Astec Lifesciences

Stock Opportunities Not-so-Hidden Gems
8

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
12 Likes