Ladies and gentlemen, good day, and welcome to Deepak Fertilisers and Petrochemicals Corporation Limited Q2 FY 2023 earnings conference call hosted by IIFL Securities Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Ranjit Cirumalla from IIFL Securities Limited. Thank you, and over to you, sir.
Thank you, Nirav. Good afternoon, everyone. Thank you for joining us on Deepak Fertilisers and Petrochemicals Q2 FY23 earnings conference call. Today we have with us Mr. S.C. Mehta, Chairman and Managing Director, Mr. Amitabh Bhargava, President and Chief Financial Officer, Mr. Tarun Sinha, President, Technical Ammonium Nitrate, Mr. Mahesh Girdhar, President, Crop Nutrition Business, and Mr. Deepak Balwani, Head, Investor Relations. We'll begin the call with opening remarks from Mr. Mehta, followed by comments on financial performance by Mr. Amitabh. Post which we will open the floor for an interactive Q&A session. I now invite Mr. Mehta to share his opening comments. Thank you. Over to you, sir.
Yes, thank you. I hope my voice is clear, right?
Yes, sir. Loud and clear.
Okay. Thank you. A very good afternoon to all of you, and I take once again a lot of pleasure in welcoming all of you for this Q2 FY 2023 earnings call of Deepak Fertilisers and Petrochemicals. I hope all of you have had a chance to look at the financial statements and earnings presentation uploaded on the exchange and our website. At the outset, I'm quite happy to underscore the good news that our Q2 top line grew by 52% and the bottom line by 195% and similarly the H1. Additionally, our H1 bottom line surpassed the whole of last year's profits. As we were thinking and as I was looking at it, to try and see what do we need as a root cause for the delivered this positive way.
Somewhere, you know, to look at it at a distance of what are the fundamentals that have been, you know, indicated through these results. I was wanting to check two from the outside in perspective and two from the inside out perspective. From the outside in perspective, what we see is that despite the huge raw material price hikes we have seen over the last now year and a half, we have been able to establish a good pass-through in our finished products. Somewhere the larger picture is that the finished product prices have now set a new norm for price affordability among all our segments.
This I see as a good sign over the long term, that the resilience that the downstream of the upstream is also somewhere where the price affordability is of a new order amongst our rivals. The second perspective from the outside in approach is I also see that the strong alignment with the India growth story, that all our three businesses, the fertilizers, the industrial chemicals and mining chemicals, the kind of strong alignment that is being seen with the India growth story is clearly validated. Despite the price hikes, we have seen no demand destruction. In fact, it would be the other way. These are the two at the fundamental levels that we see from an outside in perspective that, you know, seems to have been established as we see the performance.
From the inside out, if I look at it, that number one that I see is that, you know, all the hard work that we have put in setting up good, IT systems and processes, those have. The strength of those have been validated, as we were in a position to withstand all the volatility that we saw. The geopolitical uncertainties, the waves of uncertainties in logistics availability, price approvals, that the internal systems and processes have been able to withstand these, I would say, onslaughts and yet take advantage of, you know, these aspects which are reflected in the results.
The second aspect that I see is the transformative strategy that we had, you know, been pursuing over the last couple of years, which is the shift from commodity to specialty in each of our businesses. It does seem to be bearing fruit and does seem to be giving us the very strong also foundation to further build on. Especially I'm happy to share that in our fertilizer business as we move from commodity NPK to SMARTEK, which is, you know, product which enhances the nutrient use efficiency and then from SMARTEK as we are moving towards CROPTEK, which is a more crop specific kind of grade. These efforts and the work that we are doing at the farmer level was also noticed by ADB.
ADB has come up with a unique, blue loan, I'm hoping for the first time in the country, where, not just, debt funding, but also certain grants for the, efforts at the farmer level is something that, they have signed up with us. That gives a very warm acknowledgment of, the fact that, you know, we are in the right direction and somewhere this is making an impact of the bottom line at the farmer level. That was something I think I should share. Now, of course, you know, Q2 otherwise typically is a dull kind of, you know, quarter because of, rain sometimes impacting the chemical business or the mining activities. This time, of course, the rains, at some places were excessive, so which also impacted the fertilizer sector.
As we move out of this you know Q2 and look at the H2 going forward we now see somewhere you know the settling down of some aspects of the supply and price volatility between raw material and finished product. Despite the fact that there's still uncertainty on what happened between Russia and Ukraine. At least it is something that is getting factored. As it settles down we'll see that there will be some plus minuses a month here and a month there but it should then finally settle down at a different level. We will continue to make you know further and further deeper inroads through our strategy of moving from commodity to specialty.
That is something which we are now seeing further and further reflected in terms of somewhere we're looking at Solar-Grade Nitric Acid, for instance, or in the mining sector, you know, more and more TCO projects to do cost of operations where one looks at not just products, but services. Then looks at the total impact in terms of the whole project, which gives you know, a much better traction and a brand creation for the mining sector reference products, Technical Ammonium Nitrate. Similarly on the fertilizer side, I see you know, more grades of Croptek that have been approved by the government and now gradually it will be showing up at the marketplace and creating its own inroads specific to these crops.
Last but not the least, I'm also very happy to share that the ammonia project execution is going on full steam on a very good fast track. It's now onto the final phase work, you know, final last five or six months of commissioning, pre-commissioning, commissioning activities. Very soon, you know, that should be available to give a very strong foundation towards the downstream, you know, availability just across our complex, you know, pipeline availability of ammonia for all the downstream that are there. With these broad thoughts, I'll hand you over to Amitabh, our President and CFO, to take you through the details and then of course, you know, share clarifications to all your questions. Amitabh?
Yeah. Thank you, Mr. S.C Mehta. Good afternoon, ladies and gentlemen, and thank you for joining the IIFL Conference call to discuss Q2 FY 2023 results. During the Q2 FY 2023, we reported a total operating revenue of INR 6,619 crores, an increase of 51.7% YOY compared to the same period last year. Our operating EBITDA increased to INR 495 crores as compared to INR 312 crores in Q2 of FY 2022. Operating EBITDA margins increased to 18.6% from 11.8% during quarter two of FY 2022. Our net profit for the quarter recorded growth of over 196% YOY to INR 276 crore with margin of 10%.
During quarter, our manufactured chemicals business recorded a revenue of INR 1,533 crores, an increase of 55.5% compared to Q2 of FY 2022. Manufactured pharma chemicals recorded a revenue of INR 454 crores, an increase of 22% YOY. Manufactured mining chemicals, that is our TAN. That TAN business recorded a revenue of INR 920 crores, an increase of almost 136% YOY during the quarter. On YOY basis compared to Q2 FY 2022, all the key indicators of TAN business such as coal and overburden production, cement and steel production recorded a healthy growth.
That said, as I'm sure you would notice that there was basically a reduction in margins quarter-over-quarter, which was due to quarter two being a lean season, as is the case pretty much every year for chemical segment in general. That is both TAN and acid, we're seeing reduction in demand due to monsoon effect. This year, availability of more acid in the market also came due to the extended shutdown of the downstreams of our co-producers in the market, this further reduced our volume and margins in acid. Lean season is in India, which is because of monsoon.
It also coincides with the lean season in the geographies like Russia and Brazil, which are the other major consumers of TAN, which also resulted in reduction of imported fertilizer, which is the fertilizer grade ammonium nitrate, which also had an effect in terms of the margins in Q2 . Our crop nutrition business resulted in Q2 approximately revenues of INR 1,181 crores, an increase of 37.3% YOY, with segment margins of 7%. As quarter production had obviously gone up due to the sharp rise in the prices of raw material. During the quarter, our IPA plant operated at a capacity utilization of 54% and both acid and TAN operated at 81% and 93% respectively.
In the crop nutrition segment, isopropanol and NPK plants operated with utilization levels of 66% and NPK plant operated at 74% utilization level. Net debt as of September was INR 1,921 crores with net debt to equity of 0.22X. ADB, as Mr. S.C. Mehta was mentioning, has recently granted a $30 million debt assistance and $0.5 million equity grant for our farm efficiency initiative, which I think Mr. S.C. Mehta elaborated earlier. With all of these trends, CapEx about 3,163 crores as on September end on greenfield ammonia plant and 423 crores on the TAN project, as on September end.
Out of these, the company has already infused equity of about INR 1,587 crores for ammonia and the entire TAN project capital so far has been done through equity infusion or our internal accruals. Promoters pledged shares now are restricted to only 2.67%. The non-disposal undertaking obligation, which you must note that this is not a pledge, but non-disposal undertaking is 3.66% of paid-up share capital. With this, we would be happy to take your questions. Thank you.
Thank you very much. We now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. Participants, you may press star and one to ask a question. The first question is from the line of Nisheet Shah from IKROYA Investments. Please go ahead.
Good afternoon, sir.
Good afternoon. Please carry on.
Yes. Sir, I wanted to understand how are the imports in Technical Ammonium Nitrate now in terms of volume and pricing?
Okay. Is that your question or is there any other question you have?
Yeah, I have other two questions also. The second question is I want an update on the debottlenecking of the TAN facility. The third question is, how are the key input prices trending now, like natural gas, ammonia, propylene? That's it.
Okay. For the first question, my colleague, Tarun is also on the call. Tarun, if you can please take the first two questions and then I'll come in for the third one.
Yeah, absolutely. Thanks a lot. Just to check with the moderator, am I audible?
Tarun Sinha.
Okay, thanks. Okay. Thanks for the questions, first of all. On the imports of ammonium nitrate, so far this year has not been any unusual year as compared to the prior years in terms of the volume of imports that we have been seeing in the country. That said, the demand for ammonium nitrate in India has been also seeing, you know, growth year-on-year. It is not unlikely because we try to reach towards the end of this financial year, maybe the volume of growth or maybe the volume of imports of ammonium nitrate in this year could be slightly higher than in the prior year, and that is in line with the growth of demand in the domestic market.
While the domestic AN manufacturers are continuing to produce to their capacities. That leads to your second question, which is about the capacity augmentation of ammonium nitrate. As far as Deepak Fertilisers and Petrochemicals Corporation Limited is concerned and hence fertilizer is concerned, we have actually implemented some of the measures to increase our capacity at our Taloja, which is another major plant of this group, Deepak Fertilisers. And there are some more initiatives being undertaken to increase the capacity further again, you know, in order to meet the ongoing growth of demand of ammonium nitrate in the country. We have kept the various regulatory bodies and ministry informed of our intention and activities that are ongoing in relation to the substitutes and that kind of thing. Deepak, over to you.
Yeah. As far as the raw material price trend is concerned, while we've seen some early change in H2, that is, phosphorus, for example, prices have come down significantly. The prices of other commodities, particularly ammonia, gas price depends on what we are going to see in terms of Russia-Ukraine situation and how Russia also reacts to it because one of the other news that we have given to everybody is also certain restrictions that Russia may put in terms of certain additional export tax that Russia may put on various fertilizer and commodities.
It's difficult right now to gauge what will happen to the fertilizers in general and also the gas price because gas price spot prices of gas obviously would also have a bearing depending on how winter in Europe, which is we are still in the early stages, how that would pan out in the next couple of months. The commodities other than phosphate where we have very clearly seen the downward trend, the other commodities may have to be. We'll have to see what comes out in coming weeks and months depending on how U.S. or the Russia-Ukraine situation pans out.
This is very useful.
Sir, I have one follow-up on our debottlenecking plan. How much of the capacity have you already added? Going forward, how much can you add from debottlenecking?
Sudhir, we have added nearly 33,000 tons. The second phase is on, and we would be able to come back with the exact increase once we've completed that phase.
Okay. Thank you, sir.
Thank you. Participants, you may press star and one to ask the question. The next question is from the line of Sanjay Shah from KSA Shares & Securities. Please go ahead.
Good afternoon, gentlemen. Thanks for opportunity. Sir, congrats on good set of numbers. My question was, on the fertilizer side. A new government rolled out a new fertilizer policy, One Nation One Fertilizer. Can you highlight upon how that can impact us, as a company on our margin side? Can you even help us to know the modalities of this policy?
My colleague, Mahesh is also online, so I'll request him to take this question. Yeah.
Am I audible?
Yes.
Yeah. Good afternoon. See the One Nation One Fertilizer circular has been received. We are also trying to understand how finally it will be implemented. In terms of policy provisions, it says that, you know, some part of the fertilizer bag would have to contain certain government communication which is related to subsidy, and certain part of that can be used by the company to bring about their brand. This policy was announced recently, and certain four products have been covered with that, and we are trying to understand implication on other products at the moment.
Am I right in saying that we are coming under control of government for the pricing of this?
See, the prices of phosphate fertilizer are governed by NBS scheme. As you may know that there is a nutrient-based scheme by the government, whereby the government announces nutrient subsidy price for NPK and various micronutrients and sulfur on an annual basis. Depending on the movement of the prices, companies can fix the price. Basically, the nutrient-based policy whereby nutrient subsidy is fixed. That's the policy. Policy for urea is different, whereby it is on a process-based and the government decides on price for the partners.
Really helpful, sir. My second question was regarding ammonia plant. Deepak sir, can you highlight upon the project? As you said, it is on schedule. How about the cost? Is there any overrun in the cost? Next year, we'll be able to start the production of the same?
We've been, I think, now consistently for last couple of quarters giving the details even in our investor presentation on the total project cost and how much has been spent during the quarter. At the end of September, while total project cost has remained the same in terms of what we've been sort of announcing for last couple of quarters, that is INR 4,360 crores. By end of September, we've already incurred INR 3,163 crores, and balance INR 1,526 crores is to be incurred. We are expecting the commercial operation somewhere in Q1 of FY 2024.
That's great. What about TAN? How is the capacity ramping up and how is the demand right now?
Capacity, if you're talking about the new Gopalpur capacity that we have, we are now implementing.
Yeah.
That would add additional 333,000 tons. It is expected to be completed by Q2 of financial year 2025. That project is nearly about INR 3,200 crore CapEx project, and we've already incurred INR 450 odd crores by the end of H1 this year. Overall, I think demand, like Tarun Sinha just mentioned a little while back, that this year, we are seeing an increase in demand because the overall year-on-year coal production and overburden removal from public sector coal, particularly, which is the largest consumer of TAN, has seen improvement. And that. Any specific numbers, Tarun Sinha, you would want to mention over and above that?
Not at the moment, unless there are any specific questions around the numbers then, which we can think about those. But broadly speaking, as you rightly said, the entire demand is being driven by coal sector at this stage, followed by, you know, the other minerals that India has about plenty of in terms of mining activity that there has been made. Then secondly, this growth is also dependent on the infrastructure growth under the various schemes and policies of the Government of India, which have been announced to build infrastructure in the country. In most of those cases, there's a lot of rock blasting to be done, which requires explosives and hence Technical Ammonium Nitrate. All these sectors are combined with driving the demand in the country.
For us, as you would have already noted in our presentation, the year-on-year growth in volume in TAN in Q2 was about 13%, which is in TAN sector year-on-year.
Thank you, sir. Thank you very much.
Thank you. Next question is on the line of Chaitanya Thapar from ASK Investment Managers. Please go ahead.
Good evening, sir. The question is, on the TAN business from a more medium to long term perspective, how should we view the profitability timelines for the TAN business?
As Tarun Sinha mentioned, as far as Q2 is concerned, it is a lean period in not just India because of monsoon effect, but even in other large geographies which consume TAN. As you know, TAN, of the substitute of TAN, which is fertilizer grade ammonium nitrate, is essentially a fertilizer. Therefore its relative, I would say consumption vis-a-vis other nitrogenous fertilizer is kind of decides the prices of fertilizer grade ammonium nitrate and therefore the import substitute that we see in TAN in India also in a sense gets governed by that price at least partially. There is also obviously the other domestic producers who also determine demand supply. This is the domestic demand supply.
They kind of set their prices. A combination of all of these will decide the prices going forward. I think the one larger aspect in TAN. I was just mentioning that there is also a level of impact that we are likely to see from what happens in Russia-Ukraine situation because the prices of gas thereby the prices of overall cost of production of TAN as well as you know shutdown of some of these TAN plants in Europe because of these high energy prices will also have bearing on our TAN prices.
The third thing that I was mentioning, which very early, we just picked up the news that Russia, given that the season is coming back, demand season or consumption season is coming back. Russia in general is looking at imposing certain export taxes on export of fertilizer. TAN is also one of the products. We have to see this combined effect of all of that. I still think Q4 in general I would say should be from a demand perspective at least that we are very clear that the domestic demand will again pick up after a lean period.
You know, we are given that dimension of the overall margin. We should see, hopefully, better quarter between Q3 and Q4.
Okay. This question is largely coming from historically, the first time profitability that we witnessed for the TAN business. Our current numbers appear to be significantly lesser. Just wanted to get a sense on that. Will it start to revert to that over a more medium term? It's again a play of what happens globally in terms of energy cost in Europe and that on the margin will decide the profitability for TAN business?
I didn't get the first part of your question where you seem to suggest that TAN margins have come down. Is that what you were alluding to?
Earlier, TAN profit per ton used to be significantly lower than what it appears to be today. Just wanted to get a sense on, do we start to revert towards that over the medium term, or is this profitability here for some more time before we start to see anything happen on that? Because prices have obviously gone up, and we've seen our spreads also increase, significantly compared to historically last seven, eight years of slight profitability.
I think overall margins are a function of both the chemical prices and raw material prices. Raw material prices have as much as chemical prices have gone up in last few quarters, so have the raw material prices. But we've seen a better pass-through of raw material prices into finished good prices. As long as the demand in Indian context, as well as the demand for fertilizers overall nitrogenous fertilizers in particularly the fertilizer consuming geographies remains strong. As fertilizer grade ammonia and nitrogen also which is essentially a fertilizer would continue to have buoyancy as far as the prices are concerned. But we'll have to see.
I mean, there are too many factors right now at play, meaning the prices of natural gas, prices of ammonia, and then of course the nitrogenous fertilizers. A combination of that and actually some external factors like what Russia does in terms of exports, and export policy may also play some role. I think it's different. I would say, like from a demand perspective, we remain quite bullish. We'll have to see how all of these factors would play out in terms of the future margins in TAN.
Okay. Just the last question on the ammonia commissioning. Once that commissioning happens, what is the strategy in terms of locking the contracts for natural gas and how should we view that?
We are looking at both domestic gas as well as a part of it, LNG. Domestic gas, as you know that, there are some gas options have in fact come in in the last quarter as well, and there are some more expected in the coming couple of months. We look to tie up a part of that gas from domestic sources and the balance we are in discussion with LNG suppliers. It is a combination of the two.
The total requirement for natural gas is how much at full utilization of the plant?
About 1.2-1.3 million kg per hour.
Per day.
Sure. Sure.
Thank you so much. All the best.
Thank you.
Participants, you may press star and one to ask a question. The next question is from the line of Mitesh Patel from Nuvama Institutional Equities. Please go ahead.
Hello. Sir, this ammonia project is entirely for self-consumption only, huh?
Yes.
Approximately the project is on schedule in May. It will take how much time for test run trial run?
I'm sorry. Your voice is breaking.
One sec. How much time will it take for trial run test run and then full production capability, when do you think that will start?
Mitesh, sorry to interrupt you, but once again your voice is still breaking. Could you please rejoin the queue, please?
Yeah, sure. I'll rejoin the queue.
Thank you. The next participant is Amarjeet Gupta, Individual Investor. Please go ahead.
Yes.
I wanted to know what is the total import of ammonia we do in an initial year?
We'll just give you the numbers. Any other questions you have?
How are we going to supply ammonia through Gopalpur project?
Gopalpur project, we have as part of the project, we have a tie-up with Gopalpur Port, where there would be a port terminal for ammonia, and then we would have a ammonia tank at our project site. It will be essentially imported. The Talcher ammonia project would essentially be cater to the requirement of our existing products, that is Taloja and Dahej.
Amarjeet, do you have any follow-up questions?
No, no. Actually, I was looking at the total import of ammonia.
Roughly about 300,000 NPK. Then of course, we have our own capacity.
In terms of Ammonia from this plant?
Like I said, we have our own ammonia that we produce, which is about we have a capacity of 128,000 tons. We produce some ammonia from our own plant. We have imports, which I just mentioned, and we also procure partly from other domestic players. As you know our fertilizer capacity is on a ramp up. Our capacity utilization and fertilizer are currently at about 67%-68% odd. That would ramp up, basically the Taloja production would largely get consumed in our West Coast plants, basically Taloja and Dahej.
As you know, you know, the part of the capacity that's surplus at any stage, we are also in a position to sort of sell it domestically because India is a significant importer of ammonia. In the past we have sold surplus ammonia in the domestic market also.
That's a little bit helpful.
Thank you. A reminder to all the participants, you may press star and one to ask a question. Next question is from the line of Vidit Shah. Please go ahead.
Hi, thanks for taking my question. My first question was on the ammonia plant. You know, when the plant had initially been you know planned and announced, you were expecting about $250-$40 per ton of benefits versus import costs back then on the plant. Just in terms of numbers, and given that the plant is just four to five months away from commissioning and given the current industry scenario, are we still expecting similar benefits or is this going to be significantly higher than before? And if so, then how much? My second question was on the solar-grade nitric acid capacities.
You know, how much of overall volumes would these constitute or even other specialty there Nitric Acid constitute? What would be the margin accretion due to these, you know, move towards these products?
As far as ammonia, margins are concerned, between current prices of ammonia and the likely gas prices that we are looking to buy at, margins are likely to be significantly better. I think it would be fair to say that a much better estimate or more accurate estimate can be assessed on our end, and we can inform also the stakeholders once we have clarity on our gas prices. As we speak the gas prices are, if at current prices of ammonia, I think that leads to $30-$60 of delta. We can afford significantly higher prices of gas. Our likely tie up is gonna be at much better pricing as we are discussing with the suppliers.
We'll give a better estimate maybe by our next quarter. I think we'll have a first quarter estimate. As far as your other question is concerned.
On how much of the Solar-Grade there.
Solar grade. As of now we are looking at roughly about 6,000-7,000 tons a year kind of volume. But depending on how the demand picks up, we have the ability to expand the capacity. Pricing wise also, a little early for us to. We've just done a trial run. For pricing wise also maybe by the next quarter we should be in a position to give you a better estimate on additional margins coming out of this grade.
Okay. Thanks. Bye-bye. Thank you.
Thank you. Participants, you may press star and one to ask a question. Our next question is from the line of Prashant Taini from TCS. Please go ahead.
Hello? Hello?
Go ahead sir, you're audible.
Yeah. Good evening, sir. Thanks for the opportunity for me to ask the question. Like, recently had some protest in the Odisha project, which is near to Ganjam district. Still that the protest is going on, the work is resumed and it is going accordingly.
We have, I think we've also reported and we've given some photographs also as part of our investor presentation. The filing work has started. There were some, I would say, local leaders, there were certain issues which were more linked with the overall SEZ and earlier, I think issues, compensation issues which were there. I think those government has sorted out. These protests, the protests that you would have picked up are not specific to our project but are to a larger, you know, the SEZ there. As far as our project is concerned, we are getting support from local administration and our work has commenced. We've already, in fact, shown some progress through photographs also in our presentation.
Okay. Thank you, sir. Sorry. Like I said, I, as I'm from Odisha, I saw like one or two, three, four, some protests was there. Okay. Thank you, sir. Thank you.
You're welcome.
Thank you very much. As there are no further questions, I now hand the conference over to Mr. Bhargava for closing comments.
Yes. Thank you everyone for your participation. For any further queries or clarifications, please do get in touch with our Investor Relations team. Have a good day, and thank you so much.
Thank you very much. On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us. Thank you for joining us. You may now disconnect your lines. Thank you.