Deepak Fertilisers And Petrochemicals : DFPCL Q2 FY 2024 Earnings Call Transcript

10th November, 2023
The Secretary	Listing Department
BSE Limited	National Stock Exchange of India Ltd.
Phiroze Jeejeebhoy Towers,	Exchange Plaza,
Dalal Street, Fort,	Bandra - Kurla Complex, Bandra (E)
Mumbai - 400 001	Mumbai - 400 051
BSE Code: 500645	NSE Code: DEEPAKFERT

Subject: Management Transcript of Q2 FY 2024 Earnings Conference Call

Dear Sir / Madam,

Pursuant to the Regulation 30(6) read with Part A of Schedule III of the SEBI (Listing Obligations and Disclosure Requirements), Regulations 2015, please find enclosed the Management Transcript of the Earnings Conference Call held on 3rd November, 2023 to discuss the financial results of the Company for the quarter and six months ended 30th September, 2023.

The transcript of the Q2 FY 2024 Earnings Conference Call will also be made available on the website of the Company i.e. https://www.dfpcl.com/.

We request you to take the same on your record.

Thanking you,

Yours faithfully,

For Deepak Fertilisers

And Petrochemicals Corporation Limited

GAURAV UMAKANT MUNOLI

Gaurav Munoli

Digitally signed by GAURAV UMAKANT MUNOLI

Date: 2023.11.10 11:06:44 +05'30'

Company Secretary

Encl: as above

Deepak Fertilisers And Petrochemicals Corporation Limited

Earnings Conference Call

Q2 FY2024

Earnings Conference Call

Q2 FY2024

November 3, 2023

Management:

Mr. Sailesh Mehta - Chairman & Managing Director

Mr. Deepak Rastogi - President and Chief Financial Officer

Mr. Tarun Sinha - President, Technical Ammonium Nitrite

Mr. Deepak Balwani - Head, Investor Relations

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Q2 FY2024

Moderator:	Ladies and gentlemen, Good day, and welcome to Deepak Fertilisers and Petrochemicals
	Limited Q2 FY24 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 the conference
	call, please signal an operator by pressing '*' then '0' on your touchtone phone. Please note that
	the conference is being recorded.
	I now hand the conference over to Mr. Ranjit Cirumalla from IIFL Securities.
Ranjit Cirumalla:	Thank you, Akshay. Good afternoon, all. On behalf of IIFL Securities, we welcome everyone to
	Deepak Fertilisers and Petrochemicals Corporation Limited Q2 FY24 Earnings Call. Today, we
	have with us Mr. S.C. Mehta, Chairman and Managing Director; Mr. Deepak Rastogi, President
	and Chief Financial Officer; Mr. Tarun Sinha, President, Technical Ammonium Nitrate; Mr.
	Suparas Jain, Vice President, Corporate Finance; and Mr. Deepak Balwani, Head, Investor
	Relations.
	I would now hand over the floor to Mr. S.C. Mehta to begin the proceedings. Thank you, and
	over to you, sir.
S.C. Mehta:	Thank you. A very good afternoon to all of you. I extend a very warm welcome to each one of
	you for the Q2 FY24 earnings call of Deepak Fertilisers. I trust that you have had the opportunity
	to review the financial statements, press release and earnings presentation already made
	available on the stock exchange and our website.
	Now on the face of it, as we look at the figures, I'm sure we all would feel that it seems to be
	quite dismal. However, let me share some insights for your better appreciating and understanding
	the numbers. Firstly, when we look at the last year Q2, it was indeed some bit of an abnormally
	high base. So, if you were to compare with Q2 FY22, Q2 FY21, Q2 FY20, Q2 FY19, the
	performance of current quarter Q2 FY24, is indeed better, and this is decidedly better in lieu of
	the challenges that we faced. So, despite the challenges, we are seeing this kind of a performance,
	and let me share some of those challenges.
	On the fertiliser front, let me just explain that the government policy on subsidy is a little
	backward looking. That is the prices of the previous 6 months form the basis of the new subsidy,
	6 monthly penalty and the subsidy is given on the tonnages actually bought by the farmers. There
	is a POS machine, and on that basis, the subsidies are given. So, what happened is that the
	inventories which have been sold to the channel or dealers, but not sold to the farmers, that gets
	impacted and in a situation where the global prices are falling, the industry gains on this channel
	inventory, while it loses on the channel inventory when the global prices of raw material are
	going up. Now in view of this, basically, we took a hit in the Q2 of almost Rs. 106 crores on this
	discount.
	On the other hand, the performance of the quarter in terms of sales and liquidation, it was the
	highest ever that we have ever done. what is more is that our crop-specific grids, the move that

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we had from commodity to specialty or the crop specific, is gaining very good ground and very good acceptance.

The second aspect is that we also took a hit of around Rs. 87 crores in this quarter itself, emanating from our new ammonia plant. Now firstly, any new global scale plant takes a quarter or so to stabilize and during the stabilization phase, there are some plant trips and restarts, which always add to the cost. So, post our COD, some of those costs are contributed by the stabilization phase, and this is quite normal and expected. What is peculiar was that the ammonia prices during the Q2, when we started the plant were unusually low, almost down to $330 Middle East.

Now as we speak, the plant has now stabilized, and it is both in terms of capacity, efficiency and sustained running. It's now reached to the designed capacities. And what is more, the global ammonia prices have also climbed up to $550 levels, aligning to the long-term average, which was what was expected.

The other thing that happened was that the other major impact came from the Russia-Ukraine war ramification. What actually happened was Russia found an embargo on its various products in various countries, because of thetilt towards the Ukraine. In this situation, India became a good dumping ground for the Russian products and this brought in large quantities of cheap fertiliser-grade ammonium nitrate, and that impacted our Technical Ammonium Nitrate business.

However, because of our strong market grip, we have insured in Q2, also despite all these headwinds, a very strong volume growth and going forward, all the mining activities that we are seeing are on an upswing, whether it is coal mining, limestone or cement, or the infrastructure based on the government budget outlay. They're all having a very positive current and the key that is there is that we have started making this concrete shift from commodity product-oriented business to mining solutions business based on success fee On the Industrial Chemicals space, the nitric acid business, besides the typical monsoon lull, did have some impact emerging out of our downstream customers, the agrochemicals and pharma customers, because they were getting impacted by the Chinese dumping.

In that space, on the other hand, the IPA had a very positive current. As we move to the specialty space, steel grade nitric acid or solar grid nitric acid, or pharma-grade IPA, we will be gradually scaling up into those specialty areas, and that should create a good insulation for us from the larger global vagaries.

In summary, if you compare the previous 4 years Q2 other than last year, it validates our strength and resilience to take in the headwinds of the geopolitical environment and at the formation level, I remain completely convinced that our strategic transformation journey from commodity to specialty or holistic solution in each of our business lines, that is Mining Chemicals, Industrial Chemicals and also the Crop Nutrition business, in all the 3, I feel very deeply that they are in the right direction and over the next few years, quarter-on-quarter, as we consolidate our this part of the journey from commodity to specialty, and as we solidify the premiums and the brand, I feel that we will bring Deepak into a complete different light. I also feel that now that the

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ammonia plant is with us in the group and running fine, it will bring a huge risk mitigation for the group's downstream from all the global vagaries.

Overall, in terms of the financial controls, we see the gross debt to equity now at 0.76x, so which is also a healthy state and in terms of our growth strategies, all of it would be, since they are all in areas where we continue to have the support of our last 40 years of strength, that is only going to be something that'll, once again, prove the resilience against any kind of geopolitical situations.

For more granular details, I will now hand over to Mr. Deepak Rastogi, our new CFO and I also take this occasion to share my warm wishes to you and your families a little in advance for the Diwali festival. Thank you.

Deepak Rastogi:Thank you Mr. Mehta, Good afternoon, ladies and gentlemen. I thank you for joining the Deepak Fertilisers and Petrochemicals Corporation Limited conference call to discuss our Q2 FY2024 results.

In Q2, we achieved a total operating revenue of Rs. 2,424 crores with an operating EBITDA of Rs. 286 crores, which translates to 11.8% margins. This Q2 EBITDA was Rs. 286 crores, as what Mr. Mehta was mentioning. We have basically taken around Rs. 87 crores EBITDA loss or a charge due to ammonia plant stabilization, and Rs. 106 crores charge on account of fertiliser inventory based on the new subsidy notification, which actually got recently notified. Therefore, our net profit for the period was Rs. 63 crores with a margin of 2.6%.

Last year, for the same quarter, the base was Rs. 495 crores, which was a positive upgradation, but we all knew that the margins are very high, and we may not be able to sustain for a long. EBITDA is one of the best quarterly performances for DFPCL. We are on an exciting journey despite the raw material volatility, geopolitical concerns and other external challenges impacting the business.

Our lifting of export ban in growth capex towards our nitric acid Dahej and TAN Gopalpur, which basically helps us in transitioning from commodity to specialty products and also to giving holistic solutions, capturing the overall backward integration and on the top of it, the ultra-mega benefits will act as catalyst and is laying a strong foundation for long term sustained growth.

Manufactured TAN business had a revenue of Rs. 516 crores in Q2 of this year with a strong sales volume, up over 9% on a year-on-year basis. The company achieved its highest ever Q2 sales volume of AN Melt. The margins were impacted on account of dumping of cheap Russian.

During the quarter, our manufactured Pharma/Specialty Chemicals business recorded a revenue of Rs. 409 crores. IPA registered a volume growth of 62% on a year-on-year basis, supported by strong demand and implementation of SGQR, while nitric acid volumes growth was almost 12% year-on-year.

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	Regarding fertiliser business, it recorded manufactured revenue of around Rs. 708 crores. During
	the quarter, sales volume of manufactured, NP and NPK, including Croptek was 1,47,000 metric
	tons as compared to 1,55,000 metric tons in the previous quarter. This was slightly impacted on
	the erratic monsoon, which actually continued during this quarter even though we had obviously
	record sales after that.
	In Q2, IPA plant operated at 76% capacity utilization while both assets and TAN operated at
	93% and 118%, respectively. In the Crop Nutrition segment, NP/NPK plants had a utilization
	level of 51%, while Bensulf plant operated at 52% utilization. With capacity had to be available
	across our businesses, we are well positioned to capitalize on future of those prospects.
	Gross debt as on 30th of September was approximately Rs. 4,000 crores with gross debt to
	equities 0.76x. Net debt was Rs. 2,700 crores. A similar number for March 31, which is net debt
	was around Rs. 2,500 crores as on 31st of March 2023.
	With this, we would be happy to take our questions. Thank you.
Moderator:	We'll now begin the question-and-answer session. The first question is from the line of Jainam
	Ghelani from Svan Investments.
Jainam Ghelani:	I want to check on the ammonia facility that now you said that the last quarter, we had an impact
	on the stabilization of the plant to the tune of Rs. 87 crores that we have already taken a hit. Now
	with the gradual ramp-up of the facility, can you give us the update in terms of how the spreads
	are looking currently, given the gas prices contract that we have already entered?
Deepak Rastogi:	The way the ammonia prices are currently, and they are in the range of around 550, the spread
	is closer to, give or take, around $75 to $100 is the spread right now.
Jainam Ghelani:	But the $75 to $100 is including the benefit that we're getting from the government in terms of
	subsidy and the steam benefit?
Jainam Ghelani:	So that means equal to almost $150 to $160 of this that we could get it in Q3?
Deepak Rastogi:	Yes. closer to that.
Jainam Ghelani:	In terms of the capacity utilization, how shall one look for the second half in terms of the
	ammonia plant?
Deepak Rastogi:	We are already reach the 100% designed capacity. So, we think we would be around 90% to
	100% capacity utilized during the H2.
Jainam Ghelani:	Second question is on the TAN business. Now since that you have already indicated that our
	volume is growing in the TAN because of strong domestic demand, but there is a huge dumping
	by the Russia . I just wanted to understand whether we are getting any measures or the protection
	from the government and how shall one look in terms of the margin of the TAN business when
	the imports are continuing at such a high level?
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Deepak Rastogi:	So obviously, the margins are impacted to some extent. But generally, WAN prices move in
	tandem with the IPP prices of ammonia. Currently, they are not moving in tandem. We expect
	that things would basically move in tandem, and we expect that things may get better from where
	it is. But we'll have to wait and watch how do the actual year pans out.
Jainam Ghelani:	To assume that at least for the couple of quarters because the ag-chem prices are not moving in
	the line with the TAN prices, there could be a pressure in the overall chemical business margin
	for the second half?
Deepak Rastogi:	We basically expect some pressures, but we'll have to really wait and watch to see. But overall,
	we think, over a period of time, things will only improve but we'll have to really go through how
	the geopolitical scenario looks like and then take a call accordingly.
Jainam Ghelani:	The other question is on the fertiliser. Now we have almost taken Rs. 267 crores of the impulse
	of the reduction in the subsidy. Now in the last quarter, which we did of almost Rs. 106 crores,
	that includes the revised subsidy rate, right?
Deepak Rastogi:	Yes, that is correct.
Jainam Ghelani:	Sir, if we take it forward, assuming that there is no further reduction in the subsidy from the
	government and the fertiliser price remains steady at current level, is it fair to assume that our
	fertiliser business can generate near about Rs. 400 crores to Rs. 500 crores of the EBITDA on
	the quarterly basis?
Deepak Rastogi:	I will have to check and maybe come back to you on this.
Jainam Ghelani:	With the expansion that we are doing here it in terms of TAN and WAN, what will be our peak
	debt? and when could we see that number reaching in by FY2024-25?
Deepak Rastogi:	It depends upon what kind of growth projects we encounter. Predominantly, the only way I could
	answer is that we will be in comfortable position overall from a gross debt-to-equity perspective.
	As I said that we are comfortable right now, and we expect that we will be continuing to be in
	comfortable zone going forward.
Moderator:	Thank you. The next question is from the line of Nishit from Aequitas Investments. Please go
	ahead.
Nishit:	I wanted to understand that now since the TAN export ban is lifted, by when do we see the
	exports to start?
Tarun Sinha:	Yes, you're right, the export ban for ammonium nitric finally got lifted a month or 2 ago from
	now, which is a great news and currently, I think you must have picked it up for the information
	available on the public domain, that our company is going through some corporate restructuring
	and one of them has been the name change of our previous company, Smartchem, which used
	to house technical ammonium nitric business and fertiliser business to another company called
	Mahadhan Agritech Limited, which continues to house the same 2 businesses as we speak today.
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	As a result of this name change, the TAN business, which is a highly regulated business from a
	licensing perspective, is currently undergoing through some license transfers in terms of the
	name change from the previous company to the new company and we're expecting the final steps
	to be completed in that direction, hopefully, in this month. Once the license thing is transferred
	from old company to new company, all types of licenses of technical ammonium nitrate
	business, then we should be able to start exporting again.
Nishit:	My second question is that in this current quarter, the production of IPA was only 76%. Any
	particular reason for the lower production? and how do we see that going forward?
Deepak Rastogi:	Our capacity utilization for IPA is around 76%. If the demand continues, we would expect that
	it should improve.
Moderator:	The next question is from the line of Arvind from ValueQuest Investment Advisors Private
	Limited.
Arvind:	Few questions from my side, some of them have already come up. Now when we talk about the
	fertiliser subsidy going forward, this is obviously a backward-looking policy. So, is there a
	possibility that any more could be hitting us around this coming, the election time?
	And the second thing, that I would like to ask is, in some areas, we are talking about 118%
	capacity utilization. Some light on this, what does this mean? and whether can a plant operate
	like this for a long time, or then, how would it reflect on the operations of the plant as well?
Deepak Rastogi:	Subsidy part is difficult for us to predict anything, but we do not expect that any changes because
	this subsidy notification is applicable until March 2024 and hence, we are not expecting anything
	which will come in between.
	The other question is on the account of our TAN capacity utilization, which is predominantly at
	118% and obviously, we are taking steps to improve the capacity going forward till March and
	things like that and because we are debottlenecking it and hence, this position is going to improve
	going forward.
Moderator:	The next question is from the line of Deepak Poddar from Sapphire Capital.
Deepak Poddar:	I just wanted to have a few clarifications. Now the subsidy impact of the last 2 quarters that has
	come, the subsidy rate remains same there's no further impact, right? All the channel inventories
	impact has already been factored, right, in our P&L?
Deepak Rastogi:	Yes, that is correct.
Deepak Poddar:	You did mention that including the government benefit, at current price of $550, that is FOB
	Middle East price, right?
Deepak Rastogi:	That is correct.

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Deepak Poddar:	So blended price would be additional $100, that would be $650?
Deepak Rastogi:	That is correct.
Deepak Poddar:	Okay. So, we are getting about a spread of $150 to $160, the spread we are getting, including
	the government benefit, right?
Deepak Rastogi:	That is correct.
Deepak Poddar:	I just wanted to understand, because that effectively means it's utilizing fully, so Rs. 150 crores
	of benefit that we might get on assuming $150, on a quarterly basis from this plant?
Deepak Rastogi:	That is your estimation, obviously and we will have to go through the utilization over a period
	of time when we see how it actually pans out.
Deepak Poddar:	Utilization is 90 to 100, I'm assuming.
Deepak Rastogi:	Yes, but that is just a calculation.
Deepak Poddar:	I mean, this quarter, we had a lot of one-offs, right? If I adjust that one-off, our EBITDA would
	have been more than Rs. 500 crores and if I take the advantage of our ammonia plant - so just
	wanted to understand at the current prices, ammonia prices, what should be our steady-state
	EBITDA margin? I mean, would it be in more in the range of 20%, 22%? Because ideally, your
	EBITDA would have been more than Rs. 550 crores if this one-off would not have come, right?
Deepak Rastogi:	We are unable to give any forward-looking statements, so I will not be able to comment on this.
Deepak Poddar:	No, this is not regarding forward-looking statement. I'm just trying to understand at current
	ammonia prices, if this one-off would not have been there, so our steady-state EBITDA margin
	would have been in the range of 20% plus, right? I'm just trying to understand that point.
Deepak Rastogi:	You can add Rs. 87 crores, and I don't know whether you are adding subsidy. If you can add that
	number, it will be those are to around Rs. 417 crores.
Deepak Poddar:	And plus Rs. 87 crores, the impact will not come, right, because it was in stabilization ammonia
	plant?
Deepak Rastogi:	Yes. Looks like that, yes.
Deepak Poddar:	So that, also, we need to add, right?
Deepak Rastogi:	Yes.
Deepak Poddar:	Fair enough. I got it. When we say this benefit of ammonia plant spread, we have factored in the
	recent change of UMPP benefit to 100% from 75% of this greenfield project, ammonia?
Deepak Rastogi:	The answer is yes.

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Moderator:	The next question is from the line of Sharan, an individual Investor.
Sharan:	My first question is, historically, how has been the price of ammonia fluctuating? and when do
	you see you are getting the benefit from the new plant with respect to price getting increased?
Deepak Rastogi:	The ammonia prices, FOB Middle East, has been ranging from $250 to almost close to $1,100,
	and these are in U.S. dollars, FOB Middle East price.
Sharan:	What factors, does this price fluctuation impact? and from when do you see getting benefited
	and from what price onwards Deepak will start getting benefit of it? and when do you see it
	happening?
Deepak Rastogi:	So effectively, it also depends upon how the gas prices are moving up and down, so it is not a
	straight answer. But as I said, currently, we have a positive spread of around $100, $150 based
	on the current FOB Middle East, and that will change over a period of time based on how the
	global prices are moving up and down.
Sharan:	Other question is the new specialty chemicals for solar and the semiconductors. From when do
	you see those getting into production? and also, what do you see from, like, from next 1 or 2
	years, the revenue and the benefit from that, the profit?
Deepak Rastogi:	For solar, as we have communicated in our press release also, that we will be starting production
	from October of this year. As far as semiconductors are concerned, obviously, the market is still
	growing in India and it will take some time for us to get to a full-scale revenue level and for a
	solar perspective, since obviously, it's a forward-look statement, we will not be able to comment
	that how much and to the extent of the revenues, specifically for this particular request.
Sharan:	The other question on the same is, like, basically, are there any other producer who is producing
	a similar kind of chemical in India? and what's the total market size for that chemical, and what
	is going to be your share in that?
Deepak Rastogi:	Currently, to our understanding, there is nobody else who's actually doing this at this point in
	time.
Sharan:	Okay, and what's the market size for Deepak in that segment overall?
Deepak Rastogi:	So, we have just started that. We are talking solar grade. So, we have just started that and we are
	obviously landscaping because the solar markets itself is obviously in a nascent state and
	growing. We basically are doing our own market studies to figure out how much that market
	would be and how much we will play into that.
Sharan:	On the last question about the Pune real estate sale, just like noncore asset sale. Any update on
	that?
Deepak Rastogi:	As we have mentioned that we would be looking for such sale and take action, based on the
	Board approvals.
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