Deepak Nitrite Ltd

NSE:DEEPAKNTR

Earnings Call Transcript 2024-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to Deepak Nitrite's Q4 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. At the outset, I would like to clarify that certain statements made or discussed on the conference call today may be forward-looking in nature and a disclaimer to this effect has been included in the investor communications shared with you earlier. The results documents have also been shared with you earlier and also has been posted on the company's website.

I now hand the conference over to Mr. Ranjit Cirumalla from IIFL Securities. Thank you, and over to you, sir.

[Ranjit Cirumalla, analyst]

Thank you, Nirav. Good afternoon, everyone, and thank you for joining us on Deepak Nitrite's Q4 and FY '24 Earnings Conference Call. Today, we have with us Mr. Maulik Mehta, Executive Director and CEO; Mr. Sanjay Upadhyay, Director, Finance and Group CFO; and Mr. Somsekhar Nanda, CFO of Deepak Nitrite Limited.

We will begin the call with an opening remarks from the management team followed by an interactive Q&A session. To begin, Mr. Maulik Mehta will share views on the operating performance and the growth plans of the company, followed by Mr. Sanjay Upadhyay, who shall take us through the financial and segmental performance.

I now invite Mr. Mehta to share his opening comments. Thank you, and over to you, sir.

[Maulik Mehta, executive]

Good afternoon, everybody. Thank you for taking your time out to join our conference call. As we entered FY '24, we faced multitude of headwinds such as low price dumping from countries such as China, continued recessive trends in the EU zone, crisis that continues in the Red Sea area, which affects geopolitics as well as freight and a general weakness in certain parts of the market due to an uncertain future caused by many of these tensions at this point.

In addition to this, demand for products relating to agrochemicals remain soft. Despite these obstacles, we successfully navigated the complexities and maintained a steady supply of products for our clients. We also maintained or, in many cases, improved our wallet share. If there's one thing that the team at Deepak understand, it is the business landscape that is challenging rather than conducive.

And we are prepared to apply ourselves to adapt and to innovate in order to navigate through the variable of this macro backdrop. As we've demonstrated over the past 50-plus years, we strive to deliver a steady performance and enable and ensure a reliable supply to our clients regardless of the external pressures we face.

We responded to recent business headwinds by implementing the following tactical initiatives over the last 12 months. One, we leveraged our strong brand and market position prioritizing our most important strategic relationships, enabling us to achieve growth in sales volumes. Two, we've put in a lot of work to optimize our assets and enhance efficiency, which has led to debottlenecking opportunities and record production for key intermediates. This has elevated our competitive position in a situation of abundant supply and will continue to serve us well as the market sentiment improves.

And third, additionally, our initiatives in process efficiency and cost optimization has resulted in savings in areas such as yield enhancement and power and fuel costs providing some counter to the margin pressure from the current business landscape.

With this backdrop, I will outline our performance for the fourth quarter and the financial year ending March 31, 2024, as well as our strategic plans for the coming year. Following this overview, Mr. Upadhyay will delve into the details of our financial performance and position. We will then open the floor for a Q&A session to address any questions you may have.

Deepak reported consolidated annual revenues of INR 7,758 crores, a resilient performance across business lines, driven by increased volumes. This was enabled by improved plant efficiency and our teams have been able to deliver record volumes in several products. FY '24 production volumes have been increased by 16% year-on-year, and we have improved market share despite the moderated environment characterized by lower sales environment.

This performance was anchored by strong gains in the phenolic segment, which witnessed continued volume growth owing to enhance operational efficiency and debottlenecking efforts. Revenue performance was maintained in the Advanced Intermediates segment on a sequential basis despite subdued pricing trajectory, amid a benign RM price environment.

We've reported an EBITDA of INR 1,199 crores in FY '24, lower by 11%, reflecting this moderated realization. This does not include the insurance claim of INR 80 crores received during the quarter, which is classified as an exceptional item. Favorable product mix management coupled with increased volumes in the AI and Phenol segments have helped us safeguard profitability.

The operating leverage gains helped maintain the quarter-on-quarter EBITDA performance in an environment that was marked by a steep decline in realization for several products, even sharper than the raw material price decline. Our teams have done a commendable job, given this macroeconomic backdrop.

Taking cognizance of this achievement both declared a dividend of INR 7.5 per equity share which is 375% on a face value of INR 2 for the financial year '23-'24. In our strategic business units, the Advanced Intermediates segment experienced a little pressure on revenue, though the volumes have been higher by 16%, propelled by resilient demand from both domestic and international markets.

While agrochemicals focused products are still witnessing demand headwinds other applications relating to pharma as well as the expressionary sectors like dyes, textile, paper, home care, glass amongst others, are seeing a gradual volume-led recovery. In this business environment, the company has, as I mentioned, either maintained or increased its market share across nearly all its products.

Deepak Phenolics achieved a healthy top line performance, driven by plant efficiency improvements with the highest production during the year ended notably in Phenol, Acetone, Cumene and IPA. While the profitability saw a dip due to subdued realizations prospect continue to remain optimistic with a stabilizing demand supply scenario and planned forward integration projects. Continued efforts to enhance plant efficiency and optimize assets are expected to further strengthen DNL's position in the market and drive future progress.

The strategic debottlenecking endeavor was pivotal for Deepak Phenolics, catapulting the Phenol production in FY '24. Moreover, various initiatives carried out to improve operational efficiency and product excellence, amplified phenolic competitive edge in the market.

As a general practice, the company continues to interface with third-party experts who audit the plant's safety and reliability in these conditions as well. Future performance is anticipated to be buoyed by multiyear contracts, successful pilots and new product introductions, along with new formulation introductions. While some segments experienced subdued demand recovery, others such as construction and infrastructure will continue to show healthy growth prospects, prompting a focus on wallet share and debottlenecking initiatives to optimize our risk.

In terms of geographic split, our stand-alone operations, we improved the share of exports from 43 to 47 over the last year. On a consol basis, the proportion of domestic and export revenue of 80%, 20% remains unchanged.

Coming to our ongoing projects. The Photo Chlorination One is being commissioned, and we expect regular operations imminently. Our solvent project is progressing as scheduled, and will be commissioned on time. The acid unit has also made significant progress with manufacturing expected to begin in the next quarter or so. We are also advancing other expansion projects such as hydrogenation and nitration, which would be rolled out in phases starting the second quarter FY '25.

Also, we are constructing a state-of-the-art research and development center in Savli, Vadodara, targeted for completion within the financial year. Our subsidiary, Deepak Chem Tech is actively bolstering its workforce, recruiting adapt professionals across project management, procurement and support. Deepak substantial infusion of over INR 709 crores in DCTL underscores its steadfast financial backing for the subsidiary's flourishing journey ahead.

In FY '24, several growth initiatives have come to fruition, I'm thrilled to share some key developments occurring across the group. Deepak commissioned production of its fluorination asset in Dahej, these developments strengthen Deepak backward integration for crucial agrochemicals, enhancing the company's supply chain resilience as well as being able to participate in various contract manufacturing opportunities because of the addition of fluorination in its technical competency market. These will serve on supporting the domestic market first, underscoring the importance of meeting local needs and demand before expanding on to international markets.

We, as the Board, has approved increasing of stake in Deepak Oman industries to 51%, effectively making Deepak Oman a subsidiary of DNL. The strategic acquisition aligns with our goal of strengthening our market position and expanding our operational capabilities. Further cementing this growth trajectory, Deepak Chem Tech, signs to memorandum with the Gujarat government totaling about INR 14,000 crores, which also, of course, includes a previous commitment we have paid.

To facilitate these projects, we're strengthening our balance sheet and maintaining favorable credit ratings. During FY '24, we secured a long-term supply agreement with Petronet LNG to ensure a steady supply and mitigate project risks. Additionally, an ESOP plan has been approved by shareholders to reward performing employees and retain key talent, aligning their efforts with the company's long-term success.

Lastly, the construction of our state-of-art R&D center progresses well, which will allow us to enhance our ability to parallelly innovate for the entirety of Deepak Group. In conclusion, our dedication to improving operational efficiency and maximizing asset utilization has driven us to establish new production standards in critical intermediates. India's flourishing economy presents global prospects for the chemical industry, and we are eager to be a cornerstone in creating this ecosystem for India's future as a chemical -- as a global chemical player.

The targeted investments, notably in the downstream phenol and acetone, in operational excellence and integration as well as in specialty chemicals puts us in a position to seize these efforts -- opportunities, guaranteeing growth, value sustainability with a highly valuable right to win well integrated into our strategy.

I would now like to hand the call over to Mr. Sanjay Upadhyay, who will address this forum and take you through the financial performance and key updates during the period under review.

[Sanjay Upadhyay, executive]

Thank you, Maulik. Good afternoon, everyone, and thank you for joining this call today. I'll walk you through the highlights of the financial results for the quarter and year ended. In FY '24, the global chemical industry grappled with significant headwinds, such as leaner inventory by customers, dumping and destocking by Chinese producers, pockets of geopolitical instability and reduced consumption due to inflationary pressures.

Despite these challenges, our company demonstrated resilience by focusing on retaining market share, in fact, growing also our market share, cost optimization, calibration of product mix and strategic procurement of raw material.

Importantly, the near-term volatility did not distract us from our medium-term and long-term objectives of derisking our business model. As a result, there has been considerable progress during the financial year on further solidifying our balance sheet, assure supply of critical inputs, waste management, and byproduct optimization as well as moving ahead of growth CapEx to enable value addition.

At a backdrop of volatile raw material prices, increasing utility costs and equipments to logistics, Deepak Nitrite delivered a resilient performance in FY '24, increasing market share, particularly in Phenolics and driving overall revenue growth across segments. These operational efficiency translated into an impressive 22% return on ROCE, which has been maintained at a high level. Both business segments witnessed strong improvement fueled by improved demand and product realization, contributing to robust consolidated revenue growth.

Coming to our financial performance, on the operating front, our domestic business revenue stood at INR 1,712 crores and INR 6,135 crores in Q4 and FY '24, respectively. Export revenue was INR 414 crores in Q4 and INR 1,547 crores in FY '24. On a consolidated level, domestic to export ratio stood at 80 to 20.

In FY '24, on a consolidated basis, revenue stood at -- on the consolidated basis, revenue stood at INR 7,758 crores compared to INR 8,020 crores in FY '23. EBITDA stood at INR 1,199 crores in FY '24 compared to INR 1,337 crores in FY '23. Margins are stable at 15% in FY '24. PBT and PAT came at INR 1,102 crores and INR 811 crores, respectively.

In Q4 FY '24 on a consolidated basis, revenue came in at INR 2,145 crores as compared to INR 2,025 crores in Q3 FY '24 on a Q-on-Q basis. EBITDA came in at INR 320 crores from INR 318 crores in Q3 FY '24. Margins moderated at 15% higher raw material costs and other utilities along with lower recovery of fewer products. PBT and PAT stood at INR 349 crores and INR 254 crores, respectively.

The company's profitability mirror its operational performance influenced by a review triggered by inflationary pressures in raw material and utilities. However, improvements are anticipated in the coming quarters. Basic and diluted EPS for Q4 FY '24 stood at INR 18.61 per share and that of FY '24 was INR 59.45 per share. In an update following the fire incident, the company received an insurance claim of INR 79.8 crores which was recognized under exceptional items in the statement of profit and loss for the year ended March '24.

I'm pleased to share that ICRA has reaffirmed in DNL's and DPL's long-term rating at ICRA AA, their short-term ratings at ICRA A1+ for the bank facilities with positive outlook. Additionally, Deepak Chem Tech has been assigned long-term and short-term rating of ICRA A and ICRA A2+, respectively, for bank facilities with a stable outlook. These ratings underscore our solid financial margin and optimistic prospect.

Moving to the segmental performance. In the Advanced Intermediates segment, revenue came in at INR 671 crores in Q2 FY '24 versus INR 674 crores in Q3 FY '24, while EBIT grew 43% quarter-on-quarter at INR 134 crores during the quarter under review. In FY '24, revenue came in at INR 2,074 crores, EBIT came in at INR 446 crores, translating into a margin of 16.4% despite the current environment and challenging circumstances.

Deepak Phenolics delivered encouraging performance with revenue growth at 9% quarter-on-quarter to INR 1,466 crores in Q4 FY '24 versus INR 1,349 crores in Q3 FY '24, while EBIT stood at INR 206 crores, higher by 15% quarter-on-quarter and EBIT margin was 14% for the quarter. In FY '24, revenue was INR 5,003 crores and EBIT of INR 644 crores translating to a margin of 13%.

Our cash position remains sturdy with net operating cash flow of INR 78 crores recorded in FY '24 driven by improved working capital and operational gains. In investing activities, resources are allocated to diverse new projects, initiatives and essential materials. Meanwhile, financing activities involved a disbursement of dividend interest payment totaling INR 112 crores.

Lastly, on the balance sheet front, company's financial position is significantly enhanced, and the company continues to maintain a zero-debt position with net worth of INR 4,822 crores on a consolidated basis, thereby strengthening the balance sheet for the future expansion.

Moving to our investments and CapEx plan. DNL invested INR 709 crores to its wholly-owned subsidiary Deepak Chem Tech Limited with INR 54 crores infused in Q4 FY '24, while total investment in Deepak Oman industry securing at INR 51 crores, a 51% stake stands at INR 27 crores, including INR 11.2 crores in Q4 FY '24. Additionally, DNL has invested INR 5 crores in DPMC, that is Deepak Projects Limited.

Till year, DPL paid off long-term loans, achieving debt-free status with INR 306 crores in liquid investments. DPL implemented SAP in November '23 followed by DCTL and DNL enhancing the operational efficiency and aligning with industry standards. This synchronized integration ensures streamline process across all subsidiaries, optimizing performance and fostering collaboration. Further approved projects are progressing well as planned, including the construction of new specialty chemical plant, for R&D unit's innovative and new products supporting the expansion of specialty chemical facilities.

New plants will enhance autonomy in raw materials and increase profitability. A state-of-art R&D hub near Vadodara will strengthen our expertise and affiliate expansion efforts. Additionally, the company has implemented strategies to improve operational efficiency, including process optimization, yield enhancement and reduction in power and waste consumption costs. DNL has also adopted product pricing to more rapidly transit increase in input prices, resulting in improved margin performance despite fluctuations in profits, demonstrating a proactive approach to preserving profitability amid market challenges.

With that, I will now request the moderator to open the forum for question-and-answer session, please.

[Operator]

[Operator Instructions] The first question is from the line of Nirav Jimudia from Anvil Research.

[Nirav Jimudia, analyst]

Congratulations on good set. I have 2 questions. The first is on the Advanced Intermediate business. So what portion of our raw material will be secured once the backward integration project starts operational? And when can we see the benefits of this backward integration projects starts reflecting meaningfully in our operating profits?

[Maulik Mehta, executive]

Okay. So Nirav, thanks so much. First of all, dependence on those particular raw material is about 20%. Now we are also increasing our capacity for the consumption of this product. So over the future, this might increase, and it will start to show a meaningful impact on our bottom line in the group, I'm saying, over I think the second half of the year. So maybe from mid-Q3 onwards and then next year, full year, of course, after that normalize. But we will continue to also keep investing in consumption, and hence, we will have a great right to win in the products that we are already well entrenched.

[Nirav Jimudia, analyst]

Got it. So this would again be extended towards the newer CapEx, which we'll be doing -- for which we already signed the MOU. So this is what you are trying to say on this particular raw material?

[Maulik Mehta, executive]

The MOU that we have signed in December and January of this financial -- of FY '24, in this one, a significantly large consumption is raw material, but the capital investment for those has also been factored into what we have announced as our investment plan for the next 3 years. These investments are expected to be commissioned within this financial year, and we'll have next year as a full year of operation. We will also be expanding in existing businesses. So what we have announced, you would be well aware, we don't really get into micro details about capital investment that we put into existing products. As for the strategic new investment for new products, those are the ones that we announced, and those will have a level of backward-forward integration as required.

[Nirav Jimudia, analyst]

Got it, sir. Got it. Second question is on the fluorination complex or the fluorination part, which we started operations on. So once those products are used for our captive consumption for the agro intermediate, which we have highlighted in our investor presentation, is the market big enough for those products to be served or we need to further create the downstream products to utilize these capacities?

[Maulik Mehta, executive]

So there is already an existing market that can be served. We have a significant part of...

[Operator]

Sorry to interrupt you. We lost your audio in between.

[Maulik Mehta, executive]

So while there is already an existing market that can -- in India also and abroad also, that is available to Deepak, we don't need to go into development of new molecules. However, we have also consciously up-engineered part of the asset to be able to manufacture products, which would be more contract manufacturing opportunities, maybe higher pressure, higher temperature, different kinds of throughputs and metallurgies, which would allow us to do these things as the opportunity presents, while we are discussing with some strategic customers. So we will have this level of flexibility either to service intermediates, which we are making in the whole plant or to utilize a significant part of the plants for those and the rest of the plants for contract manufacturing.

[Nirav Jimudia, analyst]

So sir, before this plant got started on, are we were importing those intermediates for our finished products or was it available in the domestic market and we were getting those materials domestically?

[Maulik Mehta, executive]

I mean, we do both. On a finalized basis, we look at what is the best for our strategic growth. So we are happy to buy domestically and happy to [Technical Difficulty] beneficial for stable prices and long-term used.

[Nirav Jimudia, analyst]

And sir, with given 2, 3 months of our operations in the fluorination space, how has been our experience in terms of running the plant and how we are able to differentiate ourselves, given there are a lot of existing players also on the fluorination side?

[Maulik Mehta, executive]

Okay. Fair enough. So first of all, I'll be very candid. I'll state that we are not able to differentiate ourselves on fluorination. But it is heartening to know that within 3 months, based on the combined experience that has come into the company as well as our experience of operating, we believe that we have very clear visibility towards being able to manage fluorination assets using HF like many of these players who have been in it for decades now. It is a matter of time. And right now, I believe that we are manufacturing what we are making as well as anybody else in the world, even one who have been in it for 15, 20 and 30 years. So that is a good start for us. We are not seeking to be the best, but our first aim is to be as good as. As we grow our own confidence and our own talent pipeline, you could be rest assured that we'll apply the same filter we do for our core chemistries.

[Operator]

Next question is from the line of Vivek Rajamani from Morgan Stanley.

[Vivek Rajamani, analyst]

Two questions from me. On the Advanced Intermediates, could you give us a bit more color from an F '25 perspective? How should we think about the pathway of recovery over the course of fiscal '25 from a demand and pricing perspective? And just maybe as an extension to that, given that you would now have some of these backward integration facilities, which were really coming through, do you think the fiscal 2023 earnings for Advanced Intermediates could be a good benchmark to look at for fiscal '25? That was the first one.

And the second question was with respect to your more medium-term CapEx plans. On the larger INR 90 billion MOU where you're targeting polycarbonates, MMA and the like, could you maybe give a bit more color in terms of maybe the time lines or funding plans? Or maybe any color on what kind of capacities you'd be targeting?

[Maulik Mehta, executive]

Okay. So on the first question, I'll give a perspective and then I will request Mr. Upadhyay to also share his. And then of course, we can answer your second one, no problem. So on the first part, I think what's ending up happening is that we are seeing the year divided into two. So the first half of the year where we are seeing a volume-led improvement in most of the segments, except for some key ones like agrochemicals. And even there, it is not a uniform downturn, right? But there are certain regions which are more critically affected than other regions in terms of demand.

So in the first half of the year, whether this is because of demand or overstocking or over dumping, whatever you want to call it, we expect that there will be some volatility. The second half of the year will actually be characterized by more even improvement in the business outlook across industries and it will be further supported by the commissioning of many of these projects that will come on stream at various points. So I think that the second half of the year would be meaningfully better than the first half because both of these factors would be different.

So while I remain very optimistic about the kind of investments that we have made, as they come onstream, we also start to see the situation improve. So if I was to look at the later part of the year and whether that would correspond well with FY '23, there I have a greater degree of confidence. Of course, a lot of things can go right and wrong in the meanwhile. But I think that the first half of the year continues to be something where one must be very conscious that the situation is still on an improving trend.

I request Mr. Upadhyay also to share his perspective on the same thing.

[Sanjay Upadhyay, executive]

Yes, thanks, Maulik. See, I'll just share with you our products, the agro -- around 35% of our product goes in agro. Now agro segment is not -- it has not done well, but it's a good segment to be in. And we have certainly -- I mean, we are seeing some signs of revival, but it can only rightly pointed out in first quarter and early second quarter also, we will find agro is still weak as compared to other segments. So revival will take place after maybe around mid of the second quarter.

Other segments are performing steady performance, the dyes and pigments and textile where we have around 20%, 20%. And in other, homecare and pharma is around 18 -- 10% to 15%. So those teams are doing well. And overall, if you see, there is a sign of revival, but destocking and everybody is actually now wondering that how long destocking continues, whenever we will hold these stockings, it's okay.

But people -- the prices were abnormally low in the last year, and there has to be a change in the prices. In fact, the volumes are going up. We are expanding our market share also. It's a matter of time once the prices start -- realization starts going up, this will definitely, definitely change. So I personally feel that mid of the second quarter or around end of the second quarter things will start changing and improving.

And we are, in fact, that way Deepak Nitrite has a sound business model where phenolics is doing well. Phenol products are finding applications and the demands are also growing. Our team is performing extremely well in Phenolics. So overall, if you see the model what we have is the phenol, pharma, textile dyes, and we have textile dyes and pigments also. So it's a well-spread business models created and it will balance out each other. So performance will certainly be resilient next year also, we are very confident.

[Maulik Mehta, executive]

You had a second question also about the time line. I think there is a level of flexibility, which we have alluded to before. But we have also categorically said that, by and large, everything needs to be in line, online by mid, I think, 2027.

[Sanjay Upadhyay, executive]

Around '27 end.

[Maulik Mehta, executive]

Around '27 end. So whether you do one group first or second group first or whether you do them in a combined manner and things like that, that will all be on the basis of how well we are able to exploit the opportunities that are made available. We'll do it in a strategic manner. But as we have highlighted right from, I think, about 2 quarters or 3 quarters ago, there is a very clear end date, which is almost publicly available. These are the things that we need to get done within this period of time.

[Sanjay Upadhyay, executive]

Today, if you are referring to those announcements and this, we are actively working on technology discussions. These are the products where we need a sound and very good technology so that as you've seen how we have done well in phenol, if you have a good technology, if you have a good understanding about the processing, even it helps in a big way. Phenol also, whatever debt we are committed, we have commissioned the project on time.

Here also, our endeavor is to start the production latest by '28, '29 beginning, and we have tied up our raw material also with the announcement of Petronet and what we do, you must have seen that. So things are progressing well. Our technology team is working very hard on these technology things. So once those things are tied up, the projects will start -- it will go at the ground level. Before that, it needs a lot of discussions with the team. It needs lot of discussion with the engineering people also. So those things are in progress currently.

[Maulik Mehta, executive]

I'll just add one point, it is characteristic of us to not go into a great level of detail. But while we are delivering on that, you can be rest assured that in the quality of the conversations we are having in all of these things, including the technology partnership and all that is at an extremely advanced and at a crucial stage. So while we are doing that, we are also actively working on ensuring that our compound, our products, which are not the intermediate, but which are finally formulated compounds for specific applications are gaining significant traction and acceptance by international players already.

So these things will also accelerate once we start manufacturing it, hence, we will actually be solution providers rather than just suppliers of intermediate chemicals. I think these are strategic initiatives well on track. And please keep in mind that when we give a strong commitment out, it is backed by everything signed off, including raw material supply, including time line, including technology partnership, customer, acceptance, all of those things. And until those things have happened, we think that it is in the best interest of shareholders to not overcommit and not deliver.

[Sanjay Upadhyay, executive]

In fact, as a part of strategy, we are discussing on that, let me tell you that we have started PC compounding, you must have seen that. So that is actually a step taken to understand because, see, ultimately these are end-to-end, very well-integrated projects and all projects were delivered. So if you have the PC compounding where it consumes polycarbonate per se, if you have that in your TTL -- where your polycarbonate is consumed locally, captively, that is a very big step, I would say the company is taking. We are progressing well on PC compounding. In fact, some people must be wondering what is this [ OC, SOC ] and this, but that is actually precisely the step we have taken for PC compounding.

So PC compounding also needs different applications, and there are different types of compounding where some are common, which we had already started, where -- and some are specialized applications. We need some technical support for specialized applications. So those things are progressing well where we are talking to the various technology suppliers on these also. So those things are progressing. The CapEx will start on PC compounding at the earliest. That is the first CapEx to start, in fact. And then once that is established, parallelly, we are working on PC and other products. So it's all integrated and well planned execution of the entire whatever investment what we have announced.

[Operator]

Next question is from the line of Ankur Periwal from Axis Capital. [Technical Difficulty] Ladies and gentlemen, thank you for your patience. We have the line for the management reconnected.

[Ankur Periwal, analyst]

To start with just one clarification. On the tech part, which you just highlighted, the technology for PC compounding and the specialized applications, last for the tech is in-house or we are open to have a global tie-up as well when you were saying the work on tech enterprise is ongoing?

[Sanjay Upadhyay, executive]

We are working on various options, Ankur. It will be too premature early to tell you anything about it. But yes, we are discussing with technology suppliers also. In what way, which way we do that is a different thing, which we'll let you know at an appropriate time. But it's under very advanced and active discussion.

[Maulik Mehta, executive]

I think rest assured, we will have significant updates on this question over the forthcoming quarters.

[Ankur Periwal, analyst]

Sure. And just in between, you did mention that the customer feedback, et cetera, is very positive on the product. That reference was towards the AI part of the business or towards the compounding part itself, wherein probably we would have already started some dialogue there?

[Maulik Mehta, executive]

The compounding.

[Ankur Periwal, analyst]

Okay. That's helpful. Secondly, on the overall macro here, we have been hearing a lot about China adding capacities in commodity chemicals and hence the pricing pressure. But at the same time, as you alluded, pricing have stopped correcting further and probably is more stable now. If you could share your thoughts on the overall demand-supply balance, imbalance in the phenol, acetone value chain globally?

[Sanjay Upadhyay, executive]

See, globally, China is actually not supplying to the world. They have added a facility, but it's largely integrated and back to for captive only. There are some plants which are closed down also, okay? So it is now today at a stage where it's balanced. No new capacity is coming up in the near future. And we are actually doing very well in domestic. If you see our market share in our -- in fact, our -- whatever extra product synergies, it's all going in the market. In fact, we are now today running at a full capacity, even more than that. You must have seen that. And our team is capable of actually further producing capacity expansion also. So those things are -- today, there is a worry in the global market as such on the phenol product.

[Maulik Mehta, executive]

I'll just add that there is investment also, there are new plants coming up in China. Most of them, however, seem to be also downstream integrated into business and all and largely seem to be targeting the captive, I mean, within China consumption of the upstream as well as the downstream. So China normally has been a net importer, and over the last couple of years has stopped being a net importer. But that has very little to do with India's growth which is not only in phenol, but also in the downstream of phenol that Deepak is getting into.

I think we are confident that whether it is the existing capacity, which will be debottlenecked further or it is any expanded capacity, the opportunity for domestic consumption and growth remains significantly more than what another geography like China or Europe or anywhere else might see. So as being incumbent, I think we will have a good chance to succeed and continue to succeed in our investments.

[Ankur Periwal, analyst]

Sure. That's helpful. And just lastly, in that background, how has been the demand outlook or, let's say, the margin, et cetera, of our AI portfolio there, whether it is DASDA or on the Specialty Chemicals part? You did highlight the slowdown in agro, but I was more keen on the overall business growth there in terms of pricing correction or in terms of demand uptake.

[Maulik Mehta, executive]

Thank you for not forgetting the AI part of it. But in Advanced Intermediates segment, I think there is a good volume-led recovery, which seems to be relatively sustainable and consistent when it comes to applications in dyes and pigments, in fuel additives, in glass, in home and personal care. And so these improvements are largely because, one, the situation has bottomed out. But the second is also that there is an improvement in demand and an improvement in expectation of this demand continuing. So our buyers are willing to consider -- I mean they are actively engaging with us not just for like a short-term opportunity, but more consistently 3 months, 6 months, the quality of conversations that we used to have with them a couple of years ago, and that's great. Of course, there will be pricing pressure when you're facing these kind of macroeconomic headwinds, but it's heartening to know that we are able to service this with our expanded capacity as well.

Now all of these things are good but will hopefully get better as things normalize. In Agrochemicals, it is somewhat the same, but maybe 2 quarters behind because that's the kind of log jam that has been clogging up the system, whether it is at the shop floor level or whether at our customers end or whether it is at the shop level of our customers' customer, at the B2C level. So this kind of log jam as well as this dumping of cheap intermediates in order to push the supply chains more will start to even out. We're starting to see some signs of that. But it will take a couple of quarters. As I've also alluded that agrochemicals is not across-the-board negative headwind. There are spots of it where things are marginally better than other spots. And we're seeing that the situation will eventually come back to a normalized trend, but maybe in the second half of the year.

So I just want to also highlight one thing that while we say that prices are soft right now -- raw material prices are soft, some of the key raw materials that Deepak buys, which are benzene, toluene and xylene, they are largely governed by artificial constraints that crude oil manufacturer has put, right? And so hence, those prices, along with crude prices remain range bound at a high end, not actually reflective of the kind of demand that the world is seeing, but more reflective of the kind of supply constraints that are artificially being able -- being applied. So while some of our raw material basket has certainly improved in its pricing position, a large part of it, especially one linked to petrochemical, has not improved at the same level. I guess this is a normal situation for anybody who buys these kinds of benzene, xylene, toluene kind of raw materials.

[Operator]

Next question is from the line of Arun Prasath from Avendus Spark.

[Arun Prasath, analyst]

My first question is on the phenolics supply side situation. We saw a couple of large plants started recently in the last year and in the early part of this year. So is the spreads -- phenol spread sufficiently reflecting this new supply? And are they completely ramped up? And going forward, what kind of capacity is coming for the rest of the '24?

[Sanjay Upadhyay, executive]

No, I just answered that question. See, this new capacities, these are all fully absorbed. So the spread what you are seeing is after all those capacities, that has started in 2024, early 2024, okay? And now what you will -- you are finding is some capacity in Japan has closed down also when you're saying that capacity has been added.

[Maulik Mehta, executive]

I think he is referring to the upstream or to phenol and acetone production itself?

[Arun Prasath, analyst]

Phenol and acetone itself.

[Sanjay Upadhyay, executive]

So this spread is after all these capacity addition as well as closing out of capacities. And it is now today, it's a market where no further additions are taking place at least in the near future.

[Maulik Mehta, executive]

But I can also point out that the spreads in the last quarter have been some of the lowest that we have seen since we commenced operations. Just to give you an example, benzene is the raw material for phenol. And the price of benzene is the same as the price of phenol. So we buy the raw material and we sell the finished product at the same price. It is as good as a negative margin, as you can imagine. So the situation is seeming to improve, whether it improves a little bit or it improves in a more meaningful way is yet to be seen. But quarter 4 did see some of the most suppressed spreads between RM and FG.

[Arun Prasath, analyst]

Right. And Maulik, you also mentioned that given that many Chinese capacities are integrated, but obviously, the plants or capacities or companies which we are supplying to China, they will have surplus and either they need to shut or need to dump this there. So it affects our spreads also. So from that perspective, what happened to those suppliers? Have they shut the plant? Or are they waiting for the spreads to rebound and start supplying to the rest of the world? What is your thought process on that?

[Maulik Mehta, executive]

So the easy answer gets compounded because of these issues like the geopolitical crisis at the Red Sea, which causes freight to spiral out of control. But generally, before anyone considers shutting down, they start by reducing the run rate of their plants. So most plants in this region are seeming to operate around the 60% to 70% utilization. I think Deepak might be the only one which is pushing higher and higher and higher. I think now we're close to about 150%. But generally, when you operate at such a low capacity utilization like 60%, 65%, 70%, your production also reflects that kind of inefficiency when the costing is done. And that further degrades the margin profile that many of these companies have to operate under. Some of these will fold. For example, there have been recent announcements both in Japan as well as in Korea of companies that are choosing to stop production in forthcoming year or quarter or whatever it is.

And somewhere where you will have some manufacturers who will say, okay, we were making in 3 lines, now we will only make in 2 lines, and we will mothball the third line, maybe the situation will improve over a period of time. So these are all geopolitically affected exigencies and how this will affect the crack is a difficult question to quantify because generally, benzene prices are better governed by not just phenol but a lot of other downstream, including things like styrene, including things like MDI as well as including things like gasoline demand as well as upstream crude prices. So there are many, many factors that govern the price of products like benzene and propylene. And phenol and its downstream seemed to be a minor in terms of being able to dictate.

[Arun Prasath, analyst]

Right, understood. And secondly, globally, the acetone prices are surprisingly holding strong. So probably that is also giving some support to the spreads. What is your assessment that is happening there in this market, especially now that there is surplus situation in the M&A side and there are alternate routes also there for M&A. So what is happening in the acetone market?

[Maulik Mehta, executive]

We supply to the Indian downstream applications, right, of acetone as well as IPA. India does not manufacture methacrylates. So we are...

[Arun Prasath, analyst]

But global acetone prices are influenced by these supply-demand at the global level. They are maybe derived -- the prices are derived. We don't -- of course, I agree, volume is not affected, but prices get impacted by what's happening elsewhere.

[Maulik Mehta, executive]

Correct. And there are many routes to manufacturing methacrylates. Of course, acetone is one of the largest in terms of the number of plants that are available there. So yes, there is a strong floor. That is generally the case when run rates are low for the first coproduct. There is generally a firmness in a second coproduct. And how this affects the downstream is, I feel, more for nonintegrated players to worry about as Deepak invests and it invests downstream, it will invest in a level of integration, which will allow it like how we are right now doing with IPA. It will allow it to remain flexible whether to sell more of acetone or more of IPA and this is the advantage of integration as well as knowledge about how to manage co-products.

[Arun Prasath, analyst]

All right. Just finally, one bookkeeping question. The most of the CapEx that we have -- that is assets we are building or already in the final stages, all the CapEx is done or we have -- how much more is likely to go this year? Plus for our MOU of INR 9,000 crores, is there any significant -- any amount will go out in this year?

[Sanjay Upadhyay, executive]

So we have INR 9,000 crores, whatever we had announced, that will go maybe towards the end of this year, some portion will start. But out of earlier announcement, we are already completing around INR 1,800 crores to INR 2,000 crores CapEx during the year. The results -- annualized full results will be seen from the next year onwards because some are starting in Q3, some are starting early Q4. So those will be like our backward integration in this. It's starting in the second half of the year.

So those things, we'll see. I mean, if you have to really assess the performance, that full year will be the next year on those things. Balance on phenol, phenol downstream and our mega plant, as I earlier mentioned, we are working on technology. You will see the investment, some investment in compounding this year. We have already acquired a portion of land for compounding, in the process of acquiring rather. And that you will definitely see this year because that is the starting point of our -- those all investments.

[Operator]

[Operator Instructions] Next question is from the line of Abhijit Akella from Kotak Securities.

[Abhijit Akella, analyst]

Just a couple. So one is on the Phenolics segment. This quarter, we have seen about a 9% quarter-on-quarter increase in revenues. Is that entirely volume-driven? And if so, can we expect this same level of capacity utilization to sustain through fiscal '25 going forward?

[Sanjay Upadhyay, executive]

Yes, yes. I believe, so in fact it can be a little higher also, why same level.

[Maulik Mehta, executive]

It is entirely volume-driven. But I think in the first quarter and the second quarter, while debottlenecking activities continue to remain ongoing, I don't know what the schedule is -- I mean, every year, we have some schedules that we keep in place with regards to shutdown, clean up, restart those things. I don't know whether that is in Q1 or Q2, but certainly, we can come back to you on that front.

[Abhijit Akella, analyst]

Okay, sure. That's helpful. And the other one was on the Advanced Intermediates segment, if I adjust for this insurance benefit of about INR 80 crores, the margins seem to have compressed quite significantly, somewhere to about 9% or so -- 8%, 9%. So from the first half perspective for next year, should we expect similar margins before they sort of start to come back towards mid-teens in the second half of the year? Is that how we should think about it?

[Maulik Mehta, executive]

Yes, you're right that the exceptional item has played a role here. I don't know how you come to 8%, 9% because that is much, much under what I think...

[Sanjay Upadhyay, executive]

You're talking about EBITDA margin, which margin you are saying, Abhijit?

[Abhijit Akella, analyst]

EBIT margin, Sanjay bhai. So if I take this INR 134 crore EBIT and subtract INR 80 crores, I end up at about INR 50 crores, INR 55 crores or so, which implies about 8%.

[Maulik Mehta, executive]

Okay. Let us come back to you on that point. But no, it is -- it should not be 8%, 9%. Anyway, the question that you are asking is about whether it is representative of the year in general, right? No, I would not say that it is representative of FY '25. There have been challenges in Q4. Some of those, for example, were more regarding things like overdue payments and these things which are not normal, not usual, which took place. I would prefer to say that I think -- as I mentioned earlier, the first half of the year will be soft with marginal improvement. And the second half of the year will be substantially better because also of our backward integration, forward integration and expansion that will come online. So I know that you're asking a pointed question, it is very hard for me to unpeel it for you.

[Abhijit Akella, analyst]

No, sure. I understand. And just the last thing was on the CapEx outlook. So fiscal '24, we've shown about INR 700-odd crores of cash outflow towards CapEx on the cash flow statement. For fiscal '25, is there a number we can work with? I know we are capitalizing about INR 2,000 crores of investments. But in terms of cash outflows, how much could we expect for the year?

[Sanjay Upadhyay, executive]

Cash outflow for the current year was around -- somewhere around INR 800 crores to INR 900 crores. And next year, it will be around INR 1,200 crores. I mean the last year was INR 800 crores to INR 900 crores. This year, it will be around INR 1,000 crores to INR 1,200 crores cash outflow. And most of the projects will be capitalized in the current year, except maybe one. So that's the total for this capacity.

[Maulik Mehta, executive]

And EBIT, excluding exceptional items in Q4 for the stand-alone was, I think, around 12%.

[Abhijit Akella, analyst]

Okay. Okay. Understood.

[Maulik Mehta, executive]

One point to highlight that the investment that Mr. Upadhyay had mentioned, there may be an aspect to the last -- the tail end of the year, which may have some incurrence from the further growth CapEx that we've announced. There may be some participation in that, which is not included.

[Operator]

Next question is from the line of Rohit Nagraj from Centrum Broking Limited.

[Rohit Nagraj, analyst]

Sir, first question is again on Advanced Intermediates. This is the first time we have categorically mentioned about the Chinese dumping. So is that only the inventories, which are getting destocked in the system or there have been some capacities which have come but are again giving some issues from our -- we have been able to grow. But on a margins front, those capacities are impacting the margin. So your thoughts on this.

[Maulik Mehta, executive]

I'm just thinking as you asked this question, Rohit, I don't think that there is any new capacity anywhere in the world that has been announced for most of the products that the stand-alone company makes, right? Correct me if I'm wrong, but I don't think that, that is the case. However, there has been stockpiling of many of these feedstock -- many of these intermediates that are kind of getting unleashed over the last 4 quarters on to the global landscape.

And partially, this has also been in order to show that there is production and sale because the domestic market in China, which would otherwise have been significant, has played a little bit of a spoil sport. So these things kind of get depleted, the situation, of course, improves. And we are seeing that, as I mentioned earlier, that there is a volume-led improvement. I do not believe that there are any plans for new investments to be announced in the same segments that the stand-alone entity Deepak Nitrite plays in. There may be some -- in the medium term, there may be some consolidations on the other hand. But other than some capacities in India, which have been either announced or commissioned in China or in Europe, no.

[Rohit Nagraj, analyst]

That's helpful. Sir, second question again, apologies for happening on phenolics. So the Q4 performance in terms of volume growth and the margins where they are, is it -- can we take it as a quarterly performance in terms of the profitability for this segment over the next foreseeable future unless we going for further debottlenecking or the margin situation further improves? Would that be a reasonable assumption?

[Maulik Mehta, executive]

Difficult to say, right, because it is highly affected by feedstock prices and these things. But Q4, as we mentioned, was some of the worst that we have seen since we commissioned the plant. We are seeing that there is an improvement in the spread crack, whatever you want to call it. But I think the only thing that we can guide as of right now is that this existing quarter and perhaps the next quarter would be relatively reflective of Q4. We are working to debottleneck also. But let's see when that bears fruition. Today, I think Q4, Q1, Q2, by and large, one can look at it on an even keel.

[Operator]

Next question is from the line of Rohan Gupta from Nuvama.

[Rohan Gupta, analyst]

My first question is on of the fluorination plant, which we have just commissioned, just wanted to have more views on that, that you mentioned slightly, but just wanted to understand in fluorination what are the product pipeline, which we have like apart from the salt -- specialty salt, which you have mentioned that how we plan to ramp it up, what are the customers' feedback on the initial basis -- initial feedback on the product sampling, which we have done? And what are the most product pipelines we are expected out of this plant integration, whether forward integration or backward over next 1 year?

[Maulik Mehta, executive]

It's a very good plant. You should come and see it.

[Rohan Gupta, analyst]

Definitely, we will seize that opportunity to see that. But I just wanted to understand the customers' feedback and proven development and the sampling, which we have been doing so far on that.

[Maulik Mehta, executive]

The customer feedback is positive. Deepak Nitrite also sells to select external customers. So the product matches the global standards and specifications for impurities. So I think from the product quality perspective, this was always flag on the ground that, that will not change, that we have to match it. It's part of the hygiene factor. Now it allows us to participate in opportunities, which we missed out earlier, even though we had significant competencies for things like nitration reduction, even things like chlorination and all that because we did not have fluorination. Now it will allow us to participate in many of these.

Tomorrow, for example, one of the reasons why we have high pressure, different metallurgy in half of our asset is because it allows us to also engage tomorrow, for example, in something like a pyridine chlorination. I'm not saying that, that is the target, but that's the kind of spread that we should be able to have. And this advanced metallurgy will also be able to operate on a campaign basis separate to the rest of the asset, which may operate more on a consistent annualized basis. So we are actively engaged with customers and potential customers as we make these products with their help. These will all start to see value in an intermittent manner over the next financial year.

[Rohan Gupta, analyst]

Okay. Any products which have been approved or -- I mean, that's what I was trying to understand that any product which has already been under -- closer to the approval stage in formulation which requires this fluorination chemistry? I was looking for more from that requires, needing the approval from the customers, which can become a formulation plus for us in near term.

[Maulik Mehta, executive]

Okay. I think your -- these are two separate points. One is when we have engaged in the manufacture and formulation of products that go into the solar industry, the heat treatment salt. So that is one segment. And at the moment, that has nothing to do with fluorination, although in the future, it might. Today, this is for the heat transfer salt and these are formulations.

On the other hand, you are talking about the fluorination asset as it was commissioned. And that manufacture products, which are currently also being supported by many of these CDMO companies, which are well known, well regarded and they have accepted our products and the purchase from them will be not that consistent. So we will also be making our products in the same assets, which will be of a higher value, which may kind of replace the original product or it may add on to them. And these are also approved, but how we schedule them, how we develop our long-term agreements, those are all being negotiated and talked about with customers.

[Rohan Gupta, analyst]

Okay. Sir, just second question, in terms of the technology development, especially on the PC side and even you also mentioned in some other products also, you are in talks with multiple technology suppliers globally. Sir, just a little bit more clarification on this front. It's all related to the phenols and acetone, on which we are working and looking for the technology supplier from globally, and it will be only on a technology front or we are also expecting some kind of capital infusion also from these players going forward? What kind of arrangement we are seeking or exploring right now?

[Maulik Mehta, executive]

Okay. First of all, aniline has nothing to do with phenol or acetone, right? And neither do the downstream of aniline. So that is one thing to keep on the side, right? And we also have announced investments. We are also working on executing projects, which will go into specialty chemicals, again, have very little to do with phenol. There will be products which will be made by Deepak Nitrite, Deepak Chem Tech, which may have phenol as raw material, but which will have the kind of application and the margin profile and those things, which are similar to Deepak Nitrite stand-alone.

The polycarbonate manufacturing along with its upstream all the way to phenol and the second phenol plant, those are the one place along with that, I think the methacrylates which will have acetone as a consumption, those are the 2 products which are directly linked to the phenol value chain. But the customer profile, and all of those things are also entirely different from the way that phenol is sold in India right now, which is largely to the chemical, plywood laminates and pharma spaces.

[Sanjay Upadhyay, executive]

Rohan, I think you are -- see, the technology, what we are saying is on phenol and phenol downstream also carbonated this. We are discussing with them, capital and this, I mean, too early to talk like this. I mean, it's nowhere in the -- in our mind also today that capital somebody -- there are other technologies also on PC compounding, which needs a specialized technology, specialized recipes and all the things, where we are actively involving technology partners. So those details can be shared at an appropriate time, not today, because we are today -- we ourselves are working on various options and projects. So too premature to talk about this. But yes, we are discussing the technology with all this because we have to see that around 40,000 investors, whatever we announced must come by '27 and '28 beginning that has to help us. So those things are -- we are actively actually working on that. We will come back on details later as and when we ourselves are finalizing.

[Operator]

Thank you very much. ladies and gentlemen, we'll take that as the last question. I will now hand the conference over to the management for closing comments.

[Sanjay Upadhyay, executive]

Thank you all for participating in Deepak Nitrite's con call. In case you have any further questions, queries, please get in touch with our Investor Relation team, Som Nanda and Gopal Thakkar. Thank you all once again.

[Maulik Mehta, executive]

Thank you very much. Have a great day.

[Operator]

Thank you very much. On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.