Just a small update from the above statement. Company is installing MVRE (mechanical vapor recompression evaporator) for treatment of water. So, in terms of water treatment which is extremely important, they are improving.
Though, I still find out to be a very basic CMO operation.
UPL dependence seem to have increased to 54% of sales vs 43% in FY21
The contingent liabilities problem that showed up last year has come down significantly and company has also appealed against it.
The high fixed rate loans taken earlier are running down. With lower leverage, they should get a rating upgrade and lower their borrowing cost. It makes no sense for this kind of a business to borrow at 10%+
Miscellaneous
Revenue grew by 38% on back of growth in existing products + commercialization of 2 new contracts for international clients, each of which can potentially generate 100 cr. revenues in FY23
Industrial chemical division doubled in revenues
2/3rd revenues come from agrochemicals and 1/3rd from performance chemicals (including intermediates and industrial chemicals)
Portfolio of 10+ products in contract manufacturing for MNCs and Indian companies. Expect growth in existing molecules as customers get registrations in additional geographies
Developing intermediates which should be commercialized over next 2-years
Target: reach 1’500 cr. in next-2 years with 2-3% increase in margins
Expect 7-8 products with long-term contracts and registrations that will include 5-6 agrochemical products, and rest from specialty intermediates over next 2-3 years
Intermediates will be supplied to leading Indian and MNCs - two molecules are expected to commercialize in FY23. We have a contract with a Japanese client that start contributing from FY 2023
Has approved Effluent Treatment Plants with incinerators to treat the waste materials in Derabassi and Lalru. For disposal of solid waste, it has a tie-up with Common Effluent Treatment Plants close to manufacturing sites
Plans to manufacture agrochemicals in Lalru which is currently used for chemicals, separate agrochemical site has been initiated
CSR: Spent 75.94 lakhs (vs 49.9 lakh in FY21). It was slightly above requirement of 75.67 lakhs to fill last year’s gap
Order book: 1’500 cr.
Capacity utilization: Derabassi (85%), Lalru (70%), Pune (95%)
Identified local producers for some basic raw materials
Number of employees: 1213 (vs 1176 in FY21) + 867 (vs 597 in FY21) on contractual basis
Share price (low): 839.75, (high): 1933.7
Number of shareholders: 19’419 (vs 14’451 in FY21)
Average percentile increase in employee salaries (ex-managerial) was 10.34% and managerial remuneration increased by 43.65%
Management remuneration: 6.04 cr. (vs 4.13 cr. in FY21) (2.26 cr. was commission vs 1.05 cr. in FY21)
R&D: 3.3 cr. (vs 1.97 cr. in FY21). Out of this, 1.45 cr. was capitalized (vs 0.24 cr.in FY21)
Implemented SAP B1 Hana Ver 10 and G-suite cloud backup
Customer advances: 18.6 cr. (vs 33.48 cr. in FY21)
Revenue from top 2 customers was 503.71 cr. (vs 288.32 cr. in FY21) and 75.83 cr. (vs 58.43 cr. in FY21)
Contingent liabilities: 13.41 cr. (vs 76.84 cr. in FY21). Out of this, 13.25 cr. (vs 76.68 cr. in FY21) was in relation to income tax matters
Auditor remuneration: 34 lakh (vs 25 lakh in FY21)
Revenue breakup:
Agrochemical division Derabassi: 664 cr. (vs 513 cr. in FY21)
Specialty chemical division Lalru: 156 cr. (vs 111 cr. in FY21)
Industrial chemical division Pune: 111 cr. (vs 52 cr. in FY21)
Geographical revenue breakup:
India: 426.96 cr. (vs 242.26 cr. in FY21). In domestic revenues, sale of services was 126.11 cr. (vs 45.87 cr. in FY21). What could this be related to?
Punjab came up with decent sales growth of 29%, margins were under pressure resulting in 17% decline in net profits. Management is very bullish on growth in FY23, some part of the margin deterioration was strategic in nature (to gain market share in certain molecules). My concall notes are below:
FY23Q1
Faced margin pressure due to higher power costs. Gross margin pressure was due to lag in price hike, some part of which is strategic in nature. Gross margin pressure can continue in Q2 and should come back to normal levels in Q3FY23, company is targeting sales growth in-line or slightly higher than last year (i.e. 37%+)
Agri residue prices increase led to higher power costs, along with higher fuel costs. Looking for alternate energy sources
Some of the price hike delay is to gain market share in certain newer molecules. It’s a herbicide with a market size of 2500 MT, Punjab’s market share is less than 20% and they intend to reach 40%
Lalru lower production: One specific product had much lower production as that agri-molecule failed last year and there is lot of inventory in market. Will start production of that product in Q3
Working on 2 new products with much higher realizations ($80/kg to $140/kg) with market size up to 500 MT
In agro, products are on 5-year long contracts
UPL contribution will go down to 30% in next-3 years and 25-30% in 5-year time frame. In FY22 UPL contribution was 36-37% (why is there a mismatch with annual report numbers?)
Added 3 Japanese customers in previous year
Metconazole: Should double production this year due to re-registration in Europe. Discussing another molecule with Kureha
Should have higher production in Q2 and Q3. Should have 15%+ volume growth in FY23
There are 11 disclosed products on the investor presentation + 4 undisclosed due to confidentiality. Out of these 15 products, 6 were added since 2020 and have contributed around 400-450 cr. of sales. 2 of these are still not running at optimal utilization
Disclosure: Invested (position size here, no transactions in last-30 days)
Management has mentioned in the past that they will look to buy from GACL, it will probably not be margin accretive, but will ensure more reliable supply chain.
I believe it’s due to technical reason. most chemical companies are correcting after giving spectacular return in last bull market. Leaders of last bull market hardly give any return in short term like 1-1.5 years. Here is a weekly chart indicating it.
Punjab came up with very good sales growth of 33%, but margins were stressed due to RM inflation and higher power costs. Management remains confident of strong growth and are guiding for 1100-1150 cr. of sales in FY23, and 1500 cr. in FY24. My concall notes are below.
FY23Q2
Headwinds in business environment, have adopted flexible approach in product pricing (to increase market share) and are focusing on new geographies such as South America
Margins: pricing pressure, product mix, carry over of high cost inventory from earlier periods (mainly hydrazine hydrate). Energy, fuel (rice husk; gone up) and freight costs impact other expense. Will be able to pass on cost pressures by Q4 and revert to 14-15% EBITDA margin
Hydrazine hydrate prices have started tapering off
Power costs (60 cr. in FY22 vs 32/33 cr. for IPL/Bharat Rasayan): Products (herbicides) are more power intensive + due to farm law changes in last couple of years, availability of rice husk has become a challenge
Investing in renewing assets that are 30-40 years old (should have replacement capex of 30-40 cr. over 2-years)
Lalru: facing raw material problems resulting in lower production and delay in registration. Hope to come back to 70%+ utilization in Q3/Q4. Large part of CRAMS business comes from Lalru, and majority of expansion will also happen here
Derabassi: mature products, debottlenecking
Order book: has increased from 1500 cr. to 2500 cr.
Looking for a new site in Maharashtra or Gujarat and should finalize by end of FY23
Lot of customer visits happening from multiple geographies (Japan, Israel, etc.)
Phosphorus derivative: Faced pressure in this division due to pressure from Chinese suppliers. Have seen large margin drop, should see it come back to 16-18% next year
Have seen some slowdown in demand from domestic market
Agri segment has seen significant growth in South America
15%+ volume growth. Maintain 1500cr. revenue by FY24
Thiocyclam: Full potential of this product has been delayed due to registration an should be realized in FY24
Singapore customer molecule (most likely prosulfocarb): Registration has been delayed and growth should come in FY24
Capex: 120-150 cr. over next 2 years
CRAMS: 65%; 40% from generic molecules + 25% from tech transfer of 2 molecules from Japanese customers + 1 more. Are either first or secondary supplier in CRAMS business. Have quarterly review on forex adjustements
FY23 sales will be 1100-1150 cr.
60-65% CRAMS + 15% specialty chemicals + 15-20% intermediate & fine chemicals. On spot basis, sales are very low (maybe 5%)
2 new products coming in agro + 1 in specialty chemical in FY24
Making intermediates for Israeli company specializing in fermentation space (most likely NextFerm Technologies). It’s a small high margin business
Disclosure: Invested (position size here, bought shares in last-30 days)
This product is sold by UPL in Srilankan Market (Looks in-license agreement from Nippon Kayaku )
Possible reasons for high power costs are due to very old equipment (30-40 years old and they are spending about 30-40 cr to upgrade)
Reasons for low Margins
Increase in RM costs (Hydrazine hydrate)
High Power Costs
To maintain the customer relationship unable to pass on the RM costs
Growth Guidance
FY23 Target of 1100 Crores (550 Crores of that is achieved in H1 FY23 , they should do another 550 in another two quarters of FY23)
FY 24 Target is 1500 crore
Aiming to achieve 14-15% EBIDTA
By end of FY23 few of the products will be approved in Brazil market
Lalru’s utilization (where most of the CRAMS stuff happens) is low at the moment, aiming to reach to 75% utilization
Beyond FY24 guidance will be announced soon (by Q3 or Q4 of FY23)
Focussing more on inhouse R&D to capture market share of molecules that are going to off patent in couple of years from now
Margins will be better in Q3 onwards (This is product that they are making exclusively Nippon Kayaku and one more product for a Singapore Customer - Syngenta? )
Enough land at Lalru (6 acres ) to address the growth beyond FY25
Also looking for a site in Gujrat / Maharashtra
Growth Capex is between 120-150 Cr (At Derabassi it is mostly debottlenecking )
Punjab came with muted nos, with sales being flat YOY. Margins have started reviving but next quarter will also be soft. Management is guiding for resumption of growth starting Q1FY24 and a 30-35% jump in revenues in FY24. Concall notes below
FY23Q3
Shifted guidance of 1500 cr. revenues to FY25 from FY24. Will probably see 30-35% growth in FY24 and there will be a shortfall in reaching 1500 cr. in FY24. Will get projections from customers in February
Gross margins impacted due to high cost inventory, pricing pressure from certain markets and higher energy prices. This will persist in Q4 which will be a flat quarter. Gross margins will revive in Q1FY24, if energy prices are still high then EBITDA margins can be under pressure
All existing contracts renewed, none of their products are in red category
Industry is into stock liquidation mode to reduce high cost inventory
CRAMS contracts over last 2-years have ramped up well, have started reaching volume projection for the Japanese customers. 1 molecule projection has been surpassed, one is in-line, and one is lagging due to registrations
Lalru: Expecting 1 product registration in early FY24 from Europe. Capacity utilization will increase significantly after that as there is a dedicated capacity
Building new chemistry capabilities in line with newer demand from CRAMS customers
Have commercialized 1 new product this year, 1 more product was supplied in small batches for registration purposes. Will start contributing in Q3/Q4FY24 and major contribution will flow in FY25
In most CRAMS relationships, have exclusive relationship. In few molecules, there is a second supplier
Have been able to develop local vendors for 3-4 intermediates in last few years
Export margins are higher than domestic
Volume has grown 8-10% in 9M FY23
Capex: Will spend 100-150 cr. in next 2-years
Disclosure: Invested (position size here, no transactions in last-30 days)
PUNJAB CHEMICALS
Innovative CRAMS - active ingredients (similar as API in pharma) - capex funded by clients (partially)
ROCE 30%
Food grade Phosphoric acid goes to Pepsi and Coca cola (clients since 20Y). Bet on CEO Vinod G (IIT Bombay Chemicals )
Rev : 48% India 39% Europe 10% Japan
Metamitron (hemani group is competitor along with best crop science)
Metconazole (Anupam rasayan, Astec lifesciences, meghmani and rallis are competitors)
Major client - UPL (client concentration risk)
What i feel they have good management barring the past acquisitions to enter US and other regulated market. (2003-2009) + Fire impacted in major products plant
We can think that the company came out of all this major liquidity problem. But that should be taken with a pinch of salt.
Debt/Equity has come down from high levels of 18 in FY11 to 0.3 in FY23 - CRAMS impact - innovator or not one needs to judge on its own.
I also think they are not doing innovator molecules (personal view) - one can think of this as a turn around story where a bet is on the management and no hoax narratives like innovators.
Dear Sir your analysis is extremely mindful. Based on my personal opinion adding this stock to core portfolio seems unlikely. Here are few factors -
Promoters holding
Working capital days
Cash conversion cycle
Borrowings and other liabilities > reserves vis a vis fixed assets and gross block
OPM too thin and Interest increase.
The sector has a lot of hurdles. I personally will wait for it to showcase a better performance.
Many thanks
(For educational purposes)
