Punjab Chemicals & Crop Protection Limited (PCCPL) A Clear Runway Ahead!

raghav1836 · January 19, 2022, 5:02am

Respected Investors, My name is Raghav Agarwal and I am a final year management student. I have been reading a lot on this wonderful platform and am finally able to present everyone with my first thread on Punjab Chemicals and Crop Protection Limited. I am open to your wonderful suggestions and your subtle criticisms and I hope we can have a fruitful discussion of this excellent company on this extraordinary platform.

*Punjab Chemicals & Crop Protection Limited

Overview*

Punjab chemicals and crop protection limited (PCCPL) is an agrochemical manufacturing company based in Punjab. The company was founded in 1975 with a vision of being an integral part of the strategic supply chain both domestically and globally. It started its manufacturing facility by initially producing generic chemicals like oxalic acid. It now caters to agrochemicals, pharmaceuticals, intermediates and industrial and special chemicals and is now manufacturing various types of agrochemicals, for example, Metamitron Ethofumesate, Diflufenican, Lenacil and Cyanazine, with Metamitron and phosphorus acid being the major products.

The company owns two manufacturing units in Punjab and has leased one in Pune. The company also has a wholly-owned subsidiary in Belgium by the name of SD Agchem, which caters to the demands in the European market. Agrochemicals hold 80-85% of revenues which further breaks into 3 segments which are herbicides, contributing to 55%, fungicides contributing to 30% and insecticides contributing to 15% to the revenues. Out of these Agrochemicals, CRAMS contribute 60-65% to the revenues and this division is expected to grow 3-4x in the coming years. The pharmaceutical’s division provides Analytical reagents to pharma companies like divis labs and Laurus labs. The top five Analytical reagents contribute to 30-40 Cr.
Export- domestic sales breakup comprises 63% of the revenues generated from exports and 37% from the domestic market. The domestic market further breaks down into two parts
Agrochemicals amounting to 40% and Intermediates amounting to 60% to the domestic segment.

Location-Wise Revenue Breakup FY21

		Manufacturing Units
	Derabassi, Punjab	Pimpri, Pune	Lalru, Punjab
Size	24Acres	1.5 Acres	23.5 Acres
Capacity	29700MT	3347 MT	5778MT
Capacity Utilization	80%	95%	73%
Certifications	ISO:14001	FSSI	ISO:14001, ISO:9001
Divisions	Agrochemical manufacturing	Industrial Division	Agrochemical manufacturing
Revenue Contribution	60%	5-10%	30-35%

Fundamentals

The company generated consolidated revenue of 678 Cr in the FY20-21 with an EBITDA of 97Cr and an EBITDA margin of 14.3%. The net profit was aggregated to 49.1Cr with a PAT margin of 7.2%. Punjab chemicals have an excellent ROEof 40% and ROCE of 32%, which showcases the excellent returns of the company on their equity as well as their capital employed.

	Q2FY21	Change%	Q2FY22	FY20	Change%	FY21
Revenue	164Cr	27%	209Cr	550	23%	678
EBITDA	23 Cr	34%	31Cr	42	131%	97
EBITDA Margin	13.8%	1%	14.8%	7.6%	6.7	14.3%
PAT	12%	6%	18%	11	345%	49
PAT Margin	7.2%	1.4%	8.6%	2%	5.2%	7.2%

Accounting Ratios	FY21
Debt/Equity	0.5
ROE	39.83%
ROCE	38%
EPS	Rs.40
P/E	30.02
Interest Converge Ratio	10.3
Current Ratio	1.19

Promoter Holding

Image derived from Company’s Annual Report FY20-21

PCCPL VS Market Indices

Image derived from Company’s Annual Report FY20-21

Industrial Outlooks:

· Anticipated growth of the industry can be from $32 bn to $49 bn between 2021-2025 and grow at a CAGR of 6.3%.

· A big opportunity is created in the agrochemicals and speciality chemicals market because of the gaps in the supply chain that have been created because of the china plus one policy. This encourages the domestic producers to gain momentum in the production cycle and gain market share. This can be a big opportunity for a company like PCCPL which has a reputation for its contract manufacturing and its customer relationships. India imports 50% of the agrochemicals and keeping these will further boost low-cost manufacturing and will make India an important part of the supply chain.

· The export around agrochemicals in India is growing at a CAGR of 12% while domestic production is growing at a CAGR of 4%.

· India’s average per hectare consumption of agrochemicals is 1/10th of USA & UK and 1/20Th of Japan and China, this suggests that India’s demand for agrochemicals can still grow multifold and create robust demand for agrochemicals in the coming years. Food production is likely to increase in the coming years to cater the demands of the on a growing population. World food production is likely to increase by 70% by 2050.

· More than 100 agrochemical patents are getting expired by 2023. This will open up opportunities for CRAMS players and contract manufacturers and generic players including Punjab chemicals to manufacture new products for the excellent existing clientage as well as new players.

Key Growth and Profitability Drivers

The company aims to achieve a revenue of 1500 Cr within the next 3 years with the help of the following factors strengthening their objectives:

· Revenue Visibility: Punjab chemicals generated an order book of more than 1500 Crores for the FY21 with a stable EBITDA Margin of 12-14%. Improvement in the margins can be driven by better procurement, better efficiencies and cost savings and the company expects EBITDA margins to grow to 18-20% in the coming years.
· The management expects 2-3x growth in revenues from top customers which are UPL and ADAMA and which account for around 60% to revenues (35% and 25% respectively)
· Nippon Kayaku: The product that is being supplied to Nippon kayaku currently generates 10-12 Cr PA, with capacity utilisation of 80% for this particular product, The company believes that this product has the potential to generate 60-70 Cr to the revenue within12-18 months.
· Contracts with Singaporean MNC- The product that the company is manufacturing for the Singaporean company generates 12-15Crs to the revenue. The company aims to double that number in 2-3 years.
· The domestic formulation business is expected to grow 3-4 years, it currently contributes up to 50Cr to the top-line.
· Punjab chemicals is looking to increase revenues from its Industrial division because of the rise in demand for Phosphoric acid in pharmaceuticals as well as food and beverages. The company is already in talks with Coco cola to export phosphoric acid to their Korean and Singaporean factories. PCCPL already caters to the domestic needs of these companies and this segment adds around 50Cr to the topline. The management aims to double the segment revenue by next year.

Capex & Debt

· The company has planned a CAPEX of 150 Cr over the next 2-3 years and is planning to do a brownfield CAPEX at Lalru land where 6 acres are unutilized and available. The Asset turns from CAPEX of 150Cr will give out 3-4x returns and the total asset block will generate 200-300 Cr in the next 2-3 years.

· Company is planning to expand its Pune facility by planning to acquire the adjoining plot, because of the rise in demand for industrial chemicals like phosphoric acid that the company is producing for MNC’s like Coca-Cola and Pepsi Co.

· The company has a debt of around 80Cr and have managed to reduce it by 13cr in the last year. The management aims to go debt free in 2 years.

Risks and Concerns & Key Monitorables

· Change in Government and Government policies: Government policies related to agriculture and any alterations in agro expenditure and incentives can directly affect the company’s order book.

· Adverse climate and weather conditions: weather conditions like rainfall and pests directly affects the revenues of the company.

· Exchange rate Fluctuations, Registration period, supply security and quality from domestic supply.

· Promoter holding is low and has decreased since the last year by 2.02% from 40.03% to 39.22%.
· Registration processes for new products and molecules take time for registration and formulation.
· 60% of the revenues are generated through the two MNC’s UPL (35%) and ADAMA which contributes 25% to the top line, having concentrated revenue generation can cause concern if any issues regarding these companies take place.
· Raw Material- Raw material contributes 60% of the expenses and vary time to time. Any changes in Raw material costing directly affects the topline as well as the bottom line of the company.

Company’s Plus points

· Excellent Clientage and Long-term contracts: Punjab Chemicals have excellent customer relations with excellent clientage which includes UPL, ADAMA, Corteva, Coco cola, Pepsi Co, Divi lab, Laurus labs, to name a few.

· PCCPL contract manufactures niche products for clients which include Nippon Soda, Nippon kayaku, Corteva, Syngeta, Bayer etc and also manufactures intermediates for Zydus, Cadila, Laurus labs, Divi labs etc.

Opportunity In The CRAMS Segment

Crams segment contributes 60% to the revenues by agrochemicals and its successful execution remains the key re-rating trigger for growth. The company has the advantage of being a go-to CRAMS player for both domestic and international companies by gaining market share as the industry expands. PCCPL is expected to use this as an opportunity to grow with the help of:

(a) concrete relationships with global agrochemical companies.

(b) expertise in the business led by an experienced management team

(c) integrating R&D team of both companies (PCCPL and the partner

company) to provide better products.

(d) renewed relationships with domestic formulators with a strong base in the domestic market;

(e) strong order book of INR15bn as of FY’21 (revenue visibility for the next 2-3 years).

The Company continues to focus on new and promising products either for CRAMS or for direct sales to improve its revenue and profitability. While they have been able to get new clients in the CRAMS business with lucrative long-term agreements signed with few MNC’s.

Capital Intensity:

Company’s Competitors

Data derived from Screener.com

PCCPL Business Template

MY VIEWS
• The company can double its EPS from Rs 40 in FY21 to anywhere between Rs80-100 in FY22-23.

• The company can achieve a short-term target of achieving Rs 850-1000Cr Revenues in the FY22 and can double its PAT from 49.1 Cr to 100 Cr by the end of FY23.

• Punjab Chemicals and Crop protection limited is a great company with outstanding return ratios. I believe the company can achieve its revenue goal of Rs 1500Cr by FY23-24.

Disclosure-Invested

vedantinvestor · January 19, 2022, 3:43pm

May you share your valuation please?

raghav1836 · January 27, 2022, 9:25am

Q3FY22 results announced.

Punjab Chemicals and Crop Protection limited performed well and have resulted in total revenue of 255.2Cr in this quarter Q3 as compared to 209Cr of revenue from Q2FY22 and that’s a 22% growth from QoQ. The company also generated a net profit of 22Cr in Q3FY22 as compared to a net profit of 18Cr in the last quarter. Revenue from 9MFY22 stands at 675Cr as compared to 9MFY22 of 470 Cr and net profit remains at 64Crs and 38Crs respectively. I am attaching the BSE results pdf for your reference.
PCCPL Q3 Results.pdf (2.0 MB)

Souresh_Pal · January 27, 2022, 1:26pm

Thank you for your analysis. You saved a lot of time. This is why I love valuepickr forum
I think the key monitorable things for now is export revenue trend because of global container shortage issue and rm cost because of 30% dependence on china and how the largest customer UPL is doing. The business seems to be fairly valued.

Souresh_Pal · January 27, 2022, 6:09pm

I was going through the quarterly result. the raw material cost is 63% of revenue compared to 59% in q2. This is partially offset by cosr cuttinf. So going ahead there can be margin compression.

There is a negative point the company has taken loan of 15 cr from the promoter at an interest rate of 12-16% compared to bank interest rate of 11%. However the loan amount was 27 cr in fy 20. So the promoters are not very good. just check the related party transactions

SanketB · February 1, 2022, 8:11am

harsh.beria93 · February 7, 2022, 2:03am

Thanks @raghav1836 for initiating this thread and capturing the business essence. I am adding a few of my observations.

A bit of history
Company was founded by S.D. Shroff in association with Excel Industries Ltd and Punjab State Industrial Development Corporation (PSIDC). Currently, Shalil Shroff (son of S.D. Shroff) is Managing Director. They recently appointed a professional CEO Vinod Kumar Gupta who is B.tech in Chemical Engineering from IIT Mumbai and Post Graduate from IIM Ahmedabad with 29 years work experience and 23 years in Operations. Also, they hired a new CFO (Dr. S. Sriram) who has a PhD in supply chain management with 33 years of total work experience and 15 years in UPL.

This is the case of a turnaround company which went into losses due to a debt funded global acquisition spree that the company undertook in 2003-08. The acquisitions were done with the aim to move up the value chain by buying out global agchem companies which had registrations in developed countries. Then the 2008 market collapse happened which meant company couldnt raise equity from the market and had to default on their debt obligations. Additionally, they had losses in derivative contracts in 2009 and fires in one of their factory units.

CRAMS
To get out of the financial mess, they delved into contract manufacturing products for MNCs, their first contract was with Kureha and currently they work with very large innovator MNCs (Kureha, Adama, Corteva, Nippon Kayaku, UPL) in agrochemicals. The business is structured through long term contracts (5-year) on a cost plus basis, where registration lies in the name of innovators and AIs are supplied by Punjab Chemicals. A unique feature with this company is their customers part finance (~50%) capex requirements.

A brief of their past 5-year financials

In cr.	FY17	FY18	FY19	FY20	FY21

Revenues	535.90	495.92	642.90	549.60	678.20
Exports	355.40	296.30	411.10	343.10	422.60
Domestic	180.50	199.60	231.80	206.50	255.60
Gross margins				40.83%	40.27%
EBITDA margins	2.78%	8.39%	10.33%	7.71%	14.08%
PAT margins	-3.71%	3.47%	2.61%	1.97%	7.24%

Punjab Chemicals have scaled their export business (i.e. AI supplies to agchem innovators) very well. Their current quarterly export runrate is ~130 cr. (annualized sales of 500 cr.+). The quarterly domestic runrate is 100-120 cr. (annualized 400-500 cr.). Management is confident of reaching 1400-1500 cr. sales by FY24.

Interestingly, company makes healthy gross margins of ~40%, which is higher than generic peers like Insecticides India (30% gross margins). In the last few years, EBITDA margins have scaled well and are now closer to industry benchmark of 17-20%. There is still scope for margin expansion, additionally the export CSM business provides higher realizations. So once they are able to get to 1500 cr. sales, their EBITDA margins should go towards 17-20%. We already saw this happening in Q1FY22 which had EBITDA margins of 17%, since then margins have deteriorated due to increase in basic raw material prices (felt by players across industry).

Other useful data points to keep track of
Top 5 customer concentration

FY18: 68%
FY19: 73%
FY20: 65%
FY21: 75%

Revenue from metamitron and metconazole

FY18: 43%
FY19: 45%
FY20: 40%

Revenue from UPL

FY18: 50%
FY19: 50%

Raw material: Hydrazine Hydrate (produced from nitrogen and hydrogen gases), Aluminium Chloride Anhydrous, 2-Chloro Nicotinic Acid, Ethyl Acetate, Benzene, Denatured Spirit
Raw material imports: 25-30% (2020), 30-35% (2021)
Long-term contract with the suppliers for key raw materials (Metamitron and Hydrazine Hydrate) imported from Europe, China and Japan

Environmental compliance

Zero liquid discharge facility + in-house incineration facility for organic waste
REACH compliant for select performance chemicals

I will keep adding more points as I finish reading their concall transcripts.

Disclosure: Not invested

harsh.beria93 · February 7, 2022, 3:51pm

FY22Q1 notes

Currently 30% revenues comes from innovative (or patented) molecules (4 molecules). Increasing contribution from patented products will enable company make EBITDA margins of 18-20% levels
Confident of scaling FY22 sales beyond 800 cr.
Pune plant has been operating at 75% utilization in the last 2 years. Should do 50 cr. sales in FY22 and double it to 100 cr. in FY23. Looking to supply to international customers
Aim is to become debt free in next 2-years
30% of raw material comes from China
Currently, CRAMS account for 45-50% of revenues which should increase to 55-60% in medium term
Currently have 5-6 molecules that are making 100cr.+ annual sales
Contingent liability of 76 cr. is due to an error on part of Income Tax department which missed advance taxes that were paid by the company. Should get this rectified
Have excess land in Lalru where they can expand
Supply advanced intermediates to companies like Mylan, Laurus, Divis etc. It is of strategic importance to become part of DMF filings of these API companies. To supply advanced intermediates to Europe, don’t need a formal EU audit. Only customer audits are required
In long term contracts (multiyear), company doesn’t go to innovator for a 1-3% price increase. They only go for a price increase (on quarterly basis) when price change is higher than 3%. These are generally high value molecules (>$20/kg) generating gross margins of 38-42%
Auditor: KPMG

Customer specific details:

Bayer Crop Science: Did small business couple of years ago and currently discussing more business with them
Singapore customer: Shipments will start in H2FY22, expect 80-90 cr. contribution
Nippon Kayaku: Have commercialized one new product, production of which is under stabilization with respect to yield
Adama: Relationship goes back 20 years

Product specific details:

Metamitron and Hydrazine Hydrate are very important raw materials where company has a long-term contract with European and Japanese suppliers. Have installed a plant to distil lower purity Hydrazine Hydrate to bring down material cost
Metamitron: Adama and UPL control global volumes and Punjab supplies 60-70% of market demand
Metconazole: Innovative product from Japanese MNC. EU registration can bring in additional sales of 150-200 cr.

Capex:

Will need 50-75 cr. in updating facilities over next 2-3 years, this will be incurred from Punjab’s balance sheet. The remainder 50-75 cr. will be funded by the customer (taking total capex to 125-150 cr.). This capex will allow reaching 1500 cr. annual revenues
Need new capacity (either at a new place or enhanced capacity on excess land) to reach 3000 cr. annual revenues

harsh.beria93 · February 7, 2022, 5:43pm

FY22Q2 notes

Faced container shortage leading to delay in supplies to customers. Also, power crisis impacted power availability in their factories for 10-12 days. Had to use DG sets for backup power.
Commercialized two new products and started supplies to customers. These should contribute 15 cr. each. The third product will be commercialized in Q4FY22. These three products should contribute 70-80 cr. in FY23
Gross block decrease from 400 cr. in FY16 to 250 cr. in FY21: Some non-productive assets were sold, Tarapur plant was sold to UPL (for 23 cr. in FY20), couple of Mumbai offices were sold. Current assets are located in Pune, Lalru and Derabassi
Pune industrial unit supplies food grade phosphoric acid to pharma cos like Divis and Laurus and beverage companies like Coca-cola and Pepsi
Customer advances of 50-75 cr. for ongoing capex of 125-150 cr. is a cashflow arrangement, the enhanced capacity will belong to the company (and not customers)
Borrowings from Hem-Sil: Hem-sil is owned by promoter Shalil Shroff who supported company to enable one time debt settlement with the banks
Shipping costs are covered in the contract on a cost incurred basis
None of the new products face obsolescence risk, growth in 1 product might be lower, other products should grow by 7-8% going forward
Sales contribution from Derabassi ~ 60%, Lalru: 30-35%, Pune: 10-15%. Production from Lalru and Derabassi facilities are interchangeable in nature. Over next 2 years, contribution will be equal from Derabassi and Lalru
Pune: Spans across 1.5 acre. Leased by company (and not owned). Looking to supply to the Korean plants of Coca-cola and Pepsi. Currently supplying to their Singapore plant. In discussions with customers to enhance capacity and are looking at adjoining plot or for other plots within a given radius
Supplies to EU, US and LATAM depends on when their end customers get the registrations, their current growth projections rely on the timeline for registrations
In 1500 cr. revenue target by FY24, export contribution will be 60-65% and agro contribution will be 60-70%
Have developed local Indian suppliers for 3-4 critical raw material in last 2 years. Currently at pilot stage for localization of 2 more critical raw material. Focus is on diversifying China dependence for key raw material

Customer specific details

Nippon Kayaku new product: Should do 10-12 cr. in FY22 (bit careful due to logistical challenges). Full potential is 60-70 cr. which should be achieved in 12-18 months
Singapore company new product: Have started shipments, should do 12-15 cr. Demand is okay in Europe and UK which are the biggest markets for this product, a bit impacted in Australia due to drought. Full potential for this product is 90-100 cr. depending on timing of registration

Product specific details:

Metamitron: 0 in FY20, 160 cr. in FY21. Market size ~ 900-1000 cr. Provide 60-70% of customer requirements (UPL and Adama)
Metconazole: 195 cr. in FY20, 50 cr. in FY21. This was due to excess inventory with the customer (and not due to demand problems)
Diflufenican (pyridine based herbicide): Bayer is coming up with a new combination product. Punjab is only other company apart from Bayer and certain Chinese players to make this product, and they are backward integrated with no China dependence
Oxalic acid and diethyl oxalate: Contribute 10-20 cr. annual sales

Capabilities:

Handle products like Hydrazine Hydrate, Thionyl Chloride, Sodium Cyanide, Yellow Phosphorus, Chlorine Chemistry, Hydrogenation, Friedel Craft, Reaction, Aluminum Chloride.
Additionally, has strong capability in handling hazardous chemicals (100 tons/month of bromine, 300 tons/month of Hydrazine Hydrate, 300 tons/month of thionyl chloride)

FY22Q3 concall notes

Confident of reaching 900 cr. sales in FY22 and 1400-1500 cr. by FY24. Confident of reaching 17%+ EBITDA margins in 2-years, gross margins should reach to 41-42% post FY23
Hydrazine Hydrate refinement plant which uses hydrogen hydride as raw material (bought from Japan and Europe) is operational now
60-65% of sales are through CRAMS in which raw material and freight costs are automatically passed on in next quarter
Pune Industrial division: FY21 phosphoric acid sales ~ 45 cr., FY22 sales should increase by 75-80%, FY23 increase should be 25-30% based on current discussions. Have started supplying to overseas plants of Pepsi and Coca-Cola in Thailand, Korea and is discussions for their plants in Swaziland. These are 20+ year relationships. Their global head in Iceland have stated that they will increase procurement from current 2-3% to 15-20% in the next 2 years
Intermediate business should reach 130-140 cr. in FY22 and grow by 25% in FY23. Working on import substitution products for customers like Mylan, Laurus and Divis (currently undergoing trials). These should be commercialized in Q2FY23. This is different from the supply of 2 domestic products under secrecy agreement
Sales breakup: 70% from agrochemicals. Working on an intermediate product that should be commercialized by FY23Q2 and should bring sizeable topline contribution
Capex: 30% of the planned 150 cr. (including customer advances) have been done
Contingent liability of 76 cr. should go off-books by Q4FY22
Product concentration would reduce going ahead, envisage 5-6 CRAMS products and some specialty intermediates
Domestic products are generic in nature and give lower realizations compared to exports
Number of customers: 4 currently in CRAMS which will expand to 6 (1 Japanese + 1 European) in the next 2 years. For whole agrochemical division, currently there are 10 customers including MNCs and domestic companies

Customer and product specific details

Nippon Kayaku new product: Contract was signed in December 2020. Currently doing 55-60% of production, AI is being formulated at Nippon’s facility
Metconazole: Should grow by 5-15% in FY23. Are also supplying an intermediate to this Japanese company which should scale up by 100% in FY23
Singapore company new product: Supplied good quantity (hundred tons maybe). Target is to reach 500-600 tons and finally 1000 tons. Main market is Europe and Australia
Domestic contract: Started supplies of 2 products (under secrecy agreement). Currently discussing two more projects which should start production in Q2FY23
Nippon + Singapore: Should contribute 130-150 cr. by FY24
These 3 new products (Nippon, Singapore, domestic secrecy) have contributed 20% of FY22Q3 sales. The higher margins are not reflected in gross or EBITDA margins because higher freight and raw material costs are a pass through and they maintain an absolute spread. With increasing raw material and freight costs, margins will look lower

Dev_S · February 26, 2022, 5:45pm

Excellent notes as usual @harsh.beria93 , thanks @raghav1836 for spotting.

Current run rate and order book in hand, most of capacities in place and minor WIP, customers & molecules in place - would be veery difficult to miss FY24 revenue target , infact seem likely to get an upgrade of Med term goals by mid FY 23.
If anything they seem to be constrained only by product registrations in countries- which is something they don’t control and takes its own time - this will however be more for beyond FY24 game.
Customer and product de-concentraion is already in works and likely to get better in coming times.
They seem to be winning on multiple fronts - Innovator partnership, Large global/domestic accounts, large opportunity size, Smart Capital allocation with part Capex from Customers, professional leadership team, leaner balance sheet, so far very lean /negative working capital( to go up with scale), CRAMS model cost inflation pass through for majority revenue giving resilience, longer contracts giving visibility
China+1 is equal case for Agchem Similar to Spec chem - latter has got investors fancy as sector
Next leg of growth could have sizable contributions from Coca cola, Pepsi- 2% to 20%+ - food grade intermediates - These accounts itself is a mini Moat. Pune expansion is key monitorable.
Good communication- presentations, concall, openness in guidance etc.

All in all a good play on Agchem CRAMS story, MoS considering FY24 targets. At 1500 cr revenue, conservative 15% EBDITA - 225 cr and 15X EBDITA- potential to be at 3300cr+ mkt cap from current 1650cr.

Some anti thesis

Usually many turn arounds have a vote of confidence by promoter buying- not a single instanse here - not even at lows of Mar 20, when revenue TTM was 600 cr and Mkt cap would have fallen to 400 cr vicinity. Low promoter holding of 39% , high float - high volatility.
Legacy of past performance issues - perception mostly
Product and client concentration- Shroff family another entity Transpek had tough time here in FY21
Low margins for a CRAMS heavy player - should improve with time as indicated by product mix, cost pass through with lag, scale efficiency and GPM improvements
Unclear on part Capex by customers ( why not a practice for peers/industry ), though a great feat
Some seasonality? June qtr had higher margins in last 3 years.
What happens on absolute nos when input cost prices decreasing scenario plays out - cost+ model.
Quality of growth - What’s the volume vs pricing growth currently ? Couldn’t get data in deck/call.
Near full capacities, assuming greenfield expansion will be needed at some point - cutting too close? Though mgmt assured no issues here yet and hopefully part of Q2 23 updates.

Dev_S · February 27, 2022, 4:35am

Metconazol - some quick research on one of their top product.

key suppliers from India - Rallis( to Kureha chemical) , Punjab chem, Noble.

Total exports in Q3 22 250 cr+, At 9mo it is 800 cr+.

FY 21 exports around 500 cr +

FY 20 at around 300 cr+

All previous years has been under 200 Cr.

Export growth Trend seems structural - need to check competition commentary.
Import is still 3X of exports currently - need to understand better. Many are based out of Germany , could be an import substitution theme as well.
Metconazole Suppliers & manufacturers in Germany to India - volza.com

harsh.beria93 · February 27, 2022, 11:45am

Good point, has there been any regulatory action against them so far?

Recently in 2019, they had fires at one of their plants which led to subdued FY20 numbers. https://www.bseindia.com/xml-data/corpfiling/AttachHis/d7f4dbf2-2966-4b29-99ef-1a4b1cb4a1ba.PDF

Also, in the past (2009), there was fire incidence which led to them defaulting on their debt obligations. But this is part of any chemicals business.

These two are the only incidences which I could find, and this is pretty normal for chemical companies.

If we look at compliance certificates, Punjab Chemicals mention in their presentations about their facilities being zero liquid discharge + REACH compliance certificate + in-house incineration facility for organic waste. I found an interesting TOI article on their facility being used by local authorities to dispose drugs (heroin, ganja, etc.).

I have been unable to find anything where the company has come in crosshair with regulatory authorities in terms of environment compliance issues, can you point me to a relevant source?

Thanks for sharing these numbers, these are for metconazole only, right? I am also adding my notes related to metconazole

It’s a triazole fungicide, Punjab most likely supplies it to Kureha or Sumitomo (based on US import data)
Rallis supplies metconazole to Kureha under contract manufacturing arrangement. There was a destocking in metconzole in FY21 (this was mentioned in Punjab’s Q2FY22 concall). This was also mentioned in Rallis’ concall
Metconazole sales for Punjab: 195 cr. in FY20, 50 cr. in FY21 (mentioned in Q2FY22 concall)

Disclosure: Invested (with transaction in last 30 days), position size here

harsh.beria93 · February 27, 2022, 11:56am

I am adding some of my notes on their key raw materials and their pricing trends. The main raw material for Punjab is Hydrazine Hydrate which is mostly imported.

The prices have gone up significantly in the recent past (as can be seen above), to counter it Punjab has installed a plant to distill lower purity Hydrazine Hydrate to bring down material cost.

Other key raw material pricing trends are below.

Aluminium chloride HS Code: 28273200 (mostly exported from India)

Ethyl acetate (HS Code: 29153100) – mostly exported from India

Benzene (HS Code: 29022000) – mostly exported from India

Its very clear that company is facing headwinds in terms of raw material pricing, everything has gone through the roof and are at decadal highs. This along with high shipping costs means there is some scope for improvement in gross margins going forward.

harsh.beria93 · March 1, 2022, 5:42pm

AR21 notes

Miscellaneous

CRAMS revenue grew by 40%, contributed 64% of revenues (~434 cr.)
3 molecules were approved, expect commercialization of 3 molecules in H2FY22
Plans to manufacture agrochemicals in Lalru which is currently used for chemicals
Received show cause notice from SEBI for alleged non-disclosure of certain transactions undertaken in Argentina. Company and directors have settled with SEBI by paying 21.67 lakh and 14.45 lakh respectively
Vinod Kumar Gupta has been appointed as CEO on 08.02.2021
Spent 49.9 lakh in CSR (against required amount of 45 lakh + 3.6 lakh unspent from FY20)
Company developed local sources for 6 critical raw materials
Number of employees: 1176 (vs 1089 in FY20) + 597 on contractual basis
Share price (low): 300, (high): 1028.5
Number of shareholders: 14’451
Median salary: 4.32 lakh (vs 4.36 lakh in FY20)
Management remuneration: 4.13 cr. (1.05 cr. was commission)
R&D: 1.97 cr. (vs 1.18 cr. in FY20). Out of this, 24 lakh was capitalized (vs 21 lakh in FY20)
Implemented SAP B1 Hana Ver 10, an integrated ERP system across all plant and office locations
Customer advances: 33.48 cr.
Revenue from top 2 customers was 288.32 cr. (vs 206.6 cr. in FY20) and 58.43 cr. (vs 86.23 cr. in FY20)
Contingent liabilities: 76.84 cr. (vs 3.3 cr. in FY20). Out of this, 76.68 cr. was in relation to income tax matters
Auditor remuneration: 25 lakh (vs 33 lakh in FY20)

Revenue breakup:

Agrochemical division Derabassi: 513 cr. (vs 391 cr. in FY20)
Specialty chemical division Lalru: 111 cr. (vs 127 cr. in FY20)
Industrial chemical division Pune: 52 cr. (vs 37 cr. in FY20). Was at 95% capacity utilization
Out of the above, job work was 46 cr. (vs 29 cr. in FY20)

Geographical revenue breakup:

India: 242.26 cr. (vs 195.35 cr. in FY20)
EU (including UK): 219.1 cr. (vs 174.62 cr. in FY20)
Japan: 73.48 cr. (vs 88.7 cr. in FY20)
Others: 130 cr. (vs 79.78 cr. in FY20)

Banking relationships

RBL bank + SVC Cooperative bank
Availed moratorium on interest payments during covid period
Term loan from RBL bank is at 11.25% interest rate
Term loan from SVC Cooperative bank is at 9.7% interest rate
Vehicle loan is from Indostar Capital Finance at 11.03%
ICDs were 15.85 cr. (vs 27.85 cr. in FY20) at 12.75-16.50% interest rate

Total income of SD Agchem (Europe) NV was 11.36 cr. (vs 9.14 cr. in FY20) with profit after tax of -1.55 cr. (0.89 cr. in FY20)

Fire incident in 2019

Received major part of the claim against the loss of property with no disputes by Insurance company
Damaged plant has been rebuilt and operationalized at a different location with improved safety and protection

Disclosure: same as before

Rafi_Syed · March 3, 2022, 7:32pm

Adding my notes from Q3FY22

Punjab Chemicals
Business Segments : Ag.Chem, Pharma Active Intermediates (AI) and Spciality Chemicals (phosphorus derivaties, oxalic acid, diethyl oxalate, various oxalates … )

Market Cap : 1,692 Cr
Order Book Size : 1,500 Cr (Includes the visibilty of 3 years and 5 year contracts, all the contracts are auto renewed )
TTM Sales : 884 Cr
Interest : Downward Trajectory
Share Capital : Never diluted any equity since 2012
Share Holding : Two of the share holders under public category major share and very long term investors as well (Looked up they are kind of related to promoter)
CMP / Sales : 1.99
Historical Median PE : 35.3
TTM PE : 22.7
EV/EBIDTA : 13.60
Gross Margins : 40% (Aiming to set it at 42% by way product mix and bakward integration )
EBIDTA Margins : 14% (Should be imporving and settle at 17-18% from the current 14% - Margin Expansion)
Pricing Model : Auto Check - Any increase in Raw Material and Freight automatically passed on to the customer immdiately (Margins and other expenses are negotiated with the customers on annual basis )

Clients :

Agchem : Nippon Kayaku, Singapore Client, European Client and Domestic Client
Industrial Chemicals : Coca Cola, Pepsi
Pharma : Mylan, Laurus and Divis (The product Punjab Chemical produce is a import substitue, the product come online by next year, it will come online q2fy23 and potentail is 100 crore )

Bullish Commentary

Aiming to to achieve topline of 1400-1500 crore in two years by end of FY24 (They will be ending the FY22 with 900 crore top line FY21 Sales → 678 FY22 → 900 i.e., 32% YOY increase if they can hit 900 mark)
Domestic presence is going to go up substantially and you will see next year will also grow very high in terms of supply to many of the formulation companies

Yes, so the speciality chemicals I just talked to you about some intermediates which we did, we are going to do. As far as the phosphorus chemistry which that our customers are very strong that is Coca-Cola, Pepsi and then we have the pharma giants in India and overseas. So this year also we have a good road map towards this business portfolio as I told you that this business portfolio can go as high as 250 Crores in sales. This year we have done very good we should be closing anywhere compared to last year almost double for this financial year and next year we envisage with the discussion which we had with our export customers there should be an increase of at least 25% in terms of sales and business with the industrial division products

Question : I was not very clear on the topline and the order box. So with 1500 Crores of order book which you define as live and which is over two to three years and if I look at next year and say FY2024 target of 1500 Crores how much of this target is actually backed by the order book.

So when we have given you or when we have stated that in the next two years will be 1500 Crores. So that order book and the contracts are already in place and as you have seen for this nine months we have clocked in for the first full financial year which we did last year and has already stated that we have another quarter to go. So moving forward we are pretty confident that what we have planned and achieved we will do it because right from the customer to our
production plan everything is well organized and well set to have this target achieved.

Question : Okay so because of auto renewal what you mean to say is that you have complete visibility of 100% order book there may be a little bit of supply disruption here and there but basically your full year target is backed by total order book.

Yes, so you are right because we do not foresee that the virus or there should be anything up the sleeves but at this stage yes absolutely right we are very clear everything is defined fine sealed and it will be delivered.

Question

Sir my second question is looking at the order book do you think that you should be upgrading it to around 2000 odd Crores in with a vision of three, four years do you think that the board has actually chopped it out.

Yes, so basically as I did mentioned during the second quarter that our next phase of plant is already, we are doing that where right now from 1500 where do we go, do we go 2500, 3500 so and the business plan is already been prepared so I believe during the first quarter or maybe by second quarter we should be able to give you a little more clarity on it but by and large to be very clear there is a strong demand a lot of customers have come to us a few things which have been already find sales and we just needed to tabulate it and put it in so we are pretty sure during the first or the second quarter of next financial year we will come back with our phase II.

Question

One last question, Sir, which is more a business structure thing when you look at the inputs you gave in the early part of the conversation there are two products which is Metaconazole and Metamicron both of which contribute maybe one third of the revenues or more then you will have one more intermediate coming up which has the potential to be a 100 Crore product I hope I heard that correctly. So how do you balance between growing and not being too concentrated
how do you manage that risk and can you share some thoughts on whether you think of it as a risk or not. Thank you.

No, so you are right and that is where has been on our agenda that dependability on one or two products is not very healthy and which you will see during the next two years that the product mix would come in by and large the growth would come in from the gsector so for example leaving these two products aside you look at the product which we would do for Nippon Kayaku and the Southeast Asian customers which would definitely next year would break that balance
would then get distributed between four to five products and moving forward between next year and 2024 the intermediate and the speciality chemical products would also bring in but as I said that by and large the product mix which right now you see is between maybe one or two would then get defined between five to six products with strong backups with long-term contracts and moving forward depending on the product registration and all we believe by the time we go 2023 past 2024 we should be in the mix of close to around seven to eight products in terms of agro which would be close to I would say five to six products and the balance would be speciality intermediate which would add to the revenue and the product mix.

Products

Metaconazole - 150 Crore Revenue Potential
Metamicron
FY2024 the Nippon Kayaku and the Singapore contract together would contribute about 130-150 Crores
70% of the revenue is from Ag.chem (Herbicide and Fungicide )
Industrial Chemicals - ( phosphorus chemistry - Coca Cola and Pepsi are the customers)

Capex

HH refinement plant

Hydrogen hydride is one of our basic raw materials as you know we buy from Japan as well as Europe, having said that with supply chain we always try and see that the raw materials are closer to us. So yes we have already started this exercise and we are pretty successful in delivering within our premises and we have also commercialized the production and we have used it. So the quality issue is also taken care and everything is as planned.

150 cr Ongoing Capex (50% of the capex is co-funded by the customer, this gives long term commitment from the customer and overall sticky nature )

Notes : The Shroff family sold on of their entity Excel Crop Care to Sumitomo Chemical Inida

Disc : Invested

sreered · March 4, 2022, 5:37am

Some moot points which require attention:

Company’s Sales growth has been zero over 10 years - from 2010 to 2020. Only in the last 1-2 years they are seeing 20% growth. More or less same trend in the profit growth too. Why is that?
The Gross Block / fixed Asset has reduced (infact became half) over the last 10 years. How can they achieve the growth they are saying with this base (and additional 150 crore ongoing capex ) especially with asset turn of just 1.6
Promoter’s holding is only 39% and infact reduced over the last 1.5 years by around 0.85%. No promoter buying seen too

Any pointers to address the above will be helpful

Sridhar Reddy

Rafi_Syed · March 4, 2022, 8:57am

Change in the Business Model (Read @harsh.beria93 first post ), they are more into CRAMS, now working for innovators where the margins are pretty high, 10% difference in gross margins when we do like to like comparision between them and insecticides india (who does the same kind of stuff )

The Gross Block / fixed Asset has reduced (infact became half) over the last 10 years. How can they achieve the growth they are saying with this base (and additional 150 crore ongoing capex ) especially with asset turn of just 1.6

These were the assests hived off to restructure the busines, they did lot of acquistions out of india and incurred huge losses. They are into CRAMS not a bulk chemical producer, they produce active ingrediants , they work for innovators, Punjab supplies AI innovator who makes formulations.

Promoter’s holding is only 39% and infact reduced over the last 1.5 years by around 0.85%. No promoter buying seen too

Gowal Consulting Services Pvt. Ltd. (24.47% for quite same time - Address PLOT NO 50 & 51/B GIDC AREA VAPI Valsad GJ 396195 IN)

Directors : SALIM PYARALI GOVANI / JAGMEET SINGH SABHARWAL

SALIM PYARALI GOVANI - (Also director in UPL SUSTAINABLE AGRI SOLUTIONS LIMITED ) I am assuming this one of the related party company of UPL

UPL used to be their major customer

Excel Industries Limited ( 4.77 ) This is a listed company and belongs Shroff family ( I can see this name everywhere in UPL, Excel Industries, Punjab Chemicals , Excel Crop Care , need to understand is there any common connection )

Kharanshu · March 4, 2022, 9:56am

So @Rafi_Syed that was one of the questions I had, relationship between promoters of UPL, Transpek and Punjab promoters?

@harsh.beria93 if you could throw some light too pls?

Rafi_Syed · March 6, 2022, 7:40pm

harsh.beria93 · March 6, 2022, 9:56pm

One small point on hydrazine hydrate: Gujarat Alkalies is coming up with a new plant this quarter (10’000 MTPA, 405 cr., expected commissioning in Q4FY22) using a better process for which it has been granted a patent. This will reduce imported raw material dependence (assuming Punjab buys from Gujarat Alkalies). This should be asked in next concall.