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)