Deepak Nitrite Limited (506401) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Deepak Nitrite Limited Q1 FY '22 Conference Call hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhijit Akella from IIFL Securities Limited. Thank you, and over to you, sir.

Thank you, Mallika. Ladies and gentlemen, good afternoon, and thank you for joining us on the 1Q FY '22 post results conference call of Deepak Nitrite. We're delighted to host the company's senior management team, who are here with us to discuss the results. I would like to hand the call over to Mr. Nishid Solanki from CDR India to take proceedings forward. Thank you, and over to you, Nishid.

Thank you, Abhijit. Good afternoon, everyone, and thank you for joining us on Deepak Nitrite's Q1 FY '22 Earnings Conference Call. Today, we have with us Mr. Maulik Mehta, Executive Director and CEO; Mr. Sanjay Upadhyay, Director, Finance and CFO; and Mr. Somsekhar Nanda, Deputy CFO. We will begin the call with opening remarks from the management team followed by an interactive question-and-answer session. At the outset, I would like to clarify that certain statements made or discussed on the conference 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. Maulik Mehta will share his views on the operating performance and the growth plans of the company, followed by Mr. Sanjay Upadhyay, who shall take us through the financial and segmental performance. The results documents have been shared with you earlier and have also been posted on the company's website and uploaded on stock exchanges. I would now invite Mr. Mehta to share his opening thoughts. Thank you, and over to you, sir.

Good afternoon, everybody, and a warm welcome to you on Deepak Nitrite's Q1 FY '22 Earnings Conference Call. I trust you, your families and colleagues are safe and in good health in these unprecedented and very trying times. Given the second wave of COVID-19, the company maintains a high level of production at all of its facilities while complying to all regulatory mandates, rules and safety requirements. Our employees and communities health and well-being are of paramount significance to us. Despite the limitations, we have ensured that all facilities are operated with utmost care for the safety of people, materials and processes. Additionally, the company has undertaken to vaccinate all employees and spouses. Moving on, as our results documents were shared with you earlier, I hope you've had an opportunity to glance through them. I'll briefly -- I'll initiate by briefly taking you through our key financial and operational highlights for the first quarter and how we are preparing ourselves for the coming year. Mr. Upadhyay will then present to you a more detailed and comprehensive financial overview during the period in review. Following this, we'll be open for questions. Our teams have once again performed well in the midst of a challenging environment, enabling us to maintain our performance momentum from the second half of FY '21 into the first quarter. In addition to the instability caused by the second wave in India, the operating environment was characterized by soaring input and energy costs, volatility in foreign exchange rates, inbound and outbound logistic limitations as well as relatively high logistics and utility expenses. To ensure an efficient performance, your company has utilized its manufacturing competence, world-scale facilities and agile operations. This was supported by a healthy balance sheet. I'm happy about our announcements of key investments to elevate our growth momentum moving forward. Deepak delivered resilient performance amidst the second wave. On a consolidated basis, revenues came in at INR 1,534 crores, up 125% year-on-year and 4% quarter-on-quarter. Improved capacity utilization aided revenue growth, as also DPL substantially improved performance, largely on account of higher realization of its products. Even though certain end user segments are yet to recover to pre-COVID levels, Deepak Nitrite and Deepak Phenolics have proactively catered to both domestic and export markets to generate higher volumes and capitalize on favorable realizations. I should mention that we had lost a month of operations last year in the same quarter. So the audiences may please consider this. In Q1 FY '22, EBITDA stood at INR 460 crores, higher by 144% year-on-year. The EBITDA margin increased by 200 basis points to 30%. EBITDA performance has been improved by operating leverage from revenue recovery as well as advantages from higher realization and export management initiatives -- expense management initiatives. PBT grew by 206% year-on-year and 4% quarter-on-quarter to INR 405 crores, attributable in a good part to an outstanding performance by the Phenolics business. Besides DPL's performance, PBT improved as a consequence of increased net revenue and reduced interest rates as a result of significant debt reduction over the previous year. During the quarter, profit after tax came in at INR 303 crores, higher by 206% year-on-year and 4% quarter-on-quarter as a result of improved operational and financial efficiencies, supported by higher revenues. Even though the market is still recovering from the effects of the second wave, the company was able to record an improvement in PAT due to an improvement in performance across all the segments. Now on to segmental performance. Revenues in Basic Chemicals increased by 70% to INR 249 crores in the first quarter. This is keeping in mind that there is certainly an impact in the MSME sector, which is a large customer base for the basic chemicals product. This is thanks to the resurgent second wave and various logistical challenges. A resilient performance was exhibited during this quarter. Gradual rise in input commodities have helped to reap better realizations during the quarter. However, future margin will depend on the pace of demand recovery. Revenues in Fine & Specialty Chemicals increased by 48% to INR 207 crores in quarter 1. Volumes have been affected this quarter due to disruptions in export-bound logistics. Furthermore, increased commodity costs have certainly had an influence on profitability. Meanwhile, revenues in Performance Products segment increased by 55% to INR 93 crores in quarter 1. The Performance Products segment has seen only partial recovery in volumes since key end user industries have yet to fully rebound to pre-COVID levels. That said, DASDA, which is a key raw material for the segment, has seen its prices and volumes return to what we consider is a normalized situation. Deepak Phenolics delivered a remarkable quarter with revenues soaring by 202% to just shy of INR 1,000 crores in quarter 1. Despite limited personnel and material transportation during the peak of the wave, the facility continued to operate at a high utilization, with quarterly average utilization at or above 110%. While EBITDA grew by 263% year-on-year to INR 313 crore in quarter 1, the EBITDA margin improved to 31%. The company has been able to leverage favorable price trends and demand for both phenol and acetone in the quarter. Without doubt, our business model has been put to test by the ongoing global pandemic. But increased capacity from brownfield expansions, sustained robust demand from end user industries, we believe will help drive growth through all of the strategic business divisions. In key developments, I'm glad to share with you that we are nearing completion of our land development in Dahej 2. Investments of INR 300 crores for new products in life sciences have been undertaken at this site. While Deepak Phenolics is in the process of expanding its IPA facility and continuing to improve its utility capabilities, the company is planning to invest another INR 700 crores to add new solvents, which are downstreams of phenol and acetone. These solvents, which are primarily used in applications like life sciences, paints and coatings, are seeing a healthy demand CAGR within the country and in target export markets. The company aims to be a world-class supplier of solvents, which are well integrated with its wide product basket and process competencies. During the quarter, Dun & Bradstreet recognized our company as a winner in the best growth performance of Chemicals division. Deepak Nitrite has also been ranked #2 on Fortune India's list of wealth creators. We're confident that the company is well equipped to assess emerging growth opportunities in end user segments, while expanding in the value chain and nimble-footedness to adopt to an evolving market. All of these will contribute to its long-term success. In conclusion, I'd like to emphasize that DNL is well positioned for expansion in a range of aspects. Along -- sorry, apart from a noticeable change in the chemical supply chain from other countries to India, Deepak has the ability to take advantage of the opportunity and accelerate in the near to medium term. Deepak is an excellent candidate to lead the India chemical manufacturing trend, thanks to its unique product mix and decades of manufacturing experience. This, along with contributions from ongoing brownfield expansions and major greenfield projects containing value-added forward integrations, will improve our competitiveness and position us to grow market share, generating value for all stakeholders. Thank you. And I would now like to hand the call over to our CFO, Mr. Sanjay Upadhyay, to address this forum and briefly take you through the financial performance of the period in review.

Thank you, Maulik. Good afternoon, everyone, and thank you for joining us today on Deepak Nitrite's earning call. I will walk you through the highlights of the financial results for the quarter ended June 30, 2021. In Q1 FY '22, DNL has performed impressively in a challenging quarter [Technical Difficulty]

Hello, sir, your voice is not audible. Hello?

Can you hear me now?

Yes, sir. Thank you.

So in Q1 FY '22, Deepak Nitrite has performed impressively in a challenging quarter, given the disruptions induced by a second wave in India during April and May 2021, escalating expenditures and persistent volatility in foreign exchange rates define the operational environment. On a consolidated basis, revenues grew by 125% to INR 1,534 crores during the quarter under review. The revenue performance has been attributable to the normalization in standalone operations, particularly in Bulk and Chemical and Fine & Specialty Chemicals segments, supported by DPL's significantly enhanced performance by running its facility at its high utilization levels allowing it to take advantage of favorable demand and competitive pricing for its products. EBITDA reported at INR 460 crores, higher by 144%. Despite the cost pressures and logistical challenges, the margin performance has been commendable with the company reporting EBITDA margin of 30% during the quarter. PBT and PAT expanded by 206% to INR 405 crores and INR 303 crores, respectively. As Maulik mentioned earlier, growth rates are to be reviewed in backdrop of lower base of last year caused by nationwide lockdown and related restrictions. Now moving to our segmental performance. Impact on MSME sector owing to rising cases and logistical issues, performance was resilient in the quarter. EBIT increased by 134% by INR 25 crores with an EBIT margin of 34% in Bulk and Chemical segment. Fine & Specialty Chemicals segment revenue grew by 48% to INR 207 crores in Q1 FY '22 as compared to INR 140 crores in Q1 FY '21. EBIT improved by 9% to INR 67 crores, with EBIT margin of 33%. Challenges in export logistics as well as a significant increase in commodity input costs had an influence on Fine & Specialty Segment's revenue performance. Product demand, on the other hand, continues to be strong. Performance segment reported the early growth of 55% to INR 93 crores during the quarter under review versus INR 60 crores in Q1 FY '21. DASDA value gradually started returning to normal and volumes are improving. Deepak Phenolics reported solid performance with revenues expanding by 202% to INR 999 crores, 1 short of 1,000, in Q1 FY '22. EBITDA soared by 263% year-on-year to INR 313 crores in Q1 FY '22. The EBITDA margin stood at 31% in Q1 FY '22. Robust demand and high plant utilization with a quarterly average of 110% utilization helped revenue realization of both phenol and acetone increase over year-on-year. The company has been able to take advantage of favorable demand patents and competitive pricing for both phenol and acetone. Last year, on the balance sheet front, company financial position has significantly enhanced and starting the leverage to gradually reduce debt. On a stand-alone basis, Deepak Nitrite is debt free. Surplus is of INR 270 crores in cash and bank balances and investments. While on a consolidated basis, the net debt-to-equity ratio is 0.7, down from 0.43% in the first quarter of FY '21. With that, I would now request moderator to open the forum for question-and-answer session. Thank you.

[Operator Instructions] The first question is from the line of Nirav Jimudia from Annual Research.

Sir, I have 2 set of questions. Sir, first is, if I see your annual report of last 10, 11 years, on a stand-alone basis, we have almost invested around INR 100 crores on the R&D. And if I see from 2016 to 2021 barring 2019-'20, excluding the DASDA benefit, our EBITDA has gone up from roughly INR 160 crores to INR 540 crores on a stand-alone basis in 2021. So sir, is it fair to assume that majority part of this R&D expenditure of INR 100 crores in the initial years of this decade was more towards process innovation, the benefit of which we started feeling now in the numbers? And the benefit of product innovation in terms of launching new products would be subsequently felt from 2021 onwards? So -- yes, this is question number one. And a related question would be, how do you see the next decade of R&D expenditure at Deepak? Probably, we are at 40, 42 products at this point of time. So next 10 years of R&D expenditure would be used more towards product innovation than in process innovation because what normally you guide in most of the interactions is that process before product? So can it be reversed for next 10 years that now process innovation is mostly being achieved and next decade would be more towards product innovation?

Nirav, I slightly disagree with you. It was never process versus product, it was always both together. The products were also there. In fact, we have introduced quite a few products in the last 7, 8 years, 10 years in various -- and particular in Fine & Specialty segment. So it's not like that. We have a separate team of people for product development as well as process development and both are running and it's not one versus other. So -- but yes, your EBITDA margins and whatever you said, we are setting up a premium R&D facility now. Up till now it was in our premises, now it's a separate building and it will be coming up there, which will be a high-tech, latest, I mean, -- so focus will be on both. But yes, we have today the ability to provide and spend more and more on R&D and our product. You can certainly expect quite a few products in coming years, no doubt on that.

Okay. So can the product -- in terms of number of products, can it get double from here in terms of either doing backward integration? Because every backward integration comes also savings in freight cost and et cetera, because we have within the same complexes itself our raw material. So if you can guide in terms of how many new products can we expect over next decade or, let's say, even a period of 5 years would be helpful?

Actually, I'd like to answer this question. I would be wary about talking about number of products because, frankly speaking, number of products is not a helpful guide. If you look at Deepak Phenolics, they added 2 products, but it significantly changed the economic landscape for the company. So instead of that, I would say that our goal is to be able to add a basket of very high-quality products which are fitting within our "right to win" template, which I have alluded to before. One thing that I can mention and I know this has been a point of chagrin for a lot of investors where we are shy about mentioning the names of the products that we are getting into. And it is not because there is some sort of a veil here or something like that. But what I can very simply say is that our effort over the last 2 years and our effort moving forward is to invest in platforms. Now that platform in jigsaw puzzles with other platforms that we already have good competency in results in a very large number of good opportunities for us. In many cases, these are with customers who already have a good key account relationship with Deepak. So it further enhances our right to win. And this is how we foresee the near-term future. When we invest into a new product, it will be keeping in mind the platform competencies that we have been building. Along with that, the kind of relationship and the right to win that we have in the short, medium and long term. So we have never shied away from saying that we would not look at making investments, which are fly by night where there is an opportunity in the short term, but long term, we don't know. So we stay away from such opportunities and focus on ones where we believe that for the next 10 years, 15 years, there is a very good reason that Deepak should be #1, #2 or #3 in the world in those products. This is what we will continue. And as Mr. Upadhyay has mentioned, we do have two separate pillars: one is process intensification and one is product development. Process intensification is taking existing products and improving the process to unlock value, and product development is where we use existing processes to develop new products.

Got it. And sir, my second question would be in terms of talent pool, like we have seen recruitments by almost all major chemical companies, including ours also. So how we at Deepak is being able to retain the key management team or the key personnel within the company as well as strengthening the leadership team by recruiting new people? And if I can ask a related question to this would be, how most of the time of -- Mr. Maulik Mehta, like you spend on like either most of the time is spent on looking after expansion or looking after the existing business or like interacting with the core teams across the business verticals or like the mentoring new teams? If you can give your order of preference in terms of these 4 parameters would be helpful, sir?

See, I'm only 38 years old. And I don't come with the decades of experience that a lot of our management has. So for me, every single opportunity is an opportunity to learn. If you ask me where I spend the majority of my time, I can tell you that I spend the majority of my time just seeing what I can do to help the rest of the management achieve the goals that we have collaboratively set about together. So frankly speaking, my entire day goes in seeing what I can do to help the goals that have already been set or are in the process of being set, what I can do to remove potential impediments. Now in terms of the talent aspect. What we find is that talent where the values of the individual are in line with the values of the company, and talent, which finds that there is a good opportunity for professional growth within the company and also talent that believes that at the end of the day, the company itself is growing, is talent that is likely to stick around. We have our internal processes where we look at enhancing the value, both on a personal and on a professional level that our best talent is able to drive whether it is L&D opportunities; whether it is courses in connection with various premier institutes, both in India and outside of India; and whether it is opportunities to develop good, well-functioning cross-functional teams. The goal here is to enhance the environment for productivity. When that happens, the organization is growing, the person has a chance to grow professionally. I think it's a good recipe to retain good talent. And as the word spreads, it's also a good opportunity to attract new talent. We've already started with the disadvantage of being located in a place which is far away from the metropolis cities. So we have to see what we can do to ensure that working here is a pleasure, not a pain.

Correct. And lastly, I would like to congratulate the team again for providing the encyclopedia of information in the annual reports. Best of luck and good luck for the future.

Thank you.

Thank you, Nirav.

The next question is from the line of Saurabh from Asian Market Securities.

So my first question is on the new expansion on the downstream product. Can you provide more color in terms of capacity what we are looking to add under this project? And also the time line in terms of commencement of the project?

On the capacity front, instead of giving a direct number because if you look at phenolics, we could have told you that the capacity is 2 lakh tonnes, which we did, but we realized that that's not the right number. The capacity is what you make out of it. But what I can say is that the products that we are investing in certainly have an import substitute element. And what we believe internally is, step 1 is Atmanirbhar Bharat. But step 2 is Make in India for the world. So if we really want to have the right mix of market access and of cost optimization, we have to focus on world-class capacities. So the solvents that we are looking into manufacturing, which are downstreams of phenol and acetone will have world-class capacities, but with a clear preference on import substitution.

And time line for commencement?

Yes. Sorry about that. So the timeline would be, I think, about 20 to 26 months.

Okay. So are we also going to add phenol and acetone capacity along with the downstream product?

So this is something that I've had the pleasure of answering in past con-calls. As a company, we have been very good at going downstream and at the same time, maintaining the market share. Now phenol consumption in India has a good healthy demand CAGR. And also most of the downstreams of phenol and acetone are actually imported. So that gives this double opportunity. Now it's only -- so in short, we will be doing both. It's only a question of what we do first and what we do second. Right now, the immediate priority is to ensure that we have downstream products, which are good import substitute and good value drivers. And at the right time, hopefully in the near future, we will also be looking at ensuring that we retain our market share in a growing demand situation.

Actually, I'll just add on to this. We are moving towards -- we had said earlier that we want to captively consume both acetone and phenol around 30%, 35% in-house. So this is the step towards that. And once these capacities are commissioned, new facilities, we will be doing that. So both phenol and acetone downstreams are ready with captive consumption of 30%, 35%.

Okay. Sir, my second question is on Fine & Specialty Chemicals. So over the past 2 quarters, we have seen some pressure on the margin because of the higher commodity price. So what is our outlook in terms of the margin going ahead?

So the thing is that margins have to be looked at in a range. They are never very specific because there's a basket of products. Thank you also for pointing out about the raw material price increases, which, of course, have been a factor. So as the reality that logistics have certainly spiraled out of control in the last couple of months. Now this will, of course, also have an impact. Our -- what's important, let me emphasize is that our products are preferred by our customers. So in most cases, we are L1. In a few rare occasions, we are L2, but that might also be because of our inability to go beyond a particular volume. That said, the margins, at least in Q1, have been slightly under pressure simply because a lot of our higher-margin products are actually export bound, and there were a lot of export disruptions where ship berthing was not available, where you had the Suez Canal issue, where, in some cases -- in most of the cases, orders are in hand. The job is to get the product to the customer at the right time. So in all of these situations, what has happened is that Q1 numbers look slightly deflated because many of these are products that we targeted towards the Indian marquee customers. Now moving forward, once this the situation with ship availability, I'm not even concerned about cost of shipping, but ship availability once this normalizes, we will continue to see a healthy balance between export volumes and domestic key accounts. And at that time, you will see really some improvement in terms of the EBITDA. But it is true that this should always be considered in a range-bound fashion.

Sorry, I will just add 1 more point here. Maulik rightly mentioned about the availability of ships and containers. So you must have read which is the fact that sea freights have gone up significantly. So it helps us in some segments, particularly in bulks, but it affects where you -- like in Fine & Specialty, where we have slightly longer-term contracts and the terms are of CIF and where we are bearing the freight. So there is -- there would be an impact to the extent we have signed a contract for -- and by the time we negotiate and arrive at a fresh realization of price. So that shipping lines issue still remains for particularly in export businesses.

Yes. Actually, thank you for bringing this question out. It allows me to talk about 1 of the 2 or 3 points that I had handwritten. But let me mention that when you're talking about phenol -- phenolics and when you're talking about basic chemicals, the best situation is when you have a stable demand situation and volatile logistics, right? Because at that time, the customer gives you a greater premium because you are local, you are dependable, you are easy access for the customer. In finance specialties, the only thing that we have to look at is logistic movement from India to that country, worse off than logistic movement from some other country to the target customers. If it is as bad or if it is better, then we are in a good place. But if it is worse, then the customer is highly dependent on those particular products and if that is a challenge in getting the material -- so for example, it's so difficult to find ship berth into places like Canada or South America, where even if the orders are there, even in places like Europe, even if the orders are there, delivery being delayed by a month, 2 months, et cetera, can really push our customers' production schedules off track. So we are exploring various options like vendor-managed inventories and other things. Hopefully, the situation will normalize in the future. But this is just to give you an insight into what each of our business units, what kind of environment they prefer.

The next question is from the line of Rohit Nagraj from Emkay Global.

Congratulations on, again, a very good set of number, plus the new announcement of CapEx. Sir, the first question is in terms of the newer opportunities. So we've been growing organically over a period of time. And given that the debt levels have been very, very low now and the cash flows have been coming in, we have earmarked another INR 1,000 crores of CapEx for the next couple of years. Beyond this, do we aspire to go in for any inorganic initiatives, maybe domestically or outside India to garner some new technology or some new product streams which will be complementing our business?

So this is always there. I mean, again, it's quite same products and process. There is no -- of course, we are growing and we have announced CapEx, but if there is a good opportunity to grow inorganically, no doubt in -- I mean, we'll certainly grab that. There's no question. But it has to be -- the valuation has to meet and fit our requirement. Otherwise, you acquire and then don't make money out of their product 4, 5, 6 years, doesn't make any sense. So -- but yes, we are open to that, no doubt on that.

Right. Sir, the second question is on the Basic Chemicals front. So predominantly, nitric acid and derivatives, the margins have gone up significantly and there is a slight anomaly that we have been gaining market share from the smaller players. At the same time, there is an impact on the smaller players, as you have said that MSME segment has been under pressure during the quarter. So how does the performance is so strong during the quarter? And is it in a transitionary phase that may be a couple of years quarter -- sorry, a couple of quarters down the line, things will start normalizing and probably the margins will come back to more normal levels of maybe, say, 20% plus-minus?

So first of all, when you said nitric acid, immediately, I thought you might be referring, maybe I should connect you to Deepak Fertilizers because they are one of the largest nitric acid manufacturers, we are consumers. But if I look at products manufactured from nitric acid and other petrochemicals and these things, it is true that we do have actually in this business -- so in the nitrites business, there's a lot of dependency on MSME. But in the -- what we call the nitro business, it's actually a good mix. So there is also the large players, world players, and there's also the small niche players. But that said, in terms of the margins, what I can say is what I mentioned in the earlier question. As long as the demand is stable or at an uptrend it's good business for us. And it's better business for us if export logistics are a challenge because that way, the customers will prefer to give a premium to a domestic supplier. However, the nitro business has definitely had some tailwind because of disruptions in China. And because of a reluctance from a lot of European companies and countries to engage in expansion of nitration, which if not handled properly can be a dangerous chemistry. So this is a key competency that we have. This is the key competency that we are investing into. There will, of course, be some amount of brownfield, but you will also see greenfield. So I can safely say that nitration and nitro products, the margins are directly proportionate to the kind of growth that we are expecting from the consumption. And Deepak will continue to remain, maybe even improve its world market share.

The next question is from [ Riddhi from Ridhaan Securities. ]

Hello? Am I audible?

Yes, ma'am.

Yes.

Sir, my question is, as per your knowledge, are there new incremental capacities coming up across the globe for phenol and acetone? And how are the current prices of phenol and acetone trending?

Capacities, of course, people announce every now and then. I don't want to comment on that because, a, there's a big gap between announcing and then actually going on and implementing, okay? And in any case, new capacity comes, it will be 3 to 4 years away from today, so the way demand is growing, I mean, there is absolutely no issues on phenol today. I don't want to comment on prices because prices keeps on fluctuating. We have said in our comments that yes, realizations are better in Q1 and continues to remain improved on phenol. Acetone, of course, are up and down, but then we have IPA also consuming acetone. So -- I mean, that is how we want to play the game between IPA and acetone. And similarly, when we have phenol downstream ready, again, it will be the same case. So no point in telling you the price because there is no pricing point as such today. Today, if I say it is INR 1 lakh; tomorrow, it will be INR 110,000; day after, it may be INR 90,000. So it doesn't make too much of sense in giving the numbers.

Sure, sir. And my other question is, what is the capacity utilization for Fine & Specialty block?

Fine & -- we run our capacity around 90%, 95% on an average.

The next question is from the line of Rikin Shah from Omkara Capital.

Congratulations on a fantastic set of numbers. I just wanted to understand the new capacity additions that we're doing in the solvents and downstream space, what kind of competitive landscape is there in those spaces?

So as we mentioned, these are import substitutes. So yes, there are capacities is world over, no doubt about it. But the demand for these products is growing, and it is growing at a very high CAGR. In fact, it is in the life sciences and paints and coatings end segments that we are finding the highest utilization for these solvents and also the highest demand CAGR. So this is something that we believe is going to be a continuing trend in India.

So like domestically, we would be #1 in this space?

Yes, yes. [Foreign Language]

But then from a market perspective, yes.

The next question is from the line of [ Ashmit ], an individual investor.

My question is regarding Deepak Clean Tech. So I just wanted to know as already mentioned that phenol will be getting used around 30%, 35% in-house, and that will be used for product portfolio, which are coming from Clean Tech, right? Deepak Clean Tech?

No. No. Products that Deepak Phenolics is going downstream into are downstreams of phenol and acetone. So the raw materials for these products are being manufactured already today. And I think sometimes I feel like we should change the name of Deepak Clean Tech to just saying Deepak Chemicals or Deepak Other Chemicals or something like this because it's making a lot of people feel that there is only a particular small basket of products that will be made here, maybe some detergent chemicals or some cleaning chemicals, things like this. That's not the name. It just happens to be a name, don't put that much into the name. I will just say that the products that will come into this business are ones that have a very tight synergy between Deepak Nitrite's competencies, Deepak Phenolics' competencies so that in the future, nobody has to bother with asking should this product come in Deepak Nitrite or Deepak Phenolics? It happens to come in a separate segment called Deepak Clean Tech.

Okay. And one more question. Just wanted to know, Deepak Clean Tech will be having a product portfolio. So on a projection basis, what type of revenue and margin we can see once capacity is coming online? And also, I wanted to know is there any plan for additional borrowing for the expansion that are already in the pipeline?

We have not even finished announcing our capital investment plans yet. We've only announced 2 tranches of capital investment. You are already asking us about revenue. You don't want us to announce more investment plans? And with regards to the question about debt. See, we have a very experienced finance team. So we are very comfortable taking debt also. We have absolutely no problems with that. We have a very strong liquidity basis also. So we are happy to look at that. So it opens up a lot of opportunities for us, and we will take a very judicious call. But in fact, Mr. Sanjay Upadhyay has told us many times that look, he is very tired of people asking him about zero debt. He is not interested in being a zero-debt company. And therefore, moving forward, we will ensure that we have a healthy mix of both.

The next question is from the line of from Ramakrishnan from Equity Intelligence.

Yes. Congratulations for the best set of numbers. Sir, I was just looking at your quarterly numbers, especially on Deepak Phenol. See Q3 FY '20 it's -- so we were doing around INR 535 crores turnover, and we had a INR 40 crore segmental profit of around 8% margin. Then gradually, it went up to 12%, 21%, 22%, 23%. Now we are at somewhere between 30%, 31% EBITDA -- segmental margin on the phenols and acetone. So to what percentage -- yes, we have a huge capacity. So is it the COVID -- what is the demand pickup? And our capacity utilization also gone up to 110%. So what has driven this? If it's a demand-driven pickup? Can you give me some -- a little bit elaboration on that?

See, this -- yes, your observation is right. But if you see the Q4 number, quarter 4 also in terms of profit, we've done well in Q4 also, right? These numbers are on turnover side, yes, because it is -- and Maulik was mentioning, if there are issues on the logistics and base, Bulk Chemical tends to gain. Demand is already there in the phenol business. So -- and we are running at 110%, 115% capacities at times. So this is a mix of higher volumes as well as better realization. And realizations were really, really better in the last quarter in Q1. So this is a result of that.

So what is the trend like? Is it the demand? Because price trend, nobody can predict. But the demand trend, what do you see? Is it COVID-related? What percentage is COVID-related? And otherwise normal...

No, no, it has nothing to do with COVID, first of all, right? See it's on supply. If we are facing our problems in shipments, parallelly, other companies are also facing problems in shipments. So the local player tends to gain. So demand is certainly there, and we are able to supply because we are the only large player here. So that is the main reason. It is nothing with COVID. But yes, the shipping industry is in -- I don't know I won't say it is huge advantage, but yes, shipping industry is becoming a major bottleneck today. So the supplies across is becoming an issue.

So it is basically import substitution?

This is only an import substitution. But...

Phenol is entirely largely import substitute.

Last year, we had some challenging months where the domestic demand, the consumption was much less. Now as a company, we don't have -- we didn't have that sort of money where we could put up any sort of capacity, any sort of storage and all that, we had limitations everywhere. And therefore, there were periods of time last year where we had to export our volumes, right? So it is not like there has been only a consistent growth, growth, growth in terms of demand. That is the trend, no doubt about it. But things like COVID play spoilsport, especially to industries, which are linked to infrastructure, housing, these things, that -- keeping in mind the margins, I would give a high degree of credit to the operating team. Because such kind of products and processes, significant chunk of the margin actually comes from operating them at a higher degree of productivity, which the teams have done either because of their process competency or because of the theory of constraint because there's no other choice.

Okay. So this -- so the demand of the import substitution continues. So you should see the -- going forward also would kind of a demand for both phenols and acetones?

Yes, yes, yes. When we envisage the project with 2 lakh tonnes, we expect it to be about 65% of the Indian consumption story, which we expected it to grow also at 6%, 7% CAGR. When we finally came into production and today, if I look at it, with significantly more than 2 lakh tonnes, I won't go into the exact number, significantly more. We are now at 55% of the domestic consumption. So that is how the market size has actually increased, having a domestic supplier encourages a lot of other companies also to think about making investments. That has happened. And we believe that this is a moving trend in this direction. So we don't expect -- in a normalized environment, if you keep COVID and all this aside, we expect demand for products like phenol, acetone and even many of the downstreams of phenol and acetone to have a good healthy demand base and demand CAGR in India.

The next question is from the line of from Dhruv HDFC Asset Management Company.

Sir, can you guide for the CapEx for FY '22, the CapEx number?

So at the moment, we have announced INR 300 crores from Deepak Nitrite in new products and INR 700 crores in Deepak Phenolics for also new products, which are downstream of its current product basket. We will announce more as and when we find that it is the right opportunity. And this does not take into account the brownfield expansions that we do of existing products. And phenol and -- sorry, IPA and utility cost enhancement projects, which were ongoing in Deepak Phenolics, we were looking forward to seeing value come out of them -- revenue and value come out of them in -- from around the third quarter onwards.