Heranba Industries

sales to regulated markets can be game changer for this company. is there any update on that.

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FY22 AGM notes

  • Chinese business (20% of exports; 125-130 cr.) is slightly affected due to COVID lockdowns, have tried to push products to other markets
  • Next generation family members are drawing very low salary (1 lakh / pm for a CA or a chemical engineer)
  • Import ~ 12% of raw material

Disclosure: Invested (same as before)

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Sep 20 quarter was the best. After that it had poor performance in most of the quarters. The sales are almost stagnant in 300 - 400 crs range. Same with profits.

TTM stock price is -27%

Also curious to know why there is very very less institutional participation.

This again got flagged in my screener run due to low PE but will not add further.

Disc: Invested.

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I like the growth in revenues which is in line with management’s commentary.

However there are a few items in the AR which spook me.

  1. Receivables: This is quite bad for Heranba and I read above in this VP thread that management has guided that issue will start correcting by end of FY22.

Net receivables increased from 341cr to 409cr. To put things in perspective, the PAT is 189cr.
Then there is 22cr credit impairment allowance, which is 11% of PAT.
Receivables with significant increase in credit risk + credit impaired = 27cr. This most likely will be next years credit impairment allowance.

Then there is bills discounted of 37.2cr. From what I understand the company sold receivables worth 37.2 cr to a third party/ bank. Will touch this again at the end of this post.

  1. Inventory buildup of 73 cr. Is this inventory mismanagement?

  2. Contingent liabilities & discounted bills


    #5 reads that there is a contingent liability on the Co for 37.235cr. This means that the company is still liable for recovery of this amount even though it sold the receivable to a bank.
    Can anybody please educate me if this is the correct understanding?

disc: invested, not a large position

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Hi Nimit,

I can try explaining some points raised by you.

Receivables: This should be looked as a % of sales and not as a % of profits. Broadly, receivables have stayed around 90-100 days which makes sense as they are exporting to unregulated markets. If you look at like to like peers, here are the statistics for receivables/PAT based on FY22 nos

Bharat rasayan ~ 2.64x
India Pesticides ~ 1.57x
Insecticides India ~ 3.07x
Heranba ~ 2.17x

So Heranba receivables are very much in-line with similar sized companies. Also, we should take into account quality of receivables as a majority of Heranba’s exports are into unregulated markets. If you can do a peer wise comparison, it will be very value additive.

Inventory: Again we should look at this in reference to similar sized peers. Here is the March 2022 inventory nos for Heranba’s peers, Heranba’s inventory nos are one of the lowest.

Bharat rasayan ~ 120 days
India Pesticides ~ 165 days
Insecticides India ~ 208 days
Heranba ~ 100 days

Also, building up inventory can be a business strategy. If you look at quarterly results of agchem cos, almost everyone is reporting fall in margins as cost of intermediates have shot up significantly. In this context, Heranba’s inventory positioning makes sense.

About securitization of receivables: I do not have much expertise in this, so will refrain from commenting. Maybe someone with better understanding can help.

Disclosure: Invested (position size here, no transactions in last-30 days)

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Sales growth was subdued due to Chinese lockdown, supplies have already started reviving in July. Company faced pressure on gross margins and on power and fuel. Concall notes below.

Guidance: Lower sales growth to 15-17% (vs 18-20% earlier) with 16-18% EBITDA margins (vs 18-20% earlier). There was decline in exports to China due to lockdown, which should recover in next 2 quarters. Already have seen strong recovery in July and August

  • On annualized basis, 12% of sales are from China
  • Gross margins of 32% should increase going forward
  • Expecting 25 cr. of revenues in FY23 from Mikusu India Private Limited and 75 cr.+ in FY24. Currently setting up dealer network
  • Power & fuel costs are around 5 cr. per month

Capex:

  • First block of Sarigam facility will come onstream in Q4FY23, there are 5 molecules that should be launched from this facility
  • Planned capex of 130 cr. in FY23 + 120 cr. in FY24 (250 cr. in next 2-years)
  • On newer capex, expect 3.5-4x fixed asset turns

Pyrethroid

  • Top 3 molecules account for 30-35% of sales
  • Total contribution from pyrethroids are 57-58% of sales
  • Regulated markets
  • Generally markets open in Q3 and Q4 of fiscal years
  • Will get to know about new order to USA in Q3, have sent trial batches
  • Have not been able to get business in Europe due to travel restrictions

R&D

  • 2 planned launches in FY23, 1 has been launched and 1 will be launched
  • 5 out of 15 products are in registration phase

Disclosure: Invested (position size here, no transactions in last-30 days)

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index.pdf (54.6 KB)

China has issued its first national drought alert of the year - rainfall is down and the country’s fields are suffering from scorching heat.

Can be bad for all Players tending to the chinese agrochemical market. Heranba has 12.5% of it’s revenue from the chinese market.
Disc - recently sold all Positions in the company

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Future Commentary by Management:

  • Export is expected to regain strength as China sees demand pickup in Oct-Mar due to season.
  • Good demand for technical/formulations is seen in the domestic markets.
  • US market operations ramping up and one product registered. Stream of revenue will increase.
  • 2 more products for registration in US are in the pipeline, one herbicide and one insecticide.
  • Revenues will double from US in FY23 and targeting 50 crores from USA in FY24.
  • Phase -1 of Sarigam Facility will commission in Q4 FY23. And Phase-2 in Q2 FY24.
  • Another pesticide facility in Saykha will get commissioned in FY24/FY25.
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Sales growth revived in Q2, company is putting up capex in Sarigam and Saykha which should start contributing from FY24. Interestingly, they are doing exceptionally well in domestic formulations business which gives a good cashflow stream to invest in technical plants. Concall notes below

FY23Q2

  • Guidance: Maintain sales growth guidance of 15-17% with 16-18% EBITDA margins. Exports were impacted due to China lockdown. Currently operating at 89-90% utilization
  • Witnessed 35-37% increase in fuel costs and 20% increase in labor costs
  • One of promoter family member resigned from board to reduce family representation on board as advised by investors
  • Chinese contribution was 18% of H1FY23 sales (vs 22% earlier). Have lots of products registered in China and have started exporting a new intermediate to China
  • China exports: bromine intermediate, insecticide intermediate, and pyrethroids
  • China: Sell to companies that make formulations or to traders. Don’t sell directly to distributors (so B2B and not B2C)
  • Make 13-14 products, out of which 7 are pyrethroids in which they are fully backward integrated making their own intermediates

Regulated markets

  • US: FY22 revenues was 15 cr., expect 30 cr. in FY23 and 50 cr. in FY24
  • Received 1 registration in Europe in Q2FY23
  • Hoping to receive 2 registrations in USA by Q4FY23 (1 herbicide + 1 pyrethroid)
    Domestic market
  • 60% contribution for them comes from Kharif and 40% from Rabi
  • Launched 10-12 formulations
  • Will potentially reach 400 cr. in formulation sales in FY23
  • Formulation business: though gross margins are lower, its a fixed cost business where EBITDA margins increase due to larger volumes
  • Currently present in 21 states and sell to 8000 dealer

Capex:

  • Spent 41 cr. on Sarigam in H1FY23 and will spend 100 cr. more in H2FY23 and Phase I (5000 MPTA capacity) will commercialize in Q4FY23 and give 3x asset turns by FY25. Phase 2 should commercialize in Q3FY24
  • Saykha unit expansion (technical herbicides plant) will be 150 cr. and will occur in FY24 and FY25. Expect 3-3.5x fixed asset turns and commercialization in Q1FY25

Disclosure: Invested (position size here, no transactions in last-30 days)

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One of Heranba’s group companies, Shakti Bioscience Ltd (Shakti), was declared as a wilful defaulter by Cosmos Co-op Bank Ltd (Cosmos) in FY16-17. Heranba acts as a co-borrower for a Rs35 crore term-loan issued to a group firm, Insunt Trading Pvt Ltd (Insunt). Heranba will have to bear the liability in case of default by Insunt in future. Heranba’s promoters were disqualified from acting as directors of its group entities for failing to file annual returns. Moreover, SEBI has issued some administrative orders against Heranba’s promoters in the past.

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Very bad Q3 results. All parameters are nearly halved YoY! Stock tanked -20% today.

If anyone had attended the concall then please share in brief the feedback. Will other agro chem companies meet same fate?

https://www.heranba.co.in/wp-content/uploads/2023/01/05-Investor-Presentation_-Q3FY2023.pdf

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Disastrous results indeed ! 73% drop in PAT (YoY), Revenue declined by almost 30%. Poor operational performance overall. Management just blamed everything on geo-political concerns, macro economic conditions etc. “Revenue is impacted by challenging global macros including prolonged geopolitical concerns, rising inflation in major economies and slowdown in demand. The domestic technical business witnessed lower demand due to challenging market conditions coupled with higher inventory. The company’s export business was impacted by volatile global macroeconomics. The Ebitda margins were suppressed during the period due to higher raw material prices and an increase in power & fuel costs. The near-term outlook is challenging for the entire agrochemical industry. However, Heranba will continue to diversify its product portfolio, widen its distribution network and sharpen its R&D focus for creating sustainable growth, the management said.”

Wondering if other agro-chemical companies are also expecting similar dismal results or is it just a one off for Heranba. @Experts - please share your analysis of these results.

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Astec came out with worse results than Heranba…income drop of 30% resulting in PAT loss of 97%… so it seems smaller agrochemical players are badly impacted this quarter… :grimacing:

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Hi,

There has been a large spike in pyrethroid supplies from Chinese cos in past few months. At the same time, channel inventory is higher than average. As a result, realization in a number of these molecules have taken a bit hit. This has resulted in pressure on volumes and realizations.

I have been maintaining a journal of my thoughts on Heranba since they started reporting bad results in Q1FY23, you can read them below.

Thoughts on 16.08.2022

  • Interaction with a few investors suggest that there will be de-growth in Chinese sales due to Chinese lockdown
  • On further work, it seems Heranba’s molecules are similar to Meghmani and Bharat Rasayan. However, Heranba’s end markets are of lower quality (mostly Africa + Asia). So Meghmani and Bharat Rasayan score ahead in those terms
  • Before increasing position size, it’s important to see if Q1 was just a China blip, if yes growth should come back in Q2 (albeit at lower margins as Chinese intermediate exports have low realizations)

Thoughts on 08.11.2022

  • Growth looks optically higher due to lower base in Q2FY22. On 2-year basis, sales growth is 10%
  • Have got 1 registration in EU, forecasting doubling of sales to US (to 30 cr. in FY23 vs 15 cr. in FY22), commercialized one new intermediate to China. So growth seems to be on track
  • Sarigam facility Phase I will be commercialized in Q1FY24 and full benefit will be reflected in late FY24 and FY25.
  • Although FY23 might be a bit soft (maybe 15% sales growth; 5-10% PAT growth), growth should come back strongly in FY24
  • Domestic market growing very fast

Thoughts on 29.01.2023

  • Revenues have been very badly impacted due to pressure in Chinese market (technical + intermediate), it’s now clear that they were struggling with growth this year
  • Management has clearly guided that FY23 will be a no growth year which suggest Q4 will also be a flat quarter. I personally think there might be 10-15% sales decline in FY23 given Q4 of a fiscal year records a jump in exports
  • US/EU forey is not going to be a meaningful sales driver in FY23 or FY24. Chinese sales are 45-50% of exports and filling this gap is very hard
  • Domestic formulation business has already done 330 cr. in 9MFY23 which is higher than FY22 (250 cr.)
  • If I find a better opportunity, it might be better to sell Heranba and keep checking when sale revives and reinitiate position
  • Heranba can be a very interesting opportunity when exports revive as their domestic formulation business is likely to cross 400 cr. in FY23

Hope this clarifies my thought process.

Disclosure: Invested (position size here, no transactions in last-30 days)

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Hi Dev,

The current market cap is 1300 cr. What is the view now?

regards
Disc: Studying the company may or may not invest.

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HI Harsh,

Astec also suffered similar fate like Heranba in Q3. Isnt is a better opportunity than Heranba given that Heranba promoters have blemished past?

regards
Disc: Studying the company. May or may not invest

Promoters increasing their stake.

Can someone clarify as per NSE data buyer and seller is same for bulk deal happened recently.