Deepak Nitrite Limited (DEEPAKNTR) Q3 FY23 Earnings Concall Transcript

Deepak Nitrite Limited (NSE:DEEPAKNTR) Q3 FY23 Earnings Concall dated Feb. 09, 2023.

Corporate Participants:

Ranjit Cirumalla — Vice President

Maulik Mehta — Executive Director & CEO

Sanjay Upadhyay — Director Finance and Group CFO

Analysts:

Nirav Jimudia — Anvil Research — Analyst

Vivek Rajamani — Morgan Stanley — Analyst

Naushad Chaudhary — Aditya Birla — Analyst

Chintan Modi — Haitong Securities — Analyst

Meet Vora — Axis Capital — Analyst

Manish Jain — MoneyLife Advisory Services — Analyst

Rohit Nagraj — Centrum Broking — Analyst

Tarun — Individual Investor — Analyst

Presentation:

Operator

Ladies and gentlemen good day and welcome Q3 FY ’23 earnings conference call of Deepak Nitride Limited hosted by IIFL Securities Limited. As a reminder, all participant lines will be in the listen only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ranjit Cirumalla from IIFL Securities Limited. Thank you. And over to you, sir.

Ranjit Cirumalla — Vice President

Thank you, Ruthija. Good afternoon everyone and thank you for joining us on Deepak Nitrite’s Q3 FY ’23 Earnings conference call. Today we have with us Mr. Maulik Mehta, Executive Director and CEO; Mr. Sanjay Upadhyay, Director, Finance and Group CFO and Mr. Somsekhar Nanda, CFO. We will begin the call with opening remarks from the management team followed by an interactive Q&A session.

To begin with, Mr. Maulik Mehta will share his views on the operating performance and the growth plans of the company followed by Mr. Sanjay Upadhyay who shall take us through the financial and segmental performance. I now we invite Mr. Mehta to share his opening comments. Thank you and over to you.

Maulik Mehta — Executive Director & CEO

Good morning everybody and a warm welcome to you on Deepak Nitrite’s Q3 and 9M FY ’23 earnings conference call. I trust you had an opportunity to go through our results documents that were shared earlier. I’ll begin by taking you through the key financial highlights and operational highlights for the period ended December 31, 2022 and some key developments and strategic approaches for the coming year. Mr. Upadhyay will then present to you with a financial overview about the period under review.

The operating environment continues to be highly dynamic. The recalibration of global supply chains over the last year due to various points like the sanctions on Russia, China closing and then reopening continue to play out further as we have the Chinese economy reopening after very, very strict COVID protocols. It will continue to remain dynamic, at least for the next couple of month as the situation gets normalized. Of course, these developments have certainly affected the supply and demand of skilled labor [Phonetic].

With this backdrop, we’re pleased to share that DNL has demonstrated remarkable agility in capitalizing on pockets of opportunity during the third quarter. Our global competitiveness and strong customer relationships ensure that we are called upon by customers for the requirements, while a focus on operational efficiency ensures that plants can be consistently operated at high utilization levels. This quarter we have set new benchmarks in production and sales volumes for several key products such as DASDA, OBA, and phenol. Consolidated revenue for Q3 was INR2,004 crores higher by 15% on a year-on-year basis. Now, despite the recent cooling off in price on certain inputs, and by recent I mean the last couple of weeks, they do remain elevated as compared to the same time last year. We had indicated that higher costs would be passed on to customers with some lag and the ongoing pass-throughs.

Q3 EBITDA of INR328 crore was higher on a sequential basis from the previous quarter of INR283 crores by 16%. Consequently, the EBITDA margin too has risen over the previous quarter, though it remains below the elevated level of last year. Certain product margins were high last year, but have normalized this year, causing margin compression compared to the base period. We are taking further measures to pass on increased input costs while also driving cost optimizations in order to protect profitability. But I would also want to mention one important point, and this is the base effect. From a standalone basis, every single kilo that the company manufactures has been able to maintain or grow its gross EBITDA per kilo. Naturally, with a higher raw material price and a higher finished good price, the percentage looks squeezed.

Anyways, going on to the performance of the strategic business units, the advanced intermediate business delivered strong revenue despite inflationary pressures, in the backdrop of strong demand. We have aggressively pursued opportunities both domestically and with international customers. There was a sharp rise in exports by nearly INR100 crores in the same quarter when compared to the previous quarter. The segment is expected to continue to perform well due to the shift of global supply chains and positive demand trends. Further performance will be driven by new multiyear contracts, strong demand, and the ability to pass on cost increases to customers.

As prices of products and raw materials stay at elevated levels per kilo margins, as I mentioned earlier, a better, even though the percentage looks deceptive. I would remind you that out of nine months our mandatory unit is operated for eight months — a little bit less than eight months as one month was lost owing to a fire incident that took place.

The phenolics business has demonstrated encouraging results. With an average capacity utilization in excess of 117%. I would like to say here that while demand in India remained stable weakness in global demand was observed. Many Asian phenol plants were operating at 60% to 65% capacity, and nonetheless, we were able to manufacture and sell more than 117% of our production capacity. We saw an EBITDA margin improvement compared to the previous quarter, owing partially to the moderation of raw material prices and partially due to the Indian demand remaining a bright spot in Asia. Deepak

Nitrite’s standalone basis achieved for 13 consecutive quarters an ROCE of more than 30%, including the current quarter. The result should be seen in light of unusually high base of higher margin and phenolics and recent supply side challenges for critical raw materials like nitric acid.

And while the world has witnessed volatility, Deepak’s customers have not. The Company has maintained or grown wallet share in nearly all its and its relationships with key accounts remain buoyant. As domestic consumption in some segments has been subject to slight demand, in the recent few quarters, the Company has prioritized export markets and ensured both production and inventory remain very much in control. We are also progressing well with our expansion plans with multiple projects in progress.

The installation of capacity for our SAC plant is set to be commissioned this quarter. Our projects for MIBK and MIBC, which are derivatives of acetone, are progressing well and should be onstream as planned. Just to highlight that between these products and IPA the company will consume 80% of the acetone that it manufactures. We are constructing a facility for complex chlorination and photoclorination that will go on stream starting early H2. Our project to internally manufacture key raw materials is progressing well and towards commissioning as planned. In addition, our board has approved a capital investment of approximately 1000 crores which will help the company’s growth plans. Out of this, we have approved a project for manufacturing polycarbonate compounding at a world scale which will add impetus to our move toward the polycarbonate business. And this will help us in understanding the key marketplace, the niche players, the large players and we will be manufacturing compounding products which will be used by growing demand in India in applications like 5G boxes, EV batteries, medical devices, and much more.

With the Nandesari plant back into full operations and other plants running at high utilization, we are operating [Technical Issues] our captive power supply enables us to do so consistently and steps have been taken to create a short supply of critical raw materials while we further derisk the business. With multiple plants set for commissioning in the ensuing quarters, we’re very well-placed to continue to deliver on our growth aspirations.

One point that I forgot to mention also is that we continue to progress as per plan with regards to our plant in Oman that will manufacture sodium nitride as Phase one. Thank you. And I would now like to hand the call over to our Director of Finance and Group CFO, Mr. Sanjay Upadhyay, to address this forum and take you through the financial performance. Thank you.

Operator

Sorry to interrupt, but we are unable to hear you, sir.

Sanjay Upadhyay — Director Finance and Group CFO

Is this any better?

Operator

Yes, please go ahead.

Sanjay Upadhyay — Director Finance and Group CFO

Deepak Nitrite’s reported an encouraging performance during the period under review. Despite the ongoing micro-challenges, solid improvement demonstrated in both our business segments aiding DNL’s continued strong revenue growth. I may like to mention here that around this time, the macroeconomic situations for chemical energy as regards prices or raw material were not very supportive. However, in spite of such steep challenge, we could bring in a resilient performance owing to diversity in our product market, reaching out to the customers not only at the time of their need, but always hence increasing the wallet share. Constant negotiation of price of major raw materials, making raw materials available at all times repeatedly excel in our operations. All of these steps helped us deliver better and sustainable performance.

While I take you through the numbers in a key development during the period the company was awarded an Excellence in Financial Reporting for its annual report 2021 and ’22 by the Institute of Chartered Accountants of India. We are pride in announcing that this will be a milestone achievement for us. On the operating front, the domestic business loan stood at INR1574 crores in Q3 higher by 11% and on a cumulative basis this was down to INR898 crore higher by 30%. Export stood anywhere [Phonetic] at 417 crores in Q3 and [Indecipherable] INR1,113 crores in nine months FY ’23. On a consolidated level, domestic to export mixed at 79% is to 21% for Q3 for FY ’23 while standalone DNS export revenue was 45% of the total turnover. In nine months FY ’23.

On a consolidated basis revenue were up by 22% at INR6,046 crores compared to INR4,969 crores in nine months FY ’22. Robust — growth was achieved through increased volume across and especially in phenolic segments. Utilization level remained high with ongoing improvements throughout the year to date period. EBITDA stood at INR976 crores in nine months FY ’23, compared to INR1,232 crores in nine months FY ’22. PAT stood at INR618 crore versus INR799 crores in FY ’23. In Q3 FY ’23, on a consolidated basis, revenues grew by 15% at INR2,004 crores as compared to INR1,748 crores in Q3 FY ’22. The internal [Phonetic] top-line performance was fueled by higher production volumes in several key products. EBITDA came in at INR328 crores compared to INR378 crores in Q3 FY ’22. And PAT stood at INR209 crores. Profitability is lower on Y-o-Y basis due to high base in the previous year. But the company has improved profitability quarter on quarter in line with its operational performance.

Now moving towards segmental performance in our advanced systemic segment revenues increased by 19% to INR829 crores in Q3 FY ’23 versus INR699 crore in Q3 FY ’22. The growth is going to sustain healthy demand from key customers while rise in EBITDA was 2% to INR172 cores during the quarter under review. As Maulik mentioned, growth in EBITDA has not capped due to significant increase in input costs compared to the previous year. Although input value has moderated recently in the company and the company is working to transfer the elevated cost to its customers, by and large we are successful in achieving this. If you see on per ton basis, we have achieved higher contribution but in terms of percentage because the total revenue is also going up you are seeing a marginal impact on the percentage.

In nine months, FY ’23 revenue grew at 27% to INR2,263 crores and EBITDA came in at INR470 crores translating into margin of 21% despite the current environment and challenging circumstances. Deepak showed an [Phonetic] encouraging performance with revenue growth of 13% to INR1,187 crores in Q3 versus INR1,050 growth in FY ’22. The company has operated all plants at high inflation rates. The phenol plant has clocked in average utilization of 117% for the quarter and achieved highest ever quarterly domestic sales and highest production per day of phenol. In spite of that, this achieving 117% doesn’t mean that we are in a — we are debotteling the phenol capacity further and you can further expect some further growth in the volumes. EBITDA stood at INR157 crores and EBITDA margin came in at 13% in the quarter.

In nine months, FY ’23 stood at INR3,812 crores and EBITDA came in at INR508 crores, translating into margin of 13%. During the quarter, DNL witnessed extreme volatility in exchange which peaked at 83.03 and bottomed 80.81 recording a volatility of 2.75%. For nine months FY ’23 the exchange rate moved between 75.33 to 83.03 recording a sharp volatility of 10.22%. The company implemented dynamic hedging strategies to mitigate its own extra risk resulting in a gain of INR3 crores in Q3 FY ’23 and INR4.162 in nine months FY ’23. The company continues to remain debt free with a net worth of INR3,860 crores, thereby extending the balance sheet for future expansions. I would now request the moderator to open the forum for question and answer session, please.

Questions and Answers:

Operator

Thank you very much. We will now begin the question and answer session. [Operator Instructions] Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Nirav Jimudia from Anvil Research. Please go ahead.

Nirav Jimudia — Anvil Research — Analyst

Yeah. Good afternoon, team. So I have two questions to answer. First of all, great details on the expansion program. So I think we have got almost all the details of the INR1,500 cross capex which is currently undergoing. So, just wanted to ask here, like you have mentioned one of the point in terms of the backward integration in fluorination space in the [Indecipherable] plant. So if you can help us explain the rationale over here, like in terms of, let’s say first on the fluorination side. So are we producing some of the products where entering into fluorination would be a first step to assist our current product profile as well as the newer opportunity size which we will be addressing with this falling into the complex fluorination complex which you just mentioned in your opening remarks?

So this is on the fluorination side and on the acid plant. If you can just give some bit of understanding like what could be the size of the plant or let’s say out of around INR460 or INR470 crores of raw material cost, which we have reported in the standalone business for Q3, how much would be the contribution or the raw material composition of acid out of this INR470 crores. So this is question number one, sir.

Maulik Mehta — Executive Director & CEO

Okay, I’ll answer the first question first. So you rightly pointed out our strategy when it comes to photo chlorination and fluorination. About a few years ago this was imported 100% bias, not just the fluorinated molecule, but the downstream as well and then we use that as a feedstock for a few of our Agrochemicals. Then we started facing pricing pressure from China and hence about a year — a year ago, we stopped using some of our existing assets and repurposed them to make the upstream ourselves partially. And those steps required nitration. They required reduction, distillation, purification, those things. So those were processes which Deepak is intimately familiar with. So we shifted from manual manufacturing ABC other products and started using them here in order to derisk our supply chain. We started with 50%, today we’re manufacturing 100% of our internal requirement. But we were still at risk for the basic feedstock, which again, came from China.

With this what we aim to do is have a 100% derisk model all the way from the petrochemical source to the final advanced intermediate. More than that, we recognize that these are competencies which we are adding to our portfolio. So it was important that we start with products where we ourselves would be the anchor customers and it would essentially not require a market discovery process. While we would sell a good amount of volume to strategic customers, we would also be our own customer. Nonetheless, this was never the end intention, this was the beginning. So all of the assets that we are putting up are up engineered in that sense to be able to do a lot more to be very — very flexible and fungible and with that we intend to get into more advanced processes which require the same chemistries.

But as I mentioned, the first step was to do something where we have a very very high chance of success. And as we are succeeding and as we’ve established the key infrastructure which is required, we are working with strategic [Technical Issues] in order to develop products that we want, which would utilize some of these strains into supplying their requirements, which would be very different from the product that we are going to be making, which we will self consume. This gives you a good understanding of how we are looking at investments first, by either having an existing strong competency or building a competency by targeting a strong customer, in this case us, ourselves and then building up that competency horizontally by ensuring that the process knowledge that we are able to gain allows us to make more complex molecules with niche applications.

So that answers your question about fluorination and photoclorination. Both of these are built in multiple trains so that there is a level of flexibility. We have purification towers along all of these so that it allows us a greater sense of flexibility in making one set of products and another set in parallel if we so choose or we can make a higher volume of a smaller number of molecules. This choice will remain ours and the plants are engineered to be modular in that fashion, even moving forward.

Similarly, as you asked about the backward integration, what I can just share rather than going into very specific numbers is that the capacities will address not only all of our requirements to date, but all of our requirements over the next few years because once we have our own internal supply, we will naturally work towards expanding its consumption, but there will be ample supply for us even with the expanded capacities.

Nirav Jimudia — Anvil Research — Analyst

So, sir if I understood your answer correctly, in the fluorination space, some of the products that we are already producing 100% of that product, backward integration we are doing but we are going one step ahead and building up the capacities to assist the 100% backward integrated product also and safe to understand that that product or the capabilities what we are building and suffice newer number of addressable products which then we may approach to the markets for agrochemicals or maybe pharma and a new stream of revenue could be opened up for us.

Maulik Mehta — Executive Director & CEO

Absolutely. We are already in active conversations with specific strategic customers to develop products for their niche applications. They happen to be in the life science of the agro and pharma space. We’re working with them. We cannot talk specifically about the products but rest assured that these will be with a long-term focus in mind.

Nirav Jimudia — Anvil Research — Analyst

And this asset plant would also have a WNA plant for our CNA requirement, right?

Maulik Mehta — Executive Director & CEO

Again not going into specifics, let me just tell you that we will be no longer subject to the vagaries [Phonetic] of the market.

Nirav Jimudia — Anvil Research — Analyst

Got it sir. Understood.

Maulik Mehta — Executive Director & CEO

So the point is to derisk and we’ve been working on this for a while and it is something that we expect to see very soon and it will allow us to be on very firm footing.

Nirav Jimudia — Anvil Research — Analyst

Got it, sir. The second question is on putting up a sodium nitrate plant in Oman. So I think we are a substantial player here in India for sodium nitride. And our last quarter press release suggests that we will be infusing something around $15 million, as the initial amount for that GVR will be holding 51% stake. So if you can just help us through the rationale of putting up a plant over there, why we have been putting up a plant in Oman? What could be the size of investments which could be happening? And let’s say if our current capacity is, let’s say X, how much would be the addition happening to overall Deepak Nitrite’s portfolio so far as sodium nitrate is concerned from Oman?

Maulik Mehta — Executive Director & CEO

So basically, this is something that we have been working on for a while, but we were doing it in a soft manner as we saw the situation all over the world with regards to the energy crisis develop and become in the beginning it was more of a short term threat, but then it turned out to become more of a systemic challenge. We activated and we started fast-tracking a lot of the initiatives that we had been working on anyways in Oman. And hence we — the reason that we targeted it is clear. Oman is a country where the energy that is available is used both as a feedstock, as a raw material in the form of ammonia, as well as an energy source. And it also has trade agreements with various countries of interest worldwide.

The one thing that happened over the last two quarters or three quarters is while the Indian domestic demand was temporarily subdued because of XYZ reasons, we targeted more and more of the export demand, which was earlier maybe supported by European manufacturing, because we saw the systemic shift. Today, I think we have more than doubled our export volumes compared to the same time last year. And this will continue. But we are running our plants on full right now. So we cannot wait for this facility in Oman to come up. So we really needed to come up very quickly so that as we see, the Indian market also recover covering, we don’t need to let go of the export market which we have been able to capture. So that market will be serviced by our facility in Oman, whereas the resurgent Indian demand will continue to be met by our plants in India.

Now with regards to size, today Deepak is already a world-scale manufacturer of sodium nitrite. And what I can say is that the Oman facility to start off with will be of reasonable size compared to the Indian plant. It will not be exactly as large, but it will have the capacity to ramp up production rather quickly depending on the demand. But we take a balanced approach. So we can say that the plant in Oman will be world scale. But to start off with in phase one it will be somewhat smaller than the plant in India. It will also have ample room to grow in terms of the infrastructure along with as the opportunity to set up other products in phase two and phase three which may have something to do with sodium nitrate, may not necessarily but may follow similar philosophy where we are able to use the Omani advantage to our benefit. Sir, is there any [Indecipherable] you have set internally for this project to start in the phase 1. We’re targeting to see how we can do it in two years or so.

Nirav Jimudia — Anvil Research — Analyst

Got it, sir.

Maulik Mehta — Executive Director & CEO

And the earlier the better for us.

Nirav Jimudia — Anvil Research — Analyst

Yeah. Thank you, sir, for answering the questions in detail, and all the best to the entire team.

Maulik Mehta — Executive Director & CEO

Thank you so much.

Operator

Thank you. The next question is from the line of Vivek Rajamani from Morgan Stanley. Please go ahead.

Vivek Rajamani — Morgan Stanley — Analyst

Hi, sir. Thank you so much for the opportunity. The first question was on the advanced intermediate performance, and it’s a bit of a two part question here. Obviously, towards the end of last quarter, you said that your Nandesari facility was now operating fully. And I think even during the comments, you mentioned that you’ve had high utilization rates. So the question was, if I say this quarter, it’s obviously still quite a bit lower than the peak that you saw in the fourth quarter of 2022. Would it be fair to say that this is purely based on the margin and price compression that you’ve seen since then? And if you could just elaborate on which products are causing this, that would be great.

And the second part of the question was, you obviously mentioned very high utilization rates across the board. Would it be possible to give a bit more specifics for some of your bigger plants? That would be really helpful. That’s the first question.

Maulik Mehta — Executive Director & CEO

I did not understand the first part of your first question. Are you comparing quarter three performance to our quarter four performance? Are you talking about this particular quarter about, meaning January to March 2023? Because we barely know, but I’m surprised if you know that.

Vivek Rajamani — Morgan Stanley — Analyst

No, sir, I was just referring to the December quarter performance and comparing it to the March quarter of 2022 which was obviously the peak for that segment.

Maulik Mehta — Executive Director & CEO

Right. So let me also point out that to a certain extent, to a certain extent last year we had some of our raw materials on formula link, whereas that is not the case…

Sanjay Upadhyay — Director Finance and Group CFO

He is talking about the topline. Are you talking about the topline?

Vivek Rajamani — Morgan Stanley — Analyst

No, sir. I’m talking about your EBITDA.

Maulik Mehta — Executive Director & CEO

Maybe EBITDA, right. So that is one of the factors. The other factor of course is that last year before the Ukraine war broke out, the price of several commodities like oil and therefore petrochemicals, BTX was definitely lower. Along with that there was generally speaking an optimistic atmosphere where the domestic market dies in intermediate segment. All of these segments were quite buoyant in terms of their expectations and outlook through the year. And also one thing that is always there is while Q4 is in that sense a relatively normal year — normal quarter in any year, the first two months of any — the January and the February are normally affected by uncertainties owing to China’s New Year’s and all of those things. Beyond that what ends up happening is that a lot of customers of ours are looking at the year afresh. So they are done with their previous quarter, which would be on a calendar basis, the non Indian customers, they have finished, and now they are looking at new volumes, new contracts, new this and new that. And in most cases it has allowed us also to have slightly higher prices and slightly improved margins as per a renegotiated contract.

So these things happen. And I would not read too much into this, to be honest. What I can say is that quarter four has just begun. It begins with some rays of optimism, but it’s too early to call the quarter as a normalized quarter. Nonetheless, it does point to generate, generally speaking, greater consumer confidence in various countries across the world. So we will see how it goes. But I remain cautiously optimistic.

And with regards to our plant utilization, plant utilization is good across the board. In most of our plants, all of our large volume are high-value plants, we’re doing well. I can give you one example, in the month of December when we commissioned in November and December when we commissioned a facility that goes into manufacturing of an agrochemical intermediate. Now, this was an expansion project. Now, once we commissioned it, we were able to ramp it up to 100% utilization within a few days. And by the end of the month we were able to ramp that up further to 120% of the design capacity. And we were able to do it with all due precautions in mind. And let me also assure you that the throughput, even the increased throughput spoken for several years to come as well, because these are all tied up in volume contracts and our customers have shown that there is a great degree of optimism with regards to the end application here.

Vivek Rajamani — Morgan Stanley — Analyst

Very clear, sir. Thank you so much for the explanation. And the second question was something you did also touch upon briefly in your answer. I just wanted to get a sense in the first month that we’ve seen whether there’s been any change in the trends in terms of the end segment demand or is it broadly similar or again, like you said, you are cautiously optimistic. So I just wanted to get a sense if any segments [Indecipherable], just show some signs of pickup or not. Thank you so much.

Maulik Mehta — Executive Director & CEO

Yeah. So, generally speaking, we are seeing, compared to the previous quarter, slightly greater sense of optimism. Now, just to be very clear, optimism doesn’t straight away translate into more orders. Optimism translates first into discussions with a longer outlook in mind, rather than just a few weeks or a month. It talks more about how we see the situation and the resilience of the end application. Whatever the end application is, it could be textile, it could be paper, it could be detergent, it could be agrochemicals or pharmaceuticals. So our customers are having conversations which includes how they see the world improving in its buying sentiment over the next few months. And in some cases, this has resulted in our customers being more willing to buy larger volumes, run their plants at a higher capacity, holding on to more stocks of raw material because they see their order books filling up.

But as I mentioned, cautious optimism because this is still early days, a lot of new factors have to be considered. For example, China’s reopening, Europe, going through a milder winter than anticipated, various countries, central banks also sounding not dovish, but less hawkish. So it’s going to be end-to-end about whether every single part of the global recovery trends in the same direction or not. Therefore it’s — at least it’s enough to start a conversation.

Vivek Rajamani — Morgan Stanley — Analyst

Sure, sir, thank you so much for the explanation and all the very best.

Operator

Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants, kindly limit your questions to two per participants. The next question is from the line of Naushad Chaudhary from Aditya Birla. Please go ahead.

Naushad Chaudhary — Aditya Birla — Analyst

Hi, thanks for the opportunity. Firstly, on the power cost pressures in the last couple of quarters it has almost doubled. Any outlook here, any sort of relief we are witnessing here, or how do you see in next two to three quarters? How should it be?

Maulik Mehta — Executive Director & CEO

See, when you say power cost, you mean power for all utilities, correct?

Naushad Chaudhary — Aditya Birla — Analyst

Yes. What we see in the PNM, sir, I don’t know, I just clicked that.

Maulik Mehta — Executive Director & CEO

See as volumes, for example, in phenolics, as the volume and the throughput of the plant increases, you can anticipate that so with the power and fuel cost on a per kilo of the final output basis [Indecipherable], it remains fairly consistent, but — I mean we are still exposed to the volatility of the movement of prices of products like coal and natural gas, for example. So as these stabilize over a period of time, you will see the gross value of these costs also stabilize.

One thing I can tell you is that because of our cogen [Phonetic] power plant operating in Dahej, we were able to avoid any and every failure of the plant because of the grid being down. This allows us to maintain a consistently high level of production and allows us to avoid any negative impact with regards to the specifications and quality of our phenol or Acetone because they’re manufactured on a continuous basis. So this gives us more confidence, more product, better quality. Now let’s see how the coal prices and the gas prices moderate over a period of time. Right now it seems like in the last couple of weeks they have improved. But it’s again, as I mentioned very early.

Sanjay Upadhyay — Director Finance and Group CFO

See there is a one time impact also because of fire or coal fire boiler down in Nandesari and we had to run our plant because we wanted to get production, we had to run gas, which was very costly then. So these things do happen and what you are saying is the total number but the production volumes have also gone up in phenolics and [Indecipherable]. This is also impacting. So you can’t just compare the absolute number but then yes, it is fairly under control.

Naushad Chaudhary — Aditya Birla — Analyst

Understood, sir. So one of impact, can you quantify that and would it be there in the coming quarters as well?

Sanjay Upadhyay — Director Finance and Group CFO

No, but that was because of fire. Why should it be there?

Naushad Chaudhary — Aditya Birla — Analyst

Right, right. And would you be able to quantify that?

Sanjay Upadhyay — Director Finance and Group CFO

No need to quantify this particular figure, but this I’m just explaining to you that this is also there because one month we had to run the boiler on coal gas.

Maulik Mehta — Executive Director & CEO

We’ll quantify it when speaking with the insurance company.

Naushad Chaudhary — Aditya Birla — Analyst

Sure. And sir, I have calculated it though but just wanted to hear from you how you are seeing the phenol spread swing? Because I see the benzene, propane these prices are softening. But if you compare it with the phenol prices, phenol prices relatively are stable. So how do you say the phenol is spread currently in any outlook, if you would like to share?

Sanjay Upadhyay — Director Finance and Group CFO

What does your calculation say?

Naushad Chaudhary — Aditya Birla — Analyst

Sir, obviously the secondary market data and you have been sharing that your way of doing things is slightly different so it won’t match but directionally it’s indicating that there is a positive improvement at least on the spirit side. So would you validate that sir?

Maulik Mehta — Executive Director & CEO

Maybe in short term not much.

Sanjay Upadhyay — Director Finance and Group CFO

I don’t know whether you are seeing but yes in the federal market I think by and large we will remain in the same range as of Q3, maybe 1% or 1.5% here and there.

Naushad Chaudhary — Aditya Birla — Analyst

Okay. And in terms of the — last question in terms of the end user slow down earlier you had indicated textile is having some problem apart from this any other end user which is giving us a problem in terms of growth?

Sanjay Upadhyay — Director Finance and Group CFO

[Technical Issues] It’s only Textile and dyes and dye intermediate, but here also we are seeing the improvement now in the fourth quarter. That segment is really impacted. Otherwise, we don’t see much of a problem in any other segment.

Maulik Mehta — Executive Director & CEO

I will add however that the European paper industry is currently in quite a depressed state. But it’s been low for the last three quarters. So any small improvement will also be a big improvement. And that’s significant power cost and water cost and energy cost that it has to contend with. So this as I mentioned earlier, this is a structural thing but our customers certainly are looking at Deepak as larger players rather than their other suppliers who are also based in Europe. So this helps us because when we are manufacturing in India and supplying to European companies suddenly they prefer Deepak rather than buying from other European companies which might be facing their own cost of power and energy and water.

Naushad Chaudhary — Aditya Birla — Analyst

Right. Yeah, that’s it and all the rest of the future. Thank you.

Operator

Thank you. The next question is from the line of Chintan Modi from Haitong Securities. Please go ahead.

Chintan Modi — Haitong Securities — Analyst

Hi sir. So thank you very much for the opportunity. So, firstly, you have mentioned about new investment of about INR1,000 odd crores which will partly also go for polycarbonate compounding business and it is like furtherance to your polycarbonate business. So if you could help us understand, what exactly would this mean?

Maulik Mehta — Executive Director & CEO

It is not exactly that as you rightly mentioned. So the compounding facility which will be a world-scale facility will be able to make small batch and large batch. So made to order and made to stock. And it will largely service India very fast growing demand of these compounds. Now, the compounds are manufactured based on certain properties that they are imbued with. It could be the ability to withstand temperature or pressure or a particular shape. It could be on the base of precision, a lot of different metrics depending on the end application. And all of these, therefore, have polycarbonate as the main ingredient with other additives which are able to support that particular application.

Now, in this case, what we are going to do is with this facility, we will engage with key partners and start building those relationships, applying and having our products approved at their end. And as we are doing this, we put up significant facility that will manufacture polycarbonate and it’s upstream all the way to phenol over a period of time, and then once that is done, it is essentially supplying to the compounding facility itself, which is then making the application compounds as the customers require. Some amount may also be sold into the market and some amounts will be moved via this compounding facility. So it is our effort to occupy a space way downstream where we are talking more about applications and more about long term value creation with customers who are based on Indian requirements.

Chintan Modi — Haitong Securities — Analyst

Sure. So basically currently you would be buying polycarbonate, compounding it and sell it into the market and once you understand the market, you will be going more backward integration by setting up a polycarbonate plant.

Maulik Mehta — Executive Director & CEO

Yeah. So imagine building a bridge from both sides of the river.

Chintan Modi — Haitong Securities — Analyst

Got it. Got it? Sure. And secondly, as you mentioned about all of your backward integration projects which are currently under implementation, once you are done with that, what level of self-sufficiency you will achieve in advanced intermediate business? If you could give some kind of number?

Maulik Mehta — Executive Director & CEO

So we should see an EBITDA improvement of at least about 2% across the advanced intermediate revenue. So whatever is the EBITDA percentage that we get we will consistently be able to add at least 2% to that, more as we add more production and debottleneck and add more capacities. So that will be margin accretive but in the meanwhile it will be at least 2% on the current business.

Chintan Modi — Haitong Securities — Analyst

Okay. And if we were to just see it from a revenue perspective like how much per portion of that will be backward integrated to a large extent, how much would that be?

Sanjay Upadhyay — Director Finance and Group CFO

70% to 75% initially.

Maulik Mehta — Executive Director & CEO

Just to be clear, I don’t think I have understood your question, to be honest. But we will be internally consuming to start off with about two-thirds or a little bit more than two third of the capacity with plans over the next year or two years to expand that to about 90% to 95%.

Sanjay Upadhyay — Director Finance and Group CFO

See, the idea here is we are setting up this facility with some extra capacity. We will expand parallel in nitrogen business so that we consume entire production captively. It pays back very fast, maybe three and a half years. And this is a step in the right direction because not only the price advantage but it was also causing interruptions in the operations which will stop now. So it is helping us on both the fronts, in the EBITDA improvement as well as running the plants smoothly.

Chintan Modi — Haitong Securities — Analyst

Sir sorry to hammer on this. My question was a little different. Like out of the INR100 of revenue that you are deriving today, say in advanced single digits, how much proportion of that revenues would you be fully backward integrated or say to a large extent backward integrated?

Maulik Mehta — Executive Director & CEO

40%.

Sanjay Upadhyay — Director Finance and Group CFO

This is — advanced intermediate as a large product portfolio. We are talking of only nitric acid here, right? And the fluorination. So the combination would not be — I don’t know how it matters to you in terms of percentage. That cannot be so large. There are only two products what Maulik spoke about in today’s capex. Is this the right question or [Speech Overlap]

Maulik Mehta — Executive Director & CEO

I think there is confusion about your question. Look, we manufacture a lot of products which will use these feedstocks. They have their own revenue and margin profiles and because they’re long in particular streams, it’s very difficult to quantify because if I’m making A product which has nitration as a key step, I’m selling that, but I am also internally consuming that to go downstream into other processes which may be hydrogen reduction or sulfonation or [Indecipherable] chloride reactions and things like that. So it becomes very challenging for us to answer this question because everything that we are doing in the advanced intermediate business is part of a chain, one chain or another. So how do we go about answering this question?

Most of them begin from the basic intermediate building blocks. And a large, large part of basic intermediates as the building blocks require these few intermediates that we spoke about, which we are backward integrating into. They’re not the only one, but they’re key raw materials. So as it supports the upstream cost and availability, so will it benefit all the way downstream as well. But the safer answer to tell you is that it will certainly help something in top line because we have not had the opportunity to manufacture consistently because of unavailability of some raw materials as I mentioned, when we do it on a regular basis, it will add to the top line, but the significant impact will be an improvement to the EBITDA percentage. This is what Mr. Upadhyay has also emphasized.

Chintan Modi — Haitong Securities — Analyst

Sure, sure. I think that is very helpful. Thank you very much.

Sanjay Upadhyay — Director Finance and Group CFO

Thank you.

Operator

Thank you. The next question is from the line of Meet Vora from Axis Capital. Please go ahead.

Meet Vora — Axis Capital — Analyst

Yeah hi sir. Thanks for the opportunity. Just trying to understand on phenol acetone derivative. So while you have said that we will be doing MIBK and MIBCN including IPA, the total acetone consumption captivity will be around 80%. Currently, we’ll be selling the current acetone and open market. So will we let that market go off or how we are planning on that once MIBK and MIBC come [Technical Issues]? This is my first question.

Maulik Mehta — Executive Director & CEO

That’s kind of left to us, right? Because we will see that we participate in the market depending on the value that we get. But it gives us that sense of flexibility because when we make isopropyl alcohol IPA, it comes in a margin accretive manner compared to sale of just pure acetone. Similarly, MIBK it comes in a margin-accretive manner. Similarly, MIBC is margin accretive to MIBK itself, right? So all of these and in fact, MIBK and MIBC will have margin profiles which will be similar to what you would expect from, say, the AI business. So it is an effort to go downstream.

Now, if you’re asking about vacating the pure play acetone market, we’ll need to figure out a strategy about how we can address that. But as Mr. Upadhyay also mentioned, we are debottlenecking our phenol and acetone capacities anyways. When I [Technical Issues] acetone production, I was referring to the current production, we will be able to add some through debottling exercises which are extremely short-term. So you should see the result of that coming in maybe a couple of months from now, to be honest. Maybe Q1 of the next year. And that will add the capacities of both phenol and acetone.

So I think we will be well placed to have a significant market share of all the products, including acetone even though we plan to internally consume higher and higher quantities. And as required, when required in the future, we do anticipate that we will need to significantly expand our phenol capacity far beyond what the current plant is capable of doing. So we will have to put up new plants. Some of those capacities will be consumed downstream as we move towards polycarbonates, and some of those will be available to the market as we intend to maintain a particular wallet share in India’s growing story.

Meet Vora — Axis Capital — Analyst

Sure, sir. That’s helpful. And secondly, as you rightly said that in the polycarbonate we are doing like the upgrading bridge from both sides of the river. So I just wanted to understand whether we have cracked the phenol downstream products till we go up to polycarbonate, like this phenol, entire root have we cracked or till the time we market for polycarbonate through just processing it and once we find the end consumer, then we’ll start cracking or how is it going to role out. And also if you can quantify this…

Maulik Mehta — Executive Director & CEO

Sorry, what do you mean by cracking? The technology is widely available and well-established. There are various different technologies, different routes. All of them are well established. All of them have different advantages as it pertains to the Indian ecosystem. Now it is up to us to decide which road we want to take. But the destination is clear and we have started to invest in the destination as well.

Meet Vora — Axis Capital — Analyst

Okay. If you could quantify the debottlenecking exercise that we are doing on phenol and acetone plant, that would be helpful.

Sanjay Upadhyay — Director Finance and Group CFO

We will add around 50,000 tons. We’ll touch on 300,000 tons, above 300,000.

Meet Vora — Axis Capital — Analyst

Okay, thanks so much. That was from my side.

Maulik Mehta — Executive Director & CEO

Thank you.

Operator

Thank you. The next question is from the line of Manish Jain from MoneyLife Advisory Services. Please go ahead.

Manish Jain — MoneyLife Advisory Services — Analyst

Thank you for the opportunity. I wanted to understand the trending raw material prices. Last few quarters, the prices had increased drastically due to various factors. Are you witnessing moderation in the prices especially for nitric acid, ammonia and caustic soda?

Maulik Mehta — Executive Director & CEO

No, these prices are volatile now. They are at an elevated level. If I’m comparing to last year at the same time, and there has been, I won’t call it a moderation, certainly, but I would call it a plateau compared to the previous quarter. And as and when we do find small pockets of opportunity, we take them. We are large consumers and we are able to use that and leverage better product pricing. But beyond the point, this is also challenging. So in the short term, we do anticipate that even if prices moderate, they may not reach the prices that were prevalent last year. One of the reasons, of course, being that last year we were engaged in contractual agreements with formula prices, and this time we are addressing the situation on our own.

Manish Jain — MoneyLife Advisory Services — Analyst

Okay, secondly…

Maulik Mehta — Executive Director & CEO

I’ll just highlight that what you see as a performance of this quarter, the last quarter and the quarters before that is despite having this as a challenge. So this is not a challenge that began last week. It’s not just going to be in quarter four. It has been the challenge for the entirety of this financial year. And as you can see, while it is a challenge, we take it in stride. We are up to that task, and we work hard to make maintain our margin profiles. And while we are doing all of this, we do not lose wallet share.

Manish Jain — MoneyLife Advisory Services — Analyst

Okay. Secondly, I wanted to understand how you looking to strengthen your employee base in the medium term for the upcoming projects and expansion. Also, can you give me the number of employees you will be looking to add in the R&D department or he is pouring to more downstream products?

Maulik Mehta — Executive Director & CEO

No, I won’t go into numbers, but there will be significant additions. Nonetheless, we also have internal programs where we target to prefer internal mobility. Now of course, in R&D this is difficult because our teams are generally occupied and normally for things like compound and all, it requires a specialized skill set. So we have been looking out and searching — taking talent and we have some good people who have joined us with this very clear vision in mind and they’re already working on that. It is in that sense quite similar to what we did about two years ago when we decided to enter the fluorination space. We announced it about eight months to a year after we started recruiting.

We started building R&D facilities, we started piloting. We ensured that we tied up our raw materials. We started hiring people who would be operating at the plant. Those people were also deeply involved, when we were doing the piloting so that they would be confident that what they were getting when the plant is operational is something that they were confident running. Their input and guidance has been invaluable to us while we have done this. So we recruit at the right time, not too early, but not only at a time where we need to operationalize. So whether it is at R&D level or it is at plant level, we start incorporating people and ensuring that the ambition is smooth.

Manish Jain — MoneyLife Advisory Services — Analyst

Okay, thank you and all the best.

Maulik Mehta — Executive Director & CEO

Thank you.

Operator

Thank you. The next question is from the line of Rohit Nagraj from Centrum Broking. Please go ahead.

Rohit Nagraj — Centrum Broking — Analyst

Yeah. Thanks for the opportunity and congrats on our sequential growth in both segments. Sir my first question pertains to the capex. So INR1,500 crores capex is what we have planned for FY ’23 and ’24. And as I understand in previous calls, we had indicated about INR700 of this will go to phenolics. We have already invested close to about INR400 in Clean Tech [Phonetic]. So just wanted a broader bifurcation in terms of standalone Deepak Nitrite’s, how much of this capex will go, phenolics and Clean Tech [Phonetic]?

Maulik Mehta — Executive Director & CEO

No, don’t look at it from that perspective, right.

Sanjay Upadhyay — Director Finance and Group CFO

This is actually — Clean Tech [Phonetic] is a vehicle. It’s a 100% owned subsidiary. So all these expenses are through Clean Tech [Phonetic]. So don’t read too much into how much is going to Clean Tech [Phonetic] and how much is going here. It’s all through Clean Tech [Phonetic] only.

Rohit Nagraj — Centrum Broking — Analyst

I just wanted to have an understanding. Okay, let me rephrase the question. So out of INR1,500 crores of total capex, how much of capex will go for backward integration and how much of it will go for capacity creation or growth?

Sanjay Upadhyay — Director Finance and Group CFO

50 – 50 you can take?

Maulik Mehta — Executive Director & CEO

Yeah. This of course does not incorporate the additional announcements that you would have seen in the investor presentation, which is approximately about INR1,000 crores, which would be over and above this, and most of that would go into revenue generation. Correct?

Rohit Nagraj — Centrum Broking — Analyst

Right, and out of this INR1,500 crores, how much we expect to capitalize in FY ’23 and the rest will be in FY ’24?

Maulik Mehta — Executive Director & CEO

[Foreign Speech].

Sanjay Upadhyay — Director Finance and Group CFO

FY ’23 is hardly anything. I think around INR70 crores to INR80 crores. This all will be next year.

Rohit Nagraj — Centrum Broking — Analyst

Probably some INR100 this year and the rest of INr 1,400 crores will be capitalized in FY ’24? Right, and other question…

Sanjay Upadhyay — Director Finance and Group CFO

Maybe beyond that also, in the first quarter, not everything is coming in ’24 March.

Rohit Nagraj — Centrum Broking — Analyst

Right, I mean, there could be spillover by a quarter or so.

Maulik Mehta — Executive Director & CEO

Yeah, Rohit, that’s it.

Rohit Nagraj — Centrum Broking — Analyst

And in terms of PC compounding facility so could you just give us a broader understanding in terms of capacities that we want to create here in the initial stage?

Maulik Mehta — Executive Director & CEO

As I mentioned earlier, it is world scale. So to start off with, in phase one, it will be about 35,000 tons. That will be broken up into small batch volumes and large batch volumes and all of those. There will be tremendous amount of flexibility, that is from day one. And as we need to grow, we do it in a phased manner.

Rohit Nagraj — Centrum Broking — Analyst

So right. And initially the PC will be imported.

Sanjay Upadhyay — Director Finance and Group CFO

Yes. [Foreign Speech]

Rohit Nagraj — Centrum Broking — Analyst

Okay, that’s all from my side, sir. Thank you and the best of luck.

Maulik Mehta — Executive Director & CEO

Thank you.

Operator

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

Tarun — Individual Investor — Analyst

Hello. Sir regarding the recent fire, although minor, which happened three days back, that is the second fire in the past year. We wanted to understand what actions have been taken now to ensure that the chances of this happening are reduced in the future?

Maulik Mehta — Executive Director & CEO

Believe me, I appreciate your concern. We are significantly concerned as well. Investigations are definitely on the way and we are working on this. Unfortunately, at this very moment, on this call, I cannot give you an answer, but we are working with our internal team. We have got an external team which is specialized in investigations. And we’re working with statutory bodies on this. One thing is for certain, let’s not get into about whether it is minor or major. We take everything equally seriously. What I can assure you is that the actions that are around the corner will be decisive in nature. And that will be the end of any such situation happening. That is the intention with which we are pursuing this.

Tarun — Individual Investor — Analyst

Okay, thank you.

Maulik Mehta — Executive Director & CEO

Thank you.

Operator

Thank you. Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to the management for closing comments.

Maulik Mehta — Executive Director & CEO

Thank you all for joining this call. In case you need any further clarification, please do get in touch with our investor relationship team. We’ll be happy to provide all the clarifications. Thank you once again.

Operator

[Operator Closing Remarks]