Deepak Fertilisers & Petrochemicals Corp Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Strong top- and bottom-line growth: Revenue and profit both rose 40% YoY in Q3, with 9M profit up 138% YoY, driven by a strategic shift from commodity to specialty and value-based pricing across all three businesses.
• TAN volumes dipped but margins held: A ~10% YoY Q3 volume decline from delayed tenders and Russian imports was offset by better MSPs and total-cost-of-ownership initiatives, keeping profitability significantly better YoY.
• Ammonia project nears completion: The greenfield plant is 93.5% complete with pre-commissioning underway; 40% of gas is tied up at an attractive discount, and commissioning is expected by Q1 FY24.
• Demerger process is live: The NCLT process to separate the fertiliser and TAN businesses is underway, with management citing independent boards, focused structures, and the ability to attract strategic partners as key value-unlocking levers.
• What to watch next quarter: Whether delayed Q3 TAN tenders actually convert to volume recovery in Q4, the pace of gas tie-ups for the remaining 60% of ammonia requirements, and any update on the demerger timeline.

TAN Business: Volume Dip, Margin Resilience

• Q3 volume decline: TAN sales volumes fell ~10% YoY because of delayed demand pickup in infrastructure and non-coal segments, Coal India subsidiary tender processes that pushed demand into Q4, and the resumption of imports from Russia.
• 9M still positive: Despite the Q3 softness, 9M TAN volumes grew 4% YoY to 366,000 tonnes, even as industry explosives demand grew only ~1% in H1. Coal demand was strong, but non-coal sectors like infrastructure, cement and steel mining were sluggish.
• Margins improved despite lower volumes: Q3 contribution margins were better than Q2 because MSPs improved sequentially, and total-cost-of-ownership (TCOD) initiatives plus value-based pricing added to margins. The business now earns from product margin, solutions margin, and shared value from mine productivity improvements.
• Domestic premium over imports: Domestic technical-grade TAN commands a premium over imported fertiliser-grade ammonium nitrate on three counts: higher purity and efficiency, security of supply versus import disruptions, and value addition through TCO initiatives. JNPT congestion and geopolitical disruptions have intermittently hit import reliability.
• Full-year volume confidence: Management is confident that full-year FY23 TAN volumes will be higher than last year, with Q4 expected to capture the demand delayed from Q3. Coal is expected to stay strong; non-coal and infrastructure performance is the key watchpoint.

Tarun Sinha: "We are quite confident that on an annual basis as we exit this financial year in March this year, our TAN volumes are likely to be higher than last year despite a very, very moderate growth in the demand in the country."

Ammonia Project: Near Completion, Margin Visibility Improving

• Construction status: The greenfield ammonia plant is 93.5% complete and in the peak of pre-commissioning activities, with commissioning expected by Q1 FY24.
• Gas procurement progress: 40% of gas requirements are tied up on a Brent-linked contract at an attractive discount to current spot. The balance 60% is being worked through domestic auctions (Reliance, ONGC) expected over the next couple of months, plus discussions with global LNG players.
• Margin outlook: Management sees the ammonia-gas delta of \$300 to \$400 per ton as "pretty much intact," with no significant downside expected. Structurally, few new merchant ammonia capacities are coming online, and China is expected to shift from net exporter to net consumer as demand returns, counterbalancing any European capacity restarts.
• Project economics: The Maharashtra Government granted an SGST reimbursement scheme until 75% of capex is recovered, which management says added materially to the project's financial viability. The project is viewed from a 20-30 year perspective, with both ammonia and gas expected to cycle.
• EBITDA guidance: Management declined to give a narrow EBITDA range until 100% of gas is tied up and underlying benchmarks are known, but acknowledged that analyst-computed figures are "doable."

Amitabh Bhargava: "The ammonia gas delta or margin of anywhere between \$300 to \$400 seems pretty much intact as we see going forward."

Chemical & Fertiliser Segments: Broad-Based Growth

• Plant utilization: TAN plants ran at 117% utilization, reflecting strong operational execution. Acids ran at 88%, IPA at 62%, NP/NPK at 63%, and Bensulf at 50%.
• One Nation One Fertiliser policy: No significant margin impact in Q3. Bags carry uniform government-prescribed text on one portion, but roughly one-third or more of bag space still allows the company's brand, logo and product specifications.

Strategic Shifts: Solutions, Value Pricing, Demerger

• Products-to-solutions transformation: The TAN business began this journey 12-18 months ago and is still in early seeding stages. The company deploys mining engineers to benchmark and improve mine productivity, then shares in the cost reduction value. Solutions margins are currently low but expected to become much higher over time, both on percentage basis and in the overall margin pie.
• Value-based pricing: The shift from competition pricing to value pricing is now embedded across all three businesses. In TAN, pricing reflects not just the product but the total cost of ownership delivered to the mine operator, creating a stickier, higher-margin relationship.
• Demerger rationale: The NCLT process will separate the fertiliser and TAN businesses (currently in subsidiary STL) from Deepak Fertilisers, which retains industrial chemicals. Management says independent boards, focused org structures, and the ability to raise capital separately for each business will unlock value and attract strategic or financial partners interested in only one entity.
• Listing question unanswered: Management declined to comment on whether the demerged entities would be listed or remain unlisted, calling it too early to say.

Amitabh Bhargava: "Separation of these two allow us to get both strategic and financial partners on board, which could accelerate the growth. So sum and substance of it is, yes, it certainly will unlock value, a better quality, a better focus, better — increased sources of capital for growth."

TAN Demand Outlook: Coal Leads, Infrastructure the Wildcard

• Medium-term demand growth: Over the next 2-4 years, TAN demand is anticipated to grow at a 5-6% CAGR, driven by coal for energy needs and infrastructure-led mining of cement, steel and rock aggregates.
• Infrastructure budget link: The new budget's significant infrastructure commitments drive TAN through three channels: cement (limestone mining), steel (iron ore mining), and rock aggregates (stone quarrying). The pace of non-coal sector recovery will determine how much of this demand materialises in the near term.
• Import dynamics: Russian imports resumed in Q3, adding to domestic supply. However, import reliability remains vulnerable to JNPT congestion, limited storage capacity, and geopolitical disruptions like Black Sea trade interruptions. These structural frictions support the domestic premium.

Guidance & Commitments

Key Metrics