DCM Shriram Limited analyst Q&A

We will now begin with the question-and-answer session. The first question is from the line of N irav J imudia from An vil Wealth Management. Please g o ahead.

Sir, I have a few questions to ask on the chemicals side. Sir, when we analyze our ECU numbers for Q3FY'25 vis-à-vis Q2FY'25, our ECU was up by around Rs. 3.50. And if I just multiply with our volumes of 1,80,000 tons, what we have reported in Q3, i t gives us a positive impact of close to Rs. 62 crore. But however, when we see our PBDIT numbers on a QoQ basis, the net impact is only Rs. 27 crore. If you can just help us explain why the difference between both the numbers is varying and is there any specific one-time loss or increase in depreciation because of which this number is not tallying?

I think there are two reasons for difference. One, because they have earlier been capitalized and now they are being charged to P&L , and second reason is that as we move i nto operations the overall expenses do go up with the higher man power cost, repayment and things like that. So, I think that also inched up. but that should even out over the period as the volume increase , then probably you will see the higher impact coming in.

I would not have it right away. Maybe you can connect with our investor relations team after the call. We'll provide that to you.

So, secondly, when we inter acted last time during Q2 FY '25 concall, you mentioned that chlorine was like negative Rs. 6.50 in Q2 FY'25 which in Q3 FY'25 the trend was around Rs. 9 negative. So, if you can just help us explain what was the chlorine negative in Q3 FY'25 and what's the current trend in terms of the chlorine negative in Q4 of FY'25?

So, Q3 the trend was close to again the range around Rs. 9,000 to Rs. 10,000 and the similar trend continues as we speak.

Sir, y ou mention ed in your opening remarks that the prices have started correcting for caustic soda in January, but of late what we have seen also is that in China, the prices of caustic soda has again started trending and also when we see November and December, ECU trend for us I think it is close to around Rs. 30.50 for DCM. So, is it fair to assume that even for Q4 , our ECU trend looks positive in terms of the higher numbers, or it would be on the similar lines what we have reported in Q3 of FY'25?

So, as you know, ECU is a combination of caustic and chlorine price. We have seen that the caustic price has been stable and has gone up, but of course the pressure on chlorine continues due to the capacity and the demand /supply balance in the country. So, the current ECUs are in the range of Rs. 29,000- Rs. 30,000 per ton and we do expect it to remain at these levels or improve overtime.

Sir, also, if you can share the production breakup of 1,997 TPD in Q3 of FY'25 between the Kota and Bharuch plant?

broadly of course the details, the investor relations team can share with you later as well, but broadly, our Kota plant runs steadily at close to 550 tons per day for caustic, and the Bharuch plant therefore is the remaining, which we are ramping up now with the new additional capacity.

When we see our revenue of Rs. 721 crore in Q3'25, what number I could arrive based on the ECU realization multiplied by the volumes, our contribution from the value-added products was close to 27% in Q3 of FY'25. Correct me if I'm wrong. So, if you can share what would be the contribution of the value- added product in the PBIT of Rs. 66 crore what we have reported in Q3 of FY'25?

I would suggest this detailing and the arithmetic we can do it offline, right? I think broadly we g ave you the trend . The details you can check with our investor relations team, Himanshu Bo karia and we will respond to all your queries in terms of aligning these numbers, right?

The next question is from the line of Riya Mehta from Aequitas Inve stment Consultancy. Please go ahead.

As I mentioned in my opening remarks, the capacity utilization in the complex at Bharuch is in the range of about 70%.

This will be the overall, right?

Yes.

And just particularly for the newer plant, what would be the utilizations level like?

So, see, we don't look at it that ways because the newer plan t has its own set of efficiencies. So, we might operate newer plant at 8 0%-90% and the older plant at lower capacity. So, I think one should look at it as overall thing.

And over the next one-year, what kind of utilization levels do we look at here given we are in an oversupply situation?

So, we are looking to see how we can ramp up our capacity utilization and in line with that a s you are aware we are close to commissioning our Epichlorohydrin plant that will help us, also, the board has approved aluminum chloride further expansion and entry into calcium chloride. So, again, both these will help us in improving our utilization. So, we do expect it to take a little time, but we expect that in the next 12 to 18 months we will reach full capacity utilization.

So, it is fair to say that maybe by FY'27, we would reach by around 80 % or 90% capacity utilization, which is our peak capacity utilization?

Right.

In terms of power, basically we have commissioned our power plant and it's been running for a while. What kind of savings and costs are we seeing in the last say this one quarter with the new power plant?

So, I think we are getting good savings. So, we have invested close to about Rs. 500 crore in the power plant, and we are getting ballpark; we are running in terms of about 20%, 25% on the power plant.

The incremental 6 MW which we are buying that would be also yielding similar returns?

That might be a little lower, but yes, that's more from our endeavor to reduce the carbon footprint. So, wherever we have an opportunity, we add that.

So, will that not reduce our cost in a significant way which earlier was 120 MW?

Yes.

Where would we see cost saving coming in the chemicals division as such?

That's what we have done. Whatever investment we have done over last three years, whether it is the capacity expansion, the 850 T PD, which has more efficient electrolyzers, second is the P120 power plant or the green energy that we took 44 MW, the first tranche we did, will definitely add to lot of savings and then we also , if you remember, I think in the last board meeting we had approved a project for another extraction turbine, that will further improve the cost structure. That's the constant endeavor to keep working on cost.

And in addition to that, we can also add that the other major raw material for us is salt. So, we are seeing what steps can we take to further optimize our cost on that side. And also there's a huge focus on digitalization. And leveraging data and analytic s to further enhance our efficiency and competitiveness. So, with this holistic focus areas, we expect to remain cost - competitive.

In terms of ECH, when do we see this commissioning because I think we have seen a lot of delays? Is this because of late approval or after you commission there will be an entire one year which will take for approvals and all?

So, I think as mentioned earlier in the opening remarks, we have faced a technical issue with the commissioning of the EC H plant. The teams are working very actively on it. And as we shared, we expect to start the trial runs and commission the plant towards the end of this quarter, which is Q4 FY'25.

And post that, we will see approval processes across all the clients, right?

Yes, approval is with the customer. That's part of the process. So, we expect that to happen and then we expect to ramp up the capacity.

And aluminum chloride would come by when for us?

I think that has been approved by the board . The timeline for commissioning for that is Q1 FY'27.

In terms of PVC, we are seeing that anti-dumping duty was recommended. So, where in this stage of regulatory approval are we there and how much time we can foresee if everything goes smoothly?

Well, this is actually with the ministry right now, the commerce ministry is also aware of it. We made our application. There are a couple of court cases which are delaying this. Hearings are going on. The results so far in the court cases are positive. So, there is an expectation that after the budget … we hope i t's not too late after that, but we expect that after the budget it should come fairly soon.

The next question is from the line of Nisar g Vakharia from NV Alpha Fund Management LLP. Please go ahead.

My first question is for Fenesta. Sir, we have an order book growth of 33%, last quarter also we had order book growth, but it's not translating into revenue growth. And secondly, our capital employed is only Rs. 45 crore for about Rs. 120 crore of P BT per annum that we do. Could you just explain both these points?

So, one on the capital employ ed first, that is also because we get customer advances and whether it is project customers or retail customers. So, we work largely on advances, that lead to lower capital employed. And in any case, this is a business which has the capital output ratio is high in any case. So, I think those are the reasons why the capital employed is low. Coming to the bookings, you are right. The bookings are good; however, the execution is slow in the market. We have seen that something wh ich we are seeing across the building materials space, that the growth levels are slow, implementation is slow. And there are various reasons, I mean, liquidity issues and things like that. But yes, we are seeing execution being slow.

Sir, can you explain this Rs. 65 crore that we are deciding to invest for hardware manufacturing, I think I'd also read few quarters or 1-2 quarters back where you said you want to invest Rs. 150 crore in aluminum. Both of these are separate projects if you can explain in detail on how you see this business ramping up over the next 2 to 5 years in India.

See, the aluminum extrusion project, the purpose of that and that's where that was for about Rs. 150 crore. So, that project was to bolste r our aluminum windows business. So, currently we are importing aluminum extrusions and the profiles. And then they go for coating separately. So, there is a lot of inefficiency involved in terms of transportation , logistics and delays in execution, which is not a very good consumer experience. So, our idea was that we should have our own extrusion facility where we can control the quality as well as customer service. So, that was one objective and aluminum windows are actually doing very well. They are growing faster than UPVC today as an industry, as well as for us. We see good scope there. And obviously, once we get into aluminum extrusion, it will open a door for other products within the aluminum space which we can diversify into. So, that's a little longish plan, maybe 2 years after commissioning. Coming to hardware, again here, we procure hardware. As we speak, we procure hardware of almost Rs. 90 crore in Fenesta. Almost 50-60% is imported, rest is indigenous. And the idea is once we are able to get into the hardware business, it will help us again on the logistics front because the imported suppliers are unreliable given the logistical constraints at times what we have seen, and that again delays our service to the customer. So, one, I think we can do that with our own , we can indigenize more once we have our own facility , t hat is one. Second, upgrading o ur innovative products is something what we are looking at. So, our research and development can be at a much faster pace. So, these two things are more from the customer experience perspective. The last is again, once we get more hands-on experience, we will be able to build that as a revenue platform as well.

Sir, now my second question is regarding Shriram Farm Solutions. Can you tell me what sort of volumes we have done in research wheat this year? And do you think that we have captured enough market share or do we still have potential to grow these volumes for next year also?

You see, last year we had done about 76,000 tons of research wheat seed. This season we have done close to about 96,000 tons. These are ballpark numbers. I may be off by about 1 ,000 tons here and there. So, about 96,000 tons of research wheat is what we have done this year. Our market share is close to about 65 %-70%. But the market itself is growing by about 15%, the research wheat market, in the overall market. So, I think there is scope for growth.

I will just add to that that ultimately in any of the research products, agricultural products or seeds, one has to have a strong research setup to come out with new products which are better than the past one and continuously going through the trials and developments etc. because everyone is in the business. So, how do we stay competitively ahead? So, we have a strong R&D setup also, so they're also coming up with new products. So, we are fairly well positioned on the research wheat front.

Sir, one thing is that in India we have not seen a company get such dominant market share in research wheat. We have seen companies come and go in cotton and the market shares change every 3-4 years. Can you please explain the research wheat segment slightly better for us as to how sustainable is this and what is the reason that DCM has sort of got this dominant market share in this segment?

So, I would say as CMD mentioned, it is primarily because of our strong research on research wheat. We have been introducing products almost every year except this year. Last year also we launched about 2 to 3 varieties and the year before that also there was one variety which was launched which ensures that we are doing the right life cy cle management. It's not that other companies are not there in this segment. There are companies in this segment, but I would say because they are not able to grow the way and we also had the early mover advantage. So, one is the early mover advantage, feeding the market with newer products a nd there is competition as well. So, that just continues. And that's why we need to continue to feed products into the market.

Thank you. Next question is from the line of Jainam Ghelani from Svan Investments. Please go ahead.

My first question is that what would be our current captive chlorine consumption and post our expansion of all the derivatives, where do we see it going forward?

You see post expansion, our overall as a chemical, both Kota and Bharuch put together, our captive chlorine consumption will be close to about 32% captive and on top of that we have pipeline supplies which again will be in the range of around 35%-40%. So, if you add these, we are almost 70% captive. So, one is what is consumed captively and that is virtually captive with what we supply to pipeline.

And so, since we will announce a fundraise, are there any other derivatives that we wish to expand into as of now?

So, we are continuously evaluating new opportunities and adjacencies for the chemicals business and all our businesses. So, at a suitable time if we do decide and the board has approved then we will announce those as well.

Thank you. Next question is from the line of Rohit Nagraj from B&K Securities. Please go ahead.

First question is on ECH. We have seen that the project has got delayed. Any material challenges from the initial on the delay front? And secondly, even during operations, do we expect that there will be teething problems because the technical issue has got elongated ? And another adjacent question to this , given that the domestic market is now completely supplied, what is the strategy from the management in term s of placing the product, maybe partially in the domestic market or how to tap the exports market?

You are right. I think this was shared partly in our opening remarks as well. There has been a technical issue in the ECH project. But as we discussed earlier, the team is working very actively and there has been a solution that has been found. So, we expect the commissioning of the plant to happen and trial runs to begin in this quarter itself, Q4 FY25. And once that is done any plant might have some small teething issues to begin with, but we don't foresee any material issues going forward after that. In terms of the market, there are some capacities which is already there in the market, but we feel that this additional capacity will be absorbed in the market. There is a growing market domestically with a number of epoxy players , expanding their capacities. So, domestically itself, there will be a significant demand. And also, we are already in touch with customers globally as well. So, we do expect that we'll be able to commission and then ramp up the capacity as planned now.

Second question is on t he PVC front. In terms of current market trends, how are we expecting that the utilization levels will move up on the PVC front? And particularly, the margins, what are we expecting that the last couple of years, significant decline in margin because of th e China overcapacity and supplies . Will that continue in the foreseeable future? And another allied question that we have carbide capacity, and we heard probably during pre -COVID that China's carbide capacities are also likely to get toned down. So, any view from that side? Is this happening in China from your connects or your contacts in China? Are we seeing any kind of such move?

So, to answer your question on the margins, this quarter our margins were around 19%. So, I would say these are reasonable margins at a price realization for PVC at about Rs. 76,000-77,000 and carbide also was in the range of around Rs. 64,000-65,000. So, I would say prices have been suboptimal. However, on cost front there has been significant improvement, both because the raw material prices went down as well as our efficienc y is improved. So, I would say that, one, I don't see prices coming below Rs. 76,000. Unless something happens on the cost front, the margin of 19% are quite reasonable. So, that was one. What was the next question you had?

On the carbide capacity , any cues from China that the capacities have been contained or there is a move from the government to contain those capacities. Because I think earlier, pre -COVID, there was an expectation that due to pollution issues from coal, the government was taking steps to curb those capacities which are already in place?

I agree there was a phase of 1-2 quarters where they did curb capacities but after that all the capacities have come back and most of their capacities are carbide based and they are dumping their product globally. So, at least I am not aware of any further action they are going to take.

My question is, we have seen the profitability margins being low in the sugar business in Q3, right? So, now this weakness because of the lower sugar prices will continue for the entire season or do you have any levers which can help you offset the margin loss?

I think essentially there are two reasons. One is there was an increase of the state advised price of sugarcane last year by the UP government, number one. Number two, there was a very good variety of sugarcane called 238, which was roughly 80% of the cane being crushed by most sugar mills. And that has got infected by a disease called red rot. And that has now decreased, and that was a very high yielding and a high recovery variety, which had come up in the last 4-5 years. And that has now decreased dramatically. And that's one of the primary reasons why our cost of manufacturing has gone up, because of lower yield, lower recovery, and also because of higher SAP.

What is the ethanol mix between B-Heavy, C-Heavy, and grain based?

So, we are doing primarily C-Heavy.

And the decline in the rise cost from FCI, will that help us meaningfully?

Probably in the next financial year, not in the current financial year.

Yes, because we already covered as far as feedstock is concerned, besides the molasses or C-Heavy, we have already covered till mid-April, as far as other feedstocks are concerned.

For the financial year at FY25, what will be our molasses -based ethanol and what will be grain-based ethanol? Percentage, roughly?

Roughly, I think we will manufacture close to about 16.5 crore liters. Out of that, about 45% should be grain based.

And last question on the hydrogen peroxide and aluminum chloride . I n t he presentation you have written that your utilization currently is 80%. What was the utilization for the full quarter, Q3 for these two products?

For Hydrogen Peroxide, average for Q3 was 40%.

Just one more thing, on the caustic side, this quarter the volumes have gone up sequentially. So, do you see the utilizations further moving up in Q4 as well for caustic soda?

Yes, that is a continuous focus area for us , to utilize the capacity and we do see it ramping up quarter-on-quarter.

Thank you. Next question is from the line of Raj Vyas from TM Investment Technologies. Please go ahead.

Given that our volumes are increasing and the capital expenditure plans are coming to an end, the first round or let's say whatever we had announced last three to four years, we do expect volumes to increase. Our cost structures are better than what they we re in the past. So, we do feel our numbers should continue to get better. However, it is all a function of cost as well on the raw material cost as well as the product prices, which are not in our control. So, it's difficult to say, but we are taking steps to improve our profitability.

Any reason for the fall in ROCE? It went from 16.1% to directly 13.7%?

That has been explained during the message by our JMD. That's because the new capital expenditure which got commissioned in this f inancial year in H1, that is part of capital employed with returns are yet to, because the capacity utilization is low right now. So, they will come up over next one year and that's when we will see the optimum return on capital employed.

What is the peak capacity that you are looking for?

As it was mentioned by Mr. Aditya Shriram that we will look to ramp up over next 12 to 18 months to about 90% to 100%.

Thank you. Next follow-up question is from the line of Nirav Jimudia from Anvil Wealth. Please go ahead.

Sir, you mentioned that our hydrogen peroxide plant operated around 40% in Q2. So, even at 40% utilization, did it have a positive contribution at the PBIT in Q2 or the breakeven point for hydrogen peroxide plant is slightly higher than 40% if you can just share your views here?

It has been positive on the contribution, definitely.

And that should further improve in Q4 given the kind of utilization rates pick up we have seen in the current quarter, right?

Yes.

Just a follow up to this is like our hydrogen production is ought to go up with the increase in the caustic production, right?

Yes.

So, some of the increase d caustic soda production help us for the excess hydrogen which could be utilized here. But I think we also had commissioned a flaker plant. So, there is also probably we would require some amount of hydrogen for conversion it to from lye to flakes. At any point of time, our sales of hydrogen to the outside customers won't be curtailed on, is this right assumption to make here, sir?

So, we have actually done the mapping and the planning for our hydrogen production and demands, whether it is captive demand or it is catering to our customers' requirements. So, we very consciously evaluate where to prioritize, obviously we really value our customer relationships. So, that always gets the highest priority while we are ramping up our own capacity and internal utilization as well. So, as it is ramping up, we are continuously optimizing and at full loads we expect to have adequate hydrogen to cater to a ll the requirements.

Just to add, I think the gas that we have started with natural gas as well in our Flaker plant.

So, our Flaker plant has a dual feed fuel capability, which is one is natural gas and the other is hydrogen. So, that gives us flexibility as well to balance out the hydrogen requirement.

Entirely 600 TPD is now commissioned or only 300 TPD is currently running on flaker?

So, in the flaking so far 300 TPD has been commissioned and the remaining 300 TPD also is being worked on and we expect that to be commissioned soon as well.

Sir, last bit from my side . I n the hydrogen peroxide side, are our hydrogen peroxide catering to some specialized applications or it is safe to assume that it is similar to what it is available in the market? So, is there any differentiation factor in our hydrogen peroxide which is getting sold in the market?

So, we are working on the special grades of hydrogen peroxide as well. We have an innovation center which is also exploring how to create differentiated hydrogen peroxide. So, over time we do expect a healthy percentage of our H2O2 to be specialty grade hydrogen peroxide.

But that would take some time before it is getting operationalized, right?

Yes, it will take some time, but the teams are working very actively on this. So, we are very optimistic.

Thank you. Next question is from the line of Pratik Tholiya from Systematix . Please go ahead.

Sir, what is the CAPEX guidance for FY26?

CAPEX should be in the range of around, as of now, whatever has been announced, it should be in the range of around Rs. 700 crore.

And sir, this could be projects, this includes your aluminum chloride, aluminum extrusion, right? What else is there?

There is aluminum chloride and calcium chloride, extrusion. And then like the Rs. 65 crore which has been announced very recently. Then we have this 74 megawatt of green energy that will also happen in FY26. And there will be some CAPEX happening on the infrastructure front at Bharuch, like water reservoir and things like that. And there is a turbine investment as well of about Rs. 50 crore-Rs. 60 crore. Which is a cost improvement which I was talking about.

And sir, what is your guidance on this epox y resins? Where are we on that? Because we had announced this quite some time back, this Rs. 1,000 crore project, but any further development over there?

Yes, so that is something which is very much on the agenda for us as a group. You rightly said, we have taken a board approval and the board has approved a Rs. 1000 crore investment in advanced materials, largely epoxy space. And so there are active discussions going on internally. And as we get final approval to go ahead from the board, we will announce.

And just to add here, we have already acquired land for that and we are in discussions with technical suppliers and all that. So, the movem ent is happening. Hopefully we should close things soon and start implementing.

And sir, ballpark, what sort of capacity are we looking at?

It will depend on the technical discussions. But overall, for Rs. 1000 crore, that we were talking about, we were looking at about 80,000 tons per annum.

So, how much of our ECH will be absorbed captively for epoxy?

So, it will actually depend as we ramp up the capacities. But as Amit has said, at 80,000 tons per annum, that would translate to roughly 50,000 tons per annum of ECH consumption. But over time, we will look to ramp up this entire vertical. So, therefore there will be continuous capacity additions in this space.

And lastly, on Fenesta, because we have seen margins coming off from 18% odd to 15% odd. Of course, you did mention that there are additional fixed costs due to marketing activities and growing the business. So, when can we then expect the margins to crawl back to 18% or do you think that a couple of years, since you are in the expansion phase, it will remain in this 15 %-16% range?

See, last year same period and I'm looking at the EBITDA margin, right? Now EBITDA margin was about 19% and the same period last year were about 21% so there is a 2% dip and I've always said that this is a business which is a 16%- 17% EBITDA margin business, right? Given that as we increase the portfolio of products each product will have a different set of margin. Currently the major reason why it's down is fixed cost and as was mentioned in the opening remarks that fixed costs are expected to be elevated because we will have to invest more on marketing, brand building and things like that, as well as more on people as we are growing platforms and even otherwise on existing people. My competition also adds to the cost pressure.

Thank you. Next follow-up question is from the line of Rohit Nagraj from B &K Securities. Please go ahead.

Just a couple of questions. One is on the ECU, given that the market is well supplied from the domestic point of view, do you see that the EC U should be in the similar range for the time being till again the demand supply mismatch comes in or probably on the demand side there is a ne w uptick from the domestic side?

As you know, caustic ECU is made up of caustic and of chlorine. Caustic of course is highly dependent on the global demand supply situation and chlorine is more dependent on the local demand supply situation. So, the ECU is currently in the range of about Rs. 30,000 per ton and we do expect it to remain balanced in the times to come. And hopefully over time it will inch up further as well.

Second question, on the CBG project front, given that it will be commissioned sometimes during this quarter, what is the arrangement in terms of off take in terms of supplies to customers pricing for the same? And pardon me if I have not done my homework earlier, just to get more clarity on the same. Thank you.

So, this will be to OMCs, the oil marketing companies, we will be supplying to them.

And in terms of infrastructure network to transport the gas as well as from the pricing perspective, how will it be priced?

So, you see, there is a pricing formula which is based on the natural gas prices, and that makes it pretty viable as a business. Transportation infrastructure is there, further pipeline is being looked at. And also, to add that, we will definitely look at doing maybe some bit of supply to retail as well as we grow the business.

And just last bit on this, when we have worked out the project, what is the threshold IRR or ROC E that we had looked, I mean, is it in line with other businesses or probably slightly higher for this business?

If I remember correctly, this was about 18% return on capital employed business.

Thank you very much. Ladies and gentlemen, that will be the last question. And now I will hand the conference over to the management for closing comments.

Ladies and gentlemen, thank you very much for your participation in our earning conference call. We are dedicated to achieving long-term success by implementing strategic initiatives aimed at investing in scale, value creation, and boosting operational efficiencies. We ensure that our values of integrity, agility, customer centricity, teamwork, openness, and newness are reflected in our ways of working . Our priorities are of creating a more engaged workforce that is equipped to thrive in an ever -evolving business landscape. To this effect, we ensured effective team building and collaboration by encouraging open communication . Investing in people development through conducting skill -gap analysis, upgrading skills, and encouraging continuous learning is another focus area that is vital for organizational growth and employee satisfaction. The integration of digital technology into management practices is transforming how organizations operate. Embracing digital transformation and addressing cybersecurity concerns has become imperative to improve customer experiences and maintain competitiveness. Central to our strategy is a focus on su stainability which underpins our unwavering commitment to environmental stewardship and social impact. Thank you very much once again, goodbye.

Thank you very much. On behalf of DCM Shriram Limited that concludes this conference. Thank you for joining us and you may now disconnect your lines. Thank you.

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