Dharmaj had a very good FY24, with sales growing 24% and EPS by 34%. This was a year when most agchem cos had a very bad year. They are confident of 25%+ sales growth in FY25. Concall notes below
FY24Q4
Targeting 900 cr. sales in FY25
Technical division
Started with 7-8 products in phase 1, 5 synthetic pyrethroids (Cypermethrin, Alphamethrin, Lambda Cyhalothrin, Bifenthrin.) + 3 non-synthetic pyrethroids (Thiamethoxam, Chlorantraniliprole, Pymetrozine, Dimethomorph). Have achieved desired purity levels in May
In phase 2, will commercialize 3 new molecules in 2024
Average monthly production of 200 metric tons per month (30% utilization in FY25) - 275 cr. capex
Witnessing price increase in pyrethroids . Gharda is the largest manufacturer for synthetic pyrethroid and have shut plant for last 6-8 months as they are shifting plant from Dombivli to Sayakha which will become operational in 2 years
Started exports in April, achieved 27 cr. sales in April + May (sold 300 tons of synthetic pyrethroid)
Quarterly expenses: depreciation 3.7 cr, finance cost 1.1 cr. (this includes government subsidy), fixed overheads 9 cr.
Targeting 70 cr. annual overheads (33 cr. fixed + 37 cr. variable), 150 cr. sales and 15-20 cr. EBITDA loss
Will breakeven at 200-220 cr. (40% utilization to be achieved in FY26)
Will see 3-4% EBITDA margin improvement by FY27 (and 400-450 cr. external sales)
B2C
Tapped 4 new states in South India (Odisha, Andhra Pradesh, Karnataka, Telangana) expanding to 24 states. Wont add new states in FY25
Rajasthan grew to 23 cr. (vs 13.5 cr. in FY23)
Gujarat sales was 80 cr.
25% growth target in FY25
B2B
25% growth target in FY25
Volume growth was 45-50% in FY24
Targeting 800 cr. formulation sales in FY25
Reduced payables to avail cash discount
Formulation has 90 days credit period, technical division will have 120 days credit period
Accounting changes
Cash and quantity discounts were earlier reported as other expenses and will now be netted directly from sales. (FY23 revenue has been restated by ~9 cr.)
Out of 275 cr. capex, 260 cr. was on physical assets with remaining being capitalization of interest, consulting fee, intangible items.
6.25 cr. expenses in FY23, one-time professional and consulting fee for Sayakha project
Disclosure: Invested (position size here, no transactions in last-30 days)
Have clocked 35% CAGR revenue growth in last 5 years (though from a lower base). Remarkable that they have been able to achieve 25% growth in FY24 despite a challenging environment where most of the AgChem players were struggling on volume/margin front.
Significant 9x capacity increase underway, major part of that being covered by IPO proceeds (reduced impact of negative leverage in the initial years).
Capex is focused on Pyrathroids, which is 2nd highest type of AgChem globally. 2 levels of backward integration (Technical and intermediates) will help them be cost competitive to gain market share.
Pyrathroids (Global perspective):
Pyrethroids were first developed in the 1950s. Are synthetic chemical compounds that are procured from chrysanthemum cinerariaefolium flowers. Pyrethroids are cost-effective alternatives & less toxic compound as compared to conventionally used insecticides. They are also replacing traditionally used or ganophosphates (majorly used as insecticides).
Global Pyrathroid market is estimated to be ~2 Bn USD.
The consumption is concentrated in developing markets like Asia, LatAm and Africa while developed markets like the USA, Canada and the EU have been witnessing a declining trend owing to the newer chemistries and local regulations imposed for restricted usage. (could be a potential threat if the developing markets adopt to the restricted usages guidelines)
Among the Pyrethroids, Lambda Cyhalothrin, Cypermethrin, Permethrin, Alpha Cypermethrin, Bifenthrin and Deltamethrin contribute to about 70% of the total Pyrethroid business generating a revenue of USD 1990 MN.
Global pyrethroid market break up by key molecules. (Highlighted in yellow are the molecules which Dharmaj intends to produce. Good news is that production has already commissioned for top 5-6 molecules starting Q4’FY24. !!!
India is the the biggest manufacturer of pyrethroids. In fact supplying intermediates to China.
On demand size, China accounts for more than 50% of global demand for pyrethroids. China used to manufacture pyrethroids after importing intermediates from India. However, China’s pursuit of the ‘Blue Sky’ initiative to realize green GDP lead to the closure of several chemical plants. This in turn resulted in higher volumes of pyrethroids being exported out of India.
The pyrethroid market in India is expected to grow ~10% CAGR. The key driving factor will be regulatory outlook, China factor, wide spectrum crop application and the substitution of organophosphorus compounds.
In 2019, Heranba Industries Limited dominated the India pyrethroids market, accounting for a share of 19.5% of the total Indian pyrethroids production values. Heranba Industries was followed by Tagros Chemicals India (14.8%), Hemani Industries (9.9%), Dhanuka Agritech (8.7%), Insecticides (India) (7.9%), Syngenta India (6.2%), Sumitomo Chemical India (5.8%), UPL (4.2%), Bayer CropScience (3.9%), Rallis India (3.6%), Excel Crop Care (3.4%) and Others (12.1%).
One of the key reason for Heranbas pole position in India pyraethroids market is backward integration in CMAC (Cypermethric Acid Chloride). The EOU facility has made Heranba one of the largest manufacturers of CMAC in India, with new production capacity of ~3000 metric tons per year.
Export contribution by each of the major pyrathroides: (overall and each of the molecules almost doubling in 5 year window between (FY16-20).
Of all major Pyrethroids produced in the country, Permethrin has a special significance. India is the only manufacturer of Permethrin (Tech.) in the world catering to global Permethrin consumption under all Crop and Non-Crop segments.
Hemani and Heranba has cornered max market share vacated by Gharda and Bharat Rasayan.
Another significant molecule is Transfluthrin, India is the leading producer of Transfluthrin tech. with over 30% market share in the global Transfluthrin tech. business.
Current formulation plant (Ahmedabad) had gone through 2x+ capacity augmentation to 25,500 MT/year between 2022-24 . Running at 51% capacity utilization in FY24. So, significant headroom to ramp-up formulation side of the business. In fact, is well positioned to drive a much better growth aided by backward integration.
Recent capex of ~275 Crs for greenfield capex at Saykha. ~100 Crs each from IPO proceed and Project finance, rest met by internal accruals.
Saykah plant has capacity of 8,000 MT Technical & Intermediates Capacity. Initial plan was for
2,500 TPA dedicated MPBD capacity
2,500 TPA dedicated CMAC capacity
3,000 TPA multi -purpose technical capacity.
However, going by Q4 presentation and concall hints, seems that they have converted MPBD capacity to multi-purpose.
60-70% captive consumption for intermediates • 20 -25% captive consumption for technicals
Somehow, I find striking similarities in the glidepath between Dharmaj and Heranba – be it product profile, break up of revenue across B2b and B2C, domestic vs export, backward integration etc. Hopefully, similarities ends there. (you know what does that mean😉).
Setting up CMAC (Cypermethric Acid Chloride) capacity of 2500 MT/year against the biggest Pyrethroid manufacture Heranba’s backward integrated CMAC capacity of 3000 MT/year is something noteworthy.
During the latest conference call, one of the analyst mentioned that company currently not generating enough cash flow from operating activities because they’re reinvesting all their cash back into the business. They believe this approach will lead to better cash flow from operations in the future.
Looking at the financial statements, I’ve noticed a couple of key factors affecting their cash flow:
Increase in Inventories: Inventory levels have gone up slightly from 23 to 24, which means more cash is tied up in stock.
Significant Increase in Trade Receivables: There’s been a big jump in trade receivables, further blocking cash flow.
These increases in inventory and trade receivables are the main reasons for the current cash flow issues. To improve cash flow in the future, the company needs to manage and possibly reduce the growth in trade receivables.
By implementing better credit control measures and ensuring timely collections, the company can free up cash that’s currently tied up in receivables, which will help improve their cash flow from operating activities.
Good Q1 numbers, but few red flags from their recent annual report – The auditors draw attention to Note 39 in the financial statements, which discusses the restatement of prior period errors
The auditors referenced a disclaimer in Annexure C that may have an adverse effect on the functioning of the company.
The company’s accounting software had an audit trail (edit log) feature, but it was not enabled throughout the year for certain transactions at the application level. Additionally, the audit trail feature was not enabled at the database level to log any direct data changes
During the year the Company has been sanctioned working capital limits in excess of ` 5 crores in aggregate from Banks on the basis of security of current assets and immovable fixed assets. Based on the records examined by us in the normal course of audit of the financial statements, quarterly returns filed with such Banks are not in agreement with the books of accounts of the Company
According to the information and explanation given to us, the Company has not formalized and documented its internal financial control with reference to financial statements on criteria based on or considering the essential components of internal control stated in the Guidance Note on Audit of Internal Financial Controls Over Financial Reporting (“Guidance Note”) issued by the Institute of Chartered Accountants of India (“ICAI”). Consequently, we are unable to obtain sufficient appropriate audit evidence to provide a basis for our opinion on whether the Company had adequate internal financial controls with reference to financial statements and whether such internal finaancial controls were operating effectively as at March 31, 2024.
The Company has accounted for material prior period errors discovered during the current period, retrospectively by restating the comparative amounts to which the same relate, due to this their last year profit came down from 331cr to 268cr and eps came down from 12 to 9.76
Recently management said – The company is in the process of formalizing internal financial controls to improve business operations. These controls will ensure better systems for safeguarding assets and business continuity. An ERP system has already been implemented to improve transparency and operational visibility.
Seeing good traction with small formulators and have broken through some large customers
B2B growth was driven by Saykha plant, B2C volume growth is higher but lower prices resulted in lower B2C revenue growth
Sales return are always in the range of 1% to 2%, however in FY24 it was slightly above 2% because they have created additional provision on the basis of historical data based on the opinion of newly appointed statutory auditor
Target to launch 8 to 10 product every year With 9(3) registrations in pipeline and it will be a continuous process.
Public and animal health is at nascent stage of growth, they have 12 brands and are expecting good growth in coming years
Have started brand business in southern states and normally it takes 18 to 24 months to develop a market. Around 20% of total revenue comes from new states which were added in recent years.
Saykha capacity will reach optimum utilization in 3-years, current production is in-line with target
50 day cash conversion cycle will not be achievable with scaleup in Saykha plant (higher receivables in B2B + higher inventory). 80-85 days cash conversion cycle is new normal
Normal payables: 45-120 days. Sometimes pay suppliers earlier to avail cash discount
Financial restatement happened after hiring of one of the Big-5 auditor
No major capex plans for 2-3 years
Technical plant they are doing 5 synthetic Pyrethroids and 4 others (CTPR, thiamethoxam, pymetronzine, tebuconzole)
Saw weak exports in Q1 due to delays in export to Bangladesh due to civil unrest
Disclosure: Invested (no transactions in last-30 days)
Dharmaj saw muted formulations growth due to pricing pressure and lower demand, they are expecting a strong rabi season and 15%+ B2C growth. Technical division has ramped up very well resulting in 23% sales growth this quarter. Concall notes below:
FY25Q2
Higher rainfall in August and September disturbed insecticide spraying schedule leading to slower domestic business momentum, expecting strong rabi season
South Indian starts (newly launched) contributed 5.28% to sales
B2C
Witnessed price contraction of ~10% in September which resulted in muted sales despite volume growth, also discontinued 1-2 bulky products.
Expect 15% branded sales growth in FY25
25% of their branded B2C sales come from Gujarat, 12% from Maharashtra, 12% from Madhya Pradesh and 9% from Rajasthan
Technical
Unit 2 at Sayakha witnessed 118 cr. revenues in H1FY25 (manufacturing 8 products). Rampup has been better than projected (50% utilization vs 30% projected). Made ~20% gross margins in Q2. Will be breakeven on EBITDA in FY25, will breakeven at PBT level on 225-230 cr. sales
Targeting peak utilization sales of 450 cr. from technical plant in FY28 with 15-18% EBITDA margins
Higher working capital is due to commercialization of Unit 2 at Sayakha
Incorporating wholly-owned subsidiary in Brazil to expand in LATAM. Applied for registrations for 3 products (Alphacypermethrin, Permethrin and Lambda Cyhalothrin)
Disclosure: Invested (no transactions in last-30 days)
