Analysing Deepak Fertilisers & Petro Expansion Plans
#DeepakFertilisers & Petrochemicals has plans of expansion in Odisha and Gujarat.
Chairman & MD Sailesh C Mehta shares insights in conversation with BQ Prime's Niraj Shah. #BQLive
Chairman & MD Sailesh C Mehta shares insights in conversation with BQ Prime's Niraj Shah. #BQLive
Transcript
00:00 Thank you for tuning into BQ Conversations. I'm your host, Neeraj Shah. Our guest today is Mr.
00:04 Sailesh Mehta of Deepak Fertilizers. They've had a remarkable FY23,
00:09 be that as it may, while Q1 may have done what they've done. The idea of this conversation
00:15 is try and understand from where Deepak Fertilizers and petrochemicals ended in FY23.
00:21 What does the management believe is in store over the course of the next three to five years?
00:26 Mr. Mehta, good having you. Thank you so much for taking the time out.
00:29 Sure. So, Mr. Sailesh Mehta, please tell me, your FY23 performance was a landmark year for you.
00:36 Now, based on what you did then, and despite the fact that Q1 might have been slightly rough,
00:42 you've taken multiple initiatives, the results were rocking. How do you foresee,
00:46 or how do you intend to build out from there for FY24 as well as for the next few years?
00:56 Okay. So, very broadly, let me share with you a very little bit of the history and then come to
01:02 the strategies that are at play. So, as you know, Deepak Fertilizers have been in the business,
01:09 in the chemical fertilizer business over the last 40 years. And initially, while we were inward
01:15 looking, then on, we have been looking at ourselves from the outside in, where we serve three critical
01:22 sectors of the Indian economy. One is the fertilizer sector, agriculture sector. Second is
01:29 mining chemicals, which go into mining of coal, limestone, cement, or infrastructure. And the
01:36 third is industrial chemicals, which have some building block chemicals, or speciality chemicals
01:41 and so on and so forth. So, I would say, some 15-20 years back, we, in place of a traditional
01:51 organization structure, a functional structure reporting to me, we have turned it into SBU.
01:56 Sure. And that business, we saw that, there was some very good traction that emerged and
02:03 I would say the bedrock of our strategy. So, just to fast forward, basically, let's say a decade back
02:11 when we looked at ourselves, that where do we go from here? We saw two aspects. One is from the
02:18 outside in, we saw that we were beautifully aligned with the India growth story. All our
02:25 three business lines were beautifully aligned with the India growth story. So, as India grows,
02:30 its need for food, and especially in terms of fruits and vegetables, the higher end of the
02:38 food chain would only grow. And that was very beautifully aligned with our crop nutrition,
02:45 the fertilizer business. Secondly, as India grows, it needs coal for its energy needs,
02:52 it will need cement for its, you know, other realistic growth, and also a lot of infrastructure,
02:59 bridges, dams and things of that kind. And there, our technical ammonium nitrate, the mining chemical
03:06 was exceedingly well aligned to deliver that. And the third is, as India, you know, becomes a,
03:14 I would say, good choice, and a China plus one strategy for the global players,
03:21 the industrial chemicals and specialty chemicals were seeing a lot of positive traction.
03:26 So, from the outside in, we saw this beautiful alignment with the India growth story. And from
03:35 the inside out, we saw there was a phenomenal strength that we have developed over the last
03:40 40 years, right from raw material sourcing, inward logistics, manufacturing, safety, health,
03:47 environment, outward logistics, customers, channel, regulatory framework, and so on and so forth.
03:53 So now coming to where do we see ourselves and you know, going forward, what we saw was that
04:00 these two dimensions we need to capture in our strategy. And that is something that has been at
04:06 the bedrock of what we have been up to in the last five years and now next five years as we
04:11 go forward. So there were, I would say, four mantras, I might put it that way that have been
04:18 driving us. And part of it is already something that can be perceived, can be seen. And some part
04:26 of it is in the making. So what we saw was that with this kind of an alignment with the India
04:33 growth story, we said that look, whatever we are doing, it makes obvious sense to do more of it.
04:38 And so the first aspect we took up was to triple our fertilizer NPK capacity.
04:45 And that is something that, you know, I would say five, six years back, we've taken up and
04:50 we are seeing the positive traction of that. So now, capacity wise, you know, we should be very
04:58 shortly in fact, with some report lacking, we should be touching a million tons. So that will
05:02 make us a good player in the fertilizer sector, particularly in our core command geography,
05:08 where from 3-4% market share that we had earlier, we will be somewhere touching 20%. So you know,
05:15 size, volume, giving us that muscle power. We also saw in the acid business, that you know,
05:23 that was a lot of demand. And I'll share with you and further expansion that we're thinking
05:28 of, we have just recently announced. Yeah. But over the last five years, we added a complete
05:33 new complex at the edge. And this chemical nitric acid is a building block for all the
05:40 specialty chemicals, which are having the positive traction from the China plus one strategy.
05:45 And then at that stage, we had also taken up adding one more complete complex for technical
05:54 ammonium nitrate, the mining chemicals. And that is into an advanced stage in terms of project
06:00 execution. Now, that, you know, would put us very squarely among the top three in the world,
06:09 as far as technical ammonium nitrate goes, and for the mining sector. So the first mantra,
06:17 do what you're doing well, do more of it, and tap into the India good story.
06:24 This is has played out in a large way. And you know, some balance, you know, capex is still in
06:32 the making. And with the size, you know, one gets absolute muscle power in terms of raw material
06:39 sourcing in terms of channel in terms of a variety of aspects, etc. So that's one mantra that is
06:45 very strongly in the making. The second that we saw was in order to bring solidity in what we're
06:53 doing, that we said that let us backward integrate into our critical raw material. Now all the three
07:01 businesses are based on ammonia as their raw material, the fertilizer business, the technical
07:09 ammonium nitrate and the industry chemicals. So we the most obvious growth path, the growth
07:15 mantra was backward integration into ammonia. And you've done very recently, yeah, we have done that
07:21 we have announced the commissioning. But this is a world scale, top class strategy, you know,
07:28 technology based ammonia plant. And what it has done is not only brought in a lot of I would say
07:38 risk mitigation that otherwise we were facing from a viewpoint of logging in that ammonia all the way
07:44 from the Middle East and then congestion at JNPT port and then getting tanker by tanker into
07:49 athalogea complex. Now, we are just across the current complex and ammonia will be piped.
07:57 So besides the supply chain, you know, batteries that will be taken care of, we will, of course,
08:04 be having a massive saving in the logistics costs almost 70 to $80 per ton, you know, in terms of
08:10 the sea freight and then the road tanker movements. But besides that, the most important aspect is
08:17 that we would be also making our strong contribution to reducing the carbon footprint.
08:24 All these ocean going vessels that will get stopped, got almost 25-30,000 road tankers,
08:33 which were otherwise to fly from JNPT to thalogea in a year. And there the,
08:40 I would say the carbon will be at the human consumption level that will vanish.
08:44 Got it. So that viewpoint, you know, that's something which we're looking forward to. And,
08:50 of course, it's a great import substitution product. So we'll be looking at almost
08:54 20,000 crore import substitution emerging in the next 10 years, emerging out of the ammonia plant.
09:03 So this was the second mantra, the mantra being let us become solid in what we are doing. So,
09:10 you know, backward integrate into a critical raw material. So these two mantras have been based on
09:18 KPEX on projects, hardcore solid projects. The two strategies that have, you know,
09:25 are in the making and some chunk, you know, I've delivered very good results.
09:29 And some we are going to see in the next few years are the two mantras are based on strategy.
09:35 I would say the software, the other was the hardware, if I might put it that way.
09:40 So on the software side or on the strategic shift and the transformative strategic shift,
09:48 that we are thinking of is in each of our three business lines, we are now very intensively
09:55 looking at moving from commodity to specialty, or from product orientation to holistic solution.
10:04 Or another way to describe it is a journey from customer to consumer. I'll just explain in terms
10:10 of how it is playing out. Sure, but we have we have 11 more minutes, Mr. Mehta. So I would urge
10:16 you to kindly, I mean, I would love to hear everything. But let's just try and do it in a
10:20 nutshell, please. Sure, sure, sure. This is the last and the most exciting part. So basically,
10:26 just two quick examples. So in the fertilizer sector, while the typical structure of the
10:32 industry is that you make a product like Urea, DAP, NPK, SSP or stalag, give it to the dealers.
10:41 And then you know, your job is done. What we have done in a nutshell is that we have said that,
10:48 let us look at it from totally another perspective. And we have now looked at
10:52 crop specific fertilizers. So what does specifically sugarcane need? What does
11:00 specifically cotton need? What does fruits and vegetables, what do they need in terms of
11:04 the nutrient basket? So of course, NPK, the basic nutrients are required, but there are
11:10 micronutrients and others that enhance the specific need for that crop.
11:14 From a pure product orientation, we are now looking at a holistic solution orientation.
11:22 And unlike people in the industry, we have almost 300 agronomists working directly with farmers.
11:30 So from customer, which is the dealer segment to consumers, which is a farmer segment. So very
11:36 intense involvement at the farmer level. Over the last two years, I think we have almost had
11:42 30-40,000 demo plots to show to the farmers the difference in terms of productivity and yield.
11:50 So this is one definite, you know, shift, transformative shift of that strategy from
11:59 commodity to specialty. Similarly, we have tried in terms of the asset instead of just pure
12:04 commodity asset, we are looking at steel grid asset or solar grid asset. And again,
12:11 very quickly to say one time in case of technical ammonium nitrate, besides reaching out to all
12:17 the end users or with the high dense product, a low dense product, which is the world class
12:23 bills, ammonium nitrate, milk, or even for the medical needs, hospital needs that are there,
12:28 you know, anesthesia, we have, you know, cater to that we are adding lasting services,
12:35 drone based management to move from product to impact at the mind to improve the mind productivity.
12:43 Okay. So that is the strategy. The last of course, is how to, the last mantra is basically how to
12:52 send on the internal systems and controls with the AI and IT driven methodologies, smart factory,
12:58 where a customer oriented data points and all. Yeah, but I won't get into those details,
13:04 please, because otherwise, I'll miss out on a lot of other things that I want to ask Mr. Mehta. So
13:07 you'll have to excuse me for that. Okay, so this is broadly, I would say the play that we are seeing
13:12 in the next five years. Yeah, and I wish you all the best for that. I have certain questions,
13:16 which I believe the street would want to know from your perspective as to how does that happen.
13:21 So for example, the backward integration and ammonia planted the loja file, like empty per annum,
13:26 etc. Now, your AGM speech, of course, shows that 85% is captive consumption,
13:33 I would love to understand what is the what is the benefit or the IRR on that plant,
13:39 with the spreads being where they are right now? Part two of my question are the spreads contracted
13:45 right now? And do you reckon at some point of time, they normalize? And if so, how does it
13:50 change the benefits or the IRR of this plant for you? Yeah, sure. So, as you would know that,
13:57 you know, it's every feedstock goes through certain cycles. So what we had done when we had,
14:03 you know, taken up this project is looked at a seven year tenure average of spread between
14:09 natural gas, which is the raw material and ammonia prices. Now, as we are coming out of this COVID
14:16 pendulum swing, which we have seen that, you know, last year, prices got gone through the roof.
14:21 Now they're stabilizing, we are finding that for each of our raw material, there is a certain kind
14:27 of coming back to a long term average that is happening. And we are seeing this as we,
14:33 you know, are watching things month by month. And from that perspective, if one were to look at
14:39 the long term average, the ammonia project not only brings a huge degree of risk mitigation
14:45 for the downstream, but, you know, it has very attractive returns. Now, those of course,
14:52 are linked to the spread between natural gas and ammonia prices. So what we have done is gradually
14:59 we have looked at tying up natural gas, linked to Brent or Henry Hub, or the domestic gas that is
15:09 there, and linking it in a fashion which also has certain correlation with the ammonia prices so that
15:15 it hedges the whole business as far as the margins go. And we have also looked at, you know, a three
15:24 year kind of a tie up. And then a long term tie up because what we were told was and what we are
15:29 seeing in the marketplace, that for the initial three years, there is a little bit of tightness
15:35 on the gas availabilities, and the pricing, particularly availability is not much of an
15:41 issue as much as the pricing. But post that, we were seeing based on feedbacks from the marketplace
15:47 that things were emerging into an even keel, you know, it's all linked to the demand supply of
15:53 natural gas itself. So on that basis, we continue to very firmly believe that, you know, we should
15:59 be looking at a long term attractive return emerging out of the ammonia investment.
16:04 Okay, but there's no timeline or a number that you've zeroed down upon that you would expect
16:10 that the IRRs would be x percentage or you would expect that the payback would be within a
16:15 particular period of time because you could have imported this from elsewhere independent of the
16:18 carbon footprint, but at a particular cost, you could have imported versus you're doing it yourself.
16:22 Is there a time frame that you have in mind about when the payback would be,
16:26 like, you know, done and over with, if you will? What we are looking at is in the next year,
16:33 year and a half, the price that is the spread between gas and ammonia should,
16:37 you know, come back to the normalcy. And then, I mean, depending on the swings, it could be,
16:44 you know, somewhere in three years itself or five years itself, that we expect, you know,