Heranba Industries

Promoter acquired 20K shares since last two days. Any major reason why this is trading at discount.

It’s one of the most backward integrated companies in the listed agrochem universe - it only Procures the basic chemicals and all else is made in-house.
Although, this is only for Pyrethroids which is a significant Part of its turnover.
Only Meghmani i can think of who is as backward integrated as Heranba in terms of making their own intermediates.

All other Indian agchem Players are still heavily dependent on China while this company exports to China. Shows the strength in Production and scale of operations.
Even in such torrid times, the company was able to maintain its gross margins showing its strength.

Tailwinds are strong for the whole sector! Can’t comment on Promoter buying as anything would be just speculative.

6 Likes

It looks company is registering few molecules in US. Is there any website in US which we can check the filings to get more details ?

Lambda Cyhalothrin is the main Product for which they have gotten the license in USA.
It’s a big volume Product and it’s manufactured by several other agchem Players like Bharat Rasayan!

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It looks even Rallis India is also manufacturing Lambda Cyhalothrin.

Yes it’s manufactured by multiple players. But it’s one of the biggest generic volume product, multiple players make it and no issue in terms of a demand constraint!

2 Likes

AR22 notes:

Miscellaneous

  • Aggregate capacity: 15’224 MTPA
  • Sent 1st consignment to USA in October 2021
  • Incorporated Mikusu India Pvt Ltd
  • CSR: 3.06 cr. (no unspent)
  • Median salary: 4.06 lakhs (vs 4 lakhs in FY21)
  • Permanent employees: 714 (vs 601 in FY21)
  • Contract employees: 805
  • Share price: 551.1 (low), 866.85 (high)
  • Shareholders: 93’108 (vs 111’829 in FY21)
  • Auditor remuneration: 40 lakhs (vs 40.5 lakhs in FY21)
  • Cumulative receivable impairment: 22.45 cr. (vs 17.11 cr. in FY21)

R&D

  • R&D team of 22 members (vs 22 in FY21), have been working on a product basket of 15-20 molecules
  • In FY22, worked on developing 2 fungicides, 2 herbicides and 1 insecticide. 2 of these compounds are at an advanced R&D stage, and are being developed for sales in Europe and USA
  • Will commercialize 3 molecules in FY23
  • Plans to launch 5 molecules in FY24 (subject to getting registrations)
  • Will expand pyrethroid product basket from 5 currently to the entire range of 10-14 molecule

Capex

  • Had CAPEX of 80 cr. in FY22, 1/3rd towards on the Sarigam site. Spent 25 cr. to acquire land at Saykha
  • 180 cr. has been earmarked for Sarigam technical expansion. This phased expansion will increase capacity by 5,000-6,000 tonnes in phase I by the end of Q4FY23, and 10,000 tonnes by the end of FY24.
  • 50 cr. has been earmarked for the Sykha site. However, it will be given further priority in the coming years, upon complete commercialization of the Sarigam site

Manufacturing units

  • Unit I (GIDC Vapi): Manufactures a wide range of synthetic pyrethroids, organophosphorus insecticides, and various pesticides intermediates. It is a large scale manufacturing unit for insecticides, herbicides, fungicides & their intermediates
  • Unit II (GIDC Vapi): Manufactures Cypermethric Acid Chloride (CMAC) and all other Isomers/derivatives of CMAC. Also manufactures Cypermethrin, Alpha Cypermethrin and Permethrin technicals. The Company has acquired an industrial plot measuring 2702 sq. mt. adjacent to the existing unit which has enabled them to enhance production capacities and upgrade Unit II’s environmental pollution control facilities. Common Boiler System is also being explored on this newly acquired plot to cater to steam requirements for all the Company’s running Units at Vapi
  • Unit III (Sarigam GIDC): Equipped with modern formulation and packing facilities capable of handling large capacities of Liquid, Powders and Granules. The formulation division was established to exclusively focus on manufacturing branded formulations and trading activities. In addition, this unit is involved in the manufacturing and distribution of agrochemicals for plant and public health segment. Company has installed and initiated its new setup of spray drying facilities for WDG formulations for various formulations of sulphur such as WDG and specific combination formulations of sulphur such as Sulphur/Imidacloprid 70WG/ COC WG, Sulphur/ Tebuconazole, and other such spray-dried granulated products. This unit is also equipped with a rooftop solar plant that generates 185.0 KW per annum energy, utilized for captive consumption, in addition to its DGVCL power connection of 750.0 KVA. Got EC approval for technical manufacturing, production should begin by FY23 end
  • Unit IV (GIDC Vapi): Large volume production facility to produce highest purity products from by-products and Intermediates, which have agrochemical applications. This facility enables the Company to become self-dependent, mainly for Bromine recovery, without relying on external job workers. Commercialized in FY22 and expect 100 cr. revenues from this site
  • Sakhya: Has land parcel of 34’600 sq.m for further expansion with EC approval for annual capacity of 10’680 MTPA. Company has also acquired an industrial plot measuring 57,248.29 sq. mt. at Saykha Industrial Estate for further expansion

Pyrethroid molecule breakup

image

Disclosure: Invested (position size here, bought shares in last-30 days; still building up the full position)

14 Likes

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

1 Like

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)

11 Likes

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.

1 Like

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

2 Likes

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)

8 Likes

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)

7 Likes