Ladies and gentlemen, good day and welcome to the Deepak Nitrite Limited Q1 FY24 Earnings Conference Call, hosted by IIFL Securities Limited. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing star and then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Ranjit Chirumalla from IIFL Securities Limited. Thank you. Over to you, sir.
Thank you, Darwin. Good afternoon, everyone, and thank you for joining us on Deepak Nitrite Q1 FY24 Earnings Conference Call. Today, we have with us Mr. Maulik Mehta, Executive Director and CEO, Mr. Sanjay Upadhyay, Director, Finance, and Group CFO, and Mr. Somsekhar Nanda, CFO, Deepak Nitrite Limited. We will begin the call with opening remarks from the management team, followed by an interactive Q&A session. To begin with, Mr. Maulik Mehta will share his views on operating performance and the growth plans of the company, followed by Mr. Sanjay Upadhyay, who shall take us through the financial and segmental performance. I now invite Mr. Mehta to share his opening comments. Thank you, and over to you, sir.
Good afternoon, everybody, and a warm welcome to all of you on Deepak Nitrite's Q1 FY24 Earnings Conference Call. To begin, we pay tribute to Sri C.K. Mehta, the visionary Founder and Chairman Emeritus of Deepak Nitrite Limited, who departed peacefully, surrounded by family, on July 3, 2023. Over 50 years ago, he dreamt of Make in India, leading to the establishment of Deepak Nitrite Limited, a professionally driven organization epitomized by strong values, excellence and responsible chemistry. His legacy of nation-building by serving society continues to inspire and guide the Deepak Group, and we cherish his illustrious life, filled with inspirational moments, and fondly remember him for his contributions to the nation, to society, to the company, and to our entire fraternity of stakeholders. Our results documents were shared with you earlier, and I hope you have had the opportunity to glance through them.
I will initiate by briefly taking you through the key financial and operational highlights for the quarter ended 30th June. Mr. Upadhyay will then present you with a more comprehensive financial overview during the period under review. Following this, we will open the forum for a Q&A session. As we stepped into fiscal year 2024, we faced an array of challenges arising from global macroeconomic pressures and slower than anticipated demand from key customer segments. The Indian chemical industry, including Deepak Nitrite, was impacted in Q1 by factors such as additional supply from China's opening up, a global destocking of inventory, and a slowdown in the Eurozone. This has led to the softening of realizations and impacted the volume offtake. In order to safeguard profitability and market share, the company proactively took several measures, like exploring new customer opportunities, optimizing procurements, and evaluating valorization opportunities of byproducts.
Apart from continuous improvements around operational excellence, these have helped us to operate plants efficiently and consistently deliver supplies to customers while making progress on growth initiatives and strategic parameters. During May, we reported our highest ever production for some of our products, showcasing the solid business resilience. Notably, we have been able to export key pharma and agro intermediates to China during the last two quarters. We will continue to do so. We have also successfully enhanced wallet share in each and every one of our products. Apart from carefully navigating these challenges, we made progress on strategic endeavors. We proactively de-risked our business model by securing assured input supplies from alternate sources. We have recently commenced captive power supply and are driving value from waste. The growth initiatives to enter into substantial supply contracts in all segments ensure the clear pathway for sustainable growth.
The development that I am personally excited about is the setting up of a world-class R&D center in Vadodara. This R&D center is under implementation and will allow us to further deepen our key facilities and expertise across existing as well as new complex chemistries. We've also made considerable progress on all of our growth initiatives and CapEx plans, making Q1 a fairly eventful quarter on all counts. With this backdrop, I shall share an overview of the performance. In Q1, consolidated revenues were INR 1,800 crore, lower by 13% YOY and 9% QOQ. The challenging industry-wide conditions permit opening up of China, inventory destocking, et cetera. We believe that this is transitionary and have undergone several such cycles in our history.
Our focus during the quarter was on factors within our control, such as optimizing of procurement, operational excellence, exploring new opportunities with existing and new customers, and new products that we have enhanced our valorization opportunities for. This has enabled us to partially mitigate the impact of prevailing weak industry trends. We must also remember that many of these are sustainable improvements and will take us well into stronger quarters with them. EBITDA for Q1 '24 was INR 242 crore, lower by 33% YoY, translating into an EBITDA margin of 13%. The changes in the global chemical landscape, intensified by China's product dumping at lower prices, resulted in lower sales realization. Sales at several key products, including phenol, owing to a general sluggishness of market, impacted our overall performance. Consequently, PBT and PAT for the quarter declined by approximately 36% year-on-year.
However, in most of the cases, we have been able to either retain or increase wallet share. Projects under implementation for brownfield of existing products and processes and CapExes for a short supply of inputs using various CapEx, including photo-halogenation and complex HALex, which is fluorination, as well as projects for acid supply, are expected to be commissioned over the next six to eight months. These will enhance our competitiveness, and together with the cyclical recovery in prices, will buttress our profitability going ahead. Now, coming to our segmental performance. In Q1, the Advanced Intermediates segment generated revenues of ₹719 crore, lower by 3% on a YoY basis, amidst a decline in input prices and hence, realizations. Despite inventory destocking by our customers, our margins in AI remained steady.
As a result, segment PBT was resilient at INR 115 crore, as compared to INR 131 crore last year. Deepak Phenolics reported a revenue of INR 1,089 crore in Q1. The decline in revenue and EBITDA is due to a sharp contraction in phenol spreads due to a supply glut arising from the opening up of China, as well as the slowdown in global markets and spreads being at a multi-year low. We do have to also mention that the phenol plant was shut down for the first time in four years for its own regular maintenance changes, and this was for 15 days in the beginning of the quarter.
We also looked at the improving raw material trends to sell finished products at a much more accelerated rate. We entered Q2 with a multi-year low opening inventory to take the best advantage out of the improved feedstock prices. The Phenolics division aims to enhance downstream offerings through projects such as MIBC and MIBK, which will lead to higher capital utilization of acetone and attractive margins. Looking ahead, we are strategically positioned to capitalize on increasing demand and benefit from the trend of import substitution in India. The acetone derivatives have made significant process progress on ground for the project's execution. The plant is expected to be commissioned in the first half of FY25, enabling downstream value-added products.
In a key development, Deepak Chemtech Limited, our wholly-owned subsidiary, signed a ₹5,000 crore MoU with the Government of Gujarat to manufacture specialty chemicals, phenol acetone, as well as bisphenol in the state. DCTL will invest approximately ₹5,000 crore across these projects, with the aim to commence the first phase in FY24-25, and complete the projects by FY26-27. Just as health indicators, I'd like to share, because I know that this question will come up during the discussion. In Deepak Phenolics, we expect Q2 to be better on a YoY basis, as well as a QoQ basis. In Deepak Nitrite, we expect Q2 to be flat on a YoY basis and improved on a QoQ basis. On a consolidated level, we expect both Deepak Nitrite and Deepak Phenolics together to be able to deliver better on QoQ as well as YoY.
In closing, I'd like to emphasize that Deepak Nitrite is well positioned for expansion in various aspects, with a strong integration in the value chain. Our investment plans, which at the moment progress, the projects under execution, amount to about INR 2,000 crore ±, reflect our enthusiasm to seize opportunities both in India and worldwide. We continue to diversify our product offerings, expand our client base, and enhance overall value propositions. With a strong financial position, valuable customer relationships, and well-considered growth initiatives, we're poised to elevate our business proposition. Our expansion plans will improve our competitiveness, grow market share, and generate value for all stakeholders. I'd now like to hand over the call to Mr. Sanjay Upadhyay, who will address this forum and take you through the financial performance and key updates during the period under review.
Thank you, Maulik. Good afternoon, everyone, and thank you for joining us today on Deepak Nitrite's earnings call. I'll walk you through the highlights for the financial year for the quarter ended June 30. Deepak performed impressively in the quarter, despite a challenging environment, which impacted most of the chemical industries all over the world. In Q1, consolidated revenues were lower by 13% year-on-year at around INR 1,800 crore, due to declining realization and lower volumes in light of inventory destocking by global customers. In spite of that, Deepak Nitrite's volume have volume share has not gone down, neither the volume share, but the impact is largely because of the price realizations, which were lower as compared to earlier periods. EBITDA was INR 242 crore, down by 33%. Trade across its key products and Phenolics have reduced from the levels witnessed in past quarters.
In fact, phenols witnessed further multi-year cyclical lows this quarter. As a result, EBITDA margin has compressed to 13% during the quarter. PBT and PAT decreased to INR 202 crore and INR 150 crore respectively. Our domestic business generated revenue of INR 1,432 crore, while export revenues were at INR 336 crore during the quarter. Moving to our segmental performance. In the Advanced Intermediates segment, revenues decreased by 3% to INR 719 crore in Q1, versus INR 739 crore in Q1 FY23. While EBITDA was down 9% to INR 136 crore during the quarter under review. The Advanced Intermediates segment reported a resilient performance at the back of the diverse product portfolio and strong customer service capabilities, performing very creditably despite the challenging industry backdrop.
Deepak Phenolics reported a revenue lower by 19% to INR 1,089 crore in Q1, versus INR 1,338 crore in Q1 FY23. EBITDA was INR 107 crore, down by 51% in Q1, while EBITDA margin came in at 10% versus 16% in Q1 FY23. The company's working capital position improved by ₹121 crore. Advanced Intermediates by ₹41 crore and Phenolics by ₹82 crore. In Q1 FY24, DNL witnessed exchange rate volatility, ranging from a peak of 82.85 to a low of 81.61. To manage the Forex volatility risk, the company employed dynamic hedging strategies, which led to a gain of ₹ 10.24 crore in Q1 FY24.
Lastly, on the balance sheet front, company financial position continues to be strong in net zero-debt company, with solid cash flows, we are well-placed to execute on growth plans. In the quarter, we effectively managed surplus funds to make advance payments to select suppliers, receiving cash discounts and invested remaining funds in safe investment avenues, as the surplus funds are in the process of being deployed in growth prospects. As a result, we achieved an aggregate gain of INR 8.6 crore in Q1 FY24. On a considered basis, the company remains debt-free and boasts of a networth of INR 4,240 crore. This will facilitate leveraging in balance sheet for potential expansion projects as and when needed in the future. This was explained in detail by our chairman in the AGM last week.
In the quarter, our cumulative investment in its wholly-owned subsidiary, DCTL, was INR 499.5 crore. Of this, INR 94.5 crore was invested in Q1 FY24 itself. The total investment in DCTL comprises of INR 9.5 crore in equity and INR 490 crore in CCDs. Our three projects are being executed as per plan. We are poised to announce commissioning of projects over the next several quarters in a phased manner. Once commissioned, the plants will help secure internal supply of critical raw materials and thereby elevate the profitability levels at full utilization. Further, the company is building world-class R&D centers, as explained by Maulik, near Vadodara, to solidify its capabilities and expertise across complex chemistries, while accelerating growth momentum, while existing R&D setup keeps working on various products and processes. With that, I would now request moderator to open the question for our question and answer session, please.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Madhav Marda from Fidelity International. Please go ahead.
Hi, good afternoon. Thank you so much for your time. I just had one very broad question. I think in the initial remarks, you mentioned that, you know, you all have seen quite a few such cycles in the history of the company. Just wanted to understand, like, is there what is what are the key things which are similar and key things which are different in this cycle versus the past ones? And, in your view, what could help in this cycle sort of correcting itself and, you know, things coming back to more normalized levels? That'd be very helpful, thank you.
See, when when we alluded to the fact that we have seen several cycles, what we mean is in a general sense, when new capacities are coming, you will always have a short period of time. When demand grows, the demand grows at a relatively consistent pace, 5%, 6%, 7%, 8% CAGR. When capacities come online, they come online in a sudden manner. Over a period of time, this normalizes, so the demand is able to match up to the capacity that has been commissioned. Hence, when we're talking about commodity chemicals, where Deepak Phenolics plays largely, you have such situations of bull and bear cycles, but over a period of time, they normalize. Similarly, as China has always been over the last 25 years, a significant player, maybe the most significant player in the production of chemicals.
Now, generally, what ends up happening is that the production comes online in a normal market situation. What we have right now is a perfect storm, where there is low consumption in China, and sudden, you know, unlocking of COVID measures in China has pushed a lot of volume out. Globally, because of tightening interest rates, there is also the headwind with regards to long-term visibility on consumption. Let me clarify that in the short term, demand is there, consumption is there, but customers are not able to project a situation beyond the next three to six months. Wherever they are, that is simply because they may have their own downstreams tied up in the consumption markets as well.
Cyclicality on this sense in the chemical industry, whether it is in specialty or in commodity chemicals, from the involvement of players like China and from the involvement of players like Europe, this we have seen, and we expect that Deepak is not only well-positioned, but will be having an opportunity to be able to make significant, you know, strengthening of its moat as we move forward.
I would just add one thing to this. Though cyclicality is affecting the prices, we are able to maintain, I repeat, our volumes. Even if you see Phenol, Phenol is there, we are confident that we will achieve last year's production level, maybe, maybe we'll. Not production, but the turnover, and maybe we'll cross that also. Our the market share remains intact, and the position in which Deepak Phenolics is, we are certainly, once the things, as the demand picks up, we are, we are very confident we will do better than what we have done in first quarter.
Got it. Just a follow-up from my side would be that, so the key thing to watch out for incrementally is China's own domestic demand, kind of, coming back, and that should solve for a lot of, lot of challenges that the global chemical industry faces. Is that, like, one key thing to watch out for, or, which are the other pointers that we should look at, to sort of, think about recovery?
Generally, as interest rates stabilize, as global consumption comes to a point where we are able to project over a longer period of time. As I mentioned, right now, customers also have a visibility of only a couple of months. As they become confident that the global situation is stable, even if it is stable at a higher level, they are very happy to place a long-term commitment for volume. At the same time, China is picking up its internal consumption as well. Whatever you see, which is a slowdown in terms of quarter- month-on-month exports as well as imports in China, a large part of this is prices, not so much volumes. Volumes are intact in that sense.
As we move forward, we expect that China will go closer towards its own self-sufficiency, and India will be more linked with the rest of the world in terms of global demand and supply.
The India supply chain diversification, thing, you know, which has been a key driver for growth for the companies in India, that kind of still holds, right? This is more of a cyclical challenge than anything changing structurally in the long term.
Yes, I will also caution that it is easy for companies and for investors to just bet on the same horse. This is certainly a key driver, but by no means is it the only driver. There are other important factors at play, too, including, but not limited to the Indian companies' own resilience and competitiveness. Companies like Deepak are used to competing with China. Our, you know, our performance matches China's ability to perform on the best of days as well as the worst of days. We don't necessarily need to depend on China doing well or badly in order to have a level of resilience from our own operational excellence.
Okay, got it. Thank you so much.
Thank you. The next question is from the line of Nirav Jimudia from Anvil Research. Please go ahead.
Yeah, good afternoon, sir.
Good afternoon.
I have two, three questions on the R&D part, which is mentioned in our annual report. One is, you mentioned that we have successfully implemented a process for a chemical which is used as an agro-intermediate. Further, it is written that this involves a process where lot of new ideas across the chemistry and engineering was implemented to achieve the desired critical to quality parameters. If you can just elaborate more on this with respect to the changing capabilities prior and now, that the samples have already been approved by the customers. How much of this product, in terms of the opportunity size, the wallet share could come to us once the production is ramped up from Deepak?
No, Nirav, thank you for the question, but I can't answer it. What I can tell you is that we have been able to not only have the product approved with regards to quality, but we have been able to achieve best-in-class atom efficiency as well. Moving forward, what we have done is, we have bet not only on being able to deliver the product, but doing it with a degree of sustainability, which is higher than other industry peers. More and more such products will come out from Deepak's stable, which will not just be, I mean, they may be me-too products, but they will be utilizing processes which are unique to Deepak. We may have, you know, we may have taken an existing process, but we have significantly improved it.
In some cases, we have added new processes which are not currently done by, I think, any company in the world at this moment. As we are able to commence, you know, commercial production, we will be able to give more visibility. Right now, it is very, very premature. I can give you an example. What we have done, for example, in Phenol, is we took technology from the best technology provider in the world, and the process that we have today is optimized to a level where the, the technology supplier, even though other potential customers have gone to the same supplier, the supplier is unable to match the productivity and the efficiency which Deepak has on a day-to-day basis. This is our in-house internal capability, and until now, we have only been using it to improve existing processes.
Now, we are applying it to improving novel processes as well. I know this all sounds very vague, but we will hope to add more color over the forthcoming quarters. All of this will be done largely in-house.
Got it. Sir, whenever we will ramp up and the commercial production is on, is it safe to assume that we'll be the few producers of this product in the world, and suffice to say that we'll be the lowest cost producer of that product being supplied?
Yes, that is for sure, and we hope to be able to take. So what we've done always is start off with whatever, but over a period of time, we have been able to become a dominant supplier for pretty much all of our products, at least in Deepak Nitrite. Compared to any global scale producer, we are at world scale. So hopefully, moving forward, we will not just be one of some, but we will be one of very, very few. Also, I agree that we will have the best atom efficiency in terms of our conversion from raw materials to FG.
We should see some contribution to the top line in second half of FY24, right?
No, this will see value addition in the first half of 2025. There are separate CapExes, which will add revenue as well as PBT, add in the later part of this financial year. I think to be on the safe side, you should look at a full year starting next year, not this year.
Got it. Got it. The second observation is also on the, one, qualitative demands, which you have mentioned in the annual report regarding the pilot facility for the vapour phase process, which we have installed. I think it supports, it supports very high pressure oxidation reaction for adipic acid as well as the salicylic acid. If you can provide some insights, qualitative would also help in terms of what is this actually and how this will help us in developing the further value-added products.
I would not like to comment on those.
Okay. Okay, got it. Sir, last thing is on, the spent sulfuric acid CapEx, which all the plants which we have commissioned. If you can, share the CapEx as well as the cost savings which could accrue to us with the commissioning of this plant.
I mean, the, the plant has been commissioned, but, you know, cost savings are not the right way to put it, because we have significantly reduced the volume of spend that we will push out.
Okay.
Cost savings are always going to be in relation to the price of fresh acid. What I would like to, however, say is that this will add a significant score advantage to our scope 1, scope 2, you know, emission disclosures. More than that, it allows us to have a more sustainable operation, where we are less dependent on external vagaries.
Got it.
You know, all of these things have a cost of energy, a cost of fresh material, and these things change. It is difficult to give you an exact number. But anyways, what I can tell you is that the spent acid concentration plant fit well within our, you know, our internal benchmark with regards to savings, and has the significant added benefit of improving our ESG. I look at it from not the bottom line, but from the right thing to do.
Got it, sir. Thank you so much, sir, and all the best.
Thank you.
The next question is from the line of Rohit Nagraj from Centrum Broking. Please go ahead.
Yeah, thanks for the opportunity. First question is on the new R&D center. We have been building capabilities over the last few years, and that is also displayed in terms of the newer products that we are working on and the projects which are getting commissioned. What are we incrementally working, I mean, we plan to work on through this new R&D center. Is it that we now would be also focusing on exports market, given that predominantly earlier, our focus was on import substitutes? Your thoughts on the same from a vision perspective. Thank you.
We supply to the import substitution market, but more and more, the import substitution market has become a good foil for the global market, because more and more of these multinational companies have started putting up their own investments into India or have tied up with converting partners in India. Now, we, I mean, we don't look from Deepak Nitrite's perspective as just an import substitution, but we look at it from the perspective of Make in India and making it in order to be able to supply to the world, which of course, includes India. The processes that we are building up in our R&D center, some of these are the processes which we currently have in our technical toolkit, and we are adding new processes in this, which are at a very advanced stage.
What we are doing is, we are ensuring that we have a very, you know, high level of integration, both software integration as well as hardware integration, between our R&D, our scale-up facilities, and what we would call our challenge product, challenge capability plants, which are, you know, somewhere between mini plants and pilot plants, where we are able to demonstrate our capability. Now, we do, we are also getting into a lot of liquid, liquid, gas, liquid reactions and gas-gas reactions. As I have mentioned earlier, we are going to be, I mean, we are moving ahead with at least three life sciences products, which will be downstream of our existing product basket.
These are, as I have earlier also mentioned, going to be tied up with strategic customers in multi-year contracts, and we will have some, we'll have some small volume of sale into the market as price discovery also. These will all be taking place on an accelerated basis in our new R&D center. What it will definitely allow us to do, is it will allow us to do more of the same faster, rather than keeping everything in a long line of projects that need space from the assets that are available. Along with that, it will also allow us to get into a couple of new processes, which I will not get into details of right now.
Sure, sir, this is helpful. Second question is on phenol. You, in your opening remarks, you alluded that, there have been supplies coming from China. Does it mean that, there have been significant capacity additions in China, which are on, on, over and above their, internal consumption, and that will probably have some bearing on the, spreads over the medium term? A second quest- light question to that, in terms of the capacity debottlenecking that we're talking about of 10%, so after the debottlenecking, our capacity would increase to 330,000, you know, from, 300,000? Thank you.
Okay. For the first part, we are not seeing any significant imports of Chinese phenol into India. However, because China is the largest producer in the world, its presence on a global stage means that there is an increased pressure from non-Chinese phenol suppliers to also participate in the Indian consumption. Nonetheless, as we alluded to in our opening remarks, Deepak has been able to maintain as well as grow its wallet share. While these imports were there before we started, these imports continue even when we are running our plant. We expect that these imports will continue even into the future. Sometimes this is because the new capacities that have definitely been commissioned in the last six months, have not yet had their downstream capacities commissioned, which generally may happen with a delay of a couple of months.
Nobody wants to be in a situation where they commission the downstream first and then the upstream. This may have a transient effect, but all I can say is that, yes, there will always be this pull between, you know, what the change is in terms of RM and the changes in terms of FG, especially for a commodity chemical like phenol. We remain confident that we will maintain or grow our wallet share in India, as India's consumption continues to increase. Even compared to the rest of the world, where consumption may be moderating or slightly decreasing, India is a bright spot on the global economy when it comes to the consumption, and Deepak is in a prime position to be taking advantage here.
Second question that you asked with regards to the capacity, rather than going into numbers, or, you know, three thirty, three this, three that, whatever, what we can say is that on a bottleneck basis, compared to the design capacity, Deepak should, at will, be able to produce about 150% of what it had invested to produce in 2018.
Actually, I would rather elaborate here also that, see, when you say debottlenecking, the process is already on. You know, we have touched this capacity, say, 135%, 140% width. I mean, this is not a one short go, this is now, debottlenecking capacity will go up like this. It has gone up. If you, if you observe last one year, we have definitely gone up from 220, 225, 250 to 260, 270, 280. You know, so this is how it is. To put any number is difficult because our team is capable of doing much, much more than what we say anytime. We are very confident that we will deliver, as Maulik mentioned, about 150% on a consistent basis, that the approach, it can go even beyond that.
Thank you. The next question is from the line of Anas Dadarkar from ValueQuest. Please go ahead.
Yes. Hi, good afternoon, sir. Actually, I didn't quite get the last part where you mentioned about the Chinese imports. If you could just repeat what you said, because I understand, I think in the Q4 call, you mentioned that the company doesn't have any competition from Chinese phenol manufacturers, right? It's still a little bit easy. If you just tell me your.
Direct phenol from China, there is some in India, but it is very, very small. Because China is a large player, its supply into the global market disrupts other suppliers, who then divert more volume to India. This is a normal situation. You have to think of phenol like any benzene, toluene, xylene, where it's an ocean. If one place gets occupied, you know, it's like water, it moves into another location. Please continue.
Okay, got it. No, that's it. That's it from my side. Basically, we're just seeing it's a second-order effect.
Yeah.
You know, other than the phenol coming into India. Yeah, got it. That's it from my side. Thank you.
Thank you. The next question is from the line of Ankur Periwal from Axis Capital. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. First question on the Advanced Intermediates side. you know, in your opening remarks, you did mention 3% YoY decline is largely led by realizations, while volumes have been largely intact. Just wanted to understand within the segment, you know, considering from, let's say, the basic product or the value-added segments, is there any, you know, significant diversion there? How has been the competitive intensity in both of them?
Okay, let me give an indication of what we are seeing in the end application industries. Plywood, and I'm telling you about the company as a whole, including the phenol. Plywood and construction, we are seeing an improving trend for sure. Auto, we are seeing somewhat of an improving trend. What I'm telling you right now is on a sequential basis, just to be clear. Pharma is relatively flat or slightly better. Dyes is flat, but it is flat at a low point. Over the last couple of quarters, dyes has not picked up to what it was maybe about a year, a year and a half ago. Agro, also flat. Paper and textiles, also flat, but also at a very low level.
Where I am saying that we are seeing an improvement is, on the basis of how we see quarter two going, where there are certainly shoots, green shoots that are visible, as I mentioned earlier, in the construction and the auto segments. The other places where we see an improvement is because we are able to take wallet share away from other players who are in the same product.
Sure, sir. From a, you know, growth perspective, given that we have been launching, you know, newer products earlier as well, and now also there are plans of, you know, the new value-added products getting launched, how do you look at them, let's say, from a growth perspective, in terms of your market share gains with the existing ones as well as the new customer addition?
Our guidance with regards to growth and the value that, that growth would bring into our top line and bottom line remains intact. Even today, we see a similar, you know, top line as well as a bottom line to all of the CapExes which are currently under execution. There are a few other CapExes which we have not yet started to execute, which are at the engineering levels, and these are also being seen from the same light. Today, we expect a similar outcome from those, but we are, I mean, we are going into it with caution, talking to customers, because, you know, they also need to be able to give us the same confidence, not only on prices, but also in terms of volumes, because these will all be multi-year contracts.
Today, I can tell you that there is no, there is no drop in our excitement about the existing projects as well as the ones that we have not yet announced.
Sure, sir. Just a follow-up on that, what percentage broadly of the business here will be more on the longer-term basis, more like a, you know, a client commitment there?
Most of the new products that we get into, products, will be with, significant part of, the volume, majority of the volume being on contractual basis. Some brownfield expansions that we do for existing products will continue to have the same blend of contractual and non-contractual. I hope that gives clarity.
Sure. That, that's helpful, sir. Thank you and all the best. Thanks.
Thank you.
Thank you. The next question is from the line of Abhijeet Akella from Kotak Securities. Please go ahead.
Yeah, good afternoon, everyone. Thank you so much for taking my questions. Just I had one question actually with regard to the project pipeline that is getting commissioned over the rest of this year, you know, 2023, 2024. While we are aware about the intermediate we're integrating to, as well as the, you know, asset capacity, both of which will serve battery integration. Any other projects, you know, brownfield or greenfield, that were commissioned in the past, that we should expect to start contributing, you know, to the numbers over the rest of this financial year?
At this moment, we have about, give or take, about INR 2,000 crore-INR 2,100 crore, which is under execution. This does not include projects where we have not yet tied up everything. If we have tied up everything, including the customer contracts, including the RM sourcing, et cetera, then we would add to this number. When we're talking about, you know, that INR 5,000 crore and all that, that is a separate amount, because we're still in the process of tying up with customers and all. This INR 2,000 crore is well on its way, and over the next, I think, one year, or at least the next five quarters, pretty much all of these should be commissioned. This will be a mixed 50/50 of bottom-line accretive as well as top-line accretive. Let me highlight that anything which is top line accretive is obviously also bottom line accretive.
If you are asking about the past, brownfield, whatever we have done, the expansion and then the quantities are fully sold. Only issue is that today, if you see the agro industries is not doing that well. The demand is subdued. So there is an impact on those. I mean, we are not running at 100, 100. In fact, it will be at double the capacity. So if you ask me double capacity, are we running fully? Then, no. But then we are much higher than the earlier levels. That much I can tell you. The capacity, of course, we have run in past the full double capacity, but today it is lower. And in, say, Nitrite also, we have capacity much more than what we are. But yes, we are running little lower than our full capacity.
Today there is a subdued demand in the market, no doubt on that. We are running full, selling higher volumes as compared to earlier years and even this year also. We still have stock to increase further capacities if the demand revives further.
Absolutely.
That's very helpful. Just maybe one follow-up on the Advanced Intermediates business. Sanjay, you mentioned the sodium nitrite running a little bit, you know, subdued utilization levels. How about the other major products in that segment? Like, if you take nitrochlorobenzene or the, you know, etcetera, or the fine specialty side, are we pressure sort of, you know, visible across all of these, from another?
No, Abhijeet, I see. Let's not get into product specific, you know, we, we told also that the products going to dyes and dye intermediates, you know, there, there is definitely an impact. Going to textile also. There you will, you will be impacted. Demand slowdown is certainly felt. It is there for past one year. I mean, things have not improved as such in those industries. There, we are not able to run at full 100%, beyond 100%. Normally, our capacity should go beyond 100%, you know, which we are not able to do. We are selling the volumes higher than last year, then capacities can be bottleneck, we have bottleneck. To answer your question, running at 120%, 115%, 100%, that is not possible, because demand is subdued.
Got it.
End application rather than product specific, you know, where the application is.
Yeah, yeah, absolutely. No, that's clear. One last thing on the raw material side, we've been seeing softening commodity prices. For us to sort of benefit from those, will we again need to see a demand recovery before we, you know, start to be able to hold on to those benefits, or?
No, not really. In fact, if you see the first quarter having some impact of this, inventories also, because we are, you know, we are importing also for our fine specialty. Now, if you import, you don't import in a very small parcel. When the pricing suddenly fall and prices started falling, we were carrying inventories, and that was consumed in the first quarter. Q2 will not have much impact of raw material. We should start seeing the benefit. As Maulik explained that this quarter looks to be better than on sequential benefit of Q1. That is largely because we in Q1 volumes we have sold, but this impact is not, will not be seen, and then you'll see a better number in Q2.
Got it. Thank you so much, sir, and wish you all the best.
Thank you.
Thank you.
Thank you. The next question is from the line of Rohit Jain from Tara Capital Partners. Please go ahead.
Yeah, hi, can you hear me?
Yes.
Yeah, thanks. Thanks for the opportunity. Just one question on the outlook for global phenol. You said that globally, the demand for phenol is not growing and India remains a bright spot. In that sort of a context, this pressure that we have from goods getting imported from other parts of the world, is that something that we should expect on a sustained basis in the future also? Or you still maintain that this is a transient issue and this is going to solve itself out?
Okay, just to clarify, it's not that the demand for phenol is not growing. It's just that the supply of phenol in the last six months has been significantly faster than the growth in demand. As I alluded to right in the beginning of the con call, this is part of the regular bull-bear cyclical trend that one sees with commodities. India's demand is growing faster than the world's demand, and hence, just because of the gravity of India's demand outstripping world demand, there is more interest from international suppliers. As I also mentioned, Deepak has been able to hold its own, has grown its wallet share, and has ensured that it is able to make product available from its plants.
In Q1, we had a short, you know, 15-day shutdown. This is the first time in four years that we've taken it, and this is a critical part of maintaining any capital invested chemical plant which operates on a continuous basis. Yes, this has been, you know, an impact that was felt in Q1. Similarly, there has also been the impact of Deepak destocking its own FGs in order to ensure that it is able to best take advantage of the lower price raw materials heading into Q2. Both of these have been playing on the numbers that you see in Q1, which are both limited to that quarter and will not come into Q2.
What this means with regards to global demand and supply is that, look, the global production of phenol is higher than it was at the same time last year. Soon enough, we will also start seeing a significant increase in the consumption of phenol as the downstream capacities come online. In the interim period, we may have a situation where the supply of phenol is more than the consumption of phenol, and this will moderate, you know, over some quarters. I would just urge all of our stakeholders to be patient with us. This is a normal situation, and there's nothing here that is particularly perturbing to the kind of strategy that phenol has to undergo. Nonetheless, as we have also mentioned, that Deepak is investing in its own downstream capacities, which will be consuming both phenol and acetone at market prices.
Any benefit that we see there is only accretive on the base numbers that we are seeing today, and even the EBITDA % will be slightly better than whatever we are seeing when it comes to the prices for phenol and acetone.
Okay. Just one related question to that. You've mentioned that you have seen the cycles earlier as well. So one question is, how long do you expect this cycle to last? I mean, is it a one or two quarter phenomena, or do you think it could go on for slightly longer than that? The reason I ask is, there is a view that, a few market participants have, which is that, structurally, China's growth is now, at least the capital investments are going to be much lower than it has been in the past. A recovery in China, even if it happens, would be consumption-led and not investment-driven. With that sort of a context, how long do you expect this cycle of extra supply and lower demand to sustain?
I'm going to answer your question on a consolidated basis, not just Deepak Phenolics and Deepak Nitrite. On a consolidated basis, we do believe that the amount of destocking that took place in the first half of the year has softened, and we expect going into Q2 and then Q3 onwards, that destocking to still be there, but with a materially, you know, lower impact compared to the first half. Whether this means that, you know, we are, back to, you know, what do we consider as a normal is a question. All I can say is that Q2 and Q3 look to be sequentially better than the first half.
Understood.
Primarily under pressure, simply because of the destocking. That part will be slowly addressed. What happens with regards to macro, you know, interest rates and recession/stagnation and all that, those are in the hands of, you know, things like the Federal Reserve or the Bank of England or wherever else you look at it. Those are, you know, not in anybody's visibility. We are seeing some level of course correction there as well, where the tightening of interest rates does not expect is not expected to be something that continues for quarters at an end.
Understood. Thanks. Thanks for answering my question. Thanks a lot.
Yeah, thank you.
Thank you. The next question is from the line of Vivek Rajamani from Morgan Stanley. Please go ahead.
Hi, sir. Thank you so much for the presentation. Just one clarification and one question from my side. I just wanted to clarify, when you were talking about the end segment demand with respect to the trends that you were seeing, like private construction, autos, et cetera, you're talking about it from a sequential perspective, right? Q2 over Q1, correct?
This is correct. No, sorry. Sorry, sorry, sorry. Yes, it is sequential. I agree there. However, I would also like to mention that a couple of them are seeing, for example, plywood is seeing an improvement even compared to the third quarter of last year, right? One, where we are seeing an improvement, certainly, I mentioned sequentially, but it is also longer than sequentially. The rest of them, you are absolutely correct.
Dyes also one year.
Dyes, over the last one year, has been down. Even last year it was down. We waited for a long time for festival season to come, and it didn't really come. Nonetheless, we sold some of the highest volumes that we have sold, and we will actually exceed that number this year. Primarily, this is because of taking market share away from other players. If I'm talking about the demand, in the end industry, we are yet to see dyes and colors get into a celebratory mood.
Sure, sir. Thank you so much for that clarification. The question that I had was, I think you've mentioned in your presentation that, you know, you've been acquiring new customers, and you've also, you know, talked about the commencement of exports to China. Just wondering, would it be possible to give any indicative sense of the margin profiles from some of these new customers? Is it comparable to your existing customer base, or is it better? You know, can you just give some color along those lines? That would be really helpful. Thank you very much.
I can't give you a lot of details there, but I can say that it is actually a little bit better. When we are selling to China, we are discovering that the margins are better. Now, whether they remain better or not, I don't know. We will see how it goes, but right now this is more exploratory. I think it's too early to tell, but the margins are at least as good, if not better, compared to our normal sales.
Sure, sir. Thank you very much. All the very best.
Thank you.
Thank you. The next question is from the line of Rohan Gupta from Nuvama. Please go ahead.
Hi, sir, good afternoon, and thanks for the opportunity. Sir, just a few clarifications. First is on phenol plant. You mentioned that consistent utilization rate will be 150% of the rated capacities of 2018. Sir, this include 10%.
Consistent, consistent capability rate. We will manufacture and we will sell whatever we believe is the right number, but our ability to produce consistently will be, as you mentioned, compared to the installed capacity, a significant improvement.
Yeah. Yes, sir. Fair enough. I am talking about production only, so definitely selling will be dependent on the market conditions. Does it include the 10% kind of expansion in brownfield, which you are likely to go through? Or that is on over and above this?
No, no, this is including.
Rohan, I just responded to earlier question. Let's see, when we talk of de-bottlenecking 10%, and this is from that last level, but we always close that, you know, see what, what we achieved last. Actually, the capacity is going up beyond three. You can assume, and that's what Maulik was mentioning, that consistently achieving 150%, that will be done once the de-bottlenecking is over, May, which is likely to be over in next couple, over this month. After that, you will have a ability to produce 150. It can go beyond that also, but consistent, 150%.
That will be our new floor. However, in winter, we can make more.
10%, we, we, we cannot talk about that now.
Yeah.
Right. This 150% will be available, I mean, from Q3 onwards, right?
Yes.
For the current year?
Yes.
Yeah, yeah.
In winter, we may be able to produce more because we have to do less chilling.
Right.
We don't, you know, we don't include that in any guidance.
No, sir, that is fine, because those are the technical things that compensation and one number. Sir, second question is on your new project of INR 5,000 crore investment commissioning. Sir, if you can give some more line on that, I mean, in terms of you are still in talk to the government and the project has just to take off. I mean, will it include phenol, acetone, bisphenol? All these are the, in your existing line of products on the. In specialty chemicals also, you have mentioned that some of the new products and will be included there. Can you give some more sense that it is completely in the existing line of the business of the company, or you are trying to add some more diversified revenue stream from the ₹5,000 crore annual project planning with the government?
No, you've answered that question yourself, Rohan. While there will be some participation of phenol and acetone, most of the other products, including, for example, as you mentioned, bisphenol, including the specialty chemicals that we will be putting up, are products which are having a very tight level of synergy with our existing platform. These are new products. Bisphenol also for us is a new product. When we get into manufacturing of polycarbonate, it will also be a new product. As you can imagine, all of these will not approach from our. These are upstream and downstream.
Yeah. These are all the products which we have already talked about. I was just asking that, are we expecting any new, completely new chemistries or new revenue streams?
Yeah, yeah.
To be included there?
Yes, yes. Because, see, when I say specialty chemicals, it gives me so much bandwidth to be absolutely vague. Pretty much all of the CapEx that is here is of products which are not currently manufactured by Deepak, which will be manufactured by Deepak, and which will have a very tight level of integration with our core competencies, as well as the new ones that we are adding. For example, you know, we are just stepping into, you know, photochlorination and fluorination. These will now be these, these now become parts of our technical toolbox, and when we invest into this larger CapEx, they will become part of what we call our core competency. Something which we are not used to is, and, you know, it is an opportunity.
Once we invest in something, we start doing it commercially, but it is only for, you know, a couple of products. We call it part of our technical toolbox. Once it is something that we are comfortable using for multiple products and in multiple states, then we call it part of our core competency. Diazotization, nitration, hydrogenation, these are part of our core competency. Sulfonation, fluorination, chlorination, these are part of our technical toolbox.
Thank you. Also, this last question, sir, for clarification only, you mentioned that though, our subsidiary, phenol plant, is likely to witness a YoY, as well as a sequential improvement. I understand probably sequential because of your plant shutdown this current quarter and extremely low spreads, which we have seen in phenol. Sir, in standalone business also, you mentioned that still YoY kind of flattish kind of numbers. That business that we have been continuously investing, and last year it has gone through a complete low cycle, our standalone business and the progress there. Still it is not seeing any significant improvement that on YoY we should be seeing some surge and uptick in that business?
See, on the standalone business, there is a good amount of it which goes into the dyes and colors segment, right? While this and, so the two industries which DNL on a standalone supplies to, one is in the dyes and the other is into paper and textiles. These continue to be underperforming the rest of the applications like agro, pharma, rubber, those things which are reasonably good and our contractual agreements are well maintained. What we have is two end segments, which are slow, and I'm giving you a cautious guidance, because if you speak to a lot of other companies who are in this space exclusively, they will give you buoyant, you know, optimistic visibility with regards to dyes. We are just telling you what we have been told.
If this picks up, well and good, maybe it picks up in the tail end of Q2, maybe it picks up in Q3. I've also mentioned that there is a sequential improvement that we are seeing. you know, being halfway into Q2, what I can tell you is that these are segments which have not seen as much of a bounce back as we had hoped, and hence we have given a guidance of flat. Flat compared to last year, and better, certainly much better compared to Q3.
Coming about agrochemical business in under fine and specialty, we were planning to launch a couple of AI technicals and also intermediates. As you mentioned that in agrochemical industry is going through a tough time. Are there any delays in products, in those product commissioning or, they are all intact as for now?
No, no, there's no delay. In fact, as Mr. Upadhyay mentioned last year, at the end of last year, we commissioned, and then within a couple of months. For example, if we plan to commission a plant to make 100 tons, we commission to 100 tons, and then we debottleneck it very quickly to 150 tons. When we debottleneck to 150, we are today selling about 100. It is as per what we had invested in, but not as per the debottleneck capacity. We expect this to come back anyways, but here and now, because there is destocking going on through the entire value chain, including at the farmer's end, we are cautious about this based on the indications our customers have given.
What I can tell you is that not only does the wallet share remain intact, but the long-term visibility for the growth of these applications also remains intact. I would caution to say that agrochemicals is not doing well. In fact, on a longer term basis, it is, but on a shorter term basis, there are headwinds, which I believe will culminate over the next quarter or two, and then we should have something of a normalized situation.
Thank you. The next question is from the line of Krishan Parwani from JM Financial. Please go ahead.
Yeah, hi, sir. Thanks for the opportunity. I think you answered couple of my questions in the previous answer, but just, you know, couple of clarifications on that. It is regarding the ₹5,000 crore investment. You know, just wanted to understand, because in order to put up, let's say, or in order to kind of reduce the imports of bisphenol of India, you would have to also expand to some extent in our acetone capacity. Is that understanding correct?
Yeah. Part of it is from expansion and part of it is from greenfield. Correct.
Understood. I mean, have you kind of finalized how much of this INR 5,000 crore would be towards the bisphenol production, and how much would be for, let's say, phenol expansion and how much for specialty chem?
No, we have an indication internally. Certainly, it is not right for discussing externally.
I f you see the press release, we have said INR 3,500 crore is towards phenol and bisphenol A, and INR 1,500 crore is towards fine and specialty.
Noted. That is helpful. Have you kind of or are you okay to kind of, let's say, go into the detail of specialty, or should I not ask at this moment?
No, no, not at this moment.
I got you. No problem.
All of these are at a very advanced stage when it comes to engineering and planning. While we are still discussing with customers for, you know, signing up of these multi-year, legally binding contracts, I would not like to go into more details.
Got it. Got it. No problem. That is helpful. Thank you so much for answering my questions.
Thank you.
Thank you. The next question is from the line of Hitesh Agarwal from Fair Value Capital. Please go ahead.
Yes, sir. My question was, the CapEx, which we'll be doing under Deepak GreenX, is it exclusive of INR 2,000 crore announced for Deepak Nitrite and Phenolics?
Yeah. What is, whatever is ongoing is ongoing. This would be in addition to.
Thank you. The next question is from the line of Yashwi Securities Private Limited. please go ahead.
Hi. I wanted to ask something on Deepak Phenolics. We will see the demand side.
Please speak louder, we can't hear you.
Hello, can you hear me now?
Yes, it's better.
Okay. We can see the outlook and the demand side for Deepak Phenolics. I just wanted to have a light on the margin side. Are you gonna plan on doing any actions that we're gonna take to improve the margins of Deepak Phenolics as compared to the first quarter? Or these are gonna remain, because you already said that the guidance for the margins are gonna remain same, as you have already said that this before. What are we gonna do to improve the margins here in Deepak Phenolics?
I would not like to specifically answer any questions about A product or B product, but let me give you clarity. We maintain a particular guidance that we have in Deepak Phenolics. In the next couple of quarters, in Q2, Q3, we should see a range bound EBITDA of about 12%-15% as compared to whatever it was in Q1. In DNL, we should see a range bound between 20% and 22%. On a consolidated basis, hence, we should see something between 15%-18%. This is, of course, different from what you saw in Q1, and hence I'm confident that in the rest of the year, we will be able to perform definitely better on a consequential as well as on a YoY basis.
Thank you. The next question is from the line of Hitesh Agarwal from Fair Value Capital. Please go ahead.
Yes, sir. How the CapEx plan, which we assigned the ₹5,000 crore MoU, could you give us some guidance on what is the asset terms and how we are likely to fund the CapEx?
No, I think we have enough tools in our toolbox to be able to do it via judicious mix of internal accruals, debts. Right now we are at 0.0, as well as raising of funds, if required, through other routes.
In case required?
We are very, very comfortable, and we have lots of options.
Thank you. Ladies and gentlemen, that was our last question. I would now like to hand the conference over to the management for closing comments. Over to you, sir.
Thank you so much for joining us on all this call. In case you need further clarification, you can talk to me, Somsekhar Nanda or our investor relations team. Thank you once again.
Have a great week.
Thank you. On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.