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

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.

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So far there are 2 key products which are driving close to 60%+ revenue for the company. Have spent some time understanding bit more about these two:

Metamitron:

  • Triazinone Herbicide - Metamitron herbicide controls pre-emergent and post-emergent weeds. Key application in sugar and fodder beets.
  • Developed by Byer Crop in 1975 and the patent has already expired.
  • Global players are Bayer CropScience, ChemChina, Nufarm, SIPCAM-OXON Group, Ultra Group, Hutchinson Group, Shenda Chemical Industry, Nantong Reform Chemi
  • As per one news feed, Its importance is increasing with the regulatory phase out of certain other competitor active substances ongoing in 2019 and 2020. (link)
  • According to a report , global sales of metamitron in 2016 was $115 Million.
  • UPL and Adama are significant players in European markets.
  • In India, only Punjab Chemical has approval for Metamitron. Most importantly, it’s a 9(3) approval. - 9(3) approval is for first time indigenous manufacture of technical grade pesticide or formulation.
  • Post capacity expansion, PCCL has capacity of 2700 (800 + 1900) MTPA.
  • Interestingly, another player Himani Group has applied for Environment clearance (Link). Their proposed capacity is for 4800 MTPA. Close to 2x that of PCCL.
    - Trivia - This Himani Industry had submitted a DRHP back in 2011. However, looks like the issue never came out.
  • Also, Best Crop has applied for a 9(4) (generic) application for Metamtiron in 2019. (link)
  • As per Europian Pesticides Properties database, the dossier expiration date is 31/08/2022. What is the implication? (Link)

Metconazole (MCZ):

  • Metconazole, was discovered by Kureha and initially co-developed with AgriShell (now BASF) to control a range of fungal infections cereals, canola, rice, maize, soybeans, sugar beet, cotton, stone fruit, nuts, peanuts, ornamentals, and turf.
  • Kureha is a relatively small R&D-based company and has limited in-house marketing capabilities to cover all the major markets for metconazole and therefore entered into a number of collaborations with other companies. (Link).
  • These collaboration has not only achieved wider geographical usage of metconazole but has also resulted in license companies developing mixture products and expanding metconazole’s use spectrum.
  • In 2003 Rallis tied up with Kuhera for a 100% export oriented project on Metconazole.
  • Rallis used to report Metconazole as one of the top three products till 2013.
  • Even in the recent investor presentation and call etc, Rallis talks significantly about Metconazole supply to Kureha, just that the requirement may have changed and they are not required to explicitly call out top 3/5 products in AR.
  • PCCL has current installed capacity of 240 MTPA for Metconazole.
  • Meghamani has applied for Environment clearance for a capacity of 2400 MTPA. (link). 10X bigger capacity then what PCCL has today.
  • Interestingly, Meghamani had applied for a 9(3) registration back in 2011 as well. They have gone through a lot in-between.
  • Also, Astech has applied for Environment clearance (link) - proposed capacity is 240 MTPA (just what PCCL has today).
  • Also, Anupam Rasayan has applied (Link) for environment clearance.
  • Unlisted player Uma Organics also has applied for Metconazole capacity.

Some open questions/apprehensions that I have:

  1. Without any implied inference, they have very close working relationship with UPL - Infact a long standing one:
  • Divesture of 4 subsidiaries to UPL in 2012-13 post the financial headwinds that PCCL was facing around that time. S D Agchem (Netherlands) I B.V., Agrichem B.V (Netherlands), N.V Agricultural Chemicals, Agrichem (Helvetia) GmbH.
  • Biosar MIDC Plot lease right transfer in 2020.
  • Customer funded (50%) capaex.
  • Very remunerative supply of Metamitron piggybacking on UPL’s penetration in European market.
  1. Specifically on Metamitron, intrigued why this has been a monopoly situation for PCCP though the market size is decent enough and patent has already expired.
  2. Hemani with 2x capacity can be significant challenger in a level playing filed - if PCCLs proximity to UPL kept out of equation.
  3. On Metconazole, important to identify if the existing business shifted from Rallis to PCCL or PCCL was onboarded for incremental demand with an intent of supplier base diversification? Will be important to see Rallis historical capacity and growth thereon. Could be indicative if they have snatched business away from Rallis.
  4. Are we heading for a supply glut on Metconazole with Meghmani getting 10x capacity and other guys like Anupam and Astec getting in the fray?
  5. On the claim of 1500 Crs+ topline in next 2-3 years, current assets are close to 200 Crs. With proposed capex of 150 Crs. it will take ~4x to 5x asset turn for a top line of 1500 Crs. I think this point was discussed in Q2 concall as well. The explanation is not very convincing so far.
  6. On the claim of being significantly into CRAMS business, in context of the R&D capability etc. my impression is to look at this more as a contract manufacture. They claim to have 0.3% as R&D expenditure and have close to 55 people into R&D function. That gives a range of ~3 lac per employee/year as R&D personal salary.
  7. Overall Debtor days has impoved a lot and looks far better as compared to industry peers.

Thanks,
Tarun
Disc: No Investment

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Hi, the company is purely a CMO and it does not possess any specific R&D capabilities.

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Thanks for your succinct notes, I can add a few clarifications.

I dont think this is true, metamitron and metconazole contribution to sales used to be reported in CARE rating reports until FY20. In FY18, contribution was 43%, in FY19 it was 45%, in FY20 it was 40%.


In FY21, this wasn’t mentioned in the credit rating report. However, this was mentioned by an analyst in concall of Q2FY22. If we are to trust the analyst numbers (which the management didn’t deny during the call), contribution should be 160+50 ~ 210. On sales of 678 cr., it implies ~31%.

So contribution from these two products have come down gradually from 45% to ~30%, this is still quite high but much lesser than 60%. Unfortunately, I couldn’t find these numbers in their annual report.

About increased competition in these products, I think its not that simple to get registrations in Europe. On average, it takes 6 years for a registration to come and this number ranges from 3-10 years (mentioned multiple times by Sharda management, also in this article). Also, I don’t know how complicated it is (regulatory wise) to change the technical supplier. If I am not wrong, a technical needs to be registered once across EU region and then the final product needs to be registered separately in each country (mentioning the technical supplier). Overall, its a complex regulatory process.

About UPL relation: UPL bailed them out by buying a lot of non core assets (like their office in Mumbai, a few factories which were leased to UPL, etc.) and providing them with job work opportunities. In Punjab’s FY21 annual report, contribution from top customer (most likely UPL) was 288.32 cr (288.32/678 ~ 43%). Thus, UPL’s contribution has been coming down (albeit gradually) from 50% in FY18 to ~43% in FY21.

About enough capacity for 1500 cr. sales? I also had this doubt, basically is 4-5x fixed asset turns a reasonable number? I then checked fixed asset turns of other technical/AI manufacturers (for FY21).
India pesticides: 5.2x (649/124)
Bharat Rasayan: 5.7x (1091/191)
Heranba (also into formulations, so asset turns are higher): 9.2x (1219/133)
Asset turns of PI and Astec is much lower (<2.5x). So, a 4x+ fixed asset turns is very much possible (as seen in numbers for India pesticides, Bharat Rasayan). Even NACL Ind. has 7x+ fixed asset turns. Currently, Punjab is doing 4.4x fixed asset turns. So, its possible for them to maintain these kind of asset turns, especially if they don’t have to buy new land. Management mentioned current facility (along with brownfield capex) should be suffice until 1500 cr. They also mentioned about excess land available in Lalru to use for further growth.

R&D spends: This is also an enigma for me. Basically, company claims R&D is done with the innovators.

What I find surprising with Punjab is their customers pay advances for capex requirement, pay them very quickly (1.5 month receivable in B2B is unheard of), fund R&D, give them very good margins (40% gross margins + 5-year contracts + raw material price escalation + freight), etc. Then what does Punjab exactly do? Their FY21 ROCE was 38%, their 9MFY22 ROCE is 40%+. Why are they getting this kind of a sweet deal?

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Hi, can you please tell what is this website from where you are tracking the raw material price?

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Q4FY22

Results
Presentation
Earnings Call

  • Currently Three Products under CRAMS , two more will be added this FY and two more by next FY
  • Working on Import Substitution Products, validations in progress
  • Current EBIDTA Margins are 15-16% aiming to reach 18-20% in couple of years
  • All the projects are on track
  • Net working capital days stretched due to volatility in RM prices and more inventory
  • Working on registrations in markets like LATM, SE and Australia
  • Major Business categories are Agro (65% ) and Performance Chemicals ( 35% , can be broken down further as Intermediates and Fine Chemicals )

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Punjab came out with decent set of numbers, Q4 sales grew by 23% and PAT by 90% (YOY). FY22 was a good year with sales growing by 37.6% and PAT by 69%.

In terms of production volumes, both Derabassi and Lalru had low production in Q4 (maybe a function of product mix or raw material shortage).

FY22Q1 FY22Q2 FY22Q3 FY22Q4
Derabassi production (MT) 7’022.00 6’236.00 6’521.00 4’018.00
Lalru production (MT) 342.00 412.00 491.00 100.00

Management is confident of reaching 1500 cr. sales in next 2-years, lets see execution. Concall notes are below.

  • Net working capital days should stabilize at 50-55 days
  • FY23 growth drivers: Got registration for 2 more products which will be launched in FY23. Certain launched products got registered in additional geographies, so there will be growth in existing products as well
  • FY24: 2 more products will be added in FY24 (expect to have registrations by Q3YF23). Will start advance intermediate supplies to pharma cos Laurus/Divis/Mylan
  • The 3-4 new molecules are generic products where Punjab is an additional supplier (site transfer from existing suppliers)
  • Agrochemicals: 65% (~600 cr.), performance chemicals (intermediates + fine chemicals): 35% (270-280 cr.)
  • Top 2 product contribution (metconazole + metamitron) has reduced to 20%
  • Advance Intermediates: Delayed by 3-4 months as they had certain supply chain dependence on China which is being resolved. Will have sales coming in from early FY24
  • EBITDA margins should increase by 2-3% (from current 15-16% levels) in next 2-years
  • CRAMS model works on EBITDA/kg, so margins can look lower if raw material prices increase a lot. Looking at absolute EBITDA is more important. Look for 22-25% IRR on new contracts
  • Current business mix is ~60% CRAMS (550-600 cr. in FY22). This can grow to 1500-2000 cr. in next 3-years
  • Volume growth was ~18% in FY22
  • Capex: In ongoing 150cr., ~30cr. was finished with remainder being ~120cr. Currently discussing more capex which will be announced in Q1/Q2. When doing capex, look for 2.5-4x fixed asset turns
  • Cost problems can persist in Q1/Q2 of FY23 because of higher energy prices
  • Metconazole sales should double in FY23 over FY22 as customers got their re-registration in EU
  • Most of sales comes from technical to formulators (B2B relationships). Also make some bulk formulations to formulators (again B2B). Don’t do their own B2C marketing
  • Capacity is not a big constraint in fulfilling current growth trajectory
  • Target regions for next leg of growth: Latin America, South Asia, European Union
  • Registration for certain agrochemicals is taking a bit of time.
  • Patented products are also mentioned as Technology transfer products

Disclosure: Invested (position size here, bought shares in last-30 days)

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How did you calculate this? It was not mentioned in the presentation. Is it from the concall?

They report cumulative production every quarter, you can figure out quarterly production from that.

E.g. Lalru
FY22Q4

FY22Q3

and so on for FY22Q2 and FY22Q1

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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.

Disc : Not Invested.

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They do have some patented molecules too. I Read in concall transcript.

AR FY2022




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AR22 notes

Quick summary:

  • 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?
  • EU (including UK): 360.71 cr. (vs 219.1 cr. in FY21)
  • Japan: 89.8 cr. (vs 73.48 cr. in FY21)
  • Others: 39.59 cr. (vs 130 cr. in FY21)

Banking relationships

  • RBL bank + SVC Cooperative bank + Bank of Baroda (new one)
  • Term loan from RBL bank is at 11.25% interest rate (4.96 cr. vs 9.91 cr. in FY21)
  • Term loan from SVC Cooperative bank is at 9.7% interest rate (44.58 cr. vs 49.66 cr. in FY21)
  • Vehicle loan is from Indostar Capital Finance at 11.03% (7 lakhs vs 49 lakhs in FY21)
  • ICDs were 15.85 cr. (same in FY21) at 12.75-16.50% interest rate

Total income of SD Agchem (Europe) NV was 12.58 cr. (vs 11.36 cr. in FY21) with profit after tax of 2.89 cr. (vs (-1.55 cr.) in FY21)

Disclosure: Invested (position size here, no transactions in last-30 days)

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The dossier got extended, now expiry has been extended to 31/08/2023 in EU and 31/08/2025 in UK

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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)

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