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.
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.
Inventory buildup of 73 cr. Is this inventory mismanagement?
#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?
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)
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)
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
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)
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.
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.
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…
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)
Guidance: Targeting 18-20% revenue growth in FY24 & FY25. Capacity utilization of 65% to be achieved by Sept, 2023. Want to match last year’s turnover this year of 1450 crores (can be achieved) and 1850 crores in FY24. EBITDA margin expected to be 12-14% in FY23.
