Deepak Nitrite Limited (506401) Earnings Call Transcript

Good noon, everyone, and thank you for joining us on Deepak Nitrite's Second Quarter and First Half FY '20 1 earnings call. Today, we have with us, Mr. Maulik Mehta, Executive Director and CEO; Mr. Sanjay Upadhyay, Director of Finance and CFO; and Mr. Somsekhar Nanda, Deputy CFO with us. We will begin the call with opening remarks from the management, followed by interactive question-and-answer session. At the outside, I would like to clarify that certain statements made or discussed on the call today may be forward-looking in nature, and a disclaimer to this effect has been included in the investor communications shared with you earlier. To begin, Mr. Mehta will share with us the operating performance and growth plans of the company, followed by Mr. Upadhyay, who shall be taking us through the financial and segmental performance. And I will now hand over the call to Mr. Mehta for his opening comments. Thank you, and over to you, sir.

Good day, everybody, and thank you for taking the time to participate in the earnings call. I hope all of you and your families are safe and in good health and are being very contrite about taking opportunities to meet each other during the festival season. I trust you will have had the opportunity to run through the earnings documents, which were shared earlier. Before we take your questions, we'd like to share some perspectives on the performance during the quarter. I'm sure that you have noted that Deepak Nitrite has embarked on its Golden Jubilee Year. We're celebrating 50 years since our incorporation in 1970, and it will be our endeavor to maintain the high standards of corporate governance, adhere to the 3 Ps of sustainable growth, people, planet and profit in that order and sustain the focus on value creation for all stakeholders in the years and decades to come. We're pleased to be in a position to set new benchmarks and performance as we commemorate this milestone. Our people philosophy has driven all plans to work efficiently across locations, while very strictly adhering to government directives and regulations. Our EHS team and plant teams have recognized that a restrictive manufacturing environment may lead to unintended errors, and thus, we have been very vigilant and proactive in ensuring human equipment and material safety. During quarter 2, Deepak Nitrite delivered a strong recovery on a quarter-to-quarter basis, capitalizing on the ability to manage its plant operation for more days. There has been a strengthening in various segments as we go along when it comes to production and the supply chain. In addition to this, we have also actively evaluated and pursued opportunities across domestic and export markets to enable this revival, both in terms of production and in terms of maintaining value. Recording double-digit growth at all our strategic business units, has been a demonstration of this. On a consolidated basis, revenues were INR 991 crores in quarter 2 compared to INR 1,011 crores last year in the same quarter. I would say that this is a fairly remarkable achievement. If we had to take into account the operational constraints that we experienced in this quarter, combined with the fact that last year, we had an exceptional realization in one of our segments, Performance Products, and these have been normalized as expected and anticipated. So a credible performance in quarter 2 by Deepak Nitrite, even when some engines were not firing as they were last year. Consolidated EBITDA was at INR 280 crores in the quarter as compared to INR 250 crores in the previous year, higher by 8.1% on a year-on-year basis. This was significantly propelled by the Phenolics business, which allowed the company to report high-growth in its consolidated EBITDA. On a consolidated basis, PAT was INR 170 crores as against INR 150 crores last year, higher by 13.3%. Reporting growth in profit after tax in Q2 has been a hard-fought achievement, for which I would like to acknowledge the contribution of the entire team of both companies. On a stand-alone basis, revenues were INR 448 crores in quarter 2, higher by INR 26 crores -- 26%, compared to quarter 1, a quarter where we operated just for about 2 months or maybe a little less. On a year-on-year basis, Q2 revenues were lower by 22%. Operating conditions in Q2 last year did not have the same constraints as we have had this year to peak production and therefore, there is also a higher days effect due to the exceptionally high realizations of Performance Products, as I originally mentioned. We reported an EBITDA of INR 139 crores in Q2 FY '21 against INR 102 crores in the previous quarter, registering a 36% growth. EBITDA margin has improved by 230 points to 31.1% in Q2 compared to Q1, which was due to the operating leverage as we operated not only for more days. But slowly and surely, we gained more confidence across the board from our agrochemicals, pharmaceuticals and care chemicals segment -- products. Stand-alone profit for Q2 was INR 124 crore, higher by 46% compared to Q1, lifted by effective cash conversion recovery program and the current position as -- and a debt-free company on a stand-alone basis. Stand-alone PAT for quarter 2 was INR 92 crores, higher by 45% on the previous quarter. DNL has sustained an attractive margin profile and has retained customer stickiness as expected. In the global chemical supply chain, Deepak Nitrite continues to take advantage of potential developments. As for a global China Plus One strategy, where de-emphasizing of the supply chain dependence on China and reemphasizing on strategic partners in other locations, including India, has remained a high priority at the strategic level of many multinational companies. Deepak has been able to leverage its extensive business experience, business leadership position in several products and a process competency to be able to be an attractive target for many of these discussions. We believe that the drive to diversify and derisk supply chain shall rapidly accelerate despite the ongoing pandemic. Moving to performance of Deepak Phenolics. On a sequential quarter basis, revenues increased by 64% from the last quarter, INR 334 crores in the last quarter to INR 549 crores in this quarter. EBITDA has also moved up by 63%, in line with the increase in volumes and revenues. And this has rebounded significantly on the operating constraints from the last quarter. The nimbleness displayed by the team to address the export market, while the domestic market remained constrained in Q2 has allowed us to manufacture at a very high utilization on an average even higher than 100%. The EBITDA margin in the Phenolics business was stable at 25% in Q2 as compared to Q1. Operating leverage, combined with reduced interest costs has enabled us to more than double our profit and PAT compared to the previous quarter. On a year-on-year basis, we delivered sharply. 26% improvement in revenues and 229% growth in EBITDA. Operating leverage, lower feedstock prices as well as IsoPropyl Alcohol, which came into commissioning in April, added to an increase in EBITDA margin, which is now at 25%, sharply higher from last year's 9.6%. Solid realizations from all of the products, but particularly Acetone and IPA aided the performance and we responded to the slower domestic demand by quintupling our exports in the quarter compared to the previous year. And despite this, we have ensured that not only has capacity utilization remained peak, but we have managed all sorts of logistic challenges with a joint effort of marketing production and the logistics teams. In a key development, the company has incorporated a wholly owned subsidiary named Deepak Clean Tech Limited. The subsidiary will carry out the business of manufacturing chemical intermediates that have similar process competencies to ones that the company already has and have also further developed some new ones to add to its kitty. In conclusion, let me highlight that Deepak Nitrite is very well suited for numerous end user segments, and with its tailored and enticing product portfolios and deep process expertise, remains an attractive option for multinational companies looking to depend on companies like Deepak. The roadmap for the near-term appears promising as we incorporate new downstreams and value-added product offerings, while also strengthening our existing platform of resources. This will improve the operational efficiency, along with gains from our forthcoming brownfield expansion ventures and position us well to increase market share where we are already present. With this, I would like to hand over the call to our Director of Finance and CFO, Mr. Sanjay Upadhyay, to address the forum briefly.

Thank you.

This is the operator. We are not able to hear the management right now.

Is it looking out?

Yes. Now we're able to hear you. Thank you.

Yes, thank you, Maulik. Good afternoon, everyone, and warm welcome to Deepak Nitrite's Q2 and H1 FY '21 Earnings Call. I'll take you through the financial highlights for the quarter ended 30 September, 2020. On a stand-alone basis, total revenues for the quarter declined by 22% to INR 488 crores as compared to INR 572 crores in Q2 FY '20. In H1 FY '21, it was lower by 29% to INR 803 crores as compared to INR 1,126 crores in the same period last year. On a stand-alone operations, staggard improvement from lockdown and social distancing policies, customized digitalization levels on a year-on-year basis. Taking this into account, revenues would have still been in line. One must remember these results in -- or must read this in line -- in view of -- it's a 5-month operation as compared to 6 months last year. In Q2 FY '21 on stand-alone EBITDA was lower at INR 139 crores as against INR 216 crores reported in the corresponding quarter of the last year. EBITDA margin was 31% in Q2 this year compared to 37% in Q2 of the last year. In H1 FY '21, EBITDA declined by 40% to INR 242 crores as against INR 404 crores in the same period of last year. EBITDA margin was 30% in H1 FY '21 compared to 36% reported in H1 previous year. Profit after tax for the quarter stood at INR 92 crores as against INR 179 crores in Q2 FY '20. Depreciation for the quarter was at INR 14 crores, while the finance cost declined by 88% to INR 1 crore in Q2 FY '21. On a stand alone basis, domestic revenue stood at INR 230 crores in Q2 FY '21 as against INR 348 crores in the corresponding period last year. Due to the divert towards exports market, which were recovering ahead of India and the domestic recovery, we witnessed a moderation in domestic revenues, which were to partly impacted by constraints to the peak production. Export earnings came at INR 218 crores in Q2 FY '21 compared to INR 224 crores in Q2 FY '20. We gave greater emphasis on key exporting countries, which are on the road to recovery from virus effects. In the quarter under review, consolidated revenue stood at INR 991 crores in Q2 FY '21 compared to INR 1,011 crores in Q2 FY '20. For H1 FY '21, revenues were INR 1,672 crores compared to INR 2,074 crores in H1 FY '20. Since DPL achieved higher volumes in the capacity utilization for more than 100%, the deficit in stand-alone earnings have been noticeably recovered in the consolidated revenues. EBITDA stood at INR 280 crores in Q2 FY '21 compared to INR 258 crores in Q2 FY '20, higher by 8% on a year-on-year basis. In H1 FY '21, EBITDA was INR 468 crores compared to INR 524 crores in H1 FY '20. PAT at INR 170 crores in Q2 FY '21 compared to INR 150 crores in Q2 FY '20, higher by 13%. In H1 FY '21, PAT was INR 269 crores as against INR 282 crores in FY '20. In Q2 -- coming to segmental performance, in Q2 FY '21, revenue from basic chemical stood at INR 166 crores as against INR 236 crores in Q2 FY '20. While sector margins are aided by low petrochemical prices, top line suffered because of slow pickup in the end use segment, such as textile, oil, fuel additives and also due to temporary supply disruptions. This segment contributed 17% of total consolidated revenue. EBIT stood at INR 41 crores, with EBIT margin of 24.6%. In the Fine & Specialty segment, the revenues came in at INR 210 crores in Q2 FY '21, growing by 52% year-on-year. This segment delivered a stellar performance, although capacity utilization was impacted by COVID-19-linked government restrictions performance guidance by robust demand during some of the key end user segments, which contribution margins also improved. Fine & Specialty Chemical contributed 21% to total revenues on an EBIT -- INR 102 crores EBIT margin, [indiscernible] 48.6%. The Performance Product segment revenue stood at INR 73 crores in Q2 FY '21, registered a subdued performance. Decline in revenue in year-over-year mainly due to stabilization of last year's reasonably high-grade realization as well as the low slower recovery in end-use industries. Having said that demand is gradually recovering, and we expect to reach pre-COVID level by next year. Let me again repeat that our personal product prices have significantly declined over last year, which is clearly evident in PP segment revenue. While the prices still remain below normal level, we expect the trade to positively improve in the ensuing quarters. Performance segment has contributed 7% to total consolidated revenues, with EBIT came at INR 5 crores and EBIT margin of 6.7% compared during the quarter under review. Moving to finally segment performance, in Q2 FY '21 revenues increased by 26% on year-on-year basis to INR 546 crores, with EBIT of INR 122 crores, translating to strong EBIT margin of 22%. Lastly, on the balance sheet front, between March and September, we have generated nearly INR 500 crores of net cash flow from operations compared to INR 765 crores generated in full financial year 2019/'20. This has been primarily deployed towards reducing the borrowing while also continuing investment towards the CapEx. As a result, we have improved debt-to-equity ratio on a stand-alone basis to interminate almost 0, 0.02 as on 30 September. Stand-alone equity is -- balance sheet is today debt-free as of today. On a considered basis, the debt-to-equity is from -- it has come down from 0.69 on March 31, 2020 to 0.37 presently. The financial position of the company is stable and ends in a very healthy liquidity position with cash liquidities on the banking -- bank balances improved in consolidated basis, despite the loan prepayments of more than INR 100 crores. Loan repayments and CapEx incurred, as stated above, that also is a part of this. Let me add a key development here CRISIL Limited, upgraded the long-term outlook of the Deep Nitrite from bank loan facility from CRISIL AA minus stable to CRISIL AA minus positive, and has reaffirmed the short-term rating as CRISIL A1 plus. With that, I will now request the moderator to open the forum for questions-answer session.

[Operator Instructions] The first question is from the line of Sajal Kapoor from Unseen Risk Advisors.

I have been a shareholder for over 4 years now and must congratulate the entire management team for their potent strategy backed by a flawless execution, and so hearty congratulations on that front. I have a 2-part question. So in the last con call, Maulik you alluded to this network effect playing out in the Indian chemical industry over a period. So in that context, how do you see the landscape for Deepak in terms of partnering with MNCs for long-term custom synthesis? So that's one. And secondly, within pharma intermediates, are we looking at both GMP and non-GMP intermediates or purely non GMP at this stage? Reason I ask this question is because the economics and the regulatory oversight is very different for GMP and non-GMP intermediates?

Okay. First of all, thank you for the questions. The last time I alluded to the network effect. I remain a very strong believer in that. And I believe that this comes from 2 aspects. One is India and the other is Deepak. Now India, as it becomes -- it has its own strengths when it comes to manufacturing capability when it comes to IP rights and things like that. And it also has a very large domestic consumption in any case. But network effect, what I meant is that as more and more companies worldwide start looking at India as a manufacturing base. Chemical as an industry is an industry where once there is a base put here, adding newer and newer opportunities on top of that, specialties allows the base industry and the growth industry, both to capitalize on the synergy with each other. And therefore, as India becomes a country, which is in pole position for attracting new investments from these multinationals. Over a period of time, this growth will only accelerate, the attractiveness will only accelerate. I believe that in a certain way, Deepak Nitrite is a microcosm of the same. We have a very healthy mix of large volume, basic chemicals which also become the foundation for a lot of specialty chemicals and process expertise. And many of these companies worldwide -- and by the way, may I also mention many of these companies worldwide also includes Chinese companies that are looking at increasing exports. Many of them look at companies which have strong backward integration and strong process expertise instead of fly-by-night operators. Deepak is very well positioned here because, one, it has demonstrated a committed performance over the last 50 years. Two, it has a very wide portfolio. Three, it is financially stable. And four, it is backed by a strong management team. Because of all of these, I believe that Deepak and India both should be very attractive for new opportunities moving forward. Now when you come to pharma. Predominantly, what we would look at is at the end of the day, why should Deepak manufacture something? Is there a process expertise? Is there a downstream synergy? Is there customer synergy? So we always look at new products, whether it is in pharma or agro in any other segment with this lens. And then we look at making those investments. So therefore, we will learn to work before we learn to run, and we will focus on pharma intermediates, which has a good 1 step or 1 or 2 steps away from our current expertise and our current product portfolio. If you ask whether this is GMP or non-GMP. As I mentioned, our focus will first be to walk before we run. I hope that answers your question.

Yes, sure, Maulik, it does. So just on that custom synthesis part, are we sort of actively looking at partnering opportunities for all sorts of specialty chemicals or other chemicals with these partners? Because the reason is when we do custom synthesis, a, our margins are better, the entry barriers are higher, and it gives us a more sustainable sort of revenue and cash flow stream.

So we did start looking. What has happened over the last year or so is whatever we were looking, others have been looking at us a little bit more than we were looking out. And therefore, that seems to have been a good meeting of minds of companies that are looking at Deepak actively and Deepak looking at opportunities actively. It's too early to go into details, but I think that you will find, moving forward, that not only are we not [ averse ] to it, but we understand the attractiveness, and we understand why the customer looks at Deepak as a promising opportunity. So you will see more clarity on this moving forward. It's -- these discussions are not at a stage where we are able to talk about them openly.

But we are open to this note. I mean, we are not averse of taking -- if at all a good opportunity comes, certainly. Why not?

[Operator Instructions] The next question is from the line of Levin Shah from Valuequest Investment Advisors.

My first question is on this Fine & Specialty Chemical division. So like in the last quarter, you had spoken about it that we are -- we have seen a very good performance backed by pharma and agro. If you can just throw some light how -- what exactly has changed for us in this segment that we are seeing increased revenues and also margins have gone up substantially. And how do we see sustenance of this kind of growth and even like on the margins going forward?

Okay. So in the Fine & Specialty Chemicals business, what we have are very sticky customers where the entry barrier is quite high because, one, it requires a deep process expertise. And the other is it requires sustainable supply and confidence about meeting that quality day in and day out. So the margin has been high in recent times, largely because of significant investments that we made for improvement of process competencies and also because customers have, over a period of time, decided to depend on Deepak more perhaps than they did a few years ago. And they have also been benefiting from that because instead of looking at Deepak as only as tactical supplier, when they're looking at Deepak as a strategic supplier, we have been able to meet their demands when it comes to quality, when it comes to sustainability. And also, we must keep in mind that last year, there was a lot of concern when it came to environmental regulations because of which there were costs built up. Right now, you're seeing margins because we've been able to optimize on our production processes. We expect that this will remain sustainable in the short to medium term. These are strategic customers, let me reemphasize.

And sir, this will be like from pharma and agro customers itself, right, from those segments itself?

There's a diversity. But yes, there is a significant influence of pharma, of agro and of care chemicals.

So when you talk of Fine & Specialty margin, I would rather add one thing that the margin have significantly gone up no doubt because of as more like -- rightly explained is because of process competencies. So it is going to stay. And there is -- there can be some impact of the price suddenly going up, but that is not -- in this case, I would always suggest that you take a range. Today, you are seeing margins of this. But as a sustainable margin, I would still suggest you take between, say, 40% to 44%, that will be a fairly sustainable assumption, okay, in the short-term and in the long-term also, but then it has gone up, no doubt on that. And here to stay.

Got it, sir. Sir, and my second question is on this new wholly owned subsidiary that we have incorporated, Deepak Clean Tech Limited. So if you can throw some light -- more light on this, that is this regarding some new chain of chemicals that we are getting into? Or it is just a separate subsidiary so that we can take advantage of the tax benefit. Or basically, it's a whole new frame of business that we are looking out for under this subsidiary?

See, this subsidiary, of course, we will tell you more about that when we announce certain projects, but the whole idea is it not only takes alone here. It's a mix of everything. But the product range or the product, whatever -- it will be an own chemistry. We are not going to venture into something which is unknown. So there's no doubt on that, okay. But we -- if you remember, we had acquired a piece of land last year, and there were definite plans. But plans were certainly put on hold temporarily because of COVID situation. Now we have reworked and we are coming out with our plans, and we'll announce -- make the announcement at an appropriate time. But it is a known chemistry -- known processes and not unknown processes. Maulik if you would?

Absolutely, what Mr. Upadhyay has said. I will just add 1 point here that the products that we are looking at investing into again, internally, we take a very hard line to ask a very simple question, why should Deepak be the company to make them? The products that we are looking at have a very strong convincing case and therefore, the investments that we will be talking about, over a period of time, the product that we will get into will have a very strong synergy with Deepak's current platforms, current customer sets and new platforms, where we continue to believe that Deepak will be the best manufacturer of these products.

Okay. But sir, the product of...

Sorry to interrupt, sir. Sorry to interrupt, sir. Sir, we'll have to move on to the next. I'm sorry about that. You may come back in the queue. [Operator Instructions] The next question is from the line of Swarnabha Mukherjee from Edelweiss.

Right. And congrats on a good set of numbers. So sir, my first question is on Deepak Phenolics. If you could throw some light on -- of the 3 products, what are the trends that you are seeing and which one is contributing to the improvement in margin profile at this point of time?

See, Deepak Phenolics performance. First of all, you will be happy with Deepak Phenolics' performance, right? Now the point is -- and the calculations were made that we are -- every time I used to say they don't go by crack, whatever is in the market. And it has to -- it's a mix of everything. Like we have come out with IPA. In fact, first quarter, IPA was doing significantly well. Now IPA market is -- now the prices are getting gradually normalized. So it is just not 1 product where I can say that, yes, this has done well or that has done. It is a mix of everything. It is -- Phenol has also done well. Acetone is also doing well, and IPA is also doing well. So it's a combination of all these. And on top of it, we are running, as Maulik said in opening remarks, we are running our plant at 100% capacity. I mean, this is something which is remarkable. In the current situation, if we find that there are imports and we are exporting the product and achieving our efficiency. So it's a mix of everything. The production levels are high, we are able to sell the product and the combination of the product mix. So I mean, that's what it is paying here. It cannot be just IPA or just Acetone or just Phenol, no. So I think we should not get into 1 product, I mean, people are having that impression, it's just because of IPA. No, it's not that.

In fact, IPA has had a negligible impact in quarter 2. I would like to add 1 point to what Mr. Upadhyay has said. The DPL result, I would say that an overwhelming part of it has been because of how efficiently they have manufactured and moved the material. It has not been any individual product that has contributed more than normally to it. The markets for all of these products are not yet recovered in the domestic segment. And in the export market, it is at the export prices where there are even larger players. So what you are seeing is a performance that is largely delivered by operational excellence.

Okay. Okay. Got it, sir. So in Phenolics, are we also continuing with the exports?

Of course.

We have increased it by 5x compared to last year. In fact, we have increased it from the first quarter. And therefore, until the domestic market is back to where it was pre-COVID. As you will notice, there is always an impact as to export more because the loss is if you manufacture less.

Right. Right, sir. Got it. Got it. And 1 quick follow-up on previous participant's questions. So in the Fine & Specialty segment, I just wanted to clarify that apart from the improvement in the operational processes that you have mentioned, would -- is there any new products also that you have come up with that might also be aiding the performance?

We've come up with differentiation in existing products. But that is based on the customers' requirement. New products will be introduced in the coming few periods.

The next question is from the line of [ Neerav Jamoria ] from Annual Research.

Congratulations on the excellent set of numbers. Sir, my question is related to the previous participant only. So I just want to understand more on our R&D part. So whether our R&D is more focused on process innovation or the product innovation? So like you mentioned that it's more of a process innovation, which has really helped us in our last few period -- periods in terms of reducing our cost of production. But even if you can just explain us that whatever turnover or the margin accretion, what we have seen in the Fine & Specialty Chemicals segment is some products might have also been introduced in last 2, 3 years. So if you can just elaborate more on this that what are the size of these products? So can each of the product can be an opportunity between INR 50 crores to INR 100 crores of size or something like that? If you can just help us with that.

I would caution from extrapolating so much. I can just say that in our R&D, I would say, technology department. We have a team that focuses on product development, and we have a team that focuses on process intensification. A lot of what you are seeing is a result of value coming in from both the teams. And you will continue to see this in the future.

Correct. And sir, 1 more thing related to this is like what can be our differentiator factor in terms of EHS? Like I was reading your annual report where you mentioned that we have been undergoing hazard and operability studies before any project is undertaken. So if you can help us understanding more on this, that would be very helpful.

I think this is, frankly speaking, something that I believe that any good responsible company should do it. It's a matter of shame that it seems to be one of the defining features of what Deepak is doing. It should not be unique to Deepak. It should be by all the chemical companies. But it is seeming to be something that is not shared by all manufacturers. Nonetheless, HAZOP studies and process safety studies, environmental safety studies are regular parts of any new product development where we continuously engage our internal team in looking at how we can constantly improve our existing processes, which anyways are as per whatever government regulations and standards, but our goal is always to keep on improving our water footprint, improving our affluent footprint. This we believe is something that we need to do for future generations. So this is part of our values. We believe that it should be part of the values of any chemical manufacturer.

The next question is from the line of Prateek Agrawal from ASK Investments.