Astec Lifesciences

Stock Opportunities Not-so-Hidden Gems
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Not too sure that it implies anything about Astec’s future. In my opinion, it surely implies that all is not well between Godrej and Mr. Hiremath. This can be judged from the fact that Godrej’s had to take a lot of write offs in Astec post acquisition to clean up the books. So I am sure Godrej’s must not be happy with Hiremath’s accounting shenanigans and lack of transparency at the time of acquiring the company, although this is pretty common in all Indian family run companies. But what is uncommon is keeping the promoter as MD of the company with some ownership post the acquisition.

Long story short, I am not too concerned about Hiremath selling as it was expected. This will put short term pressure on the stock price for sure. But investors have to ask themselves only one question. Whether they have invested in this company looking at Mr. Hiremath as a founder MD or as Godrej as ownership group. This company was in existence for last 26 years (and was going nowhere) but I started looking at it only when Godrej purchased majority shares in late 2015. So as long as Godrej group is committed to this company, I am ready to stomach some short term hiccups as opportunity size for Agrochemicals is very big for Indian companies.

Disclosure - invested from 2017 onwards and forms more than 10% of my PF

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67

I hope you realize Godrej bought the company at below 450 Rs per share and their investment value has doubled.

Till date only Mr. Hiremath has been talking about Astec’s future. So there is a world of difference between what he is telling us and how he is acting.

For Astec to be a good investment we need genuine understanding of prospects over next 3 to 5 yrs

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Godrej purchased the shares around Rs 160 only… but I remember attending their AGM in 2017 when someone asked Mr. Godrej why did they buy such a small company. His response was so that they can make it BIGGER! So they are in this for long term.

If you see Godrej’s action plan over past 5 years, they have systematically converted this into Godrej company (although their plan of merging into Godrej Agrovet failed). They brought in their systems (SAP), brought in their auditors etc. Last thing remained for them is to bring in their own MD. So as far as I am concerned, writing is on the wall for Mr. Hiremath. He may have other plans beyond Astec which is quite OK for me.

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69

Premium content…for members only…

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70

Another tranche of 1,84,850 shares (0.94% of total shares) sold by Mr. Hiremath on 15th Dec as per bulk deal disclosed to BSE. So now he has only 4% shares remaining with him. By this speed, he may get out by Mar 21. Just a guess…

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71

Ashok Hiremath sold 4L on 15th Dec, 1.84L on BSE, 2.16L on NSE. He is left with only 2.9% stake now (5.67L shares). If he sells these, another 5.67L shares will be in market soon, but value wise its only 56 crores, it may not impact price much once a decent since buyer shows up. What happens once all the selling pressure from Ashok disappears?

Refer Link: https://www.bseindia.com/xml-data/corpfiling/AttachLive/2DD7DED6_6899_4A5D_91D2_ABE8F40E159F_174501.pdf

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72

For the first time, Astec is going to have separate conference call post its results (earlier it was discussed during its parent company Godrej Agro’s concall). Many investors and analysts were asking for separate concall . I also have written to the company about this. Looks like company is listening to its minority shareholders! Very good sign for the new investors as this will provide detailed discussions on company’s results as well as its future growth plans

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73

huge accumulation by MF’s

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74

Looks like most of shares sold by Mr. Hiremath are picked up by mutual funds…If so, this would augur well for the stock in the long run.

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75

The result seems very poor!!

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76

This clearly came out as negative surprise. One likely reason could be postponement of few export orders or lack of containers hurting exports. If so, it will benefit current quarter . Astec is a lumpy business and last quarter is always the best quarter.

Will have to wait for management commentary on concall but expect market to react negatively on Wed which may provide opportunity to buy this growing business.

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77

Results are definitely poor when most companies are reporting growth.
Waiting for management con call on 27th and giving it 1-2 more quarter before exiting completely.

Dis: Holding from lower levels.

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78

This is what I call the classic “pump and dump”. Mr. Sudhir Trehan did the same in Crompton Greaves. Mr. Ashok Hiremath has done the same with Astec. Pumped up the stock with his bullish guidance and dumped more than half his stake…

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79

I think it is grossly unfair to slot this company with “Pump and Dump” companies like Crompton Greaves, as majority shareholder here is the Godrej group (and they are neither selling nor involved in any fraudulent activities like CG promoters). Also stock price is hovering between 1050-1250 in last 3 months (when overall market has gone up by 20%+ so it could be purely market driven price rise) , hence one can not say that it has gone up a lot due to positive talk. It may be just one bad quarter…let’s wait for the concall before jumping the gun…

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Sudhir Trehan was not the promoter of Crompton at that time and both Crompton and Sudhir Trehan were darlings of the market…

BTW Godrej group is also not beyond reproach. See the article in the following post

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81

Although it’s said that past performance is no guarantee of future performance in any financial investments, it definitely helps to keep a track of forgotten past records of corporate actions where the intent of the management towards minority shareholders comes in question.

I had posted a link to an old Godrej matter which was flagged as inappropriate in this tread, So I have moved it to the appropriate thread Here

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83 
# Revenues at Rs1.16bn down 7% YoY. Revenue decline was mainly due to fall in Tebuconazole realisations (-18% qoq).
# Higher employee expenses (due to hiring of new R&D team) and change in product (lower share of CRAMs) led to a sharp decline in EBITDA which tanked 25% yoy to Rs 156mn 
# Net income declined 42% yoy to Rs 71mn
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85

Q3-FY21 results

  1. (Financials summary): Revenue, EBITDA, Revenue etc (along with previous year quarter
    Deferment of few orders and decline in prices of 1 key product. Due to seasonality full year financials are more representative of performance.
  2. (R&D Facility): Construction of R&D facility as per plan. Quantum jump in R&D capabilities.
    (stake sale): Ashok Hiremath: Stake sale for personal reasons
  3. (Growth Guidance): Target for bottomline is 20% CAGR
    (Herbicide plant): full impact 2 years from now (asset turn ratio of 1.7), the plant will open in Feb 2021 3rd week. No revenue booking in Q4. The capex was 80cr. Plant will give EBITDA margin of 20+%. 110 new employees will be added. 200cr peak revenues. After a year the asset turn would be ~1x. Gross margin is closer to 50%.
  4. (which product volume went down): Tebuconazole: Price came down by 30%. Main issue was in a falling market raw materials were already in procedure so margins went down. Subsequently the price of raw material also went down and margins will recover in Q4.
    (margin guidance): 19-20% full year EBITDA margins. In 2-3 years we can touch 25%. We are getting a lot of high margin product inquiries.
  5. (Geography breakup): Strong traction in US market. Varies from product to product. Australia is very cyclical market (years of drought). Domestic market is also very strong. One product was selling so well that it is booked until Q2 of next year.
  6. (Molecule pipeline): In Q4 1 molecule, and next year 2-3 molecules and every year 2 molecules.
  7. (SDHI vs triazole fungicides): SDHI cannot replace triazoles which are bread and butter of fungicide, Triazole is much wider mode of application. Amount of combinations those are made with triazole is also very high. Of all the classes of fungicides, triazoles is largest market.
  8. (Deferred orders): Equivalent of profit of 2cr. Not very significant. We will make up in the next quarter.
  9. (herbicide plant): Herbicide plant will be used for only CRAMS operations. We introduced 1 promising herbicide intermediate. It has potential to be very large volume product. For a patented herbicide. We will move it to the new plant. Orders for 30% of the capacities are already there. 50% of the capacity we are under contract negotiation.
  10. (CRAMs segments): We are not dependent only on triazole chemistry other chemistries too. At the moment we are not doing early stage research. Our new R&D center will be at a scale where we will be able to do early stage research as well. Right now we do not have bandwidth. Right now only focussing on process development and scale up.
  11. (Tebuconazole): Lot of plants had gone offline in China due to covid. They came back online. That led to price erosion. Prices may go up if covid spreads in China.
  12. (Capex frequency): Every 1-1.5 years we will have to put up new plants. Luckily we have a lot of land in mahant. Also scouting for new land in Gujarat. Might put up another greenfield project in the future. Lot of demand.
  13. (Raw material sources): We import 70% of our total purchases, of that 75% comes from China. We commissioned 1 product. 50% of our purchases from china are 1 product. We either make or buy from there. So that itself will bring our purchases from China down from 50% overall to 25% if we chose to make the RM.
  14. (Pharma): In future we may put up cGMP Pharma KSM plant. We have those products developed but need not able to focus on that right now.
  15. (new orders fulfillment): In the new plant we have ability to put up new reactors. We can also debottleneck existing capacities. In new R&D plant we will do process efficiency increase to improve the throughput.
  16. (CRAMS growth): 14% growth in the 9M period. There were some deferments. So Q4 it will catch up. Some orders we could not send due to shipment problems. YoY growth would be significant.
  17. (1 product banned in Europe): Even for that product we have a new generation of triazole fungicides under development.
  18. (Total volume growth): 15-20%
  19. (Domestic vs Exports): 50% domestic and 50% exports. Our realization was a bit better on domestic front. Domestic grew by 20% and exports by 6% YoY basis.
  20. (R&D Facility): Want to increase our EBITDA margins from 20% to 25%. We want to grow at a rate of 20% compounded. We have to roll out higher margin products in order to do that. Need to attract higher margin products. Will develop capabilities on Fluorination. Biochemistry, chiral chemistry. Profitability is not just driven by chemistry but also engineering. Eg: vapor phase reaction. Working on various new age technologies. If the same chemistry can be in a fine chemical or pharma intermediate, we are agnostic to that. We don’t want to invest in GMP plant right now but can do so in future.

My take away: I’m happy with the concall. Management has clarified on the reasons for lower profitability and growth. Margins should come back in next quarter. FY22 onwards, herbicide plant should be a driver of growth and margins. FY23 onwards the R&D should result in much better margins and sustenance of growth. At least at a public level, looks like Mr Hiremath is still committed to Astec and only sold his stake for personal reasons (it is up to each investor whether they want to believe Mr hiremath). Frankly my investment thesis is not built around Mr Hiremath, so him selling or leaving doesn’t make much difference to me.

Disc: Invested and adding.

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86

Attended the concall live: there can be some mistakes

-Total income was impacted due to the deferment of few orders. There is also an element of seasonality in our business, better to look yearly at our performance. Performance is in line with our expectations.

-Stake sale was purely on account of personal reason, believe in the future to be extremely strong.

-We have often said that we have targeted a bottom-line growth of 20%+.

-Margins will be restored in Q4. 19-20% Ebitda margins are sustainable.

-In Q4, our herbicide capacity would be coming up.

-Aspire to touch 25% Ebitda Margin in next 3-5 years and getting good order inquiries.

-One of the products that had seen low demand last year, has recovered this year.
Molecule Launch
-In q4FY21:1 MOLECULE
Next FY:2-3 molecules
Every year 2-3 molecules

-New generation fungicides are mixed with Triazoles to avoid Fungal Resistance. Triazoles have much higher application. Triazole Fungicide is the largest market.

-Herbicide Plant is being used for Contract Manufacturing. Introduced: one extremely promising intermediate (for patented herbicide)

-Next year when our r&d plant comes online, we will also be doing CRO.

-Gross Margin went down by 0.5%.

-Every 1-2 years, we will need to keep putting up MPP. Luckily we have more land in Mahad, and we are planning to buy land in Dahej (Greenfield).

-70% of our total purchases are what we import and 75% comes from China. We want to minimize the dependence on China as far as possible.

-Pharma Intermediates we will do, at the moment non-gmp pharma intermediates. In the future: cGMP plant.

-Gross Margin would be closer to 50% in the new products/herbicide plant.

-In the new plant we have the facility to put up many more reactors and debottleneck the existing plant.

-Crams growth in the first 9 months is 14%. Q4 it will all catch up, we couldn’t sell due to shipping line problem.

-Our volume growth would be 15-20%.

-We need to develop capabilities to target higher-margin products at our R&D labs. Working on various new-age technologies. It will take some time. Targeting fluorination in which SRF and Navin have had a monopoly, targeting high pressure and continuous flow, Biochemistry, Hydrogenation etc.

-Application of r&d: fine chemical, pharma intermediates. Not investing in a separate GMP plant, that we will do at the right time. A totally different ball game.

Disc: not invested. Directionally seems very positive though.Chinese dependance seems to high, given players like Pi have bought it down to single digits and Bharat Rasayan is also working on the same.

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87

As a note of caution…4QFY20 was the largest in FY20…you have a very challenging base for 4QFY21

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