DEEPAKNTRNSEQ1 & FY 2023August 10, 2022

Deepak Nitrite Limited

8,235words

127turns

13analyst exchanges

4executives

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Management on call

Maulik Mehta

EXECUTIVE DIRECTOR & CHIEF EXECUTIVE OFFICER, DEEPAK NITRITE LIMITED

Sanjay Upadhyay

DIRECTOR – FINANCE & GROUP CHIEF FINANCIAL OFFICER, DEEPAK NITRITE LIMITED

Somsekhar Nanda

CHIEF FINANCIAL OFFICER, DEEPAK NITRITE LIMITED

Ranjit Cirumalla

IIFL SECURITIES LIMITED

Key numbers — 40 extracted

40%

owth, both topline and bottom-line through the Company. The heartening part is, we at DNL, almost 40% of our top line has been contracted and at Phenolics, 20% to 25% of the topline has been in con

20%

e heartening part is, we at DNL, almost 40% of our top line has been contracted and at Phenolics, 20% to 25% of the topline has been in contractual agreements. Deepak Nitrite has deli

25%

ening part is, we at DNL, almost 40% of our top line has been contracted and at Phenolics, 20% to 25% of the topline has been in contractual agreements. Deepak Nitrite has delivered a

Rs. 2,000 crore

rmance in Q1 to kickoff fiscal 2023 on a positive note. On a consolidated basis, revenues crossed Rs. 2,000 crore, specifically, it was Rs. 2,068 crore up by 35% year-on-year and 10% quarter-on-quarter. This was

Rs. 2,068 crore

positive note. On a consolidated basis, revenues crossed Rs. 2,000 crore, specifically, it was Rs. 2,068 crore up by 35% year-on-year and 10% quarter-on-quarter. This was achieved despite the Nandesari unit o

35%

consolidated basis, revenues crossed Rs. 2,000 crore, specifically, it was Rs. 2,068 crore up by 35% year-on-year and 10% quarter-on-quarter. This was achieved despite the Nandesari unit of Deepak N

10%

revenues crossed Rs. 2,000 crore, specifically, it was Rs. 2,068 crore up by 35% year-on-year and 10% quarter-on-quarter. This was achieved despite the Nandesari unit of Deepak Nitrite being unavaila

Rs. 366 crore

their availability as well as elevated utility and transport costs. In Q1 FY23, EBITDA stood at Rs. 366 crore translating to an EBITDA margin of 18%. There was a one-off impact from the fire incident, it mus

18%

and transport costs. In Q1 FY23, EBITDA stood at Rs. 366 crore translating to an EBITDA margin of 18%. There was a one-off impact from the fire incident, it must be appreciated that we are function

Rs. 1,687 crore

cturally elevate profitability. On the operational front, our domestic business revenues stood at Rs. 1,687 crore in Q1, higher by 46% year-on- year. Export revenues came in at Rs. 371 crore in Q1. On a consolida

46%

n the operational front, our domestic business revenues stood at Rs. 1,687 crore in Q1, higher by 46% year-on- year. Export revenues came in at Rs. 371 crore in Q1. On a consolidated level, domestic

Rs. 371 crore

s revenues stood at Rs. 1,687 crore in Q1, higher by 46% year-on- year. Export revenues came in at Rs. 371 crore in Q1. On a consolidated level, domestic to export mix stood at 82:18. Our focus on domestic busi

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Guidance — 20 items

Maulik Mehta

opening

“As we have already explained to you, we are at various stages of project implementation, out of the projects that we have announced of Rs.”

Maulik Mehta

opening

“In addition, three products are in the engineering phase, which means they are past the piloting phase, which will be downstream products or something that DNL and DPL make.”

Maulik Mehta

opening

“We will be able to take advantage of this trend attributable to a promising pipeline of products, which also includes solvents like MIBK and MIBC amongst others, which have already been approved.”

Maulik Mehta

opening

“So, this is what we would look at as a pretty challenging situation, which we expect to be very short-term.”

Sanjay Upadhyay

opening

“However, we have a formula-based pricing, and these costs are passed on, but there will be some lag somewhere.”

Nirav Jimudia

“So, would it be next year we will get the benefits of this projects getting commissioned or would it be in the year after that?”

Maulik Mehta

“They will be commissioned in a phased manner between now and the next 15 months.”

Nirav Jimudia

“We have also mentioned in the AGM, that we are going to increase our Phenolics capacity by 25% probably which will come up in next year.”

Maulik Mehta

“But anyways, the margin hopefully will start to strengthen in the near to medium-term, because we are seeing a decrease in the price of raw materials.”

Maulik Mehta

“So, this was already asked basically, while the capacity does stand at like what, 250,000, this is part of the process, our original capacity was less than that and taking it to 250,000 and then further on adding maybe about 15,000 to 20,000 over and above that will be done in short course.”

Risks & concerns — 14 flagged

Foreign exchange rates, as that also was very volatile during the quarter.

— Sanjay Upadhyay

Given the normalizing spread across the key products combined with inflationary pressures, as well as some operational and logistical challenges, the margin has undoubtedly faced pressure with the Company reporting an EBITDA margin of 18% during the quarter.

— Sanjay Upadhyay

During the quarter, currency rate was highly volatile, fluctuating by 5.33% highest being 79 and lowest being 75.

— Sanjay Upadhyay

In order to lower the risk of foreign exchange volatility, the Company uses dynamic hedging measures, which resulted in exchanged gain of Rs.

— Sanjay Upadhyay

Breakup would be difficult to give, because it is set up on the new site and it includes infrastructure also.

— Sanjay Upadhyay

And they have already started to soften in line with prices of crude that we see.

— Maulik Mehta

So, my question is since we are projecting that the prices of raw materials may soften from here on.

— Isha Agarwal

So, do we see the risk of inventory loss?

— Isha Agarwal

So, while they can manufacture the base products that we are tying up immediately, they also have the capability to manufacture far more complex molecules, which require very different environment, whether it is in kind of pressure or temperature or material construction.

— Maulik Mehta

We have some impact of fire because Nitrite is not running at full capacity as Maulik explained in his speech.

— Sanjay Upadhyay

So, we continue to be present in the market as customers and we see what we can do to de-risk ourselves internally as well.

— Maulik Mehta

So, in India, which is largely dictated by end segments like construction, infrastructure, pharma, auto, there is certainly the visibility of reasonable demand resurgence, because the last couple of years were more uncertain with things like COVID and global uncertainties, but in India, by and large, there is generally a slightly improved temperament.

— Maulik Mehta

And if I am being very honest, while there are opportunities, there are certain things about Europe, which one has to appreciate that while energy costs are extremely high, they are also facing a severe drought situation, which is making it difficult to move products within Europe through its existing waterways.

— Maulik Mehta

I think that in June, there was a significant pressure on margins.

— Rohan Gupta

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Q&A — 13 exchanges

I have two questions. So, one is the initial remarks, you have mentioned that we have been setting up the MIBK capacity, and I presume MIBC is a forward integration of MIBK. So, in the AGM you have reiterated that we are planning to put up something around 40,000 tons of MIBK capacity. But if you can share your views in terms of how much we are planning to put up the capacities of MIBC? And when these projects are going to get commissioned? Along with it, if you can also share that since we have announced almost Rs. 700 crore of capex for Phenolics, how much these projects would take care of o

Maulik Mehta

What is Rs. 700 crore? You have mentioned in the annual report, that we are planning to invest Rs. 700 crore for the Phenolics, for the solvents. So, we are investing Rs. 700 crore for solvents in Phenolics, MIBC out of this, to answer your question is 8,000 tons. Now the Rs. 700 crore comprising of the MIBK, MIBC and other solvents also, okay. Breakup would be difficult to give, because it is set up on the new site and it includes infrastructure also. When you see certain capex, it covers the infrastructure cost also. So, in totality, we are spending Rs. 700 crore for this. Okay, got it. And

My question is, so we have put in the presentation as well that the input cost for a lot of our raw materials that have gone up substantially. And now how do we see this situation post Q1? And whatever the cost pass-through that we would have done, do we see that for rest of the year, the margins would improve from here on?

Maulik Mehta

So, the largest raw material purchases that we make as a group are into petrochemical, benzene, toluene, propylene, and those saw a significant spike in Q1. They have reached numbers, which I mean in recent memory, they have never reached. And they have already started to soften in line with prices of crude that we see. So, while there is a pass-through, we will start to see some benefits of that moving forward. But anyways, the margin hopefully will start to strengthen in the near to medium-term, because we are seeing a decrease in the price of raw materials. In Deepak Nitrite on a standalone

So, my question is since we are projecting that the prices of raw materials may soften from here on. So, do we see the risk of inventory loss? And also, how do we procure our inventory, like for how many days do we keep the inventory of raw materials?

Maulik Mehta

This is dependent on products and dependent on how we see the macroeconomic environment shaping up. For example, when the prices of raw materials were low, we targeted every external tanks that we could, in order to carry high levels of inventory of raw materials. In such an environment where the raw materials are high, but coming down, then the goal is to see how little expensive raw material you can carry, because you are expecting it to be much better. Now, this is true, whether it is Deepak Nitrite or Deepak Phenolics, and what I can also share is that while prices for petrochemicals are c

So, couple of questions. First is on our capex, which you have talked about a little bit in our AGM in polycarbonate that is a forward integration in phenol. So, just want to understand that how much you think that there is a further investment opportunity in polycarbonate or even some more phenol derivatives which we have been talking about. So, definitely, the advanced plant you have already announced. But what I want to understand that how much investment potential we see over next 4 quarters to 6 quarters or 8 quarters we can put in this phenol derivatives, including polycarbonate?

Maulik Mehta

See, polycarbonates today, there is currently an import of about 2 lakh tons into India. And this is expected to grow. As I mentioned, Rohan, world over, phenol and acetone are largely consumed into the polycarbonate segment, but India imports always polycarbonate. So, over a period of time, over the next few years, having a meaningful presence in India to cater to domestic demand would have, I think roughly about between Rs. 5,000 crore to Rs. 7,000 crore as a total expected investment over a few years. And I think this kind of consumption, which is currently standing at about 2 lakh tons, we

In the initial remarks, you mentioned about 3 products. So, just can you give more color in terms of end user industry and whether those products will be manufactured in the existing setup or in the new setup?

Maulik Mehta

Yes. So, these are products which are downstreams of Deepak Nitrite's existing products and Deepak Phenolics' existing products. They will be manufactured in sites that we already have, including the newly acquired site Dahej. They are largely catering to the pharma segment. And they are I mean; they utilize this very technically challenging gas-liquid reaction as compared to the other standard processes that are there everywhere else in the world. So, they are highly efficient, very low footprint in terms of energy and water cost and very, very efficient in terms of any byproduct that is gene

First question is in terms of the new segment, Advanced Intermediates, is it possible for us to give what were the volume growth on a year-on-year basis?

Sanjay Upadhyay

Actually, this is not a new segment. This all, we had 3 segments, but it was creating a lot of confusion because our products are such that it is fine. It is a lot of integrated products, and the chemistries are similar. So, over a period of time, the plants are also multi-product plants. So, it was creating all kinds of confusion, so we have merged all these segments into one segment, which is called Advanced Intermediates. Right. Just wanted to know, out of this 33% year-on-year growth on the aggregated segment, what was the volume growth on a year-on-year basis, if possible? Volume growth w

So, just 2, 3 clarifications. One is, we are saying that we are proposing to add new capacities of our key raw materials. So, which raw materials are these and whether they will be in Phenolics or they will be in Nitrite?

Maulik Mehta

We do not go into those details. What I said is that we are ensuring that between upstream integration and downstream integration, we have investments, as I mentioned in both, where we will be looking at de-risking part of our supply. So, we continue to be present in the market as customers and we see what we can do to de-risk ourselves internally as well. Sure. And on the brownfield expansion of select products, these will be phenol, acetone, 25%, which we are saying, or they are also in our Nitrite section as well as in sodium nitrite, sodium nitrate? Yes, both. It is in sodium nitrite also.

I have 2 questions. So, one is that you need roughly about 8,000 tons of MIBK for 8,000 tons of MIBC more or less. So, external, MIBK could be 30,000 tons. Is that right?

Maulik Mehta

MIBK is 40,000 tons, MIBC is 8,000 tons. So, these are all external sales you are saying? It is a capacity build up. And as Mr. Upadhyay and Mr. Maulik said, these are all import substitute products. So, they will be all merchant sales. No, I meant is that to make 8,000 tons of MIBC, you would need 8,000 tons of MIBK. Yes, correct. Say if your capacity is 40,000 tons of MIBK, then external sales at, let us say, 100% utilization could be 32,000 tons for MIBK. Is that correct? Yes. Correct. Okay. Fair enough. And the second question is on the other products in that Phenolics chain. Are you also

Yes. I have two, three questions. First, my question is about the market size of phenol and how it is growing?

Maulik Mehta

Okay. So, there is a separate answer to that with regards to India and a separate answer with that with regards to the world. So, in India, which is largely dictated by end segments like construction, infrastructure, pharma, auto, there is certainly the visibility of reasonable demand resurgence, because the last couple of years were more uncertain with things like COVID and global uncertainties, but in India, by and large, there is generally a slightly improved temperament. That said, worldwide, there is because of what is happening in Europe, for example, intermittent COVID outbreaks in Chin

Congratulations on the great set of numbers. So, due to this European energy crisis, do you see any benefits for our Company in the short-term and long-term? And if there is any demand shift from Europe to India and it is getting benefited for our Company's production and demand.

Maulik Mehta

See, that is a very affirmative question. And if I am being very honest, while there are opportunities, there are certain things about Europe, which one has to appreciate that while energy costs are extremely high, they are also facing a severe drought situation, which is making it difficult to move products within Europe through its existing waterways. Over and above that, there is, generally speaking, an expectation that this will at least continue over the next 3 months to 5 months because of its own energy crisis. So, while one can construe opportunity, a lot of this in the short-term, it

Do we have any update on the QIP, like when we are planning to raise the money and in the segment in which we will be utilizing this money?

Maulik Mehta

QIP, we just have an enabling resolution, because of the market conditions, we will launch as and when required. Frankly, today it is not required. And today, I mean market conditions are also not very favorable. So, we will have to wait for some time. Okay. And my second question is on the exceptional line items in our P&L during Q1. So, is my understanding right that we booked a loss due to fire of Rs. 47.20 crore in exceptional item and we also recognized the income with the same amount. So, our net impact is nil in the exceptional item? That is the right understanding you have. We have boo

Yes. Just a couple of varying questions. One is on the current spread, we have seen that the phenol prices have continued to come down while the benzene has not started correcting. I think that in June, there was a significant pressure on margins. Do you see that this may impact our phenol business profitability in Q2 and in the near-term?

Sanjay Upadhyay

Rohan, can I ask you to get in touch with Mr. Somsekhar Nanda, he will explain to you separately. Okay. Just second question. For the second question, you can further ask Mr. Nanda, that would be better. Okay. Right, Rohan. Thanks. And I will be in touch with you.

Thank you all for joining this call. For any further questions on this, you can address this to our investor communications team or Mr. Somsekhar Nanda, they will be answering whatever questions you have and clarify. Thank you so much. This is a transcription and may contain transcription errors. The transcript has been edited for clarity. The Company takes no responsibility of such errors, although an effort has been made to ensure high level of accuracy.

Management

Speaking time

Maulik Mehta

Sanjay Upadhyay

Moderator

Nirav Jimudia

Rohan Gupta

Rohit Nagraj

Krishan Parwani

Saurabh Kapadia

Levin Shah

Isha Agarwal

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Opening remarks

Ranjit Cirumalla

Thank you, Good afternoon, everyone, and thank you for joining us on Deepak Nitrite's Q1 FY23 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. We will begin the call with opening remarks from the management team followed by an interactive Q&A session. To begin, 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. I now invite Mr. Mehta to share his opening comments. Thank you, and over to you.

Maulik Mehta

Good afternoon, everybody, and a warm welcome to all of you on Deepak Nitrite's Q1 FY23 earnings conference call. At the outset, let me state that the Company continues to maintain a high level of production at all its facilities while complying to all regulatory mandates, rules, and safety requirements. The health and well-being of our employees and the communities within which we function continues to be of the utmost significance to us. Moving on, our results documents were shared with you earlier, and I hope that you have had the opportunity to glance through them. I will initiate by taking you through the key financial and operational highlights and how we are preparing ourselves for the upcoming year. Mr. Upadhyay will then present to you a more comprehensive financial overview of the period under review. Following that, we will open the forum for Q&A session. Our business model continues to be tested with various operational and macroeconomic challenges, and I am pleased to repo

Sanjay Upadhyay

Thank you, Maulik. Good afternoon, everyone, and thank you for joining us today on Deepak Nitrite's earnings call. I will walk you through the highlights of the financial results for the quarter ended June 30, 2022. Before we start discussing the financial numbers, a key development to share with you is the reclassification of business segments, as the businesses have undergone a lot of changes over a period of time, thereby inter-dependence of processes and products has increased, hence due to the increasing number of facilities catering to multi- products, integrated production processes in similar economic characteristics of products and business scenario, the Company and the Chief Operating Decision Maker reviews our group performance in two business segments and distributes research based on the value generated by these segments. Due to this mergers of SBUs, the Group's operations are now reported as the two business segments, Advanced Intermediates and Phenolics in accordance wit

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