CHEMPLASTSNSEQ1 FY2023August 16, 2022

Chemplast Sanmar Limited

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19analyst exchanges

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Management on call

Ramkumar Shankar

MANAGING DIRECTOR – CHEMPLAST SANMAR LIMITED

N. Muralidharan

CHIEF FINANCIAL OFFICER - CHEMPLAST SANMAR LIMITED

Krishna Kumar Rangachari Managing Director

CUSTOM MANUFACTURED

Key numbers — 40 extracted

3.3 million

lk about the suspension PVC landscape in India. The demand for suspension PVC in India was around 3.3 million tons in FY20. There has been some drop over the next two years due to the pandemic, but this year

4.5 million

nt year itself. By 2026, the suspension PVC demand in India is expected to grow to around 4.25 to 4.5 million tons and with the current capacity of only around 1.5 million tons, that would mean a significant

1.5 million

expected to grow to around 4.25 to 4.5 million tons and with the current capacity of only around 1.5 million tons, that would mean a significant gap of 3 million tons. As all of you would be aware there h

3 million

d with the current capacity of only around 1.5 million tons, that would mean a significant gap of 3 million tons. As all of you would be aware there has been a new project announced for one million tons pe

2 million

mes in will only serve to reduce the demand supply gap from the expected 3 million tons to around 2 million tons; the gap would therefore be quite substantial. Moreover, new capacities are likely to fuel f

rs,

countries and there is a lot of potential demand. Internationally as well, over the next five years, the estimates have been made by global analysts and industry watchers that put the demand growth

9 million

estimates have been made by global analysts and industry watchers that put the demand growth at 9 million tons over this period against the supply growth of only around 4 million tons. Thus, while the la

4 million

put the demand growth at 9 million tons over this period against the supply growth of only around 4 million tons. Thus, while the last three months have thrown up some temporary challenges due to COVID l

47%

ng the quarter, despite a very challenging environment we delivered another quarter with a strong 47% growth in revenues on a year-on-year basis and 28% growth in EBITDA on a year-on-year basis. Sequ

28%

t we delivered another quarter with a strong 47% growth in revenues on a year-on-year basis and 28% growth in EBITDA on a year-on-year basis. Sequentially, however, our profits are lower than Q4 of

65%

es. I would like to highlight that currently commodity business dominates our sales by close to 65% of our sales. However, in terms of profitability our specialty business accounts for more than 50

50%

5% of our sales. However, in terms of profitability our specialty business accounts for more than 50% of our EBITDA. In the long-term, once our proposed expansions of both paste PVC and the custom ma

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Guidance — 20 items

Ramkumar Shankar

opening

“While this is a small project, its timely completion in spite of COVID- 19 related disruptions reflects our commitment towards growth and strong project execution capabilities.”

Ramkumar Shankar

opening

“With the completion of this project by the end of May, which was ahead of the time that we had announced, we now have 331,000 tons per year production capacity of suspension PVC.”

Ramkumar Shankar

opening

“As all of you would be aware there has been a new project announced for one million tons per year of suspension PVC capacity, which is likely to come in, in phases starting FY26.”

Ramkumar Shankar

opening

“The benefit of this will be realized as the prices stabilize.”

Ramkumar Shankar

opening

“We did some debottlenecking last year and we continue to have some more debottlenecking exercises that are ongoing as we hope to sweat the assets further.”

Ramkumar Shankar

opening

“Once that comes on-stream we will be able to again ramp up our volumes.”

Ramkumar Shankar

opening

“Going forward, we are committed to make future investments to support cash flow growth and shareholders return.”

Ramkumar Shankar

“I think the one-million-ton project that you are talking about is the Adani project, we have yet not announced any increases, it was announced by the Adani group, so they had originally announced 2 million tons expansion, but I think in the last AGM they have brought it down to 1 million tons, which will be done in phases and that will be at a capital cost of around $2 billion.”

Ramkumar Shankar

“Second question whether this will affect the balance, it will not really because by the time it comes up the gap between demand and supply for PVC in India would be around 4.25 to 4.5 million tons, so even if the one million tons were to come in,the gap would still be around 3 million tons, which is higher than the gap that is there today, so actually we will be faced with an even more tight situation.”

Akul Broachwala

“Directionally do you expect once things normalize in China, so would you expect that these prices will kind of sustain going forward at higher levels or is there still some kind of quantity just that might affect going forward at least in Q2?”

Risks & concerns — 7 flagged

With respect to our performance across our key product categories, on the PVC front, prices came under pressure as the lockdowns in China had an impact on consumption centers whereas the production centers were not impacted.

— Ramkumar Shankar

Now considering that we took the inventory write down, which clearly explains that on that inventory we would not be making a positive EBITDA, so does that continue in July and August considering that we have seen a sharp decline in PVC as well as VCM prices, so does that inventory issue continue for July and August?

— Ahmed Madha

Now, on the paste PVC side - is the price decline in line with suspension, so is this because of the imports or is this market phenomena that generally paste PVC prices falls in line with suspension.

— Ahmed Madha

Few from my side, first is on the volume front on the specialty, sorry I have joined late probably you would have answered that but just for my clarification, so we have 66000 metric ton we have sold close to 14000, so the average run rate has been 17000 tons, was there an issue even on the demand side or it was just a destocking, which we have seen on client side in the anticipation of price fall, which has led to the slowdown in the volume sales for this quarter?

— Sanjesh

Second on the spread, so if I look at the spreads in the Southeast Asia, your spreads are either remain stable or only hardened and in India we have other tailwinds like currency depreciation from 75 to 80 now and I know there is some headwind also in terms of lower customs duty, which will hurt our margin.

— Sanjesh

Lastly on the specialty chemicals, so if I look at realization that is if I divide your revenue by volume for specialty chemicals it has declined on both Q-on-Q and Y-o-Y basis, so on year-on-year basis the decline is more and the realization was quite strong in the same quarter last year, so what would be the reason for it in product mix?

— Yogesh Tiwari

Paste PVC has grown year-on-year at around 60% in this quarter, but that is a little higher because in the first quarter of last year you also had the impact of the delta wave so to that extent the numbers were a little subdued in the first quarter of last year.

— Ramkumar Shankar

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Q&A — 19 exchanges

Thank you for the opportunity. Can you please share the number of what kind of inventory we have at the end of June quarter for suspension and paste PVC?

N. Muralidharan

As finished products we had 10163 tons of suspension PVC and around 4500 tons of paste PVC. Okay, got it. Now considering that we took the inventory write down, which clearly explains that on that inventory we would not be making a positive EBITDA, so does that continue in July and August considering that we have seen a sharp decline in PVC as well as VCM prices, so does that inventory issue continue for July and August? This is Ramkumar here, I will take that question. This drop in prices will affect really the inventory that we have as of the end of June and till it goes out., The drop in pr

Sure, thank you.

Management

Good afternoon and thanks for the opportunity. Sir, my first question is related to some bookkeeping, so in this quarter, when I subtract Chemplast Sanmar’s standalone from the consolidated revenue, we normally end up deriving the CCVL revenue, which is effectively our suspension PVC sales - so this time that number is around 841 Crores but in investor presentation the SPVC revenue is 923 Crores, so what exactly I am missing over here?

N. Muralidharan

There is an inter-company sales between Chemplast Sanmar and CCVL. To support CCVL import VCM, Chemplast Sanmar utilized its LC limits and imported two parcels of VCM and supplied to CCVL, so that is the intercompany sale that has been knocked off. Ok. So, this purchase of stock-in trade of 130 Crores - that pertains to this intercompany sales? Yes, you are right. Secondly, our operating expenses in CCVL look little bit higher this time compared to Q4 despite the lower volumes, so was there any one-off over there? N. Muralidharan:: There is no specific one-off, this is primarily due to the sli

Yes, I will come back in the queue.

Management

Sir, thanks a lot for the opportunity. So, this is the follow-up on the operating expense itself, so on this question of higher opex if we see Q-on-Q your opex per ton has moved from $308 to $460 per ton, so what has resulted in this almost $150 increase in opex Q-on-Q, and even if I compare your last eight quarters your average opex is about $330 per ton whereas this quarter it is about $460 per ton?

N. Muralidharan

Key reasons for the movement in other expenses is primarily power and fuel like I explained on an overall basis power and fuel contributed almost 71 Crores out of the 96 Crores increase and it is primarily due to the coal cost increase. As you know, natural gas prices have also gone up and that also added to the power and fuel cost and that is the primary reason for the increase, other than that increase is mainly driven by the volumes. I am talking per ton, Sir, so if you could just help me with let us say Q1 FY23 what was the overall power and fuel costs within that other expense? Overall po

Sir, I have two questions, first on this one-million-ton expansions which you are taking up - is this with VCM route only or EDC route and how is the capital employed per ton different for both the production method and related question what are the other capacities coming up in India given that there is 2-million-ton deficit?

Ramkumar Shankar

I think the one-million-ton project that you are talking about is the Adani project, we have yet not announced any increases, it was announced by the Adani group, so they had originally announced 2 million tons expansion, but I think in the last AGM they have brought it down to 1 million tons, which will be done in phases and that will be at a capital cost of around $2 billion. Second question whether this will affect the balance, it will not really because by the time it comes up the gap between demand and supply for PVC in India would be around 4.25 to 4.5 million tons, so even if the one mi

Thank you so much for the opportunity. Just wanted to check can you just help us with the existing prices of suspension PVC and VCM that are prevailing right now?

Ramkumar Shankar

Suspension PVC right now - CFR India prices are at around $1050, there are some quotes lower, some quotes higher, but if you look at the more serious quotes we are talking about $1050 per ton and VCM prices are currently ruling at CFR Asia level (which is the indicative level) of around $700 per ton. Directionally do you expect once things normalize in China, so would you expect that these prices will kind of sustain going forward at higher levels or is there still some kind of quantity just that might affect going forward at least in Q2? Ramkumar Shankar: We think that on suspension PVC defin

Sure, I will come back in the queue.

Management

Thank you Sir for giving this opportunity. You just mentioned that the paste PVC does not have much seasonal impact, but when we look at the specialty chemicals volumes this has come down from 22000 tons that we have seen in Q4 to around 13600 tons in Q1, so what explains sort of the sudden decrease in sales volume?

Ramkumar Shankar

Right, actually we went into Q4 carrying stocks for paste PVC, so we liquidated a lot of that in Q4. In Q1, we are really selling what we produce and because of the falling prices scenario, people like I explained were not buying to stock, they were buying only to need and therefore there was that 4500 tons of inventory that built up by the end of June as Murali also explained. So that explains the drop between Q4 and Q1. Right, second question was about the competition that we are facing from China, so what is typical order cycle with the Chinese competition comes in, how much time it takes f

Thank you for the opportunity. I have two questions, one was a little bit on the strategy side, so the volatility that we keep seeing is probably because we sell everything on spot, so as a strategy just wanted to know the thought of selling certain portions of our volume on contract basis where we can fix prices and thereby reduce the volatility that we see in our earnings?

Ramkumar Shankar

This is an interesting question. We would rather not have one side of the equation fixed and one side of the equation floating, because well in some cases if that goes against us, it could be disastrous. For instance, we cannot afford to have feedstock floating on a month-to- month basis while the finished product alone is fixed. The way we are doing it right now is that both are based on that month’s pricing, so to that extent normally we will get a very good spread or margins over the years, it is only in exceptional situations like what we have seen in the last three months or four months w

Thanks for taking my question. Just wanted to understand that 80 Crores impact that you have taken that is based on the price movement till June end right and the price fall that has happened in July is yet to be accounted that is the way one should understand this?

N. Muralidharan

It takes into account the price fall that has happened in July. So, even the July price fall has been taken into account in the 80 Crores of exceptional income that you have taken that one should understand it? Yes. For practical purpose should then one assume that incrementally the closing stock that you will be selling that will be based on the spot spreads, I am particularly speaking in terms of the margin that you will be realizing in it would be based on the spot side because the margin that we will be booking in Q2 will be more based on the spot spreads is what one should understand this

Good afternoon Sir. Thanks for taking the question. Few from my side, first is on the volume front on the specialty, sorry I have joined late probably you would have answered that but just for my clarification, so we have 66000 metric ton we have sold close to 14000, so the average run rate has been 17000 tons, was there an issue even on the demand side or it was just a destocking, which we have seen on client side in the anticipation of price fall, which has led to the slowdown in the volume sales for this quarter?

Ramkumar Shankar

Yes, it is more because of the price fall, see normally when the prices are on a falling trend customers do not want to be on the wrong side of a pricing decision. Therefore they tend to stock less and wait for and buy only for need whereas in the rising price market they tend to buy more and stock more, so it is more a question of sentiment and expectation and this is really because of that. So, basically client destocking is what has led to the lower volumes? Right. When the prices stabilize or move up, you would see them restocking? Correct, especially now that there is some stability that

Good afternoon Sir and thanks for the opportunity. Take it forward from previous participant question, so I believe the kind of run rate that we have I hope suspension PVC stocks must be out of in Q2 correct?

Ramkumar Shankar

For suspension PVC the older stocks would be out by possibly the third week of August or so. In August, is still demand low? does it reflect that way because we do have around volume of 25000 per ton per month, so even say suspension PVC. We have 10000 kind of June stock still it is not out. Am I correct? The demand will be fully back like I said once the monsoon is over. Once the monsoon starts weakening and that is normally by around September, so we will start seeing that happen and that should be a good increase in demand. Also what Ram mentioned is that by second or third week of August t

Okay.

Management

Thanks for the opportunity. Sir, one question on the exceptional charge, so I think in terms of inventory gains or losses, this is a normal phenomena in our business, so why have we separately accounted for it this time and historically we have not provided any inventory gains or losses? Thank you.

N. Muralidharan

Primarily the test of exceptional items is basically based on materiality and whether it is one-off, in this particular case it is of course significantly material one and it is also exceptional because we have not provided like this many times. In the last 13 years we have done it maybe two to three times that is why it is not routine, we do not provide for NRV on a regular basis because normally the prices will take care of the cost, of course the margins could marginally vary here and there, but we do not write down the inventory materially we have done it only three times or so in the last

Sir, if you can just share the prices at least the average prices for Q1 FY2023 and the current prices for caustic soda, chloromethane, hydrogen peroxide and suspension PVC?

N. Muralidharan

The Q1 prices we would talk about, Q1 prices for suspension PVC average was around Rs, 123500 and caustic soda that was around Rs. 56000 and chloromethane that was around Rs.60000. Any indication currently how has this trended in the price of these products? The suspension has corrected now somewhere around Rs.92000 level that is the one Ram is also talking about the significant drop, which normally does not happen and caustic still holds good, it is somewhere around that range only and CMC also it is more or less in the same range around Rs. 55000 level. Lastly on the specialty chemicals, so

Thank you for the opportunity. My first question is related to refrigerants like what is the sales percentage of total revenue from refrigerant gases on Y-o-Y basis and are there any future expansion plans for the same?

Ramkumar Shankar

Refrigerants currently forms a very negligible part of our overall portfolio - in terms of percentage, it is around 1% of our total sales. It is not very significant.Definitely we are looking at this as well as one of the areas where we could grow because there are adjacencies here which we could look at and we have a long history in making both, we started off with the chlorofluorocarbons and then also we are now in hydrochlorofluorocarbons, so we have a long history here, a lot of experience, so this is one of the areas that we are looking at. My second question is related to PVC paste resin

Good evening, Sir. Thanks for the opportunity and hardly this will be the repetition, I just wanted to confirm that the reason for basically lower sales in this quarter vis-à-vis the previous quarter is that the demand has been on the softer side and secondly the inventory numbers that you gave out and also the position in terms of liquidation can you please reconfirm that that what kind of inventory we were holding as of June in terms of finished and raw material, how much is still high cost inventory and still left with us?

N. Muralidharan

We talked about the inventory equivalent of around 35000 tons of suspension PVC in the form of finished product as well as the intermediates and significant part of it will get liquidated by the second week of August and on the paste PVC side we had an inventory equivalent of somewhere close to 22000 tons and that may also get liquidated during this quarter. Right, this is finished and intermediate inventory anything on the raw material side as well that we were holding? We have provided right from feedstock to finished product we have covered in that item. Understood, so this will be liquidat

Thank you very much for taking the time to join us on this call this afternoon. We tried to answer all your questions. If there are any questions that we have left unanswered, please do reach out to our investor relations advisors and I am sure that we will be able to address your questions. We appreciate your interest in our company. Thank you very much for the time.

Management

Speaking time

Ramkumar Shankar

Moderator

N. Muralidharan

Sanjesh

Ahmed Madha

Nitin Tiwari

Chintan Chheda

Akul Broachwala

Kirtan Mehta

A. Padmanabhan

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Opening remarks

Ramkumar Shankar

Thank you very much. Good afternoon everybody. On behalf of Chemplast Sanmar Limited, I extend a very warm welcome to everyone for joining us on a call today. On this call, I am joined by our CFO, Mr. N. Muralidharan, Dr. Krishna Kumar Rangachari, Deputy Managing Director - Custom Manufactured Chemicals Division and SGA, our Investor Relations Advisor. I hope everybody had an opportunity to go through the financial results and the investor presentation, which has been uploaded on the stock exchange and on our company’s website. In the quarter gone by, we finished the first of our multiple capex projects which we announced at the time of our IPO - the debottlenecking of our suspension PVC capacity at our Cuddalore plant. While this is a small project, its timely completion in spite of COVID- 19 related disruptions reflects our commitment towards growth and strong project execution capabilities. With the completion of this project by the end of May, which was ahead of the time that we ha

N. Muralidharan

Thank you Ramkumar and a very good afternoon to all the participants on the call. The company reported a good performance for Q1 FY23 owing to strong volume growth across all its products. During this period, Chemplast has been able to demonstrate the strength of its business dynamics in the face of challenging circumstances. The revenue from operations for Q1 FY23 was at 1,411 Crores, higher by 47% on year-on-year basis primarily on account of higher volumes across our product portfolio. EBITDA for the quarter was at 194 Crores, registering a growth of 28% on year-on-year basis. The zero COVID policy in China and the resultant COVID-related shutdowns there have resulted in a sharp contraction of demand for PVC resin in that country. On account of this, there is a spike in exports of PVC resin from China resulting in a steep fall in finished product prices in India as well as feedstock prices. In line with generally accepted accounting principles, we have written down the carrying valu

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