Deepak Fertilizers and Petrochemicals Corporation Limited analyst Q&A

Sure. So I think your first question was about -- something about explosives acquisition. Is that correct?

So it was about -- I'll repeat myself. It was about an explosive manufacturer that we recently acquired. I want to know the kind of strategy we are playing with that. Is it more like production ramp-up? Or is it more like a tech acquisition? Or -- and are we looking forward for infusing any amount of money in that explosive manufacturer?

Okay. So first is we have not yet acquired the company. As you mentioned -- I think you said you have acquired. The answer is no, we haven't. What we have done is we have signed an agreement to acquire. So that's the first clarification. And the acquisition will be subject to certain due diligence and conditions, precedents, as we say, being fulfilled, after which if everything goes to our satisfaction, then the transaction will go through. And that would mark the acquisition. So that's one clarification. Now, if that goes through under that assumption, what's the purpose of that? The purpose is basically for us to -- for DMSL to produce differentiated value-adding kind of products to help enhance our journey in the mining industry as a solutions provider and also help in terms of our export business. So one example of that could be we could look at bundling those newly produced products along with our technical ammonium nitrate and provide a comprehensive bundled offering to the international markets, and to some extent, also assist our Australian subsidiary, which is known as Platinum Blasting Services. So that's the kind of overall view we have at this stage.

And whether that manufacturer is placed in India or is it outside the India?

Based in India.

And the last question, could you please throw some light on how our steel picking solution that we recently launched, I think PICKBRITE is the name, is performing? Subhash Anand: Sorry, come again?

We had a steel picking solution. I think the PICKBRITE is the brand name. I just wanted to know how that is performing in the market. Subhash Anand: Okay. That is still in ramp -up stage, I call it. It's an early stage where we are working with a couple of manufacturers, and then, I'll say, take it up from -- you call it from a ramp-up stage to commercialization. So still not reached to a level where it has a meaningful, or I'll say, sizable contribution to our overall scenario. But yes, this is one of the product on which we are working, and then, once it's there, it will be a differentiated product in our nitric acid business.

We have the next question from the line of Chirag from Keynote Capital.

Sir, my first question is related to the Fertilizer segment. As I'm able to see that our volume growth was stable for the quarter and the realization has improved. However, there has been a significant dip in the margins. So do you want to say that this is purely because of the increase in price of phosphoric acid, which you had tried to pass on to the customers? However, the pass- on was not that much due to the ability for us to charge higher, as there was an extended monsoon. This is the reason behind that? Subhash Anand: Two reasons, Chirag. Yes, one reason very clearly, this is a sizable cost increases, which has happened on raw material side. And subsidy was not in tune with the increases, the size of increases which happened, impacting the overall profitability of that. Second, if you see the growth in overall revenue, which has come, it has come in primarily from, I'll say, low end of the product. Since the monsoon was delayed and erratic, actually, that gave us only just a month to place the product of -- our value-added product, which was Croptek and specialty. So the mix has changed in last quarter, and that's another reason for us with the lower profitability what has come in. The one was raw material costs, not compensated by subsidy; second, erratic rain and delayed rain, finally restricted our ability to push the -- or I'll say, place the full value-added product, which -- normally which happens in this business. So both reasons was there in the last quarter. Now, with this quarter, with Rabi back in place, we hope now things will be back in place.

Fair enough. Fair enough. Sir, my second question is related to the IPA segment, which you have mentioned. I couldn't understand the reason behind the plant shutdown. If you could just repeat that once again? Subhash Anand: It was an annual planned maintenance, which we need to carry it out. So it was nothing to do with anything specific. There was a planned shutdown, which happened -- maintenance shutdown.

Okay. And sir, third thing I wanted to understand that we have an ammonia plant with ourselves, too. So any increase in price of the ammonia is actually beneficial for us, as it helps us to make the plant breakeven to an extent, right? So even after increase in ammonia prices -- I just wanted to understand why there was a reason our margins significantly took a hit in our Chemical segment. Subhash Anand: Yes. Normally, if you say mid- to long-term, ammonia prices get passed on in the end product, whether it's a TAN or whether it's other nitric acid product. But it's always -- there is always a time lag. It doesn't happen immediately with ammonia price movement. So what price increases what we have seen in ammonia in last quarter, if it remain at this level for some time, then we will see the correction happening in end product. And that's the time when the real benefit come out. Otherwise, it's a shift from one basket to another basket or one segment to another segment until the end product prices gets corrected in line with ammonia.

Okay. So will it be fair for me to assume that in TAN, specifically, there was no margin correction -- there were no margin impact; however, the impact was majorly into industrial front?. Subhash Anand: I will -- okay, yes, if you're looking at combined ammonia and TAN together, then yes, TAN price increase -- while ammonia price increases impacted TAN stand-alone margin, but both put together, margin was same. And nitric acid, yes, has seen a price -- cost increases because of ammonia coming to them.

We have the next question from the line of Mukta Chandani from Arihant Capital. Please go ahead. Ms. Chandani, could you kindly come closer to the microphone? Your voice is not very much audible.

I wanted to know regarding mining chemical business. I can see B2C revenue share stood at 15% this time. So if you could just throw some light on long-term targets, it would be great. Subhash Anand: B2C mining.

Okay. So Tarun here. Thank you for your question. So one thing which -- the way we are looking at B2C is in the -- we now start to call it as a downstream business of DMSL because I think earlier in the call, there were some -- there was one question on DMSL as an entity and things like that. So as an entity, DMSL has got its own upstream and downstream businesses. Upstream business is largely TAN and supported by its own ammonia, as was answered in the previous question from now. And the downstream is the B2C part, which you are talking. So first, I wanted to clarify, not just for you, but for all the callers. And t he way we measure downstream is through that model, through that B2C model, we connect with -- directly with the mining companies, the end consumers. So there are various ways we do that, and there are different go-to-market models that we adopt for that. But that's where I would like to leave it at. It's growing. It's growing in its own way, driven by the mining -- the growth in mining and infrastructure. And our share is slowly, slowly improving there. Having said that, as we will have the new TAN facility in Gopalpur in a few months from now, again, the mix will look a little bit different because we've got a range of products coming in Gopalpur also to market. So what we will have to see is not downstream as the overall mix in the revenue, but in terms of absolute numbers, whether it's growing or not. And the answer is yes, in absolute number, it will be growing in line with the market growth. Subhash Anand: And just to add to Tarun, our strategy -- or just now or just a couple of questions back, we talk about acquisition in explosives. So that also is part of our downstream journey, how do we take that downstream journey and speed up that journey in that. So all actions are in place, we want to make that business grow and then meaningful for us. So we are working in that direction.

We have the next question from the line of Sheel Kumar Shah from Sameeshka Capital.

My question is on the fertilizer side. So I could see that our trading business revenue has significantly increased, probably for 2Q and this quarter as well. So what is driving that? I mean, is it going to continue for 4Q and probably next year as well? A nd what type of margins do we make on this trading side? Yes. Subhash Anand: Okay. The strategy in our fertilizer business is simple. I call it -- our focus is to grow specialty and crop -focused business. And that's how we are looking Croptek and specialty's growth happening in overall side. We have a limited manufacturing facility, but it's fungible. So our priority will always be dedicating our manufacturing facilities more and more towards Croptek. At the same time, we have a brand. We have a market presence. So if we see a demand, we will look at trading route to fulfill that demand of Smartek and o ther products. So that's the strategy, which we'll continue to take. Yes, specialty products do have a margin profile, which is, I'll say, elevated compared to rest of the profile. But at the same time, when we are looking at traded versus manufacturing, even if we go with trading, we see we maintain a right margin profile even with that journey, and that's what the focus will continue to have. Our strategy is to focus on Croptek and specialty and grow that in a big way. For us, trading is an opportunity. We'll keep looking that way.

So I mean, do you mean that when you say trading, it's like a B2B of whatever manufacturing we have done of Smartek or Croptek products or it's like getting products from somewhere and probably importing and then selling to the market? Subhash Anand: No, we do -- it's not a plain vanilla product what we import and sell. Even if we import, we have our own process, which we need to apply to make a customer -- a product which is differentiated and which match to our product differentiation and quality. So we follow that route. But yes, we do -- if we see an opportunity and if manufacturing capability is not good enough, we are open to looking at that opportunity through trade route and then doing a few processes in-house to make it the right product for our quality levels and for our customer level.

Okay. So do you think this to continue in 4Q and probably 1Q as well? Subhash Anand: We are -- that's what I'm saying that our focus is more on Croptek and specialty. That's our priority. But this is an opportunity business. We are in market. If we see a demand, we'll continue with this journey.

We have the next question from the line of Dev Mehta, an individual investor.

So yes, I have one question with respect to our forward integration in the TAN business into explosives. So are we directly competing one of the largest mining explosive manufacturer in India?

Yes. So our business model is likely to be quite different from the existing players in the explosives industry in India. And the main difference will be the offering that we will make to the mining companies, mining contractors, infrastructure projects. And that will be that our proposal and our offering will be more on the outcome-based, more on the solution-based rather than on the product sell based, which means eventually, we will be guaranteeing some KPIs, some deliverables to the mine owners, mine o perators, mine contractors, which others are not doing. And that's the very big difference in our business model compared to what currently prevails in the country.

Okay. And sir, the second question is the $430, $450 savings, which was mentioned, was at EBITDA level? Breakeven, breakeven, I mean, the $430, $450... Subhash Anand: That's EBITDA level.

So in our previous con call, sir, it was mentioned as $350. So why is there so much difference? Subhash Anand: There are always, I'll call it, 2 things which one need to see. One is the gas prices, where it is. Second is with GST reduction or lower GST rate, the incentive has come down. So that impact also now got factored in.

Okay. So sir, this much difference, it will have approx. -- almost $80 if we -- because for calculation purposes, what should we take as a sustainable basis for savings amount? Because when we take $350, then we are breaking even at a very low level considering the ammonia prices have reached $500. So there is a $150 of savings we can see here. So if you can just guide me through that. Subhash Anand: In fact, if you see, the incentive benefit itself, which 9% local sales tax coming down to 2.5%, itself is sizable on the overall volume, and that's what the impact is. Now, what we are seeing basically, currently -- current, last quarter, Middle East FOB was around $420, $430. At that, we were almost at breakeven last quarter. But that was at a gas price, which is prevailing today. Now, with a new contract coming in, we do see a substantial gas prices reduction, and that will bring our breakeven down in double-digit percentage terms, I'll say, at this point of time. So that will bring the overall breakeven much lower and will make the PCL profitable.

Okay. And sir, last question, with respect to our TAN business only, if we are looking for forward integration, so are we looking at any potential acquisition in the smaller explosive companies to get all the licenses in place, so maybe if we can intend to sell products in future, we can do the same? Subhash Anand: We are not -- we have all options open. We'll see what is fit for our strategy, and we'll keep doing those steps. As Tarun spoke just a few times, we had one acquisition in pipeline for which we have done a communication, not yet concluded, but the opportunity, if it comes and if it makes a business case, we are open for that.

Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Subhash Anand, President and Chief Financial Officer, for closing comments. Subhash Anand: Thanks, and thanks, everyone, for taking out time and having a conversation. Look forward connecting with all of you. I understand we are not able to take all the questions because of time constraints. So in case you feel, please do reach out. We'll be able to answer those questions on a one-on-one basis or any further clarification. But thanks, everyone. Look forward connecting again next quarter. Thank you.

Thank you. On behalf of Deepak Fertilisers, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. For further information, please contact:

Subhash Anand

President and CFO

subhash.anand@dfpcl.com

+91 20 6645 8797

This transcript has been edited to improve readability

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