DCM Shriram Limited analyst Q&A

Thank you very much. We will now begin the question and answer session. The first question is from the line of Jainam Ghelani from Svan Investments. Please go ahead.

Hi sir. Thank you for this opportunity. As you have mentioned in the presentation the caustic soda import prices have risen by almost 15% to 20% quarter -over-quarter, but there was no major difference in the ECU realization for us. So what was the reason for the same?

So global prices are different in different regions of the world. One of the important factors actually for India, especially Western India where our capacity gets impacted is the import from Iran. And from Iran, the import s were coming at lower prices . That has an implication on the pricing in the Western market which has been associated with that.

I would just like to add here that given that in domestic market there is surplus capacity. So as a result of which even if the international prices are better, there will be an impact on domestic prices. They may not follow the similar trend.

Okay. And so what is the peak debt that we are planning to take and what is our cost of debt?

Pardon me, could you kindly repeat that?

So what is the peak debt level that we plan to take and what is the current cost of debt for us?

So the current cost of debt blended short term, long term is around 7.5% and see debt lev el will be governed by the cash flows and the next year plan. So still as we mentioned that we would like to maintain our debt-to-EBITDA level that's what our financial prudence principle is, it should be in the range of around 1.5x to 2x.

Okay. And sir, once our additional capacity comes in for caustic how do we plan to dispose of the additional chlorine that would be coming from it?

So for chlorine, actually we have a multipronged strategy. One is, of course, we are putting chlorine downstream capacities ourselves. So that will be captive chlorine consumption. Second is at least in our Bharuch site we have a very long -standing relationships with our customers. And so they consume pipeline chlorine from us, and that's been th e backbone for us. And they are also increasing their capacity going forward. So that a large part of the chlorine will also be consumed along with our pipeline customers and over time we expect the market to grow steadily as well. So we fore see that in the coming year and beyond the chlorine consumption will increase that way.

So sir currently, if we consider we almost consume 40% of our chlorine captively. So post our expansion what will be the total chlorine consumption?

So see at Bharuch which is the largest site now it's at 2,225 tons per day. See there the current is let me put this way post expansion and everything that comes up in terms of epichlorohydrin, our captive consumption will be about 15%. Further, as Aditya men tioned, if we add the pipeline supplies that's about 40%. So about 55% to 60% we have ready markets in terms of almost like virtually captive consumption and the rest will be market, but there also we are looking at certain tie -ups and multi - pronged strategy is there to see that we increase our chlorine disposal.

And sir, in your initial remarks you indicated about the higher import coming from the Iran in terms of caustic. So if you look in the month of April and May what was the import situation and what is the ECU as compared to the exit of the Q4 numbers?

Can you repeat your question, please and be louder please?

So just wanted to understand as you indicated that there is a huge presence coming in from the im port in terms of the caustic and the subdued demand. So just wanted to understand that given the exit price of the ECU in month of March what is the current situation in the month of April and May?

Yes. So the current ECUs in the Western market is in the range of around 28,000.

Okay, sir. That's all from my side. If I have further questions will come back in the queue and all the best.

Thank you. The next question is from Nirav Jimudia from Anvil Research. Please go ahead.

Thanks for the opportunity sir. So just wanted to understand your thought process on the chlorine. So if you can just walk us through in terms of what are the feedbacks you are receiving from the customers in terms of improvement in t heir existing capacity utilization where chlorine is used? And you mentioned about the expansions also which have been carried down by your customers there. So how do you see the schedule of -- or some understanding about the improvement in the chlorine demand because I think our ECU portion is largely impacted by the chlorine part and hence for the utilization on the caustic part also. So if you can just give us some sense on the customer side in terms of the feedbacks what you have been receiving, that would be very helpful?

Sure. So actually in the last past year or so there has been some subdued demand in some verticals especially agrochemicals and other related industries, but the way we are seeing it is that a lot of our customers are also expanding their capacities anticipating the demand increase in the coming quarters. So along with our capacity increase, a lot of our customers are also increasing their capacities which will consume our chlorine. So we expect that in the short term, yes, there's a lot of caustic capacity that has come in, but in the medium term and long term we expect a robust growth sort of aligned with the GDP growth. So we are very optimistic in the medium to long term.

And sir, are you seeing any po ckets in terms of the consuming industries where the demand for chlorine is picking up apart from the agrochemicals?

Aluminium will be the other segment where India is seeing capacity additions. So that's the other segment where the demand is picking up. But that's for caustic. But in chlorine, I think it will largely be as overall sector picks up in textiles we'll also see dyes and chemicals picking up. I think over the period this demand should pick up.

Got it. And sir is ther e any benchmark on which you work upon, let's say, when -- before 2 years when the textile was doing good, agrochemicals had a good pickup in terms of the demand. How much fall in the demand for chlorine possibly you would have witnessed over the last 2 years which is justifying the current suppressing capacity utilization for caustic soda too? So is there any benchmark, let's say, before 2 years we were at 100% for the chlorine consumption for these two sectors, how much they have fallen over last 2 years? Is there any benchmark which you have done sir?

I think I'll put it this way. Compared to 2 years ago and if you are saying 100% whatever capacity industry was running at. In the last 2 years a lot of capacity addition has happened which has made the chlorine availability much larger than what it was 2 years ago. So I think the optimism of all of us on the Indian economy growing at 7%, 7.5% in the next many years, few years anyway. I think we are bullish on the Indian economy and any commodit y products which compared to 2 years ago when the prices were very healthy that's the new additions have come in. It takes a couple of years for the prices to stabilize, demand to match out and then we'll come back to a sound position once again of the ch lor-alkali industry. So I think we are optimistic overall not only on chlorine consumption, but even on caustic consumption to get a reasonable satisfactory ECU in the medium term.

Got it, sir. Sir, second question is on the VAP side. So if I recall a few of the conference call, you have mentioned that our contribution to sales and EBITDA in the caustic soda business from VAP was close to 18% to 20%. So how has been in FY '24 in terms of the contribution both in terms of sales as well as operating profit or PBIT whatever you can give us, sir?

Yes, yes. Value-added products, including the hydrogen part if I'm not wrong, sir?

So if I look at this year, hydrogen would have added almost 60% to 70% of the total earnings, total EBITDA.

Okay. And the rest could be divided between poly aluminium chloride, S BP and other value -added products which we will be manufacturing?

Yes. I mean I would say largely caustic soda would be the largest after this. Others are more in terms of consuming chlorine so that they can help the capacity utilization of caustic. So however, SBP is picking up. In the last six months, we have seen good traction in SBP.

Got it. So is it safe to believe that whatever PBIT we have reported, close to 60% is contributed by hydrogen?

Yes.

Got it. Sir, last question is on the hydrogen part. So with this expansion, the excess hydrogen will be producing out. So some would be consumed in the hydrogen peroxide, rest of the hydrogen are we planning to sell in the domestic market or we'll be using for our captive caustic flaker plant?

Yes. So again, like for chlorine, I think we have the advantage of having strong partners and pipeline customers for hydrogen as well. So over time, we expect the demand for hydrogen through pipeline also to increase. We also sell hydrogen through banks in the markets around our units. And of course, we will be adding value our self as we mentioned also, through hydrogen peroxide. So we have multiple avenues through which we'll add value to hydrogen. And it's an important stream for us as well.

Got it. What will be the total flaker capacity now after this addition of 850 TPD of capacity at Bharuch?

We are expanding by another 600 TPD for flaker.

So total will be close to 900 TPD at Bharuch.

900 TPD, right, sir?

900 TPD at Bharuch and 200-plus TPD at our Kota site.

The next question is from Rohit Nagraj from Centrum Broking.

Sir, my first question is on the industry front. So you mentioned that there has been a cap acity addition, which has happened, so what is the current domestic chlor -alkali capacity? What are the utilization grades? And I guess that there is one more conglomerate who is going to put up chlor - alkali capacity in the near future. So how do you look at the overall demand -supply equation. And given that the capacities or supplies will be higher, will the ECUs remain benign, at least for the near to medium term? So your thought on this? Thank you.

Yes. So one, the current capacity, the cau stic soda capacity in the country is about 5.6 million tons. And the overall production is about 4.5 million tons. That comes to about 80% is the capacity utilization in the country. However, we are close to about 90%. So that is one. What was the next question?

Sir new capacities are also coming up, like we have recently now put up 850,000 then there is another conglomerate who is also putting up 22,000 tons of capacity?

Yes. So the total capacity should go up to buy other 0.5 t o 1 million tons. That will be added over the next one year. So it depends from one our capacity is already added, and it all depends how their plans go, but ballpark is 0.5 to 1 million ton getting added.

Right. So the ECU environment will r emain benign in such scenario and supplies are higher and demand has growing at a reasonable pace?

So actually, we anticipate that the demand is going to continue to grow. So caustic soda actually can be moved globally. So as the capacities increase in India, the export from India will also increase. And so it will be driven to an extent by the global market scenario as well. Of course, the chlorine that gets produced along with the caustic is more of a domestic play because transporting chl orine internationally is not easy. So therefore, our focus also continues to remain on chlorine utilization and we are taking active steps to make that happen. So we expect that in the short term, prices do remain range-bound, and in the medium term, we are bullish on the demand situation.

Sure, sir. That answers the question. The second question is in terms of the future capital allocation. So whether we are looking at any other subsegments where we want to do the capex. So any adjacencies that we have found similar to what we did in, say, ECH a couple of years, a few years ago. So are there any other such areas where we are looking at given that in domestic market, chlor - alkali as you said the capacity additions have been happening even in ECH today, the capacity is more than the demand. So any other areas which we are actively looking at? Thank you.

Yes. So we are continuously exploring new avenues for growth, not only in the chemicals business, but across all businesses in th e group barring maybe one or two. So there's a lot of interesting options that are being evaluated. And as the Board approves them of course, that become public knowledge. Within chemicals itself, one of the areas in which the Board has approved an in principle go ahead is for epoxy, advanced materials in the s phere of epoxy. So that is something which we are working very actively on. And at a suitable time, we will declare that as well.

The next question is from the line of Ahmed Madha from Unifi Capital.

I have few questions. First on the ca ustic part, can you explain what is the reason for increase in cost on quarter-on-quarter basis compared to Q3?

So my question is, if I look at the numbers for caustic business compared to Q3 last quarter, why has the cost structure increased? I thought that cost was supposed to improve compared to Q3 and Q4. So is there any specific reason?

Yes. So the cost structure has improved. But if you see in the month of January, the prices had -- in December, January, the prices have come off. So that's the reason why overall performance was a little lower than previous quarter. But overall cost structure has improved.

And on the sugar side, I have two questions. First, on the prices, do you see the current level of INR 39, INR 40 sustaining in the next season? First question. Second question, is it fair to expect that we should do 17 to 18 crore litres of ethanol in next financial year?

So on your first question, in terms of prices, see, the point is yes current prices are in the range of INR 3,900 to INR 4,000. Now given that FRP has increased and even SAP went up in the last season, given that the prices should increase. However, it's very difficult to say given the sensitivity of the commodity. What was the second question?

On the ethanol side, we did, I think, around 16 crore litres this year. Next year, we should be doing 18 crore litres?

So our capacity is about 18 crore litres. But it depends on the feedstock, depending we're using maize, we're using surplus rice, C-Heavy, B-Heavy, all that impacts. But on B-Heavy, let's say, it's about 18 crore litres.

Okay. And as of now, how much we are doing ethanol from sugar and how much from non -sugar feedstock?

So see, our capacity on non-sugar is about 250 KLD out of total about 550, 570 KLD capacity that we have per day.

But can you tell me, individually production number? Is it possible?

I can. So in the total what we produced in the last financial year, total we produced from grain was about 6.6 crore litres.

Okay. And this will remain the same in the next year as well based on whatever current scenario is?

See again, it will depend how much from maize and how much from surplus rice, but it should be in this range. As I said, the capacity is 250 KLD, and we operate our distilleries to almost 330 days, 330 to 340 days what we try. On that basis, about 8.2 crore litres is what we can do maximum.

Okay. And on the fertilizer part, the sales volume is still like near 1 lakh ton. So I don't see issue under the volumes part. So how much shutdown expenses we have taken on P&L?

Because of fertilizer?

I don't have that number right away, Ahmed. I can probably provide it to you separately. I don't have the number right away.

The next question is from the line of Riya Mehta from Aequitas Investment. Please go ahead.

My first question is in terms of cost of sugar.

A little louder please. Can I request you to please speak a little louder?

Congratulations on good set of numbers. My first question is in regards to the cost of production for sugar for the season.

Yes. So for the season, the cost of production is INR 3,590 per quintal.

Okay. And what was it last year for FY'23?

It was about INR 3,200 approximately.

INR 3,200, got it. Also, what is the current chlorine cost, prices?

In the range of minus INR 2,000 to minus INR 2,500.

Okay. And when we are seeing the increased incremental capacity addition in caustic, how are we looking for incremental sales of chlorine, like apart from the capacity addition of already existing pipeline customers, what other avenues are we looking for?

So as we said earlier as well, it's a multi -pronged strategy that we are offering. One is captive consumption. So we already have captive consumption of chlorine and we are going to look at newer avenues for consumer chlorine in -house as well. The second ve ry important for us is our pipeline customers, especially in Bharuch. And they are also growing continuously. So we have long -standing partnerships with them, and that will continue as well. And fundamentally, we expect the market to grow as well, steadily. So that will also help in increase of chlorine consumption.

Got it. Also, you mentioned about exports of caustic soda as a further opportunity for us. So what's the current export level? I guess last year, we had good export number, but it ha d declined. So what is the current scenario? And where would we export if we are exporting?

See, the export numbers have not declined. For the full year, if you look at it last year, we were about 4.25 lakh metric tons. This year, also, it's around the same level, a little higher 4.39. What has happened is imports have gone up from about 1.4 last year to 2.4 lakh metric tons.

Got it. And where do we export primarily?

Got it. And you just said that we are increasing our flaker capacity. So where are we seeing the demand for flaker? Is it entirely for exports?

Not entirely, it will be both for domestic market as well as for exports, and we continuously evaluate where it is that we are getting the best value and then take decisions accordingly.

Got it. And overall, globally, you said there's a lot of import happening. So is there demand slowdown globally also? And what would be the cause for that?

Globally, Riya, now the demand is improving. We're not seeing demand, as Chairman had mentioned in his opening remarks as well, that globally, demand is improving.

Right. But for us, I think you mentioned that in our region specific, we are seeing a lot of imports happening, from Iran?

Yes.

So what's led to that? Like is there a surplus capacity addition there? Or the lack of demand or other places are more self-sufficient? What has led to this incremental change?

So it is a dynamic situation based on the regional demand-supply balance or imbalance, also based on trade rates, based on disruptions lik e we had in the Red Sea disruption, etc. So it's a dynamic situation. There are times when we see imports and sometimes from Iran, they tend to come at a lower price, and that impacts the domestic market disproportionately. But again, with a close to 100 m illion metric ton global size and growth of 1.5% to 2% at a global GDP level, so we expect the demand for caustic also to grow. So therefore, the domestic prices and demand will be balanced by the global growth in demand as well.

Got it. And even in a domestic s cene, there's a lot of capacity additions. We would see some time till we see further hike in ECUs, right?

Yes. So it's, of course, hard to predict the price going forward because there are many factors that get involved. And yes, you're right that the domestic capacity has increased significantly more than the domestic demand. And so in the short term, we do see some of those challenges, which is why we tend to focus back also in caustic to move outside the country.

Right. And in terms of ECH, I was just asking that since our competitor is currently at around 50%, 60% capacity utilization, how much time will we take to ramp it up? And are we planning to export ECH as well?

Yes. So it will take some time to ramp up like it does for any new capacity, and it's a new product for us as well. But we have strong teams in place, and we expect both domestic consumption and exports. There is an approval process for ECH with the customers, largely ECH goes into the manufacturing of epoxy and we have good relationships with a lot of the epoxy customers as well. So we expect a positive movement over the coming quarters.

Got it. And when do we see entire ramping up of the capacity?

See, it will take about 2 to 3 years to achieve about 90% to 100% capacity utilization.

Okay. And post our ECH capacities around for the next 2 years, our chlorine consumption or captive would increase, right?

That's right.

The next question is from the line of Saket Kapoor from Kapoor & Company. Please go ahead.

Thank you to the team for a very detailed investor presentation, and we hope for the continuity of the format. Sir, I missed the point on the ECH part and epichlorohydrin part of the story, if you could just explain once again my line got disconnected. The last few statements that you made.

So what is the question specifically?

Regarding the ECH contribution going ahead and the epoxy chloride, which you mentioned that they will start contributing in a meaningful way. So when can we expect that to happen? Amit Agarwal See, in the initial period, let's say, in the first year of operation for ECH and H2O2, the ramping up will take time. I think the meaningful contribution can happen only, let's say, in Q4 of this year and then full year impact will come in FY'26.

Okay. And we will be commissioning it in the first half itself, the H2O2 and the ECH facility?

As mentioned by Chairman in his opening remarks, the hydrogen peroxide should get commissioned in next 1 to 2 months. And ECH will get commissioned in Q2.

Q2. And the total capex -- yes, sir?

Pardon me?

Okay. And the total capex we have spent on these two products, sir?

That will be close to about -- these 2 products put together will be in the range of INR 1,100 crore plus/minus INR 100 crore.

Okay. So out of the INR 1,700 work in progress, INR 1,100 will get capitalized by Q2 of this financial year?

Yes.

And the balance amount of the odd INR 600 crore?

See, there are projects in other businesses as well. Like in sugar, we mentioned there ar e CBG and there is a capacity expansion also happening in sugar. And there will be some other projects in other businesses as well. So they all -- and there will be some normal capital expenditure as well. So it's summation of all that.

Okay. Sir, when we look at chlorine as the byproduct and the evacuation and the utilization of chlorine being the key figure determining the utilization levels for the caustic players, I think the investment in the PVC segment has been due for over ages, if I m ay use it, and also a lot of big corporates have lined up projects for setting up big PVC projects going ahead in 2, 3 years down the line. So what is the update that we are getting on the PVC? I think the PVC is still imported in the country. There is inh erent demand. So what is the thought process and what are the feelers on the front of setting a big PVC complex and then this chlorine dynamics changing completely?

Well, I'll put it this way that, yes, India imports today almost 60% of the P VC requirements. And based on our cost structure, we actually took a view that we are not looking at investing in PVC expansion right now. As you are aware, there are 2 of the large groups, which are looking at setting up large capacities in PVC. So that's moving in its own direction. We are looking at the more value -add segment now in a more aggressive manner. And we are seeing what more we can do in the value -add front.

Right, sir. So when we look at the country as a whole, what is the annua l chlorine demand and the availability of chlorine with the expanded capacity at 5.6 million tons from the existing -- all the existing caustic soda players?

Well, chlorine is actually about 0.88% of caustic production.

That's right. So the production, that is the linkage. What we see is that over the past many years, the capacity utilization at an industry level has been a fairly healthy 85% plus/minus kind of range. There was a sudden increase in capacit y. In the short term, this will reduce capacity utilization will reduce driven to a large extent by chlorine. But again, as we are saying that in the medium term, we expect the demand is going to be robust. And so we expect that it should come back, the ut ilization should come back to its levels which have been there historically.

No. Suppose we are factoring in an increase in caustic prices also globally. So in that case, we would be able to increase the utilization level only to the extent c hlorine gets consumed. So I was just alluding to that fact to reach from average 80% to another 90%, 94% as have been the averages earlier also. What kind of chlorine consumption capacity should be in the anvil so that evacuation happens? Or how will the metrics work?

So Saket, as we’ve mentioned, I think there have been multiple questions on this call with respect to chlorine utilization, right? So we have mentioned that we're looking at there is a multi -pronged strategy that we have as the board approves, we will take that up. Our utilization is around 55%, post all expansions coming in. We will be having 55%, including the pipeline. And we are in advanced talks for further adding up to just captive consumption. So we'll come back to the shar eholders once those plans get firmed up.

Sir, on the debt level numbers, I think the INR 1,400 crore is the net debt as on 31st March. So this is the peak amount or what should be the debt number say for H2? And for H1 closing for FY 24-25?

For our kind of a company, the kind of businesses we are in, the March debt is always the peak debt.

Correct.

Right. So H1, it will -- by end of H1, it will be lower. And then it again goes up by end of H2.

But factoring into the current -- yes, yes. I join the queue. I want to just understanding currently, the current -- what are the current maturities lined up and just joined the queue.

We keep our repayment at least for the next 1 to 2 years, if I remember correctly, the repayment in the range of around INR 100 crore, INR 150 crore.

Thank you. The next question is from Rohit Nagraj from Centrum Broking. Please go ahead.

Just 1 question. In our presentation, you h ave mentioned that we have sanctioned a power cost optimization project with capex of INR 120 crore. What is it exactly? And how will it help? Is it pertaining to the chlor-alkali project? So if you can give a little more details on this one. Thank you.

So we are looking at doing certain modifications in our turbines, especially the older turbines. Now that will improve the efficiency of the power generation, thereby reducing the cost. So that is something we keep looking at innovative ways to reduce our costs because that's something which is in our control. And with that objective, the board has sanctioned this project.

Thank you. The next question is from Parth Vasani, who is an individual investor. Please go ahead.

Yes. Thank you for the opportunity. I just wanted to know about the epoxy plant. So what is the capacity of it and by when you're expecting to commission the same?

So that, as we've mentioned in the past, we have a n in-principal approval fr om the Board. We are doing a lot of the technology evaluation, detailing out capacities, et cetera. And once it is approved by the board, we'll be able to share all those details.

Okay. Any date as such by when you're expecting or that is still yet to be finalized?

So we expect that in the next couple of quarters, we'll be able to go ahead with moving forward with the project after approval internally.

Thank you. The next question is from Shantanu Naik, who is an individual investor. Please go ahead.

My question is...

So my question is regarding Fenesta. So what kind of total revenues from Fenesta. What would be the percentage…

Can you kindly repeat yourself?

Okay. So my question is regarding Fenesta. So of total revenues from Fenesta, what would be the percent share of projects, retail and commercial?

So out of the total revenue, about 35% is projects. The rest is retail.

Okay. And in -- and with respect to growth, what kind of growth do we expect in UPVC compared to aluminium? Considering aluminium right now is doing a lmost 20% of total revenues from Fenesta, so.

So if I got your question right, you're saying the gro wth of aluminium versus UPVC, have I understood it right?

Yes.

Yes. Aluminium actually is growing faster, but we had a much lower base. So it s definitely growing faster. Put together, we have seen at least our business growing at almost around 20% year-on-year.

Okay. And do you see that in medium term, aluminium and UPVC sharing equal in percentage of total revenues for Fenesta?

Frankly, for Fenesta business, it's now been expanded to UPVC windows, aluminium windows. We are into doors, we've started façades. So we've got a range of product and down the line more things will get added . So w e are hoping that the aluminium window as well as the UPVC windows both grow rapidly, and the y both have a separate market segment. So we are focusing on both very aggressively.

Thank you very much. We'd like to take that as the last question. I would now like to hand the conference back to the management team for closing comments. Ajay Shriram Well, ladies and gentlemen, thank you very much for your participation in our earnings conference call. We are committed to deliver better earnings and gr owth. Initiatives taken by us to enhance capacities, raise efficiencies and promote sustainability will begin delivering intended outcomes in the coming years. The commissioning of our new projects in the Chemical business will usher in a new area of growth. Further, we continue to evaluate adjacencies to enhance our portfolio in the core area. Thank you once again and wish you all, all the very best always. Thank you.

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