Concall Summary: Dharamsi Morarji Chemical Company Q4FY20

Business Update

1.  There was an impact of a corona virus outbreak on the results of the company in March as all customer plants were shutdown
2. Did lose turnover of Rs 10 crores due to the plant shutdown

Participants

• Ultra Capital
• Candyfloss Advisors
• Bamboo Capital
• Sunidhi Securities
• Vriddhi Capital
• Atom Investments
• Alphaaccurate Advisors
• GIRIK Capital
• Sapphire Capital
• Astute Investments

QnA

• Most of the contracts with customers are linked to raw material prices. The average price for key raw material sulphur was 45% less in FY20
• The Q3FY20 was one of the lowest offtake quarter in terms of exports as there was uncertainty in the global market
• The overseas market is reasonably strong but the domestic market is subdued
• The entire chemical industry across the globe was never shut down because it was classified as essential but in India, there were different distinctions made
• The sulphuric acid plant expansion is expected to complete in H2 2021
• Not planning to be aggressive on debt expansion because of current uncertain environment
• Chinese government if offering very good sops to the export industry as a subsidy to get back their industry and for India, this is a big threat
• AlsoIndia is the only country where the chemical industry is shut down and there has been no incentive from the government to the industries
• In the sulfone market, China is a big competitive threat
• The gross margins in Q4 were higher because raw material prices had gone down but finished goods prices will adjust in April
• The boron business hasn’t been doing well because of multiple problems coming one after the other and it is not operating at optimum capacity utilization
• No single sector contributes more than 10%to the overall revenues
• Most of the specialty chemical products are exported and some products are mature while others are newer products with higher growth potential
• The sourcing of sulphur is mostly done locally but if there is a price differential then could import as well
• The availability of sulphur is high and there isn’t a negative impact as of now but if there is a continuous slowdown in consumption of fuel in domestic markets then there could be an impact on prices
• There hasn’t been a substantial increase in costs due to sanitizing and other requirements of working in the corona era
• The maintenance expenditure will vary in a range of Rs 8-10 crore on an annual basis
• The Chinese government has been far ahead in terms of tackling coronavirus than other countries globally. They are providing 13% export subsidy along with power and interest costs already being very low
• The new sulphuric acid plant that is coming up will be the only expansion in commodity chemicals from the company over the next 10 years
• Post this expansion other expansions will be in downstream products
• The investment in the sulphuric acid plant will be to the tune of Rs 50 crores and another Rs 20 crores for the downstream plant
• The debt for the expansion has already been tied up and 2/3rdof the expansion will be financed by debt
• The market size in sulphur chemistry is very large and even if the company grows its revenues by 10 times there would still be growth opportunities available
• The asset turnover in a sulphuric acid plant varies between 1-1.5 while in downstream products it is 2-3 times
• The company supplies directly to pharma companies and makes the chemical that goes into making the API
• The philosophy of the company is to enter into smaller value molecules rather than higher value molecules
• Have not lost any market share in export markets but revenues are down due to overall demand being low
• The sulphuric acid market is a pure commodity and it is very difficult to forecast the future pricing trends
• Power costs in China are half (Rs 4.5 vs Rs 9/unit) of India’s cost and interest costs in China are 25% (2.5% vs 10%) of what are the costs in India and along with this there are export subsidies provided
• The other income is higher due to regrouping done on adjustments of some line items which were previously being classified in a different way

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