Deepak Fertilisers and Petrochemicals Corp Ltd

NSE:DEEPAKFERT

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the Q4 FY '22 Earnings Conference Call of Deepak Fertilisers And Petrochemicals Limited hosted by Systematix Institutional Equities. [Operator Instructions] And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pratik Tholiya from Systematix Institutional Equities. Thank you, and over to you, sir.

[Pratik Tholiya]

Yes. Thank you, Steve. On behalf of Systematix Institutional Equities, I would like to welcome all the participants who logged into this Q4 FY '22 earnings conference call of Deepak Fertilisers. From the management team, we have with us Mr. S.C. Mehta, Chairman and Managing Director; Mr. Mahesh Girdhar, President, Crop Nutrition Business; Mr. Tarun Sinha, President, Technical Ammonium Nitrate; Mr. Amitabh Bhargava, President and CFO; Mr. Suparas Jain, Vice President, Corporate Finance; Mr. Deepak Balwani, Head, Investor Relations; and other members from the management team.

At the outset, I'd like to thank the management for giving us the opportunity to host this conference call. I would like to now invite Mr. Mehta to begin the proceedings of the call by giving his opening remarks. After that, we will open the floor for Q&A.

[Sailesh Mehta, executive]

Thank you. You can hear my voice clearly?

[Pratik Tholiya]

Yes, sir. You're loud and clear.

[Sailesh Mehta, executive]

Okay. So a very good afternoon to all of you, and welcome to the Q4 FY '22 earnings conference call. And I hope you have had a chance to look at the financial statements and earnings presentation that we've uploaded.

So at the outset, let me share with all the joy, that the top line for the year grew by 32% and we crossed a milestone of USD 1 billion in terms of the top line. And as far as the PBT goes, profit before tax, again a milestone that we crossed INR 1,000 crore. So that gives a certain kind of joy.

The operating EBITDA grew by 42%. Net profit increased by 69%. And all in all, it resulted into a very strong cash flow available then for projects, which was around INR 1,200 crores, which helped us to reduce the net debt by around INR 400 crores.

And looking at all these good results and looking forward to also the good things, the Board has recommended upping the dividend from 75% last year to 90%. So now I was wanting to just broadly share that what do we see as undercurrent? How did this happen? And somewhere to share some of those insights.

So on the face of it, it is obvious that while we had some severe raw material price jumps, I mean, [ on head ] of jumps, ammonia jumped by 192%, phos acid by 90%, propane by 39%, gas by 58%. But we were in a position to and hence, the finished good pricing also are sufficient enough to widen the delta. So that is at the face of it.

But at an undercurrent level, some of the aspects that we see are these 5. So number one, it got validated that all our products, whether it is the fertilizers, industrial chemicals or mining chemicals, all are beautifully alligned with the country's growth stories. And with that came in the positive current as far as the demand goes, so that aspect of it got established, and that was certainly a good support to make these operations, these results to come in.

The second aspect that got established was that the 40 years of our working in this space, and the efficiency in terms of the supply chain management, efficiency in terms of the manufacturing cost optimization. All those during the challenging times of various disruptions, various COVID shocks. It also got established that those systems and those processes are indeed robust and they ended strong. And that also got validated by way of the performance.

The third aspect that came in, and as you can see, the results of it in terms of the results -- financial results, is the emphasis that we have put on systems processes digitizing over the last couple of years and last year in particular, the internal word we had put in a lot of emphasis on a sales and operation planning system, where based on demand generation, one could plan right from raw material, inward logistics, manufacturing, outward logistics market.

So those systems in terms of internal systems, including the SAP HANA-based, dashboard-based systems, those certainly came in very handy during these kinds of volatile times. At the plant, we also brought in some of the smart factory digitization efforts. And at the external site, we have brought in the Farmer Connect digitization efforts.

So I would feel that these systems and processes also got tested and came in very handy during these kinds of volatile times and helped us.

So next, the third aspect -- rather the fourth aspect that I see that certainly helped was the close proximity that we have with customers and understanding each customer segment, their needs and their ability to absorb the higher prices. And that is something -- that understanding really helped us to make sure that despite these kinds of passing through of the high prices of raw material that we did not destabilize the end segment market.

And that aspect of it, we also saw that for our end customers, the impact of these prices are not very significant. So to that degree, we saw that, that gives an inherent long-term strength during these kinds of volatile period.

Last but not the least and the most exciting part of our journey, which we pushed through last year, and we are going to be pushing through very strongly in the coming current year and the next year also, is our journey from commodity to specialty or a journey from product to solutions. And in each of the 3 businesses, it panned out from the very strong ground level efforts. So based on certain kind of emphasis on applied R&D in the fertilizer sector from -- if you recall from the earlier days of commodity NPK, we had moved 100% to Smartek, which is a very potent, I would say, performance fertilizer, which gave phenomenal results. And from Smartek, now we have -- last year onwards and continuing this year, we are moving to crop specific. So we have branded as Croptek.

So some of the crop specific grades that came in, and that is something that is giving us a very positive traction. In case of the industrial chemicals as well as an IPA, so somewhere we have kick-started efforts for solar grid asset or steel grid asset, IPA [indiscernible] , besides the hand sanitizer, now we have started pushing towards the hospital segment. So there, again, the move from commodity to specialty, plus, of course, positioning the product for the pharma sector that we did for IPA. So that aspect also is something that certainly helped.

And in the Technical Ammonium Nitrate sector, the mining sector, we brought in ANP-based various [ caprice ] products. We started looking at again, from product to solutions. We started looking at the TCO, the total cost of the owner for a particular mine and looking at innovative products that could help them. So this whole journey from commodity to specialty, or from product to solutions, is something that gave us, I would say, very positive tailwinds. And these are things that are going to be helping even in the future.

So with that, how do we look at life ahead. We see that these kinds of, I would say, volatile environment emerging out of raw material price hikes, Russia and Ukraine, is something that is going to haunt us maybe another 3 months, 6 months. But having now learned to drive the volatility, we feel that all the 5 aspects that I mentioned are going to continue to support us.

We are also seeing that because of some of these stoppages of manufacturing last year because of COVID or sometimes a little supply disruption, we still have certain further capacities that we have not packed. We could not pack last year, but we are available this year. Plus, we kickstarted some debottlenecking programs which also we are seeing that they will allow us a little elbowroom in the current year. So those will come in handy in terms of, I would say, some additional opening in terms of positive working.

We are also seeing that with the China shift progressing, that there are some strong positive wins coming our way in the state of speciality chemicals, who then require as their feedstock, our Nitric acid, and so that's something that we are seeing again as a positive wind that's blowing with us.

And lastly, and not the least, as we see even further ahead that the investments in the projects that we have taken up, both Ammonia and Technical Ammonium Nitrate, those are going through very strongly. In fact, on the Ammonia Project, both having got all the land, having got all the environment clearances with almost 95%, 97% of equipment having reached and the EPC with Toyo, that project is going into a very strong closure [ string ].

And we are talking about, I would say, middle of next year when we should be moving towards commercial production. So with all that put together, this I would look at as kind of a broad brush in terms of the background within which the good results have emerged. But more details, Amitabh will take you through, sector by sector. And of course, the team is available for any question and answer after the presentation. Over to you, Amitabh.

[Amitabh Bhargava, executive]

Yes. Thank you. Thank you, Mr. Mehta. Good afternoon, ladies and gentlemen, and thank you for joining the Deepak Fertilisers And Petrochemicals conference call to discuss the Q4 FY '22 results.

Our growth momentum continued during the quarter and overall, FY '22 was an important year for Deepak Fertilisers. We have come a long way in our journey to climbing the revenue chain strategy that Mr. Mehta was earlier alluding to. And the chain has started giving us the targeted benefits in terms of revenues and margin expansion.

We still have a long way to cover, and major further growth is expected from this journey and the upcoming background -- backward integration to Ammonia Project. During quarter 4 FY '22, we reported a total operating revenue of INR 2,012 crores, an increase of 28% compared to same period last year.

Our operating EBITDA increased to INR 502 crores compared to INR 273 crores in Q4 FY '21. And operating EBITDA margins expanded to 24.9% from 17.3% during Q4 FY '21. Our net profit for the quarter recorded a growth of over 144% to INR 283 crores with margins of 14%.

Finance costs reduced by 19% Y-o-Y during Q4 FY '22 due to amortization of operating term loans and continued reduction of short-term debt.

Overall, net debt reduced by about INR 400 crores during the year and net debt/equity improved to 0.35x compared to FY '21 when it was 0.65x. During the quarter, our Chemical segment revenues increased from INR 870 crores in Q4 FY '21 to INR 1,500 crores in Q4 FY '22. Segment profitability also improved from INR 232 crores to INR 523 crores in Q4 FY '22.

Manufactured mining chemical, that is TAN business, recorded a revenue of INR 839 crores compared to INR 400 crores in Q4 FY '21. Mining Chemical business delivered an outstanding quarter. Pricing of all products remain competitive.

Margins in all segments, that is HDAN, AN Melt and LDAN, improved despite adverse impact of increasing ammonia and commodity costs. This was achieved on the back of good demand and better realization.

As far as assets are concerned, we are in the process of segmenting the market depending on the concentration of assets, their application and different end user segments. Robust demand for Nitric acid due to improved consumption and enhanced prices of downstream products helped in realizing better prices and margins.

CNA, that is concentrated nitric acid and dilute nitric acid, NSP in Q4 increased year-on-year through DNA production volumes were impacted, though the DNA production volumes were impacted due to ammonia unavailability and temporary mechanical limitations.

IPA sales volume increased by 66% Y-o-Y in Q4, despite some production loss on account of mechanical issues. The propylene prices continue to rise. There is almost 39% Y-o-Y, which impacted the IPA margins. During the quarter, our Fertilizer segment revenues were INR 506 crores compared to INR 702 crores in Q4 FY '21. Steep increase in raw material prices, such as ammonia, phos acid and MOP, did impact the production cost of fertilizers adversely in Q4.

We recently launched Croptek Sugarcane and Croptek Cotton on the back of successful Croptek Onion launch in Q3 last year. During the quarter, our IPA plant operated at capacity utilization of 88%, and both assets and TAN operated at 77% and 100%, respectively.

In the Crop Nutrient segment, NP, NPK plants operated with utilization levels of 34% and Bensulf plant operated at 60% utilization level. Increase in raw material prices and disruption in supply chain were essentially the reason as I mentioned earlier. The available capacity across our plants provide us headroom for future growth potential.

And as Mr. Mehta was also mentioning that the -- we're also doing some debottlenecking in our plants, which should also give us the opportunity to further increase our production in our Taloja facility. Long-term growth is expected from our continuous endeavor to transform from a commodity to specialty player in each of the product segment, as Mr. Mehta was mentioning earlier, increasing utilization levels, capacity enhancement and backward integration initiatives should also help us with the long-term growth. With this, we will be happy to take your questions. Thank you.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Madhav Marda from Fidelity International.

[Madhav Marda, analyst]

I had a few questions. Firstly was on the -- I think your production was impacted because of ammonia unavailability in some of the segments. Could you just help us understand like what is happening there exactly? And is the supply now normalized? Or could we continue to see some volume impact maybe in 1Q and first half of FY '23?

[Amitabh Bhargava, executive]

So we did face issues with ammonia because one of our largest suppliers had certain disruptions, particularly on the logistics side. And as a result, we had to then move to, at [ Hog Supplies ] from some of the international players as well as we bought ammonia from local players who had surplus ammonia. But since I think April onwards, we've been back on track in terms of our supplies from one of our long-term suppliers.

So as such, this year, we are not anticipating, of course, it's early days, but we are not seeing any challenge as such on ammonia. That's the situation on ammonia. MOP was another product or other raw material, which had challenges. Again, I think partly it was logistics and partly also a good part of MOP also globally traded that comes out of Russia, Belarus. So that also -- we saw some disruptions. As of now, we have worked on some alternate sources. And for the foreseeable period, we do have the required quantity, but we'll have to see as it goes in the future.

[Madhav Marda, analyst]

So our nitric acid capacity utilization in Q4, which has come to 77% and the fertilizer NP, NPK , which is at 34%, that should largely normalize and come back to a healthy level now onwards, right, basically?

[Amitabh Bhargava, executive]

Yes.

[Madhav Marda, analyst]

Got it. Understood. And the second question was on the ammonia CapEx. I think a lot of companies are facing CapEx for situation because of steel prices, et cetera, going up. So have you largely locked in our CapEx at that INR 435 crores for ammonia or could there be like any escalation there because of commodity prices...

[Amitabh Bhargava, executive]

We have a fixed price turnkey contract with Toyo. And what we understand is that a contract that they had also tied up their metal purchase before this inflationary trend came into metal. So the assets have contractually fixed price. So we don't see any risk, but even contracts are on the back end has tied up its metal.

[Operator]

The next question is from the line of Pritesh Vora from Mission Holdings.

[Pritesh Vora, analyst]

First of all, congratulations for super milestone which you achieved in this quarter. I want to understand, is there any specific one-off in terms of like our finished good prices move up in light of raw material price movement? And we could have sourced the raw material at cheaper rate somehow. So is there any -- how do you look at the spread between the raw material price and the finished good? And do you think that the spread may come off in coming quarters?

[Amitabh Bhargava, executive]

See, fundamentally, it was -- I would say it was a mixed bag as far as the raw material prices and the finished good prices are concerned during the year. So on one hand, increased raw material prices, particularly ammonia, phos acid, MOP impacted us on our Fertilizer segment. Because one is, of course, the production was low and also in terms of the margins, it resulted in squeezed margins.

But in other segments, like Nitric acid, for example, where generally our pricing is -- passes through the raw material prices. And also, there was an impact. And we've been talking about this for the last couple of quarters, that because of China plus Wuhan kind of inclination of global supply chain. We are seeing the Specialty Chemicals segment showing strong growth. And that impact of that on the demand for Nitric acid has been very strong. So we are seeing better realization in the spot market, and that we believe is so long as -- and I think industry believes and so do most of the players, that this impact of China plus Wuhan is something which is here to stay because as we understand some of our customers also have fairly long-term supply contracts with their customers.

So we are going to see this Nitric acid strong demand continues. And therefore, these prices or the margins should largely sustain, notwithstanding the movement in ammonia prices, which is the basic raw material for Nitric acid. As far as TAN is concerned, and it had, obviously, as the raw material prices went up, so did the finished good prices. So to that extent, TAM could not just pass on the raw material prices.

But overall, the margins expanded during the year. So this is [indiscernible]. So I would say that this is -- and let me also, in IPA, for example, while overall demand came back as the pharma sector, some of the challenges that pharma sector was facing on their supply chain started normalizing the margins, because the oil prices went up, so did the propylene prices, margins squeezed during the year.

So we had -- I think we had both sides of the raw material price increase in our numbers. Some product had headwinds, some had a little bit of a tailwind, giving us better ability to pass on the grid...

[Pritesh Vora, analyst]

Right, sir. My next question is about the CapEx which you are doing, where you are saying that mid of next year, this project should come online, [ Dahej ] project's. What is the amount of we have CapEx spent? And what is the asset turnover we see in that particular project?

[Amitabh Bhargava, executive]

So we are looking at ammonia, as we have mentioned earlier that this project is -- expected project cost is INR 4,350 crores. We have nearly spent INR 2,500 crores already and balance -- whatever balance of INR 1,850 crores or INR 1,900-odd crores is yet to be spent. As far as the asset turnover is concerned, look, I think ammonia as a commodity has seen cycles.

And if one were to look at today's price, for example, and that's the price which would get, in a way, translated into revenue for the project. Then we are talking about almost at current prices upwards of $500 million of revenue, which is almost kind of, I would say -- 0.8x to 0.9x of the asset turnover. But ammonia is a commodity that will see its cycle in next 5 years, 10 years, 15 years, whichever way you look at it. And to that extent, asset turnover will vary year-on-year.

[Operator]

The next question is from the line of Abhijit Akella from Kotak Securities.

[Abhijit Akella, analyst]

Congratulations on a great set of numbers. I just had 2 or 3 clarifications to seek. One is in the context of improvement in the debt number that you have seen already by end of this year to about INR 1400-odd crores net debt revenue.

Given the CapEx program that is yet to be undertaken over the next year, 1.5 years, where do you see the peak debt ending up for the company now? Is it substantially lower than what you had originally anticipated, say, 1 year or 2 years back before the numbers turn so strong on the earnings point?

[Amitabh Bhargava, executive]

So Abhijit, I think this is a question that if you recall, I've always been a little -- I was hesitant in pointing a number here. And the reason that is the case is that while both of these projects from a financial closure standpoint, we are -- we have a base case where we are looking at, I would say ammonia, we used to earlier look at 60-40 debt equity, we are possibly looking at 40 -- 50-50 debt equity ratio now.

Likewise, in time, while from a financial closure standpoint, we are timed up 70% of the project cost as debt. But given the kind of cash that we are generating internally, we are quite confident that the debt requirement in both these projects would certainly be below the base case that we have planned.

To give you an example, we have got an like [ Dahej ] in ammonia, we have already spent about INR 2,500 crores. We require another INR 1,850-odd crores and, let's say, another INR 2,200 crores in TAM. So put together, let's say, another INR 4,000 crores of additional CapEx that is required in these 2 projects. We ended this year with almost INR 1,150-odd crores. We generated roughly about INR 1,200 crores to [ Ishanya ] Foundation. So run rate, even more -- if you look at very conservatively also, the run rate is somewhere around INR 350 crores per quarter.

Now TAM is some project that we would be implementing over the next 30-odd months. So if you look at the numbers, our current cash balance and the kind of cash that we are generating quarter-on-quarter, we do believe that we would not grow with debt that we are looking at from a base case perspective.

Equally, we are amortizing our existing operating debt. So the numbers we believe will remain fairly within control, whichever metric you apply, debt EBITDA or debt equity. And to that extent, while I'm not giving you a number, but I think you would have got a sense of -- that we are not going to go up to the levels that one would have ended as in -- the beginning when we had announced these projects.

[Abhijit Akella, analyst]

Okay. That's helpful. And the other thing was just on the debottlenecking benefit that you had alluded to earlier on the call. Any further color you could provide, please, on -- I mean, what sort of impact this might have, say, in fiscal '23 or fiscal '24? How much capacity can we expect and how it might benefit us?

[Amitabh Bhargava, executive]

You're talking about the debottlenecking?

[Abhijit Akella, analyst]

Yes, that's right.

[Amitabh Bhargava, executive]

So debottlenecking, one is in TAM. We are looking at in the first [indiscernible], roughly about 30,000 tonnes per annum kind of capacity enhancement. And by second phase of that debottlenecking -- it will add another 45-odd-thousand tonnes from the existing facilities. So put together about 70,000, 75,000 tonnes. As far as the fertilizer is concerned, while we haven't -- because of different reasons in the last 3 years, we haven't managed to, I would say, utilize our entire NPK capacity, but we are also debottlenecking NPK capacity where it will go up from -- in case of NPK, would go up from 800,000 tonnes by another 100,000 tonnes or so.

So overall, there is also a capacity debottlenecking that is sitting there in NPK. But I think it's only fair that we first utilize that capacity completely before we start sort of capturing the upside to the debottlenecking in the NPK. But the immediate ones are essentially planned, which is, as I mentioned, is 30,000 tonnes and another 45,000 tonnes in 2 stages.

[Abhijit Akella, analyst]

Yes. And by when are these getting commissioned?

[Amitabh Bhargava, executive]

Yes, 30,000 tonnes is [indiscernible], we are ready as far as the process is concerned. We are seeking some regulatory approvals. And as soon as those approvals are in place, we are in a position to start reducing that additional quantity. 45,000 tonnes additional would be, I think, by end of this financial year or between somewhere fourth quarter, third to fourth quarter.

[Abhijit Akella, analyst]

Got it. And just one last thing from me. Any update you could provide us on the status of your gas contract negotiations for the ammonia project?

[Amitabh Bhargava, executive]

Well, gas contract today, while we do have the heads of terms available from the large gas aggregators. But at this stage, I would say, given the prices in Europe and therefore, even the spot prices. We believe that there is a more negotiation that is possible as far as the slopes are concerned. And to that extent, we are keeping the options of having spot gas in the initial phase and then tie up on a long term with these contractors. And it could be with the same contractor that we initially get into spot kind of a contract and then starting from subsequent years, we then move to the long-term formula.

So that's, I would say, a correct negotiation that is on -- this also depends on how we see ammonia prices standing out because if the ammonia prices do come down from here, it is expected that even the gas prices, long-term gas prices and the slopes will also climb down. So we are keeping both these options open and engagement with 3 different gas aggregators.

[Operator]

The next question is from the line of [ Yogesh Bathia ] from [ Sequent Investment ].

[Unknown Analyst]

Sir, congratulations on a very good set of numbers. I have the question for the gas, which we are going to need for the Ammonia Plant. So if you go for the spot pricing and if the prices are very high, how does it affect the economics? Is it like pass-through? Or how does that work?

And my second question is in Mining chemicals, we've seen the volumes are lower year-on-year, but realizations are very high. So how sustainable do you think these realizations are?

[Amitabh Bhargava, executive]

So on your first question, see, gas today, even for our current operations, we buy certain quantities of spot gas. And that gas is somewhere between -- today, we are buying somewhere around $20, $21. So at $20, $21 also, if we were to buy gas, our cost of production would be in the range of $650-odd per tonne. But if you look at the realization based on, let's say, CFR prices and from the incentives built into our project through government of Maharashtra, ultra mega project scheme.

Our realizations could be as high as $1,200 today. Today we are sitting on a delta of almost $550 to $600-odd per tonne, which is significantly higher than what we had planned for our projects. So today, if you want to look at the economics between spot and ammonia prices, they are actually significantly better than the long-term economics that we had planned. But this is a very sort of static way of looking at this project. One needs to look at this from a life cycle perspective.

And as if we go back to last 10 years of [indiscernible] , whether it is ammonia prices or gas prices. And I think we've discussed that and we sort of earlier also indicated those numbers and those economics continue to be attractive based on about last 10 years, 15 years of exceeding. So as such, spot prices of gas, [indiscernible] today, given where ammonia prices are, things are looking better than what they were. But like I said, we need to look at this more from a 10-year, 15-year perspective.

Yes. Your second question on mining chemicals, Q4, I think I've already answered that question, which is to say that essentially, in mining chemicals, we have seen as much as the -- our raw material prices went up. We also saw the finished goods prices going up globally. And so we'll have to see how both the raw material prices and finished goods prices pan out in the coming quarters. But the other aspect of mining chemical is what Mr. Mehta was alluding to earlier, that we are gradually going from product to product plus solutions where we are working with our consumers in terms of giving them overall blasting solutions and not just the product.

We are also going downstream in terms of manufacturing ANFO based bulk and packaged explosives. And that's where some of the margins -- or sustainability of these margins or expansion of these margins is where some of this would lie in terms of our downstream journey in time.

[Operator]

The next question is from the line of Pritesh Vora from Mission Holdings.

[Pritesh Vora, analyst]

How big this downstream journey -- how big the revenue when you go with the downstream journey for your explosives? Is it -- can you quantify in terms of revenue?

[Amitabh Bhargava, executive]

Can we quantify it in terms of revenue? Actually, there are number of areas within downstream that we're working on. So the kind of work that is happening in coal mining is very different from the kind of work that we are doing in infrastructure side. So it's very difficult at this moment to predict what will happen. But what we're essentially doing is that whatever would be your TAN -- pricing of your TAN, we're going one step further and you are charging your customer based on either the value-added explosives that you are manufacturing and supplying or you are giving them a solution, where, let's say, typically what happens in a developed country, we take the entire blasting contract where you design your -- the whole blasting design is done by you, you take the product, ride down to the mine hole and blast it for the customers.

So you, in a way, capture that next step. And there, the pricing could also depend when you get into a solution-based approach, the pricing could also depend on not just products plus, but it's more like the value add minus. So what value add you added in terms of reducing the overall cost of your customer or you reduce the time in terms of certain infrastructure projects and your pricing could be linked with what value you are providing. So it is little early, I would say, for us to make an estimate of what it would do to the revenues, but more than revenue, you've seen this as a margin gain.

[Pritesh Vora, analyst]

Right. And sir, the second question is about your ammonia project. Whatever your assumption for the gas price and spread between gas and ammonia on long-term basis, what should we consider in your project economics? What sort of return on capital employed you've considered when you envisage this particular project?

[Amitabh Bhargava, executive]

So we've looked at return, equity IRR of, I would say, high teens and early 20s, though today's economics suggest that those numbers would be significantly higher. But in our economics or in our internal calculations, we have gone by last 10 or 15 years average numbers, and that's where the equity IRRs are high teen, early 20s kind of equity IRR.

[Operator]

The next question is from the line of Vidit Shah from IIFL.

[Vidit Shah, analyst]

The first question was on the margins of the fertilizer business, which has significantly improved this quarter despite volumes being down Y-o-Y and even manufacturing revenues and given the challenges with input costs rising versus last year. So what explains the growth in margins in the fertilizer business? And are these likely to sustain in the coming years?

[Mahesh Girdhar, executive]

Yes. So maybe, Amitabh, I will try to answer this question. This is Mahesh Girdhar, President, Crop Nutrition business. So as Amitabh already delved around it, we have seen significant increases in the raw material. And you also would have noticed that twice in the last year, the government of India intervened by virtue of enhancing subsidiary. There was an enhanced subsidy in the month of May. And again, there was enhanced subsidy in October. So basically, raw material prices increase were between the 3 areas, 3 avenues whereby you look into pass-through, either through enhancing subsidy as well as enhancing the total price changes, right? So subsidy particularly supported in the last 2 quarters. Plus you may also notice that we have done a significant portfolio development with crop-specific solutions called Croptek.

So most of our quarter 4 focus was on Croptek Cotton, Croptek Onion and Croptek Sugarcane. As well as in this period, we have significantly enhanced our manufacturing of specialty product Bentonite Sulphur. Last year, we had launched an enhanced version of Bentonite Sulphur by the name of Superfast Bensulf. We got established and that gave us good advantage in the market as well as overall impact on the margin also came from increase in our specialty product volume and pricing, right, which are nonsubsidized, which grew by about 54% over last year. So coupled, all these put together helped us sustain better margin.

[Vidit Shah, analyst]

So any guidance you could give for margins in FY '23, '24?

[Amitabh Bhargava, executive]

No, it is -- I would say, I mean, the million-dollar question for FY '23 is also how raw material prices would move. Because as Mahesh was mentioning that realizations are a combination of our market prices, MRPs and government subsidies, and of course, how raw material prices move alongside.

So it's very difficult today to give you an example. We're almost in the May end, we still don't have the phosphoric acid prices for India for quarter 1 decided because that's something which government is directly involved in negotiating with the suppliers. So as we would see what kind of prices -- raw material prices emerge in quarter 1 and then subsequent quarters, that perhaps would give us a better handle on [indiscernible]. Given all these 2, 3 parameters, it's, I would say, difficult to give any guidance.

[Vidit Shah, analyst]

Okay. Understood. Just one question around the gross profit per tonne in the chemicals business, especially TAN and nitric acid. I mean you alluded to passing on rising raw material costs easily, but if you compare the gross profit per tonne in 4Q versus 4Q last year, how much higher do you think it would be in percentage terms versus what we were making last year in nitric acid and TAN?

[Amitabh Bhargava, executive]

So if you see the -- I think that the answer to the question is in terms of Q4 segment EBIT, which was INR 744 crores. It's up to INR 1,164 crores. So that's the increase that we have seen in a combination of TAN and nitric acid margin.

Overall, you see, one is -- in nitric acid also, last year, this whole China + 1 effect on the demand side of nitric acid came somewhere, I would say, it started last year, but we got -- the major impact of that came in second, third, fourth quarter. So Q4 as such of last year compared to this Q4, there were significantly better margins because of this whole China + 1 p demand price panning out in the way the realization we saw in the spot market.

While the contractual customers, which are largely on a cost-plus basis, contractual basis, they remained -- I mean the contractually, we could pass on those pricing. Some contracts also came up for certain divisions. So we've got effect of that also in Q4. So there was a combination of factors that changed the margin from Q4 last year to Q4 this year.

[Vidit Shah, analyst]

Okay. Understood. And just one last question on any update on the sale of the [ realty malls ]? Are we still looking to standard what the valuations currently are? Or what are we looking at there?

[Amitabh Bhargava, executive]

So valuation wise, we've run valuation at different points in time. They were anywhere between INR 700 crores to INR 900 crores. But the real value is if there is actually a transaction happen, we would know the fair value. As such, we are still working on certain regulatory aspects that we need to iron out before we could decide to do any transaction there. So right now, I think we're more focused on ironing out those regulatory aspects.

[Operator]

The next question is from the line of Rohit Sinha from Sunidhi Securities.

[Rohit Sinha, analyst]

Two questions on my side. One on, I would say, on this ammonia side. Just wanted to understand your thoughts on this green hydrogen thing, which people are talking about and ultimately going through green hydrogen to green ammonia. How this thing look viable for you as of now? And going forward, what would be your take on this in terms of your business?

[Amitabh Bhargava, executive]

So for us, the ammonia project that we are working on is gray ammonia in a sense that we are manufacturing it through natural gas route. The green ammonia, which is where, let's say, through hydrolysis of water you produce hydrogen and hydrogen -- also hydrolysis is done by renewable energy. Now what we understand is that as far as the cost structures of green ammonia are concerned, they are still at a stage where -- while there are players who have taken a view in setting up these capacities, there are others who are actually waiting to see what happens to the cost structure because in renewable energy and trying to hydrolyze water on a 24-hour basis, you need certain storage technologies and so on and so forth.

So today, for manufacturing the same level of hydrogen, which is required for an equivalent capacity of ammonia to gas, you need a much higher renewable energy capacity. And to that extent, the cost structure today are significantly on the higher side. I just say -- and these are very, very initial estimates as we hear from our project team. But the cost of manufacturing ammonia through green ammonia route would be in the range of 800- to 900-odd dollars per tonne. This is a cost structure.

And therefore, while in today's ammonia pricing scenario, they may make sense. But if the ammonia prices were to overall go down from here, this kind of the green ammonia would require certain carbon credit and the other factors to make it economically viable. So for us, it is gray ammonia and what the way you would want to create a balance in terms of the environmental aspect is to essentially look for -- increasingly look for investments into green or renewable energy for our operations. Last year, for example, we invested in one solar capacity and that we are now buying power from that solar capacity. We already have some windmills and we are [indiscernible] to diversify to sort of take more and more of our power consumption towards renewable energy side.

The other aspect which we are exploring is to use carbon dioxide that we would get generated out of our ammonia plant for enhanced oil recovery measures. But I think we will have to see what are the plans of large oil majors before we could really, on an economic way, plan pending for transportation of CO2 to these oilfields.

[Rohit Sinha, analyst]

Okay. Okay. Secondly, just wanted to understand on this TAN business, I mean how we should look into this in terms of, I mean, sort of revenue perspective that revenue should grow by order size or it is related to take it on utilization basis that how much or whatever the capacity would be there and similar would be the uptick. I mean when the contract is basically done, I mean before or after. That is what I wanted to understand.

[Amitabh Bhargava, executive]

I couldn't really get your question, I am sorry. Your voice was also not very clear, and I didn't get the intent of your question. Can you please repeat that?

[Rohit Sinha, analyst]

Yes. So in TAN business, how the contract basically is designed? Is it on the order basis? Or it's just on requirement as and when comes and we supply for them.

[Amitabh Bhargava, executive]

Tarun, if you're there, would you like to take that question?

[Tarun Sinha, executive]

Yes, absolutely, Amitabh. Am I audible?

[Amitabh Bhargava, executive]

Yes.

[Tarun Sinha, executive]

Okay. Good. So this is Tarun Sinha here from TAN business of Deepak Fertilisers. So basically, we have a of contract and spot business. That's the first point. So not 100% of our business is contracted. The mix of contract and spot varies from time to time, depending on market situation. The market situation is defined by a number of factors. One of them could be the commodity prices, the second could be the overall demand and supply scenario in the market and so on and so forth.

So once we decide to contract, then the point is how much to contract and how to contract. Those volumes, which we'll get into contract for, are also dependent on the market factors that I just talked about in terms of what's the demand and supply, what's the raw material situation, so on and so forth. So it's not a fixed number at any point in time in summary in terms of what volumes we contract and how far do we contract for.

[Rohit Sinha, analyst]

Okay. Okay. So we basically could not provide any order book kind of thing in this business?

[Tarun Sinha, executive]

There is no one figure for this. Quarter-to-quarter, it will vary depending on the market situations as I described just now.

[Amitabh Bhargava, executive]

[indiscernible] net importer of TAN. So to that extent, one could, I would say, very safely that it that the production that any of the manufacturers do, including us, by and large gets placed in the market from a demand perspective.

[Operator]

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

[Deepak Poddar, analyst]

Sir, am I audible?

[Amitabh Bhargava, executive]

Yes.

[Deepak Poddar, analyst]

Yes. Okay. And sir, I just wanted to understand, last year, what is the capacity utilization of our plant?

[Amitabh Bhargava, executive]

So last year, as far as the -- last year as an FY '22?

[Deepak Poddar, analyst]

Yes, that's correct.

[Amitabh Bhargava, executive]

Okay. So FY '22 capacity utilizations as far as TAN is concerned, it was 100%. TAN was 100%. The CNB that is our fertilizer bulk was 62%. Specialty fertilizer was 60%. Our acid total were about 82% and our IPA was about 90%.

[Deepak Poddar, analyst]

So on an average, our capacity utilization would be about 90% plus rate if you...

[Amitabh Bhargava, executive]

On the chemical side, yes. Fertilizer, like I mentioned, the bulk was 62%.

[Deepak Poddar, analyst]

Okay, okay. And given our expansion is coming only by in FY '24 and FY '25, is it something that this year our growth would be quite minimal now assuming the ASP remains same, right? So any comment on that.

[Amitabh Bhargava, executive]

So like I mentioned that in TAN, one is even after 100% capacity utilization. This was perhaps only the second-best capacity utilization in last couple of years. We have earlier produced up to [ 505,000 ] and [ 6,000 ] tonnes, which is roughly about 110% capacity utilization. So that is global even in the existing capacity.

What I also mentioned is that our debottlenecking in TAN, the first phase of it, which is about 30,000 tonnes from a process perspective is already over. We are just seeking some regulatory approvals to be able to produce that additional 30,000. And the second phase, which should come by second, third quarter of this year is another 45,000 tonnes as far as TAN capacity is concerned.

With CNB Bulk getting underutilized last year to about 60%, 62%. There is definitely a headroom sitting there in terms of enhancement of capacity utilization. Equally on the specialty side, which is -- we're underutilized. And that's the market that we are enhancing every year. So that should be another segment or product where we would -- we have the headroom. Acids, while our overall capacity utilization was about 80%, 82%. We are also doing some certain work on the acid side in terms of improving the reliability of these plants. And with ammonia, supply remaining -- hopefully remaining steady compared to last year. We also have a headroom in the acid capacity utilization.

[Deepak Poddar, analyst]

Okay. Understood. That's great. So basically, on the back of this debottlenecking and even TAN going up to 110% utilization level. So what sort of revenue growth we may look at in FY '23 then? Maybe 15%, 20% growth. Is that in given this -- on this background?

[Amitabh Bhargava, executive]

So production is one, but the other aspect is what happens to the product prices. It's difficult to predict in terms of revenue numbers, what the numbers are going to look like. But if the prices remain at current level or what we saw in Q4, the capacity utilization or enhanced capacity utilization should [indiscernible] improve the topline.

[Deepak Poddar, analyst]

Okay. So assuming price remains at the current level based on the volume, so what sort of volume growth one can look at overall in FY '22, 10%, 15% volume growth?

[Amitabh Bhargava, executive]

Actually very difficult for me to give a number. I don't want to give you guidance, which -- I can only tell you that in bulk, the -- fertilizer bulk, we were significantly underutilized. And if the raw material disruption does not occur this year, then there is definitely a scope there. And equally on TAN, there is a scope for higher capacity utilization.

[Deepak Poddar, analyst]

Understood. Understood. And my final query on the margin front. Now anything on the sustainability of this fourth quarter margin? I understand it's difficult because of the RM pricing, but any sort of rough comment that you can provide us on the sustainability.

[Amitabh Bhargava, executive]

Very difficult, like I said, all 4 segments: IPA, nitric acid, TAN and fertilizer. All of them could have a different dynamics going forward, depending on what happens to raw material. Like I was mentioning that some segments stay relevant while the others had a little bit of a tailwind on their side. So that depends on what happens.

But what I can confirm to you or one area where we do have fair bit of confidence is on the nitric acid and TAN side, the demand remains strong. IPA, the demand side, which has -- in between has beated down because of the challenges pharma sector was taking, that came back in Q4. And at that supply chain side, if pharma companies do not get to see another disruption, that IPA demand should remain strong because as you know, India is a net importer. So as far as the local manufacturers are concerned, they continue to have the ability to place all their production in the market.

So I think the demand side in each of these product segment remains very strong. We'll have to see how raw material prices pan out going forward.

[Operator]

The next question is from the line of [ Abhijit ] from PI Capital.

[Unknown Analyst]

Most of my questions are answered. Just one question. Sir, when you say China + 1 impact is here to stay. So does this mean when raw material prices go down, the realization will more or less remain around the current levels? Or it would also go back to the earlier level?

[Amitabh Bhargava, executive]

So when I say China + 1 factor is here to remain, I would say one is based on the fact that a lot of our customers in the specialty chemicals segment are either looking at capacity expansion or from their order book standpoint, they seem to have order book tied up for a longer horizon. So that's where the comment that China + 1 one is here to stay.

Now in medium term, long term is anybody's guess what happens because in any product, you could predict the demand, supply situation for a period which it takes normally for new capacities to come. And to that extent, in short to medium term, the margins that we are seeing in nitric acid, for example, should remain. What happens 3 years, 4 years down the line in terms of the new capacity, it is hard to predict. I mean, we ourselves may have depending on what happens on the demand side. We, including other players may also think of capacity expansion. So then what emerges after 3 to 4 years on the demand-supply side, it's hard to get. But in foreseeable future, short to medium term, we are seeing that the demand side remaining strong on the nitric acid side.

And in any case, we are a net importer, and we are seeing whether it's infrastructure, coal or pigment, all of these sectors should continue to see the demand. We may always have a blip as we saw in infrastructure in last few quarters. But on an overall basis, I think these 3 segments should continue to grow and see the demand from 10%. And we've been the only producer of TAN in solid form and our capacity expansion is already in the pipeline, we should be in a position to capture that growth going forward.

[Unknown Analyst]

Understood. And apart from challenge on raw material front, what other challenges we are facing right now?

[Amitabh Bhargava, executive]

What other challenges, by and large, other than raw material is just rather than challenges, I would say that a lot of the work that we are doing in the marketplace, the initial work, the market entry, all of that is fairly established. Next 2 to 3 years is when we would see the whole downstream journey or commodity to specialty or the product to solution journey is yet to pan out in next 2 to 3 years.

I think that, that, in some sense, is a challenge that we have to take head on for the next 2 to 3 years to really translate our downstream journey in terms of enhanced margin and market share. But other than that, we are actually not seeing any fundamental challenges.

[Operator]

The next question is from the line of Ranjit Cirumalla from IIFL Securities.

[Ranjit Cirumalla, analyst]

Did I hear it correctly that the debottlenecking in that time was through a process improvement in the initial one? And the second is, what would be the CapEx that we would be incurring for this debottlenecking exercise for the Phase 2 as well?

[Amitabh Bhargava, executive]

These CapExes are fairly small compared to the green field capacity that we are we are spending CapEx. We would be somewhere less than INR 100 crore range, I would say, INR 50 crores to INR 60 crores, I guess, that's the number.

[Ranjit Cirumalla, analyst]

Okay. And the initial 30,000 was through the process improvement?

[Amitabh Bhargava, executive]

Yes, that 30,000 was through debottlenecking. This is essentially improving the capacity of certain equipment in the process, which was sort of the limiting factor.

[Ranjit Cirumalla, analyst]

Okay. That's helpful. Second, in the press release, you have mentioned that the improvement is also on account of the strategic initiatives that you have taken at the marketplace. So just wanted to understand whether these were more aimed at the volume growth or at the improving profitability?

[Amitabh Bhargava, executive]

So I think all of these we took in different pieces earlier. So the whole downstream journey in TAN is one aspect. As far as fertilizer is concerned, we're launching crop-specific formulation is the market -- I think the strategy that we have as far as fertilizer is concerned. In nitric acid, we are looking at more and more I think customer- or consumer-specific formulation, whether it is solar grade nitric acid or electronic grade nitric acid.

In IPA, we are looking at IPA, which is Pharmacopoeia-compliant and therefore commands better margins and pricing in the marketplace compared to commodity IPA. We are also, as part of our downstream journey in IPA, we're also -- our CORORID brand, which is essentially hand sanitizers and a number of other segments, product segments, which are aimed at largely at institutional clients is also the other market intervention or market work that we are doing. So these are -- all of these are what we meant by strategic initiatives at the marketplace.

[Operator]

Ladies and gentlemen, as there are no further questions, I now hand the conference over to Mr. Pratik Tholiya for closing comments. Over to you, sir.

[Pratik Tholiya]

Yes. Thanks, Steve. On behalf of Systematix Institutional Equities, I would like to thank all the participants locked into this conference call. I'd like to thank the management for giving us the opportunity to host this call. I would like to now ask Amitabh, sir, if you would like to make any closing comments, please?

[Amitabh Bhargava, executive]

Well, thank you, everyone, for your participation. Also, the line of questioning from your side was quite insightful. For any further queries or clarifications, please do get in touch with our Investor Relations team. And thank you so much for your time and patience.

[Pratik Tholiya]

Thank you so much, sir.

[Operator]

Ladies and gentlemen, on behalf of Systematix Institutional Equities, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.