Deepak Fertilisers and Petrochemicals Corp Ltd
NSE:DEEPAKFERT
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Deepak Fertilisers and Petrochemicals Corp Ltd
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Ladies and gentlemen, good day and welcome to the Deepak Fertilisers And Petrochemicals Limited Q4 FY '23 Earnings Conference Call hosted by PhillipCapital (India) Pvt. Ltd. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Harmish Desai from PhillipCapital India Private Limited. Thank you and over to you, sir.
Thank you, Lizan. Good afternoon and welcome to the fourth quarter and full year FY '23 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 Chief Financial Officer; Mr. Tarun Sinha, President, Technical Ammonium Nitrate; Mr. Suparas Jain, Vice President, Corporate Finance; and Mr. Deepak Balwani, Head, Investor Relations. 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.Thank you and over to you, sir.
Thank you, Harmish. So a very good afternoon to all of you and welcome to the Q4 FY '23 earnings conference call. I hope you have had a chance to look at the financial statement, press release and earnings presentation that were uploaded on the exchanges and our website. But let me take you through some of my thoughts and insights as I look at the larger picture. At the outset, let me share the joy of the performance of FY '23 as a whole for the 12-month period where our revenues jumped by 47% and it crossed the landmark of INR11,000 crores, INR11,300 crores to be precise. Even more, I would say, joyful was that profits jumped by 77% and again crossed the landmark of over INR1,000 crores, to be precise INR1,221 crores. And looking at this performance, last week in our Board meeting, the Board was also enthused to recommend a 100% dividend for the coming year for the shareholders to consider. And all of these are indeed a landmark and this is something that is a joy to see.Of course almost over 85% of these results are emerging out of the chemical business and that is something that in one sense brings this misnomer also to light that we are Deepak Fertiliser, but 85% is from the chemical business. So I was looking at in terms of what could be the undercurrent takeaway from the 12-month results and 1 aspect that I thought I should share with you what I was seeing was that despite the fact that we saw an unprecedented hike in raw material prices in the last year almost 60% to 80% and, as a result, we also saw an unprecedented hike in finished product pricing because we had to pass on. But the newsworthy aspect was something that we saw as a very positive aspect was that there was no demand disruption despite the unprecedented finished good pricing and what that give us very clearly as a message was that it validated the excellent alignment all of our 3 businesses have with the India growth story.The fertilizer business, the industrial chemicals or pharma chemical business and the mining chemicals business. So all of the 3 indeed have a very good alignment with the India growth story and which is why we did not see any demand disruption. Now having said that, we were seeing also Q4 and where as Q4 while the revenue jumped up by 38%, 39%; in terms of profits, there has been a dip of around 9%. And as we analyzed that, we saw that mainly it is emerging from the TAN business; the mining chemical business or Technical Ammonium Nitrate business; and there saw 2 or 3 things that has emerged in this quarter. Number one is what we have been seeing in general also and specific to this quarter that now the raw material prices are gradually coming down to the normal levels which were there during the pre-COVID period and so also there is a similar correction in the finished good prices and they're going almost in tandem.But we are seeing that in some of the quarters, one precedes the other or the other precedes the first, which is where for that particular quarter, there could be a little bit of an impact emerging as the raw material prices and finished good prices in tandem move to the lower level. So there as I see it while it has impacted the quarter, it is something that should even out in the balance part of the year. But in case of TAN, there were 3 other things that uniquely happened. Number one is that the government had put a ban on exports of ammonium nitrate and this is something which we were wanting to actually push especially the low density porous grade, which is our top grade quality product. But because of the worries that the government had in terms of availability of TAN for the larger targets that they had for coal mining that they were worried that it would not be available. It's a misplaced worry. But as we speak, there is a ban on exports.And of course we have talked to the various levels in the government and now they see illogical that aspect and we are hoping that some corrective action will come in soon. The second aspect is that there were floodgates open up of imports because the anti-dumping duty went through a sunset clause, 5 years getting over. And while the government and the other measures that are there to reevaluate the logic of it, this window was clearly there that imports were really allowed. And the most important aspect that we saw was that because of the various sanctions on Russia from other countries, India has become a nice dumping ground and that aspect of it also impacted. Now a lot of these things are gradually shifting, moving into a better place. But from a strategic perspective, if I might share that some of the volatility is something that we are seeing as a part of our lives and in order to combat the volatility, we are looking at 3-pronged approach.So number one is that we are continuing our aggressive drive in all the 3 businesses to move from this commodity orientation to a specialty orientation. When I'm saying specialty, it is more in terms of holistic solutions for the end consumer. And in the fertilizer business so instead of the commodity NPKs, more and more now we are looking at crop specific nutrient markets and instead of focusing on the dealers, we are focusing on the farmers as I had shared last time also. And similarly for the TAN business, there's very strong focus on technology-based holistic offering, TCO as they say for various infrastructure projects. So first aspect that we are seeing as a strategic imperative to deal with the volatility is a continued strong drive to move from commodity to specialty.The second aspect that we are seeing in order to combat the volatility is again what we have put into effect, which is a backward integration into our raw material which is ammonia, which can become a very great risk mitigated so that the volatility of the ammonia prices stays within the groove. So there again as to what we have committed, before the end of Q1 we are looking at declaring commercial production and as we speak, we are in the very last legs of commissioning activities that are going on at site. But that is going to be -- the ammonia is going to be also a good risk mitigator in the longer run so that we have good, I would say, combat for the volatility that otherwise would have impacted us in the ammonia pricing. And the third is we are moving more and more lot of products for a natural hedge where the finished goods prices are somewhere interlinked with raw material and ForEx so that some of those become a pass-through.Now as I look at the balance part of the year in terms of the major undercurrents, what I see is: number one, as far as the TAN mining chemicals sector goes. The coal mining upswing that we are seeing and so also in case of cement infrastructure, those bode very positively in terms of at least the demand and needs that are there. And there like I said, we will continue our drive for holistic product offering in terms of product solution rather than just products. In case of the acids business, the China Plus One aspect is something which is continuing to give a continued good demand for the assets and in fact it is leading us to very seriously look at additional capacity looking at the growing market. And even in case of acids, we have got some very good breakthroughs for specialty grade assets for the steel sector or for the solar industry and that is something that we are pushing. Once we have a good proof-of-concept, I believe that even the export markets could open up for the specialty grade.In case of IPA where we had struggled with the dumping from China, now thankfully the safeguard duty has kicked in and that is something that is going to give us a certain kind of insulation. And additionally, of course our drive to move the commodity IPA into pharma grade IPA also continues. On the crop nutrition space, we will continue for the balance year or years ahead to focus more and more in terms of the crop specific NPKs and working more and more closer to the farmers so that the move is from pure price-based, commodity-based selling to more value-based and value pricing kind of approaches and thoughts. Like I said, the ammonia available from our own plants will become a good risk mitigator. And whereas we have tied up almost 68% of gas requirement for the next 3 years, we are just about round the corner to tie up the balance that is there.And lastly, our demerger activities are in the right direction. It's a matter of I would say little time. The NCLT process is on and we should be in a position to look at I would say effectively implementing the demerger and what it will do is, as you're all aware, it will get a very strong focus on each business segment now being housed in an independent corporate entity. So right from the Board to the lowest level of management will be very strongly focused on that specific sector and obviously this would open up also various kinds of further corporate restructuring ideas and thoughts. So that is also something, which is in the right direction.So with these I would say initial thoughts, let me hand you over to Amitabh, who can take you through all the details of the figures and how the year and the quarter went by. Amitabh?
Thank you, Mr. Mehta. Good afternoon, ladies and gentlemen, and thank you for joining the Deepak Fertilisers And Petrochemicals conference call. We are presenting our Q4 FY '23 results. I think Chairman did cover at length a number of aspects so I'll just keep my statement very, very brief. Just to quote the numbers. DFPCL has successfully concluded FY '23 with record-breaking financial achievements of our highest-ever revenue and PAT figures. For '23, we reported a substantial growth in our total operating revenue, which amounted to about INR11,301 crores representing an impressive Y-o-Y increase of 47.5%. Our operating EBITDA was INR2,165 crores, a growth of 60% on a Y-o-Y basis. And profit after tax of INR1,221 crore, growth of 77.6%. These remarkable growth figures are the results of our various strategic initiatives undertaken during the year as Chairman also explained in his statement. As of 31st March '23, the company had net debt of INR2,518 crores with net debt to equity of 0.48x. We have already tied up entire debt of INR1,541 crores with door to door tenor of 14 years for our TAN Gopalpur project and we don't have any large loan repayments during the next 3 years.So I'll just keep my statement brief and I'll open the floor for question and answers.
[Operator Instructions] The first question is from the line of Vishal Prasad from VP Capital.
So Amitabh, I think sometime in 2021 I had asked about our CapEx and you had explained in detail why we are doing ammonia backward integration and the benefits we would have, but a lot has happened during last 21 months. So what we know today in terms of gas and ammonia price behavior, if today we have to take a decision on the CapEx, would it come to the same conclusion and you will choose to do the CapEx or will you be a lot more circumspect?
Okay. So look, any of the long-term decisions where you are building an asset for 25, 30 years or even longer; you don't take those decisions based on what happened in last quarter or this quarter or the next quarter. You need to look at last 10 years, 15 years average numbers. Now what has happened and you're right in that the gas prices have gone up and we know the reason why gas prices have gone up. One of the factors has also been what has happened in terms of geopolitical changes that have happened, Russia-Ukraine war and therefore, suddenly Europe clamming for more gas. Now those are the kind of events no one would be able to anticipate. But that said, that still doesn't change the fact that in a matter of time the gas prices will become -- and they have already corrected significantly from what we saw in terms of peak to we are looking at today, let's say, a JKM of around $10 or a little less than $10.So we are seeing gas prices coming down. We also equally are at a stage where barring our next 2 to 3 years which we have tied up; beyond those 3 years, next 15 years of gas that we are looking to tie up, 10 to 15 years, is actually at a competitive rate because there are more capacities coming up globally of LNG. Equally on the ammonia side, the fundamentals haven't changed. There are no significant investments that happened on stand-alone ammonia plants globally, which is what typically would decide the prices of traded ammonia or the price at which we would end up buying ammonia. Today given what is happening to nitrogen as a fertilizer and their demand, ammonia seems to be in excess, it's overbought and we would have to wait for this commodity cycle or this, let's say, low cycle of ammonia to kind of get through that because we are not building this asset for 1 year, 2 year or a few quarters. It's a 20-year, 30-year or even longer asset.So I think our decision, certainly one does get influenced by here and now, but certainly in this kind of assets, you have to take a 10-year, 15-year view and you can't get bogged down by a high price of commodity or a low price of commodity. We always knew that those cycles would come in ammonia and gas. So my answer would be that we would still -- by and large we would come to the same decision because for us, it's a 15-, 20-year view not a quarter view.
Sure. So I was having a conversation with a company based out of Punjab not in our sector, that's another sector, and they had similar benefits as we have got for our CapEx where they will get the SGST refund. However, over many years they haven't got a single penny from the government in spite of them putting a lot of effort and having all the paperwork ready. So I know we are not putting it up in Punjab. But in your experience, how confident are we that we will be able to get what has been promised without much hassle?
You're talking about the state [indiscernible]. We have made investment in Gujarat and we have started getting those incentives. In fact we have collected significant part of our incentives that we have claimed and we don't see that any different. I mean in fact Maharashtra and Gujarat given the industrialization, given the kind of investment that these states have attracted, I think their policies as well as the way they would implement their policies is not going to be any different from each other.
Okay. So Tarun, we work with Coal India and other miners where we sell our explosive solutions and we also supply to solar industry. So what is the difference between what we supply to the miners directly and what we supply to solar industries?
My colleague, Tarun, is there. Tarun, would you like to take that question?
Yes, absolutely. Am I audible, Amitabh? Thanks for the question. So first thing is the product that we supply to solar industries, that is technical ammonium nitrate, which is actually used as a raw material by solar industries to produce commercial explosives and then that commercial explosives is supplied to Coal India and all other mining companies across the country as a finished product. So that's what we do with solar industries. Now what we are doing slightly differently as well, which is what Chairman mentioned in his opening address, which is a shift from selling just product and technical ammonium nitrate is just product to selling products, but also getting closer to the end consumers in the form of holistic solutions. So who are the end consumers for us in this context? They are again the mining companies, the infrastructure projects and so on and so forth. So what do we do in that business model?It is about again a term, which was used by Chairman in the opening address, a term called total cost of ownership, TCO in short is what we call as; which basically means we work very closely with the end consumers, again the mining companies and the infrastructure projects, to first baseline and benchmark their operating cost, which is cost of extracting mineral, cost of extracting rock. And then we put in technology together with some specialized differentiated explosive products, which is not technical ammonium nitrate, and that's the difference fundamentally. And then we commit ourselves to certain improvements in the cost of mineral extraction, which is basically in simple terms productivity improvement in the mines and infrastructure projects and that's the solution we provide. So parallelly we are running 2 business models. One is product as product, which is the first example I gave. And the second one is complete holistic solutions for mine productivity improvement, which is where we go direct to the end users, which has been talked earlier.
Do we compete directly with solar industry because this is what they do? Just one follow-up, please. So Tarun, do we directly compete with solar because they provide the same thing to Coal India and other miners, right?
As I said, our business model is very different because most of the explosives manufacturers in India and explosives vendors of Coal India, they just supply products which are explosives and get paid for that, which is through the rate contract that they have, let's say, with Coal India or other mining companies whereas we do not sell explosive as explosives only. We basically provide a holistic solution, which I was talking about earlier, which is a mine productivity improvement program and then we invoice to those end users based on the solutions that we are providing instead of the explosive products or something else that we are providing. In some cases, we have gone to the extent of structuring our contracts, which we call as outcome-based contracts. What it means is we also get paid on the basis of the outcome that we generate as a result of the solutions that we provide, which is very different compared to getting paid on the basis of input that is supplied to a mining company, which is explosives. So it's a very different business model compared to what other explosive manufacturers are currently working on in India.
The next question is from the line of Vidit from IIFL Securities.
My first question was again coming back to the new ammonia plant. So we've tied up around 2/3 of our procurement for the next 2 to 3 years, at least our near-term procurement. Can you guide how much this is and what cost we'll be paying for at least in the near term? And also if you could give us an update on the current dynamics of the plant in terms of how much we'll be making at prevalent rates of ammonia and gas?
So your first question is in terms of the quantity of gas. So we require roughly about 1.3 million cubic meters of gas per day and we have tied up about 68% of that. That said, the balance 32% is also at an advanced stage in terms of finalizing the commercial terms and signing the gas supply agreement. These gas contracts have different underlying price benchmarks namely Brent, some part of the gas is linked with Brent prices. There are part of the contract is also linked with JKM prices. But at the same time because it is coming from KG Basin, it is also governed by the price cap that government comes up and revises every 6 months. So it is JKM linked, but capped at the PPAC price ceiling that government determines. The contract that we are looking to tie up again from a diversification point of view could also be linked with Henry Hub prices.So we are trying to create a portfolio where it is linked with different benchmarks and to that extent, a diversification so that we are not dependent on or expose ourselves to volatility of only one say underlying commodity, namely oil or spot prices of LNG or Henry Hub for that matter. Now at the current prices of ammonia, I think we discussed this at length in terms of typically what is our economics. We require roughly about 33-odd million BTU of energy in form of gas for per ton production of ammonia. And therefore depending on what happens to these underlying price benchmarks and to our prices of gas, we would typically -- you can take that if it is, let's say, today my guess would be that -- while I've not looked at the Brent and all of these benchmarks as on date, but my guess is that our portfolio would be somewhere around $14-odd and as JKM prices go down, we would get the impact of that.And so at about $14, you can calculate based on 33, it's roughly about $450 to $460-odd of gas cost. And then we have about $25, $30 odd of other costs involved. So that's the cost of production. And if you look at prices of ammonia today, we are seeing the contract prices of FOB Middle East around $300-odd or plus/minus whatever movement happens on a weekly basis. And if we add say about $80 to $90-odd on transportation, customs and other charges that we pay to bring the ammonia to our doorstep and then we add about, let's say, 9% of that as the duty or the GST benefit that we are getting and roughly about $10 to $15 odd of production of steel that we would replace in our existing operation. That would give you a sense on where the economics of our per ton of ammonia lies.
Okay. Understood. The second question I had was on the TAN expansion plan. We were going to debottleneck around 75,000 odd tons of capacities over the next year, what is the status of that? And on the other mega project at Gopalpur, I see that's been pushed to FY '26 now. So what's happening out there?
So we are debottlenecking our ammonia. We've already done debottlenecking of 45,000 tons in Taloja and the second step of another 45,000 tons would be done by September, October of this year. So that increases our current capacity. Gopalpur is somewhere in H2 of FY '26 we would complete and that's about 3,76,000 tons. So as of now, see last year we've done about 5,05,000 odd tons so that means that this year we still have -- and that is on the basis of 4,86,000 tons of nameplate capacity. So we do have, therefore, enough headroom in terms of the enhancement of our production this year and until Gopalpur comes, we do have that additional capacity. And Gopalpur would then get added by second half of FY '26.
Fine. So does that mean that the nitric acid that we sell externally that those volumes come off as we expand volumes of ammonia?
So we have also taken up a program in terms of debottlenecking our nitric acid capacity, also making them more reliable because lately in last 2 or 3 years I would say or particularly post COVID and during COVID, there were challenges in terms of regular maintenance of the nitric acid plants and we did see a drop in capacity utilization, which you would notice that even this year we have improved it compared to last year. But we are still not even touched what the capacity utilization that we saw pre-COVID. Plus like I said, we are also doing some debottlenecking and improving the reliability. So we are confident that as far as enhanced capacity of TAN is concerned, we should be able to extract it out of our existing nitric acid assets.
[Operator Instructions] The next question is from the line of Chirag Shah from White Pine.
Sir, my first question is again coming to ammonia. So are these take-or-pay arrangement, the 3-year lock-in that you have done -- contract that you have done or you have an option of not picking up the offtake or something like that? So what is in this committed offtake that you have to take?
So one is we have tied up 68% and I was mentioning that the balance, we are in the advance stage of signing that up. We've not yet signed that.
So 68%, it's a take-or-pay kind of a thing, right, so even if the spreads turn negative?
Yes. So in terms of the contracts that we have signed, there is somewhere between 80% to 90%, kind of take-or-pay obligation. That said, what we've also done in some of the contracts is that we need not even if there were for the reasons related to plant initial hiccups in terms of capacity utilization, we have the option of settling the take-or-pay on net proceeds basis meaning that the aggregator through whom we are buying it; if they sell it in the market, we can bear the balance or the different cost also. So we have all of those arrangements. There's also a makeup arrangement typically in these contracts that if you don't take a part of the capacity and you pay for it, you can then make up or you can take that in future quarters. So it's a combination of all of these that works in these contracts.
Sir, just a follow-up on this. So in your experience of past so many years, such kind of spreads when I say your spread, generally it's a 1, 2 quarter phenomena or it can ask longer also? So what your general experience has been if you can indicate?
So like I was mentioning with the first question that was asked if we had taken the same decision based on the current prices. We took our decision based on last 10-year and 15-year price trends. And there as mentioned earlier as well that on an average in 10 to 15 years, whatever horizon we take, the average cost of ammonia has been about $420 to $430 of FOB Middle East and about $80 of additional costs, whether it is ocean trade or customs or local transportation and port storage. So we've seen this ammonia cycle at an average of $500 of landed cost for us. And to that $500 of landed cost; if you add the duty benefits, GST benefits and the steel production that we do; our estimate was that we would have an average realization of $560, $570-odd. As against that, on an average even if one were to take -- we had looked at about $8.5 of gas.Today, JKM is around $10 and maybe landed at $11, $11.5 for us. But if you look at the gas cycle also and the kind of price that we are seeing beyond 3 years for next 10 years in terms of the contractual -- some of the discussions that we are having. The average price of gas even if we were to take it as $9 to $10 -- let's say $10, we're still talking about $330 of gas and about $25, $30 odd of other costs. That leaves almost $200 per ton of margin. So $180 to $200 per ton of margin average is the basis on which we took this decision. You know that 6 months back despite high prices of European gas, ammonia was at almost $1,100 FOB Middle East. Now the margins would have looked very, very different at that stage. So I think we need to look at it more from an average standpoint over 10-year, 12 year time frame because at the end of the day, it is also we have not set this up for trading this capacity or selling it outside.It is for our own internal consumption. And to the extent where our ammonia prices go down, we do have certain benefits in some of our products where our margins improve. And therefore on an integrated basis, we still find that this is an investment which would give us the desired return. And we have also spoken about the aspect that as we are increasing our total ammonia consumption, we have seen challenges on JMPT, the kind of disruption we have seen in freight, we have seen it in ports at different locations. That questions the very sustainability of our downstream operation and that's the risk that we have now addressed through this backward integration. You can't put economic value to everything from a risk perspective. So that's another aspect that needs to be kept in mind.
Sir, last question, if I can squeeze in. On the TAN this solution-based offerings, one, how much percentage it contributes to our asset business, if you can indicate and how the trend has been? And secondly, in terms of incremental economics, how much is the difference? If you can help us understand that also, [indiscernible] differential or the margin differential?
I couldn't get your questions. Let me just ask my colleagues if they did.
Kindly repeat the question. Amitabh here. I've understood your question, but go ahead, please. So the first part of the question was what percentage of the revenue or of the business is the solutions model? That was the first question. And the second question, as I understood, was what sort of margins or differential margins are we making out of the solutions model? Is that correct? Were these the 2 questions?So on the first part, we have started this business model of holistic solutions about 1.5 years or so back from now so it is in the nascent stage of its journey. It's coming up quite nicely and we are seeing some very positive responses across all the end user segments and the way we categorize the end user segments -- because that also determines the profitability of the model. The way we categorize the end user segments in the solutions model is there are 3 end user segments. One is what we call as the coal mining segment where we operate directly with the coal mine operators through that solution model. The second is the non-coal mining, which is all kinds of metals and limestone, but they are still mining. And the third end user segment for us for the solution model is the infrastructure segment where we operate in different kinds of infrastructure projects.Now because this solution model has been a journey which was started about 1.5 years ago from now, as of now it's picking up. It's a small portion of the overall business. But certainly as we move forward because of the group strategy that Chairman was talking about again in his opening address, it's about moving from just being a product supplier to a holistic solution provider also. So this will take momentum in all the 3 segments and we are already seeing a lot of pull because there are not too many companies in India which are operating on the solution model that I was describing to one of the earlier questions where I said that we are also building a business model whereby we are trying to get paid for the outcome that we generate instead of just the input being provided to the mining company or the infrastructure and that's the fundamental difference.And these models take time to get matured because not too many companies are doing this in India. So that's the answer to the first question. And in terms of the second question, which was around the margin. Obviously because the solution model has got lot of value for the end consumers because basically it means improving their cost of mineral extraction or improving their cost of rock extraction if it is a quarry project for that matter. Naturally it comes along with products and services and solutions all bundled together instead of just a product being supplied as an input. So margin levels are much better compared to the product only model. Now again in terms of what is the margin and what's the delta between this model and the product only model, I would qualify these as commercially sensitive information at this stage so I won't go any further on that.
The next question is from the line of Deepak Poddar from Sapphire Capital.
Am I audible now?
Yes, sir.
Sir, I wanted to dwell more on the ammonia mechanics that you mentioned. So what I understood is that if I have to buy ammonia from outside, our landed cost would be close to about $700 per ton whereas from our plant, we would be able to manufacture at $500 per ton. So $200 is the spread that we'll get from this ammonia plant. Is that right?
No. I quoted last 10 or 15 years' average numbers and those numbers were more like $560 and $360 with a gap of $200.
No. As per current, I mean I was just trying to understand.
Current prices would be lower for ammonia because the $560 is based on $420-odd of FOB Middle East while the current FOB Middle East would be more like $280 to $300-odd. And gas prices are today on a higher side compared to the gas price that I had mentioned from a last 10 or 15 years perspective. So today, the margins are obviously more like I think we are at breaking even rather than having that $200-odd of margin. And that is where the point I was making is that one needs to look at it across the commodity cycle and not at a point in time in that commodity cycle.
Yes, I got that point. So currently the spread is barely anything, right? I mean that's what you're saying.
Yes.
Okay. And sir, from this plant, what would be the incremental depreciation and interest cost that will come in and we're going to capitalize it from first quarter onwards, right?
We are expecting the commercial operation in the first quarter. Given that we are already in May so we would get the depreciation largely from second quarter onwards so depending on when we commence commercial operations. The interest cost would be in the range of somewhere about -- of course the current loans are at a higher interest rate because of the construction and we look to refinance that. But on an average somewhere in that around about INR200-odd crores would be the interest cost and depreciation would be INR276 crores to INR300-odd crores.
Mr. Poddar, are you done with your question?
This is per annum figure, right?
Yes, per annum figure.
The next question is from the line of Vignesh Iyer from Sequent Investment.
I just wanted to understand what was this spread of natural gas to ammonia in Q4 just to get an idea.
So let me just correct 1 figure. Depreciation would be around INR110 crores odd. Sorry, what was your question? I missed it.
I just wanted to get an -- so from what I understand now we are breaking even at today's levels. Just to get an understanding what was the spread if you could quantify in Q4 FY '23?
If we take prices of Q4, then what would have been the spread on ammonia?
Yes, ammonia natural gas spread, what was it?
Okay. Let me just check that. I'll answer your question. We can in the meantime proceed to the next question.
So what is -- I mean how is it panning out the new ammonia I mean facility? Like if you could just give an idea from when it will start, I mean the timelines, are we on time with that timeline and by when? So I mean basically this facility is to backward integrate, but our facility will take some time to coming up, right? So in meanwhile, what is the idea? I mean we are selling it, what is the -- just give us an idea like how it will pan out in FY '24?
So like I said, we are looking to commence operations in Q1 itself and therefore, roughly 9 months of operation is likely to be completed in this financial year. We need to still see what kind of capacity utilization. But ammonia plants technically speaking can ramp up to 100% capacity fairly quickly, but we'll have to see whether we touch that capacity soon enough. But we are confident that this year we would run it at at least average of 80% capacity utilization. And so overall I think 75% to 80% given that we are also losing roughly 3 months in the year. For quarter 4, FOB Middle East prices were on an average of $670.
So sir, I just wanted to understand what the spread was. I mean was it at $200 in quarter 4?
Quarter 4 gas prices would have been -- given that these again were linked with Brent, Henry Hub and JKM. The JKM component would have been on a higher side so on an average very difficult. But I think somewhere the margins would have been somewhere in that at least about $150-odd.
Okay. Sir, just 1 last question. I just want to understand are we going to switch to a different tax rate? I mean a lower tax rate at [ 22% ] probably like many of the manufacturing entities have done or are we going to continue with the 33%, including the deferred tax component?
At DFCL, we have already moved to 25%. As far as STL is concerned, it has right now 2 businesses which is Technical Ammonium Nitrite and Fertilizer business. And we have taken subsidies benefits, exemptions under earlier benefits that were available. So till the time STL remains an integrated entity, it will be roughly about 34%. But once the demerger takes place, then we would have the choice of opting for lower tax rate in Deepak Mining Solution, which is TAN business. While STL where the fertilizer business would be there would continue to be at 34% because that is where we've taken certain exemptions earlier and ammonia would be at again 25%.
The next question is from the line of Chirag Shah from White Pine.
Sir, on the fertilizers, if you can just throw some light. Have seen very strong numbers so how much of this is kind of sustainable? That's the first part. Is there anything specific to note about this could be a lumpy or a temporary event and some reversal could happen?
So fertilizer, see, last year our capacity utilization in the bulk fertilizer, which is where our ammonia nitro phosphate ANP and the NPK both Croptek and Smartek capacities are. While ANP was roughly about -- the capacity utilization there was more like 65%, 70%; but the capacity utilization at NP Croptek and Smartek were on the lower side partly because our Croptek products are at premium in terms of pricing. Given the raw material prices were at a higher level last year, we saw some challenges in terms of the demand side or affordability of farmers. But even in that kind of an environment, we crossed total 1.01 lakh tons of Croptek we sold. In the previous year in fact it was about 40,000 tons. So we've seen almost 2.5x jump in our Croptek product.So one is fundamentally a capacity utilization and we do have a headroom available in increasing our capacity utilization in both NP and NPK. And given the raw material prices are going down and therefore in general NSPs of these products, particularly the premium products would also commensurately come down; we are quite hopeful that this year our Croptek volumes would grow further and by a good margin. So that's 1 commentary as far as the volume is concerned. On the overall margin front given that last year we had made some changes to our portfolio because some of the portfolio that we produce were seeing certain lower margins so we did not produce some of those grades. But this year given where the raw material prices are and the recent NBS that has been announced by the government, we see all our grades making fairly good margin.So even the volumes in non-Croptek NPK, which is in the Smartek category, this year we should see better volumes. Overall as far as your question of onetime kind of an impact, given that NBS has been announced very recently and it has both January to March and April to June NBS has been changed, we may see certain provision in terms of the subsidy which we had booked compared to that, the change in subsidy NBS on the inventory, which was lying in the channel; we would see some effect of that in our coming quarter. So that is more like a onetime impact that we would see. But from a longer-term perspective, lower raw material prices are in fact a better outcome for us from our overall volume and margin perspective.
Sir, no specific call-out for Q4 also, right? Because sequentially also Q4 fertilizer segmental performance was extremely strong. So no specific call-out for Q4 also, right? It's normal. It's business as normal kind of thing.
Yes, it was normal in Q4. In fact Q4 overall margins were better despite lower volumes and that reflected in the numbers. And like I was mentioning, that some effect of revised NBS would come in Q1 in that.
The next question is from the line of Ranjit from IIFL.
The first question is in the opening remarks, Mr. Chairman has alluded to some headwinds in the domestic TAN business with the influx of imports. So just wanted to get a sense how do we see the profitability panning out over the next 1 year? And that also with our own backward integration into ammonia so we always have this decision to make whether to buy or make. How would that play out for our base TAN business over the next 1 to 2 years?
So TAN business, as Chairman was also mentioning, that there has been increased import in Q4 and there's been high opening inventory. To that extent, we are going to see some pressure on the pricing. But fundamentally as far as the demand sectors are concerned, whether it is coal or the infrastructure, there we are not seeing any weakness. In fact if at all the kind of investment government has announced, we are likely to see better offtake on the infrastructure segment. So demand wise -- in fact volume-wise, we are hopeful that this year with our increased capacity, which last year we utilized partially, but this year we have that available for the full year; our volumes should be better. Margin-wise if you see current prices and the current import situation is such that we may see some pressure on the margin side, but we'll have to see. By the time the season again picks up post monsoon, we'll have to see what happens to the prices of both imported TAN and ammonia.Your question on buy versus make is -- was it for ammonia because I heard you saying it's in the context of TAN? So buy versus make at this moment, see, anyway even earlier we were making roughly about 100,000 tons of our own ammonia from an old plant which was actually far less energy efficient. So we are going to -- to the extent of our own requirement, we would actually see a better economics in the operations of the new plant because it's far more energy efficient. Assuming the same gas price, our cost of production from new plant would be better than what it was in the old plant. That's 1 aspect. The second aspect that in the event we produce more ammonia than what we consume. We are also seeing that the local traded ammonia or ammonia that is bought by players whose consumption is on a smaller level and where they don't import directly, the prices of that are today almost -- I think roughly about almost 50% to 60% premium over import parity prices.So the local traded ammonia, which also have a significant volume, is actually trading at significant premium to import parity and that's because most of the players who are producing ammonia and trading it in the market, particularly the fertilizer players who produce excess ammonia, their cost of production is high given where the gas prices are. Therefore, we're also seeing an opportunity of selling a part of our production in the domestic market particularly when if we were to run both our old and new ammonia plants. So we'll see a combination of that playing out in terms of our margins and once we start producing from our new plant, in very odd situations that we would be importing, but mostly we would be producing on our own and any excess ammonia we would also have an opportunity of trading in the domestic market.
Sure, sir. Are we allocating any portion of the new ammonia plant towards fertilizers?
No, there is no such requirement. Ammonia would be consumed by all our 3 segments and fertilizer and acid. And the gas that we are buying, we are not buying from any priority sector allocation. So from that perspective, we are free to allocate it to any of our product portfolio.
Sure. And one last thing, how do you see the peak debt panning out over the next 1 to 2 years now that we have kind of pushed the Gopalpur plant? So what would be the peak debt levels over FY '24 and '25?
So I think we have mentioned earlier there are 2 CapEx that we have undertaken, ammonia and TAN. Ammonia has, if you look at a cutoff of March 31, '23, about INR700-odd crores of additional cost that needs to be incurred. We may largely fund it by way of our internal accrual. While we have tied up the bank debt, we may not draw more debt at least for ammonia. As far as TAN is concerned, over next 3 years we have roughly about INR1,500-odd crores of debt that we would draw down and we would also be typically paying INR250 crores to INR300 crores every year from our existing debt, amortization of our existing debt. That's the way the numbers are looking currently. And also I think we've made that point earlier as well that our ammonia as well as Gopalpur TAN debt that we have tied up from an amortization perspective are long-term debts, anywhere between 10 to 14 years of repayment cycle.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Amitabh Bhargava for his closing comments.
Well, thank you, everyone, for your participation. There were interesting questions and I think most analysts and investors were focused on our ammonia plant, which is rightly so because we are going to start our operations very soon. For any further queries or clarifications, please do get in touch with our Investor relationship team. And thank you once again for participation. Thank you.
Thank you, members of the management team. Ladies and gentlemen, on behalf of PhillipCapital (India) Pvt. Ltd., that concludes this conference call. We thank you for joining us and you may now disconnect your lines. Thank you.