Deepak Nitrite held a conference call on 08 August 2023 to discuss the results for the quarter ended June 23 and way forward. Mr. Maulik Mehta, Executive Director and Chief Executive Officer, Mr. Sanjay Upadhyay – Director, Finance & Group CFO and Mr. Somsekhar Nanda –CFO of the company addressed the call.

Highlights of the Concall

• The Indian chemical industry, including Deepak Nitrite was impacted in Q1 by factors such as additional supply from China opening up a global destocking of inventory and a slowdown in the Eurozone. This has led to the softening of realizations and impacted the volume offtake.

• Topline performance was impacted due to industry-wide challenges linked to inventory destocking and persistent slowdown in EU and other markets

• During May, the company reported its highest ever production for some of its products, showcasing the solid business resilience. It has been able to export key pharma and agro intermediates to China during the last 2 quarters, and will continue to do so. The Phenol plant operated at an impressive average capacity utilization of around 135% during the quarter, however it also went into annual maintenance.

• The company has also successfully enhanced wallet share in each and every one of its products.

• The company has proactively de risked its business model by securing assured input supplies from alternate sources. It has recently commenced captive power supply and is driving value from waste. Further, the growth initiatives to enter into a substantial supply contracts in all segments ensures a clear pathway for sustainable growth.

• EBITDA for Q1FY24 was Rs 242 crore, lower by 33% YoY, translating into an EBITDA margin of 13%. The changes in the global chemical landscape intensified by China's product dumping at lower prices resulted in lower sales realization.

• Construction work at Photohalogenation and Halex plant is ongoing as per planning and is expected to be commissioned in H2 of current FY. Acid plant project also remains on track to commence commercial production in FY24. Other projects like brown field projects of increasing existing process and product lines are under implementation too, they are expected to be commissioned by the end of current financial year. These will enhance our competitiveness and together with the cyclical recovery in prices will buttress its profitability going ahead.

• Acetone-derivatives project of MIBK and MIBC has seen significant progress on-ground including engineering works and ordering of equipment. The plant is expected to be commissioned on schedule in H1 FY25 and aims for downstream value added products using captively sourced acetone

• Sodium Nitrite Project in Oman is on track and progressing well, as planned.

• Initiatives around debottlenecking of Phenol facility have commenced and the same is expected to increase the production by close to 10% over FY23 levels, thereby giving DPL more headroom for incremental growth in phenol.

• Deepak Chem Tech Limited signed Rs. 5,000 crore MoU with Government of Gujarat to invest around Rs. 5,000 crore to manufacture Specialty Chemicals, Phenol, Acetone and Bisphenol with aim to commence the first phase in 2024-2025 and aims to complete these projects by 2026-2027. It aims to generate a revenue of approximately 1.5 times the investment.

• In Q1FY24, DNL witnessed significant exchange rate volatility (USD/INR), ranging from a peak of 82.85 to a low of 81.61. To manage the forex volatility risk, the company employed dynamic hedging strategies, which led to a gain of Rs 0.24 crore in Q1FY24. Consequently, the total treasury gain amounted to Rs 8.84 crore.

• Advanced Intermediates segment generated revenues of Rs 719 crore in Q1FY24, lower by 3% on a YoY basis, amidst the decline in input prices and hence realizations. Despite inventory destocking by customers, margins remained steady. As a result, segment PBT was resilient at Rs 115 crore as compared to Rs 131 crore last year.

• Deepak Phenolics reported a revenue of Rs 1,089 crore in Q1FY24. The decline in revenue and EBITDA is due to a sharp contraction in phenol spreads due to a supply drug arising from the opening up of China as well as the slowdown in global markets and spreads being at a multiyear low.

• The phenol plant was shut down for the first time in 4 years for its own regular maintenance change, and this was for 15 days in the beginning of the quarter.

• The Phenolic division aims to enhance downstream offerings to projects such as MIBC and MIBK, which will lead to higher capital utilization of acetone and attractive margins.

• The company is strategically positioned to capitalize on increasing demand and benefit from the trend of import substitution in India.

• In Deepak Phenolics, the company expects Q2 to be better on a YoY basis as well as a QoQ basis. In Deepak Nitrite, we expect Q2 to be flat on a YoY basis and improved on a QoQ basis. And on a consolidated level, it expects both Deepak Nitrite and Deepak Phenolics together to be able to deliver better on QoQ as well as YoY.

• Domestic business has generated revenue of Rs 1,432 crore and export revenues were at Rs 336 crore during the quarter.

• The company is executing projects worth Rs 2000 crore that will be completed in the next 4-5 quarters. These projects will enhance both revenues and margins for the company. However, some projects that are already executed are not operating at full capacity due to weak demand from the agrochemical sector.

• Key end-use industries—plywood, construction and automotive—are seeing sequential improvement, with the plywood industry seeing improvement even compared with 3QFY23.The Pharma industry's outlook is also looking better. However, some sectors are still struggling, leading to low demand for phenol. The dyes segment, which uses phenol for making colorants, is flat at a low level and down versus the previous year. The agrochemical industry, which uses phenol for making pesticides and herbicides, is also flat. The paper and textiles segments, which use phenol for making coatings and fibers, are flat but at a low base.

• A new agrochemical intermediate is expected to generate revenues from H1FY25. DNL also aims to enter into long-term contracts for three life sciences products that are downstream in its value chain. The new R&D center is expected to expand the company's capabilities and add a couple of new processes.

• The company expects Ebitda margin of Phenolics and standalone to range from 12-15% and 20-22% respectively in FY24. Consolidated Ebitda margin guidance is between 15-18% for the same period.