India Pesticides Ltd

ranvir · December 26, 2021, 11:05am

INDIA PESTICIDES ( Estd - 1984 )

A mid sized agrochemicals company mainly focussed on making AIs ( active ingredients or technicals …akin to APIs in Pharma ). Company makes AIs of fungicides and herbicides. Company also makes a few APIs.
AIs made by the company include -

Fungicides -

Cymoxanil Technical ( to control fungal growth in grapes, potato and other vegetable crops )
Captan Technical
Ziram Technical
Folpet Technical ( used to control fungal growth at vineyards, cereals and as a biocide in paints )

Herbicides -

Prosulfocarb
Thiocarbamete family of Technicals ( used on paddy and wheat crops )

APIs made by the company include -

Anti Scabies drugs
Anti Fungal Drugs

Contribution of AIs to the total sales at - 506 cr out of 648 cr

In addition, company makes and markets a variety of agrochemical formulations ( which also include a few insecticides , growth regulators and acaricides). Some of these formulations have the benefit of backward integration as the company would be making their AIs in house ( as brought out above )

Contribution of Formulations to total sales at 135 cr out of a total of 648 cr

Company is the sole maker of 5 AIs in India and is one of the largest maker of Captan, Folpet and Thiocarbamate globally in terms of volumes.

Manufacturing facilities -

Two facilities- Both in UP

Current financials- Year ending Mar 21-

Sales - 648 cr . Last 5 yr CAGR of 23 pc
EBITDA - 189 cr. Last 5 yr CAGR of 29 pc
PAT - 134 cr. Last 5 yr CAGR of 57 pc

Mainly a B2B company. Has long term relationships with various multinationals. Key clients include - Syngenta, UPL,Conquest Crop Protection, Sharda Cropchem and Stotras.

57 pc of the total revenues currently driven from top 10 customers.

Current capacity - 19500 MT for AIs, 6,500 MT for Formulations

“Emergence of India as favourable manufacturing hub on account of trade Tensions with China has spurred the demand for indigenous offerings in agrochemicals” - Said Mr Agarwal ( Chairman ) in the AGM

Company’s plants have effluent treatment plants, warehouses and other essential arrangements for reducing effluents and hazardous waste generation.

AIso worth $4-4.5 billion are expected to go off patent by 2026. Company is focusing on this space along with their constant endeavour to expand their geographical footprint and customer base.

Key focus areas of the company -

Improvement in production processes
Improvement in quality and purity of current products
Undertake pilot studies to make new AIs to finally make them for their customers

The company reported an EBITDA of 183 cr and NP of Rs 135 cr for the Last FY. The EBITDA margins were at 28 pc LY. For the last 02 qtrs ( when most companies are struggling with input cost pressures ), they have reported EBITDA margins of 32 and 31 pc respectively. Combined NP for last 02 qtrs has been Rs 84 cr.

Company’s present mkt cap of Rs 3800 cr doesn’t look expensive. Plus the kind of margins that they are reporting definitely warrant further inquiry.

Another thing that’s quite interesting is that their margins are way better than even PI Industries !!!

Surely, they must be doing something that probably others are not. The only thing that comes to mind is - greater degree of backward integration ( something like Divis for their generic molecules )…but that’s only a guess.

Key risks - fall in margins going forward. Clearly, the current margins are really rich. We need to dig deeper as to how is the company able to generate such good margins and how sustainable are they.

Key triggers - Mkt recognition of their Industry leading EBITDA margins.

Consider this - their EBITDA margins for last 5 FY have been - 27 pc, 22pc, 19pc, 20 pc, 28 pc

The same for peers are as follows -

PI Industries -

24 pc, 22 pc, 20 pc, 21 pc, 22 pc

Rallis India -

16 pc, 15 pc, 12 pc, 12 pc, 13 pc

Insecticides India -

11 pc, 14 pc, 16 pc, 11 pc, 11 pc

I really think we need to get to the bottom of this secret sauce that’s giving them Industry leading margins. Surely, this will come up as the company conducts its next concall.

Excerpts from management commentary provided on CNBC on 21 Dec 21 -

(a) Capex of 70 cr likely to be commissioned for this FY
(b) Capex of another 70 cr likely to be commissioned in the next FY
(c) Expecting an asset turns of 2-2.5 on the same with similar margin profile as the company is presently enjoying
(d) Capex of 350 cr lined up for FY 24 …again with similar margins and asset turns of 2-2.5
(e) Company likely to clock revenues North of 700 cr this FY
(f) Revenues likely to hit 1000 cr in next 02 years
(g) Revenues likely to cross 2000 cr inside 04 yrs from now after all this new cumulative capex of 500 cr goes online

Attaching the video for reference…

Dheeraj Kumar Jain Of India Pesticides Speaks On The Firm's Business Outlook | Midcap Radar - YouTube

Well…to me, this looks like a rare high growth, low risk, moderately priced bet in an otherwise richly valued markets. Could not find too many negatives about the company except for the fact that I am yet to fully comprehend the reason behind their Industry leading margins except for process efficiencies, careful product selection, tight cost controls etc

On Corporate Governance - nothing adverse that I could come across. But yes… it is always a work in progress.

Views are welcome … Specially the counter views.

Regards
Ranvir Dehal

ranvir · December 26, 2021, 11:16am

CEO’s interview on the expansion plans in the next 2-3 yrs -

Must say…the commentary sounds extremely bullish !!!

ayushmit · January 15, 2023, 4:12pm

I have been working on this company for last few months. It looks pretty interesting. I was earlier quite surprised with the excellent financials the co was having and I was a bit skeptical on sustainability. However as I read more about the journey, products and the management interviews etc, I get a feeling that they have been doing good work…they are manufacturing products that are old and low value but it seems that they have become the leaders in those (perhaps due to some chemistries) and there is very less competition (just 2-3 players at max). Add to it the company is very aggressive on growth and is doing continuous expansions and are confident about 20-25% growth for next few years…this growth is as of now coming from the brownfield expansions at the existing plant and then they had filed for EC for new plant which got approved recently.

I think in FY23 they will comfortably cross 1000 Cr revenue! Interestingly the IPO came at 300 and stock traded at 330-350 levels for a long times. At that time they were at 700 Cr revenue base. Now the price is 240-250 and PE ratio has moderated to 18-20 vs 30 at the time of IPO. Promoters have also been regularly buying from market.

Given that this company is from my city, I must say that they have been pretty low profile despite the scale up and excellent profitability the company has been having.

It’s not easy to come across cos with such good operating margins, high ROCEs and low fixed asset requirement. Given the turnover base they have reached, if they can deliver on what they are saying…i.e… 20-25% growth for next few years which maintaining margins of more than 25%, I think there can be lot of value creation.

It would be great to know views of others esp negatives if any.

Ayush
Disc: Invested in family acs and client acs

vimaljain1974 · January 15, 2023, 5:44pm

I found this.

Karthic · January 17, 2023, 9:54am

smallcapstalker · January 17, 2023, 9:58am

Hi @ayushmit … not negatives but a couple of concerns i had on India Pesticides were:

substantially increased realizations in the last 2-3 years without commensurate capacity increase - so how much is this driven by the agrochems price increase vs volume increases?
could the realizations drop with inflation getting in check?

Any thoughts would be much appreciated.

Disc: invested from slightly higher levels.

calm · January 17, 2023, 11:12am

Nice video - India Pesticides Share Analysis |IPL का Long Term Future | Fast Growing Small Cap Chemical Share IPL - YouTube

ayushmit · January 17, 2023, 11:23am

Hi @smallcapstalker…not sure but I don’t think there has been a very big role of price increase in the growth of turnover

I think if you go through the presentations etc, they have been consistently adding capacities at their existing plant at Sandila.

smallcapstalker · January 17, 2023, 3:41pm

Thanks @ayushmit for the response.
Just checked their DRHP again for earlier data from 2019 to 2021. Realizations seem to have risen proportionately to increased volumes in these years too. 2022 - I couldnt find the production volumes / CUF but seem to read somewhere in the transcripts that CUF can be 70-72% and not higher. Seems a little lower than what they had achieved in the past. An analysis of per MT realization based on 2019 to 2021 data as collected from DRHP is presented below: Comforting to know increase in revenues and profitability doesnt have too much to do with inflation!

smallcapstalker · January 18, 2023, 12:48am

Sorry… Here goes…

Capacity in MTPA	2019	2020	2021
Technicals	10000	14500	19500
Formulations	6000	6500	6500
Total Capacity	16000	21000	26000
CUF
TEchnicals	80%	76%	77%
Formulations	59%	58%	73%
Production in MT
TEchnicals	7974	11028	15003
Formulations	3533	3784	4724
Revenues
TEchnicals	256.67	383.28	506.83
Formulations	83.60	94.67	135.80
Realization per MT
TEchnicals	0.032	0.035	0.034
Formulations	0.024	0.025	0.029

Based on the EIA submitted for Hamirpur - they are likely to end FY 2026 with following installed capacities:

Technicals - 54,875 MTPA
Formulations - 35,700 MTPA (dont hear any mention of the increase in formulations capacities)
APIs - 730 MTPA (dont hear any mention of the increase in this also)
R&D - 730 MTPA
Byproducts - 182,500 MTPA (not sure if this is a revenue contributor in any way)

Any thoughts on capacity increase?

harsh.beria93 · January 18, 2023, 10:08pm

Hi @smallcapstalker ,

Thanks for adding your notes. I am sharing the breakup of their sales (taken from Care rating reports).

As we can see in the above figure, the large improvement in financials happened from FY18, with rapid scaleup in technical division. This coincided with scaleup in molecules such as Prosulfocarb, Folpet, Cymoxanil and Thiocarbamate. Captan has been a very old product for IPL.

Captan, Folpet and Thiocarbamate account for 40-45% of revenues, followed by Prosulfocab which accounts for 25-30% of their sales (Q3FY22 concall transcript).

Its very interesting to note that in most of these molecules (Prosulfocarb, captan, folpet), they are market leaders with 20-25% of global market share and the sole Indian manufacturer at scale. This is one of the reasons for their superior margins.

In past couple of years, they have launched newer products such as Aclonifen, Triclopyr, and Carboxin which are scaling up. These 8 technical molecules (Prosulfocarb, Captan, Folpet, Carboxin, Aclonifen, Triclopyr, Cymoxanil and Thiocarbamate) account for majority of their turnover and most revenue growth has come from these products.

I have been following IPL for a while and am sharing notes from the past few calls.

Major raw material: Chlorine, tetrahydro phthalic anhydride, carbon disulphide, technical grade urea, di-n propylamine, benzyl chloride
Imports RMs: Tetra Hydro Phthalic Anhydride (THPA), Ammonium Thiocyanate, Di N Propylamine and Cyano Acetyl Ethyl Urea from Taiwan and China

21.09.2022

Use rice husk for fuel (price has increased from 300 to 900/quintal). This contributes around 2% of cost of production
Have been unable to full price hike for energy cost increase, raw material increase has been passed on
MNC contract prices are reset quarterly
Sandila has seen lot of brownfield expansion. It was 19’500 MTPA in FY21, then increased by 2000 MTPA in FY22, has again increased by 2000 MTPA and will increase further in next 6 months to reach 27’500 MTPA
Hamirpur: EC clearance in progress, 2 stages finished 1 remaining (environmental impact assessment) which is being submitted. Expect to get EC clearance by November. Will make conazole based fungicides, 2 herbicides and 2 intermediates. Expect to start operations by FY24Q3

06.10.2022 Care ratings report

Out of 8 planned new products, 5 were introduced in FY22. 1 was launched in Q1FY23 (Pretilachlor technical as a part of backward integration)
Domestic distribution network consists of 3500 distributors and sales force in Gujarat, Rajasthan, Maharashtra, Andhra Pradesh, Madhya Pradesh, Punjab, Haryana, Uttar Pradesh, etc.
Major raw materials used in making captan technical are imported from China and Taiwan
Imports Tetra Hydro Phthalic Anhydride (THPA), Ammonium Thiocyanate, Di N Propylamine and Cyano Acetyl Ethyl Urea from Taiwan and China
Specializes in manufacturing of fungicide based technical

29.11.2022 CNBC

Sales growth will be 30% in FY23 with export growing by 40%. Expect 25%+ growth in FY24
H2FY23 margins will be at same levels as H1
Technical and API margins higher vs formulations
Capacity will increase to 27’500 MTPA by FY23
Major export markets are Australia and Europe. Haven’t seen any order cancellation from Europe

29.12.2022 BQ

EC clearance for 100 tons/day and 2 tons/day of API at Shalvis Specialities Limited, first block will come onstream in Q4FY24
When Shalvis Specialities comes on stream, total capacity will increase to 57’500 MTPA
Will do annual Capex of 100-125 cr. over next 3-4 years
Incremental fixed asset turns will be 2.5-2.7x
Expect FY23 sales growth to be around 30%, and expect growth to be maintained in FY24
20% of raw materials are imported from China, and 10% from other geographies
Hoping to end FY23 at 24-25% EBITDA margins
Export incentive has been reduced from 2% of sales to around 0.8% of sales

17.01.2023 CNBC

Newly launched herbicide (from Sandila) can contribute 100 cr. annual revenues. At peak capacity utilization, this can go up to 150-160 cr. Margin will be 22-25%
Will be marketing this herbicide in India and Europe. Have started talks with 5 customers
Out of 8 products promised during IPO, 7 have been launched with 1 to be launched in March 2023
Margins will go back to 24-25% when current high priced inventory gets used up

Disclosure: Not invested (no transactions in last-30 days)

Ansh_Gupta · January 19, 2023, 3:06am

Thanks a lot for sharing your notes, super helpful! Given the management commentary in the notes, curious to know what are your reasons to stay away from the company?

harsh.beria93 · January 23, 2023, 12:28am

Hi,

I invested in Punjab Chemicals instead of IPL as I feel that the level of undervaluation is higher in Punjab, when both IPL and Punjab have similar business and growth profiles. On similar topline of around 1000 cr., Punjab is available at a market cap of 1200 cr. vs IPL which is available at 2800 cr. Mcap.

I think the main reason for this gap is that IPL has shown very good margins since 2018 whereas Punjab still has lower margins. If Punjab is able to improve its margins over time (from 13-14% to 18-20%), their profits can grow from 80 cr. to 200+ cr. in 2-3 years. However, that kind of improvement is harder for IPL as they are already operating at industry leading margins (even higher than PI Ind). It also brings in a risk of margin contraction at some point of time.

My experience in the past has been that market rewards delta in earnings more than absolute nos. All this being said, IPL has been doing very well and I have been having this internal debate of what to sell to buy IPL.

Chaitanya_Ghorpade1 · January 23, 2023, 2:01am

Detailed analysis

Arjun · February 10, 2023, 1:45pm

There was a proposal to ban 27 pesticides in India (Proposed Govt Ban On 27 Pesticides Could Impact One-Fifth Of Industry Revenues)
Not sure what is the latest information on this. ‘Captan’ is in that proposed list.

harsh.beria93 · February 10, 2023, 4:06pm

This was clarified in their DRHP. There are two IPL products which were there in the proposed ban, both are exported and ban (even if it happens) will not impact export demand.

calm · February 16, 2023, 6:32am

ashishk · March 3, 2023, 10:35am

Hi all,

I am a beginner level value investor and IPL is one of the first companies I have attempted to try and understand. Just wanted to share my understanding on it so far.

Couple of things that stand out for me are:

Consistently better GMs vs competition (since last 4 years at least)
Company’s aggressive capex plans over next 4-5 years

Gross Margins

Compared to some other similarly sized companies their GMs are considerably superior.
Management puts this down to - (i) Cost control through back ward integration and higher % of local raw material sourcing; (ii) Careful selection of which molecules to launch - target high GM, niche category.

(Note: Their GMs are not stable as they do not have much of pricing power, but are superior vs some others, so there’s likely something going on here)

Capex plans over next 4-5 years

They have done/are doing a cumulative of ~140 Cr. brownfield capex in FY22 & FY23. And plan to do 300-400 Cr. of greenfield Capex in next 3 to 4 years. All this has been and is planned to be funded through internal accruals, without raising any addnl. money. (Currently, it is virtually a debt free company)

Mgmt is confident of an asset turnover of over 2x. If this happens, there could be an additional ~800 to 900 Cr added to the top-line in the next 5 years (in the near term, for FY 24 mgmt. has indicated crossing 1100 Cr. - TTM is 864 Cr.)

There are of course many things that could go wrong - new molecules not selling well; margins do not sustain (mgmt. has already over-committed on margins earlier & then revised down); increasing working capital intensiveness (apparently due to need of stocking inventory of newer molecules) etc.

However, given that there has been a significant drop in valuations since IPO (Mcap/sales going down from around 6x to 3x), and their future plans - it does seem worth a good consideration.

(Discl: Not invested yet, but find myself likely to do so in the near future)

ashishk · March 5, 2023, 9:06am

I am trying to figure out the chances of IPL’s main (revenue-wise) molecules getting banned.

As per mgmt. 45% of their revenue comes from 3 molecules - Folpet, Captan & one thiocarbamate herbicide (which though not specifically mentioned by them, likely is Prosulfocarb).

Here is what I found so far:-

Captan and Folpet (25% of revenue)

(i) Both these have been under EU assessment since 2015, among other things for endocrine i.e. hormone related disruptions. However nothing concrete has emerged so far and their approvals keep getting extended every year.

(ii) The corresponding body in US - EPA, too listed them in 2010 as possible endocrine disruptors in their Tier 1 testing. Captan was deemed low risk and didn’t need Tier 2 testing, while Folpet has been under Tier 2 testing since.

(iii) Possible reason for such long testing periods without any conclusion being reached could be something mentioned in scientific research available online for these molecules. Which is that - during testing (with mice etc.) their risk of causing cancer has been found to be very low. For non-cancer risks however, the transient nature of their chemistry makes it hard to find reach a meaningful conclusion. Both these molecules have been around since 1950s and have gone multiple tests across decades.

(iv) PAN (Pesticide Action Network) publishes a list of around 530 pesticides along with how many countries have banned each of those. Captan is banned in 6 & Folpet in 3 countries. The median of that list is a ban in 30 countries.

(v) One main their (Captan & Folpet’s) main advantages in use is that – they are broad spectrum (target many types of fungi) and also are multi-site (attack fungus at multiple enzyme locations).

Prosulfocarb (thiocarbamate herbicide - 20% of revenue)

So far haven’t found any major study on significant health/environment risks for this molecule. Also couldn’t find it in banned list for any country.

While Prosulfocarb was commercialized in 1980s, it doesn’t seem to have been very widely used. Apparently it is coming into prominence now as other herbicides are facing resistance from weeds. Will probably undergo more scrutiny in coming years.

The attached pdf has links to some of the webpages from which above info was derived.
Links.pdf (542.3 KB)

P.S. - I have no past experience or specific insight wrt pesticide molecules. Above is derived from what I read & understood, and hence likely to have inaccuracies.

gsapte · March 9, 2023, 5:31am

I have gone thorough this thread, and seems like good business.

I also found that, there was an article by Money Life during the IPO, mentioning that, the Management allotted shares before the IPO at very low price to benefit some of their relatives. That seems to me like a RED flag.
I am not sure whether this should be looked as serious lapse on corporate governance.

Generally before investing in any company, I tend to look for frauds, corporate governance issues and this article indicates some issues.

I would like to know how other investors look at it.

Stock is currently under watch list.