Deepak Fertilisers and Petrochemicals Corp Ltd

NSE:DEEPAKFERT

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Deepak Fertilisers and Petrochemicals Limited Q1 FY '24 Earnings Conference Call, hosted by PhillipCapital India Private Limited. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Harish Desai from PhillipCapital India Private Limited.

[Harmish Desai, analyst]

Thank you, Seema. Good afternoon, and welcome to the Q1 FY '24 Earnings Call of Deepak Fertilisers and Petrochemicals Limited, hosted by PhillipCapital.From the management, we have Mr. S.C. Mehta, Chairman and Managing Director; Mr. Amitabh Bhargava, President and CFO, recently designated as President and Chief Strategy Officer with effect from August 1, 2023; Mr. Tarun Sinha, President, Technical Ammonium Nitrate; Mr. Suparas Jain, Vice President, Corporate Finance; and Mr. Deepak Balwani, Head Investor Relations. Also, I would like to welcome Mr. Deepak Rastogi, who has recently designated as President and Chief Financial Officer of the company with effect from August 1, 2023.I would like to thank the management for giving us the opportunity to host this call. We will begin the call with opening remarks from Mr. S.C. Mehta, followed by Mr. Amitabh Bhargava for details on financial performance, post which we will have a Q&A session.

[Sailesh Mehta, executive]

Thank you. Good afternoon to everyone. I extend a very warm welcome to each of you for the Q1 FY '24 earnings call of Deepak Fertilisers. I guess that you have had the opportunity to review the financial statements, press release and earnings presentation already made available on the stock exchange and our website.This quarter, as you would have seen, we have had a severe drop in our bottom-line. And the obvious questions that could have arisen in your minds would have been what has led to this drop? And are there some fundamentals that have shifted or is it a temporary aberration? So let me share some of these undercurrents as we saw them, and here are some 4 or 5 undercurrents that I would like to share.Firstly, post-COVID, a swing back on the raw material and finished good prices in comparison to the huge jump that we had seen last year, are the swing back was expected. We had also envisaged that for a quarter or maybe 2, there was likely to be a mismatch in the sense in terms of the sequence that sometimes the raw material prices remain the same, finished good prices drop first and sometimes the other way around. So these were expected and we had talked to in our budget when we had set it up also. And we expect these to settle back into a fair and balanced equilibrium, matching to the typical long-term average.Second impact, especially for our TAN sector, came from the dumping of cheap fertiliser-grade ammonium nitrate, FGAN, from Russia. Now here, what we saw was initially the embargo from various countries and global players for the Russian products post the Ukraine war made India a very convenient dumping ground for whether it is Russian oil or Russian FGAN and others. Now combined with this, the government because of an earlier fear of not having sufficient ammonium nitrate for the mining activities, coal mining in particular, there also put a ban on exports of TAN. So on one hand, the import floodgates opened up with cheap Russian FGAN and exports were banned. Now as we see the scenario, the embargo is somewhere getting readjusted in terms of the global needs. And we also learned that the government is actively considering lifting the export ban on TAN.The third dimension that emerged is where we saw that a major global phos acid supplier to India decided to virtually withdraw from the phos acid market and move to finished fertiliser supply. Now here, what we in the industry and we at Deepak also what we have done is, we have encouraged and nurtured a lot of new phos acid suppliers from other sources and have fine-tuned our plants to accept the acid from multiple sources. So that front also should be something that should now be on a comfortable levitate.The fourth interesting negative impact that came in was due to the reduction in the fertiliser subsidies. Now normally, as the raw material prices come down, there is a resultant subsidiary reduction. But in this case, the government was delayed in announcing and they had to retrospectively announce the reduction for the first quarter. So actually 2 quarter reduction came in simultaneously in this current quarter, adding up to almost INR 160 crores of impact. And for us and everyone in the industry, the material that was there in the pipeline, the pipeline inventory, that is what is something that got hit because the pipeline had finished products manufactured with the earlier raw material prices. So now of course, we have approached the government do somewhere consider this factual aspect and see whether some relief can be given, particularly for the pipeline inventory.We had -- internally, we had also somewhere an extended shutdown in one of our nitric acid plants, but the long delivery repairs and all are now behind us. And lastly, the rains were also somewhat delayed, probably due to the Adhik Maas. And now good rains and adequate Kharif sowing has happened all over, particularly in Maharashtra. So while we see the typical level that is expected in the mining activity during this monsoon, now I'm talking about this quarter, we take typical impact on the TAN business. The fertilizer season should certainly be brisk.So having said that, on the positive side, we are very happy to share that for our new ammonia project, we have seen a successful trial production emerge. And very soon, we should be declaring the complete commercial production. And that will be something that will be giving us a long-term, very good risk mitigation on our key raw material for all our 3 businesses.Lastly, I might share that at the fundamental level, our critical strategy of moving from commodity to specialty continues to be a very strong and positive strategy, and we are continuing to work on that front for all the 3 businesses. And we are finding in each place a very positive traction. So on the fertilizer side, while the one-time this subsidy hit came in, but at the product level, we are continuing to see a good margin. Similarly -- and that is emerging of course because we have now shifted more and more to crop-specific nutrients rather than the commodity fertilizers.Similarly, in case of technical ammonium nitrate, more and more we are looking at holistic offering, what we call as TCO, total cost of operation offering that is required for the end user where product plus unique services put together as a holistic solution is what we are offering and that is having a very positive traction. And so also in case of our industrial chemicals where we are seeing that the unique offered products, pharma grade small packs and the hospital grade products, including in case of nitric acid, the solar grid and the steel grade acids where we are addressing the requirements of specific segments, those are all giving very positive traction.So for more details, we -- I would now invite Amitabh to share with you in terms of figures and the rest of the details. And of course, we'll be available to answer all your questions. Amitabh?

[Amitabh Bhargava, executive]

Yes. Thank you, Mr. Mehta. Good afternoon, ladies and gentlemen, and thank you for joining the Deepak Fertilisers And Petrochemicals Corporation Limited conference call to discuss Q1 FY '24 results.During quarter 1 FY '24, we achieved a total operating revenue of INR 2,313 crores, representing a decrease of 24% compared to the same period last year. This was of course largely due to the raw material prices going down. And commensurate with that, there was also reduction in finished good prices. Our operating EBITDA for quarter 1 FY '24 amounted to INR 281 crores with a margin of 12%. Despite the challenging quarter, we recorded a net profit of INR 114 crores with the margin of 12%.During the quarter, our Chemicals segment had a revenue of INR 1,238 crores, a decrease of 30% on Y-o-Y basis. IPA sales volumes increased by 87% Y-o-Y in quarter 1 FY '24 with manufactured IPA generating revenue of INR 154 crores. Manufactured acids for the quarter recorded a revenue of INR 319 crores, a decrease of 25% compared to the previous year. So as such, the volumes were up 7.5%. The manufactured TAN business had a revenue of INR 541 crores, which represented a decrease of 50% Y-o-Y during the quarter. So volumes as such were down 15%.As far as Fertilizer segment is concerned, quarter 1 FY '24 revenue decreased by 15% Y-o-Y to INR 1,069 crores. Manufactured nitro phosphate and NPK, inclusive of our Croptek, recorded a sales degrowth of 34% Y-o-Y to INR 737 crores. So as such, volumes were down by 8%, which was largely because of delayed rains as our MD &D was alluding earlier. Bensulf sales decreased by 59% Y-o-Y to INR 21 crores.During the quarter, our IPA plant operated at a capacity utilization of 111% and both acids and TAN operated at 83% and 87% respectively. On the Crop Nutrition segment, NP, NPK plants operated with utilization of 76% and Bensulf plant operated at 31% utilization level. The available capacity across our plants gives us that additional headroom for future growth potential. We recognized the challenges that lie ahead, but remain committed to our long-term vision and growth objectives. With a dedicated and resilient team, we are confident we'll navigate through these uncertain times and achieve sustainable growth.With this, we are happy to take your questions.

[Operator]

[Operator Instructions] We take the first question from the line of Mr. Madhav Marda from Fidelity International.

[Madhav Marda, analyst]

My question basically was on the ammonia facility. Now that it's about to ramp up, could you give us an update in terms of how the spreads are looking currently given where our RM cost is for the gas and then the end market pricing? And then just -- yes, could you share that, please, that will be helpful?

[Amitabh Bhargava, executive]

Yes. So we are currently looking at FOB Middle East prices of about $230 to $250-odd, in that range. And given the current gas prices, I think overall, we were somewhere between $125 to $150-odd negative in terms of our import parity prices versus the prices at which we will be producing ammonia. That said, I will have 2 other points I want to make. One is that while the import parity prices of ammonia are obviously from -- derived from $230 to $250-odd FOB Middle East, the domestic prices of ammonia or the ammonia that is traded domestically, we are seeing significant premium over import parity and that reflects the cost of production because for all the producers of ammonia who trade into surplus ammonia, the gas prices still remain elevated. That gives us an opportunity to place part of our ammonia in the domestic market.Also, this quarter, the quarter gone by, we saw almost 18, 20 days of disruption in ammonia. And that's, again, one uncertainty that we would -- once our plant starts operating commercially, that uncertainty and the uncertainty around, therefore, production of our announcing products like FGAN and acids, that uncertainty in some sense would also be taken out. So those are the factors that we need to sort of look at from the point of view of once our own production of ammonia begin.

[Madhav Marda, analyst]

Got it. And then given that this was like essentially a backward integration project for the company. So in this scenario where it seems like it could be better to buy the imported ammonia rather than produce it in-house. So would we look to run the plant at a lower utilization initially or would we still look to ramp it up? Just to get your thoughts because I'm not very clear how that plays out.

[Amitabh Bhargava, executive]

So one is we have tied up long-term gap, which has certain minimum offtake commitment. To that extent, within that flexibility that we have, we would keep the production at that level. And the balance, we always have the choice of continuing to import. So that's really the way we would approach it. But there's also a factor that the capacity utilization -- at higher capacity utilization, our cost of production is also lower. So we need to balance between reducing our capacity utilization and sort of looking at balance importing through the import channels. But in such case, the cost of production we may have to compromise because the plants, as they run on 100% or thereabout capacity, their energy efficiencies are significantly better than at lower capacity utilization.

[Madhav Marda, analyst]

Got it. So basically, if we do end up -- like running the plant at a high utilization, essentially, is it fair to assume that our -- the spreads that we make in a downstream products like TAN or nitric acid, that will get impacted because if we don't -- like basically, we'll be producing more expensive ammonia in-house than we can buy from outside. Would that mean that it has a negative impact on our EBITDA as this plant comes up or -- I know that this is a very -- it's a very cyclical margin and we are probably at the other end of the extreme on the margins, so this has to normalize at some point. But given where we are today, I just wanted to get your thoughts on how that would impact our P&L?

[Amitabh Bhargava, executive]

So as such, we are going to transfer the ammonia from our ammonia plant, which is into a separate legal entity, performance chemical, at the arm's length prices to our downstream products. But to that extent, whatever, let's say, downside we would see at APM level, which is at ammonia plant level, that from a consolidation point of view, yes, it would have an impact on our margin. But individually speaking for each of our products because we would get ammonia at the arm's length price. There is not going to be any impact as such.

[Madhav Marda, analyst]

And just on the TAN business, the other question was, again, like you indicated that there's been a lot of dumping by Russia as they are like trying to kind of resupply to India because of geopolitics. How do you see this playing out in the next 1, 2 years? Because -- will the government come in and step into protect domestic manufacturers because dumping clearly should have some response from the government, right?

[Amitabh Bhargava, executive]

So it is difficult to predict what government would do, but what we can definitely say is that in the past there has been -- anti-dumping duty has been imposed by government in TAN sector. So the -- at least history suggests that there is -- there could be a case for anti-dumping, but we would not like to regard against as to what government would do in such a scenario.Overall, while one aspect is of course the -- let's say, in this season, there was cheaper import that came from Russia because of the factors that Russian product was not finding outlet elsewhere. But there was also a larger overhang of nitrates globally in terms of the price reduction because European season and demand was on the lower side and there were channel inventory. Now that we are already seeing that because of certain incentives that European governments are giving to farmers as well as the -- we are seeing uptake -- much better uptake in this new season of -- crops season in Europe, we expect that the nitrate -- in general, nitrate prices will recover and that should have a bearing also on -- even if the import continues to come from Russia, it would obviously come at a price parity with the nitrate in rest of the global market.

[Operator]

[Operator Instructions] We take the next question from the line of Mr. Vignesh Iyer from Sequent Investments.

[Vignesh Iyer, analyst]

Yes. This is regarding the subsidy -- fertilizer subsidy reduction that the government did and we had to take it in our books. Just to get an understanding of it, whether this lower subsidy is extended for the second and the third quarter? And what is the possible impact that we could see because of this? Just to get an idea of how does this pan out for the rest of the year.

[Amitabh Bhargava, executive]

So as per the revised subsidy announced by government is valid or rather applicable from April 1 to September end. The impact that we saw, it was about INR 160 crores, INR 161-odd crores is because of channel inventory. So going forward, as much as the NBS has come down or will be lower NBS would be applicable, even the raw material prices have commensurately come down. And as our MD was earlier mentioning that overall if you look at product by product, per ton margins compared to what we saw last year, if we remove the impact of this subsidy reduction and the impact that we have taken on our inventory, the margins are better -- per ton margins in our products are better. So we in fact see a better sort of -- a positive sort of traction both in terms of volume and margins going forward in the coming quarters.

[Vignesh Iyer, analyst]

Okay. And in case of ammonia, I mean, further let's assume what the price that is running FOB $232 to $250, at what utilization level would we match -- probably match this cost? I mean, if you have to match the cost for our production, what would be the utilization level that we would need to operate the plant at?

[Amitabh Bhargava, executive]

No, the point I was making is that as opposed to running the plant at 70%, 80%, it would always be better to run the plant at 100% capacity utilization because the energy consumption now are quite sort of persistently better at 100% vis-a-vis 80%. But at 100% also, current prices of gas and ammonia, we are in that negative sort of domain. And to that extent, the prices of ammonia needs to recover for us to breakeven. And we are seeing -- I was as well mentioning the nitrate and nitrogen prices in general have seen weakness in this quarter. And as those recover, ammonia is expected to recover. And even cost of production of ammonia, marginal cost of production of ammonia in places like Europe is still high because the gas prices are -- TTF prices are high. So we expect that the ammonia prices will recover in a matter of time. And with that, we should be in a position to breakeven and make positive margins.

[Operator]

We take the next question from the line of Mr. [Technical Difficulty]

[Unknown Analyst]

Some clarifications, sir. Firstly, on the -- as you mentioned that we are moving from commodity to specialty, especially on the TAN side of the business, you said, total cost offering kind of services we are now providing. So just wanted to understand the thought process behind it? And what exactly we do here? And what is the size of opportunity we see in these kind of services?

[Amitabh Bhargava, executive]

My colleague Tarun is there. He heads our TAN business. Tarun, would you like to take that question, please?

[Tarun Sinha, executive]

Yes, absolutely. Thank you for your question. So talking of technical ammonium nitrate business and the journey of -- from commodity to specialty, what we mean by that and the concept called total cost of ownership. So there are 2 components of the term specialty, the way we look at it in our TAN business. One is specialty products, which are not commodity products. And secondly, is the customized solutions, which make it special in terms of our offering to our consumers and the consumers being the mining industry, the mine owners, the mine operators, infrastructure projects, so on and so forth. So those are the 2 components of specialty.Now the concept of total cost of ownership in simple terms means, it's the cost of extraction of mineral, cost of extraction of rock depending on what will be the case. That's what we are attempting to improve through these customized solutions. And the way we are approaching that is, there are essentially 5 value streams, the way we look at it in any mining operations. They're being drilling, blasting, excavation, hauling, which is same as transport and then crushing if applicable. So these are the 5 value streams. And the sum total of all the costs becomes the cost of mineral extraction for the mine operator.So we have started to build in capabilities in the form of tools, software, people capability, all of that over the last 1.5 years to try and attempt to bring about improvements in each of these 5 value streams of a mining operation. And thereby, reducing the total cost of ownership or total cost of mineral extraction for the mine operators, which is going to be beneficial for them. So that's in summary, this whole solution-based and specialty build transformation journey of technical ammonium nitrate business, riding on the concept of total cost of ownership.

[Unknown Analyst]

And what is the size of opportunity we see here? And how big can this be for us at least in the next 2, 3 years?

[Tarun Sinha, executive]

So in terms of the opportunity, the universe is quite large, effectively every single mine in India and every single infrastructure project in India has opportunities. If not in all those 5 value streams, then at least in some of those value streams. And you can just imagine how big is the opportunity. And we have just started this journey, as I said, 1.5 years ago. We are very excited about it as we go along in terms of the growth potential for the business, and equally importantly, for us to be able to add value to the consumers, which are the mining companies and the infrastructure project owners.

[Unknown Analyst]

Any global benchmark kind of companies you have which offers this kind of services or is it something new we have thought about and we don't have any benchmark of these kind of services?

[Tarun Sinha, executive]

So internationally, the leading explosives manufacturing companies, some of them, not all, they do have this business model in place. Certainly, in the Indian industry, I think we are going to be more or less a pioneer. Because if I may add one more point to make it -- Mr. Mehta in his initial address also talked about a holistic solution. One part of holistic solution for our technical ammonium nitrate business, and this is just a part of it. But if you look at in the overall part, you see how integrated we are in terms of being able to provide the solutions for the mining companies. For example, we have our own ammonia. We have our own ammonium nitrate. We are having forward integration initiatives in the explosives areas. And then we are investing in blasting technology, which I was talking about. All this unique change, starting from ammonia going up to blasting technology, we are the only company in India to have this holistic and complete value chain as in our offering. So it's really unique from an Indian point of view.

[Unknown Analyst]

And any particular numbers we are targeting in next 2 to 3 years in terms of revenue from this?

[Tarun Sinha, executive]

So as I said, the potential is huge and we are starting from a small base because we started this journey just about 1.5 years ago. So we definitely see some good momentum picking up in the coming months and years, and hence quite a bit of growth, both in top-line and bottom-line through this business model.

[Unknown Analyst]

Okay. And when are we planning to commercial production of ammonia plant or has it started yet?

[Tarun Sinha, executive]

Amitabh, do you want to take that?

[Amitabh Bhargava, executive]

Currently, the trial productions are on. We are monitoring the performance parameters. And as the performance parameters and the plant operation stabilizes, by and large, we would be in a position to declare commercial numbers.

[Operator]

The next question is from the line of Mr. Deepak Poddar from Sapphire Capital.

[Deepak Poddar, analyst]

Sir, first up, I wanted to understand on the ammonia, our new plant. Now you mentioned we are having a $125 to $150 per ton of negative carry as compared to import parity prices, right? So as we stand, I mean, on our overall capacity of 0.5 million tons, if I have to just calculate, so INR 500 crores kind of annual EBITDA impact could be there because of this negativity with the input parity prices at full utilization?

[Amitabh Bhargava, executive]

Well, I don't think we have done an annual calculation. We see as the ammonia prices -- and we are confident that overall nitrogenous fertilizer demand is picking up and overall nitrogen prices are going up. There has to be a recovery for ammonia in the second half of this year. I think it's too early for us to regard against in terms of what will be the annual impacts.

[Deepak Poddar, analyst]

But as per current priority prices, my calculation is correct, right, $125 into INR 180, I mean, that way?

[Amitabh Bhargava, executive]

What do I comment on that? I mean...

[Deepak Poddar, analyst]

Okay, understood. Fair enough. And sir, our incremental impact on depreciation and interest will be about INR 300 crores and INR 200 crores respectively from this plant on an annual basis?

[Amitabh Bhargava, executive]

So in terms of interest, we are restricting our overall debt on this project to about INR 2,000 crores. If you recall earlier, we were looking to raise almost INR 2,600 crores, but we have funded it from our own internal approvals. So INR 2,000 crores debt, we are looking at about 9 quarters kind of interest rate. So you can do that calculation. As far as depreciation is concerned, it's roughly about INR 200 crores annually.

[Deepak Poddar, analyst]

How much?

[Amitabh Bhargava, executive]

INR 200 crores.

[Deepak Poddar, analyst]

Depreciation is INR 200 crores?

[Amitabh Bhargava, executive]

Yes.

[Deepak Poddar, analyst]

Okay. I got it. And sir, in one of the comments earlier, you mentioned that TAN profitability should improve. I mean, did I hear correct and going forward?

[Amitabh Bhargava, executive]

Yes. The point I was making is that even when the nitrate pricing have seen weakness because of a lot of reason, and in general, there were channel inventories of nitrate. And to that extent, as -- and we are already seeing in Europe the offtake of nitrate has been quite good in the new season. Also overall, I think the farmer incentives as such in Europe and that is reflecting in terms of obviously the offtake of nitrate, but even recovery of nitrogen -- in general, nitrogenous fertilizer. And that should reflect because if you look at overall fertilizer grade ammonium nitrate is part of the overall basket of nitrate, including urea, ammonium nitrate. And as those prices become -- from a parity perspective, the prices of fertilizer grade ammonium nitrate should also recover. And I must also mention that we believe that we have seen the bottom. There is already some recovery that we have seen in FGAN [Indiscernible] prices in recent times.

[Deepak Poddar, analyst]

Okay. But sir, pressure that you mentioned because of the dumping from Russia as well as the export ban. So those pressures, I mean, are easing out in that sense?

[Amitabh Bhargava, executive]

So as far as the export is concerned, the merit of having imposed the export ban at a scale where India was reading under pressure that they would not be enough ammonium nitrate from a core production point of view, that has certainly eased out. And the import that has happened from Russia project that there is enough ammonium nitrate at available. And with that view, we are quite hopeful that government would lift the ban on TAN. So that is certainly the case.

[Deepak Poddar, analyst]

Understood. And my final question is on your duty. I mean, you mentioned that this quarter we had a 2 quarter impact of subsidiary reduction, right? So what would be, I mean, normal run rate of this -- I mean, subsidy impact per quarter going forward?

[Amitabh Bhargava, executive]

So like I mentioned that, this impact is on the channel inventory, but the NBS prices have come down commensurate with the raw material prices. So going forward, it's business as usual. Meaning that you are now on a new NBS regime and you are also going to be producing at the lower or new prices of raw materials. So this one time, I would say, the impact that comes in channel inventory as and when NBS changes, that aspect is not going to be there. We would be back into a normal kind of margins that we would make. And there, I was mentioning and our NBS -- I made that point that per ton kind of margins in each of our products, we are seeing better margins compared to a similar period last year.

[Deepak Poddar, analyst]

Correct. So this INR 160 crores would be considered as a one-time impact, right? It will not reoccur?

[Amitabh Bhargava, executive]

In a sense, yes. I mean, as and when NBS changes, there can always be an impact. But right now, we are into the new NBS which is effective from April to September. That effect we have taken on our channel inventory.

[Operator]

The next question is from the line of Mr. Jainam Ghelani from Svan Investments.

[Jainam Ghelani, analyst]

So most of my questions have been answered, but I just have one more question. So have we signed any contracts for gas pricing? And if so, what is the gas price that we've finalized on?

[Amitabh Bhargava, executive]

We have signed contracts for next 3 years of gas. These are 3 different buckets of contracts. Some contracts are related to Brent prices, and therefore, the prices of gas would depend on the Brent movement. There are -- balance are linked with Handy Hub prices and also JKM, Japan/Korea Marker. This is the domestic gas, which is also capped by government [ CPAP ] guidelines or CPAP product price cap on gas. So a combination of these 3 is going to determine our prices. So effectively, we are -- one is taking a view on Brent, Henry Hub and JKM put together. So difficult to say which way it could move. What we've also done is we've taken certain hedging position to ensure that if some of these commodities go up, we do have a production on the other side.

[Jainam Ghelani, analyst]

And sir, can we expect this to be the bottoming out of ammonia prices or can it always...

[Amitabh Bhargava, executive]

So I think in our view -- the point I was mentioning about nitrogenous fertilizers and nitrates in general, having seen the bottom, we are seeing demand recovery, also producers -- the inventory which was there with producers that is now getting exhausted. So nitrate prices in general nitrogen prices will go up from here and should go up from here. And as the demand recovery happens, the incremental cost of production of ammonia in Europe is still very high. So the prices of ammonia obviously have to somewhere reflect these fundamentals.

[Operator]

We'll take the next question from the line of Mr. Viraj Parekh from JMP Capital.

[Viraj Parekh, analyst]

So couple of questions on the debt side. So what would be our gross and net debt as on date?

[Amitabh Bhargava, executive]

Our debt [Technical Difficulty] INR 2,600 crores end of June. And we were holding roughly about INR 1,300 crores of cash balance. So about INR 3,950-odd crores of gross debt.

[Viraj Parekh, analyst]

All right. And since we've seen a significant spike in the finance cost for the quarter gone by, for Q1 vis-a-vis the previous periods, should we work on this run rate in terms of the finance cost for the rest of the financial year?

[Amitabh Bhargava, executive]

So there is -- in general, there is an increase in MCLR and today's loans do get adjusted to or gets reset because of the new MCLR on recent date. There is an increase of it -- would be an increase in [Indiscernible] cost. But incidentally for us, compared to March '23, in June '23, our average cost of borrowing we have renewed by about 40 basis points. We were earlier holding slightly expensive loans on ammonia project, which we repaid completely in this quarter. And we are refinancing those loans with cheaper loans.

[Viraj Parekh, analyst]

And so just another one on this. So by the end of March '24, what should be our gross debt number? Should we be at similar levels or there will be a spike?

[Amitabh Bhargava, executive]

So we have -- see, fundamentally, ammonia project is now complete and particularly complete from the debt standpoint. Whatever debt we needed to draw, we have drawn on ammonia project. The debt which would get added from there on would be the debt on TAN Gopalpur. Roughly, I would say, INR 400 crores to INR 500-odd crores should get added on Gopalpur till March. Equally, through the year, we roughly pay about INR 350 crores to INR 300 crores, we amortize the debt. So the balance will get -- whatever is the pro-rate number that should come down. But I think that's how we should look at the debt numbers throughout. And net debt would also -- in some sense would depend on how the business performs in the next 3 quarters.

[Operator]

We'll take the next question from the line of Mr. Aditya Bagaria from Vision Capital.

[Aditya Bagaria, analyst]

Sir, just wanted to get a brief overview on how the ammonia cycle works. From what I understand, there's a demand shortfall, and because of that, the markets are down. But essentially, are all the producers in the world right now selling ammonia at a loss. How does the ammonia end up being at the rate in spite of the gases being at the rate that they are? So if you can shed a light, that will be helpful.

[Amitabh Bhargava, executive]

See, one is, ammonia cycle in the past and we've spoken about it, when we look at our own imported cost in the last 10 to 15 years, we have seen an average of $420 to $430 FOB Middle East, which landed cost basis would be in the range of $500 to $510. So that's how average of ammonia import cost has moved for us. Now in that average, we've seen lower cycle the way we are seeing right now, which is $220, $230, $240, $250 above, but we've seen the higher end of $1,200 as well. In fact, in the recent past -- the whole of last year, the average cost of -- or average FOB Middle East prices would have been somewhere in the range of $650-odd with the, I would say, the upper side of $1,200-odd. So that's the kind of cycle that you would see.Now globally, ammonia that gets traded and procured by the players who are not integrated with ammonia, they depend on the global trade or the surplus capacity which either comes from integrated plants or certain merchant plants, ammonia merchant plants which trades into the market. What we have seen in the past and the numbers are no different currently is that roughly while the increase on the demand side has been about 1.5% or so -- 1.5% to 2%, the supply side is somewhere between 0.5% to 1% in terms of the addition, as we look at CAGR or per annum addition. And that kind of gives us that assurance that supply side is remaining I would -- somewhere behind in terms of the demand side and that should sooner or later reflect on the ammonia traded prices.And what happens is, in all of this, there are players, global players who have access to cheaper cost of gas because these are gas-producing or gas surplus countries or locations. However, the prices of ammonia would always like in any other commodity will get determined by the incremental cost of production because if the demand goes up, it's the last plant that produces ammonia to cater to that demand is what would determine the prices of ammonia. And that is where I was mentioning earlier in Europe, given the TDF prices of gas are still high and will perhaps go higher as the winter progresses, the cost of producing ammonia in Europe will remain high.Today, because the demand size is lower or nitrogenous fertilizer demand is weak, some of those incremental plants are shut, and therefore, ammonia demand is low and there is still lots of maybe channel inventory. As that equalizes, we are going to see again the demand-supply fundamentals playing out, and they should -- the lower end of the commodity prices that we are seeing, we should see recovery from there.

[Aditya Bagaria, analyst]

All right, sir. That clarifies that particular aspect. Another small aspect, although it's nothing compared to our balance sheet at this point, but the real estate division, the onset of the interest rates going up and also the property market is picking up, why aren't we trying to basically get done with the sale that we have been trying to do for the past several quarters now? It will also help us ease out the increasing debt in our balance sheet. So is there any update on that?

[Amitabh Bhargava, executive]

So fundamentally, any non-core assets that we have, we've been reviewing that closely. We have been recently started selling some of our non-core real estate plants, not necessarily in Pune, but we have some land outside of Pune region, we have sold that. And therefore, directionally, we are looking at coming out of our output. The timing of when we'll take a decision on our Pune plant and then how do we really go ahead with that, because even that has more than one parcel of land, we would inform as and when Board takes a view on that.

[Operator]

The next question is from the line of Pinaki Banerjee from AUM Capital.

[Pinaki Banerjee, analyst]

I would like to ask some questions on the Iso Propyl Alcohol segment. In the presentation, you have mentioned because of the imposition of import restrictions by the Government of India has been one of the prime reasons for the significant jump in volumes this quarter. And if you go back to FY '22, you had about 64,900 MT which has fallen drastically to [ 43,900 ] in FY '23. So how much are you expecting to produce for this fiscal considering the fact that all these imports restrictions have come?

[Amitabh Bhargava, executive]

So this quarter, our production has been around 19,000-odd tons. Exactly if I -- our capacity utilizations were about 111% and we've produced about 19,467. We are quite hopeful that our run rate this year should be, I would say, extrapolation of what we have seen in quarter 1.

[Pinaki Banerjee, analyst]

So basically, you are expecting to surpass your FY '22 level?

[Amitabh Bhargava, executive]

I don't know what's the FY '22 level as such, but...

[Pinaki Banerjee, analyst]

It was around 64,900.

[Amitabh Bhargava, executive]

Yes, I think that should be possible, though we'll have to see how prices on -- propylene prices vis-a-vis acetone prices, also the overall demand side, we'll have to see what happens in the next 3 quarters. But yes, the signs in terms of what has happened in Q1 on turnaround in IPA are very positive.

[Pinaki Banerjee, analyst]

Sir, actually, can you give us a break-up of segments with Asia, B2B or B2C? Is there any segregation in this segment to do that for this?

[Amitabh Bhargava, executive]

We are largely or significantly still in B2B because pharma remains -- almost 80% plus kind of volumes go into Pharma segment installments. Even the other sectors that we service through IPA are largely B2B. Even in our Cororid, which is the segment which in the sense is also disinfectant, we have -- we are focusing on institutional customers. There is -- obviously there are product portfolio which caters to the retail customers. But our focus is also going to be in the hospital segment, this disinfectant growth of hospital segment.

[Pinaki Banerjee, analyst]

Sir, just one last question regarding the TAN segment. Sir, actually, since it has been used for manufacturing of explosives, are you supplying these products to any defense company?

[Amitabh Bhargava, executive]

Tarun?

[Pinaki Banerjee, analyst]

Sir, are you supplying any of this TAN product to any defense sector because of its explosive properties?

[Amitabh Bhargava, executive]

I was inviting Tarun, my colleague, to comment on that.

[Tarun Sinha, executive]

I'll take that question, Amitabh. So as far as TAN is concerned, there is a very small proportion of TAN in our business which goes to some ordinance factories, which is then used for converting into some sort of products which eventually get used in the defense sector. So we are a couple of steps away from that.

[Pinaki Banerjee, analyst]

Sir, considering the fact that the defense -- these are huge expectations from the defense different segments. So are you planning to further increase its exposure?

[Tarun Sinha, executive]

So I can talk from a technical ammonium nitrate perspective, and certainly, Amitabh can add more from a Group strategy point of view. So at this stage, the technical ammonium nitrate business is focusing more on our transformation journey that I talked about. This consists of a complete value chain, starting from ammonia, ammonium nitrate, forward integration into explosives and then into blasting solutions, and finally, mine productivity improvement. So that's what we will be focusing on as a part of the core strategy for our business.

[Operator]

We'll take the next question from the line of Mr. Meet Vora from Emkay Global.

[Meet Vora, analyst]

My first question was, sir, what will be our cost of producing ammonia dollar per ton, including the current gas cost and the conversion cost versus the Middle East prices where we breakeven if we exclude the freight and custom duty that we pay while importing?

[Amitabh Bhargava, executive]

I've already answered that question.

[Meet Vora, analyst]

Sir, the current gas prices, including it should be around $380 our cost of producing ammonia?

[Amitabh Bhargava, executive]

I mentioned that overall from an import parity versus our cost of production. We are in that $125 to $150-odd range depending on the pricing fluctuations we are seeing in ammonia. That's the negative we have been correcting.

[Meet Vora, analyst]

Sir, secondly, in terms of the contracts that we enter into for our TAN and nitric acid business, how do you fix the pricing? Are these formula linked to ammonia or if you could just give a broad sense on what will be our spot, what would be our long-term and how do we fix the pricing?

[Amitabh Bhargava, executive]

So prices typically of any product, there is a combination of contractual customers and spot customers. Contractual customers are typically on the basis of certain margin protection where we pass on increase and decrease in costs. As far as spot is concerned, we look at each of our customer locations, what is the next alternative they have. And typically, our prices are to some premium over the other alternative given the quality of our product, given the kind of reach we have, the turnaround time in terms of reaching the product to our customers. So largely, that's the way any spot commodity or commodity price on spot base is and we are no different.

[Meet Vora, analyst]

Sure. And what will be our ROCE for TAN project that we would have initially worked on versus what would have changed now or just to know what will be the payback of this project that we were initially expecting versus what will be it now?

[Amitabh Bhargava, executive]

TAN, you said TAN?

[Meet Vora, analyst]

Yes. Ammonia, sorry.

[Amitabh Bhargava, executive]

Look, you need to look at ammonia. You can't look at it in 1 quarter. I mean, if you asked me this question in previous quarter or quarter before that, based on that quarter price, the number would be very different. Therefore, you need to look at the 20-year, 30-year project on the basis of the average of commodity cycle. And that's where I just explained that in the last 10, 15 years, we've seen prices of $420, $430 FOB Middle East. And that's the basis on which we conceptualize the project. And we don't see the commodity prices are going to be any different. In one quarter, you may see $1,000, in another quarter you are seeing $250. Now you can't keep changing your favorite hills on what happens in that quarter.

[Operator]

We'll take the next question from the line of Mr. Pallav Garg from Star Health.

[Pallav Garg, analyst]

The first question I wanted to know was the CapEx plans that you have for FY '24-'25. I believe the TAN is the one where you would be putting in most of your CapEx. But apart from that, is there any debottlenecking projects or assignment? And apart from that, any maintenance? So how should we look at it?

[Amitabh Bhargava, executive]

As of now, the projects that we are working on after ammonia completion, TAN is the -- TAN Gopalpur project is the only project that we have -- we are working on. So as such, based on whatever decision boards have taken so far, these are the projects -- these 2 are the main projects that we are undertaking.

[Pallav Garg, analyst]

So practically, whatever remaining CapEx for this project and additionally some maintenance CapEx is what we should be expecting? I hope my understanding is right?

[Amitabh Bhargava, executive]

Yes, that's correct. See, in the past, as you would recollect, we've also -- our MD has also made that point that the next round of growth that we see is also going to be from a potential opportunity that we would see in brownfield expansion in Dahej Acid project. The timing of it or when does that happen, we -- as when it takes place, we would bring it to the investors. But as of now, these are the 2 projects we are working on.

[Pallav Garg, analyst]

Got it. And sir, you mentioned a very interesting point that you have been taking some hedging positions to cover up for any spike in the raw material prices. So if you can divulge some details around what are these products? What index? What kind of percentage of your coal consumption and pricing levels if you can tell anything on that?

[Amitabh Bhargava, executive]

Right now, we have taken position on brand-related contract. We are evaluating the positions in other contracts out there.

[Pallav Garg, analyst]

Okay. So practically, this is just for that -- covering that. And I believe the subsidy impact which we had for this quarter, INR 161 crores, this is -- there is not resulting in like any cash outflow, rather it is just an impact on the P&L accounting statement item. So practically, what the portion of the income, which we registered for first quarter -- sorry, fourth quarter of last fiscal and one which is for this year -- this quarter, that is the impact which we have to bear, right?

[Amitabh Bhargava, executive]

Yes. See, to the extent channel inventories are yet to be sold, the realization on that both from trade and subsidiary has to still take place. But since we have booked the sales at a particular value and the NBS has come down, you need to take that accounting. There's no outgo of equivalent amount as such.

[Pallav Garg, analyst]

Yes, yes. So let's say, if we kind of imagine ourselves in a world where the NBS subsidies are getting repriced every now and then based on the prevailing prices, this impact would never have been there because the differential would have been built in that price there when the commodities were -- when we were placing our products, right?

[Amitabh Bhargava, executive]

I'm not sure if I got your question, but fundamentally, anything that we are going to sell going forward will be at the new subsidy regime. To the extend you have sold and collected, you have collected. To the extent your inventory which you've earlier booked at a particular value and on that subsidy has come down, you need to revise that and we need to sort of take that impact on that channel inventory.

[Operator]

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Amitabh Bhargava for closing comments.

[Amitabh Bhargava, executive]

Well, thank you everyone for your incisive questions. For any further queries or clarifications, please look do get in touch with our Investor Relations team. Have a good day, and thank you so much.

[Operator]

Thank you. On behalf of PhillipCapital India Private Limited, that concludes this conference call. Thank you for joining us. And you may now disconnect your lines.