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Deepak Fertilizers & Petrochemicals Corp Ltd.

BSE: 500645 Sector: Industrials
NSE: DEEPAKFERT ISIN Code: INE501A01019
BSE 00:00 | 26 Nov 366.80 -16.25
(-4.24%)
OPEN

381.00

HIGH

382.00

LOW

364.00

NSE 00:00 | 26 Nov 366.60 -15.90
(-4.16%)
OPEN

378.80

HIGH

383.00

LOW

365.00

OPEN 381.00
PREVIOUS CLOSE 383.05
VOLUME 61390
52-Week high 492.60
52-Week low 141.80
P/E 28.15
Mkt Cap.(Rs cr) 4,423
Buy Price 0.00
Buy Qty 0.00
Sell Price 0.00
Sell Qty 0.00
OPEN 381.00
CLOSE 383.05
VOLUME 61390
52-Week high 492.60
52-Week low 141.80
P/E 28.15
Mkt Cap.(Rs cr) 4,423
Buy Price 0.00
Buy Qty 0.00
Sell Price 0.00
Sell Qty 0.00

Deepak Fertilizers & Petrochemicals Corp Ltd. (DEEPAKFERT) - Chairman Speech

Company chairman speech

straight year when we got challenged on The every single facet of businessfrom all sides.Fy 2019-20 Turned Out To Be A Second

Be it the struggle in the Fertiliser sector or the Chinese dumping of IPA or the firstyear struggles for the new Nitric Acid complex or the massive downturns in the financialsector…..what all could go wrong…did. With grit and determination we dug ourheels and prepared for an all-round fight back….be it on the:

Strategy front….

Cost Optimization ….

Logistics Recasts….

Tighter Financial Prudence The Fertiliser team responded with a newfound urgencyin the strategy-to-execution journey from the commodity NPK fertilisers being sold todealers to the Crop Specific and value-added NPK fertilisers being marketed to farmersbased on superior technical product features. It called for a huge basket of changeinitiatives encompassing organisational structure manufacturing processes appliedR&D channel reselection farmer-focused marketing as well as systems and processes tomonitor these initiatives. Following the rollout of more than 13000 demonstration plotsfor different crops across geographies our marketing team connected with more than 1million farmers and 4000 focused retailers strengthening communication and convictionaround improved farm yields. The Technical Ammonium Nitrate (TAN) team took up itstransformative journey from a product sale to a mining solution repositioning itsmarketing focus to each end-user segment and its needs. To raise the productivity bar ofthe Indian mining sector our team not only enhanced its collaboration with relevantstakeholders in the explosives and mining sectors but also commenced knowledge sharing onvalue-added synergies and global best practices. Deep-rooted studies of the Consumersegment needs regulatory norms for each sector the last mile connectivity…all wentinto the preparatory phase for this journey. The Industrial Chemicals business engaged instudies to evaluate possibilities of graduating from conventional sale of IPA and Acidstowards value-added product segments. An important milestone for us was the commencementof our new greenfield plant at Dahej Gujarat for Nitric Acid. Though it initiallygrappled with some teething issues the operating team overcame challenges to show areasonably satisfactory performance during the first year post commissioning. DFPCLresponded to the need for enhanced manufacturing competitiveness through a systematicTPM-led plant maintenance and reliability improvement. It focused on methodicalexamination of in-complex cost structures as well as the complete supply chain with theobjective to moderate costs and turnaround time. Cross-functional teams collaboratedextensively to generate enhanced efficiencies and solutions. Questioning each cost elementin the chain from raw material to manufacturing to logistics to marketing and finally toCollections called for dispassionate team reviews re-engineering business processessharper negotiations and above all building systems and processes to ensure sustenanceover and over again demanded relentless discipline and drive. In this process we alsoconsciously compacted our trading basket by emphasizing more on profitable products foroptimisation of working capital.

"I believe luck is preparation meeting opportunity" - Oprah Winfrey

As we moved from Q3 to Q4 of 2019-20 the preparation phase started delivering greenshoots in terms of the market accepting the value being delivered along with cost andsystems optimisation contributing to our margin improvements.

The demo plots showcased tangible evidence of promised yield and quality improvementstranslating into attractive monetary implications for farmers in each geography. Our largenumber of last mile retailers communicated these success stories to other farmerswidening our circle of influence. The result was that what would have been a conventionalindustry-typical ‘product push' approach was gradually transformed into a‘consumer pull' strategy.

Besides systems and processes were embedded in smart handheld devices that translatedinto livelihood-strengthening messaging to farmers; a GPRS tracking mechanism wasimplemented to track farmer and field visits by the large B2C team. The interconnectedsales and operations process tools now automatically connect with the demand generationinputs to timely activate the raw material procurement manufacturing and supply chainsystems. The process of timely invoicing led to sales and inventory liquidation whichresulted in timely collections strengthening prospects of repeat sales and that too atpremium pricing. Thus began the circle of Preparation to Conviction to Confidence in theFertiliser team to take up more ambitious targets.

Then came the good rains. This positive development was complemented by the IndianGovernment announcing a pathbreaking agriculture policy unshackling constraints andproviding a greater growth catalyst.

Our TAN Business engaged in a similar painstaking new product development journey. Theglobally accomplished Low Density Ammonium Nitrate one of our key products is beingincreasingly accepted and used for the manufacture of cost-effective and impactfulsegment-based explosives. An in-depth recasting of the last mile connectivity and proof ofconcept have strengthened the conviction of the marketing team as well as consumers.Independent industry-respected Research firms confirmed the attractive and impactful minecost optimization and improved mine productivity. Strategic tie-ups downstream to providevalue-added products deeper associations with the growing private coal mining segment anddown-the-hole (DTH) last mile delivery systems commenced in right earnest.

In a heartening development the Indian Government recently announced the landmarkCommercial Coal Mining policy opening up a completely new chapter in the foreseeablefuture. This announcement positions us in the right place at the right time validatingour commitment to proactively prepare for the right opportunity.

Indeed luck is preparation meeting opportunities!

Marching with Buoyancy!

We have always stood the test of time and with every passing year we have become moreconsumer-focused agile and progressive. The disbursement of the first tranche of US$30 Mnfrom IFC Washington reinforced their confidence in our operations and growth plan. We alsocommenced the monetization of non-core assets in 2019 by selling an unused land parcel inDahej and a stake in Desai Fruits.

….And then FY 2019-20 concluded with onset of an unprecedented economiccatastrophe in the form of the COVID-19 pandemic. With our team of resilient workforcesuppliers and customers we are geared to pass through this crisis by transformingchallenges into opportunities and emerging stronger in tougher times.

"First I prepare. Then I have faith" - Joe Namath

The strong preparatory phase that was followed with the green shoots evident fromground level execution drive at the marketplace supply chain network and the end-to-endoperations has now converted into a strong "CAN DO" faith. The year ahead willsee larger wider and deeper inroads into this journey from Commodity to Value-addedproducts from Customer to Consumer focus and a digital overdrive to establish USPs andimpactful deliveries.

The compelling rationale has become stronger for our backward integration through 1500TPD Ammonia project. Weakening of natural gas prices both in the international anddomestic markets coupled with lack of additional global capacities of merchant ammoniaconfirms our prognosis of further improvement in the prices of Ammonia going forward. Astrong domestic demand for industrial explosives on the back of a greater reliance ondomestic coal production opening up of commercial mining and long-term growth trends inthe housing and infrastructure sector has given us further conviction to forge ahead withthe expansion of our TAN capacities. We plan to expeditiously complete project developmentso that the construction of the TAN plant on the East coast can commence at the earliest.While the pace may get impacted due to COVID-19 we are putting in place many innovativeproject execution strategies to contain the impact.

Luck rewards the determined

Our business-strengthening initiatives in the past years have started deliveringresults. The performance of the Company in the first quarter of the current financial year(Q1FY21) was the best-ever quarterly performance in the Company's history. While theexternal environment remained challenging owing to the fragile global economic conditionsdue to COVID-19 we reported a 23% growth in revenue and more than 11 times growth in netprofit compared to Q1FY20. Our diverse nature of the businesses gives us optimism that wewill continue to create new benchmarks in the coming years. We have invested the last twoyears in Getting on the Mark Getting Set…. we are now ready to Go!

S. C. Mehta

Chairman & Managing Director

Q. How would you appraise the Company's performance in 2019-20?

A: The Company reported total revenues of C4685 Crores in FY2020 compared to C6742Crores in FY2019. The Company cautiously consolidated its trading portfolio with a focuson high-margin products (as a result of which chemical trading consciously declined byC1405 Crores y-o-y and fertiliser trading reduced by C419 Crores y-o-y). The result ofthis conscious approach was that operating margins increased to 9.9% in FY2020 compared to6.8% in FY2019.

The total debt of the Company declined from C2994 Crores at the end of September 2019to C2928 Crores as on 31 March 2020 despite drawing additional long-term loans forCapex. As a result net debt-to-equity ratio improved from 1.35x in September 2019 to 1.25xin March 2020. The Company's credit rating was reaffirmed by ICRA at A+ stable forlong-term bank facilities and at A1 for short-term bank facilities.

The Board recommended a dividend of C3 per equity share of a face value of C10 each(30%).The highlight during the year under review was the decision of International FinanceCorporation (IFC) to subscribe to the first tranche of US$ 30 million (approx. C210Crores) Foreign Currency Convertible Bonds (FCCBs) and Compulsory Convertible Debentures(CCDs) in DFPCL and its wholly-owned subsidiary Smartchem Technologies Limited (STL). Thisfunding represented a part of IFC's US$60 million investment commitment; the secondtranche of US$ 30 million (i.e. C210 Crores) is expected to be subscribed in the firsthalf of FY2021.

Q. What was the impact of COVID-19 on the Company's production?

A: The onset of the COVID-19 pandemic impacted the production of NP/NPK TAN and NitricAcid at Dahej in March 2020. The notional ‘loss' of production on account of COVID-19was c6.0 KT for Nitric Acid

(DNA+CNA);therewasaproductionshortfallofNP/NPK (5 KT) and TAN (3 KT) as well.

Q. There was a significant turnaround in the fertilisers business. What were thereasons for this?

A: The margins of the company's fertiliser segment improved substantially from anegative (1.7)% in FY19 to a positive 1.7% in FY20. This turnaround was engineered byvarious initiatives undertaken by the company like a change in the product portfoliovalue-based pricing and cost optimisation measures along with favourable monsoons andwater levels in the country. NP sales volumes increased 11% y-o-y in FY20 although NPKvolumes remained flat. Softening of major raw materials prices also helped in marginexpansions. The delayed monsoon and lower rabi crop impacted farmers resulting in lowerdemand in the first half of the year. However a strong retreating monsoon and higherwater table levels led to a demand recovery in the second half of the year.

Even as the overall market remained subdued the Company remained focused on demandgeneration. It embarked on crop-specific market development campaigns includingpromotional activities crop seminars farmer meetings and product demonstrations acrossfarmer fields. The Company focused on various sales and distribution efficiencyimprovement areas including sales team automation and the development of alternativevendors for key raw materials.

The Company launched crop-specific grades in the water-soluble category during the yearunder review. The Company received a favourable market response; the grades enjoyed highmargins potential over regular water soluble products. The Company moved its entire salestowards differentiated products (Smartek) towards the end of the year.

Q. What measures did the Company take to reduce its non-core exposure?

A: As a part of the commitment to focus on our core business and moderate our exposureto our non-core businesses the Company divested a plot of industrial land in Dahej for atotal transaction value of C99.2 Crores. In addition the Company also sold 75% of itsholding in Desai Fruits and Vegetables Private Limited (21.50% of its share capital) toContract Farming Mauritius Private Limited for C28 Crores. The Company is taking stepstowards monetisation of its other non-core assets i.e. real estate and stake in itsstep-down subsidiary Platinum Blasting Services Pty Limited.

Q. There was a news item that DFPCL's promoter had pledged more than 70% shares.

A: Non-Disposal Undertaking (NDU) was provided by the promoter of DFPCL to IFC for CCDsissued by Smartchem Technologies Ltd. which is usual in such transactions. As per theundertaking the promoters undertook not to dispose the shares (as distinct from apledge). The NDU ensures that the promoters will continue to own the shares contrary tothe news item that the promoters ran the risk of losing management control.

The fact that the encumbrances were only a ‘non-disposal undertaking' in naturewas communicated by the promoters to the stock exchanges. The NDU assured that thepromoters would continue to own shares contrary to a news report that the promoterspotentially ran the risk of losing control of the entities on account of the pledge.Interestingly the promoters increased their equity stake from 51.50% (March 2019) to52.20% (March 2020) a reflection of enhanced confidence in the Company's prospects.

Q. How does the company ensure communication transparency?

A: At the Company investor relations (IR) is a strategic management function thatcommunicates the equity story and investment proposition for the benefit of institutionalinvestors and shareholders. The Company continues to communicate transparently with allits stakeholders through one-on-one meetings investor conferences and quarterlyconference calls. Through a large database of opinion-makers important business updateswere proactively communicated during the year through various modes like emails socialmedia platforms like WhatsApp and YouTube one-on-one calls and stock exchangedisclosures among others. The Company also brought elements of innovation into itsinvestor communication. It engaged extensively with stakeholders through vertical-focusedcalls that enhanced a granular understanding (including a specific call focusing on theTAN business). The Company also created a YouTube channel where the conference callrecordings were embedded with an investor presentation for a larger family of stakeholderslike investors shareholders research analysts bankers financial institutions andcredit rating agencies etc. who may have missed the call.

The Company was the first among peers to provide a video recording of its AGMproceedings through

"The margins of the company's fertiliser segment improved substantially from ~negative (1.7)% in FY19 to positive 1.7% in FY20"

YouTube even though the AGM webcast was not statutorily required for DFPCL.Stakeholders also appreciatedthedetailedpresentationatDFPCL'sAnnual General Meeting bythe CFO which helped enhance their understanding of the Company's performancechallenges and risk mitigation initiatives. There has been a significant decline in theturnaround time to resolve inbound stakeholder queries. DFPCL was also invited toparticipate in an expert panel discussion at the reputed International IR Magazine Awards2019 in Mumbai. The Company's views were published in an International IR Magazine article‘Game-changing governance set to reshape Indian corporate culture' in 2019. TheCompany raised the benchmark in delivering on capital market expectations and willcontinue to improve disclosures to match international governance standards.

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