Deepak Fertilizers and Petrochemicals Corp Ltd (DEEPAKFERT) Q2 FY22 Earnings Concall Transcript

Deepak Fertilizers and Petrochemicals Corp Ltd (NSE:DEEPAKFERT) Q2 FY22 Earnings Concall dated Nov. 15, 2021

Corporate Participants:

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

Amitabh Bhargava — Limited President and Chief Financial Officer

Mahesh Girdhar — President, Crop Nutrition Business

Analysts:

Vishal Bhuta — VP Capital — Analyst

Sharan — Individual Investor — Analyst

Rajan Thakur — Ruchi Oyster Mushroom — Analyst

Abhijeet Akela — IIFL Securities — Analyst

Bhavya Shah — Girik Capital — Analyst

Vishal Pratap — VP Capital Limited — Analyst

Sameer Joshi — Individual Investor — Analyst

Manish Mahawar — Antique Stock Broking Ltd. — Analyst

Presentation:

Operator

Ladies and gentlemen. Good day and welcome to the Deepak Fertilisers and Petrochemicals Corporation Limited Q2 FY ’22 Post Results Conference Call, hosted by Antique Stock Broking. [Operator Instructions]

I now hand the conference over to Mr. Manish Mahawar from Antique Stock Broking Limited. Thank you, and over to you, sir.

Manish Mahawar — Antique Stock Broking Ltd. — Analyst

Thank you, Khyati. On behalf of Antique Stock Broking, I would like to welcome all the participants on the call of Deepak Fertilisers and Petrochemicals Corporation. From the management, we have Mr. S.C. Mehta, Chairman and Managing Director; Mr. Amitabh Bhargava, President and CFO; and Mr. Mahesh Girdhar, President, Crop Food and Nutrition Business; and Mr. Deepak Balwani, Head, Investor Relations on the call.

Without further ado, I would like to hand over the call to Mr. Mehta for opening remarks, post which we will open the floor for Q&A. Thank you, and over to you Mr. Mehta yeah.

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

Thank you, Manish. Is my voice okay?

Operator

Yes, sir. You are audible.

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

Okay. So at the outset, my very warm and a bit belated best wishes for Diwali and the New Year to all of you, and I hope you and all your family members are staying safe and healthy. So I take pleasure in welcoming you all for the Q2 FY ’22 earnings call of Deepak Fertilisers. I hope you all had a chance to look at the financial statements and earnings presentation that have been uploaded, so that we can have a meaningful conversation today.

At the outset, I am very happy to share that, since we met last, we have successfully raised INR510 crores through our QIP, and what is more, it is — the new set of investors are marquee long-term investors, and that is clear testimony of the confidence that the long-term global investors have had on our operations and our growth strategy.

As far as this quarter goes, despite a massive hike in costs [Phonetic] in many of our raw materials, our quarter has — which stood fairly well, and we have recorded a revenue growth of almost 28% over last year and our EBITDA and net profit grew by about 10% and 16% compared to Q2 FY ’21. Now, as you know, we are performing in three different sectors, and if I might share from the sector perspective, the first is where we service the pharma specialty chemicals sector, and that has shown — grew 46% year-on-year in Q2 FY ’22. So in the nitric acid business, which is a part of the specialty chemical sector, we have seen that because of certain, I would say curbs in production by the Chinese government, the demand for nitric acid has further strengthened for us, and we are expecting prices also to remain pretty firm in Q3 onwards. Within the same pharma chemical sector, we have IPA where we saw capacity utilization to be more than 100%, supported by good demand, but realizations were somewhat depressed, due to the plunge in the alternate feedstock acetone. However, looking at all these aspects, the DGTR has recently recommended safeguard measures, that is the quantitative restriction on IPA imports.

We are also looking at focusing on having a special pharma grade IPA as we go along, and further in our specialty drive in the IP business, we are also seeing a good response from our hand sanitizer, the CORORID and the other disinfection products. And more recently, we also had a very good tender that we won, from the Odisha government, and we have also received our first export order for supply of IPA USP grade from South Africa.

Within the same chemical segment, we also serve the mining sector and revenues from mining chemical almost doubled compared to Q2 FY ’21. Here we are leveraging on a lot of specialty products, advanced technologies like drone and AI based blast modeling, to improve the productivity in the mines and infrastructure projects. As you are all also aware, the country is facing significant coal shortages, and with improving economic recovery, the demand for power and therefore coal is also poised to increase, and all of this bodes very strongly and positively for our mining chemicals business.

On the fertilizer side, we continue to find that our strategy of differentiation and crop specific approach continues to give us good positive results, and our SMARTEK sales notched up to 2.28 lakh metric tons during the first half. Our industry witnessed our shortage of potash, unprecedented increases in prices on all the raw materials like ammonia [Indecipherable] etc, but with some broad support of the government, the sector has performed well. We continue to adopt digital means of working and connected with around 4.5 lakh farmers through 12,000 farmer connect activities at a demo site meetings, crop seminars and others, so that connect to the farmers is getting stronger, and that is building a good brand for us.

Going forward, the Southwest monsoon in the country recorded a normal rainfall during Q2, with which we are looking at full reservoirs of — for water, and with that, we are looking at a even better rabi, as we go along.

On the capex side, our ammonia plant construction activity at Taloja is in full swing and we are looking at the progress as per the schedule and are expecting to commission the plant by Q1 FY ’24. From a broader perspective, going forward, we continue to single mindedly focus on; number one, capturing value in our chain, which is where the ammonia project will give us a good positive traction. Second is, we continue to very strongly focus on this drive from commodity to specialty or focus on the end consumer, and that is something that is going to give us certainly, improved margins and also certain strong brand creation.

And in the near term, we are looking at better efficiencies and debottlenecking, to help us enhance capacity and extract maximum value in the near term.

So with these, I would say, broad overview let me hand over to Mr. Amitabh Bhargava, our CFO and President, Finance who can then give you a detailed financial overview, and then of course we will be available for the clarifications and answers to your questions. Amitabh?

Amitabh Bhargava — Limited President and Chief Financial Officer

Yes, thank you. Thank you, Mr. Mehta. Good afternoon, ladies and gentlemen, and thank you for joining the Deepak Fertilisers and Petrochemicals conference call to discuss the Q2 FY ’22 results. Our financial performance during the quarter remained positive, as Mr. Mehta was mentioning, supported by our diversified product offerings and value-focused business model. During Q2 FY ’22, we reported a total operating revenue of INR1,793 crores, an increase of nearly 28% compared to same period last year. Our operating EBITDA increased by 9.8% Y-o-Y to INR212 crores in Q2 FY ’22, with margins of 11.8% during the quarter.

There has been a sharp increase in key raw material prices Y-o-Y in Q2. Ammonia was up by approximately 158%. Caustic [Phonetic] acid was up 70%, RVC, that is propylene up by 53%. Despite these adverse movements of key raw material prices, our better utilization levels during the quarter and wholesales volumes, resulted in improved financial performance. Our net profit grew by 15.9% Y-o-Y to INR93 crores in Q2.

Finance costs were also reduced by 11.7% Y-o-Y during the quarter, driven by better working capital management and conversion of IFC-FCCB tranche one. This generated approximately INR648 crores of cash from operations and working capital management during first half of FY ’22. Net debt was further reduced by approximately INR205 crores during H1. There has been significant improvement in leverage ratios, which net debt to equity improved from 0.9x — 0.91X in H1 FY ’21 to 0.53x in H1 FY ’22. DFCPL successfully raised, as Mr. Mehta was also mentioning, INR510 crores through a qualified institutional placement of equity shares in October 21, leading domestic as well as foreign institutional investors participated in the issue, which included SMALLCAP World Fund, Government Pension Fund Global, Axis Mutual Funds, Fidelity, Avendus and Societe Generale among others.

During the quarter, our manufactured Pharma specialty Chemicals business revenue of INR374 crores, an increase of 46% compared to Q2 FY ’21. Manufactured acids for the quarter recorded a revenue of INR208 crores, an increase of 94% compared to Q2 last year and manufactured IPA recorded revenue of INR167 crores, an increase of 12% Y-o-Y. Due to the decreasing availability of various downstream of nitric acid from China and the resulting higher pricing, nitric acid demand and prices are expected to stay strong in Q3. In the short-term, demand for hand sanitizers and disinfectant products also expected to rise.

Manufactured mining business recorded a revenue of INR373 crores, an increase of about 100% during the quarter. We recorded highest ever second quarter sales of ammonium nitrate belts, with 74% Y-o-Y growth. High density ammonium nitrate sales volume grew by 51%, as supported by a combination of fixed value short term agreements, and increasing prices of imported ammonium nitrate, due to the availability concern from exporting countries.

With improving economic recovery, the demand for power and therefore coal is expected to increase, in addition, with an increase in infrastructure activity demand for cement and rock aggregates are likely to increase, all these factors should result in increased explosive demand in mining and in [Indecipherable] segment, and in turn on our mining chemical products.

Our value-based business model in crop nutrition business, resulted in revenue growth of 15.8% to INR802 crores in Q2. NP and NPK recorded a revenue growth of 30.9% to INR687 crores, and dental sales increased by 37% to INR21 crores in Q2 FY ’22. [Indecipherable] year-over-year increase in major raw material prices are strategically oriented initiatives, which range from crop specific products to pharma focused marketing, should help us grow our market share and profitability.

During the quarter, our IC — capacity utilization of 101%, and both acids and TAN operated at 83% and 88% respectively. As you might recall in earlier quarters, I’ve made this point that last year, we got affected by COVID, particularly our operation and maintenance, and the operating leverage that we were sitting on, at the beginning of the year, it’s evident that we have sort of taken advantage of that in this quarter and in the first half of this year.

In the crop nutrition segment, and NP, NPK plants operated with utilization levels of 77% and ben sul plant operated at 66% utilization level. The available capacity across our plants provides us headroom for future growth potential. We still have a good margin there, as far as capacity utilizations are concerned.

We remain confident of continuing our growth trajectory, while extending full support to our customers, suppliers and other value stakeholders. It’s all the three sectors, that is that industrial, chemical, mining chemicals and fertilizers are strongly aligned to overall economic growth in India, and the Indian economy is expected to perform better in the coming quarters, our segments are expected to be benefited from the same in the coming quarters.

With this, we would be happy to take your questions. Thank you.

Questions and Answers:

Operator

Thank you very much sir. [Operator Instructions] The first question is from the line of Vishal Bhuta from VP Capital. Please go ahead.

Vishal Bhuta — VP Capital — Analyst

Hi, sir, good afternoon. I have one question on technical ammonium nitrate. So I understand we supply ammonium nitrate to Solar Industries, as well as TAN to coal mines, and then I also understand that solar industry’s supply — their products to coal mine. So could you help me understand what is the difference between what we provide and what solar industries provides?

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

So we have three different products in technical ammonium nitrate; one is ammonium nitrate melt, which is liquid ammonium nitrate. The second one is high density ammonium nitrate. High density ammonium nitrate essentially is more — is in solid form, and therefore, it has transported for a longer distance. But for a shorter distance, to be extended, the customer end also has the storage facility, we supply the TAN in melt form. So it has AN melt and HDAN. Our substitute or feature, the one is in solid and the other is in liquid form. Both these products go in the emulsion based explosives, which our customers like solar and others, they essentially convert these two products into emulsion based explosives, which in turn are used in — for our mining activity.

While the low density ammonium nitrate is — can be directly put down the hole, and you can add the — right there at the fuel oil, on top of it, and you can with the help of detonators, you can detonate. So in a way, LDAN can be directly used in mines. It also is then converted into certain explosives, which are different from emulsion based explosion. So essentially in summary, HDAN and AN melt used by our supply to our customers to be in turn, converted into emulsion based explosives, while low density ammonium nitrate can directly be used as explosives in the mines, or can directly use it with the addition of fuel oil, you can directly blast in the mine. So it doesn’t have to go through the intermediary customers. And then, it can also be converted into certain explosives, which we call ANFO ammonium nitrate fuel oil. So those explosives are different from emulsion based explosives, that our customers like solar can make.

Vishal Bhuta — VP Capital — Analyst

Okay. Yeah. Right. So if I’m Coal India and I’m trying to buy an explosive. so when will be buying from our company, Deepak, and when will I buy from solar, and what’s the difference?

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

So coal is depending on their requirement, can either tender for emulsion based explosive, or in certain limited quantity could even directly tender for LDAN, low density ammonium nitrate. Essentially in India, LDAN is very sparsely used in coal mining, particularly Coal India has just started using it on commercial scale only in Q4. Before that, they did not have the experience of blasting through LDAN. And to that extent, prior to that 100% of their requirement was made through emulsion based explosives.

Now from Q4 onwards, after they have tested it on a commercial scale, depending on their requirement, they would — they can tender for LDAN based explosive. But India has given the manufacturing capacity of emulsion based explosives, and explosives in general, which are largely emulsion based, particularly in the coal mine, and public sector coal mine would continue to remain sort of largely be serviced by emulsion basis. But like I said, Q4 onwards and the Coal India subsidiaries have tested on commercial scale through LDAN based explosives or blasting, they depending on their requirement, can tenders separately for LDAN based explosives.

Vishal Bhuta — VP Capital — Analyst

So if I kind of compare emulsion based explosives and LDAN, so, which is more efficient, if impact efficiency is measured in terms of money spent?

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

So fundamentally while LDAN first come basis is — can be priced or maybe priced more in rupees per ton basis at the [Indecipherable], and nevertheless HDAN or [Indecipherable]. Though that also keeps changing, depending on the demand-supply situation. But when it comes to — for the same blasting requirement, generally speaking LDAN based explosive turn out more efficient, efficient in terms of the quantity that is used, and general efficiency that we get in blasting, because blasting also depending on — so when you blast, if the overburden comes out in uniform, let’s say shape, the whole processing off renewal of overburden is additional cost that is incurred by mines. And so therefore mines tend to look at their overall costs, not just the explosive costs, but end to end costs, and those costs can turn out to be more expensive, because LDAN based explosives or blasting is more measured, it has certain efficiency in terms of outcome of overburden on them. So that that’s how it works. Generally it can work more efficiently.

Vishal Bhuta — VP Capital — Analyst

Okay. And last question, sir from my side, so majorly I mean technical ammonium nitrate, we supply to the end users, or we supply to exclusive manufacturers like solar?

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

So like I said, HDAN and AN Melt, which are — out of the total [Indecipherable] are the substantial part of our product basket. They are supplied to intermediaries, emulsion based explosive manufacturers. For LDAN can be directly supplied to the mines.

Vishal Bhuta — VP Capital — Analyst

Got it. Thank you so much.

Operator

Thank you. [Operator Instructions] The next question is from the line of Sharan, an Individual Investor. Please go ahead.

Sharan — Individual Investor — Analyst

Thanks for the opportunity. My first question is, regarding the ammonia. Ammonia, which plant capacity is in progress, whether it’s green ammonia or what is it exactly? Because government is going to make it mandatory that for the fertilizer, green ammonia should be utilized and green ammonia comes from the power — used from the renewable sources?

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

Yeah, so our ammonia is based on natural gas and to that extent, there is CO2 emission now what we are trying to do is that, we are talking to various CO2 users, including the upstream oil and gas industry, and to the extent that CO2 has generated along with ammonia, can be utilized for purposes, where CO2 can be equally consumed, rather than emitted in the environment, released in the environment. To that extent, while it is not green ammonia, it could get receipt of blue ammonia or whatever that term is used. But as of now, our ammonia, as much as the ammonia generates — is produced in the country, is pretty much every day, by all the players, is based on natural gas and therefore is not part of green ammonia.

Sharan — Individual Investor — Analyst

Okay. And in case in the future if required, is Deepak ready to consume renewable energy, and produce the green ammonia in the same plant?

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

See, as of now, it is — green ammonia has two components to it. One is the power that we are consuming. But power — renewable power consumed is then used for hydrolysis of water, and that’s how you generate hydrogen, and then we take nitrogen from the air, and that’s how you combine nitrogen and hydrogen, to make ammonia. So it has the element of not just using the power in renewable form, but it has — that power should be then used through hydrolysis of water to generate hydrogen, while in our case, the whole process, KBR process through which we are producing ammonia or going to produce ammonia, is through natural gas route, and therefore, there is a fundamental difference. It’s not just the power consumed, but it’s the whole process, end-to-end, [Indecipherable].

Sharan — Individual Investor — Analyst

Sure. And the second question is, the ammonia capacity is going to be around 500 plus tons, I think that’s a year — 500 ton per year, right?

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

500,000 [Phonetic].

Sharan — Individual Investor — Analyst

Yeah, yeah, 500 — sorry, 500 tons. So basically, there was a mention that, there is going to be a savings of around $70 to $80, just from the logistics. So can I assume that $70 is like into the Indian rupee, whatever it comes and then plus — into the 500 tons. Roughly, it is going to be INR200 crores to INR300 crore per year straightforward savings from that — that strategy?

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

Yeah, so I have — we have sort of explained this earlier as well, and I’ll just repeat that. So, one is the logistics part of the savings, which your numbers are broadly correct, $70 to $80 and whatever ammonia that we could use, we save that much in the logistics, if you compare it the FOB. There are two others advantage of producing it locally; one is that, the whole process of ammonia generation also, is exothermic, meaning that it produces additional heat. Now that heat is something that we can use, because it’s right across our plants — right across our plants, so we can use that for…

Operator

Sir, we are unable to hear you.

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

I am sorry, there is a bit — so what I was saying is that, therefore there is additional savings that we have of things that we can generate, and to that extent our — heat consumption in our main downstream plant, that can be saving, and that saving could be anywhere between $10 to $15 per ton worth of ammonia, in terms of the steam production. The third one is, where we are — our manufacturing facilities has been granted ultra mega project status by Government of Maharashtra, and there, 75% of our capex in ammonia would be — we will get reimbursement of basically state GST, until we recover about 75% of our capex there, and that’s the additional savings that we make year-on-year.

So there are really three elements of saving that would accrue to us, once it reduces the — across these.

Sharan — Individual Investor — Analyst

That’s great information. So when roughly this will get completed, in the year of 2023?

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

So our mechanical completion is expected by March and I think in the matter of four to six weeks, we can start commencing production.

Sharan — Individual Investor — Analyst

Okay, roughly in the year, when it starts producing the in-house ammonia. That year roughly, what will be the savings for an amount INR500 crore or something?

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

So like — I think have talked about all three elements. So if we can just do a [Speech Overlap]

Sharan — Individual Investor — Analyst

Yeah. Yeah, and one last question, just would like to know the big customers from all the sectors, from agriculture and industrial chemical, if you would like to give some names? Big customers and any recent addition in the customers list?

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

In which sector are you asking this question?

Sharan — Individual Investor — Analyst

Both agri and the industrial chemical and pharma? Just would like to know any big customers you have and any recent addition the customers list?

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

So in in our mining chemical, we have customers like solar industry, Special Blast, Ideal Industries, Indian Oil Corporation, [Indecipherable] these are some of our large customers, as far as the TAN, or mining chemical is concerned. As far as the acid is concerned, we have Arch Industries, Deepak Nitrite, Panoli Intermediates, these are some of the customers. In case of IPA, pretty much the entire gamut of pharma companies, Aurobindo Pharma and Dr. Reddy’s. These are all — Sun Pharma, these are all our customers in IPA.

Sharan — Individual Investor — Analyst

Sure. Thank you very much sir. Thanks for the time and all the best for the future.

Operator

Thank you. And the next question is from the line of Rajan Thakur from Ruchi Oyster Mushroom. Please go ahead.

Rajan Thakur — Ruchi Oyster Mushroom — Analyst

Hi, my question was with regards to the fertilizer business. Within these raw material prices, should be [Technical Issues]. fertilizers as before and how we can manage this?

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

The voice was not clear. Can you repeat the last line? I got your point that, there is a increase in raw material price. But what’s exactly the question?

Rajan Thakur — Ruchi Oyster Mushroom — Analyst

Hi. Yeah. So my question was, we know there is an increase in the raw material prices and subsequently our fertilizer costs will also — fertilizer product costs will also increase. So are we expecting the farmers to — like, will the farmers be able to purchase the same quantity of fertilizers before, and how we are managing this?

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

Eventually, as you know these increase in raw material prices, typically there are government also depending on the raw material prices, amidst the NPK nutrient based subsidy. The government did one increase in May of this year, based on some of the increase that will happen compared to the previous year raw material prices. Whatever other than the government nutrient based subsidy, rest of the prices are essentially depending on the market, depending on the competition and the way industry increases or passes on those prices. We also increased our prices of our products.

Overall, a combination of the team is what government, as well as the industry tries to create the imbalance and to that extent, for a brief period till the prices are passed on to the farmers, there could be some absorption that industry has to do. But eventually, raw material prices are sustainably at a higher level. These prices do get passed on to the farmer.

As you know, the NPK — I mean nitrogen is also used in other fertilizer, and to that extent of prices of other fertilizers, competing fertilizers also tend to go up. So in that sense, the clarity between other fertilizers and competitors’ fertilizer is maintained. My colleague Mahesh is also there. Mahesh, do you want to add anything to this?

Mahesh Girdhar — President, Crop Nutrition Business

So I think we already covered that. I think there two — one is that, there is a — in the May government announced nearly INR14,000 crore additional subsidy to NBS, nutrient based subsidy, again as well as the second infusion done in October, which will impact next quarters. So both the effect– costs covered through subsidy, as well as partial posture in the market, has been able to support. The consumption hasn’t declined. As we talk about H1, consumption has been nearly at the previous-year level. Also, we also deal into non-subsidized fertilizers, about 15% of total portfolio, and in the non-subsidized portfolio of the fertilizers, we have been able to pass through the increased costs. These are efficient fertilizers, used by — used through the DRIP irrigation. They are anyway lower used. So there is low grade per acre, for water soluble fertilizer, it is much, much lower than the bulk fertilizer. So there — and high value cash crops are using those. Here we also know that, he has lot of fruits and vegetable requirement, where farmers have been able to adjust the costs, as well as the cost has increased, for the amount of fertilizers.

Rajan Thakur — Ruchi Oyster Mushroom — Analyst

Thank you.

Operator

Thank you. The next question is from the line of Abhijeet Akela from IIFL Securities. Please go ahead.

Abhijeet Akela — IIFL Securities — Analyst

Good afternoon and thank you so much for taking my questions. I had, one on the Chemicals business first. So in the context, your commentary about the robust demand outlook for mining chemicals, as well as the pharma segment and specialty chemicals. So in that context, would it be fair to assume that, we can more than pass on the increases in ammonia costs in the second half of this year, as the demand seasonally picks up? And if you could just give us some help in understanding, I mean how realizations in those businesses are trending, and how we should expect margins to trend in the next couple of quarters?

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

So Abhijit, one fundamental aspect about the sharp changes that have happened in government [Phonetic] prices, I am sure, you would also be observing that. Is that — a lot of this has been very sharp in a very short time frame, and therefore, the first assumption before anyone can comment on H2, is to even — one has to come to a conclusion, whether the prices though they have gone up already so much, would they remain at this level or will they grow further up? That itself is something that today, it’s very difficult to predict, how far further up these raw material prices can grow. And so that is very fundamental to any prognosis that one cannot estimate, one can relate to the margin.

That said, I think in general, what we are seeing is that, if you look at our product by product, as said has certain contractual provisions where, the raw material prices are pass-through in our long-term contracts. In short term, we are also seeing, because of in general shortage and the China factor, the acid demand has also gone up, and to that extent in the spot market, the price realizations have improved, and that would — hopefully that would mean that, the increase in the ammonia prices would — our ability to pass that on in our acids, partly through contractual structure and partly through good realizations in spot market would be would be better.

So that’s far as acid is concerned. As far as TAN is concerned, there again, we’ve seen that, given the — again the fertilizer grade ammonium nitrate that comes into the country and competes with the local production, has also seen increase, again Black Sea prices have gone up. Now, whether they keep in sync with the sharp increase that we are seeing month-on-month in ammonia, or would they have certain level of lag, would really decide whether the pass-through is proportionate or more than proportionate. Very, very difficult to predict at this stage how quickly each of these, not just the raw materials, but their response in the finished good products prices will reflect. But generally speaking, I think H1, though in H1 itself prices have — raw material prices have gone up, we’ve seen that mining chemical business or TAN has withstood those prices — raw material prices and at the end, finished goods prices still kind of reflected that increase.

IPA is the other I think product where we are seeing obviously compared to last year and even quarter-on quarter there has been pressure on the margins because on one hand propylene prices are going up. There is acetone-based — more of acetone-based IPA is coming into the country. And to that extent, there is a question on IPA margins, and this is what we had anticipated as well in the beginning of the year also. We said that we don’t expect the margins to sustain at last year’s level. The DGTR’s — quantitative restriction that DGTR has recommended, I think that should help to an extent in getting better realization because a lot of the acetone-based IPA that was coming to the country, if the quantitative restrictions come on that IPA and most of the IPA has been propelyne-based IPA, it would improve realization for IPA, and in general, the ability to pass on the propelyne raw material prices will get better.

So that’s really the commentary on all these three products. I hope I answered your question.

Abhijeet Akela — IIFL Securities — Analyst

Yeah, and that’s helpful. Thank you. So I mean, in a nutshell, we are not too concerned on the margin front. We do believe that the demand trends are healthy enough to permit us to pass on any input cost increase in general?

Amitabh Bhargava — Limited President and Chief Financial Officer

Demand trends are certainly very, very encouraging. But the point I just made is that the increases in raw material is month-on-month and sometimes week-on-week have been sharp. And to that extent, it’s very, very difficult to predict for the entire quarter or half. We will see how it shapes up.

Abhijeet Akela — IIFL Securities — Analyst

Sure, understood. And the second one is on the fertilizer business. Given this volume pressure because of rising prices, etc., does that sort of delay your plans of achieving full capacity utilization in that business? I believe you had plans to do that in the next two years or so. So does that push that back or do you think it’s still achievable? And in terms of the margin targets that you had for yourselves, how do you see that shaping up in the context of this industry scenario?

Amitabh Bhargava — Limited President and Chief Financial Officer

I think the answer again is I would say how far this raw material cycle would continue is where a part of the answer would lie. But we don’t expect that that is going to fundamentally change the capacity utilization, because if the prices — these raw material prices are sustainable, either government would intervene in terms of increasing the subsidies or the industry, entire industries would have to look at changing the market cycle. And to that extent, we don’t expect that fundamentally there is any demand destruction that will happen in conflict with prices.

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

Maybe I can take can add to that, if you allow. So that’s the industry view. And please note that our CNB quarter-after-quarter we are explaining that we are moving away — we completely moved away from commodity business. In fertilizer, we are moved into value-added differentiated products, and these differentiated products are more efficient. We have introduced a technology — manufacturing technology, which enhances nutrient uptake, which is called nutrient [Indecipherable] technology. So we are able to differentiate ourselves and add value to the farmers, increasing their yield by the same product.

So we are actually creating higher preference for our brand used by our consumer farmers and as well as we are introducing complete crop-specific, let’s say, a more balanced product in our portfolio, which will be much more efficient for the farmers from value perspective. So those two things, coupled with the industry overall scenario, as you know that subsidized fertilizer also takes care. So both put together would help us grow sustainably.

Abhijeet Akela — IIFL Securities — Analyst

Got it. That’s helpful. Thank you so much. One last thing and I’ll come back for anything more. The capex in the first half has been about INR309 crores. Is there any rough number we have in mind for the second half? How much we expect to spend on all the projects put together?

Amitabh Bhargava — Limited President and Chief Financial Officer

We have given guidance for next, I think it was six, seven quarters. I wouldn’t have the — so if you look at — I mean what we are saying is that between Q3 of FY ’22 to Q1 FY ’24, one is, we would complete the ammonia, which means there is balance about INR2,500 odd crores of capex for ammonia that will take place in these quarters. Also, roughly about anywhere between INR700 crores to INR900 crores of capex on the TAN capacity or TAN new plant would also be there in these seven quarters.

So one quarter number is again as difficult as one or two quarters because our TAN construction has not yet started. We are sort of in the tail end of getting all our approvals in place and the financial closures. So to that extent, we are more certain about ammonia. TAN, we’ll know I think by December or January, we would know what kind of balance capex is expected till March in TAN I mean. [Indecipherable] given guidance more of the next six to seven quarters as opposed to quarter-on-quarter.

Abhijeet Akela — IIFL Securities — Analyst

Understood. Thank you so much, and wish you all the best.

Operator

Thank you. [Operator Instructions] We move to the next question from the line of Bhavya Shah from Girik Capital. Please go ahead.

Bhavya Shah — Girik Capital — Analyst

Good afternoon, and thanks for taking my question. In Q2 press release we have mentioned that we had a lower than planned production of fertilizer due to MOP shortage. So just if you can throw some light on are we facing the same issues in Q3 or — and are we facing shortage in any raw material other than MOP in fertilizer?

Amitabh Bhargava — Limited President and Chief Financial Officer

No. I think by now, the — almost for a non-availability of MOP for a long period that’s the phase we will look. So as such, raw material is or raw material availability is not really hampering anything. The prices of these raw materials and therefore production costs and an overall market pricing is a factor that we need to — that we will be reviewing or rather we would be tracking month-on-month. So that’s still one area that we need to watch out for. But that said, raw material availability is not — no longer an issue.

Bhavya Shah — Girik Capital — Analyst

And my second question was that the quantitative restriction in IPA is already in place or is there any final order left to be publishing it yet or anything like that?

Amitabh Bhargava — Limited President and Chief Financial Officer

The implementation of that as to how that would be implemented is something is a work in process, because it can be — it has to be source specific restriction. In all of those liquidities and implementation is something that is being worked out.

Bhavya Shah — Girik Capital — Analyst

Okay, understood. That’s it. Thank you.

Operator

Thank you. The next question is from the line of Vishal Pratap from VP Capital. Please go ahead.

Vishal Pratap — VP Capital Limited — Analyst

Hi, sir. Sir I have two questions again. If I look at the history of Deepak Fertilizer in last 32 years, except ’91-92 when we had unfortunate incidents of fire and on all where we struggled a few years, we have been prudent capital allocators and we are taking undue risk. But if I look at what we are doing now, like INR4,300 crores capex for ammonia and then we are talking about TAN where we’ll have a lot of capex. So do you not think that INR5,000 crores of debt on our balance sheet will be a risky proposition?

Amitabh Bhargava — Limited President and Chief Financial Officer

I’m not sure where the INR5,000 crore number comes from. But yes, the question I think if I get the essence of the question is that these two large capex is being done together whether that’s the risk or not. See essentially, if we look at ammonia, in fact, I would split the point and I would say that if we don’t have our own ammonia, given the large ammonia requirement because the fundamental nature of our business, the fundamental raw material that is required in our business because we are in nitric acid, NP and NPK fertilizer and TAN, all three of them require ammonia.

The scale is going to a level relying on logistics, particularly from Middle East to JNPT. JNPT whole infrastructure, the transportation of that through road to our plant and all the — not the logistics uncertainty and issues in terms of demurrages and the frequent disruption, but also the whole environmental footprint of this logistic is something which for a long time we’ve been — we have debated internally and we have come to a conclusion that that’s not a sustainable operation for the style of the operation that we have. And therefore, ammonia, while the capex involved is large, no doubt about that, but without having our own ammonia, we would have been running a far more risk in terms of sustainability of our operation for the size of our operation.

As far as ammonia, now if you look at the current — and I think we’ve gone through in last three years, we’ve gone through certain delays in land acquisition. But as we stand today, we are — we have all the statutory approvals. The progress on the ground is only now the physical construction of — just the construction part, because nearly 95% of the equipment is with us, the land is with us, all the approvals are with us. So it’s only civil and mechanical construction that needs to happen on the ground.

So as such, if you look at it, just the implementation is now substantially behind that. That said, yes it would mean that there is a large capex and therefore proportionate debt. But debt also if you see, we are actually even today as we have almost got INR1,800 crores of implementation that we have done, we have gone less than 60% of that by way of debt and we have used our internal accruals or our internal cash to fund the balance. And therefore, while in the base case, yes, we are planning to fund this project with say 60-40 debt equity and TAN with 70-30 debt equity, we may, depending on the cash accruals and the cash position we have, we may improve on this debt equity. Number one.

Number two, if you see the profile of this — a new project or an expansion, one huge risk that is there in any new project is the demand side I think, whether you will be able to place that product in the market or not and what would be your capacity utilization. And that’s — 100% of this is for captive consumption, and I’ve already spoken about the reasons why we believe that without having our own ammonia, we would have run at a much, much higher risk and the sustainability. We don’t believe that there is much risk that left to be addressed in ammonia. We’ve gone through that phase I think in the last two years.

As far as TAN is concerned, again, it’s largely an import substitution. We have the land in place, most of the statutory approvals are going to be with us. And to that extent, again, this is a product where quarter-on-quarter we have done well. There is a huge gap that is emerging in terms of import. And this product again is going to be used as import substitution. In this business, we’ve been market leaders, we know end-to-end, we’ve done this business, we’ve been there for more than three decades. So I think the risk is, it’s not some unrelated diversification, it’s not something that we — for which we have to create market, but it’s a ready market, we have to substitute the import. And so that is the risk why the capex are large, but the risk — if we talk about the risk, we believe that there is technology.

Vishal Pratap — VP Capital Limited — Analyst

Right. Sir, I mean, I think you have been very clear about this in the past calls, so I really appreciate that. My question was more from doing parallel capex in ammonia as well as TAN rather than doing back to back where once we are done with ammonia and then we do TAN, and that is where my question was. If you could share your thought on that that would be great?

Amitabh Bhargava — Limited President and Chief Financial Officer

So ammonia, if you look at it, we are in November. We would complete ammonia in another 15 to 16 months, say March-April of 2023. TAN, we have to start the construction. We have the land and basic — all the statutory approvals. And that let’s say at 28 to 32 months of roughly — if we see even roughly the implementation or completion of this is three quarters apart from each other. So overlap if you see, would be I would say, four, five quarters. And to that extent, they are — it’s not they are completely overlapping with each other or coinciding, there is anywhere gap that is there, while we have another 15, 16 months left for ammonia. Then after we start the construction, it would be another 32 odd months.

So even from a cash flow perspective as we would be investing TAN, our our ammonia — the advantage of having our captive ammonia would start accruing to us from the quarter one of FY ’24. So I think there is that — I mean it’s not a complete overlap, there is a gap between completion of these two. And to that extent, we have fairly good space to manage.

Vishal Pratap — VP Capital Limited — Analyst

Okay. And we have taken some land on JNPT recently, so is that for our storing LNG?

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

JNPT line?

Vishal Pratap — VP Capital Limited — Analyst

Right. There is a press release from JNPT end came up that we have taken land there for storage or something.

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

No, we had — at some point in time, we had bid for some of this for extra storage capacity, but we had not followed through in terms of going ahead with TAN construction, etc. So we had — I’m not aware what — which land are we talking about.

Vishal Pratap — VP Capital Limited — Analyst

Okay, that’s fine. Last question, sir. If I look at [Indecipherable] they backward integrated into phosphorus because I think there is lot of raw material gaps there as well. So I think is it important to have at some point in time in future to have backward integration in phosphorus or that’s not very important for us?

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

No, it does create optionality where today we are entirely dependent on phosphoric acid, iof you have the backward integration, you can — you have the optionality of using rock phosphate, convert that into phosphoric acid and then use it in your NPK. But it does make sense to have the optionality. But today given that ammonia goes into three of our products and not just the fertilizer, ammonia made better sense for us today for the scale of operation. In ammonia, we’ve also got certain advantages, as I was mentioning, both on the energy side and also the alpha, omega, betas that we got from Government of Maharashtra. So from that perspective, ammonia made sense for us, but [Indecipherable] adding backward integration in cost as a whole certainly create an optionality.

Vishal Pratap — VP Capital Limited — Analyst

Right. Thank you, sir.

Operator

Thank you. The next question is from the line of Sameer Joshi an Individual Investor. Please go ahead.

Sameer Joshi — Individual Investor — Analyst

Thanks for giving me opportunity. What is the percentage of fixed price contract as compared to variable price contract across various business? And whether — and what is the tenure of these fixed price contracts? And is there any chance that because of increase in raw material prices or decrease we can pass on the increase in case for fixed price contracts? Thanks.

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

One is fundamentally, these numbers are not fixed, they depend on the commitment that our customers want and commitment at any stage, we are committing to our customers. But typically, in let’s say today we will be roughly about 50% as far as the contract and spot is concerned in the TAN segment. And in this acid segment, this number in the P&L varies from 60% to 70% and balance 20% to 30% or say 30%, 35% can be in the spot segment. But like I said, these are not numbers that one needs to take it on [Indecipherable] could be numbers, which are dynamic.

Sameer Joshi — Individual Investor — Analyst

Okay. Because I was estimating that by which quarter the increase in raw material prices will be taken care in pricing of final products.

Sailesh Chimanlal Mehta — Limited Chairman & Managing Director

So spot also tend to — spot is typically in general are at premium over fixed prices that which we have committed to our long-term customers. So if we do pass on or if fixed price contracts have the ability to pass on raw material prices, the same given that spot is at premium over long-term, it also has the ability to pass on them to fixed prices.

Sameer Joshi — Individual Investor — Analyst

Okay, thanks.

Operator

Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Amitabh Bhargava for his closing comments. Over to you, sir.

Amitabh Bhargava — Limited President and Chief Financial Officer

Thank you so much for your participation and all the incisive questions. For any further queries or clarification, please do get in touch with our Investor relationship team. Thank you so much gain, and have a good day. Thank you.

Operator

[Operator Closing Remarks]