Best Agrolife - Think Big, Think Best!

I am not an accounting/audit expert so can’t comment where exactly the problem is in operating cash flows (other than inventory and receivables) and hence posted my query.

We can justify that receivables / inventory as a ratio to sales are under control, etc. But the problem is still the fact is that the cash flows are negative since last some time. I am not saying there something wrong or right fundamentally with the company, just trying to evaluate the reasons.

Also note the increase in Trade Payables (Rs 220 crs, equal to its net profit before tax for 6 months ending sep 22). Sooner or later company will have shell out money to pay this.

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Promoter buying in Best Agrolife yesterday

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  1. There is a stretch in the working capital as the company is transforming from a run of the mill B2B player like others in the sector to a branded player. So they have pushed the brand in the market. Sales and PAT figures are indicative of the same and so are the margins in the quarter.

  2. Plant and equipments are genuine (I have visited both Gajraula and Greater Noida plant). The company does outsource some production to another company Ravi Crop Sciences. They purchase intermediates and supply back technicals to Best Agrolife itself. This is also the reason why Ravi Crop Sciences appears as a customer in AR whereas it is actually a vendor (supplier). Also, the company has converted a large portion of its own sales from B2B to B2C for the technicals it used to manufacture for other companies earlier.

  3. Yes, this is because the growth in sales is Working capital driven. The nature of the business is working capital intensive for all Agro chemical players. However, it is seasonal too. December end, most of the cash is released in the system between Kharif and Rabi season. But investors don’t get to see as BS is reported in Sep quarter and March quarter only.

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Cash flows are negative as the company is in a supernormal growth phase. Also, model is shifting from B2B to B2C. B2C businesses needs inventory builtup to meet seasonal demand. Sharp increase is margins is a validation of change in model from B2B to B2C

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Hi Ashish! Very good company and you caught it much early. I just want to get an idea of your thought process on this company like how you look at it? a.) Company which enjoys super normal growth for some period and then growth starts maturing or even starts de growing as some molecules fail or may be competitive intensity in some key moecule increases. So is tracking this company molecule or say some of their key product wise is the right way? If it is can you suggest some sources where it can be tracked. b.) Consistent compounder wherein existing sales is safeguarded by some means and new sales is generated as time goes by company’s moat and it goes on growing as the time goes. I mostly think it will be in the first category but if you have any alternative views. Just wanted to know your thought process.

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Trying to answer point by point
a) Competitive intensity will increase in everything in life if it is highly profitable with supernormal ROCEs. However, here some of it is safeguarded as the company has 20 years patent for recently launched products. Advantage may not last that long, but still 5-7 year runway is ahead for us and that is good enough. And then they have 28 products which are filed in limited competition category. So what you think may be a short time affair could continue for several years on constant new product launches. The data on filed products is confidential and I am not privy to that, but company has disclosed some products like Strobulin chemistry ones going forward during the concall. Ronfen, CTPR and recently approved patent on another ternary combination will drive growth for FY24 and FY25 I guess.

b) For now, frankly I am looking to ride the near 2-3 years and then worry about later. If I am right, FY24 and FY25 would both be a growth of 30-40% in bottom line. FY23 would obviously be more than 100% jump in bottom line over FY22 PAT of 104Cr. The company has already done 170cr in 1H. Overall the promoter is just 44 years old and is hungry for growth. Indian Agrochem industry has tailwinds and innovation will be rewarded is my bet. Unlike most other players like Sharda, Dhanuka, etc who just copy paste molecules or make formulations from imported technicals, BAL is trying something different.

However, 3rd quarter is likely to be a very weak quarter seasonally. So not getting hopes too high. Let’s see. Stock in my view is still cheap though. 11-12X FY24.

Disclosure: Invested and so my view may be biased.
Do not treat this as investment advice. Do your own research please!

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Quick comment: The only difference with Best Agro (vs other formulators like Dhanuka) is Best Agro is doing three way combinations vs others selling two way combinations. This is because Indian government started approving three way combinations only recently, and Best Agro has a first mover advantage. There has also been some allegations against Best Agro as to how they are the only ones getting these registrations in very quick time (less than a year for 9(3) registration is unheard of, it takes 2-3 years generally).

Best agro is also importing the intermediates (largely from China), getting Ravi Crop to convert it into a technical, and then making their own formulation in their Noida facility. This is exactly what everyone else does. So, they are not doing anything different per se. Their patents are for combination of different technicals, and not for new technicals. Its important to differentiate these things, while also recognizing that they have been doing well due to 3-way combinations.

Disclosure: Not invested (no transactions in last-30 days)

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Difference is own patent verus no patent.
Allegations are baseless in my opinion, but just for information, it took them 3-5 years to get Ronfen. Product registration happens after patent has been received, but patent receipt happens after years of trials, R&D and demonstrations. For eg. the recently approved ternary combination patent has been granted but registration is yet to come. Now they have registered and product registration will take less than a year.

Although one can always believe in hearsay and stay in denial mode :slight_smile:
Everyone is entitled to their own opinions and beliefs. I smelled nothing fishy having visited the plants and also having met Mr. Pramod Karlekar - ex India head of FMC, who is now at a Managing director position at BAL.

Yes, Best Agro also imports intermediates from China, however, that’s the future game, where they are trying to backward integrate to n-5 levels versus n-1 level currently in Indian industry. Visited their R&D facility too, and I was quite impressed.

Disclosure: Invested. Views may be biased, so take with a pinch of salt.

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Rightly said. So, product like Ronfen has a global patent for 20 years. So, we can’t expect any competition in these combinations for 20 years not only in India but also in other countries if I am not mistaken. However, was there any patent for two-way combinations by any Indian players in the past if @harsh.beria93 @ashurathi any of you have any idea. I think it will help us to understand the competitive intensity it can get. Obviously, it would have cost advantage compared to just the seller of Solo Technicals. Also going for backward integerations and manufacturing technicals will surely give an edge in future.

Thanks for sharing your perspective. While working on the company, I couldn’t understand a few things and will really appreciate your perspective on them.

1. R&D costs
Do you know why Best Agro’s R&D costs are mentioned as zero in their annual report? I imagine that generating trial data for getting patents and registrations will require some investments. What is the line item that this will get reflected in?

2. Freight outwards expenses
Their freight expenses are very low at 2.6 cr given the size of their business. Dhanuka, which is of similar size in terms of topline has freight expenses of 39 cr. Why are these so low for Best Agro?

3. Other expenses
Best agro has other expenses of 36 cr. on topline of 1211 cr. vs 155 cr. on topline of 1478 cr. for Dhanuka. Does such low other expenses imply that they are largely trading in agchem segment?

Also, their audit fees is on the higer side at 45 lakhs (vs 21 lakhs for Dhanuka which has higher revenues).

4. Consolidated vs standalone nos
I was also looking at H1FY23 results, and couldn’t reconcile (consolidated - standalone) numbers.
On a consolidated basis, revenues were 1164 cr. and EBITDA was 249 cr.
On a standalone basis, revenues were 1009 cr. and EBITDA was 100 cr.
So if I wanted to understand contribution from subsidiaries (consolidated - standalone):
Sales: 1164 - 1009 ~ 155 cr.
EBITDA: 249 - 100 ~ 149 cr.
How are their subsidiaries making such high EBITDA margins (close to 96%)?

If you can help me reconcile these numbers, it will be really useful. Thanks in advance.

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Given that we are both invested in RACL, i think we will appreciate that not all cos point out R&D expense in a line item separately for R&D. See notes from July Concall


See FY22 AR snippet

I vaguely remember seeing this in Gufic too. In fact most indian cos ive seen are not very fussy about where to put true R&D expenses most just seem to fill it with “nil”. Now that Co is doing concalls, interested investors can always ask in Concall about level of R&D spends & headers where these occur.

Freight accounting is quite diverse from what I have seen. Many cos dont account since freight is borne by distributor or customer or retailer. Definitely an important question we can ask management in concall.

Definitely yes. Also see the purchase of stock in trade for BAL which is quite high.


This clearly shows that a large part of their revenue is based on purchases of off the shelf products (i assume at least AIs and potentially formulations as well). Another key question to ask management.

I think this one is relatively easier to answer. I have seen several instances where co does expenses for sub from parent P&L & vice versa. This is definitely not clean accounting but as long as Sub & parent are working towards same goals, id just analyse consol P&L and not break it down too much (unless i am confident of accounting hygiene)

Question to ask is whether and how much of these negatives are discounted by valuations.

To me personally, the biggest red flag is the cashflows which are non existent. Given their large push to B2C, the receivables specially are quite concerning. I do remember that BR had similar cashflow concerns and once cashflows came in, stock did quite well as investors confidence improved. A key monitorable IMO.

In short, im afraid investors cannot. Only management can. I encourage you & every other investor to join the public concall & ask these questions, i think that is best way to proceed.

On the positives side, one can definitely checkout http://ppqs.gov.in/ to confirm that indeed, co’s products are being approved by Govt. Eg: Consider http://ppqs.gov.in/sites/default/files/minutes_62nd_cib.pdf
MINUTES OF THE 62
nd MEETING OF THE CENTRAL INSECTICIDES BOARD
(CIB) HELD ON 09.05.2022 AT 1400 HRS THROUGH VIDEO CONFERENCING.

^ see last row, this is a triple combination formulation approved on 09.05.2022

Also consider MINUTES OF THE 437th REGISTRATION COMMITTEE MEETING HELD ON 16.03.2022.
http://ppqs.gov.in/sites/default/files/437_rc_minutes.pdf
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^ Approval of registration of Ronfen.

I think harsh’s notes while quite gooddo miss out on a few critical aspects of the investment one can derive from the concall. Most important is that co has a pipeline of 20 odd products which are similar in size & scope to Ronfen.

For clarity, this is 20% share of a 2800cr market. Thats 560cr just from CTPR. No domestic competition. 25% discount.
image
https://www.business-standard.com/content/press-releases-ani/best-agrolife-ltd-becomes-first-indian-company-to-launch-indigenously-manufactured-ctpr-122090300005_1.html

I think the accounting concerns are quite genuine, dont give much confidence. The risk of capital loss is high (what if co is outright fraud & all numbers are cooked up). This is why valuations are also quite poor. I do think it is worth diving deeper, because the upside is also asymmetric (if one can simply establish some confidence in co not being outright fraud).

I will try to visit their factory when i can (the one in Noida). Will try to attend their next concall too.

Disc: Small position of 2-3% only to be scaled up if higher confidence in accounting & cashflows can be established. To be exited if co seems to be indulging in outright fraud.

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Lots of positives with lots of red flag.

Positive:
Company started concal.
E&Y as Investor Relation Agency
Hosting Calls with Mutual fund.
Company is in a regulated industry and its not easy to make blatantly false claims in this sector as all registration and other details are available online.
Patent of formulation and process can be verified.
Formulation/Technical approval and registrations can be verified online.
Mutual Funds are invested
FIIs are invested.
Promoters buying at current levels also and increasing their shareholding.

Negatives:
Hard to believe the capabilities of Company with so low spend on R&D.

But then patents and registration of technicals and formulations are there to support their claims.

http://ppqs.gov.in/sites/default/files/440_rc_minutes.pdf

Consideration of application of M/s Best Crop Science LLP for grant of registration for
Technical Indigenous Manufacture (TIM) of Thiocyclam hydrogen oxalate technical
86.00% w/w min. u/s 9(4).

Consideration of application of M/s Best Crop Science LLP for grant of registration for
Technical Indigenous Manufacture (TIM) of Kresoxim methyl technical 94.00% w/w
min. u/s 9(4).

Consideration of application of M/s Best Crop Science LLP for grant of registration for
Technical Indigenous Manufacture (TIM) of Sulfentrazone technical 95.00% w/w min.
u/s 9(4).

  1. 198996 BEST CROP SCIENCE DINOTEFURAN 20% W/W SG Satisfactory

  2. 196909 Best Crop Science Pvt. Ltd. QUIZALOFOP-ETHYL 5% w/w EC Satisfactory

  3. 300244-
    F/9(4)2022 Best Crop Science Pvt. Ltd. Tembotrione 34.4% w/w SC Satisfactory

  4. 301016-
    F/9(4)2022 BEST CROP SCIENCE QUIZALOFOP ETHYL 10% EC Satisfactory

  5. 301046-
    F/9(4)2022 BEST CROP SCIENCE Dinotefuran 15% + Pymetrozine
    45% WG Satisfactory

  6. 303680-
    F/9(4)2022 BEST CROP SCIENCE Tembotrione 34.4% w/w SC Satisfactory

  7. 303696-
    F/9(4)2022 BEST CROP SCIENCE FLUBENDIAMIDE 20% WG Satisfactory

  8. 303704- BEST CROP SCIENCE Topramezone 336 g/l SC Satisfactory

  9. 304222-
    F/9(4)2022 BEST CROP SCIENCE
    THIOPHANATE METHYL 450 g/l

  • PYRACLOSTROBIN 50 g/l (w/v)
    FS
    Satisfactory
  1. 304235-
    F/9(4)2022 BEST CROP SCIENCE Haloxyfop R Methyl 10.5% w/w
    EC Satisfactory

  2. 304245-
    F/9(4)2022 BEST CROP SCIENCE FLUBENDIAMIDE 0.7% GR Satisfactory

  3. 304268-
    F/9(4)2022 BEST CROP SCIENCE
    2,4-D Sodium salt 44% +
    Metribuzin 35% +
    Pyrazosulfuron ethyl 1.0 % WDG
    Satisfactory

and many more … more then 40 products mentioned in the list

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Based on above message, I came to know about GSP crop. Planning IPO next year. By just adding Suspo-emulsion (I am not expert in agrochem field, and writing this just based on observation in news articles), co got patent for Pyriproxifen and Diafenthiuron combination similar to Best agro (dual combination vs triple for best agro) despite strong opposition from best agro legally.

This shows patents are fragile and sometimes difficult to protect. same company is behind CTPR, too!!
This co is also having turnover of 1200 crs or so, in the range of best agro.

better we focus on marketing at ground level, and who is winning there as multiple players can do the same, so there won’t be monopoly as such.

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Management commentary is very encouraging and bullish obviously to be taken with a pinch/handful of salt as per your taste :grinning:

https://www.business-standard.com/content/press-releases-ani/best-agrolife-ltd-holds-distributors-meet-in-thailand-launches-two-indigenously-manufactured-ctpr-based-products-122112401038_1.html

https://www.business-standard.com/article/news-cm/best-agrolife-s-subsidiary-receives-indian-patent-for-a-fungicidal-composition-122103100189_1.html
https://indiankanoon.org/doc/2058957/

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4. Consolidated vs standalone nos
I was also looking at H1FY23 results, and couldn’t reconcile (consolidated - standalone) numbers.
On a consolidated basis, revenues were 1164 cr. and EBITDA was 249 cr.
On a standalone basis, revenues were 1009 cr. and EBITDA was 100 cr.
So if I wanted to understand contribution from subsidiaries (consolidated - standalone):
Sales: 1164 - 1009 ~ 155 cr.
EBITDA: 249 - 100 ~ 149 cr.
How are their subsidiaries making such high EBITDA margins (close to 96%)?

As per my understanding:
You will have to adjust inter Company sale of around Rs 220 Cr which will effectively give contribution of around Rs 375 Cr in sales from associates and margin will be around 42%

Where are you getting these nos from? This is what the auditor has mentioned in their report.

I had got the number from Related party transaction report

Standalone sales : 1002 Cr
Consolidated : 1164 Cr

Sale of subsidiries : Rs 597 cr as per Auditors remark.

So inter corporate sales should be : 1164-1002 =Rs 162 Cr and after adjusting
597-162 = Rs 435 Cr

Inter corporate sales should be Rs 435 Cr , however as per related party transaction details furnished by the Company it is not matching up.

Best Agrolife standalone Sales of Rs 1000 Cr is purely trading sales as it is only a trading Company .All manufacturing sales are from subsidiaries, however figures are not matching up.

It reminds me of Manpasand Beverages:

On a consolidated sales of Rs 1164 Cr if around 1000 Cr are trading sales, what valuations should it command ???
Further trading margins are generally 3 to 5% whereas in case of Best Agro it is substantially high.

I had contacted many retailers but none of them had RONFEN or any other product of Best Agro.
Disclosure : Invested with a small tracking position.

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Mr. Gujral joined Heranba

image

More insider buying

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