Tata Chemicals Limited (500770) Earnings Call Transcript

Good evening, ladies and gentlemen, and welcome to the Q2 and H1 FY '27 Earnings Conference Call of Tata Chemicals Limited. Please note that this conference has been recorded. [Operator Instructions] We have with us today Mr. R. Mukundan, Managing Director and CEO; and Mr. Nandakumar Tirumalai, Chief Financial Officer of Tata Chemicals Limited. Before we begin, I would like to mention that some of the statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. I now hand the conference over to Mr. R. Mukundan to begin with the proceedings of the call. Thank you, and over to you, sir.

Thank you, Soknali. Good evening, everyone, and welcome to our Q2 FY '27 and H1 FY '27 Earnings Call. It's a pleasure to connect with all of you during this festive season, and I would like to start by wishing you and your families a very happy and prosperous Diwali. I begin with a brief overview of industry landscape, followed by key operational business highlights across our markets and geographies during the quarter and first half of the year. Starting with the customer end, which is demand scenario across various segments and geographies in the Living Essential, which is mainly bicarbonate, salt and OS, the demand outlook remains supported by premiumization, increasing consumption across food, feed and pharma and beverage applications. Salt and bicarbonate are expected to provide continue to provide stable growth while prebiotics offers attractive long-term opportunities driven by increasing customer focus on gut health and wellness. In terms of industry essentials, which is mainly soda ash and also silica, the near- to medium-term outlook for global soda ash industry continues to remain challenging. Market conditions are characterized by persistent oversupply subdued industrial demand, especially in China and intense competition across export markets. Significant capacity additions to China over the last 2 years, coupled with lower-than-expected demand recovery in end use sectors have continue to pressure global soda ash prices and producer margin. The ongoing conflict in Middle East, including disruptions impacting regional shipping routes and energy markets have increased freight volatility and supply chain risk. While large-scale demand destruction has not materialized, in fact, in some parts of the world, the demand is robust, customers remain conscious in procurement decisions amid macroeconomic uncertainty. China remains the key determinant of global market dynamics, high operating rates, continued export and competitive pricing from Chinese producers continue to influence global soda ash prices and trade flows. This is coupled with weak domestic demand from China's real estate and construction sectors, resulting in additional export volumes entering the international market. Amidst all this, India continues to outperform most global markets. Demand growth remains healthy, supported by strong activity right across segments. Capacity expansion by solar glass manufacturers, continued infrastructure investments are expected to continue to provide above-average global demand growth. Southeast Asia remains highly competitive while region is growing, it remains competitive, especially from Chinese exports who continue to gain market share in that region. In terms of farm essential, uneven rainfall delayed sowing affected demand during parts of the quarter. Although [indiscernible] subsequently recovered the broader agriculture outlook remains cautious, supported by coverage improving irrigation policy support, technology adoption and resilient rural demand. However, weather volatility, crop price movements and elevated input costs continue to weigh and remain our near-term risk. In terms of supply scenario, broadly, Mainland China continues to be the driver of supplies, including in the bicarbonate, we saw increased supply on account of new capacity. Global soda ash market, as has already been highlighted, is reset with high Chinese capacity growth and inventory levels. Export volumes from China remained elevated. By the end of September, producer inventory has reached nearly 1.89 million metric tonnes. Inner Mongolia Barons Phase 1, 5 million tonnes, underwent maintenance outages in October. This capacity is expected to full operating rates at the end of the month. Meanwhile, [indiscernible] soda ash producer, will reduce operating rates end of October. The magnitude and duration of these impacts remain uncertain. In addition, [indiscernible] parent company of [ Shandong Haiton ] also announced that they will close the soda ash and bicar operational lines. Recent announcement by U.S. producers to reduce production at Wyoming by 1.5 million tonnes and exit an economic export volume underscores the severity of current market conditions. This remains one of the key concern that is persistent low export realization and the structural demand-supply imbalance in -- which are facing the global soda ash industry. Within India, EDTR has recommended quantity restrictions on soda ash imports for 2 years, after concluding that imports are served and are causing serious injury to domestic industry. Imports have increased by 89% in FY '20 and remain at elevated levels and driven by global oversupply and capacity additions in export countries and diversion of export volumes to India. The pricing environment does remain under pressure for soda ash. The Indian domestic pricing softened towards the later part of the year following improved import availability and increased domestic supply. U.S. export pricing remains under pressure. Looking ahead, pricing is expected to be range bound and as market participants continue to contend with elevated inventory levels. Any sustained improvement in prices is likely to depend on combination of supply rationalization and strong demand growth in the applications and geographies. Now I will turn to the operational highlights and TCL performance in Q2 and H1. The company delivered a relatively resilient operating performance in a very challenging global environment. Higher sales production volume, improved operating efficiencies and cost management helped mitigate impact of continued pressure on soda ash prices. The elevated input and energy logistics costs weighed on the results despite a resilient operating stand-alone performance, our consolidated results were sharply impacted by natural gas cost increases in U.K. The prolonged Middle East conflict continued to drive input costs both in CO2 as well as in freight and logistics. These were additionally paid down by temporary suspension of Kenya operation on the consolidated performance. Stand-alone highlights, revenue from operations stood at INR 13,003 crores, up 8% compared to Q2 FY '26. EBITDA at INR 292 million was up 22% compared to Q2 FY '26. However, profit from tax was down 31% at INR 122 million. In terms of consolidated highlights, the revenue from operations was also up at INR [ 41,778 ] driven by higher volumes both in India and U.S. EBITDA at INR 381 million compared to INR 537 million was lower mainly due to lower realization in overseas subsidiaries, especially U.S. exports to Southeast Asia markets, higher energy and logistics cost in U.K. and suspension of operations in Kenya. The loss after tax at INR 50 crores compared to profit up primarily due to lower realization, higher energy costs and reduced other income and lower June income. Net debt without leases stood at INR 6,127 crores. Likewise, in stand-alone revenue was up 9% at INR 2,584 crores. EBITDA at INR 656 crores was up 29% from H1 of '26 and profit after tax was down 4% at 4.65% compared to H1 '26. In terms of consolidated highlights of H1, the revenue from operations at INR 8,432 crores was up 11% compared to previous year H1. EBITDA at INR 936 as compared to INR 1,186 was lower, mainly due to lower realization in overseas subsidiaries and higher costs incurred in logistics and energy. Profit after tax before exceptional NCI at INR 10 crores compared to INR 535 for H1 '26, thus impacting the profit after tax. Unit-wise highlights, India performed has highlighted, better mainly due to higher volume of salt FOS silica. Higher depreciation due to capitalization of projects increase the finance cost. Our -- in India, the overall demand picture remains stable and positive, pressured with oversupply and steady import pressure. In U.S., during the quarter, P&A was declared the successful bidder for Chapter 11 bankruptcy proceedings of Searles Valley Minerals. And this led to acquisition of customer contracts representing 0.5 million tonne to be serviced over 2 years. On business performance, higher revenue compared to previous year due to higher volumes, mainly due to various contracts, which we had acquired during the year, was partly offset by lower pricing during the quarter in export market. U.K., the lower revenue compared to previous year was due to lower realization in salt and the variable cost increased sharply in U.K. due to increase in gas cost. Supply chain also resulted in lower realization of sales, especially to Middle East markets. As highlighted, Kenya operations remained suspended during the quarter. Singapore sales performance was in line with expectation. Rallis monsoon shortfall and delayed sowing affected agrochemical demand during the year, [indiscernible] recovered as the season progressed. Against this backdrop, Rallis delivered resilient performance aided by growth in Crop Care and soil health. Profitability, however, remained under pressure due to cost inflation and unfavorable operating conditions. In conclusion, operating environment continues to be challenging. These are characterized by geopolitical uncertainties, evolving trade flows and continued oversupply. We continue to focus on disciplined execution, operational reliability and strong customer partnership to ensure resilience. Near-term market conditions are expected to remain range bound especially due to the impact of capacity addition in China and sustained export activity. The demand is going to be supported by several segments, including solar glass lithium food pharma applications. The U.S. producer announcement reinforces our view that industry is entering a phase where cost competitiveness, operational excellence and capital discipline will be the key differentiator. In this environment, our priorities remain clear. strengthening cost competitiveness, enhancing supply chain resilience, driving operational excellence, optimizing working capital and maintaining disciplined capital allocation. We remain focused on protecting cash flows, preserving balance sheet strength and ensuring financial flexibility amidst this uncertainty. We continue to advance our strategy of increasing contribution of noncyclical specialty and value-added business, reducing earnings volatility and strengthening quality and resilience of our portfolio. Our investments, especially in the living essentials, coupled with innovation and sustainability led solution. will support long-term value creation. Company's performance continues to reflect strategic direction outlined under life framework with sharper focus on application-oriented businesses through a balanced approach of strengthening core business while expanding noncyclical segments, we are building a more resilient enterprise. With this, I'll close my comment and hand it back to the moderator to open the Q&A. Thank you.

[Operator Instructions] We have the first question from the line of Saurabh Jain from HSBC.

My first question is, can you give us more details around what's happening in the Kenya operations? You mentioned that the operations continue to remain suspended. But then trying to take a long-term point of view, it seems to be entangled into political issues. So what is the way out now because you also approach the court and it seems that the court has kind of not look into this matter. So what are the future course of action? What are the possible solutions? And what is your outlook on the Kenya business?

So I think it's a fair question in terms of the risk facing the company. Kenya, our operations, as you know, are fairly resilient and have it's a debt-free operation and continue -- the unit has continued to generate a positive margin even in this challenging environment. It's unfortunate that the operations were suspended post notice from the Ministry of Mining, we are engaging both with administratively with the ministry and the officials also through the legal mechanism because we also have to protect our legal rights. We do believe that we have strong legal rights with our lease, which is extended right up to 2053. And these are inaliable, rights. In addition to that, the mining licenses are a layer on top because the mining law itself came much later and we have on hand approved mining licenses for which fees are being paid but not issued. So effectively, I think the discussions are ongoing with the technical committee. We have given them certain options in terms of how to engage with the progress. In parallel, the legal process did not end. The court actually directed us to go to a special court, which is the economy and the environment and land core where these matters are desired. And we have played our matter to them. They have notified the other participants and the court will be hearing during the course of November, the proceedings, and we'll wait for those proceedings in parallel. After that, of course, there is a long way of in terms of the judicial as well as administrative remedies but fair to say that we remain committed to Kenya. We remain committed to the business, and we will do whatever is right where we run our businesses in a very ethical and sustainable manner.

Sure. That is helpful. But then whatever the news and the media was reflecting and highlighting, do you think it is possible that if the political leaders come to a decision and choice that we would kind of seek for the operations to end. So despite Tata Chemicals owning these many licenses, can -- are they in a position to kind of direct product chemicals and then -- can it be a result that Tata Chemicals has to shut shop the operations and then kind of close the business in Kenya?

I think for that sort of there are multiple remedies. We have not actually -- we are in the process and that legal teams will evaluate and fundamentally, I think this operation is covered under U.K. Kenya bilateral investment treaty because this is a U.K. investment into Kenya. And the PIT actually protects the investment. So we have not -- we are head to determine what is the next course of action. We are going through the legal process and the -- if you ask me what is the ultimate, I mean at the end of the day, every business is the right to see compensation quotes beyond Kenya. But right now, we are in the court of 10-year to see justice.

Are you also looking to make any other kind of business diversification into Kenya or investments to kind of showcase that you remain limited to the development of Kenya, any sort of that plans if you can highlight?

No, I think as a group, Tata is very much invested in Kenya and also Tata Chemicals, we have highlighted how we were in the midst of our expansion to doubling the capacity. We were also in the midst of adding bicarbonate unit there and also getting a partner to set up container glass because we ourselves are not in the business. It has be done with someone who is in that business. So all these have been highlighted to them. It is part of the submission we have made.

Okay. Understood. So any outlook in terms of how long you would believe that these operations will take the minimum to start operations like the quarter or 2 quarters in sort of that comment?

I would not like to comment, but as a long-term investor in any country, we are ready for ensuring that we do everything in ethical and sustainable manner.

Okay. My second question is on the U.S. business. You were a successful bidder for CLS and you kind of got some contracts which are resting with the CLS. But what is the mid- to long-term benefit of kind of making these kind of bids? Is it only acquiring a certain portion of revenues in any ways, given the realizations that we see. It is very difficult to make profits on these contracts in my understanding. Correct me if I'm wrong here. But then is it also -- does it also have to do anything with taking a midterm or long-term benefits that also come to you along with this acquisition?

So to be fair, I think Searles Valley Mineral had an operation in California. They have a very strong position within the state of California and our joining country of Mexico. I think we get the benefit of being able to service customers or in geographical proximity which obviously enables us to also have much greater control on logistic costs, which is one of the issues which is impacting the business today in terms of netbacks. The main issue has been the increase in cost of diesel as well as the increase in the cost of the shipping freight and also nonavailability of shipping logistics connections from time to time because most shipping industry is now impacted by the long routes they need to take to avoid various conflict zones. So this is this being over land sales, most of them are positive for the company. And we hope to serve the customers well enough to continue to have their continued flow of the orders from them for a long term.

Any binding commitments you have with these customers for these contracts? So once these ends, would there be kind of an automatic order that coming -- will come back to you?

No, these are over 2 years, as has been mentioned. And beyond that, I think we'll have to go through a renewal process. Hopefully, we are able to renew them. And hopefully, we continue to serve those customers well enough, not just of those customers also pick up some additional customers.

We have the next question from the line of Abhijit Akella from Kotak Securities.

The first one was on the Living Essentials segment. So we see that the segment EBIT at the consol level is significantly below the segment EBIT at the stand-alone level, implying that the subsidiaries do seem to have made an EBIT loss. Is this primarily the U.K. salt operations? If so, is this because of the energy cost and other cost escalations there? And what's the outlook for that?

Yes, I think it's mainly the U.K. operation and mainly on account of the, I would say, bicarbonate and salt put together. The impact on salt is mainly coming in from, I would say, the higher gas and energy cost. In terms of bicarbonate, it also is coming in from the cost of getting the feedstock, soda ash into the business in addition to the energy cost. So I think that has fed into it as the energy costs moderate and as logistics costs moderate, these would come back to the normal levels. And these have been very recent spike in the quarter 2 where some of these costs escalated very, very sharply.

Understood. Okay. And then on the U.S. operations, just wanted to get your thoughts on -- number one, the Searles Valley contract, what sort of contribution margins could we aspire to for at least the next couple of years that we've contracted. And how will this be accounted for the payment that you're making will that be netted off against the revenues? Or is it going to be amortized as an intangible over its lifetime?