Deepak Nitrite Limited (506401) Earnings Call Transcript & Summary

Thank you, Liza. Good afternoon, everyone. On behalf of Antique Stockbroking Ltd. I welcome everyone to Deepak Nitrite Limited's Third Quarter and 9-month FY '20 Earnings Call. We have the pleasure of having with us today the senior management team from Deepak Nitrite Limited, represented by Mr. Asaikar, CEO; Mr. Upadhyay, CFO; and Mr. Nanda, GM Finance. Without much ado, I hand over the floor to the management. Over to you, sir.

Good afternoon, and good day to everybody. I'm Umesh Asaikar here. Thank you for taking out time to join us on our earnings call for the quarter and 9 months ended December 2019. I'm sure that all of you would have gone through the results documents prior to this call. We are glad to have demonstrated yet another quarter of elevated performance with revenue growth of 28% year-on-year on a stand-alone basis. The encouraging demand scenario in both domestic and export markets led to robust growth across all our strategic business units, combination of higher volumes as well as enhanced realization has resulted in a sharp rise in EBITDA, which tripled to INR 215 crores in Q3 this year, compared to INR 72 crores in Q3 of last year. We have sought to enhance efficiencies in operations and geared production schedules with a focus on high-value, high-margin products to optimize resources. As a result, profit after tax grew 349% from INR 32 crores in Q3 of last year to INR 140 crores in Q3 of this year. Over the past few years, most of you who have been tracking our performance would be aware,that we have benefited from the developments in the global chemical industry. China, the dominant nation in the global chemical industry has deemphasized chemical manufacturing and pigment of hazardous and high-complexity products. This has led to a disruption in global supply as many of developed nations have foregone production of base products and building blocks in favor of cheaper imports from China. Several global customers impacted by this disruption are seeking to establish supply arrangements in alternate markets, including India. The recent developments around the coronavirus have intensified the concerns around China and likely to accelerate this trend. We believe we are very well placed and globally competitive with established operations and good degree of forward and backward integration. Focus on quality, environmental standards, human resource practices and efficiency in hazardous and complex chemical processes makes us the supplier of choice for large global customers. Moving forward, Deepak Phenolics recorded a revenue growth of 24% and more importantly, delivered its first profitable quarter with PAT of INR 15 crores. I'm glad to share that we were able to increase our sales volumes and build upon our leadership position in the domestic market despite the ongoing challenges in phenol and acetone markets globally as well as decelerating economic growth in the domestic market. Capacity utilization was high at over 100%. On to the operational front in Q3 of FY '20, this year our domestic revenues amount to INR 331 crores, rising by 13% year-on-year. This was backed by high realizations for select products, efficiency in production and recalibration of product mix to drive high volumes. Revenues from exports stood at INR 251 crores in Q3 of FY '20 as compared to INR 154 crores in Q3 of last year FY '19, resulting in a strong 63% year-on-year growth. Coming to the segment-wise performance, in quarter 3 of FY '20, this year, the revenues from Basic Chemicals segment grew by 16%, supported by volume growth of 23%, given our cost leadership position in the market as well as efforts towards widening our customer base. Revenue growth in the Fine & Speciality segment came in at 17% in Q3 of this year FY '20, owing to realization gains as well as favorable product mix in the export markets. The Performance Products segment reported a healthy growth of 76%. This was driven by favorable realizations supported by demand/supply mismatch for key products in the Performance Products segment. Deepak Nitrite being a fully integrated manufacturer of FWA continues to enjoy a competitive advantage. On recent developments, I would like to share that we have acquired industrial land admeasuring around 125 acres, situated at Dahej, Gujarat. We will use this to implement our expansion plans, details of which we -- maybe -- will be shared at a later date, maybe in the next con call. Let me conclude by saying that we are aimed and primed to continue to deliver growth, leveraging on robust pillars of our business and capitalizing on global opportunities. Thank you. I would like now to hand over the call to our Director of Finance and CFO; Mr. Sanjay Upadhyay, for his comments on the financial performance. Over to you, Sanjay. Over to you.

Thank you, Mr. Asaikar. Good morning, everyone, and welcome to Deepak Nitrite's Q3 and 9 months FY '20 Earnings Call. I'll take you through the financial highlights for the quarter and 9 months ended December 31, all the figures are stand-alone. During the quarter, our total leverage stood at INR 587 crores, higher by 28% as compared to INR 458 crores in Q3 FY '19. EBITDA stood at INR 215 crores as against INR 72 crores in the same period last year. So in the strong growth of 200%, EBITDA margin came in at 36.7%. PBT was at INR 191 crores in Q3 FY '20, rising by 298% or INR 48 crores in the same period last year. Profit after tax for the period stood at INR 142 crores as against INR 32 crores in Q3 FY '19, demonstrating a growth of 349% year-on-year. Depreciation in Q3 FY '20 stood at INR 20 crores, while the finance cost declined by 58% to INR 4 crores in Q3 FY '20. Coming to our segmental performance in Q3 FY '20, revenues from Basic Chemicals stood at INR 253 crores as against INR 219 crores in Q3 FY '19, growing by 16% year-on-year. This segment contributed around 42% to total revenue. EBIT increased by 74% to INR 59 crores, with EBIT margin of 23.3%. In the Fine & Speciality Chemical segment, the revenues came in at INR 173 crores in Q3 FY '20, growing by 17% year-on-year. Fine & Speciality segment contributed to 29% of total revenue with an EBIT of INR 57 crores and EBIT margin of 33%. Revenues of Performance Products segment stood at INR 176 crores in the quarter with healthy growth of 76%. This segment contributed 29% to total revenues with robust EBIT margin of 53.7% versus 18% in the same period last year. For the quarter ended, we consolidated turnover crossing INR 1,135 crores. PBT came in at INR 211 crores and PAT at INR 157 crores, respectively. Moving to our balance sheet position. Our total stand-alone debt stood at INR 242 crores at the end-of-the-year quarter. The debt-to-equity ratio on stand-alone basis was at 0.17%, indicating strength of our financial position. On a consolidated basis, debt-to-equity ratio stood at 0.75x. With that, I would request moderator to open the floor for question-and-answer session.

[Operator Instructions] The first question is from the line of Ankit Gor from Systematix Shares.

First of all, congratulations for a good set of numbers. My question is with regards to Performance Products. Considering Performance Products is kind of a seasonal -- Q3 is a little seasonal, which can be seen in top line, which has kind of slight de-growth. While the EBIT margin has improved or probably remained at that level, 54, 55 levels, so have you seen any price hikes of our product, OBA, DASDA? And how do you look at situation now since the only major competition in China after this Chinese coronavirus, are there plants running at a similar utilization? Or do we -- earlier, we used to guide tapering of pricing of DASDA in Q4, even margin in that sense? But do we still foresee that margin going down? How are the prices now?

Thank you for your comments. So actually, Performance is not a seasonal product, as you say, it's not that. We have been saying that DASDA price cannot remain at this level, okay? So what you are seeing now is a little impact on DASDA prices in this quarter and little effect on their volumes also of DASDA. But that doesn't mean that DASDA has gone back to the level of earlier, okay? And DASDA other continues to do well as well as OBA continues to do well. And you will certainly see a good number in Q4 also on both the fronts, okay? Now, this effect of China and coronavirus, of course, if at all, it benefits the company because if we're having supply impacted from China, then certainly, we'll have an advantage in this. We are procuring certain raw materials. So there would be some impact on us also in case that happens. But our prices are also going up. So we'll be able to pass on and that can -- it will be better than what we are hearing today. So not an issue at all. We don't see -- foresee an issue, okay? So you can see good numbers in Q4 also, not to worry on that. And it will continue what I will -- but when the prices of DASDA will certainly go down, certainly I can't say of course, because I have been saying that, but again, we have seen some impact in Q3, and you can see in Q4 also the impact little.

Okay. Okay. My next question is with regards to IPA, isopropyl alcohol, can you give us some broad sense when it is expected to come? Because publicly also Deepak bhai said once that IPA is on the verge of coming. And when it is coming in, when we expect revenue to flow in?

So I had said earlier also it is Q1 of -- you can see from the beginning of next year.

Okay. Okay. So that plant construction and everything is...

Going as per plan and...

Going on probably. Hello?

Yes, yes. It is going on, and it will come from first quarter next year, the first quarter of the next year.

Okay. And last question with regards to...

If we will have a good effect from every [ one ].

Okay. Okay. Sir, my last question on...

Sorry to interrupt Mr. Gor. Sir, may we request that you return to the question queue, there are participants waiting for their turn. [Operator Instructions] We'll move on to the next question that is from the line of [ Swardanesh Chatterjee ], an individual investor.

I have only 1 question. Currently, our spread in acetone and phenol business is muted, and we have already achieved 100% capacity. So while the spread improves in the near future, what can be our realization for the customer?

What can be?

Our realization and -- for our spread from that business?

Spread remains wherever it is. I mean, we can't control spread. Our spread is better than the international spread, that much I can say, okay? What we can do is to utilize the plant at 100% and beyond 100% also, which is what we are doing in both the cases. So -- and that's why the people who are breaking phenol, acetone, they must be knowing that phenol, acetone has seen a very -- I mean, significantly lower grades. In spite of all these things, the company has really done well and managed the volatility of crack in this because of our plant efficiencies, because of our plant utilization and we are selling the quantities, whatever we have. So it is running at beyond 100%. So we don't see any issues. In case crack improves, then certainly, the company will see a significant advantage than what we have today in terms of numbers, okay?

The next question is from the line of Soumya Kumar from Systematix Shares.

My question is again on the phenol side. After we start the IPA production, so considering the spread remains at what it is currently, so what is the margin upside that you see from here?

So even we are doing 10% to 11% right now.

Yes. Margin, basically, see, this is all -- I mean, it's very short term of you to say that margin improves. Actually, what we are doing is to strengthening our phenol and acetone business so much that this kind of volatility can be absorbed. So if IPA comes, of course, margin up and down is a part of that. But if the IPA company and we are consuming around 30%, 40% of acetone in-house actively, so that significantly actual adds to an advantage. So I think in Bulk Chemical, the more important is how do we strengthen our business from all fronts, if it is downstream, the power plants and these lowest cost of production, these are all things which are helping and which will help the company in future rather than just striking [Foreign Language] and what will happen tomorrow, and this is very short-term view of the whole thing.

Okay. And sir, lastly, on the tax side. On the phenol, last quarter, we had a very high tax expense. So if you could throw some light, how do we see it for the full year?

Actually, tax -- again, tax was the impact of the new regime of tax, the government allowed the company can switch to 25%, provided the net grow, we accumulated depreciation and losses, so -- and we did our calculation closely. If you see in Deepak Nitrite, since you are tracking Deepak Nitrite, had a significant advantage in tax, if you see Deepak Nitrite's result. So -- and Phenolics had onetime impact because it was a new plant. So that is that you are seeing, but it will not be there in future. And hopefully, there will be -- there can be some reversal also and some clarifications, which are however it comes.

Okay. Sir, could you please share the spread number for the last quarter in phenol?

Sorry?

Spread.

Spread number in phenol. And where it is currently?

Spread, again, if I see mine spread and your spread will be different. So normally, I don't get into numbers of what is your spread and what is my spread. Then somebody will come up and say, no, no, [Foreign Language] I don't want to get into that. I have in front of you -- I'm telling you, phenol has seen very low spread in the last 4, 5 months. And in spite of that, you've seen these numbers. So it will continue to improve. And our volumes are much better than what we are -- actually, it's crossing 100% also at times. So just the...

The next question is from the line of [ Shekhar Singh ] from [ SL Shares ].

Sir, just wanted to know like what is the net debt on a consolidated basis?

It's around INR 1,100 crores.

INR 1,100 crores, okay? And for this land which you have bought, what are the CapEx plans on that land?

We have you'll see, there are -- and obviously, the chemical industry is certainly growing and a lot of opportunity, and that's why this acquisition of land because that helps us is to grow in future and encash the opportunity. Again, our cash flows and our balance sheet has become so strong today that we can expand, set up a facility. So that is what -- and this year, we had given a guidance of INR 400 crores wherein there are some -- because of NGT orders and the -- some CapExs are flowing to next year. And next year also, we are giving guidance of around INR 400 crores. So but then cash flow-wise, it may not come entirely in the next year because this year itself are getting postponed to next year some of the CapExs because of EC clearance and NGT order. Now clarifications have come in, we are going ahead with the CapExs. So you can take INR 400 crores to INR 450 crores next year. Combined basis, again.

Sir, our focus will be to utilize the various concessions given by the environment control bodies and expand in our existing facilities first, before going to the Dahej plant. Dahej plot of 125 acres has been purchased keeping in view 5 to 7 years of long-term plans of the company. But this particular year we'll completely focus on expansions and various kinds of debottleneckings at our existing facilities. And also feel tempted to come back on phenol and acetone. Please understand 1 thing. Let's not keep on talking about spread. Spread is not important. What is -- because our spread has been certainly all the time better than the international spread, for various reasons, which have been explained again and again. What is important in a commodity business like acetone and phenol is cost leadership, various ways to compress our costs starting from material procurement to finished goods dispatches, logistics costs, power costs, anything and everything. So cost leadership and forward integrations. This is the key to success of a bulk commodities business like phenol and acetone because higher you go up the value chain, lower is your exposure to the volatility at the BC blocks like propylene, benzene, LNG and this and that, okay? So when you go to IPA, that particular thing is dampened. The volatility is dampened. If not that volatility is not delivery, chemical will face volatilities. Fine & Speciality has faced volatilities because of China effect last year. So the key to success in a bulk commodities business like phenol and acetone is cost leadership and forward integrations, okay? And we have repeatedly told you, our endeavor is to consume 30% to 40% of our phenol and acetones internally captively, and we are on schedule on all those plants. Everything cannot be disclosed on con calls, but this is the guidance that I thought we should give from business strategy and way forward point of view.

The next question is from the line of [ Rangan Venky ] from [ Brilliant Securities ].

So as you can see from the stand-alone results, it is INR 1,700 crores, whereas in the 9 months, the consolidated one, it is INR 3,174 crores. At the end of the time, the profit before tax is INR 546 crores. And here, it's about INR 605 crores. Why because due to the depreciation and interest? Why do the business with so much -- INR 1,400 crores, it has increased, and profitability is a little not that. Second thing, in each commodity, what is your market share?

All the questions cannot be answered like this, what is the market share of which commodity in. In bulk, we are the leaders in almost all the products. Fine & Speciality, I mean, we cannot be the leaders, Fine & Speciality is a niche product and to certain customers only, okay? And OBA, we have the fully integrated only player in the world. So you are seeing the Performance Product performance also. In phenol, acetone, we are the largest in India, everybody knows, okay? So there is no question in any of the products where we are having a problem of the -- because we are not leader and we are facing some issues. I didn't get your first question. What is that you are talking about INR 1,700 crores, INR 3,000 crores and what numbers...

9 months stand-alone results. Stand-alone, INR 1,700 crores, we see that revenue from the operation, for 9 months, correct? And for 9 months, I mean, for 9 months ended consolidated, INR 3,174 crores.

Right.

And profit before tax is INR 546 crores here and here INR 605 crores.

Combined.

Yes, combined. Yes. While because the depreciation also has been higher, INR 150 crores and interest. But why you see commensurate with that, see, it should be a little more high field, why it is less like that?

Because the phenol business has shown a lesser profit because of the lower grade.

Okay. Okay. And of this one, INR 3,174 crores, you are making more than INR 1,400 crores...

Yes, it's okay. We can discuss separately on -- we can discuss this, but it is because of phenol.

Sir, our request is everybody to ask specific questions.

We'll move on to the next question. That is from the line of Swarnabha Mukherje from Edelweiss. As there's no response from the current participant, we'll move on to the next participant, the line of Bharat Gupta from Edelweiss.

Rohan here. Sir, on the Fine & Speciality products, this segment has reported a very strong EBIT margin this quarter. Can you just give some sense that how it has improved? And if in Speciality, any particular product has done well to contribute these kind of margins?

See, Rohan, if you have seen our last -- or if you were there in last 2 quarters call also, I had always maintained that Fine & Speciality will do well. Some concerns were raised last time that why the turnover is low. And I -- at that time also, I said that our turnover and everything will improve in the Q3, Q4 because there could be something seasonal here in Fine & Speciality. So Fine & Speciality, this is now you are seeing that -- the higher numbers in terms of both margin and this. So let me tell you the margins across all the segments are going up, and it has gone up significantly, if you see Bulk, if you see Fine & Speciality, now I cannot say that it will remain -- you can take average of the 9 months because you can't just take Q3, Q4 and then multiply with 4, right? But numbers are improving. Our business is growing. We are seeing a lot of opportunity and it is a combination of all these things, where again, we are debottlenecking in some products and Mr. Asaikar said that we are debottlenecking, we are expanding in the current sites also. So this all will result in a better final performance in the Fine & Speciality as well as Bulk and in Performance also. So don't worry, numbers are sustainable, and are going to grow.

Sir, I clearly get your point on the Basic Chemicals and Performance Products and even Phenolics up to some extent because these are some commodity nature. But very specifically, sir, on this Speciality Chemical business, if we compare our this business profile, the margin volatility, I understand that you guided that the margins will improve and have already improved, but the volatility may not happen quarter-on-quarter. So I just want to understand that is any particular products have contributed to higher prices? Or you see that the Fine & Speciality for us is an average of close to 27%, 28% EBIT margin business going forward?

See, I don't -- I cannot name any particular product on this phone call or neither I can name in personal meetings also because products cannot be named here. But Fine & Speciality is a mix of all -- there are 3, 4 products, 5 products in that. And these are all high contributing as you are seeing the number, okay? Now if you see Fine & Speciality, yes, compared to last year, our margins have gone up by 3% to 4%, okay? And again, I'm saying that it is going to sustain in this range. So you can take these numbers for future or whatever calculations you are making, but I can't name a particular product, which is doing well or which is not doing well.

Okay. Sir, the second question on this China -- recent issues in China. So though I understand it's pretty early right now, but can you comment that where in terms of our raw material availability or our markets which we are supplying in China can be positively or negatively impacted because of the recent virus issue?

I will. This coronavirus is restricted to 1 province of China. And China is a very large country. So let's not go by the hype being created in the press, number one point. Number two point, after so many years, I haven't understood China myself. So I really do not know what is going to happen as far as coronavirus is concerned. As far as we are concerned, we have taken absolute detailed review of all our raw materials and we are well covered in terms of our contracts and in terms of pricing with our suppliers, as I see it, at least up to April and May. So I'm not too much concerned about availability of any raw materials affected by coronavirus. That is number one point. Number two point, because of whatever euphoria it creates, some prices will go up of finished goods. And then we are there to benefit from that. In our guidance, we do not quantify or take into account such sporadic benefits, which are absolutely in the air. So beyond that, what will I say, we are doing well, and we are not affected by coronavirus, at least as I see up to May, is all the guidance that I can give you confidently.

That's very helpful, sir. Just only last question and I'll come back in queue. Sir, our new investment which we are planning in Dahej, the new CapEx which we're planning, so this will be under the new tax regime of 15% and we'll be driving the tax benefit there?

We are working on these ideas. But then we'll come back to you on that, okay?

Okay. Ideally, we should be right because we are planning to make...

Ideally, we should be, but there are calculations also one has to make.

The next question is from the line of [ Dipan Mehta ] from [ Excelsia ].

Yes, sir, congratulations on a fantastic set of numbers. I just want to understand that, is there any seasonality in these revenues, specific quarters exceptionally good as compared to other quarters? That is my first question.

Seasonality in terms of all segments you are saying?

Yes, no, overall company revenues, is there a high degree of seasonality? Or more or less, it is -- because a lot of revenues are now coming from exports. So in that context.

Revenues are not coming from exports?

No, no. A lot of revenues are coming from exports. So is there a seasonality element in the revenues of the company?

No, no, there is no seasonality as such. Revenue from export is because of DASDA, which has gone up significantly in past 2 quarters and even in the third quarter also, okay? But there is no seasonality as such.

My second question is related to DASDA on this. So if you can -- I'm sure you explained earlier also, you can explain what exactly has gone right for us in DASDA that it has become such a major contributor and kicker as far as the profitability is concerned, and especially the sustainability of this particular opportunity.

DASDA, I again repeat, it cannot remain at the level at which it has gone up in Q1, Q2, you have seen some impact in Q3, okay? Because -- but DASDA will certainly do well as compared to earlier years and '19 as well as a new normal, that much I can say. Yes. So sustainability of DASDA will not be at the same level of first half. But it will be much better as compared to the earlier year. And then in turn, OBA also. So this is bound to happen in both the businesses.