Deepak Fertilizers and Petrochemicals Corporation Limited (DEEPAKFERT) Q3 FY23 Earnings Concall Transcript

Deepak Fertilizers and Petrochemicals Corporation Limited (NSE:DEEPAKFERT) Q3 FY23 Earnings Concall dated Feb. 03, 2023.

Corporate Participants:

Sailesh Chimanlal Mehta — Chairman & Managing Director

Amitabh Bhargava — President and Chief Financial Officer

Tarun Sinha — President, Technical Ammonium Nitrite

Analysts:

Tejas Sonawane — Dolat Capital Market Private Ltd. — Analyst

Ranjit Cirumalla — IIFL Institutional Equities. IIFL (India Infoline Group) — Analyst

Jatin Damania — Kotak Securities — Analyst

Naushad Chaudhary — Aditya Birla Sun Life AMC — Analyst

Darshita Shah — Antique Broking — Analyst

Srikrishna Sonti — JM Financial Ltd. — Analyst

Abhimanyu Kasliwal — Choice International Limited — Analyst

Pratik Tholiya — Systematix — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Deepak Fertilisers and Petrochemicals Corporation Limited Q3 and Nine M FY23 Conference Call hosted by Dolat Capital. As a reminder, all participants will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions]

I now hand the conference over to Mr. Tejas Sonawane from Dolat Capital. Thank you and over to you, sir.

Tejas Sonawane — Dolat Capital Market Private Ltd. — Analyst

Thank you, Seema. Good afternoon, everyone. On behalf of Dolat Capital, I would like to thank the management of the Deepak Fertilisers and Petrochemicals Corporation Limited for giving us the opportunity to host their Q3 FY23 earnings call. From the management team we have with us today Mr. S C Mehta, Chairman and Managing Director; Mr. Amitabh Bhargava, President and Chief Financial Officer; Mr. Tarun Sinha, President, Technical Ammonium Nitrite; Mr. Suparas Jain, Vice President, Corporate Finance.

Without further ado, I would like to hand over the call to the management for their opening remarks. Post which we will open the forum for a Q&A session. Thank you, and over to you, sir.

Sailesh Chimanlal Mehta — Chairman & Managing Director

Thank you. So, thank you, Tejas. A very good afternoon to everyone. I’m pleased to welcome you to the Q3 FY23 Earnings Call of DFPCL. I hope you have had the opportunity to review the financial statements, press release and earnings presentation available on the exchange on our website. So, at the outset, let me share that I’m once again very happy to share that for Q3, again, our top-line grew by 40% over last year. And the bottom-line also grew by 40% over last year. On the Nine-Month front, we have seen a topline growth of around 50%, but the bottom-line growth has been 138%.

Now this has been in the face of headwinds coming from raw material, I would say jumps. In Ammonia we saw 84%; Phosphoric acid, 80%; Gas around 96%; Potash 103%. So, I mean, virtually, every raw material, we saw a massive hike. And this is something that we have been able to pass-through and more. So at the undercurrent level, what we saw, that has been validated and validated quite strongly, that all our three product lines, meaning, the industrial chemicals, mining Chemicals and fertilizers.

Now it is beyond doubt that they are very strongly aligned with the India growth story. And which is why despite the finished product pricing also going up to accommodate for these raw material price hike, we have not seen any demand reduction, and in fact, to the contrary. So that is one aspect that under current level very strongly, this has been established.

The second of course has been are internally our operations, supply-chain, management competency, all of that… [Speech Overlap] Hello, you can hear me, right?

Operator

Yes sir. Please go ahead.

Sailesh Chimanlal Mehta — Chairman & Managing Director

Yes, okay. So all of that also has been very strongly validated and that has helped through in somewhere right through some of these headwinds. The third and the most important thing is that we are finding increasingly very positive traction in our journey from commodity to specialty. And if I might just share that one were to take, let us say, our technical ammonium nitrate business, that this journey from moving from product to holistic services, what we call as TCOD, total cost of operations. And also moving from this selling our product to our customer, the industrial explosives companies through our consumers, which is mine, that is something that more and more we are finding a very strong, I would say, positive validation that is the right strategy.

Similarly, is in the fertilizer business, there’s shift from again commodity NPKs to crop-specific NPKs. And also our very strong focus from just focusing on the channel, that is our customer, to very strong focus on are farmers, the consumers. In the industrial chemicals, the Group also in terms of moving from Commodity IPA to focus on somewhere the Pharma Grade IPA and segmenting the market. Delivering to those segments, what is specifically required for them, including solar grade nitric acid or the like.

So from a strategy perspective, if I look at the common underlying strategic shifts that we are bringing in the all the three businesses are somewhere bearing fruit, which is number one, moving from Commodity to Specialty, which is a combination of product and technical services, which, of course in the long-run will create also a very good brand. The second is this very tough, but very strong drive on moving from customer to consumer. And finally, of course, moving from competition pricing to value pricing. So these are things which are, I would say, transformative shifts, which are bearing fruit in terms of also the financial result. But it is also something which will provide long-term, I would say, strong foundation and trust for us going forward.

As far as the project goes, the ammonia project, as last time also I had mentioned, it continues to be on a real fast track. And we are almost 93.5% progress. And we are now in the thick of the pre-commissioning activities. And we do expect to commission the plant by the first quarter of FY ’24. There I would want to also share that we have succeeded in tying up almost 40% of our gas requirements. And these are basically Brent linked, so that in case tomorrow as crude changes, we also get the positive benefits out of it. And of course, it’s at a very attractive discount over the current spot.

Going forward, we are looking forward to now, there will be the large reliance auction. And it’s going to come in, I would say, two or three slots there is fair degree of a domestic gas that’s going to be merged Reliance and ONGC. And we are in very-very close touch with other global LNG giants. And with good intense discussions happening, so very shortly, we should be able to look at our long-term time on our gas needs. The other at a larger dimensioned that you may be aware of that we taken up the demerger exercise for value creation. And since we saw now all the three businesses from a top-line, bottom-line and capital allocation in terms of assets reaching a size, where — it would be something where on their own steam, each one of them could be something that could be placed in different corporate entities, so that end-to-end, right from Board members to the lowest level, the focus remains on that specific business and that would bring a much stronger alignment of strategy and people to the business requirements.

And so, we have kick-started that where Deepak Fertilizer continues to have the industrial chemicals business, and a 100% subsidiary of Deepak Fertilizer was STL, where we had housed the fertilizer business and the technical ammonium nitrate business. And now, what we are looking at is putting those also into separate corporate entities as we go forward. So, we are in the thick of the NCLT process, and we are looking forward to that unwinding to then have focus businesses into focus corporate entities. And that will bring in a lot of value creation.

So with these thoughts, I now hand you over to Amitabh, our CFO and President, Finance, to take you through the detailed financial overview and the operational performance highlights. And then, of course, he and the team are there to provide any further clarifications that you may need. Thank you. Amitabh?

Amitabh Bhargava — President and Chief Financial Officer

Yes. Thank you, Mr. Mehta. Good afternoon, ladies and gentlemen, and thank you for joining the Deepak Fertilizers and Petrochemicals conference call to discuss the quarter three FY ’23 results. During Q3 FY ’23, we reported a total operating revenue of INR2,755 crores, an increase of 40.9% Y-o-Y compared to same period last year. Our operating EBITDA increased to INR461 crores compared to INR352 crores in Q3 FY ’22. Operating EBITDA margins were at 16.7% during Q3 FY ’23. Our net profit for the quarter recorded a growth of over 39.7% Y-o-Y to INR252 crores with margin of 9.1%.

During the quarter, our chemical business recorded a revenue of INR1,615 crores, an increase of 37% compared to quarter three FY ’22, with segment margins of 28%. Manufactured pharma chemicals recorded sales of INR454 crores, an increase of 19% Y-o-Y. Manufactured mining chemicals business recorded a sale of INR994 crores, an increase of 50.4% Y-o-Y during the quarter. Coal India overburden removal, overall productions, grew by 21% Y-o-Y and by 53% quarter-on-quarter. Its coal production grew by 10% Y-o-Y and 29% quarter-on-quarter. In sales volume, volumes declined by approximately 10% year-on-year in TAN segment, mainly because of the delayed demand as far as the intra-segment is concerned or non-coal segment also, and also there were imports — resumption of imports from Russia.

Project funding for TAN greenfield was secured with a total debt of INR1,541 crores, with a 14-year door-to-door tenure. Quarter three fertilizers segment revenue grew by 47% Y-o-Y to INR1,134 crores with segment margins of 5%. Reservoir levels in key operating geographies are well above the normal level, and we are expecting good rabi sowing. We received the sanction of Industrial Promotion Subsidy claim for FY ’20, FY ’21 and FY ’22 of approximately INR25 crores from Directorate of Industries, Government of Maharashtra. Also, ADB Blue Loan first tranche of $15 million was disbursed in November 2022. In the quarter, our IPA plant operated at 62% capacity utilization, while acids and TAN plants operated at 88% and 117%, respectively. In crop nutrition, NP, NPK plants operated at 63% utilization, and the Bensulf plant operated at 50% utilization.

This sums up this quarter’s operating and financial performance. With this, we would be happy to take your questions. Thank you.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions]. We’ll take our first question from the line of Mr. Ranjit from IIFL Securities.

Ranjit Cirumalla — IIFL Institutional Equities. IIFL (India Infoline Group) — Analyst

Yeah. Hi, sir. Thanks for this opportunity. A couple of questions from my side. First, on the volume front, just wanted to get a bit more granularity on the specific reason from the 10% decline, when we have seen at least on the coal production side, the volumes have increased. But for us, the TAN volumes have seen a 10% decline. We have also alluded as for the reason on the Russian imports coming through. Incrementally, we do see that the newspapers only suggest that these things are only going to increase [Technical Issues].

Operator

I’m sorry to interrupt, Mr. Ranjit. We are unable to hear you, sir. If you are on a speaker phone, I would request you to please switch to the handset.

Ranjit Cirumalla — IIFL Institutional Equities. IIFL (India Infoline Group) — Analyst

Yes. I hope this is better.

Operator

Yes, sir. Please go ahead.

Ranjit Cirumalla — IIFL Institutional Equities. IIFL (India Infoline Group) — Analyst

Yes. Is this better?

Operator

Yes, sir. Please go ahead.

Ranjit Cirumalla — IIFL Institutional Equities. IIFL (India Infoline Group) — Analyst

Yes. So the question was mainly on the TAN volumes front. We have seen a 10% kind of a decline on a Y-o-Y basis. One of the reason that we have given is the rising imports from Russia. And the newspapers suggest that this is only going to get higher during the calendar year 2023, given that there were very few imports in CY ’22. So how are we gearing up to address this? So would the market share would be at risk? Or would the profitability that we have seen is at risk? So that’s my first question.

Second, on the gas front, even though we have said that it is linked to the Brent and at a significant discount. But it would be really helpful if you could some more granularity as to what slope is what been looked at since it is for three years, and how that would change over a period of next three years? And ultimately, the benefits that we have been suggesting, at least, from the ammonia gas plant front, how that would change with the new gas pricing that we have entered into? Thank you.

Amitabh Bhargava — President and Chief Financial Officer

Yes. So to your first question, the TAN volumes were down 10% Y-o-Y not just for the Russian import, as I also mentioned that there was a delayed pickup of infra and non-coal demand. Also, typically, what happens is that the demand also picked up in Q3, driven by Coal India subsidiaries tender process where explosive manufacturers also — we supply them through two separate routes. One is through ENs, and there is a part that we supply to these mines directly. So some of those tenders also got delayed. So it’s more of a — we believe that overall from a full-year standpoint, the target that Coal India has for overburden removal or for coal production, that will remain.

And to that extent, we will see that improvement coming in Q4, and particularly once those tenders are out, which normally happen in Q3, this time it got shifted to Q4. Also, I think while Russian import has happened but fundamentally, the import volume remains within a narrow range, which bridges the gap that is there in terms of our demand — country’s demand of TAN and our local suppliers. Now what happens is in a particular quarter, if there is a bunching, that may have an impact in a particular month or a particular quarter, but that doesn’t change the equation per se as far as the full-year is concerned. So we are quite confident that Q4, which is normally also the peak demand for TAN, we would have certainly, recovery of volumes. And like I said, some of those demand drivers, which will shift from Q3 to Q4, we should be in a position to service that demand in Q4.

To your second question on gas. Essentially, one is, while we have tied-up 40% of the gas there is balance 60% is — we are still sort of working on two, three fronts, including the domestic auction that is, I think there are two or three rounds are expected to come in the next a couple of months. So we believe that overall weighted-average of our gas price is going to be quite competitive. As far as the gas that we’ve already tied-up, while we are not in position to disclose the slope, but I would say that, somewhere given where the brand is and we’ve seen brands hovering within that narrow range. The prices — blended price of gas is somewhere — going to be between $16 to $18. And once we tie-up the entire quantity, which we are expecting that a good part of that would also come from gas price which is lower than this price point.

Our weighted-average landed cost of gas, it’s going to be even more competitive than the price of Brent [Indecipherable] What that does to the economics as you know, sort of Ammonia, while ammonia has declined compared to what we’ve seen in previous quarters, but it’s still holds from at about $800 to $850-odd-dollars FOB Middle-East. We’ve also — there is also a seasonality in a sense that given the kind of mild winter that Europe’s [Indecipherable] the prices of gas, TTF gas prices had come down. And to that extent ammonia production in Europe started. So that had an impact.

Also all along China had been unmet in recent past two, three quarters actually has been a net exporter of ammonia, but as the China comes back-in terms of demand, some of that trade flow would reverse. And from that standpoint, Ammonia is likely to remain firm. And to that extent, Ammonia, gas, delta or margin of anywhere between $300 to $400 seems pretty much intact, as we see going forward. But that said, I think we will watch for, as much as ammonia has marginally come down, globally, gas prices have also come down. So some of our new gas that we tie-up with balanced gas, would also come at even more competitive price.

Ranjit Cirumalla — IIFL Institutional Equities. IIFL (India Infoline Group) — Analyst

Thank you, sir. Just a couple of follow-ups. On the first question, though we are confident on maintaining the volumes, how will we see the profitability panning out amid the rising Russian imports? And on the second one, do you foresee your surplus ammonia in the global dynamics given that there is a significant correction in the natural gas price? Thank you.

Amitabh Bhargava — President and Chief Financial Officer

TAN, like I said, despite the reduction in volume, Y-o-Y, overall profitability of TAN business has been significantly better Y-o-Y. So prices, in fact even between Q2 and Q3, Q3, the prices NSPs of TAN on an average were better than Q2. So the effect of import typically comes on the price first. And like I said that, volumes per se don’t normally cross the range which is the gap between demand and supply domestically. But Q3 NSP suggest that, despite that, we’ve done even better than Q2 in terms of NSP than TAN. And certainly, overall profitability vis a vis Y-o-Y despite 10% reduction in volume have been significantly better.

To your second question on ammonia, I couldn’t quite get what exactly was your question?

Ranjit Cirumalla — IIFL Institutional Equities. IIFL (India Infoline Group) — Analyst

Yes, so the question was that now — since most of the ammonia capacity across the world witnessed a bit of challenge and they were under shutdown because of higher natural gas prices, will be gas prices coming down? We see a bulk of that capacity is getting revived and restart — soon starting production. Would that lead to an excess ammonia supply? And we should in-turn would have put further pressure on ammonia prices.

Amitabh Bhargava — President and Chief Financial Officer

No, actually on the contrary, if you look at the demand-supply from a — and that holds true with many commodities like ammonia, that structurally not much of new supply has come in last few years while the demand had continues to grow globally which today is about 1% to 1.5% per annum. What we saw, of course, the aspect that largely the European ammonia capacities was shut. But like I mentioned, there was also counterbalance that was there which is the China was not consuming ammonia at all. In fact that they were net exporter of ammonia and that had played some sort of counter valid to the capacities which were shutting Europe.

Now, as the new capacity in Europe come up and we’ll have to see there from a sustainability standpoint, where does the TTS — European gas prices [Indecipherable] is posted this winter, as the new, some are — and the next winter procurement starts happening, but there is also a counter that — we are seeing that scenario is going to come back sooner or later. And that rather than China becoming a net exporter, it would then start consuming more ammonia. So we are seeing certainly counter forces. And to that extent ammonia, it can always — commodity, it’s very difficult to predict which way it would hit, but we are not seeing a significant downside of ammonia from here for the reasons I just mentioned. Because structurally not too many new capacities have come up for the merchant ammonia or that would cater to the ammonia trade globally.

There may have been capacities, but there was growth — were integrated capacity is linked with the downstream chemical or fertilizer capacity.

Ranjit Cirumalla — IIFL Institutional Equities. IIFL (India Infoline Group) — Analyst

Sure sir, that answers my question. Thank you.

Operator

Thank you. We take the next question from the line of Jatin Damania from Kotak Securities. Please go ahead, sir.

Jatin Damania — Kotak Securities — Analyst

Thank you, sir for an opportunity. Just a follow-up questions on there earlier participants, regarding the TAN volume. [Indecipherable] it is a 10% decline, because we’re delayed demand. So what are the [Indecipherable] we are getting in month of January. And second, follow-up on the same. If the raw-material prices which are corrected on the sequential basis compared to the last quarter, have you seen any correction in the TAN realization on the month of Jan and Feb?

Amitabh Bhargava — President and Chief Financial Officer

So overall I think while — you talking about Q3 in terms of volume reduction, overall nine-month standpoint, we are — our overall TAN volumes, I think is 50 — what’s the number for… [Speech Overlap] We have sold in total INR3 lakh. [Speech Overlap] INR3,85,000 compared to last year nine months. [Speech Overlap] INR3,66,000. So we are ahead of last year numbers. So from a full-year perspective, we are still quite confident in terms of are doing better volumes. As far as Jan and Feb is concerned, I mean, it’s a little early. Jan, I don’t have the numbers. But our prices, at least, in the first-half of Jan had remained from — I mean, they were not different from what we saw in the last month of Q3. Like I said, overall contribution margins even in Q3, despite the import that had happened from Russia, had remained better than even Q2 of the prices, NSPs have remained better than Q2. We’ll have to see now how the demand that was delayed in picking-up in last quarter, if that demand picks up, we don’t see a reason in terms of contraction in the contribution margin. But more than import, we are going to watch for the demand pick-up from both coal and non-coal segment. And so long as the demand comes back, we don’t see that much of a challenge, both from a volume perspective and a margin perspective.

Jatin Damania — Kotak Securities — Analyst

Sir, regarding the Coal India, you said that one of the major part is coal India. If you look at the coal India numbers for the month of Jan, that looks quite promising in terms of the production numbers. And then [Indecipherable] equity their numbers were also looking good at more then 15% growth. So, looking at that, I mean, the biggest worry will be the loan core and the infrastructure segment. And since you have already — we are already taken-up the debottlenecking activities, if its login doesn’t pick-up, will you see that businesses pressured in the contribution margins either in Q4 or the coming first-quarter of FY24.

Tarun Sinha — President, Technical Ammonium Nitrite

Amitabh, Tarun here. Can I take these questions please?

Amitabh Bhargava — President and Chief Financial Officer

Yes, please. Yes.

Tarun Sinha — President, Technical Ammonium Nitrite

Sure thanks. Thanks for asking these questions. In fact, even in the earlier question on TAN and now the ones being asked. In addition to what Amitabh said — so first of all, Amitabh, am I audible clearly?

Amitabh Bhargava — President and Chief Financial Officer

Yes, you are. Yes.

Tarun Sinha — President, Technical Ammonium Nitrite

Great, thanks. So just to add to what Amitabh has mentioned so far. And this will help. First is on a nine-month basis, that’s April to December, Amitabh gave the numbers just now on TAN volumes. We’re up by 4%, okay, compared to last year. That’s one thing to keep in mind. So we are better than the last year on volumes. Now if you look at how the demand has been in these nine months and what is likely to happen in Q4, which is another question, just some pointers to understand, in the first-six months, that’s first-half of this financial year, so as you know, TAN is a key raw-material for manufacturing commercial explosives. And consumption point of commercial exposures, as many of you have rightly pointed out, are mining and infrastructure sectors of our economy.

So if you look at the first-half explosives demand, which drives the TAN demand in the country, it had seen a very modest growth of around 1% in India compared to the last year, compared to H1 first-half. And this is on the basis of the data available from PESO, which is Petroleum and Explosives Safety Organization, the licensing body, which governs explosives and ammonium nitrate. So explosives production figures first-half this year versus last year. That has grown only by 1%. Now if you look at the third quarter, Q3, although we are still to get that data, but it is quite likely that the growth of explosives demand in Q3 of this year versus Q3 of last year is also going to be quite moderate. And why? So which means first-nine months, overall explosive demand growth, this year versus last year has been moderate. In that modest situation our TAN volumes have grown by 4%, despite all the force everything that’s going on around it.

But why the demand has been moderate in the first-nine months? Coal has been going very well, and all of you have pick that up. But certainly, there has been a sluggish growth in terms of infrastructure, which also drives the demand for cement and and steel, which are also mined, as where explosives and TAN consumptions takes place. So it’s been a mixed bag. Coal has grown, but the non-coal has not grown, and as a result of which the explosive demand and hence the TAN demand in the first-nine months have been impacted.

Now, as Amitabh said in Q4, there is a strong likelihood that while coal will continue to perform strongly in order to meet the energy demands of our country, we will have to wait-and-see how the non-coal and the infrastructure sector performs. So that will drive the again the explosive demand in Q4 as well as the TAN demand in Q4. Having said that, I would like to underscore what Amitabh said earlier, that we are quite confident that on an annual basis as we exit this financial year in March this year, our TAN volumes are likely to be higher than last year, despite very-very moderate growth in the demand in the country, as I explained. So that’s on the volume front, in order to have a full perspective as to what causing all this.

Coming to the margin part. So it’s, while Amitabh again said that the imports from Russia, or any other country for that matter, they do have a bearing on the pricing of TAN in our market and therefore a bearing on the margins of TAN, but in addition to this, Chairman, Mr. Mehta mentioned right upfront during his address that TAN business has been working on what we call as total cost of ownership initiatives, in simple terms, laymen’s perspective, what that means is, we have a team of mining engineers, completely equipped with the latest technology and software, some tools and equipment, which we deploy at the mining sites and infrastructure sites. And we do a base lining of their existing cost of mining. And then, we come out with solutions.

And Chairman also talked about the journey from products to solutions, customers to consumers, which at the end consumers. And in TAN context, the end consumers are the mines and infrastructure projects. So, as I was saying, our team did undertakes these total cost of ownership studies by real first benchmarking, the cost of mineral production in these mines, and then come out with ideas and solutions to improve the productivity, thereby reducing the overall cost of mining. And that then results to another term that our Chairman used earlier on the call, which is value-based pricing. Because all this cost of reduction in mining is a value to the end consumers. And we share a part of the value, as we deliver that value, naturally, we are entitled to, sharing that value as well with the consumers. That adds up to the margin line as well.

So it’s not now going-forward TAN margins are not just margins for the sake of TAN as a product, but there is a solutions margin we are talking on as well. And the combination of these three impacts overall TAN business margins. So hopefully, that explains the kind of efforts and initiatives that we’re undertaking to keep margins not just in Chip but also grow the margins as we go along through the settlements, while we will keep an eye on the product per se.

Jatin Damania — Kotak Securities — Analyst

Okay. Thanks, Tarun for the detailed answer. Amitabh, just a follow-up on the ammonia. In the opening remarks you said that given the current prices, it is expected to remain strong. The margins will remain in another $300 to $400 per ton. Is it safe to assume that because earlier we were guiding in the range of $200 to $250. So is there any benefit that we’re getting by revising our guidance, of course, to $300 to $400 per ton?

Amitabh Bhargava — President and Chief Financial Officer

No, actually, you see at different points in time, we have spoken about these margins in context of what was historically the margins were. If you were to go back to the project initial stage, where we had — when we had conceptualized the project, we looked at what was our last 10 years, 15 years of average cost of ammonia and landed cost of ammonia. And that’s where we were looking at about $400 to $420-odd-dollars FOB would be a kind of prices, which on a landed basis was coming to about $500.

And at that stage, of course, the prices of gas that we were looking at were also — with that, the cost of production would have been somewhere in the range of $300-odd-dollars. That is the gas and the conversion cost. And then we had also spoken about the 9% GST benefits. So that $500 of transfer pricing effectively would lead to $550 and therefore, $550 minus $300 is $250 is what we had looked at when we had started the project, and this is again from a history perspective.

Now also we have, kind of, spoken at different points in time whether ever this question had come. We’ve also tried to give a perspective on here and now depending on what the ammonia prices and gas prices are. What would that delta or margins would translate to. So I guess, when you say that we have earlier talked about $250, that would have been in context of the historical numbers and if the history were to repeat, and that’s the kind of margins, minimum margins that we were — we had kind of estimated. But as the gas price and ammonia prices have changed and every quarter, there is — there is at least some change in the numbers, and particularly gas has been lot more volatile, the numbers that I just gave you is where, today, the ammonia prices are in terms of FOB Middle East and the range that we are seeing. And als`o now that we are very close to procuring our gas and based on, at least the 40% that we have procured, we have some better estimate of where — where based on today’s ammonia prices, what those margins are going to be.

That said, I have also mentioned that these are — both these are commodities which will — which will undergo change as we see in coming quarters. This is, again, a project, which we are looking at it from a 20-year, 30-year perspective. So both ammonia and gas will go through its commodity cycle. So when I said $350 or $300 to $400, we are looking at, based on the current prices of ammonia and gas prices. And we have seen some of that remaining, at least medium term, those are the numbers that are likely to sustain.

It’s anybody’s guess where gas prices are. I mean, the way gas prices and ammonia have sharply corrected and the kind of storage that this winter, Europe would end up with, so all you know the gas prices — spot prices of gas may sharply correct. So, I’m not getting into that prognosis. What I’m telling you is more in terms of where ammonia and gas deltas are looking based on what we can foresee.

Jatin Damania — Kotak Securities — Analyst

Sure, Amitabh. So based on the numbers that you stated, so on the rated capacity, is it fair to assume that in FY ’25, we will be doing somewhere about incremental EBITDA of INR900 crores to INR1,200 crores only from ammonia?

Amitabh Bhargava — President and Chief Financial Officer

Well, again, those are the numbers. They are doable. And I don’t want to give — till we tie up 100% of our gas and we have a sense on what the underlying benchmarks to which our gas is tied up, I wouldn’t try to give one figure or a narrow range. But yeah, these numbers what you have just quoted seem plausible.

Jatin Damania — Kotak Securities — Analyst

Last question if I….

Operator

Sorry to interrupt, Mr. Jatin. May we request you to return to the question queue, sir, as we have several participants waiting for their turn?

Jatin Damania — Kotak Securities — Analyst

Okay. Thank you. I’ll come back in the queue.

Operator

Thank you. [Operator Instructions] We’ll take the next question from the line of Naushad Chaudhary from Aditya Birla Sun Life AMC. Please go ahead, sir.

Naushad Chaudhary — Aditya Birla Sun Life AMC — Analyst

Hi. Thanks for the opportunity. Some clarification, sir. Firstly, just wanted to hear from you, what is the — what was the thought process behind setting up our ammonia project? If I understand this correctly, earlier we were importing ammonia, now we are fighting for gas. So it is not helping us to at least reduce the volatility in the business. In fact, it is creating a slight more problem because gas would typically be more volatile, plus the seller of gas, the supplier would be much more stronger than the ammonia suppliers and you have to sign a contract versus the TAN product, I believe, is a spot business. So it’s bringing more volatility to the business. Can you explain this, sir?

Amitabh Bhargava — President and Chief Financial Officer

See, one is I just mentioned and I just explained in terms of numbers, the rationale — economic rationale, financial rationale of going for an ammonia in-house as opposed to buying it from our Middle East sources. So, we looked at the historical numbers and we have seen different cycles of both gas and ammonia. And to that extent, it’s kind of — from an economic rationale, we could see that it makes sense, the kind of contribution margins that we make in ammonia. That was one.

But more importantly, ammonia, see, when we are importing ammonia from — largely from Middle East sources, we’ve been seeing significant challenges in the overall logistics. As you know, even as much as we’ve seen volatility in commodity, we also saw a lot of uncertainty around the freight aspect of any commodity that you import, getting the ocean freight in terms of availability of ships and also the volatility we saw in the transportation costs. So it’s not as though the import of ammonia was without any uncertainty, particularly on the logistics.

Also JNPT, we have seen, with our experience, particularly as the volumes are growing, not just for us, but even for the other players, JNPT has seen significant congestion. And as a result, we’ve lost a number of days of volume of our products because of those disruptions, the damages [Phonetic] that we have paid because of delayed sourcing etc. Also, the overall storage capacities in JNPT haven’t enhanced. And as we grow our volume, we needed more certainty around our raw materials.

The third aspect which is also a sustainability aspect, environmental aspect, is also that as we move tankers and literally hundreds of thousands of tankers from JNPT to Taloja by road, there will always — as the volumes were growing, there was also a risk of — while we had not — in last 40 years, we’ve not seen any mishap, but you can’t take historical data for granted. As the volumes were growing, we were also [Technical Issues] inhabited area, we wanted to avoid any environmental mishap from a sustainability of plant perspective, a spiked ammonia just across the road is a lot more sustainable from a 30, 40-year operation standpoint, than lugging the tankers from JNPT to Taloja.

So, that was another aspect and risk that we had identified. And overall, if you see, when we had, in fact, conceptualized, we had largely looked at LNG as the base source of gas, but we are seeing domestic sources of gas and significant amount of gas coming up from domestic sources. And to that extent, in fact, if at all the availability of gas and even the risks related to gas has only come down as opposed to what we had seen when we had conceptualized the project. So it’s a combination of sustainability, a combination of raw material, security of raw materials that practically drives 80% of our manufacturing, combined with the economics of this.

And also we need to understand that unlike, maybe a manufacturing facility which is only a fertilizer capacity which requires ammonia, we have a good mix of chemicals and fertilizers. And chemicals’ ability — chemical sectors’ ability to withstand volatility in raw material prices is a lot better than compared to fertilizer. And to that extent, it made sense to feed our chemical and fertilizer business with our in-house ammonia as opposed to continuing to depend on larger and larger volumes on imported ammonia. And I think the point I had mentioned earlier as well in our earlier calls is that we’ve also received a very attractive — Maharashtra Government gave us a very attractive sort of scheme or concession in terms of SGST reimbursement till we recover 75% of our capex. That added to the economics of the financial viability of the project.

Naushad Chaudhary — Aditya Birla Sun Life AMC — Analyst

Yeah. Got it. Make sense. Secondly, on the TAN demand in domestic market. So what is the domestic requirement for this product, and what percentage of the requirement would be for the import? And what is the — if there is a meaningful import, what is the reason? And can there be a restriction because [Technical Issues] seems to be an explosive product?

Amitabh Bhargava — President and Chief Financial Officer

So, I think the overall demand is somewhere between 1.1 million tons to 1.2 million tons. That is TAN’s requirement. Roughly today about 25% of this demand is met through imports. We’ve seen disruption in imports for safety and security reasons. We have seen disruptions because of trade from certain regions, particularly the Black Sea regions not — and we saw the disruptions in Black Sea trade. So, there have been many instances in last two years to three years for different reasons where there have been disruptions in import of TAN. And that is anybody’s guess whether given the geopolitical situation, and also I think the whole trade situation hasn’t normalized. Some of those disruptions may continue.

Naushad Chaudhary — Aditya Birla Sun Life AMC — Analyst

So we import 25% is because of the….

Operator

Sorry to interrupt. Mr. Naushad, may we request you to join the question queue, sir? We have several participants waiting.

Naushad Chaudhary — Aditya Birla Sun Life AMC — Analyst

Just a follow-up on the previous question.

Amitabh Bhargava — President and Chief Financial Officer

The consumers who import 25%, we as manufacturers are not…

Naushad Chaudhary — Aditya Birla Sun Life AMC — Analyst

Yeah. Is it because of the pricing benefit or because we don’t have capacity that’s why we import?

Amitabh Bhargava — President and Chief Financial Officer

No, we don’t have capacity. There is a capacity gap of 25%.

Naushad Chaudhary — Aditya Birla Sun Life AMC — Analyst

All right. I’ll come back in queue. Thank you.

Operator

Thank you, sir. We’ll take the next question from the line of Darshita from Antique Broking. Please go ahead.

Darshita Shah — Antique Broking — Analyst

Hi. Thank you for the opportunity. I wanted to understand what is fueling the prices of ammonium nitrate? As you mentioned in your opening remarks, I think that we have seen an increase even on sequential basis. So what is fueling the — what is fueling the ammonium nitrate prices, A, especially when ammonia prices have fallen significantly in the recent time?

And secondly, what is the kind of differential are we seeing with respect to the domestic and international prices? So if you could probably give some idea on the Russian imports that came in during the quarter? What was the pricing differential over there? Or was it largely the same as the price at which we are selling?

Amitabh Bhargava — President and Chief Financial Officer

Tarun, would you like to take that question?

Tarun Sinha — President, Technical Ammonium Nitrite

Yeah. I will answer the second question first about the pricing differential. So basically, we need to just understand that the ammonium nitrate which is imported in India is of a different quality and that is called as fertilizer-grade ammonium nitrate, whereas what we makes in Smartchem Technologies is called as technical ammonium nitrate, which is why it is called as TAN as an acronym. And the fundamental difference between the two is the purity aspects.

So technical grade is a much more pure form of ammonium nitrate, which means it adds to the efficiency in the downstream operations as that TAN is being used compared to when the fertilizer-grade ammonium nitrate is used. And there is a additional cost that the users have to bear and incur when they process the fertilizer-grade ammonium nitrate, which is imported.

Secondly, because of the reasons Amitabh mentioned earlier, the disruptions off and on that take place on the imported front compared to that as a domestic manufacturer, we provide security of supply. And now with ammonia, our own ammonia plant coming up, which was discussed at length today, it will give us even more security of supply to our customers and consumers. So in view of all of this; first, quality; second, security of supply, and then added to that as I was mentioning earlier on the call that we bring [Technical Issues].

Darshita Shah — Antique Broking — Analyst

Hello?

Operator

Mr. Sinha?

Darshita Shah — Antique Broking — Analyst

Hello? Am I audible?

Amitabh Bhargava — President and Chief Financial Officer

Yes. Just bear with us. Tarun got disconnected. I think he is joining in.

Darshita Shah — Antique Broking — Analyst

Okay.

Tarun Sinha — President, Technical Ammonium Nitrite

I’m sorry. Amitabh, up to what extent was I heard?

Amitabh Bhargava — President and Chief Financial Officer

So you were — you had spoken about these two factors that is the security aspect and the quality, and the third one is value addition.

Tarun Sinha — President, Technical Ammonium Nitrite

Okay. So the third one is also which I mentioned earlier on this call, which is we bringing the total cost of ownership initiative as a value to the consumers. So if we add these three factors together; quality, security of supply, and value addition to the mining operation, that then drives the pricing part of our own TAN compared to the imported TAN. And therefore, as more and more of this is being perceived by the consumers — consumers and customers, our premium which is the delta that was the question between imported and our own, keeps going up. So that’s how we look at it and that’s how our customers are looking at it and willing to pay us the premium.

I was not sure about the first question maybe because of the line problem at my end. Could you repeat the first question for me, please?

Darshita Shah — Antique Broking — Analyst

Yeah. I…

Tarun Sinha — President, Technical Ammonium Nitrite

It was the delta part. Yes.

Darshita Shah — Antique Broking — Analyst

Yeah, that largely answers the delta part. Sir, I just — like just one small clarification. So the kind of — the kind of TAN that — the kind of ammonium nitrate or TAN as you mentioned that we produce, that is not imported in India at all?

Answer

Tarun Sinha — President, Technical Ammonium Nitrite

That’s correct. That’s correct. We make technical grade ammonium nitrate whereas the imported one is fertilizer-grade ammonium nitrate.

Darshita Shah — Antique Broking — Analyst

Right. Right. Okay. Also the second question was on outlook of TAN pricing. So if you could provide some outlook for 4Q and FY ’24?

Tarun Sinha — President, Technical Ammonium Nitrite

For Q4, is that what it is?

Darshita Shah — Antique Broking — Analyst

So Q4 — so one on 4Q and FY ’24 and also what kind of….

Tarun Sinha — President, Technical Ammonium Nitrite

And FY ’24. Yeah.

Darshita Shah — Antique Broking — Analyst

And FY ’24. And secondly, what kind of discount is usually there between our TAN versus the imported TAN?

Tarun Sinha — President, Technical Ammonium Nitrite

Okay. So in terms of the outlook again, we look at the macros first because that drives the explosives demand and then that in turn drives the TAN demand. When it comes to the macro environment, again, the two sectors that our TAN business caters to are mining and infrastructure sectors. In mining, coal is a big chunk. So, we have already talked about it. Coal is poised to grow in order to meet our energy demands. So, that’s a good sign for our business going forward in Q4 of this financial year as well as in FY ’24.

As far as the infrastructure sector is concerned, again, now the new budget has been announced. Government has committed lot of funds to drive the infrastructure projects in our country. So fundamentally, as the infrastructure grows, there are three things which drive the TAN demand very quickly, so that we’re all okay. One is whenever there is an infrastructure project, which involves some sort of a construction work also, it needs the cement. So the more of infrastructure projects, more is cement demand and cement comes from limestone mining. So again, cement demand drives the demand for limestone mining, that in turn requires explosives and that in turn requires TAN. So, that’s one form in which infrastructure drives the TAN demand.

Second form in which infrastructure grows — drives the TAN demand is in the form of steel because, again, lot of construction work requires steel, and steel comes from iron ore mining. Again, iron ore mining requires iron ore to be blasted off using explosives, and that in turn drives the TAN demand. Even otherwise, steel is used in other applications as well, which is in addition to the infrastructure, and more of steel demand in India would mean more of the iron ore mining and then more of explosives and TAN.

And the third aspect of infrastructure is rock aggregates. Wherever construction takes place, there are stone chips, rock aggregates which are used. Where do they come from? They come from what we call as quarrying operations, stone quarrying which are in thousands of numbers on a pan-India basis. So more of construction works for infrastructure demand means more of rock aggregate requirement. And those rock aggregates come from stone quarries and that’s where rock has to be blasted off using explosives, which in turn requires TAN. So, these are the macros of mining and infrastructure. And as I said earlier, on both these fronts, we are anticipating a reasonable growth going forward. If you look at — if you want to look at a certain number as a direction, broadly, we anticipate that over the next years, two-year, three-year, four-year kind of a horizon, the growth should be in the range of 5% to 6% on a CAGR basis. Okay?

Darshita Shah — Antique Broking — Analyst

For the pricing or overall? 5% to 6% on….

Tarun Sinha — President, Technical Ammonium Nitrite

Overall. This is the demand part.

Darshita Shah — Antique Broking — Analyst

Okay. Demand part.

Tarun Sinha — President, Technical Ammonium Nitrite

Pricing, I’ve already explained. It is a function of a lot of things, and that kind of works to basically utilize the pricing of our product.

Darshita Shah — Antique Broking — Analyst

Right. And — yes, just on the….

Operator

Sorry to interrupt, ma’am. May we request you to join the question queue, please?

Darshita Shah — Antique Broking — Analyst

No. It was just the follow — like it was I’m just repeating the question I have already asked. The differential between the domestic and international prices and secondly, why is the ammonium nitrate price still on such elevated levels, despite ammonia falling down significantly? That’s all.

Tarun Sinha — President, Technical Ammonium Nitrite

Okay. So again, differential between international and domestic, I’ve talked about, three factors; quality, security of supply and value-based pricing. That determines the delta between international and domestic.

Darshita Shah — Antique Broking — Analyst

I’m just trying to understand the pricing differential, as and if you could mention how much the delta there is?

Tarun Sinha — President, Technical Ammonium Nitrite

We can’t — unfortunately, we can’t give that number because it’s a commercially-sensitive information. So that’s something which can’t be shared here. But at least I have given you the drivers

Darshita Shah — Antique Broking — Analyst

Right, right. That helps.

Tarun Sinha — President, Technical Ammonium Nitrite

…which is determining the delta and the extent of the delta. And your other question with whatever happens to ammonia and then how is that linked to the TAN pricing. Again, I’ll go back to the same thing, which I mentioned earlier that while there is a complete pass-on of the ammonia cost to our customers and consumers by way of TAN pricing, but that’s not where we stop in terms of TAN pricing. TAN pricing is done on the basis of quality, security of supply and the value-based pricing aspect.

Darshita Shah — Antique Broking — Analyst

So I’ll pause there. Okay. Thank you so much for the opportunity and giving such a detailed answeer. Thank you.

Operator

Thank you. [Operator Instructions]. We’ll take the next question from the line of Srikrishna from JM Financial. Thank you.

Srikrishna Sonti — JM Financial Ltd. — Analyst

Good afternoon, sir. Thank you for giving me the opportunity. So in October last year, government had come up with this policy called One Nation One Fertilizer policy. So, I just wanted to understand what is the impact on that in this quarter?

Amitabh Bhargava — President and Chief Financial Officer

Yes. In this quarter, you mean Q3, what is the impact?

Srikrishna Sonti — JM Financial Ltd. — Analyst

Yeah, yeah, yeah. Q3, yeah.

Amitabh Bhargava — President and Chief Financial Officer

Actually, my colleague is not with me who is heading the fertilizer business. So, I’m not very sure from which date that policy has kicked in. But just to give you a sense that while, initially, I think there was a lack of clarity on what exactly it would entail in terms of the bag design, et cetera. But what we know and what we are — what we’ve implemented is that besides — apart one side of the bag where there is a prescribed space where it has to reflect government’s Urvarak yojana kind of details.

There is roughly, if I’m not wrong, about a third or a little more than a third of the space is where the product specifications, the name of the company and our logo and brand is also printed on that. So to that extent, in fact, while there is — all bags carry one uniform kind of, I would say, the write up, which government has prescribed. There is also a space where the companies are free to kind of display their brand logo and the product details.

So to that extent, it hasn’t really — I mean, we haven’t seen any significant impact, if at all. I think we’ve given that — for us, a lot of the work that we’ve done at the trial level is to really generate the awareness about our products and the sort of additional benefit that our product or our Croptek and Smartek product has — in terms of yield, in terms of shape, size, color that it has shown in various trials.

To that extent, we have focused mostly working on the farm trials, also working with saathi [Phonetic] farmers, group of farmers. And that our marketing and sales strategy hasn’t changed. What has changed is just the display part of the bag and there also, as I said, we have — government has allowed us to display our brand and logo.

Srikrishna Sonti — JM Financial Ltd. — Analyst

Okay, okay. Understood. So basically, it did not impact your margins much. Basically, that’s what you’re trying to say?

Abhimanyu Kasliwal — Choice International Limited — Analyst

Yes.

Srikrishna Sonti — JM Financial Ltd. — Analyst

Thank you. Thank you so much.

Operator

Thank you, sir. We take the next question from the line of Mr. Pratik from Systematix. Please go ahead, sir.

Pratik Tholiya — Systematix — Analyst

Hi, sir. Am I audible?

Amitabh Bhargava — President and Chief Financial Officer

Yes.

Operator

Yes, sir. Please go ahead.

Pratik Tholiya — Systematix — Analyst

Yeah. So, sir, on the TAN business, you had stated that we have to see the margin as a function of your product as well as solution. So if the solution part will have a higher margin as compared to the product, is my understanding correct?

Tarun Sinha — President, Technical Ammonium Nitrite

So, I can take that question, Amitabh, if you want?

Amitabh Bhargava — President and Chief Financial Officer

Yeah, please.

Tarun Sinha — President, Technical Ammonium Nitrite

Okay. So, as our Chairman again mentioned right in the beginning of the call, that as a group, we have embarked upon this transformation journey of products to solutions. And this has been a journey which has — in TAN business, which has been started about a year or 18 months back. So, we are in the early stages of that. We are basically helping our consumers to understand that this is another way — one of the ways we can help them reduce their cost of mining or mineral production. So in the initial stages, in the seeding stages of any new initiative technology, the margins are low. But certainly, as we go along, the solutions margins are likely to become much higher and not just on a percentage basis, but also in the overall margin pie of the TAN business.

Pratik Tholiya — Systematix — Analyst

Okay. Sir, just a follow-up on this. Do you have the bifurcation between how much solutions you have provided without the bifurcation product?

Amitabh Bhargava — President and Chief Financial Officer

No, in terms — not reporting our numbers, we are not reporting any separate number.

Pratik Tholiya — Systematix — Analyst

Okay, okay. That’s it from me. Thank you, sir.

Operator

Thank you, sir. We take the next question from the line of Mr. Abhimanyu Kasliwal from Choice Equity. Please go ahead, sir.

Abhimanyu Kasliwal — Choice International Limited — Analyst

Thank you so much for taking my question, sir. Am I audible?

Amitabh Bhargava — President and Chief Financial Officer

Yes, please.

Abhimanyu Kasliwal — Choice International Limited — Analyst

Wonderful. Sir, my question regarding the incremental EBITDA has been more or less satisfied. I do understand that next year or next to next year, we can expect a good amount of maybe INR crore to INR1 crores EBITDA. But my question, sir, is regarding Deepak Mining and Smartchem, the internal divisions that we’ve had. Could this be like a preceding step to perhaps a demerger going forward, which can lead to substantial value unlocking? What do you — what can you tell us, sir?

Amitabh Bhargava — President and Chief Financial Officer

So, I think our Chairman also spoke about it. The fundamental rationale for the demerger that we have proposed, of course, it is going to go through the NCLT process, is to, right, from the Board down to the employee who is facing the customer. Now that these — both these businesses have attained critical mass, we would want the Board, as well as the entire org structure, the incentive structure, everything has to be aligned such that this entire workforce can focus on management, can focus on that particular business. And that’s the whole rationale that once CNB and TAN becomes separate and it has an independent Board.

And today, they are all part of one single company. So therefore, even the various incentive structure for employees is, in a way, gets commingled. But once you have 2 separate businesses with their own org structure and their own business levers, the entire Board, right from Board to the employees, the sales force can focus on the deliverables required for that particular business. And I think that’s really the fundamental rationale. And that, obviously, logically speaking should lead to better outcome.

As far as value unlocking is concerned, what it also allows us to do is to raise capital for growth in these entities independently because some of the strategic or financial investors who may be interested in one business may not necessarily be interested in the other. And to that extent, separation of these two allow us to get both strategic and financial partners on board, which could accelerate the growth. So sum and substance of it is, yes, it certainly will unlock value, a better quality, a better focus, better — increased sources of capital for growth. Beyond that, I think what would we do with each of these entities in terms of they remaining unlisted or going listed, it’s too early for us to comment on that.

Abhimanyu Kasliwal — Choice International Limited — Analyst

Fair enough. Fair enough. But this definitely could be on the cards. I mean, when we’ve demerged the two entities, we’ll probably list the two entities while give a 1:1 for the existing shareholders. And that is a possibility I’m presuming in the next year or two maybe? Or you would like — not like to….

Amitabh Bhargava — President and Chief Financial Officer

I wouldn’t comment anything on that.

Abhimanyu Kasliwal — Choice International Limited — Analyst

Okay. Okay. Well, I had to try, sir. Thank you so much. Thank you so much.

Operator

Thank you, sir. Ladies and gentlemen, that was the last question for the day. I would now like to hand the conference over to Mr. Amitabh Bhargava for closing comments. Thank you. And over to you, sir.

Amitabh Bhargava — President and Chief Financial Officer

Well, thank you, everyone, for those incisive questions and for your participation. For any further queries or clarifications, please do get in touch with our Investor Relationship team. And thank you so much. Have a good day.

Operator

Thank you very much. Ladies and gentlemen, on behalf of Dolat Capital, that concludes this conference. [Operator Closing Remarks].