you, and over to you, sir.
Good day, everyone, and a warm welcome to Deepak Nitrite's Q4 and FY '24 (sic) [ '23 ] Earnings Conference Call. I hope you had an opportunity to go through our results documents that was shared earlier.
We entered '23 with a very challenging business landscape characterized by diverse internal and external factors. The Russia-Ukraine war has served to fracture the global supply chain for crude, fertilizers, petrochemical derivatives and specialty chemicals, led to large rises in input prices across the board resulting in a secular inflationary pressure unlike anything witnessed in the recent past.
The cascading effects of central banks across the globe raising interest rates rapidly, leading to a higher cost for capital even as ForEx volatility rose and risk spreads expanded. Internally, we were faced with a shutdown of our Nandesari plant for more than 48 days due to a fire in June. There were challenges and constraints to logistics coupled with a rise in utility costs. Amidst this volatility in spot prices, both customers and suppliers were seeking to capitalize on short-term opportunities even as they sought assured supply and purchase agreements.
Notwithstanding these adversaries, we were able to navigate our schedules and fulfill all our supply obligations while maintaining wallet shares with all customers, hence, guaranteeing a dependable and stable supply of products to all our clients. In this backdrop, I will give you a brief rundown of our performance for the fourth quarter and financial year ended March 31, '23 and the plans and strategic approach for the upcoming financial year.
Mr. Upadhyay will then provide you with granular insights on our financial performance and position. We're pleased to share that Deepak Nitrite has displayed agility in achieving growth while maintaining the high quality and adhering to the safety standards that are expected of us. Diversification across products and user segments, customers, geographies has been a bedrock of our strategy. This allowed us to be nimble and seek out more remunerative pockets of opportunity amidst operational and macroeconomic challenges. This has allowed us to maintain a strong and resilient business model.
Leveraging off a solid foundation, incremental investments are tactically utilized to increase capacity and sustain demand from end-user industries. This has enabled us to drive a healthy topline growth of 17% year-on-year and set a new benchmark of exceeding INR 8,000 crores in annual revenue, which is the first for our group.
Despite recent cooling off in input prices, they continue to remain at elevated levels and more than that, at volatile levels compared to the previous year. While profitability for the year is lower than that of the prior year, EBITDA and PAT in quarter 4 have grown in double digits compared to quarter 3, indicating that operations are progressing in the right direction as we enter the new year.
Coming to the performance of strategic business units, the Advanced Intermediates unit delivered an impressive revenue growth on the back of resilient demand from end-user industries. And we actively pursued opportunity with both domestic and international customers during the period.
We expect this segment to continue performing well, given the shift in global supply chains towards Asia and positive demand trends. However, it is worth noting that challenges around logistics and high raw material costs due to internal product transfers at market prices with a time lag before prices are passed on. Future performance will be driven by several new multiyear contracts, successful pilots and new product introductions in our basket.
Deepak Phenolics witnessed a healthy topline performance with some contribution from pricing but largely driven by the continued increase in plant efficiencies. Our Phenol plant recorded an average utilization of more than 120% for the quarter and achieved the highest-ever quarterly domestic sales in Q4 along with the highest daily phenol production.
We've seen sequentially, Phenolics has improved in volume and profitability significantly. This was due to healthy demand and improved product acceptance, resulting in a significant increase in revenue realization for both phenol and acetone compared to the previous year -- compared to the previous quarter.
Profitability in the business was lower than last year due to normalized realizations this year compared with the previous period unusually high realizations. The Phenolics business has been using more of acetone in its downstream products. And it is going to increase further upon the commissioning of projects under implementation such as MIBC and MIBK, which are solvent. And we're optimistic about the prospects for the business in the future.
FY '23 has also been a year in which a lot of our future growth initiatives have started to take concrete shape. In a key development, debottlenecking is a crucial development for Phenolics as it enables the company to increase its production, and this is expected to come on stream within this quarter itself.
Additionally, the company has approved the implementation of advanced process controls, which is expected to be operational from the second quarter. That project is expected to further enhance the operational efficiency of Phenolics and improve the quality of its products. These developments are expected to strengthen DPL's position in the market and enhance its competitiveness.
In addition to our current projects, we're making strides towards expanding our business through several other ongoing initiatives. We've successfully commissioned the installation of our SAC unit, which significantly improves our sustainability in Nandesari. And we are planning to commission the photochlorination and fluorination project in the third quarter followed by the asset project in the fourth quarter, which will take care of current and future needs.
In the first quarter of FY '25, we are scheduled to commission our MIBK and MIBC plants, both of which, as I mentioned, are derivatives of acetone. Additionally, our hydrogenation and multipurpose distillation facility has been approved, marking further progress in our expansion plans.
During the period under review, we have achieved significant derisking of the business through an assured supply of critical raw materials and paying down debt to strengthen the balance sheet. Additionally, with the Nandesari plant back to full operations and other plants running at high utilization, we are working with good momentum. With multiple plants underway to be commissioned in the coming quarters, we're poised to deliver growth and create value to all our shareholders.
Recognizing this, the Board of Directors has announced a final dividend of INR 7.5 per equity share, which is 375%, a face value of INR 2 each for FY '22, '23 in view of the company's steady performance.
Before I conclude, I would also like to make a point that DNL, the hedge facility, received an unprecedented score of 100 upon 100 in the Together for Sustainability audit. I just want to point out that TFS is very similar -- it is the European counterpart to Responsible Care, which is an American institution.
TFS is also recognized and highly valued by every single large European company and many large Japanese and American companies. This is the first time ever in the history of TFS that a company has received a perfect score in its first try. We are confident that this achievement is also going to be catalyzing many more such.
I would now like to hand the call over to our Director Finance, Mr. Sanjay Upadhyay, to address this forum and take you through the financial performance during the period. Thank you.
Thank you, Maulik. Good afternoon, everyone, and thank you for joining this call today. I'll walk you through the highlights for the financial results for the period ended March '23.
During the period under review, Deepak achieved positive topline performance despite facing macroeconomic challenges. In FY '23, revenue stood at INR 8,020 crores, which is significant as compared to INR 6,845 crores in FY '22, higher by 17%. This growth was attributable to stable demand and high plant efficiencies, while EBITDA stood at INR 1,337 crores against last year. It is lower by 19% on a year-on-year basis because last year's base was very high.
PAT stood at INR 852 crores in FY '23 versus INR 1,067 crores last year. The results have been impacted due to war and resultant high input prices and resultant inflationary pressures. There is also an impact on the several external and internal factors such as -- summarized by Maulik in his comments.
Both business segments showed solid improvements, contributing a strong revenue growth on a consolidated basis. The increase in demand in relation to 4Q key products showed the growth. Despite the challenging environment, DNL remains focused on driving growth and expanding its operations to capture new opportunities.
Further, it's worth noting DNL subsidiary, DCTL, has been actively expanding its team by hiring key persons in various departments such as projects, management, procurement and support functions. DNL has invested INR 400 crores in the DCTL towards power funding of the group's ongoing capital projects.
On the operating front, our domestic business revenue stood at INR 1,512 crores and INR 6,410 crores in Q4 and FY '23, higher by 22% year-on-year, respectively. Export revenues were INR 449 crores in Q4 FY '23 and INR 1,562 crores in FY '23.
On a consolidated basis, domestic to mix -- our domestic revenue and the mix is 77.23 for Q4 FY '23. During the quarter, on a consolidated basis, revenues grew by 5% at INR 1,974 crores as compared to INR 1,876 crores in Q4 FY '22. The impressive topline performance was fueled by high production volumes in several key products. EBITDA came at INR 361 crores compared to INR 414 crores in Q4 FY '22. In Q4 FY '23, PAT stood at INR 234 crores versus INR 267 crores of last year.
Profitability is lower on year-on-year due to high base in the previous year. But the company has significantly improved profitability quarter-on-quarter in line with the operational performance.
Moving to segment performance. In our Advanced Intermediates segment, revenue grew by 7% to INR 810 crores in Q4 FY '23 versus INR 759 crores in Q4 FY '22. The growth is going to sustain healthy demand from key customers. EBIT came at INR 137 crores with a margin at 17%. As Maulik mentioned, growth in EBIT has not kept pace with the revenue growth due to a significant increase in input costs compared to the previous year.
In FY '23, revenue grew by 21% to INR 3,074 crores, and EBIT came at INR 555 crores fastening to margin of 18% despite the current environment and challenging circumstances. Deepak Phenolics delivered an encouraging performance with a revenue growth of 3% to INR 1,173 crores in Q4 FY '23 versus INR 1,131 crores last year.
The company has operated all plants except for Nandesari, you need a high utilization rate. The Phenol plant has showed an average utilization of more than 120% but even higher for the quarter and achieved highest-ever quarterly domestic sales and highest production per day of phenol.
EBIT stood at INR 177 crores, and EBIT margin came at 15% in the quarter. In FY '23, revenue stood at INR 4,986 crores, and EBIT came at INR 594 crores, translating into a margin of 12%.
While DNL has no debt, DPL has prepaid the term loan of an amount of INR 61 crores in the fourth quarter. For the full year FY '23, the prepayment of term loan by DPL was INR 161 crores leading to a saving and interest cost. This has reduced net debt to equity ratio to almost 0 that is 0.03 as compared to last year's 0.20.
When I consider this is the surplus of funds for DNL remains debt free on a net debt basis with a net worth of INR 4,090 crores and [ INR 2,675 crores ] of balance sheet is -- our balance sheet is -- it has adequate headroom today's growth capital for future expansions.
The input on cash flow for the cash flow -- on this, cash flow remains robust. And we have reported operating cash flow of INR 650 crores in FY '23 when looked against EBITDA of -- OCF and EBITDA ratio at 4.49. We are entering FY '24 with a derisked business model, a very robust balance sheet and pipeline of projects lined up for commissioning. We are highly excited of our growth prospects and look forward to building a performance momentum.
Before I conclude, I would like to provide an update on the fire incident at Nandesari facility that occurred on 2nd June, 2022. Against our insurance claim, we had a lot of mutual damage. We have received an interim payment of INR 11 crores in March '23 and further INR 14 crores in April '23 as the engine payment balances will be -- we hope to receive the balance in the coming quarters.
Thank you for taking out the time to join our earnings call. And now though we're open for question-and-answer session.
[Operator Instructions] We have the first question from the line of Nirav Jimudia from Anvil Research.
Congratulations on a very good set of numbers. Sir, I have 2 questions. So one is when we see our performance in FY '20 vis-a-vis what we have delivered in FY '23 for the standalone business, I think our gross margins have remained at the similar levels, like at around close to INR 1,370 crores. But this has come with close to 32% higher turnover when we compare FY '23 with FY '20.
So this could be a combination of volume growth plus some raw material cost inflation, which you just alluded in your opening remarks. So my question is with the brownfield expansions and the debottlenecking, what we are undertaking in the standalone business, how much of the volume growth can we expect for FY '24?
And though some of the raw material prices have corrected, predominantly the ammonia prices, which have corrected close to 2/3 of the prices what they were in the month of December, how much of our current turnover of INR 3,000 crores in the standalone business has the scope for margin expansion on a per kg basis? So if you can just answer to this. I can add up on one more question to this, sir.
Okay. So first of all, you're right that there has been a lot of volatility, including in ammonia. However, India continues to remain the most expensive buyer of ammonia in the world if I look at the indexes.
Nonetheless, it has certainly come down from its peak last year. Now what has happened over a period of time also is that DFG prices will automatically correct as they adjust. Nonetheless, we have been able to maintain a reasonably healthy margin on a per kilo basis.
And as we expand in FY '21, we had a plant which was about 15% less in terms of its capacity than we have now. So on a stable year, you can expand -- I mean, you can expect sodium nitrite and its associated nitrate volumes to increase by about 15% to 18%.
And how this result with regards to topline growth is difficult to say because the market continues to be volatile. We continue to maintain reasonably healthy margins, which have been as they were when ammonia prices were low as well as, as they were when ammonia prices were high.
So because you rightly said that turnover is difficult to predict because it all depends upon the selling prices of the products, but if we see FY '20, we were close to INR 800 crores of operating profit when the ammonia prices were lower. As last year also, we were at around INR 680 crores.
Though there -- so this year would have seen some cost inflation on the operating cost side also because the plant was not running full and several other factors. So what could be the fair assumption based on the volume growth you just alluded upon? What could be the figure we should look upon because there could be some benefits coming to us in terms of some buckets of the raw material prices as well as reduction in the operating cost. So...
Nirav, I would expect that FY '24 and FY '21, one reason why they should not be compared is because one of the key raw materials which we used to get as a large volume in a formula-linked price, which was linked to ammonia prices. Now we are forced to buy it in the spot market at far higher prices. And we have to see how we can derisk our supply chain itself.
So for this year, I would say that one can expect a performance which is in Deepak Nitrite similar to what it was last year if we had not faced the impact of the fire and I think between 40 to 60 days of lost production.
Correct. So we could be closer to FY '22 performance in terms of our absolute EBITDA numbers, right?
Nirav, let's just interrupt here. You are comparing this with '19, '20, am I right?
Correct, sir. Correct. In '19, '20, we were at INR 800 crores.
Yes, but you are just seeing the absolute number. '19, '20 had a very abnormal year for DASDA. We have been -- if you see the con calls, and we have always maintained that DASDA will be abnormally high, and that's why the percentage is high. So you are just -- you cannot just pick up one period and then compare with that.
No, sir, even FY '22 also, I think we were close to INR 680 crores. So I think I just wanted...
'20, it's not going down. It was one single product, whereas what you are seeing now is overall across all the products in spite of and despite of rather the several challenges which we and the industry is facing outside. I mean, it's very difficult to compare. '19, '20 period was completely different than what we are facing, the world is facing now is completely different. So it will not be the number -- so [Foreign Language]. But point is you must see the outside environment also when we are comparing this.
Correct. Sir, second question is on -- like one of our competitors also expanding on the NT side. So how we are placed in terms of our existing utilization here? Because I think one of the monomer of NT is doing well because of the downstream agrochemicals is doing well.
So if you can just help us explain our exposure of sales to the agrochemicals out of our standalone business, and are sales more prone towards the generic -- niche generic or the patented agrochemical products where we supply those intermediates?
Okay. So first of all, one thing I can correct here is, I do not believe that there are any patented agrochemical intermediates. The other thing that I can say is that we are running our plant at full utilization. We will also be looking at expanding that.
We will also be, in our own manner, significantly improving the resilience of the value chain. And we are already also going downstream. We have piloted several downstream products, which come out of this chain. Those have been accepted by the customer with regards to quality. And now we are at an advanced stage of discussions for volumes and long-term contracts.
The next question is from the line of Vivek Rajamani from Morgan Stanley.
Two questions from my side. Could you give some color on the demand trends that you've been witnessing for your key end segments in the month of April and May? If I believe in the last quarter, you did say you started to see some green shoots. So it would be great to get an update on that by segment if it's possible?
And the second question was, you've been mentioning that the share of exports has been rising in your portfolio over the last 2 quarters. Just wanted to understand what is the margin profile for these export markets vis-a-vis the domestic markets? And if there is a difference, what could be the differential?
Okay. So first of all, thanks for the question. And interesting that you should mention color and green. But one thing that I can tell you is that our products, which are intermediates, are spread over multiple end applications.
You can have the same product which goes into a different end application. However, right now, dyes and pigments is seeing a [Foreign Language] in that sense with regards to demand and with regards to inventory levels even at customers and consumer end.
The segments which are doing better comparatively are oil and gas, explosives, personal care, food, rubber, infrastructure. And segments which are relatively neutral are pharma and hydro. Now when I say neutral, I'm talking about it with regards to volume. Prices may go up or down. But in most cases, we are protected by volume contracts with pass-through clauses.
So when I spoke earlier about exporting more, that is because in Q2 and Q3, the Indian demand for textiles when it comes to dyes and other intermediates was very, very poor, whereas the export need was higher because Europe had curtailed its available supply.
And finally, when oil prices were nearer to $120, there was a flurry of activity coming with regards -- into oil and gas exploration. And as we are intermediates, we were able to pivot away from supplying to a low-demand domestic market, which prioritizes textiles towards a high-demand export market, which prioritize things like water treatment and oil chemicals.
Now this is where we are able to remain nimble. In India, many of these segments have started showing a certain improvement. And hence, we have been pivoting back towards India to an extent. Our export markets continue to remain served by us.
The margin profile on a netback basis, I would say, are relatively similar for 2 reasons: one is that the freight rates have normalized compared to the highs of last year; and b, that there is a duty on our product when it is applied to the U.S.
So I am talking about netback rates, which also addresses the duty element. So our rates were not lower or higher compared to our domestic rates. And hence, in both cases, we are okay. We have adequate opportunities to grow in this segment. And we have the ability to pivot depending on end-segment demand.
And as we will have -- this year, we will have higher productivity and higher production. We are hopeful that we will be able to cater to the growing demand without needing to lose wallet share from one end segment to another. I hope that answered your question.
The next question is from the line of Rohit Nagraj from Centrum Broking.
Congratulations on a perfect score through TFS audit. My first question is on Phenol capacity. So when we talk about 120%, what is the base we are taking? Is it 200 or 250? And we have again mentioned that we will be debottlenecking further by 10%. So what will be the final capacity that will be on stream in Q1?
So base is 2 lakh then.
200 KT.
200 KT. And when you say we are saying it is above 120%, so it is higher than that. And debottlenecking in this, we are expanding 50% increase in the capacity.
From 2 lakhs.
From the base.
Right. Got it. Sir, second question is in terms of the domestic demand. So export demand has been very dynamic. What is our understanding in terms of domestic demand for the products which are further being exported by the converters or the downstream players?
For which segment are you talking about? Phenol or...
No. For the standalone segment.
No, it doesn't matter whether you're exporting it or you're giving it to a domestic converter who is exporting it because the domestic converter has a contractual agreement with an international client. It's essentially the same thing.
And it depends on product to product. Because in the dye segment, there's not much of this. However, this is much more prevalent when it comes to agrochemicals. And as I mentioned earlier, in most of our cases, if not all of our cases in agrochemicals, we have medium- and long-term contracts. Some are annual, and some are multiyear contracts.
So the volumes are relatively protected. As and when we are able to debottleneck and make a little additional volume, we do have customers who were able to supply that on a spot basis at a spot price.
Sure. Got it. Just one last clarification in our press release or presentation, we have mentioned that there are INR 2,500 crores' projects currently, which are undergoing. So what is the completion time line and CapEx for FY '24 and '25?
What I mentioned earlier is that the fluorination and photochlorination project will commission in Q3. The Phenol debottlenecking will finish to a certain extent in Q1. And with the advanced process control, which will further improve on our already standard -- global standard quality will start to get realized by Q2.
And our upstream project will be commissioned in Q4. And downstream derivative of acetone, which is also a solvent, will be commissioned in Q1 of next year. In the meanwhile, as I also alluded to hydrogenation, multipurpose distillation and a certain amount of difficult, challenging nitration, this will all be commissioned over the end of the second half of the year, all the way till the first -- end of the first quarter of the next year.
The project which we have announced finally, one last one, which I forgot to mention. The polycarbonate compounding facility will be commissioned over the next 18 months.
[Operator Instructions]
We have the next question from the line of Chetan Thacker from ASK Investment Managers Limited.
Just 2 questions. One was if you can throw some light on the domestic demand for MIBK and MIBC? And what is the capacity that we are putting up? And how do we see that ramping up?
And second was on the INR 2,500 crores CapEx. If you can let us know how much is into backward integration, and what is the growth CapEx? And what kind of IRR should we expect on the backward integration projects?
Okay. So first of all, MIBK and MIBC, we are targeting for the entire volume of both products to be consumed in the domestic market. We will take the opportunity to export if we think that the realization is better, but the domestic market has significant scope for it.
And when we are talking about volumes, we're talking about 40 KT for MIBK and about 8 KT for MIBC. Both of these projects will be commissioned pretty much together. And with regards to upstream and downstream integration, I would not consider that to be a crucial question. The upstream integration will be able to significantly add to our bottom line, no doubt.
But while we're doing it, we are also confidently expanding our consumption capacities, which will, therefore, add to the topline. And those expansions come at a fraction of the CapEx that the upstream distinct projects require.
So net-net, I will look at even the upstream integration to be able to generate growth with minimum investment in debottlenecking of our existing products. So as usual, we don't get into a lot of detail about the CapEx involved when we're talking about debottlenecking of products.
Got it. And sir, just to get a sense, the domestic total volume for MIBK and MIBC? So 40 and 8 is what we are setting up or 40 and 8 is the domestic consumption?
Both of these are the same. We are confident of being able to take 100% of the requirement. Let's also keep in mind that the requirement is growing at a healthy CAGR. So we hope to apply ourselves to see how we can debottleneck this in short order after commissioning. But we're confident that we should be able to take as close to 100% of the consumption demand.
Today, it is 100% imported, which is in the same range. So therefore, I mean, we'll be able to supply to the market, substitute the import.
Got it. And on the INR 2,500 crores, so the total CapEx that is there, is it fair to assume that since you are moving up the value chain, our payback time should be anywhere between 3 to 4 years for these projects, which is essentially faster than what it would have otherwise been?
Yes, you are right.
This is a correct assumption. Just I'll highlight that when we count payback, we are only considering the incremental value that we get.
The next question is from the line of Abhijit Akella from Kotak Securities.
First of all, on this government incentive that's mentioned in footnote 3 of the results, it was about INR 59 crores for the year compared to only INR 1 crore the previous year. So just wanted to check whether this is the usual export incentive or it's something else? And is it a one-off item? Or do we expect it to continue in the future?
Abhijit, comment on the question, please? One is incentive. What is that question?
Yes. I was referring to footnote 3 of the results, which is a table showing the government incentive income. It shows about INR 59 crores for FY '23.
Yes, INR 59 crores. Right.
Compared to only INR 1.6 crores in FY '22. So was just trying to understand what this item exactly is? And is this a recurring item going forward?
It is a recurring item going forward. This is incentive given by the government for setting up the project. And I believe this will continue for next 5 to 6 years.
Okay. Is this at Deepak Chem Tech or at Deepak Phenolics?
It is Deepak Phenolics.
Okay. So we should expect the same number to sort of continue for the next 5, 6 years?
Numbers make you very up and down depending on -- so these are various parameters on which incentive is given. But you can roughly take the same amount year-on-year, not an issue. Can be a little higher also.
Sure. Understood. Second thing was just on the polycarbonate compounding capacity. It would be helpful if you could please guide us a little bit on what sort of value addition we should expect between the compounding product versus the base polycarbonate that we'll eventually produce? So in terms of maybe the price variance or the difference in margins, how much roughly we expect on that?
Abhijit, so this is -- rather than looking at this facility as EBITDA increase or something like that, more important is that we are setting a base for polycarbonate. I mean, when you are doing a polycarbonate, if you go with just for polycarbonate without knowing the market, then it will be -- it will not be the right.
In fact, we want to go further one step beyond, not just polycarbonate but little polycarbonate derivatives also saw that we have edge over the normal -- there are various applications of polycarbonate. Which application makes sense for us, where to go, where is -- the strength lies and why is the demand growing?
I mean, these are all parameters we'll test why we're getting into polycarbonate compounding facility first, for which we have sanctioned INR 250 crores, and we are actively working on that. Parallel, we will start work on polycarbonate, but this has to happen first. This is a precursor to the polycarbonate.
It will certainly -- certainly, when you select the right application, your EBITDA is bound to go up than normal polycarbonate. I will refrain from giving any numbers now because we are also studying, but it's the whole idea is to make your product more, I would say, yes, [Foreign Language] not a commoditized product, but somewhere it is getting a color of value addition.
I'll just add one point here. This is what you would consider as feed marketing because customer approvals, especially for high-value compounds, it takes anywhere from like 6 months to 1.5 years. So our goal is to make sure that we put our foot in the door there.
Now of course, it is cherry on the top that the financial do -- they do look attractive in any way when we are talking about the compounding facility. But the purpose of investing these few hundred crores is so that we can fast-track the approval and validation process with the customers. And in the meanwhile, we work to see how we can connect between our current product portfolio and the manufacturing over a period of time so that we are end-to-end completely integrated.
That's helpful. Next question I just had was on the contracting within the business. The presentation does mention that significant part of the business is contracted. So if it's possible to give us some sense of roughly, I mean, what percentage of the volumes might actually be contracted? And what's the pricing arrangement on these? Are we sort of giving 3 monthly pricing arrangements? Or is it longer than that? That would be helpful.
Ladies and gentlemen, the management line has been disconnected. Kindly stay connected while we try to reconnect them.
Ladies and gentlemen, thank you for patiently holding. The management's line has been connected. Over to you, sir.
Yes, Abhijit?
Yes. Sorry, I'm not sure if you heard my question, sir. I'll just repeat it.
Yes.
It was basically with regard to the, let's say, the volume of contracted arrangements in the business. The presentation mentions that there is contracted supply of products from both the segments, which provides high visibility for continued growth. So just sort of wondering if we could share what percentage of the business might be contracted in both the businesses. And what sort of pricing agreements do we normally have? Is it on a quarterly basis for these contracts? Or is it longer term?
I will answer the pricing first because the pricing is not -- it's always formula-based. In today's world, nobody gives you a fixed price unless it is only a couple of months or a maximum for a quarter. So there is no fixed pricing arrangement in most of the cases.
In Fine & Specialty segment, yes, there will be a few contracts where it is fixed regime but where margins are certainly in our control and that way. In DNL, this volume should be in the range of around 25% to 30%, whereas DPL is in the range of 20% to 25%, the contracted business, okay?
But if you know, by and large, we have same kind of suppliers in DNL also, in DPL also. I mean -- and there are results for year synergies. I mean, DPL also, we are supplying to the most of the large consumers and they continue with us. In today's market, there -- nobody enters into a long-term contract, which you also know.
Sure. That's very helpful. Just one last bit clarification, and I'll get back in the queue. On Slide 7, we have shared some volumes. So for example, sales of inorganic intermediates of 7,600 tonnes and hydrogenation volumes. Just wanted to clarify, are these for the quarter or for the full year?
Would be in a month?
For the quarter.
We will come back to you with this answer. Sorry about that.
We have the next question from the line of Rohan Gupta from Nuvama Wealth Management.
Sir, firstly, just clarification on the [indiscernible] availability of ammonia, where you have said that you still have a lower cost availability, but that's [indiscernible]. In terms of...
Mr. Gupta, your voice is muffled. May I request you to use your handset, please, to ask a question?
Yes, just a second. Yes. Is it better now?
Yes, sir. Please continue.
Yes. Sir, I was asking on this ammonia porting for our non-production side. So how do you see that -- you have mentioned that the changes have been there already in place for the [indiscernible] sector, what we have earlier [indiscernible] going forward now.
So with that falling gas prices globally and also in India, how do we see that our gas cost and ammonia cost of production will come -- ammonia costs will come down and how the Phenol spread in your view is going to move in the near future? If you can just give some sense on that.
So both of these are challenging questions to answer with the volatility. One thing that I can say is that right now, while the gas prices are temporarily subdued, especially in the summer season in Europe, what we will end up having is, compared to last year, an increase in the production of ammonia.
In the meanwhile, most places have large inventory stockpiles of urea. So there will, I believe, be more ammonia available for chemical companies such as Deepak. There will also be an increase in the new capacities that come in with regards to ammonia production, which I hope will give at least some level of consistency with regards to price and availability.
Now beyond that, with regards to the spread between phenol, acetone and their upstreams, these are linked in some -- to some extent, to crude. But one thing that has happened over the last 2 years is that, that very easy linkage where you were able to derive some sort of a regression analysis, that has broken because even the consumption has been affected.
Styrene monomer, which is a benzene downstream, is doing reasonably okay compared to before. But polyurethanes, in fact, are not at the current time. In the meanwhile, paraxylene is not doing well. Therefore, there is lower production of benzene. Some refineries are down because they do not want to manufacture at a volatile crude price. So this has currently affected that easy predictability.
What I can definitely say is that benzene currently is exhibiting some level of resilience. Propylene is getting softer. We'll see how this goes as more plants either tone down their production or increase it depending on availability of crude.
So a very difficult question to answer, given the current circumstances. But one thing is for sure, I think everybody, whether it's a manufacturer or whether it is a consumer, everyone expected that even this year would be business as usual. And I don't understand why because the large -- second largest player in the chemical space, which is China, it came back with a bang in -- from January onwards with huge stockpiles of manufactured product, which they had not earlier moved out of the country for reasons of labor and availability and some such.
So of course, you're going to have a short-term situation where there is a glut in the market of certain products simply because they need to exhaust their inventory levels as well. The situation will normalize. What that means is difficult to answer. But you must look at the last quarter and the current quarter, keeping this brand-new dark horse also in mind. The largest players coming back disrupts the entire supply chain.
So sir, it means that with the China situation and that you said that the way the Chinese production is coming in the market, and since they have just started coming in the market, there may be high supplies of phenol in the market where you see that going forward or in the near term, phenol prices can further come down?
No. This is not what I am saying. Let me reiterate. First of all, we do not -- we have not in the past and we do not in the present or in the near term, in the future, next year or whatever it is, expect to have competition coming from Chinese phenol. We have had phenol coming from other countries but not China.
And at least I can assure you that when it comes to phenol, acetone and IPA, your company remains resilient with regards to its wallet share. And most of it, if not all of it, is dedicated to domestic consumption, which is also on an improving trend. So you don't need to be worried about China coming in into India with value-destructive prices in phenol and acetone.
But sir, it's still a large part of domestic market is fed from the phenol import as what I understand the phenol business, we may have a control on domestic consumption. The volumes, we are not worried about. But pricing, sir, will be determined by the global prices.
China is a large producer as well as a very large consumer of phenol. So China, generally speaking, is a producer and a consumer. And it is focused on increasing and maintaining its consumption activities within China itself. China has never in the past been a global player when it comes to the export of phenol. It is self-sufficient just like it is in, say, the chloro-alkali industry. It is the largest producer of caustic chlorine, but it does not affect the global trade flows in any way.
Just last bit from my side, and I'll come back in queue. On our further phenol extension, sir, have we any further future plan? Or is it in a near term, any further plan on expansion on the phenol plan, sir?
Yes, there is a...
Rohan, this question is again linked to your earlier question also. Frankly, China, North China, India today imports around 2 lakh tonnes of phenol. Demand is growing significantly, okay? And have we not surprised you people giving higher corrects and higher numbers than what you people would have expected?
I mean, it's not only the price in China comes [Foreign Language]. There are other things also. Like in first commentary, we said that we are digitalizing our systems and processes, which is going to improve our efficiency that you do not know what the impact is quite large by doing those things, operational efficiency.
On top of it, you have -- we have other products which are also equally doing well like AMS and acetone and IPA. So I mean, let's not get too much -- read too much into China remarks and these remarks.
We are very confident that this year also we'll give you a good result. Don't worry on that. There is a room for one more player, I must tell you, what you -- India is growing significantly in phenol. And yes, at an appropriate time, we may also come to the market. But then you'll have to wait for that.
The next question is from the line of Naushad Chaudhary from Aditya Birla Sun Life AMC.
Just one clarification, sir. If I remember it correctly earlier, we had indicated the project in phenolic resins. I think it was butyl phenol we were talking about. Can you -- what is the status currently of this project? What kind of investment we are planning? And by when should it be commercialized?
No, this was a conjecture. We are not looking at butylated phenols.
Where we have announced it? I don't think we have even made any announcement on that.
Okay. And secondly, sir, on the investment pipeline of INR 2,500 crores as of FY '23 closing on a base of INR 1,300 crores of EBITDA, with this investment of INR 2,500 crores, where we should go? How much EBITDA it could contribute on the...
Let me just give some light here. Over the next 4 years -- 4 to 5 years, we are planning as a group to be doubling the revenue that we have had in FY '23. And the products that we are getting into are a mix between downstreams of Deepak Nitrite and downstreams of Phenolics. The margin mix will be Phenolics. So this is what we are putting into motion over next 4 years.
And doubling of revenue and doubling of gross profit and EBITDA, should we take it the same way because revenue would be...
As I mentioned, the margin profile is similar. I hope you are not asking about the percentage margin.
Understood. So INR 1,300 crores of EBITDA and INR 2,600 crores of gross profit should be doubling idly with the kind of investment we are doing...
I'm just reiterating, margin profile is similar to the current margin profile in a normalized year. FY '23 was slightly suboptimal in that sense. But if it was a normalized year, we would be talking about doubling of the revenue and a similar margin profile over the next 4 years.
The next question is from the line of Krishan Parwani from JM Financial.
2 or 3 clarifications. So one is on the photochlorination. So just wanted to understand, is it for side-chain reaction of toluene or xylene? And is fluorination being done for reducing the import dependency?
So photochlorination, what we have put up as an asset is an engineered asset. And you're right that it can do toluene, but it can also do others like xylene. The asset itself, we'll start off with our base chemical. And then we will be looking at utilizing part of the asset, which is actually broken down into multiple plants.
So we're talking about photochlorination, but it's done in multiple trains. So we will be able to dedicate individual trains to different products as we require them. The balancing equipment is all that will be required, which is minor and which can be executed very quickly.
And with regards to the fluorination, this is in a similar fashion of engineers when it comes to the MOC, the pressure, the temperature that it can handle. So while it may make one product to start off with, which will reduce our volatility and increase our ability to deliver higher value intermediates, it is also designed with the intention of manufacturing products which are using this platform but are not directly connected to any existing value chain. So we'll also be able to operate individually in individual trains.
Understood. The second is on -- so on the Phenolics side, can we also think of adding, let's say, diacetone alcohol or hexane glycol because they also are imported into India, and there's a high demand. So just wondering about that.
These are all very good ideas. Certainly, we can talk about them later because they are being worked on, whether they should be worked on with a higher priority or a low priority. Again, the question is what is going to get us to, as I mentioned earlier, doubling of our revenue in the next 4 years, is it going to be a better substitute to something else that we may be working on, it's worth considering.
Understood. And just the last bit, on the CapEx front, so I know, I think you mentioned about the commercialization schedule, et cetera. But I'm sorry if I missed out. So can you just give us a quick CapEx breakup of '24 and '25 and the commercial schedule once again? Sorry.
The CapEx breakup, I won't give you because these are all in process because CapEx breakup might include CapEx which we have not yet announced so that we can achieve our target -- 4-year target, 5-year target. The commercialization...
INR 2,500 crores.
Okay. If we're only talking about the INR 2,500 crores, which we have already announced, very quickly, we have the phenol debottlenecking happening in Q1. The ACP, the advanced process -- APC happening in Q2. We have photochlorination and fluorination happening in Q3. We have the upstream integration happening in Q4, and we have the asset-owned derivatives happening in Q1 of next year. And between Q4 to Q1, we will also be commissioning our expanded hydrogenation, multipurpose distillation and multipurpose nitration.
Understood. That's why...
A lot of things are happening in next...
Yes. So the -- whatever we have announced, INR 2,500 crores, each quarter from next quarter onwards, you will find one or other project getting materialize. The numbers will itself speak around that. So as Maulik gave project-wise detail, you can consider all this coming up in the next 2 years, INR 2,500 crores. And the revenue -- doubling of revenue was 4 years. There are different plants.
Understood. So just INR 2,500 crores is for '24 and '25 combined for whatever you have announced. '25 could be higher depending on whether you announce a project or not, correct?
Right. You're right.
Sorry, last one that I forgot to mention is the compounding facility, which will be commissioned over the next 18 months.
Understood. And sorry, I think I missed one point -- just last point on. The reason for higher Phenolics spread this quarter, I mean, if you -- on the gross level, that is before power, fuel and other expenses. So that's the last one for me.
In Q4, actually compared to sequentially in Q3, we had a rather unfortunate incident out of our control when the largest supplier of one of the feedstocks had an extended shutdown longer than was originally announced. And hence, we were forced to buy the intermediate cumene from the global market at prices which would be much higher than what we would have manufactured at ourselves.
And this has impacted our Q3 numbers. Of course, in Q4, we did not need to do that. And our supply of raw materials were steady as was our phenol and asset owned to customers.
The next question is from the line of Nitin Tiwari from Yes Securities.
I'm sorry if you've already answered this question and clarification, but just wanted to know what is the purchase of finished goods in -- reported in this quarter of about INR 122 crores?
I think that is cumene.
So as Mr. Mehta was just mentioning, this cumene is purchased for this quarter, it was for the last quarter? I mean, I didn't quite get that.
Q3, largely Q3.
It will be Q3, largely.
But Q3 also had a small figure of about INR 16 crores. And in Q4, we are still looking at a figure of INR 122 crores. So there is a large purchase in Q4 as well of cumene?
Yes. So we had -- so we did have -- the regular shutdown that we have, which is for catalyst replacement and maintenance activities along with minor activities that were done for some expansion resulted in a period where we did purchase a little bit.
Understood. And on the phenol expansion, I mean, I just wanted to get some clarification also. Right now, we are operating capacity at 250,000 tonnes per annum is it or the nameplate is still 2 lakhs per annum?
No, nameplate is nameplate, forget about the nameplate. What I can tell you is that normally with most chemical manufacturing plants, especially ones which are continuous in nature, which require cooling and chilling, the plant throughput is higher in winter because of cooler environment and lower in the summer. And hence, we have actually touched much higher numbers in winter. The debottlenecking activities will allow us to manufacture at a much higher rate through the entire year, may be possibly try to squeeze out a couple of more tonnes in winter if possible.
So when we...
Increase our throughput even in summer months.
Understood. So when we say 120% utilization, that's 120% of 200,000 or as we had alluded in June last year that we have a now-operational capacity to work at 250,000. So is it 120% of 250,000 or 200,000 is what I'm trying to understand.
Nitin, what we have said is above 120%. We've not given you exact 120%. It is more than that.
120% of what?
You're right.
So it is more than 120%. And with this debottlenecking in this, we are definitely going to 3 lakh. So I think let's not do too much of [Foreign Language] because that will keep on wearing because our capacity will touch 50% higher than 2 lakh as the base.
So, all right. So we'll be roughly be at 300% after debottlenecking?
Yes.
Understood. And sir, lastly, my last question, sir, if I may. So sir, how do we look at the Phenolics pricing? So as you mentioned that 30% roughly like is contracted. So why -- is this understanding correct that 30% business in phenol is cost market related? So is that the right understanding? That is one.
And secondly, if that's the case then how do we see the pricing for us because let us -- we look at the March quarter as far as like Asian prices are concerned, we did see some weakness in phenol and acetone prices and gas. And so how do we, basically, foresee our traction pricing in the backdrop of how Asian price will be? So if you can just throw some light on that.
These contracted, then you have not heard my secondary thing because I shared it is always a short-term contract and a formula-based price. We are not contracting anything on a long-term basis because neither the customer want it nor we will want that. Prices keep on fluctuating. In Deepak Nitrite, you will have Fine & Specialty business at a price for maybe for 6 months, 9 months, but not in phenol. They are not fixed-price contracting phenol.
So sir, the pricing contracts are short term and -- or either spot is what you're seeing?
Yes, but volumes are tied up.
Volumes are tied. And sir, on the pricing front, so how will we try and like to understand the pricing that we have vis-a-vis the Asian pricing? If you can just help us understand that a little because there is a contrast in the way Asian prices have behaved in the quarter and the way our margins have been.
But you are linking where the prices is merging. You do not consider our other things which I repeat. There are efficiencies. There are other products. I mean, it's mostly -- you answer very honestly, whether it was better than what you expected or no?
Sir, 100% better than what I was expecting. And that's why I'm curious to know like understand that how do we see it going forward?
Every quarter, we have been surprising you. Every quarter you ask [Foreign Language] question.
[Foreign Language].
[Foreign Language]. I must tell you again and again, we are doing really well. The -- I mean, there are several steps we are taking. There is a product for AMS, which was earlier going to China where our relation was very low. Now we are going to Europe feedback. That is also adding to the phenol margins. These things are never ever considered by you people.
Okay. So those things are definitely like Maulik was mentioning into cumene. There is definitely an impact of that. So when you confuse that with that vis-a-vis and recently we are going through better as against last year also.
So there are several improvements which we keep on doing because we cannot -- I mean, China [Foreign Language] things like this like we're not able to run our business. But we are taking so much of stairs, so many stairs, right, to tender our business and make all this sound.
It is the numbers. And this is what we precisely we are doing, doubling the capacity. These are all there. Of course, it will be the stairs but then first, you make your business solid. That's what we try to do. [Foreign Language], that is the export for the quarter. Export was really well for this quarter, this year. So these are all things which we continue to do and which -- I mean strengthen our bottom line and business.
The next question is from the line of Janakiraman from Franklin Mutual Fund.
Congrats to you and your team for a very creditable performance.
Thank you.
So Mr. Mehta mentioned that China has returned to the chemical industry is a big event for this year. And in that context, while Deepak's Phenol business may be immune to that development, will the other operating segments -- will they be impacted by that either on the raw material side or on the finished goods, either positive or adverse impacts?
China currently operates as a wild card. What we believe influences our performance in DNL standalone more is the volatility in the consumer-buying behavior. We maintain very, very high wallet share with our customers. And our customers have been gracious enough to always give us a premium over whatever the prices in China are.
Let me also reiterate that in 2020 and in 2021, China was operating at full -- in '22, did it go into a partial or total shutdown. So while the rest of the world did have a COVID-induced lockdown and scare in 2021, '22 -- in 2020 and '21, we were competing head on with China in every one of our products.
And we were able to maintain strong performance. So while China is there, customers continue to prefer to buy from Deepak. Regardless of whatever happens, we are always confident that our operational efficiencies are as good as China if not better in every one of our products.
In most of the products, we actually have to compete in European markets with giants like BSF and LANXESS as well. While they are not Chinese companies, they have a home market advantage, which we have to be able to match.
So when we have global scale, we have the capability and the experience to match that. So I will only say that what I am cautious about is inflation and consumer-buying behavior. While they continue to buy the same volumes from us, they remain more focused on what will happen over the next 3 months and 6 months.
Nonetheless, every one of our customers who have annual or a multiyear contract with us has reiterated multiple times in the last couple of months that the entirety of the contracts is to be honored, both by Deepak as well as by them. They recognize that volatilities are there. They are there in the short term, but they are expecting us to honor those commitments just as much as we are expecting them.
Those relationships continue to grow. And we are looking at expanding the amount of business [Technical Difficulty] new products that we have with these same customers even when these are products which are new extensions to our existing product basket and value chains.
Got it. And again, from a broader perspective, the last 3, 4 years, the kind of ROCE that Deepak has generated is fairly impressive. In light of this and the fact that you'll be committing a large amount of CapEx over the next 2 years, can you sustain these levels of mid-20s ROCE?
Mid-20s is easier to sustain. Right now, we have been operating at the high 30s and the low 40s. So mid-20s sounds doable.
The next question is from the line of Meet Vora from Axis Capital.
I just wanted to understand the dynamics of phenol acetone plant. So for example, we have set up a plant with a nameplate capacity of 2 lakh tonnes. Now we are debottlenecking it by 50% and taking it to 3 lakh tonnes.
For example, if a requirement of phenol acetone increases going further, how much we debottleneck further till the time where there's a need for setting up another capacity?
There's a need for setting up another capacity. Beyond 3 lakhs, I mean, this is something that we will have to be -- I mean, we are actively working on them because the amount of easy headroom is limited after 3 lakhs.
It is still possible, but it takes more effort and maybe after that, it will start coming with certain possible downsides. When we are making 150%, we are confident of being able to do it without any impact whatsoever with regards to the reliability and the maintenance of the plant.
Anything beyond that and we start having to take compromises, we are not willing to. So we do need to actively work to see how we can maintain and grow our wallet share.
But here also, I'll rather add to what Maulik is saying. Our technical team, they have always surprised us. We used to believe that we cannot cross 250. We have crossed 250, then 275, now 3 lakhs. So people are giving a surprise. They are saying there is no capacity. It is more to do with the competency.
And I will not be surprised if they can -- they give me 5,000, 10,000 more beyond 3 lakh also. So I mean, let's keep our fingers crossed. But then there is a need for one more plant now. That is for sure.
Sure, sir. And also if you can highlight the CapEx that we need to do, for example, we said we did a CapEx of around INR 1,400 crores for our original 2 lakh tonnes. Now how much CapEx would we have spent on this additional 1 lakh tonnes debottlenecking that we did over and above the 2 lakh tonnes capacity?
Less than INR 100 crores.
Where -- have you seen anything in my balance sheet showing higher CapEx? People, you must appreciate this.
So we have done hardly any CapEx on the additional 1 lakh tonnes?
Yes. Actually, the only CapEx that we did were on IPA and the power plant.
Okay. That's great, sir. And sir, second question regarding -- sir, if you can share any update on the sodium nitrate project in Oman that we had announced last quarter?
Yes. So that is going along on track. You have to remember it's a different country, which has its own challenges. But we're targeting between 24 to 30 months for commissioning. As I mentioned earlier, this is in line with that.
The next question is from the line of Anika Mittal from Invest Research.
Hello? Am I audible?
Yes.
We can hear you.
Yes. I have only 2 questions. So my first question is why this delayed the commissioning of the projects? What factors have contributed to these delays in commissioning? And how does this impact [indiscernible]?
Which delay?
Which project delay?
In quarter 3 presentation, all the projects were -- they have delivered 1 quarter. I will tell you, MIBK and MIBC, in quarter 3 presentation, it was written that they will be commissioned by quarter 4 '24 financial year. But in this presentation, in this quarter's presentation, it is written it will be commissioned in quarter 1 financial '25.
Yes, there were certain challenges when it came to the technology supplier in some part of the engineering. This is partially also owing to some challenges that they have faced from their own subcontractors in Europe. These are actually very large and complicated assets, especially the columns. And they have a significant amount of engineering required.
Nonetheless, I do believe -- I hope that the problem is behind us. So we should have a better chance of sticking to the schedule that we have announced. We see what best we can do to try to bring it forward. But what we are telling you is something that it seems something that we are willing to commit to.
All right. So my second question is we are expecting for businesses in downstream and upstream products, which are more profitable and value-added than our current offering. You have more than doubled revenue from 2,700 in 2019 to 6,800 in 2022. However, with margins have been affected by the fluctuations in commodity prices, which makes us look like a commodity-driven company rather than a value-added company.
We are not saying that we can avoid the volatility of the industry, but we believe that our margin can improve with our new product. So my question is, when will be -- we can be recognized as a value-added company rather than a pure-play commodity one?
We are neither a pure-play commodity company nor are we a CDMO company. We're a diversified chemical manufacturing company, which has significant operational excellence and a wide basket of operational platforms that we can put into play.
Now when you see things like margin pressures and all, at the same time, you have also seen rather -- I mean, if you look at, say, Deepak Nitrite, we had a fire incident. I accept that. And that has resulted in an impact with regards to our percentages.
But over the last 3 years, you would -- every quarter, you will see a remarkably stable margin profile for the company as a whole. And that's because of the length and the breadth of our value chain.
Now when it comes to Phenolics, yes, of course, there is a nature -- commodity margins creeping in. And that is one of the reasons why there are certain projects which are more focused on downstream rather than upstream in Phenolics.
DNL has invest in -- investments both in upstream as well as downstream. Phenolics has only investment in downstream. And those investments will have margin profiles, which are similar to Deepak Nitrite standalone.
And as between them will help to elevate the margin profile of what you would consider the Phenolics business to something which is somewhere between its current profile and Deepak Nitrite. So please do not make the mistake of treating us as a pure-play commodity.
Again, let me highlight, we are a diversified chemical manufacturing company. We prioritize on intermediates because this is where we believe we can play a great role with regards to operational capabilities.
Our ROCE, please find me companies in commodity space or in what you would call the CDMO or the specialty space which have consistently over 14 quarters been able to deliver higher than 35% ROCE while also making new investments for growth.
Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you, sir.
Thank you all for joining this call. In case you have any further questions, you can write to us for Somsekhar Nanda and Mr. Gopal Thakkar. Thank you all. Thank you once again.
Thank you very much, sir. On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.