Tata Chemicals : TCL Q3FY23 Earnings call Transcript

Tata Chemicals Limited

Q3 FY23 Earnings Conference Call Transcript

February 2, 2023

Moderator:Ladies and gentlemen, good day and welcome to the Q3 FY23 Earnings Conference Call of Tata Chemicals Limited.

I now hand the conference over to Mr. Gavin Desa from CDR India. Thank you, and over to you, sir.

Gavin Desa:Good day and thank you for joining us on Tata Chemicals Q3 FY23 Earnings Conference Call.

We have with us today Mr. R. Mukundan - Managing Director and CEO, Mr. Zarir Langrana - Executive Director, and Mr. Nandakumar Tirumalai - Chief Financial Officer.

Before we begin, I would like to mention that some of the statements made in today's discussions may be forward-looking in nature and may involve risks and uncertainties.

I now invite Mr. Mukundan to begin proceedings of this call.

R. Mukundan: Good day, and welcome everyone to our quarterly earnings call. I am joined by my colleagues, Mr. Nandakumar Tirumalai - CFO and Mr. Zarir Langrana - Executive Director.

I will start the discussion with a few key highlights, following which I will request Nandu to walk you through the financial performance.

During the quarter, the operations were steady. The US which had some elongated shutdown last quarter has returned to the normal production run rate. Revenue and profitability were robust, with better realizations compared to Q3 of last year.

Overall, demand for soda ash continues to be resilient, and we believe the market to remain balanced, with a bias towards increasing demand, especially with the reopening of China and newer glass applications. Point to be added here, the Chinese inventory is at an all-time low of 2.8 lakh tonnes, unusually low figure. Hopefully, this will catch up and normalize, but that's the current state of one specific geography.

Page 1 of 13

Rest of the geographies are balanced, with India having some winter type slowdown, but we expect the overall demand to pick up fully . We expect further tightening as we move forward.

Costs are under control, in a sense that the prices of most of the input materials and energy are very stable. They are not increasing anymore, and some of them are beginning to trend down a little bit.

There are few non-operationalone-off items during the quarter by which the PAT was impacted even though EBITDA has been almost at the same level as last quarter, which is why we have indicated a normalized EBITDA, and Nandu will share the specifics of this, and these were flow through from our joint ventures.

Our expansion projects are on schedule. Our contracts for 2023 have been finalized right up to December 2023, and the impact of those contracts and the contracting arrangements will be seen at the end of the Q4 results. While we will not be making any forward looking statement, we can indicate that all our capacities are more or less booked and we are fully able to service our customers.

I now hand over the floor to Mr. Nandakumar who will take you through our financial performance.

N. Tirumalai: Thank you Mukundan and good morning everyone.

If you look at the numbers for the quarter, we had a good quarter. The revenue for the quarter was at Rs. 4,148 crore, a 32% growth over last year's Q3. The growth was broad based, with all the businesses and geographies performing well. EBITDA grew by 69% standing at Rs. 922 crore for the quarter. EBITDA margins were at 22%, which was 17% in the same quarter last year.

Moving on to individual businesses:

Starting with India; revenues for the quarter were at Rs. 1,218 crores, higher by 31% compared to last year's Q3. Growth was supported by higher realization as compared to last year's Q3. The PAT for the current quarter was lower than last quarter's PAT on 2 factors; one was in terms of Q2 in India, we had dividends coming from investments, which mainly came in Q2, and did not come in Q3. We also had a one-off kind of tax refunds coming in Q2, and not in Q3. These 2 factors led to the quarter-on-quarter PAT coming down, while EBITDA is almost on par with the last quarter.

The US maintains momentum with revenue and volume growth of 48% and 4% respectively for the quarter. Q3 witnessed volume growth over Q2 as well. We had shutdowns in Q2 in the US for some days. We made up for that in Q3, with higher volumes compared to Q2. The EBITDA margins were around 25% as compared to 15% in the last year's Q3, due to better operational efficiencies. We also prepaid $65 million of loans in the last 9 months' time.

Coming to the UK, we have been able to perform well, with revenues improving by 34%. While the uncertainty with regards to energy prices remain, we are undertaking steps towards rationalizing our costs and improving the overall efficiencies.

As far as Kenya is concerned, business did well and had another quarter of good performance, with both revenue and profits having good growth over previous year,

Page 2 of 13

and I am also happy to say that for the first time Kenya is debt-free. We prepaid all debts in the last 9 months' time.

Regarding Nutra and silica, silica operations are at an optimal level, and we are working towards increasing the capacity to better meet growing customer demand with better engagement. For Nutra our efforts are focused on acquiring customer approvals and increasing installation at the existing unit.

As far as Rallis is concerned, the Q3 was largely impacted due to the seasonality of the business. Management has continued its efforts on improving the product mix and cost efficiencies and widening the distribution reach.

As Mukundan mentioned, there were a few one-offs in the quarter, I just talked about that for standalone financials. In Q3, we had, as I explained earlier, India had the dividend income and the tax refunds in Q2, not coming in Q3. Apart from that, in Q3, there was a particular JV loss in the quarter. We have 2-3 JVs, one is in Morocco, one is Tata Industries. Overall, for the quarter, in the case of Morocco, the selling prices have come down as compared to last year's Q3. Last year had a very good pricing of phosphoric acid. So quarter on quarter or quarter over last year's Q3, the prices were lower, leading to a loss in Morocco in Q3.

We also had a one-off impact in Tata Industries' and the loss on account of this was booked in Q3. We don't expect this to continue in future in terms of the Tata Industries We expect to return to the normal numbers going forward.

On a consolidated basis, we had Rs. 2,119 crore of cash at the end of December, majority in India and the US and Kenya. The net debt was at Rs. 4,357 crore. During the year, the gross debt was lower due to debts being prepaid, and around 15% of debts have been prepaid during the current year.

Our consolidated CAPEX was Rs. 445 crore for the quarter and around Rs. 1,200 crore for 9 months ended.

With that, I will close my comments and hand it back to the moderator to open up for the Q&A. Thank you.

Moderator:The first question is from the line of Sumant Kumar from Motilal Oswal.

Sumant Kumar: My question is regarding soda ash business in India. We have seen a volume of 156,000 metric tons and a similar kind of volume was in Q2, and Q2 had a production loss because of plant shutdown. What was the key reason we are not showing the momentum what we have shown in FY21, even FY22 of a range of 170,000 to 178,000 or 180,000 metric tons?

R. Mukundan: India volumes largely, we do not see any issue in terms of demand in the market. As I mentioned, there have been some pockets where there has been a bit of a slow pickup in the marketplace and additional imports which have come in during this quarter. But as such, if you look at the overall picture and leave the quarter-on- quarter movements aside, whether it is 10,000 more or 20,000 less, and look at the overall numbers, globally, the inventory levels are low because the biggest producer, their inventory levels are low in China. We expect this one-off imports which had come in and also one-off softness in some of the markets, especially with respect to the dyes and pigments which saw some export markets taper off, to correct itself through demand from other segments, especially glass and detergents going forward.

Page 3 of 13

Sumant Kumar: My second question is, when we are talking about recession in the developed countries, the US and Europe, and if the demand is going to decline from here - we are talking about a favorable demand-supply scenario; in that case, whatever scenario currently we have, do you think with the recession, whatever consumption we have of 60 million tonnes, there might be some decline and then there will be a pressure on the margin side in the soda ash? Whatever golden period we are seeing, there might be some pressure on that side?

R. Mukundan: Actually, we are seeing the reverse. We are seeing the opening up of China. I think we are going to be short of materials. There is no recession, at least signs of recession, in the US. The demand is continuing to be strong. Even market like the UK which has seen very high gas prices, we are fully booked, and our customers have actually contracted fully with us. Kenya is fully sold out, where we are not seeing any signs of recession, especially because Kenya exports mostly to India and ASEAN. We have a good amount of understanding of what's happening in markets. The current situation we are seeing is with China which is not fully yet coming back on-stream. In fact, if China does come fully on-stream, which we expect will happen, there is going to be much more demand. On top of that, I think India is going to have at least 3 additional solar glass lines and China is going to launch about 4 to 5 solar glass lines in the intervening period.

I would say, while there is a talk of recession, we are not seeing recession signs in our demand pattern. And, in any case, we are prepared for any sort of eventuality. The only thing we can control is our costs. So, we are extremely agile and extremely cost-focused, which we do in any case. In terms of the market side, we have not seen any adverse signs.

Moderator:The next question is from the line of Abhijit Akella from Kotak Securities.

Abhijit Akella: Just a couple of questions, one is on the India EBITDA numbers for the stand-alone India operations. We are still significantly lower than the high watermark that we reported for the June quarter, which was about Rs. 398 crore of EBITDA from India. We are still at below Rs. 300 crore for the second quarter running, whereas one of our leading peers in India has actually reported more or less stable numbers for the last 3 quarters. If you could please just shed some light on what might be happening there?

R. Mukundan: As far as we are concerned, most of our input costs, basically, coal, coke, or limestone, in quarter 1, there would have been inventory of the previous year's purchases and fresh inventories would have come in in the current Q2 and Q3. We don't see any major shift in the cost structure which is remaining more or less stable. I don't want to comment about somebody else. I can only say that we are operating at optimum levels at the current kind of operations. And if at all going forward in the next fiscal year, some of these costs will ease because we are seeing signs of that happening.

Abhijit Akella: Just to understand, should we take this quarter's run rate as a normal number for the India business or should we expect to sort of trend back towards the June quarter numbers gradually?

R. Mukundan: I cannot say beyond the point that as input costs come down, it would go back to probably to June, but I think that is the process which will happen. You can monitor the coal prices as much as I can monitor.

Page 4 of 13

Abhijit Akella: The only other thing I just wanted to check about was, while you did mention that we will be able to provide some flavor on the US contract re-negotiations only by the end of this quarter, the news reports out there do seem to indicate that the kind of price increases that have been witnessed in the US domestic market are at all-time high levels. Any color you could provide there, at least qualitatively, in terms of whether it has been a satisfactory contract renegotiation season for yourself and the industry?

Zarir Langrana: I think broadly, your comment is correct. All new contracts that were entered into - or in our case, all have been entered into - are at significantly higher pricing.

Moderator:We will move to the next question from the line of Rohit Nagraj from Centrum Broking.

Rohit Nagraj: The first question is on Kenya performance, if we look at QoQ performance, the EBITDA is down by about Rs. 10 crore, but the PAT is down by almost Rs. 45 crore. Any particular reason? And you also alluded to the fact that we have prepaid the debt. So, probably the interest component also must have been lower?

N. Tirumalai: Rohit, in terms of Kenya, Q3, we had a higher tax provisioning, because the year is looking good. That extra tax provisioning was made in Q3. That's why the PAT was lower than Q2.

Rohit Nagraj: And the second question is particularly in terms of India demand. Was there any weakness in Indian demand during Q3 particularly, because the volumes on a QoQ basis have been flattish? And how are we looking at when we have entered into Q4?

R. Mukundan: I already clarified, that in India, firstly the pigments and dyestuff sector, which takes a bit of soda ash, had export headwinds, and that has been widely reported even in the media. That has impacted a bit of the demand. Also, some imports did come in in the intervening period, which I think was a one-off. We don't expect the level of imports with the kind of inventory levels which are in China. So, I don't think that is going to continue. This was a one-off issue and which has led to a bit of inventory buildup in India, which will smoothen out as we go through the year.

Moderator:The next question is from the line of S. Ramesh from Nirmal Bang Securities.

S. Ramesh:If I were to understand the UK performance, they are going from strength to strength. The question is, how much is this pricing power sustainable, and is it some kind of a structural turnaround we are seeing in the UK? And the second thought is, if you can share some numbers in terms of the India consumption for the quarter for the industry in soda ash, and how you see this consumption growing, say, in the next 2 years in India? And if you can put some percentage growth numbers for the global consumption, that will be useful.

R. Mukundan: The growth rate in India, broadly, we are expecting to be in the range between 5.5% to 6.5%, especially on the back of some of the new lines that are coming on-stream. And overall, globally, it should be anywhere between 2% to 3% growth rate. That's really the broad number; because some parts of the world will probably just stagnate, will not grow that much, but other parts like Asia and Africa will continue to grow in a good way.

As far as the UK is concerned, just to give a color on what kind of contracting has been entered we have entered for next year, is what is known as fixed margin contracts. So, we will have margins which will be protected in the next year. This year, it was a bit of an open contract which was linked to energy costs. Next year,

Page 5 of 13