Tata Chemicals : Q4FY23 Investor call transcripts

Tata Chemicals Limited

Q4FY23 Earnings Conference Call Transcript

May 04, 2023

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U.S. continues to register strong demand from all parts of the world. And as can be seen, the contracts which we had mentioned last time have started taking effect, and would continue to hold in terms of margin expansion in U.S.

UK, as we mentioned last time, will move to fixed margin from Q1 of 23-24 the effect of that fixed margin would be fully seen by Q2. And that will continue to hold good because that protects the Company from gyrations arising out of the risk of gas prices.

Kenya and India serve almost similar markets i.e., Indian market as well as the nearby markets. We expect a few trends to continue. As you know we have taken price corrections during the current quarter and also in November 2022. This was mainly to avoid discounting in the market and make sure our list price was aligned with the pricing levels prevalent in the market. But as we move through the year going forward, while the prices will remain more or less flat, our view is the costs will start to moderate within India. So, going forward beyond Q2, we do believe that the margin would go back to previous levels.

Just as a reminder, our contribution in this business used to be at the level of the percentage which we had gained in the margin structure We will be able to go back to the old margin gains which we had prior to the high increase in cost, which is trending to moderate now at a constant price.

So, the way we see the markets going forward, it will be that the U.S. would continue to lead in terms of both margins and volume for us. And that is expected to marginally improve and then in fact hold right through the year. UK would moderate to fixed margin. Kenya and India would hold flat at the current margin and start to improve from Q2 once our cost structures come down, because we contract for coal to build our coal stocks to run for about four to six months. And they need to be wound down with the new stocks when the prices are at a lower level.

Our view is that demand patterns are good. Prices are more or less stable, except where there is occasional inventory movement, especially in India where we did see some inventory coming in, because of which the discounting had increased, and we took a pricing correction. But overall, worldwide we continue to see strong demand right across sectors, especially driven by the new solar glass plants which are coming up, including three lines that are expected to come up in India. And additional lines are coming up around the world. Just as a benchmark, a 100 GW of solar capacity needs a million ton of soda ash, and every ton of lithium carbonate needs two tons of soda ash. So, that should give a broad benchmark on the demand growth.

Overall, in terms of demand supply on a global basis, while the demand growth will continue region to region, depending upon where the capacities come on stream, anywhere between 2% to 6% growth, the supply is not going to keep pace with it, even considering at some point, the 1.5 million tons of Inner Mongolian capacity which we have highlighted in the past. While this capacity will come in the interim, I think the key issue one should bear in mind is the fact that this will largely in our view, because of the high logistic cost to get it to port and beyond port, serve the domestic market. And we do believe that with the strong reopening of China, this is going to bode well for this capacity to get absorbed.

We have continued to maintain that the world needs close to about 1.5 to 2 million tons of capacity every year for remaining balanced. And till year FY'27 / FY'28 we don't see large capacities coming on stream, and hence the market is expected to

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remain either balanced or tight depending on what the current contextual situation is, and it could vary geography to geography.

The structural elements of the business remain good, and we continue to invest in this business. Our capacity of 200,000 tons in India would come on stream in two steps : we expect 100,000 tons of soda ash to come on stream during the current year and an additional 100,000 tons to come a year later. In addition to that the salt capacity will also go up in India by about 200,000 tons, but that will be slowly absorbed in the market at the rate of 100,000 tons per year.

In U.S. we are in the final stages of finishing our debottlenecking details where we intend to add about 400,000 tons of capacity over a period of about 24 to 28 months.

Broadly that is the context of our growth.

In terms of our specialty portfolio, Rallis has had a difficult quarter in terms of cleaning up its balance sheet. With this clean up behind it, I think Rallis is poised for steady and strong year-on-year growth going forward.

In terms of our two other specialty forays, as the quantities continue to rise, the capacity utilization continue to rise. As far as Cuddalore is concerned, the Board has agreed to add additional capacity of another 10,000 tons in the short term in addition to the current capacity and also pivot our entire capacity to tyre grade, and we would be focusing on that grade going forward more and more.

With these words, I just wanted to highlight that our strategy continues to be in place. The structural characteristic of the market continues to be in place, and we remain watchful because of the high interest rate environment and the impact on the market conditions. We continue to focus on cost management to ensure that we continue to deliver on the margins and the return profiles to all stakeholders.

Thank You, with this I invite Nandu to give his comments.

N Tirumalai:Good afternoon to all. I will broadly cover in four different sections --. 1) for the quarter for consolidated; 2) annual performance; 3) each geography and 4) cash and

CAPEX.

On the first part for the quarter for the Company as a whole, we had good financials for the quarter. Our revenues for the quarter grew by 27% over last year's Q4. The growth was broad-based with all businesses and geographies performing well. EBITDA grew by 47% and stood at Rs. 965 crore for the quarter. The margins expanded by 3% and it was 21.9% for the quarter aided by higher sales and improved cost management.

Coming on to the annual performance for last financial year:

Our revenue stood at Rs. 16,789 crore, almost 33% more than last year. The EBITDA was at Rs. 3,822 crore, 67% more than last year. The margins improved by 4.5% and stood at 23%. As far as the whole year PAT is concerned, the profits for the year was at Rs. 2,452 crore against Rs. 1,400 crore last year, a 75% increase. The PAT margin was at 14.6%. The financial year ended March '23 was perhaps the highest ever across all geographies and for the Company as a whole.

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Moving on to individual businesses, starting with India, the revenue for the quarter grew by 17% year-on-year for the quarter. Growth was largely due to higher revenue on account of better selling price, amidst stable demand. Salt and bicarb business as well performed well. A higher operating leverage resulted in the better margins for the quarter. Further, last year in Q4 we had a one-off Rs. 65 crore tax relief which boosted the income last year, which didn't come in the current year's Q4. And hence the PAT numbers for India were lower than last year's Q4.

In the U.S. we saw good performance for the business the newer contracts, as Mukundan mentioned, entered for the calendar year became effective in January, and those helped us in the quarterly profits that we had a healthy margin for the quarter.

Europe, especially UK, had a good performance on the back of high pricing and volumes. Salt and bicarb registered good growth which, in turn, helped the business to register a revenue growth over last year and PAT grew very well as against a loss last year. The benefit of gas hedging remained till March 2023, and we got the benefit of that during the quarter. And we also made a one-off deferred tax asset creation in the quarter, in the UK, which increased the PAT numbers for the UK for the quarter.

Kenya too had good growth over last year because of higher revenues and better profits. And the balance sheet and cash flows were strengthened during the year. And Kenya became debt free during the year '23.

Nutra and silica Mukundan just covered in depth, and Rallis, we had a one-off kind of a provision on inventory and impairment of intangible since its business of Rs. 63 crore during the quarter and that impacted the profits for Rallis for the quarter.

On a consolidated basis we had Rs. 2,398 crore of cash at the end of March 2023. Net debt was at Rs. 3,898 crore. The consolidated CAPEX for the year was about Rs. 1,600 crore. We are very much focused on cash generation and paying off debt over a point of time.

With that I close my comments and I hand it over back to the Moderator to open up for questions. Thank you.

Moderator:The first question is from the line of Sumant Kumar from Motilal Oswal.

Sumant Kumar: So, my question is for India business. You are talking about margin recovery in Q2 FY'24. So, can you talk about the whatever the raw material lag we have, say power cost, we are buying coal from Indonesia. So, what is the lag effect, how many month lag effect we have for the soda ash business in India, and any other raw material?

R Mukundan:The main reason why we keep that inventory during the first half of the year, because during monsoon the shipping delays happen from Indonesia to India, and to avoid that we do keep stock. And I said it peaks at about six months and goes down to three months during the year. So, you can take an average of four to five months of inventory which, as prices come down, will take its own time to consume the inventory build-up.

Sumant Kumar: And do you think India business will reach at the whatever the peak margin we had seen in past quarters, can reach that level or that will normalize from there.

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R Mukundan:Regarding the margin level of India business, India has always been leading in margins, but the next year will start seeing U.S. to lead the margins massively. The key lever for us in terms of performance going forward next year is going to be that as mentioned before, UK will go to fixed margin structure which means they will be profitable, but they will be on fixed margin; In Kenya and India, the margins would moderate to normal levels, but they are much higher than what it used to be pre- COVID and we are going to be in that structure, because that is the nature of the current demand supply environment. And U.S. would also improve and get to the margin levels, we have seen worldwide, but that means there is going to be an expansion in the U.S. margin.

So, the way we see next year panning out is fundamentally that numbers from U.S. will substantially change. Numbers from India more or less will hold around the same levels. And numbers in Kenya and UK would moderate and would stabilize to normal profitable levels, but this will be a higher level that what we used to see before

COVID.

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

Abhijit Akella: First on the Europe business, this Rs. 225 crore EBITDA for the quarter, is there some gas hedging benefits still within that and if so could you please quantify that? And when you are alluding to a fixed margin structure for the year ahead, would it be possible to share with us broadly what sort of EBITDA numbers we should be looking at for the year?

R. Mukundan: Yes, I understand your question. I think just wait for next quarter result that will show the constant margin numbers; we would not want to disclose that but in terms of deferred tax asset and one-offs I think Nandu can highlight.

N Tirumalai:We spoke about our hedges being in place up to March 2023, the benefit of our lower cost hedge of gas has played out in Q4FY23 also. And we also had the one-off tax benefit which came at around Rs. 50 crore in the UK, in Q4FY22. So, that won't come back in the next quarter.

R. Mukundan: The Rs. 50 crore is at the PAT level, and it's a positive impact of tax asset. But in terms of the NG they were in play, but for you to get a peek into the fixed margin we need to wait for Q1 result. And because of the fixed margin structure, firstly, we have an assured volume off take within the UK. So, volumes are not going to be under pressure at all. And, secondly, the Company will be consistently profitable.

Abhijit Akella: And the second question I just had was with regard to upcoming supply additions in the world market. So, regarding this Inner Mongolia project, apparently the news from China or at least the claims from China are that they are trying to ramp up this capacity to five million tons within this calendar year itself. So, is that something that you are seeing as well.

Also, if you could just help us with regard to other capacity expansions coming up across the globe. I believe there is something in the U.S., so if you could just help us with that over the next one or two years, that would be helpful?

R. Mukundan: Yes in terms of capacity addition I believe I have mentioned already that I think world needs about 1 million to 1.5 million tons of additional volume every year going forward, and if you add two years it's going to be 2.5 million tons. And the world needs it to be balanced. The exact month and when it is going to come, we can't

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