ValuePickr Forum

Astec Lifesciences

Short Company Summary

The Company manufactures agrochemical (Fungicides, Herbicides, Insecticides & Intermediates) active ingredients (technical), bulk and formulations, intermediate products and sells its products in India as well as exports them to approximately 24 countries. Some of the exports are via CRAMS (Contract Research and Management Services) platform.
PS: A good resource to understand CRAMS in general (though the video is about Pharma CRAMS, the basic principles still apply) is: https://indianinvestingconclave.com/recordings/97

They primarily manufacture (bulk) formulation and Active ingredients for agrochemicals. Some of the example agrochemicals manufactured by them are:
Tebuconazole
Propiconazole
Hexaconazole
Difenoconazole
Metalaxyl
Tricyclazole
Imazethapyr
Lambda cyhalothrin

Source: http://www.astecls.com/products.aspx

Apart from making bulk agrochemicals,The company has identified contract manufacturing as
a platform for future. The Company is able to provide its customers value addition due to its strong Research & Development (R&D) capabilities.

Revenue Breakup

Exports now makes up a majority of the revenue/sales and a significant (unknown) portion of exports is through CRAMS:


Source: https://tijorifinance.com/company/astec-lifesciences-limited#revenuemix

It is also interesting to see how the revenue of the company has shifted from domestic sales (bulk agrochemicals) to exports (a significant part of which is CRAMS) for agrochemicals over the years:

Financial Year Revenue from domestic Sales Revenue from Exports Percent Growth in Exports Total Revenue Percent Growth in Revenues Percent Revenue from Exports
2016 144 89 233 38.19742489
2017 178.8644 133.8356 50.37707865 313 34.20600858 42.8
2018 172.0433 206.9067 54.59765563 379 21.18644068 54.6
2019 192.712 249.288 20.48329029 442 16.6380789 56.4
2020 230.865792 303.134208 21.6 534 20.81447964 56.76670562

Source: Annual Report for FY17,18,19,20.

Financials

Mar 2016 Mar 2017 Mar 2018 Mar 2019 Mar 2020
Sales 233 299 368 431 523
Sales Growth 28.20% 23.08% 17.22% 21.28%
Fixed Assets 95 103 115 167 194
Fixed Asset Turns 2.452631579 2.902912621 3.2 2.580838323 2.695876289
OPM % 14% 21% 15% 18% 16%
ROCE% 12% 20% 22% 20% 20%
EPS 2.55 9.8 17.87 18.28 24.28

Source: https://www.screener.in/company/ASTEC/consolidated

Few observations:

  1. Strictly increasing sales
  2. Stable profitability.
  3. Good Fixed asset turns
  4. Stable ROCE

2019-2020 annual report summary

Financials

  1. Financial Year 2019-20 represented another year of robust growth for Astec. Total Revenues grew by 20.8% from 44,200 Lakh during 2018-19 to 53,415 Lakh during 2019-20. Exports increased by 21.6% during the Financial Year 2019-20. Profit After Tax (PAT) improved by 33.0% from 3,569 Lakh during 2018-19 to 4,747 Lakh during 2019-20. The Company was also able to reduce its borrowings from 17,567 Lakh to 9,871 Lakh. Thereby, the debt-equity ratio reduced from 0.87 to 0.40.
  2. Return on Capital Employed (ROCE) was 19.2% and Return on Equity (ROE) was 19.3%. The consistent performance resulted in a 4-year Compounded Annual Growth Rate (CAGR) of 19.9% in revenues and 36.4% in Profit After Tax (PAT).

Covid Related

  1. Our plants were shut down in the last week of March 2020 due to the nationwide lockdown. However, through proactive actions by our team, we resumed production in our plants in a phase-wise manner from April 10, 2020. Extensive precautions have been taken to ensure safety of our people. While the lockdown has been eased, we continue to be vigilant and continue to manage the changing environment.
  2. Your Company is ensuring utmost safety of employees and business partners at factories by strictly following safeguard measures such as usage of masks / gloves, regular temperature screening, setting up disinfectant tunnels, maintaining social distancing, allowing limited workforce and regularly conducting comprehensive factory sanitization

Contract Manufacturing

  1. The Company’s contract manufacturing business also performed well and we saw strong demand for our products. We commissioned two new products for multinationals. We also have several projects in the pipeline which will be rolled out over the next few years
  2. We have completed the design of our new state-of-the-art Research & Development (R&D) Centre, which will result in a quantum jump in our R&D capabilities. We hope to commission this facility by the end of the next year.
  3. The Company is able to provide its customers value addition due to its strong Research & Development (R&D) capabilities.

Miscellaneous

  1. Mr. Ashok Hiremath shall not be paid any sitting fees for attending Meetings of the Board of Directors or of any Committee thereof
  2. Company has 3 subsidiaries:
1. Astec Europe Sprl (Belgium, Europe) 50% shareholding
2. Comercializadora Agricola Agroastrachem Cia Ltda (Bogota, Columbia): 100% shareholding
3. Behram Chemicals Private Limited: 65%
  1. Mr. Ashok V. Hiremath is a graduate from the University of Oxford, holds a Master’s degree of Arts (Engineering) from the University of Oxford and a Post Graduate Diploma in Chemical Engineering from the University of London. He has experience in agrochemical manufacturing industry. Previously, he has worked with GEA Airexchangers Limited, London and Hiremath Chemicals Limited.
  2. He has been actively involved in the affairs of the Company and has played a key role in the growth of the Company since 1994. He was awarded the “Dombivili Giants Award” for Industry in 2008 and the “Udyog Rattan Award” by the Institute of Economic Studies in 2010 and “National Gold Star Award & Gold Medal” from “The Indian Society for Industry and Intellectual Development” and some other international awards for his excellence in Chemical Business
  3. During the Financial Year 2019-20, it has been decided by the Board of Directors of your Company to withdraw the Scheme of Amalgamation of your Company with Godrej Agrovet Limited (which was filed during the Financial Year 2018-19), based on interaction with multiple stakeholders.
  4. Both Ashok V hiremath (MD) and Arijit Mukherjee (Whole Director) and Saurabh Bhala took pay cut of 10-15% in 2019-20.
  5. Ashok V hiremath holds 9.94% in the company
  6. R&D as a % of sales is 2.26% in 2019-20 versus 0.7% in 2018-19

Management commentary on path ahead for agrochemicals

  1. Opportunity for Indian agrochemical players remains high, both in the domestic and the international markets. Increasing usage of agrochemicals is needed in India, given the high focus on increasing the yield per hectare, limited arable land, rising labour costs and increase in growth of herbicides and fungicides.
  2. Globally, disruption of Chinese agrochemical supply chain has shifted the focus on India, thereby increasing the opportunity for contract manufacturing business for Indian players. Also, as a large number of molecules are going off-patent in the next 3 to 5 years, it further augments the opportunity for Indian players.
  3. Your Company is one of the leading players in triazoles fungicide and is well-placed to capitalize on opportunities arising in the domestic and the international markets.
  4. While in India, large number of companies are dependent for their raw material supplies from China, your Company is continuously investing in backward integration projects to reduce its dependence on Chinese raw material.
  5. This is not only helping the Company in reducing its reliance on China, but is also aiding in margin expansion.
  6. Segment-wise, revenue growth was mainly driven by enterprise sales, however, contract manufacturing business also grew, as compared to the previous year.
  7. Geographically, both domestic business and international business contributed to the revenue growth.
  8. Going forward, your Company will continue to focus on developing manufacturing capabilities which should cater to the key changes emerging in agrochemical industry, both in the domestic and the international markets

Risks

  1. Erratic and poor South West monsoon can adversely impact the demand for the products of the agrochemical companies. Prolonged El Nino condition also poses a risk to companies in this sector.
  2. A large part of your Company’s operations are dependent on exports and need raw materials which may not be available in the domestic market, therefore, risk associated with the non-availability of these materials from overseas markets and also the foreign currency volatility always exists.
  3. Extension of COVID-19 pandemic for longer than expected time can impact export sales and raw material availability

Source: 2020 Annual Report

Peer Comparison

Astec Lifesciences Ltd PI Industries in 2010 P I Industries Ltd
Market Cap (cr) 1870.03 430 29426.34
Sales (cr) 557.55 543 3672.5
OPM (%) 19.21 16 21.63
Stock P/E 28.86 10 58.79
ROCE (%) 20.49 25 24.66
Debt to equity 0.4 0.49 0.19
Debt (cr) 98.71 62 507.7
Operating Profit (cr) 85 87 578
PBT (cr) 61 57 538
Net profit (cr) 64.8 42 500.5
Employee cost (cr) 30.11 44 266.6

Here, I’ve compared astec lifesciences to PI industries in 2020 and PI industries in 2010. The comparison demonstrates that business wise, astec is at a place where PI industries was 10 years ago. The major difference here is the valuation. The profitability is comparable due to similar business models. Astec today is roughly 7 times smaller than PI industries.

Valuation

I use historic P/E and MarketCap/EBITDA plots:


As we can see, it is available much below the average P/E and P/EBITDA multiples.

For comparison, the much larger and much more successful PI industries, is also much more richly valued:

Investment Thesis

  1. Chemical manufacturing migrating away from China to India (chemical manufacturers adding a backup option) is a secular multi-year trend. China is still the bulk producer and hence better able to utilize operating leverage. As indian manufacturers gain scale, our lower labor costs etc would enable us to become even lower cost producer. In recent Godrej Agrovet concall, management mentioned “So we captured a lot of Southeast Asian market. Russia, CIS market opened up very strongly. That has been one of the growth, and that will be a permanent growth, plus the U.S., Europe market.”
  2. Astec saw a promoter change in 2016 with Godrej group becoming the majority shareholder. The change in Astec’s management has put the CRAMS business on a strong footing. Technical expertise, credibility and financial flexibility – the three key things that global innovators in agrochemical industry look out for before entering into a contract manufacturing agreement, got a significant uplift post Godrej’s takeover.
  3. The CRAMS business is a steady business in terms of revenues and profitability. Since the end customers are geographically well spread across the globe, the impact of monsoons and seasonality of sales is limited, and also margins of ~20-22% are much stable on account of the stickiness of the clients, 3 to 10-years tenure of the contract agreement, and complete pass through of raw material cost. The percent of revenues from CRAMS is also increasing.
  4. The company has completed the design of their new state-of-the-art Research & Development (R&D) Centre, which will result in a quantum jump in their R&D capabilities. This will enable them to diversify the product line-up even more.
  5. Godrej agrovet (parent company)'s agrochemicals business provides new opportunities for Astec to diversify its product mix. Godrej Agrovet’s rich track record in the Indian agricultural markets will strengthen Astec’s positioning to global innovators.
  6. I do not mind paying up a little bit for a business with a good promoter, in an industry with strong tailwinds. it would be difficult to get astek below TTM P/E of 20 or below unless there is an overall stock market crash, in which case I would add more, knowing this is a great business.

Key Risks

  1. Godrej Agrovet could do a merger with Astec lifesciences, and astec minority shareholders would be at the risk of being forced to own a business they do not want to : godrej agrovet.
  2. Significant portion of revenue is linked to domestic sales which poses a big geographical risk with respect to the stability of the weather/seasons/monsoon/droughts etc.
  3. Is it richly valued on an absolute basis. This means a lower/smaller margin of safety.
  4. Chemical industry companies are always at the risk of being regulated from a pollution/environmental point of view (I analyzed these risks for a different company here: Chemcrux Enterprises - A dark horse?).
  5. Since Godrej agrovet is the majority owner of Astec, they could potentially do transactions which benefit the parent company more (force astec to sell at lower margins). Although until now, all transactions have been ‘at an arm’s length’ as far as I can tell.
  6. We do not know precisely what part of the exports are cia CRAMS which is the most stable business segment because the company does not disclose this regularly in communication.

Disclaimer: Invested. Full portfolio here.

PS: Thanks to @Marathondreams and @valuequest for discussions offline regarding this post.

Edit:
In the initial post I’d incorrectly assumed that all of the companies exports were via CRAMS. After reading some research reports, I figured out that is not the case. Hence, updated the post accordingly.

17 Likes

Some other things which I found:

  1. [CRAMS] As per this MOSL report, page 9 40% of exports are due to CRAMS activities as of FY18. (Not sure how they got this data)
  2. [RISK] Another risk with respect to the company is the heavy dependence on the triazole chemistry. As per the MOSL report, 80% of the company’s revenue can be traced back to triazole chemistry. (have not been able to verify this from primary sources either).
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Hey @sahil_vi . Astec went on a dream run last year. From -1 crore PAT in Q1 , they clocked 5 crores and then 12 and finally 31 crores in Q4! That explains the entire run up and Astec was priced accordingly due to Q4. however, their latest Q1 result showed a drop back to 16 crores. If you compared PI industries (as you say they are similar) they had a brilliant quarter and PAT was up 20+ percent from March so I’m not sure it’s a problem of seasonality. Management says they started operations April 10th so that doesn’t explain such a huge drop either. Do you think this drop from 31 crores to 16 crores is temporary or a reversion to mean which would make the valuations too high? Or is there something that explains the drop in sales in Q1 in general(I notice this drop happens often) for astec and what is this reason? Overall astec looks like a YOY type of company instead of a QoQ. Just wanted to confirm why. Also DIIs have gone from 2 percent plus a few quarters ago to 0.29 now… FIIs have gone a bit too. Promoters seem to be buying but The drop in DIIs by such a huge amount was a red flag for me. I never investigated it thoroughly though
Note: I haven’t gone through the latest concall or commentary. Just noticed the difference when comparing the quarters between PI industries and Astec

2 Likes

Thanks for adding your thoughts. Please find my thoughts inline:

The companies operate at much different scale. PI has a much less riskier business due to larger client diversification and larger product diversification. PI industries is also appropriately priced at a TTM P/E of 60. If it ever does have a down quarter, it would be interesting to see how much it falls. Whether there is seasonality also depends on specific products being manufactured. With astec being heavily into agrochemicals and that too triazole based chemistry, there might be product specific seasonalities. This needs deeper investigation, I’m hopeful management would be able to clarify.

I think specially for very small businesses (500cr sales is roughly 70 million $ of revenues) larger variance in quarterly performance is to be expected.

My educated guess would be due to cyclicalities of the downstream clients. Also, smaller companies most often have a bumpier revenue stream than larger companies. Also looks like something management can clarify.

Btw, YoY, the results are quite good:

I do not associate with mutual funds at all. They are (almost all) momentum chasers. I am glad they’re out. Gives me a chance to build a position slowly, over time. I do not know enough about FIIs to form much of an opinion about them, but from the name, they seem like foreign mutual funds (and similar investment structures). Most investors (mutual funds, pension plans) underperform the market. I would not read too much into any of their actions.

Godrej agrovet concalls cover astec lifesciences. Here is latest one : https://finance.yahoo.com/news/edited-transcript-gode-ns-earnings-221836496.html

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Please give comparison with Bharat Rasayan

Pros n cons

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Thanks for the suggestion, Bhaskar. In general comparing companies is a difficult task to do. I don’t think I’m well positioned to do this for bharat rasayan right now, but i will try to get to this in a few weeks/months if nobody else has done so already. :slight_smile: I would encourage you (and everyone else) to take this up in the spirit of collaborative fact-finding and investing.

  1. Here is a Quote i found from the Q3-FY20 concall for godrej agrovet regarding the nature of business.

  2. In last two years, management has commissioned two plants for backward integration and that was not thinking about coronavirus but the prices and costs were going up from China. They started getting into backward integration and one more backward integration plant was to be commissioned in July (has been postponed to Q3-FY21 now i think) which will be for backward integration and producing certain herbicides also in Astec LifeSciences. They were definitely worried because they are still dependent on China for import of certain products but they are happy also that their dependence is not as it was a few quarters ago.

PS: Will add any other interesting things I find from Q3-FY20 Concall to this specific post.

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Q1-FY21 godrej agrovet concall transcript

Adding my notes from Q1FY21 concall which I had not added yet.
Script: https://app.tikr.com/stock/transcript?cid=145080218&ts=2056787&e=677717202
YouTube video: https://www.youtube.com/watch?v=nb1bbrVaJD4

New R&D Center

  1. Well, the new R&D center is going to be a little bit of a game changer for Astec. I’ll just elaborate a little bit on that. Currently, Astec is in a very enviable position where the demand for new products and new projects far outstrips its ability to execute the projects in terms of its ability to develop and scale it up and bring it online for production. We have no limitation in terms of the availability of infrastructure, and we are in a position to make investments. But we just don’t have the bandwidth on the R&D facilities that we currently have to be able to do it. But having said that, we’ve still been growing at the rate that you’ve been seeing a compounded growth of 20% annually. But nevertheless, if we want to scale it up to the next level, we need to expand these capabilities.
  2. So there are 2 levels at which this R&D will benefit. One is in terms of bandwidth. The number of fume cupboards, which really defines the number of projects that you can handle, is going up by a factor of 5 from the current level. So our ability will be to handle multiple projects at a time, so that we can bring on many projects online in a given year. That is the one big benefit.
  3. And the other thing is that on the qualitative front, the new capabilities that we’re building in would be to bring in new chemistries that we can practice, for example, fluorine chemistry. Anybody who’s following the life sciences industry will know that fluorine chemistry is very, very core to the development of new molecules. So we will be building in a development capability of that in the R&D center. There is flow chemistry that involves the continuous flow chemistries, the ability to do things in microreactors and so on and so forth, there will be high-pressure reactor systems. There’ll be hydrogenation systems. And there will be all the cutting-edge new chemistries that are out there will be – we’ll have labs that have the ability to develop that. So we’ll have teams that will be developing these new chemistries.
  4. So essentially, in the contract manufacturing sector, you need to be able to offer these skill sets to your customers. And this is exactly what this R&D center will bring to the table for us.

On Pharma Intermediates

  1. Well, pharma intermediates still constitute, maybe, in the range of 5% of our sales. It’s become relatively minor at the moment simply because our agro sales have gone up significantly. And the pharma sales have become a smaller percentage, not for lack of opportunity. But again, it came down to this bandwidth issue, which we talked about, our ability to develop so many molecules. There are many opportunities out there. We have, indeed, products in the pipeline for the Pharma segment, but we’ve not been able to bring them on the line because of the bandwidth constraints that I spoke about.
  2. So we definitely have it in our strategy plan, and we will take it up as soon as we are able to get this new R&D setup in place. But I will just add one more thing to this R&D piece that we spoke about is that the whole R&D piece is to do not only with what you develop in the lab, but how you have the scale-up team and the technology transfer team. So working on the entire chain of bandwidth capabilities, which is to develop things, to take it on a pilot plant, scale it up and take it on a plant scale. So we are building that entire infrastructure over the next couple of years

On CRAMS Growth

  1. CRAMS growth has been 20% a year, in line with our overall growth. Obviously, we – our strategy is to make this a larger proportion. Currently, it constitutes 20% of our business. We are – our aim is to make CRAMS a much larger proportion, and eventually, 50% of CRAMS and 50% of what we call enterprise sales.
  2. And as far as the triazole fungicides are concerned, they’re performing extremely well. We’ve increased capacity in our key triazole fungicides very significantly last year, and coupled with better realizations on the finished products, cost optimization on imports. Our margins have really improved. The domestic season has been very good for us. The season has started early, and we’ve seen good demand for our products.
  3. We were also able to restart our plants after the COVID shutdown. We were able to start on 10th of April. But because of the restrictions, we – it took us about a month to completely scale up our production and bring it to the full capacity utilization. But in spite of that, there was very strong demand for our triazole fungicide. That has done well. And even the export market looks quite good. Climatically, we are seeing that things are good in Europe and things are good in North America.
  4. We are waiting and watching in South America, Brazil, we’re seeing demand, but we’re waiting to see the full impact of it. But nevertheless, since we are so geographically spread in terms of our triazole fungicide sales, we don’t see any difficulty selling all the production we’re going to have

On the break up of the 45% revenue growth in Q1-FY20

  1. Well, I mean, for example, the first quarter, our volume growth was 20%, but our value growth was 45%. This was not only on triazole. We had contract manufacturing products and so on and so forth. So we sold more expensive products. So I don’t have the exact breakup of the – on the triazole segment by itself, what was the difference between the volume growth and the value growth. But I’m just telling you, for the first quarter, this was the difference between volume and value growth. So that was the blended average of all our products put together
  2. Actually, that’s (enterprise and retail chemicals) also grown 20% and CRAMS has grown 20%, so – which is why really the proportion of CRAMS is remaining at 20%. So both are growing at the rate of 20% per annum

On the aspirational growth, profitability, return ratios for next 3-5 years

  1. Yes. Well, if overall growth is at 20% per annum that’s doubling our sales every 3.5 years, but I’ll put it in a slightly different way, in terms of our aspiration. The PI industry contract manufacturing business is maybe in the range of $300 million to $400 million, right?
  2. So – and ours is significantly lower than that. We believe that a lot of – once we have the capabilities, there’s this trend of the big multinationals derisking, not only from China but also derisking from the people, who’ve already got a lot of the business in India, which is PI, so there’s SRF and a handful of people. So I think a lot of that will come over here.
  3. Now it’s for us to really take that business, to be prepared for it. And that’s what this new R&D center will do. But for me to give a number that is very, kind of, forward looking, I would not like to do that. But this is the kind of size of pie that we’re looking at, and this is the kind of opportunity size

On EBITDA margin increases in last few quarters

  1. We – some of our products, of course, we had some contract manufacturing products, which had a high-margin during this period.
  2. Some of our triazoles also had better realizations because of – China was shutdown because of COVID during that time, and the demand was sustained in Q1 as well.
  3. And we had actually taken a very good position in terms of our raw material planning and everything. And therefore, we were able to sustain our production when other people were shut. So there’s a combination of these factors, which gave us a higher EBITDA.
  4. But having said that, it was not a one-off kick. We believe that we can still maintain a 20-plus percent EBITDA going forward

On Working Capital Cycle Reduction

Question was whether the working capital cycle reduction is one-off or systemic:

  1. We’ve changed our methodology of working. When we do our export sales, we go in for a nonrecourse financing – factoring. So when we do non-recourse factoring, the cost, to us, comes at about 4%.
  2. Our normal borrowing rate was 6.5%, now it’s 5.7%, so it’s cheaper, and it also reduces the amount of debt in our books. And when we get extended credit on our supplier side, that also comes in at about 4%, 4.5% per annum, which is lower than the cost of our own internal borrowings. So then we get extended credit from our customers, from our suppliers, and we factor our receivables. So this methodology of managing our working capital has worked well for us.
  3. So which is why you’ll see our debt has come down to INR 98 crores as of last year and INR 82 crores at the end of quarter 1. And you will see that our net interest cost is hardly 2% of our sales

On the Revenue from Herbicide capex of 100 cr and new CRAMS molecules productionisation

  1. We think that we can get additional – our asset turnover ratio is about 1.5 to 1.7. So that’s the incremental revenue that we will get from additional assets that we create. But that’s a rough number. It’s very hard to say this particular investment is giving so much. But as we go forward and we make capital expenditures, you will see that our asset turnover ratio will be in that range

On the Cyclicality of CRAMS business

  1. No. CRAMS – you see, CRAMS business is not uniformly distributed throughout the year. So for example, Q4, some of our CRAMS business is back-ended into Q4.
  2. So therefore, I mean, if you look at it on an annualized basis, it is the same. But sometimes, we manufacture in, say, Q2, Q3 but then we sell it in Q4. So therefore, the mix is more CRAMS oriented in Q4. And in this particular year, Q1 as well
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As you can see below, promoters are continuously raising their shareholding in this company

Shareholding pattern in percentages

Sep 2017 Dec 2017 Mar 2018 Jun 2018 Sep 2018 Dec 2018 Mar 2019 Jun 2019 Sep 2019 Dec 2019 Mar 2020 Jun 2020
Promoters + 66.79 67.08 67.31 67.35 67.35 67.33 67.62 68.14 69.14 69.55 71.33 72.30
FIIs + 1.52 0.73 0.77 0.95 0.91 0.92 0.89 0.88 0.73 0.78 0.84 0.55
DIIs + 1.99 2.08 2.17 2.19 2.43 2.32 2.10 2.20 2.10 2.17 0.51 0.29
Government + 0.00 0.01 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Public + 29.70 30.10 29.74 29.52 29.32 29.43 29.39 28.79 28.03 27.50 27.32 26.85

Most of the stake increase is coming via market purchases as can be seen from the disclosures. Post acquisition, Godrej group has brought in BSR as auditor, implemented systems and processes and cleaned up the books. All of these activities had laid down good foundation for company to start growing at next level. Recent investments in plants manufacturing raw material required by the company (thereby reducing import dependence) as well as new R&D centre shows systematic efforts to plug the skill and capacity gaps with long term view. Comfortable debt/equity ratio of 0.4 makes it easy for the company to continue adding more capabilities and capacities in time to come.

Few years back, there was a proposal to merge Astec into Godrej Agrovet. This would have destroyed shareholder value for Astec shareholders as Astec is very focused profitable growing niche business whereas Godrej Agrovet is more like holding company having many different business nested under it (Animal Feed, Palm oil, Dairy,Agrochemicals etc). Many minority investors (including myself) as well as institutional investors pushed back. Based on feedback of the minority shareholders, promoters decided to cancel the merger. In recent Astec AGM, someone asked Mr. Nadir Godrej if they would merge Astec into Godrej Agrovet in future, he responded (with tongue in cheek) that if minority investors are interested in the merger, they should send proposal to the board and board would consider it. :stuck_out_tongue_winking_eye: This is great example of promoter who is ready to listen to the minority investors. It is so refreshing in current scenario where minority investors get brushed away with impunity…

Disclosure : invested for last 4 years with more than 10% of my PF and hence biased.

PS : Noticed that last one week, Mr. Hiremath (MD and founder of the company) has started selling shares and sold maybe 5% of his holding (0.8% of the total shares). Not sure about the reason but this is the first time he is selling his shares post acquisition. So I would not be too much concerned with this.

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Thanks for sharing the details about minority investor friendliness and increased promoter holding . How do you compare this with Bharat Rasayan , another company in same line of business and also having high promoter holding ? Thanks

No idea. Never studied Bharat Rasayan. Quick look at Screener also shows not much data available for Bharat Rasayan. so not interested.

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Two things are worth noting here :

(1) Valuation wise Astec is trading far richer to PIIND if 2010 you are taking as comparing point. In 2010, when you say PIIND business was at a similar point where Astec business currently is – at that time PIIND was trading at just 10.5x TTM EV/EBITDA, 1.7x TTM EV/Sales and 13.5x TTM EPS. As visibility of business improves, valuations commanded get richer. Astec no doubt is backed by a great group, but valuationwise I feel it deserves to trade at significant discount to PIIND unless there is some corporate action due.

(2) Business focus is quite different of both companies. PIIND had a clear focus on patented molecules from the beginning for which it invested significant resources over a decade since 2000. Astec focus is generic + patented.

In short, it is better to look at each company separately rather than trying to draw comparison in both.

Rgds.

Discl. - Invested

4 Likes

Hi mahesh, thanks for adding your thoughts.

You’re absolutely right that Astec is much more richly valued now than PI was in 2010. I also feel like the understanding for these kind of businesses has improved over time, much more analysts tracking these kinds of businesses (this might be my bias though). I agree with the business stability aspects. I feel like one reason for the overvaluation is the trusted promoter group to which astec now belongs. In fact for a very long time it used to trade at 1x sales and 10x earnings in 2014-15. In india, smaller companies with similar numbers trade at a discount to larger companies with similar numbers due to various factors (some of those might not apply to astec):

  1. Less certainty of future revenues and profits.
  2. Worse track record - basically lesser past data to draw conclusions from (note the use of the superlative)
  3. Illiquidity of the stock meaning institutions would not be able to own it in any meaningful way.

I agree that the businesses do not have a 1:1 comparison. Astec has clearly stated its aim of becoming like PI industries in its concalls. Also, they have guided for CRAMS to become 50% of revenue in 3-5 years up from 20% now (no reason to assume that they would not want to take it to even higher levels in next 10 years). For these reasons (primarily the first one) i’d compared to PI industries a bit. But completely agreed this is not a 1:1 comparison.

Disc: invested

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Many companies place text transcript of con-call quite late. Is there any web portal , which provides the text format of Con-call early. Yahoo Finance does provide in certain cases, but that too with a gap of 3-4 weeks.
Thanks.

tikr.com has concall transcripts for godrej agrovet which contains astec concall transcripts.

Hi All. I’ve compiled all the discussions related to Astec on GAVL calls. Please find the PDF.Astec Lifesciences.pdf (116.8 KB)

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Very good work. Just a small suggestion. Can you please reverse the sequence so most recent concall excerpt will come at the bottom? This will help the reader to see how the story developed over the period and also it would be easy for you to add new concall notes at the bottom of the page.

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As communicated in the AGM, Astec Europe Sprl (50.1% holding by Astec) is now getting sold at 1 Euro. Extract from Astec 19-20 Annual report shows Europe Sprl shareholding and its financials.


This simplifies the company structure by removing unnecessary subsidiaries.
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Based on some requests:

… and my own curiosity, here is a side-by-side (SxS) comparison between Astec and Bharat Rasayan:

Objective Parameters

Attribute Type of Attribute Bharat Rasayan Astec Lifesciences
Type of Key product Products Insecticide, Herbicide Fungiside, Herbicide
Key Products Products Metaphenoxy Benzaldehyde, Lambda Cyhalothrin, Metribuzin, Chloropyrophil, Para Chloro Benzene Cyanide Tebuconazole, Propiconazole, Hexaconazole, Difenoconazole
Metalaxyl, Tricyclazole, Imazethapyr, Lambda cyhalothrin
Key Clientele Clients Bharat group unlisted companies Exports, Godrej Agrovet
Export Clients Clients Bayer, Syngenta, Nissan, Adama 8 of the top 20 global agrochemical players
Promoter Holding Promoters 75% 72%
Promoter Group Promoters Bharat Group Godrej Group
Pledged % Promoters 0% 0%
Willingness to increase contribution from Exports Revenue Mix Yes yes
% of revenue from Exports in 2016 Revenue Mix 28% 38%
% of revenue from Exports in 2019 Revenue Mix 23% 56%
Evidence on walking the talk for increasing exports contribution in Revenue Revenue Mix No Yes
Focus on CRAMS/CMO Revenue Mix Yes Yes
% Contribution to Revenue from CRAMS Revenue Mix 5-10% 22%
Working Capital / Sales in 2016 Working Capital 19% -5%
Working Capital / Sales in 2020 Working Capital 57% 2%
Debtor Days in 2016 Working Capital 71 126
Debtor Days in 2020 Working Capital 75 112
Fixed Asset Turns in 2016 Efficiency 3.3 2.45
TTM Fixed Asset Turns Efficiency 5.6 2.9
OPM in 2016 Profitability 18% 14%
TTM OPM Profitability 20% 19%
ROCE in 2016 Profitability 25% 12%
ROCE in 2020 Profitability 34% 20%
PE Ratio Valuation 25 37
Sales (TTM) Revenue 1124 554
Operating Cash Flow / Operating profit (Average of last 5 years) Earnings Quality 46% 82%
EPS CAGR (2016 to Q1-FY21) Past Growth 44% 46%
Sales CAGR (2016 to Q1-FY21) Past Growth 24% 23%
Debt to Equity Ratio Debt 0.17 0.4
Interest Coverage Ratio Debt 17.3 8.97

Note that the companies are a very good comparison, but not exactly apples to apples comparison. This is because primary focus for Bharat Rasayan is Insecticide whereas that for Astec is Fungicide. This is still a good comparison since both companies definitely do manufacture pesticides and are bound to compete for end consumer (Farmer)'s money.

I have also added some subjective opinions below:

Attribute Bharat Rasayan Astec Lifesciences
Promoter Group Quality Medium High
Valuation Reasonable Over-valued
Past Growth Very High Very High
Growth Prospects High High
Asset Turns High Medium
Margins High High
Business Return Ratios Very High High
Exports Management has guided to increase % of revenue from Exports but hasn’t yet Walked the Talk Management has increased % of revenue from Exports
Relationship with Top global Agro players Excellent Excellent
CRAMS contribution to Revenue Low Medium
Past Earnings Quality Low High
Indebtedness Low Medium

Note that these are my personal opinions. I could very well be wrong about them. I would be very happy to incorporate learnings from other investors or potential investors into this comparison to make it stronger.

The next level of deep dive required (imo) is to understand the size of the opportunities present for Astec and Rasayan’s current business product mixes. This is more involved and I intend to pursue this in due course of time. Please do note that these are not static businesses; they keep adding and substituting products and ideally any “opportunity size” analysis has to be repeated every 6 months / 1 year for it to continue to remain fresh and useful.

Disc: Invested in Astec, thinking about investing in Bharat Rasayan.

Edit: Added columns for earnings quality.

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That’s a superbly detailed comparison . Thanks so much . Just intrigued by one thing , why have you put earnings quality of bharat rasayan low as compared to astec when the cashflow too has improved in last results ? Thanks

That is a one-off. An average over 5 years still shows earnings quality to be low. We can look at an average over 10 years as well and it would paint a similar picture. I think the fundamental reason for this is a different working capital structure. This is covered beautifully in the various deep dives on Bharat Rasayan:




Note that the numbers capture the picture looking backwards. I’ve clarified this in the main post as well. There is clear evidence for poor quality of earnings. This is not to say that earnings quality will be poor in the future. If BR can repeat its cash flow performance of FY20 in next 3-4 years, of course earnings quality will improve.

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