DEEPAKNTRNSEQ4 & FY 2022May 5, 2022

Deepak Nitrite Limited

9,780words

85turns

12analyst exchanges

4executives

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Management on call

Akul Broachwala Limited

IIFL SECURITIES

Maulik Mehta

EXECUTIVE DIRECTOR &

Sanjay Upadhyay

DIRECTOR, FINANCE &

Somsekhar Nanda

DEPUTY CHIEF

Key numbers — 40 extracted

56%

Russia-Ukraine war. We ended this year on a high note, with consolidated revenue increasing by 56% year-on-year basis accompanied by 37% year-on-year growth in PAT. Reflecting on the Company’s ste

37%

ear on a high note, with consolidated revenue increasing by 56% year-on-year basis accompanied by 37% year-on-year growth in PAT. Reflecting on the Company’s stellar performance, the Board of Directo

Rs. 7

lecting on the Company’s stellar performance, the Board of Directors declared a final dividend of Rs. 7 per equity share on face value of Rs. 2 per share. This is notably higher than dividends declared

Rs. 2

ance, the Board of Directors declared a final dividend of Rs. 7 per equity share on face value of Rs. 2 per share. This is notably higher than dividends declared in the previous year. As a result, the b

Rs. 440 Crore

n the domestic market as well as specific export markets. Now, domestic business revenue stood at Rs. 440 Crore in Q4 FY22 resulting in a 47% growth year-on-year. While the export revenues came in at Rs. 310

47%

c export markets. Now, domestic business revenue stood at Rs. 440 Crore in Q4 FY22 resulting in a 47% growth year-on-year. While the export revenues came in at Rs. 310 Crore in Q4 FY22 compared to Rs

Rs. 310 Crore

440 Crore in Q4 FY22 resulting in a 47% growth year-on-year. While the export revenues came in at Rs. 310 Crore in Q4 FY22 compared to Rs. 227 Crore in the previous year, higher by 37%. On a consolidated level

Rs. 227 Crore

7% growth year-on-year. While the export revenues came in at Rs. 310 Crore in Q4 FY22 compared to Rs. 227 Crore in the previous year, higher by 37%. On a consolidated level, domestic to export mix stood at 80:

66%

80:20 in Q4 FY22. Now moving to our segmental performance. The basic intermediate segment grew by 66% driven by numerous debottlenecking exercises and capacity augmentation initiatives undertaken in

10%

A without losing wallet share for all key accounts. Fine & Specialty Chemicals segment reported 10% revenue growth. The performance was propelled by strong demand and an appealing product lineup th

74%

intained all grown wallet shares. Performance products segment reported healthy revenue growth at 74% in FY2022 driven by positive demand trends for key products resulting in a sharp rise in volumes

68%

erto untapped. Deepak Phenolics (DPL) delivered an outstanding performance with revenue growth of 68%. While EBITDA expanded by 35% year-on-year translating into a PAT expansion at 48%. This was ac

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Guidance — 20 items

Maulik Mehta

opening

“This growth trajectory we anticipate will be sustained across all strategic business units supported by additional capacity and buoyant demand from end-user industries.”

Maulik Mehta

opening

“This is the nature of the business, and we expect to see positive impact of this pass on in this quarter and the next.”

Maulik Mehta

opening

“As a strategy reset, going forward the Company will increase its focus on annual and multi-year contracts signed up with leading customers who continue as I mentioned earlier to have a high dependence on Deepak and in every case as we have maintained all grown wallet shares.”

Maulik Mehta

opening

“We have also commenced on the expansion project across segments approved by the Board of Directors aggregating to some Rs.”

Moving to our segmental performance

opening

“In the future, interest rates will be significantly reduced as a result of this.”

Naresh Vaswani

“1,500 Crore, if you can give a break-up between the projects and what are the timelines and the revenue that we expect to generate out of this over the next two years?, Secondly, can you give some color on what steps you have taken internally to mitigate the current environment especially the volatility in all the cost items which one is witnessing, so what all steps have we taken over last six months which has helped us perform reasonably well in this quarter?”

Maulik Mehta

“50 Crore each, those will be separate, and they are not announced like this.”

Maulik Mehta

“Anyway, so this happens and as we said earlier by and large the project execution is on track.”

Maulik Mehta

“Now of course you have events that can derail this, for example what we faced in the last couple of months was a semiconductor chip shortage otherwise the project that we are looking at commissioning in the next month or two months would have been commissioned as we speak.”

Maulik Mehta

“With regards to your third question about what we are doing in order to manage our short-term and medium-term supply chain is, we are working with key suppliers not only in India but worldwide to ensure that our supplies are coming in index linked pricing with certain volume commitments coming from the hub where we are able to leverage our positive cash flows into being able to get discounts against payments made upon delivery of the raw materials.”

Risks & concerns — 11 flagged

The DNL team is delighted to inform you that the Company has reported its highest ever revenue, EBITDA and PAT despite facing the kind of challenging macroeconomic environment that you have been hearing so much about, driven by a volatile raw material environment, higher crude prices, and supply uncertainties, which have been further accelerated by the ongoing Russia-Ukraine war.

— Maulik Mehta

This is the nature of the business, and we expect to see positive impact of this pass on in this quarter and the next.

— Maulik Mehta

During the quarter, DPL commissioned its new captive power plant as well as its second IPA plant, which will all contribute towards higher plant efficiencies as stable and assured power supply will enable us to plan production schedules better without running the risk of cost and repairs and maintenance coming from shutdowns.

— Maulik Mehta

If this is margin compression, what is the target margin that one should look at.

— Maulik Mehta

Today, we are operating in such a volatile situation.

— Sanjay Upadhyay

There are many more learnings here on supply side also because dependence on one supplier is actually very difficult today because anything that happen to them.

— Sanjay Upadhyay

My first question is you talked about the pricing dynamics on the RM front, how about the demand dynamics, are we seeing any kind of slowdown in any of the segments now because of several issues like geopolitical issues, high energy prices, logistic cost, so is there any demand side setback that we are observing currently or how the things are moving across our segments if you could just share a broad perspective?

— Rohit Nagraj

Now they are hoping for the situation to normalize but until it does not, they continue to buy from us, there is a small risk that they have shared with us that the situation could get worse although more and more it seems like Europe is becoming a little bit more resilient than it was, they are not in a position today where they can give us that level of confidence and commitment and we appreciate that they are telling us this transparently well ahead of time.

— Maulik Mehta

But in this kind of volatility it is really, really even claiming safe harbor is very difficult to give you any sort of confident answer.

— Maulik Mehta

I said in the first remark itself that we will continue to grow margins because the availability of raw material is volatile, and it can happen, but you cannot lose your customers, you cannot lose your market share, so these are all very important for us, there could be 1% or 2% margin here and there that is a different thing, so growth remains a focus no doubt on that, but if it absolutely reduces margin that is a different thing.

— Sanjay Upadhyay

No actually the reason I ask is because at least my better understanding is that the fluorination business having access to the raw material is a bit of a challenge, it is a fairly in concentrated sort of part of the market to get the raw material which is why I asked that question?

— Madhav Marda

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Q&A — 12 exchanges

Congratulations on decent set of numbers in the current environment. Two questions, first on the CAPEX of Rs. 1,500 Crore, if you can give a break-up between the projects and what are the timelines and the revenue that we expect to generate out of this over the next two years?, Secondly, can you give some color on what steps you have taken internally to mitigate the current environment especially the volatility in all the cost items which one is witnessing, so what all steps have we taken over last six months which has helped us perform reasonably well in this quarter?

Maulik Mehta

I can answer this question, but first of all this was also the most despondent sounding congratulations. Nonetheless, I will try to answer. Now, as we have mentioned earlier Rs. 1,500 Crore of CAPEX is what has already been announced and that is spanning across products that are into the life sciences space from Deepak Nitrite’s downstreams as well as from Deepak Phenolics. So, there is some amount of investment here which will go into downstream of phenol and acetone which would go into the advanced solvent space, and Deepak Nitrite which would go into the agrochemical and pharmaceutical spac

First of all, a great set of numbers given the situation and a follow-up to the previous question because of the peculiar situation that inherited in the last few months, your profit growth has lagged behind your revenue growth, now if you were to give some kind of broad guidance in the future when do you think that this trend is likely to reverse, do you think it will take a couple of quarters for us before this happens, can you just give us a flavor of when operating leverage as we understand it will really kick in to give a profit?

Maulik Mehta

I feel this is really a situation where I do not really know what to say because even with what you call profit lagging in comparison to revenue growth, I think we have over the last couple of years set new standard with regards to the kind of EBITDA margins and bottomline as a percentage of topline and yes there will always be some movement up or down, but the reality of this is that with the kind of critical cost increases that we are seeing just to give you a couple of glimpses, ammonia which is normally being bought at Rs. 26 I remember that my procurement person came to me about six month

Congratulations for the healthy show. I have two questions, so first is last two years have been very eventful for us, 2021 being a demand-led problem and 2022 being a supply-led problem, but if I can ask from Deepak’s point of view what were the key learnings and the opportunities with reference to probably products or the processes and the cost savings which now, we can say that it has become permanent for us and can create a base for us for our future growth so this is question number one?

Maulik Mehta

One thing that we have learned which I think I hope that a lot of other companies in our space are also learning is in the past, we have always focused on things like raw material costs and consumption norms and these things. Never really focusing so much on things like freight costs or packaging costs and these things, because they were always seen early on the 3%, 4%, 5%, 6% at the bottom of our total cost side whereas nowadays this has increased substantially for most chemical manufacturers and has actually become a major cost center. So we have to see what we can do to really invest in the

Maulik Mehta

A couple of products that we are seeing is while in general the demand is good, but for a couple of products what I can tell you is that customers are unwilling to give us long-term visibility what they would earlier give for a minimum of six months, one year now they are only giving us for like monthly or three monthly or things like that because they are seeing a severe volatility in their environment, so today the demand is good but let us remember that many of our customers also require key co-products that come from China or other parts of Europe which may be severely affected with energy

Congratulations to the entire team for ending the year on such a strong note with robust revenue growth and fair market share growth despite facing a challenging macro environment. My question is specifically, if you simply assume that raw material prices are going to stay limited at this point of time and at least over the medium-term do you intend to continue being largely focused on growth with some hit on margin or we intend to focus on growth in a measured manner while towards higher margin this is my first question?

Maulik Mehta

This answer is different for products that we are getting into which are Greenfield products and different for products which we are already well entrenched in. Raw material cost is at an all- time high right now, but at the same time, we are seeing certainly a level of improvement right now which is not on prices but which is with regards to availability and normally what we see is availability improvement precedes price improvement, nonetheless our focus will always be on ensuring that we continue the quality of relationship that we have with our key customers who have remained on this journ

Just one question on the phenolics business, so wanted to understand as we can see, consistently the margin of phenolics business is normalizing so just want to check if we are satisfied with the last two quarters EBIT margin run rate or do we see any scope for improvement from here on assuming all the cost pressures gets normalized, so just wanted your comment and how do you see this margin in your phenolics business?

Maulik Mehta

You are asking us if we are satisfied, I can tell you that we are always satisfied and we are never satisfied. There are opportunities to improve in this case, most of that comes from further tweaking our operational excellence that is already a very strong forte. Nonetheless, phenol as a business, the demand for the product is good, it continues to be strong, but is very significantly affected by raw material prices which are of course petrochemicals as well as energy prices which come from coal and electricity. So, while coal and electricity are challenging is there what we can tell you is t

I have a couple of questions. First question is does any of our products have application in making batteries used in the e-mobility or maybe forward products or anything?

Maulik Mehta

No but this industry which is nascent in India has a lot of utilization of processes which we are very competent in, for example hydrogen reduction, for example nitration and moving forward is certainly not something that we have a high level of competence in, but we will work towards developing our competence in fluorination as well, but this is still a nascent market in India and as it grows we will be looking at it with interest to see whether there is a role that Deepak can play. Balkrushna Vaghasia: With regard to epoxy (the adhesive products), how much of this demand may be attributed to

Congratulations on a good set of numbers. My question was, given that you already have at a consolidated level a net debt free balance sheet, why would the Company consider a QIP and sort of what would be the use of proceeds that you are envisaging for that?

Sanjay Upadhyay

We have plans, see that is why we are waiting to let market settle down but we have definite plans, of course our balance sheet is strong, our cash flows are strong, but no harm in making it stronger so if you have a war chest as somebody was mentioning is the right opportunity of inorganic growth or is right opportunity to provide with a major expansion, you are ready you cannot go into the market when you need funds you have to have war chest ready to go and expand or set up a Greenfield facility, so this is just foray, it is so much stronger balance sheet what we are creating and in particu

The update on the commissioning timeline for downstream project of Rs. 700 Crore as well as Rs. 300, 400 Crore of specialty chemical project, by when are these expansions to be commissioned and will it be in a phased manner?

Maulik Mehta

We have already addressed that question. There will be one commissioning that happens in the next month or two months. There will be more that, it will be commissioned over the next between 9 to 12 months and then there will be some more, that will be commissioned at a longer time like that maybe between 18 to 20, 24 months and in the interim, if there are opportunities and there are certain capexes that we are already executing which are smaller capexes which are more Brownfield related but the ones that I have mentioned are more Greenfield. Which project is immediately getting commissioning

I just wanted to ask you something on your fluorination project, do I understand this fluorination correctly, where you are targeting to enter first, will it be more in agrochemical space or in pharma space or in something else?

Maulik Mehta

See the bulk of the project is focused on the agrochemical space; however, there are assets included in it which are multi-purpose which will service some pharma applications; however, if we look at it, it is biased towards agrochemical, both agro and pharma form part of what we call life sciences as a space and so these are products like a lot of Deepak’s products, they have multiple end applications but the fastest growing ones today certainly are agro and a little bit of pharma. So, by when do you expect this project to get commission, any timeline? 9 to 12 months. Maybe you would have said

I just had a quick question on the fluorination project that we are undertaking, given that in India there are a few players which are backward integrated in the fluorine value-chain how does our competitiveness stand versus them as they also address agrochemical as an end market in a good way, so just wanted to understand is it a different product portfolio or do we have a different kind of processed chemistry that we are doing here just wanted to understand that?

Maulik Mehta

No, I think we would compare quite well. So what we are looking at is manufacturing as phase one from these products are ones where we have a strong degree of competency in processes beyond fluorination and the investments that we have made, we are confident about maintaining the kind of the financial targets that we put for any other business which would not be fluorination, so if you were to invest in nitration or reduction or diazotization, etc., we would have the same kind of targets that we have here and we are confident about being able to achieve them. So, while there are other players

I would like to thank the management team for taking the time to participate on this call, and I would also like to thank all the participants for joining in. Thanks again and with that, we conclude this call. Thank you so much.

Maulik Mehta

Thank you everybody. The transcript has been edited for clarity, but it may contain some transcription errors. The Company takes no responsibility of such errors, although an effort has been made to ensure high level of accuracy.

Speaking time

Maulik Mehta

Moderator

Sanjay Upadhyay

Andrey Purushottam

Madhav Marda

Nirav Jimudia

Samir Palod

Saurabh Kapadia

Reena Shah

Akul Broachwala

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Opening remarks

Akul Broachwala

Good afternoon, everyone and thank you for joining us on Deepak Nitrite’s Q4 & FY2022 earnings conference call. Today we have with us Mr. Maulik Mehta – Executive Director & CEO, Mr. Sanjay Upadhyay – Director, Finance & CFO and Mr. Somsekhar Nanda – Deputy CFO. We will begin the call with opening remarks from the management team followed by an interactive Q&A session. At the outset, I would like to clarify that certain statements made or discussed on the conference call today may be forward-looking in nature and a disclaimer to this effect has been included in the investor communication shared with you earlier. To begin with, Mr. Maulik Mehta will share his views on the operating performance and the growth plans of the Company followed by Mr. Sanjay Upadhyay who shall take us through the financial and segmental performance. The results documents have been shared with you earlier and also have been posted on Company’s website. I will now invite Mr. Mehta to share his opening comments.

Maulik Mehta

Good afternoon, everybody and warm welcome to you on Deepak Nitrite’s Q4 & FY2022 earnings conference call. It feels pretty good to be speaking without a mask on for the time being. We have shared our results documents and I hope you have had the opportunity to glance through them. Given the developments of the last few quarters and the Russia Ukraine conflict since February, we have witnessed an increasing amount of disruption in the global supply chain for crude oil, fertilizers and also specialty chemicals. In many cases we have seen the supply chain is not just stretched but, in some cases, broken as well. As major consumers work on building alternate supply networks, the focus is on partnering with world class players with integrated business models who are positioned with the assured supply of key inputs. Deepak is well placed in such a scenario and our outreach with the ‘Depend on Deepak’ message has resonated extremely well with our prospective customer base. In this backdrop,

Sanjay Upadhyay

Thank you, Maulik. Good afternoon, everyone and thank you for joining us today on this call. I will walk you through the highlights of the financial results for the quarter and year ended March 31, 2022. During the quarter under review, the Company witnessed volume gains across most of the products signaling a solid recovery. Capitalizing on the uptick in business growth and strategic efforts to elevate operations, the Company reported buoyant performance. Standalone revenues expanded to Rs. 759 Crore in Q4 FY2022 while EBITDA came in at Rs. 213 Crore translating to EBITDA margin of 28%. PBT stood at Rs. 194 Crore, while PAT came at Rs. 143 Crore in Q4 FY2022. On a consolidated basis, revenue grew by 28% to Rs. 1,876 Crore in Q4 FY2022 owing to a combination of high utilization level and focused pricing. This has enabled Company to report highest-ever annual turnover of Rs. 6,845 Crore, EBITDA was at Rs. 414 Crore in Q4 FY2022 lower by 10% year-on-year and higher by 10% quarter-on-quar

Moving to our segmental performance

Basic intermediates reported revenues of Rs. 399 Crore in Q4 FY2022, up 63% from Rs. 245 Crore in Q4 FY2021. The Company’s performance was supported by debottlenecking and capacity augmentation in key products in BI segment, which enabled it to increase volumes towards the second half of the year. EBIT increased by 37% to Rs. 97 Crore with EBIT margin of 24%. Fine & Specialty Chemicals segment revenue grew by 14% to Rs. 235 Crore in Q4 FY2022 as compared to Rs. 207 Crore in Q4 FY2021. EBIT was lower by 4% to Rs. 77 Crore with EBIT margin of 33%, this was partly because of the higher realizations which were abnormal in the last year. Performance Products segment reported revenue of Rs. 161 Crore during the quarter under review compared to Rs. 87 Crore in Q4 FY2021 representing a growth of 85%. EBIT improved manifold to Rs. 40 Crore with EBIT margin of 25%. Deepak Phenolics registered a solid performance where revenue grew by 20% to Rs. 1,122 Crore in Q4 FY2022 versus Rs. 938 Crore in Q4

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