Deepak Fertilisers & Petrochemicals Corp Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Earnings surge on specialty shift: Topline grew +52% YoY and bottomline +195% YoY, with H1 profit already exceeding all of last year, as the strategy of moving from commodity to specialty products bore fruit.
• Price pass-through established without demand destruction: Finished product prices have set a new, higher affordability norm across all segments, and management sees no demand destruction despite steep raw material hikes.
• Lean-season margin dip is seasonal, not structural: QoQ margin compression in TAN and acid reflects monsoon-driven lean demand and temporary acid oversupply from co-producer shutdowns, not a weakening of the underlying business.
• Ammonia project nearing completion with upside: The ammonia plant is in its final 5–6 months of pre-commissioning, and based on current ammonia and likely gas prices, margins are expected to be significantly better than the originally estimated \$230–\$240 per ton benefit.
• What to watch next quarter: Clarity on gas sourcing and pricing for the ammonia project, the margin trajectory for solar-grade nitric acid as trials progress, and whether phosphoric acid's downward price trend holds while other commodity prices remain unpredictable.

Financial Performance & Price Resilience

• Topline and bottomline leap: Q2 revenue rose 52% YoY and net profit 195% YoY, driven by the specialty shift; H1 profit already surpassed the full prior-year figure.
• Price pass-through validated: Finished product prices have established a new, higher norm for affordability across all segments, with no demand destruction observed despite the sharp raw material cost increases over the past year to 18 months.
• Internal systems held: Management noted that internal systems and processes withstood the raw material volatility and captured the upside, reflected in the results.
• Crop nutrition margin compression: Segment margins fell to 7% as cost of production rose with raw material pricing, though the specialty strategy and new Croptek grades aim to improve this over time.

S C Mehta: "the finished product prices have now set a new norm for price affordability among all our segments and this I will see as a good sign over the long term that the resilience that the downstream of our downstream is also somewhere where the price affordability is of a new order, a much higher order."

TAN: Demand Strength & Margin Dynamics

• Volume growth intact: TAN volumes grew approximately 14% YoY in Q2, driven entirely by coal sector demand as overburden production from public sector coal, the largest consumer, improved.
• Lean-season margin dip: Q2 is a lean period for TAN in India due to the monsoon, coinciding with lean seasons in other large consuming geographies like Russia and Brazil, which reduced imported fertiliser-grade ammonium nitrate and compressed margins.
• Margin structure stable: Raw material prices have risen as much as finished goods prices over recent quarters, but management reports better pass-through of raw material costs into finished goods prices, keeping margins constant in absolute terms.
• Import substitution pricing: Fertiliser-grade ammonium nitrate is essentially a fertiliser, so its pricing in India is governed by consumption relative to other nitrogenous fertilisers, prices of fertiliser-grade ammonium nitrate globally, and domestic demand-supply dynamics.
• Bullish demand outlook: Management remains quite bullish on demand as long as Indian demand and nitrogenous fertiliser demand in consuming geographies stays strong, though too many external factors, gas prices, ammonia prices, Russian export policy, are at play to call margin direction precisely.

Deepak Balwani: "Overall margins are constant of both the finished goods prices and raw material prices. Raw material prices have as much as finished goods prices have gone up in the last few quarters, so have the raw material pricing, but we have seen a better pass through of raw material prices in the finished goods prices and as long as the demand in Indian context as well as the demand for fertilizers, overall nitrogenous fertilizers in particularly the fertilizer consuming geographies remains strong and fertilizer grade ammonium nitrate also which is essentially a fertilizer would continue to have buoyancy as far as the prices are concerned."

Chemical Segment: Acid & Solar-Grade Progress

• Acid margin pressure in Q2: Reduction in margins quarter-on-quarter was seasonal, the monsoon makes Q2 a lean season for both TAN and acid, and was compounded by more acid availability in the market from extended downstream shutdowns at co-producers, further reducing volume and margins.
• Phosphoric acid prices declining: Prices have come down significantly in early H2, offering a clear downward trend, unlike other commodities where visibility remains poor.
• Solar-grade nitric acid trial complete: A trial run has been conducted; pricing and margin accretion details are still early, with management expecting to provide a better estimate by next quarter.
• Scalable capacity: The company has the ability to expand solar-grade nitric acid capacity depending on demand pickup.

Ammonia Project: Timeline & Margin Upside

• Fast-tracked to completion: The ammonia project is in its final five to six months of pre-commissioning and commissioning activity, with commercial operation expected sometime in Q1 FY2024.
• Pipeline integration: Once operational, the plant will provide a strong foundation to all downstream businesses via pipeline availability of ammonia across the complex.
• Margin upside vs original estimates: Based on current ammonia prices and the gas prices being negotiated for tie-up, margins are likely to be significantly better than the originally expected \$230–\$240 per ton benefit; a more accurate estimate will come once gas price clarity is achieved, possibly by next quarter.
• Gas sourcing strategy: The company is pursuing both domestic gas, where some options materialised last quarter with more expected in coming months, and part LNG, with the balance under discussion with LNG suppliers.
• West Coast consumption: Ammonia from the Taloja project will cater to western India requirements (Taloja and Dahej); as fertiliser capacity utilisation ramps up from the current 67–68%, Taloja production would largely be consumed in West Coast plants, with any surplus sold domestically given India's significant ammonia import dependency.

Amitabh Bhargava: "As far as ammonia margins are concerned based on current prices of ammonia and the lightly gas prices that we are looking to tie up the margins are likely to be significantly better, but I think it will be fair to say that a much better estimate or more accurate estimate can be fixed in our end and we can inform to the stakeholders once you have clarity on our gas prices."

Expansion Projects & Strategic Initiatives

• TAN debottlenecking underway: Some measures have already been implemented at the Taloja mother plant to increase capacity; more initiatives are in progress, with regulatory bodies and ministries kept informed.
• Phase 2 capacity undisclosed: The second phase of debottlenecking is on, but management declined to specify the exact capacity increase, saying it will be communicated once the project is completed.
• Gopalpur TAN project advancing: Piling work has started; the earlier protest was not specific to DFPCL but related to larger SEZ compensation issues which the government has sorted out; local administration is providing support; completion expected by Q2 FY2025.
• Gopalpur ammonia supply: The company has tied up with Gopalpur port for an ammonia import terminal, with an ammonia tank at the project site; ammonia will be essentially imported.
• ADB Blue Loan secured: ADB has signed a unique Blue Loan, the first in the country, providing debt funding and grants for farmer-level efforts related to the Croptek/Smartek specialty fertiliser initiatives.
• Croptek expansion: More grades have been approved by the government and will gradually appear in the marketplace, creating crop-specific inroads.
• Mining sector TCO approach: The company is pursuing more total-cost-of-operations projects in mining, looking at products, services, and total project impact for better traction and brand creation.
• One Nation One Fertiliser: A circular has been received; the company is studying implementation and has started with certain products.

Commodity Price Outlook & External Risks

• Phos acid the exception: Phosphoric acid prices have come down significantly in early H2, the only commodity with a clear downward trend.
• Ammonia and gas unpredictable: Prices depend on the Russia-Ukraine situation, potential Russian export tax restrictions on fertilisers and commodities, and how the European winter affects spot gas prices, all difficult to predict currently.
• TAN price factors from Europe: Shutdown of TAN plants in Europe due to high raw material prices will have a bearing on global TAN prices; Russia may impose additional export taxes on various fertilisers and commodities.
• TAN imports rising with demand: Imports in FY2023 could be slightly higher than the prior year, in line with domestic demand growth, while domestic manufacturers produce to capacity.

Amitabh Bhargava: "It is difficult right now to get what will happen to the fertilizers in general and also the gas price because spot prices of gas obviously would also have a bearing depending on how the winter in Europe because we are still in the early stages, how that would pan out in the next couple of months."

Guidance & Commitments

Key Metrics