Dharamsi Morarji Chemical Company Q4FY22 Highlights
Operational Highlights
Last quarter the company did a little over Rs 100 Cr of revenue. The EBITDA was Rs 13.68 Cr. As seen in most sectors the topline growth is largely due to the price increase. Also there is a moderate volume increase.
Commissioned the Dahej sulfuric acid plant and it was partially operated.
The speciality chemicals and their downstream products are still not commissioned. They are likely to happen soon. So a lot of the business in Dahej is still commodity business.
There is an increase in interest cost largely due to increase in borrowings both for working capital as well for capex.
The PBT is very similar to that of the previous quarter about Rs 9.2 Cr.
There is a big dip in PAT because we have provided for DTL on account of the differential of depreciation on income tax & depreciation according to the books.
That’s the main reason the PAT is lower.
Project Updates
Two plants are still to be commissioned at Dahej. It is expected to be commissioned in the current quarter (Q1FY23). Management expects that the next quarter i.e, Q2FY23 will reflect the true performance of the company after this investment cycle is complete.
Q&A Highlights
The company targets niche products and where there is less competition and there’s enough headroom available.
Company’s current objective is to digest the current investment and optimize the capacity and generate good cash flows.
Company’s focus is to bring down the debt, manage the cash flows and then they will look at investments which they would like to make in terms of energy recovery and things like that but there will be no major capex at this time.
RM availability was a major challenge in the boron business. There has been an improvement in the supply and based on that we expect to have better boron business in the coming quarter. This is one of the areas where the company may do some debottlenecking as well.
Company is working on new products on the speciality side of the business. New products are basically market introductions. All of them have a potential of Rs 50-100 Cr but certainly it will take some time for approvals and things like that.
Company has been able to maintain the absolute margin in spite of the cost increase. The company has been able to pass on the price to the customers. Speciality chemicals particularly overseas are based on rolling contracts which could be quarterly or half yearly. While we are facing the cost increases now we would be able to pass them on only later on. That also has an impact on quarterly percentage margins. Also as the price of all the raw materials has gone up it appears that the percentage margin has come down, absolute margin has not come down.
The numbers which the company presented for capex were at least a couple of years old. There certainly has been an escalation on that. Depending on the project there would be maybe 25-30% because of shortage of cement, steel during covid. Also prices of all the electronic components have gone up. In addition there are also other projects which are not major projects but things like the company is upgrading its fire hydrant system in Roha. Company has a new fire hydrant system at Dahej. The company has also expanded its effluent treatment facilities, made investments on safety and environmental related things. So those kinds of projects may not be covered initially in the presentations. So CWIP includes some of the existing projects which are going to be commissioned shortly as well as some of the other projects the company has undertaken. There are also other projects like upgrading the laboratories, upgrading the infrastructure. At Roha, the company has put up the zero liquid discharge infrastructure.
The company is taking some credit from its suppliers which is an important part of the cashflow management. The company has received good support from the suppliers as well. On the debtors side the company has been able to control because the market as such has been good although the cost increase has put a lot of pressure but there is good demand for their product. So the company has been able to maintain the debtor inspite of so much increase in raw material and finished product prices, the company has been able to manage the cashflows.
Peak debt will go up somewhat to 100 Cr in FY23.
The company’s sales are going up and as the sales go up the output from Dahej plant will increase and so the working capital requirement will increase.
The contracts for the Speciality chemical business are ongoing. There are few suppliers and there are few customers and the reliability of supply is as important now as the actual price. The company has proven to be reliable inspite of all the lockdown and logistic challenges the company has been able to largely meet their customer requirements. The company has missed out on some shipments but in general they have satisfied their customer requirements because the company held stock either directly or through their distributors. In any case the contracts are almost perpetual so long as the customers need the product and the company makes the product there will be formula based pricing and its a very transparent formula which links the product prices to standard norms of ratios as well as links to published prices based on internationally recognised journals. Right now it’s quarterly or six monthly contracts. Since both suppliers and customers are thinking long term any increase or decrease in raw material will average out.
Customers would usually have more than one supplier. Customers would have an alternative source of supply other than DMCC.
DMCC is a significant supplier for its products.
The company has passed on the price increase but in terms of the bulk chemicals they don’t have much control. It depends on supply and demand entirely. There are no contracts in place as such. Prices could change weekly, monthly, anything. Company anticipates the market situation and they get some kind of premium because of their reliability and sustainability.
DMCC is backward integrated for speciality chemicals.
The new intermediate project which is going to go live soon consists of only a single product. A bulk of it would go to a single customer. About 50% will go to a single customer and the rest of it would be to multiple customers. There are several end uses. The one customer has one end use but there are other end uses for other customers.
There was atleast 10% volume growth in the speciality segment. But it could have been better if the company had better logistics particularly for the overseas market. There has been a logistics challenge.
So 10% volume growth mostly came from the old top 3 products.
From Q2FY23 the new sulfuric acid plant will be at a better capacity utilization after the investment cycle is complete.
In terms of growth sulfones have been the best and the company expects that to continue.
The intermediate plant which the company is setting up would focus on the sulfur chemistry.
The new sulfuric acid plant at Dahej is not at its full capacity but as the downstream products are commissioned the plant will be ramped up as well. Almost 50% of the sulfuric acid will be consumed internally.
Thiols are still growing. Amides has achieved good volumes. Amides have stable volumes rather than growing.
The company is not going to make any major investments at this time until the current investment is fully digested. Looking forward, the sulfones as well as the boron business will see an uptick. The new plants are also going to add to the topline.
Boron business is 20-25% down. DMCC needs a backward integration in the boron side to have a meaningful business. There is a restriction on the import for technical grade boric acid that has not changed. DMCC is looking at an alternative way. The main thing that has changed is the availability of the raw material which was really hampered in the past year and a half.
DMCC is setting up smaller R&D setups in Dahej where the company will add few people. In terms of product it’s an ongoing thing. It’s difficult to say which product the company is working on will finally get commissioned. DMCC is working on several processes at this time. As of now the company is focussing on sulfur chemistry and its downstream products.
There was a major increase in the other expenses due to the logistics. The container cost for shipment to Europe was about $1500 and now it’s about $8000 – $10000. That itself is a major increase. Bulk of the increase is related to that. This situation has still not improved.There logistics supply chain challenges are across all industries across the world. There are a whole bunch of ships outside the Chinese port and a whole bunch of ships outside the US west coast port and that bottleneck is causing problems for the rest of the world. So there are not enough containers and ships where they need to be.
The investment that the company has commissioned recently in Dahej has been for commodities so therefore the number looks a little skewed right now. But prior to this it was around one-third commodities and two-third specialities. Once the investment cycle is complete the company will go back to one-third commodities and two-third specialities again. Right now it is skewed because the commodities have increased but the specialty has not. The plants haven’t come on stream yet.
Investment the company is making right now for one of the plants at Dahej is primarily for the export market. Right now the situation is dynamic. There’s also the concept of make in India. Sometimes when DMCC is selling to a customer in India the customer is making a product which goes overseas. So DMCC is supplying directly overseas. Earlier exports used to be a big thing because there were so many export incentives. Currently there are zero export incentives. So for DMCC it doesn’t really matter what the end destination is.
Revenue mix: Exports- 27% Domestic- 73%
There was some volume increase in the commodity business because there was the commissioning of the sulfuric acid plant at Dahej and also the price increases. But there would also be an increase in speciality chemical business. It would be around 10% or so.
DMCC doesn’t make ethanol, they use ethanol and few of its products have ethanol as a raw material. The whole story about ethanol in India is more linked to its use as a fuel. It’s been blended with fuel so people are making investments largely due to that market. India is still an importer of ethanol. So the chemical industry is not getting ethanol at the right price from domestic sources so they have to import ethanol as well. DMCC is not into the making of ethanol.
Capacity utilization for sulfuric acid plant in general is over 90% at Roha. Capacity utilization of the Dahej plant is currently lower since they are still ramping up some of the downstream products. In terms of other products it varies product to product but wherever the company is making the investments it is because their capacity is insufficient to meet the demand.
The capacity of the Dahej plant would be the same as that of the Roha plant which is 300 MT/day.
This year DMCC won’t be fully utilizing capacity for the entire year. The management expects some of the plants will start in this quarter (Q1FY23), by next quarter (Q2FY23) will start having meaningful sales and ramp up but certainly this year will not be a full operational year with the expanded capacity.
Margins depend on raw material pricing. A lot of DMCC’s contracts in the specialty business are linked to raw material costs. If the raw material costs go up they can pass on the costs but they can’t add a margin onto that cost. Under normal circumstances (& currently it’s not a normal circumstance) they would be making that kind of margin on all the new products (30% margins). When the company plans an investment that’s what they look at.
Apart from the cost overrun, the company has also done some debottlenecking, some statutory requirements, some investments in safety, environment, R&D etc. So all of it is necessary for the business but we can’t say for example the fire hydrant system or the effluent treatment plant system would have a direct payback. But it will surely allow the company to expand in the future. For example in Roha the company has installed a zero liquid discharge system that surely will allow the company to expand in the future while it may not be directly revenue generating or directly it can’t be linked to the output but surely is essential for the growth of the business.
There will be a maintenance shutdown in the Roha plant post monsoon. Probably in Q3FY23
We are in a situation of unprecedented raw material prices. For speciality chemical business the company has a pass through mechanism and has almost an assured return.
In DMCC’s high market share products the company is seeing some growth.