Financial Year (FY) 2016-17 has been a highly eventful year for your Company. Despite many headwinds, significant progress was made in execution of strategy and achievement of its mission, thus underlining your Company''s business strength and resilience.
The change at the helm in India in May
2014 was supplemented by expectations of bold reforms in economic and industrial policies. After an initial period of consolidation, the reforms agenda has gathered momentum and the economy has been restored on a path of high growth. The Indian chemical industry stands to gain from this growth and the policy changes have positively impacted the sector. In order to boost manufacturing in the country, the Government launched the ''Make in India'' campaign and alongside theme of Ease-of-Business announced by the Government received encouraging response with several global leading companies coming forward to commit investments in setting-up world-class manufacturing units in the country. Several large commitments in the chemical sector will undoubtedly increase the output and contribution of the sector in the years ahead. We are witnessing a shift globally and Asia, being the epicenter of growth and enjoying abundant skilled resources, is emerging as the world''s chemical manufacturing hub. Within that, India enjoys low-cost manufacturing capabilities by virtue of relatively lower-cost labour, highly competent leadership and geographic proximity with the Middle East, one of the world''s key raw material sources. Recent developments contributing to a stronger and stable currency, positive governance environment and improvement in skills and capabilities is serving to enhance the competitive advantage. With the benefits of several tailwinds and the Government''s focus on eliminating the infrastructure gaps in the country through investments in solar power, coal-based power plants, availability of power and decreasing trend of power tariff, large-scale improvement in surface and water transportation system, India is elevating its position as a critical manufacturing hub for the global specialty chemicals industry. On the environment front, Government has been strict in norms, which shall continue helping entities like Deepak Nitrite to operate for long-term growth opportunities.
FY 2016-17 also witnessed some key developments both in India and across the globe which have the potential to reshape the global business dynamics. A sharper degree of resistance to globalization has resulted in regime changes in the US and a vote for the ''BREXIT'' in the UK. The enhanced focus on job creation in the home country is forcing governments to be more focused towards protecting manufacturing. Simultaneously, in India, the ongoing progress towards the GST regime combined with steps to transform India into a ''less-cash'' society will strengthen the fabric of organized industry. Drive of demonetization created initial hiccups before swiftly moving towards a normal situation which fructifies Government efforts towards a transparent economy. Further, multiple initiatives to boost the rural economy announced in the Union Budget 201 7 combined with improved monsoon trends are expected to favorably impact demand for end-user products from those markets in the medium to long-term thereby benefiting the overall chemical industry. In light of this, it is favorable that your Company is poised to significantly elevate the degree of focus on the domestic market in the coming years.
During the year under review, your Company witnessed a slew of unforeseen events. It encountered headwind in the form of temporary closure of one of its three units at Hyderabad facility due to excessive flooding and hence issues related to pollution. However, all necessary steps were taken to address the compliance conditions and your Company received a permanent revocation order from regulators which served to reinforce the strength and quality of operations. In addition to this unexpected development, a fire broke out at one of the distillation columns of Company''s manufacturing facility at Roha Industrial Estate in Maharashtra. It was an unfortunate event, however, the Company''s trained rapid response team could avoid larger disaster. The damaged facilities have been reconstructed within a reasonably brief period, which gives me satisfaction. Your Company is adequately covered under insurance for replacement value of the damaged facilities and loss of profits due to business interruptions. While both these unforeseen incidents were swiftly brought under control, our performance in the third quarter was impacted.
FY 2016-17 also saw some setbacks in terms of reduced requirements for fuel additives due to change in dynamics of the oil supply market as well as volatile crude oil prices which led to re-pricing of products linked to global prices of crude and related petrochemical intermediates. However, by leveraging its plants and as a part of its long-term strategy and sustainability focus, your Company was able to diversify its products, markets and end-user industries in a manner that downturn in a particular end-user segment is mitigated by capitalizing on opportunities in other end-user segments, thereby providing a natural hedge.
Your Company reported resilient performance during the year even in the face of one-time developments that occurred in the third quarter. The turnaround of performance effected in the fourth quarter to recover from the impact of developments in the immediately preceding quarter was particularly heartening.
Your Company raised Rs, 150 crores through Qualified Institutional Placement (QIP) in March 2017 at a price of Rs, 104 per Equity Share (including premium of Rs, 102 per Share). The proceeds, which will be deployed towards funding the Greenfield Project for the manufacture of Phenol and Acetone, saw strong response from high quality domestic institutional investors resulting in subscription of over 2.2 times the issue size, exceeding Rs, 340 crores. It may be worth mentioning here that, in January 2016, the Company raised Rs, 83 crores through Qualified Institutional Placement at a price of Rs, 70.90 per Equity Share to part fund ongoing Phenol project.
I thank all investors participating in QIP reposing confidence in the Phenol project of the Company, which is set to escalate the Company into a new high rung.
The Board of Directors recommended a Dividend of Rs, 1.20 per Share of a Face Value of Rs, 2 each. Your Company has been consistent in paying the Dividend for past many years. The Dividend rate has been maintained despite the expanded capital base as well as the one-time adverse events.
Export revenues stood at Rs, 470.84 crores, while domestic revenues came in at Rs, 734.67 crores. Export and domestic market contributed 61% and 39% of total revenues for the year, respectively. USA, Europe and Asia continue to contribute to the bulk of the export revenues with contribution of 19%, 54% and 22%, respectively.
In order to reinforce its strategic objectives in recognition of continued transformation of the portfolio, your Company has, during the year renamed its Bulk Chemicals and Commodities segment as ''Basic Chemicals'' and the Fluorescent Whitening Agents segment as ''Performance Products'' segment. The Performance Products segment includes an expanding range of products. Details of each Strategic Business Unit (SBU) are underlined below:
BASIC CHEMICALS (BC)
Basic Chemicals segment reported steady performance during the year. While demand for fuel additives went down, your Company moved production to other products giving better contribution, though top line was impacted. This segment will witness healthy momentum going forward due to enhanced product mix as well as addition of new category of products and also good demand from end user industries.
FINE & SPECIALITY CHEMICALS (FSC)
Fine & Specialty Chemicals include agro, pharma and personal care intermediates. This segment reported degrowth in revenues as well as volumes due to the unfortunate fire incident at Roha. Going forward, FSC segment is expected to exhibit strong growth as processing capabilities for pharma and personal care intermediates have been enhanced to capitalize on healthy demand. Visibility of improved traction in agro intermediates is also expected to provide a fillip to the growth of the segment.
PERFORMANCE PRODUCTS (PP)
Performance Products segment includes direct sales of Diamino Stilbene Disulfonic Acid (DASDA) from the Hyderabad facility as well as Optical Brightening Agents (OBA) revenues from Dahej. The shutdown of the Hyderabad facility due to floods impacted the volumes and profitability of PP segment. New investments are being made in the PP segment, whose impact will be seen in the upcoming years. As you would be aware, we are the only fully integrated OBA player in the industry and this gives your Company a competitive edge over other players. Your Company has diversified its focus on export markets and end-user industries to accelerate growth.
In FY 2016-17, your Company, through its wholly-owned subsidiary, Deepak Phenolics Limited made significant progress in its project at Dahej, to manufacture 200,000 MTPA of Phenol and 120,000 MTPA of its co-product Acetone. This will be supported by manufacturing 260,000 MT of Cumene, which is a feedstock for manufacturing Phenol and Acetone. This Greenfield project is expected to be commissioned in the second half of the current financial year. For this, the overall capital outlay will be approximately Rs, 1,400 crores. I am glad to underline that your Company has tied up the long-term debt to finance this project and also made further progress in raising Equity funds needed to the tune of Rs, 150 crores through the second round of Qualified Institutional Placement (QIP) which was concluded in March 2017. Success of this round of QIP signifies awareness of investors in great potential of Phenol / Acetone project. We believe in being with the investors and take them along with us in creating a new big petrochemical venture. This is in addition to Equity funds already raised in Phase I of the QIP in FY 2015-16 and sale of land at Pune concluded in early FY 2016-17. The project team has shown excellent team efforts in executing the project.
Your Company will address the opportunity offered by the supply deficit in the domestic market which is currently met by imports. In addition to competitiveness on cost due to supplying the domestic markets from a plant located in India, your Company will leverage the latest manufacturing technologies in its state-of-the-art plant which will reduce wastage and is more efficient in utilisation of inputs and energy.
With the objective of developing working relationships with major clients across India and accelerating its market presence, your Company has already started seeding of Phenol in the domestic market to establish strong marketing and distribution channels ahead of the commencement of manufacturing at its plant. Further, the supply of benzene, a key raw material has become significantly easier in the domestic market thereby enhancing the prospects for the mega phenol project further.
Overall, your Company remains confident and continue to see several opportunities in the speciality chemicals space for widening its portfolio of value-added products as customer demand and acceptance remains robust. Your Company is confident of growth from each one of its segments on the back of improving market conditions and a buoyant pipeline of products. While your Company will bounce back from the setbacks in FY 2016-17, the management has also put in place steps to enhance operating efficiencies, which will allow your Company to scale new heights in performance. Lastly, the contribution of the Phenol project, scheduled to be commissioned in the second half of FY 2017-18 is expected to be transformational.
On behalf of the Board of Directors, I would like to take this opportunity to acknowledge the entire team of your Company for their contribution and commitment. Lastly, I would like to extend my sincere gratitude to all our business partners and associates for their confidence through the years and count on their support going forward.
Deepak C. Mehta
Chairman & Managing Director