My notes for Q2-FY21 concall (https://app.tikr.com/stock/transcript?cid=10530614&tid=539336449&ts=2130782&e=692954678#) It was interesting to see that there were many questions about Astec. I can possibly also Understand why stock has gone down, they practically guided for 10% bottomline growth in H2.
- [Topline, Bottomline, Growth, Margins]: Astec Lifesciences posted strong performance with revenue and EBITDA growth of 10.5% and 83.5%. Higher volumes + better realization + preponement of some orders into the Q2 contributed to the growth. 20% Growth YoY for FY21 (bottom line). The contract manufacturing business has a higher EBITDA margin. So that our blended average is about 20%. Herbicides manufacturing, it’s upwards of 25%. Q2 margin has been 20%. H1 has been 22.5%. Given fluctuations in selling prices, 20% is what we can give you the guidance for. And as our contract manufacturing business increases as a proportion of our total sales, this will inch upwards towards eventually 25%, when we get a significant amount of contract manufacturing in our portfolio.
- [Triazole vs SDHIs]: What is discovered is that SDHI needs triazole fungicides to be used with them to overcome fungal resistance. So SDHIs are being used along with triazole fungicides. And therefore, the market is stable and growing slowly. We are a relatively small player , we sell about $80 million worth annual. There are some new generation triazoles, replacing the older generation ones and also replacing some of the other classes of fungicides. We are working on those, and we’ll be introducing them in the next 2 or 3 years which will lead to substantial increase in our revenues.
- [CRAMS]: Our contract manufacturing business is not restricted to triazole fungicides. We are doing a lot of chemistries other than triazole fungicide chemistry. But because it’s contract manufacturing, it is not publicized. We already have a wide range of chemistries, including grignard & expoxidations & heterocyclic chemistries and some kind of building blocks of chlorine chemistry. Herbicide CRAMS plant is expected to come in Q4 FY '21. We’re investing about INR 85 crores in that plant. And it’s a state-of-the-art plant and it can make a variety of new generation herbicides and intermediates. We see visibility of 100% occupancy more or less of this plant over the next few years. Will really result in total sales turnovers of INR 175 crores to INR 200 crores. We have a range of sulfonylureas, which are being made on a contract basis.
- [R&D Center]: All the design work is over, the detailing is over. Groundbreaking by early December & we want to have it up and running by January 2022. Quantitatively, it’s going to increase the number of projects that we can handle simultaneously which is currently the limiting factor. We’ll be able to offer our customers their worth a complete toolbox of chemistries. Customers will prefer us for projects where there are a series of reactions, where we have the expertise to do it. It will attract a lot of the projects. Tere could be large-sized projects & there will be accelerated capital expenditures involved. We’ve already invested about INR 60 crores in capital expenditure this year. Our borrowings have come down to INR 99 crores. Debt equity ratio is about 0.36. Will manage all this with our internal accruals. And so even with an accelerated CapEx program, we maybe have to increase our debt-to-equity ratio to some extent, but we do not have to resort to any external borrowings or any other kind of dependence on Godrej Agrovet for funding these projects. It will certainly start showing results within a year or 2, but the real impact will be a kind of a step jump that will happen over the next 3 to 4 years after its commissioned. With current R&D capabilities we can grow 20% per Annum. We’ve hired more people, and we’ve increased our R&D bandwidth by a factor of about 50% to 70%.
- [Seasonality of business]: Traditionally in the domestic businesses in the first quarter demand is always less because in the first quarter hardly there is any crop where fungicide is used.
- [Chemistry Skills, Comparison with PI industries]: let’s say that BASF or somebody is looking for somebody who can do a field craft, there’s grignard involved and then there’s nitration and hydrogenation, they look around, they look to PI, they look, who are the people who have the set of skills. And then they will pick a partner. If Astec is good at grignards and this line of chemistry, they will come to us. So the wider range of chemistries that we have mastery over, the more business we will attract. So PI is a little ahead of us on that curve because they’ve been around longer. But by the time this comes, we will develop these so-called technologies, which means we can offer it to our customers, and therefore, these complex multiple synthesis products can be brought into our company. Clients want to derisk away from China and also concentrated suppliers like PI industries. So they are also waiting for our R&D Center to come up. And they are waiting to give us projects.
- [Astec Europe]: We had set up Astec Europe and we held 50.5% stake in that, we wanted it to hold some registrations for us. Over the years, the registrations expired, and there was no point in continuing to hold it. And there were operating costs, and they were obviously standing overheads, and it was – so there was – it was making small losses every year. Our partner over there was the 49.5% partner, wanted to acquire the company. And given that there was really not any revenue and businesses, a loss-making company, we decided to sell it him for EUR 1
My 2 cents:
Company has a great growth path forward in next 4-5 years, specially with new R&D center coming up. It’ll be interesting to see if and whether Astec can wrestle some market share from PI Industries as management wants to.
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