Advanced Enzyme Technologies Limited (ADVENZYMES) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Advanced Enzyme Technologies Limited Q3 FY '20 Earnings Conference Call. We have with us today from the management, Mr.  V. L. Rathi, Chairman; Mr. Mukund Kabra, Whole Time Director; Mr. Rasika Rathi, Director; and Mr. Parag Katariya, Senior Manager, Finance. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr.  V. L. Rathi, Chairman, Advanced Enzyme Technologies Limited. Thank you, and over to you, sir.

Good afternoon, everybody. It is a pleasure to address to all of you again as we put up our quarter 3 financial year '19, '20 results of the financial year -- this year. We view these numbers as a positive state toward our goal for this financial year. You all are aware of the fact that we do not limit ourselves by measuring our success from quarter to quarter, as we strongly believe in delivering long-term value to our esteemed shareholders. Moving further, I'm delighted to announce that we have a considerate growth in terms of profitability. This is mainly because of the product mix. Our business in India had positive results and has been up by 15%. Evoxx, which is our subsidiary in Germany is EBITDA positive in the current quarter as compared to the previous quarter and growing steadily. The EBIT for evoxx is also on the positive side. We will continue to work hard for our shareholders, and I'm really thankful to all of you for your relentless support towards this. We look forward to your questions. But for now, our finance -- Senior Finance Manager, Mr. Parag Katariya, will explain some financial numbers to you. Over to you, Parag.

Thank you, sir. Now I'll just take everyone through the numbers for this current quarter. Our sales on year-to-year basis is on positive side and has an upstream of INR 102 million and has grown from INR 1,017 million to INR 1,119 million. That is approximately 10% growth in the revenue. Correspondingly, the EBITDA has increased by INR 112 million from INR 417 million -- to INR 417 million from 259 -- sorry, from INR 417 million to INR 529 million, and that is approximately 27% growth in EBITDA. And as a percentage of total sales, EBITDA is having a percentage of 47% as compared to 41%. Our consolidated PAT for this quarter has also increased by 37% from INR 253 million to INR 346 million in the current quarter. Now we would open the lines for your questions. And if in case you have any questions, please feel free to ask us.

[Operator Instructions] The first question is from the line of Rohit Sinha from Emkay Global.

Congratulation for a good set of numbers. I mean there was significant growth in EBITDA and EBITDA margin. So I have a couple of questions. Could you share that -- the top product sales for the quarter?

Parag can you tell that, I guess?

The top product, which we have sold in the current quarter is serratiopeptidase. One minute. So Rohit, the sale for the top product is INR 9.5 crore versus INR 23.6 crore of quarter 3 December '18.

INR 23.7 crore.

INR 23.67 crore.

Okay. So this is largely -- I mean, since our U.S. customers have -- the orders are lower from that side, is it because of that the revenue has contracted significantly? Or...

Yes. The U.S. revenue has contracted significantly, but India's revenue has gone up. So that overall basis, it's like 10% growth from the quarter 3 '18 to this. But if we just remove the top customer, the growth is much higher.

Okay, okay. So can you share top 10 client and top customers' revenue share?

Sorry. As a policy, we may not be able to share that, which are the top 10 customers.

So other -- I mean, top client contribution, at least.

Yes, that I can tell you. So the top client is 9% in this quarter compared to 23% in the last quarter.

Last 2000...

Third quarter of '18, '19.

Last year, how much it was?

23% for this quarter. Right now, it's 9%.

Okay, okay. And sir, wanted to know the evoxx sales and EBITDA for this quarter.

Yes. So the evoxx sale is INR 57 million, INR 5.7 crore for this quarter, and EBITDA is INR 17.7 million, INR 1.77 crore.

INR 17.7 million. Okay. So this is positive. So last versus last year, how much it was?

So last year, it was INR 38.6 million and EBITDA was minus INR 14.5 million.

Okay. Okay, sir. Okay. Sir, just wanted to know this EBITDA expansion was because of the growth in Animal Health Care segment or is it because of other geographies doing well for this human health care?

There is a growth in animal health sector and various other sectors also. There is a contraction a little bit in the U.S. market due to top customers. But otherwise, the growth is on all the sectors.

And your question is on the margin. So margin improvement is because of the focus and focused businesses, right? So we are -- we were on the consolidation business. So now the raw material cost has gone down. And the second impact is salary cost is more or less constant.

Okay. So are we able to maintain our FY '20 guidance on the revenue front because on the margin side, I think we are pretty much in line?

On the revenue front, probably, we will end up with INR 440 crores to INR 445 crores. But on the PAT side, we will be able to manage our guidance.

Okay, okay. And going forward, I mean, how would be our strategy towards the revenue growth and some of the segments?

Rohit, sorry about that, Rohit. Rohit, basically, our strategy is now to consolidate our various different strengths in areas and stay focused on the marketplace where our strengths are. So we continue to consolidate our position in the market where we have normal strength. And we feel that our growth will accelerate, hopefully, after further 3 to 4 quarters.

Okay. And sir, the growth which we are seeing in other geographies, is it all -- I mean, it is across the segment? Or is there any specific segment, like animal or...

Across the segment, Rohit. Yes, it is in a different -- difficult conditions -- worldwide conditions right now. We were -- we are able to maintain our growth across the segments.

The next question is from the line of [ Dinesh Kulkarni ], an individual investor.

Sir, congratulations on good set of numbers. My question to you is if we see cost of materials consumed on a consolidated basis has gone up from INR 13-odd crores, almost INR 13 crore to INR 23 crores, that's almost doubled. Can you just explain to me that, please?

[ Dinesh ], when we see our total consumption, we have to consider our cost of material consumed, plus purchases and plus changes in inventory. So if we see on a totality basis of these 3 numbers, we are having a total consumption of INR 176.58 million as compared to INR 199.51 million in the current quarter. So it is somewhat similar range. And yes, there is a significant like increase in the cost of material consumed, that you can see it on account of the higher sales, which we have achieved.

Okay. So just one more question. Are you seeing any price increases in your raw materials -- in any of the significant price increases in any of the key raw materials?

I don't see it, Dinesh, because even the -- even if there is a rise in the key raw material on the overall basis, the impact is very, very minimum.

The next question is from the line of Shikha Mehta from Equitree Capital.

I just had one question. So could you give us some guidelines on what to expect with regards to new products or what's in the pipeline?

Shikha, the products are always -- is a combination of enzymes, which we supply to various different segment as a solution to the problems, rather than selling a particular enzyme. So the results are coming across the sector in various different areas with considerable significant impacts on the revenue and sales.

Right. But we had a couple of new initiatives that we were thinking of exploring, like the palm oil, et cetera. So is anything in the pipeline now or from where will the revenues be growing moving forward?

No. As I explained to you, our basic concentration is the area -- we have decided to concentrate on our strengths immediately and put the efforts into the same direction. So palm oil, even though it is on our [ charter and map ], we are not actively pursuing it.

All right. So then any update on inorganic growth?

Inorganic growth?

At this point of time, we are looking, Shikha, but nothing to declare or report about.

The next question is from the line of [ Paritosh Chandra ], an individual investor.

My question is regarding -- is there any capital expenditure in the next financial year or next quarter? This is my first question.

Yes, the first question on your capital, yes, we are using a substantial capital into our growth in research and development.

So [ Paritosh ], we just acquired, in this quarter, land of 15 acre in Nashik, and that we are building up a modern R&D center. And we are thinking about INR 100 crores in the next 3 years as a capital investment for the R&D center.

Okay. So like, what product pipeline [indiscernible].

Human nutrition, animal nutrition, a lot of areas in the food processing. We have enormous opportunities in all these sectors. And we are going to concentrate on our existing products and expanding the market segments in this.

No. Like how long before this capital expenditure [indiscernible]?

I think, like, we already, like, invested INR 33 crore, roughly. And I guess coming year, we will be spending another INR 15 crore, INR 20 crore on that.

No, no. What I mean to say is, like, see, when will the -- when will it start contributing to your top line? I just now -- I -- from what you shared [indiscernible] are in the process of setting up the R&D center, right?

No. Let me explain this again to you. We already have our current R&D centers, right? So we do spend a considerable amount of money on our R&Ds. But to -- because we are in the global nature and the name of the business in our sector is that it is a continuous R&D and expansion of R&D into those fields, whether it is a baking area, food processing area, animal nutrition or the human nutrition, as you can see, there are a lot of interesting challenges globally, and everybody is looking for the solutions. So this new facility will give us opportunity to really work -- expedite our research areas. So R&D is never stopping business. It is a continuous business. We are going to put a lot of efforts into making this R&D the global research center.

The next question is from the line of Praveen Kumar from Equitas Capital.

I have a question on your slowdown in the U.S. revenues. I wanted to understand if you could elaborate whether this slowdown you expect it to be more transitory in nature or you see it as more of a structural slowdown. And if you could elaborate the reasons behind the same.

Praveen, interestingly, you keep in mind that a lot of previous numbers were a lot of dependent upon the -- one of our major customers. That customer, if you take it away from previous numbers to this year's number, you will see that our growth is 17% in the other customers, okay? So our growth is going very well. The numbers, which get to be distorted is that when you get a big gap and you're trying to fill that up. So that is where the numbers get distorted.

So from your experience with your biggest customer, that you -- I mean, for example, I think we had earlier alluded that the biggest customer has contributed 9% of revenues, so you expect it to stay at this level or you expect it to, again, go back to earlier levels.

Good question. They even don't know about it right now. And it's a global effect. So we don't know, you don't know and I don't know what is going to have an effect of coronavirus or all these kind of things. So we look at it as a -- they are looking in the way of restoring back again, but time will tell.

Okay. I had another question on your segmental revenue split. So again, on that, do you -- let's say, I look at it over the next 3 to 5 years, do you expect it to shift more away from human health care and more into animal health care and bioprocessing? Or what's the kind of expectation one should have from it?

On the contrary, we are not focusing only on one segment per se. We are focusing on all the segments, human nutrition, animal nutrition and with other verticals, okay?

In fact, Praveen, we speculated as to be equal, all the 3 segments. Such as what, like, we intend to do in the next 3 to 5 years.

Okay. So you would expect the segmental split to largely remain the same, you would say.

No, I would put it this way. Equal in all the segments, like human, animal and food processing. That's our goal and target.

Okay. So 1/3, 1/3, 1/3, you mean.

Exactly.

So you expect -- in other words, you implicitly expect Animal Healthcare and bioprocessing to grow much faster. You're focusing there much more than the human health care segment.

You guys got it.

Okay, okay. So just one additional question on that. So given that you are largely -- large part of the revenues have traditionally come from human health care, what sort of capabilities have you developed or in the process of developing to meet this kind of a goal?

Can you repeat your question again?

So what I was asking is that, as of today, if I see a large part of your revenues, more than 70% are coming from human health care, right? So traditionally, that's where a lot of the revenue has come. So in order to achieve your goal of equal split between the 3 segments in the near future, what kind of efforts have you put in the other segments? Or what kind of initiatives are you taking in other segments to reach that kind of a goal?

Praveen, we already have all the enzymes what is required for all the segments. It was just a focused approach, which we needed. And we are, like, consolidating our portfolios, and we are focusing on the marketing. Large R&D center will also contribute in the future. So making all of this, I guess, like, we can achieve those. Does that answer your question?

The marketing [ exercise ] in these segments in the recent past. Are you planning to add that?

Sorry, Praveen?

Have you -- you referred to marketing, so have you added to your marketing strength in these other segments? Or are you planning to add marketing strength there?

Yes, we are adding the people, and we are in the process.

We will move onto the next question. That is from the line of Anupam Agarwal from Lucky Investment Managers. As there's no response from the current participant, we'll move on to the next. That is from the line of Rohit Sinha from Emkay Global.

Yes. Just wanted to know what's the cash in the balance sheet at this current stage?

One minute. So Rohit, the net cash on the balance sheet is INR 156 crore, roughly.

Okay, okay. So for FY '20, roughly, what kind of overall CapEx amount would be there apart from that INR 33 crores what we have invested in land acquisition and development? So overall, basically, what would be the overall CapEx number for FY '22 -- '20?

Rohit, we are on working. But on a roughly side, it should go about INR 25 crores?

[Operator Instructions] The next question is from the line of Anupam Agarwal from Lucky Investment Managers.

Congratulations on great set of numbers. I had 2 questions. First is that you mentioned somewhere that you plan to invest INR 100 crores over the next 3 years in your new R&D plant. I just wanted to ask you what sort of revenue can generate over time from that INR 100 crores of assets that you would be investing.

We were looking to grow 15% to 20%.

15% to 20%.

Year-on-year.

No. So my question was how much -- how many turns? Or what could be the asset turns on that INR 100 crores of assets that you are building?

At this point in time, we can't give you exact numbers on those, but let me get back to you on that.

Okay, okay. And sir, second question would be what is your dependency on raw materials on China? And what sort of -- what is your thought process behind disruptions that can happen due to the current state?

So on the raw material side, we are very less dependent, maybe 1% or 2% of raw material comes from the China. So on the dependency front, we are not really dependent on them. But on the marketing front, yes, there can be some disruption. Particularly, we export globally, and some of our U.S. sales goes to China as well.

Are we seeing some signs of disruptions or any slowdown in the past one month?

As of now, we haven't seen any effect.

Okay. Do we sell directly to China market?

Very little quantities, yes. We do, we do.

The next question is from the line of [ Dinesh Kulkarni ], an individual investor.

Wanted to know what's the long-term strategy on revenue growth you would look at, say, sort of 3- to 5-year perspective? Yes, that's my question.

[ Dinesh ], in last call, I think, like, Mr. Rathi has already given the number that what we are dreaming or what we can look at. It is about INR 900 crores in 3 to 5 years, right? And that is still the -- what we plan, what we are going with it.

Okay. That is INR 900 crores, 3 to 5 years. And should we assume the margins should remain what they are now or there should be some improvement in margins as well, EBITDA margins?

At this point of time, we should -- we will still keep the same thing, 40% to 48%, what we used to give, but we cannot give...

Current margins, look at our current margins, [ Dinesh ]. There are all improvements. As we consolidate and do more, it will affect. But also, we understand that there is a competition area which comes in. So concept is to keep those margins intact.

The next question is from the line of Shikha Mehta from Equitree Capital.

So I just had a couple of follow-up questions. Also, as we are a debt-free company and we keep generating cash every year. Do we have any specific dividend policy or something we want to do with the cash we're generating?

Well, as you know, that every year, we keep on increasing the dividends, right?

Right.

And that is the policy will continue as long as company is -- more interest for us is to grow this company on a growth basis. And there are various different things company is taking measures on to so that we can deliver a better value for our shareholders. Okay? And we will be continuing to hopefully continue to increase our dividends year by year.

And apart from dividends, is there anything specific we plan on doing with the cash we hold?

There is always a plan. The company has a plan. When it will execute we'll, obviously, let you know. But not in the dividend policy. Not into the dividends.

The next question is from the line of [ Rajesh Vora ] from Advanced Enzymes.

Mr. Rathi, you -- another participant also asked about the reason behind that top customers -- revenues from the top customer falling significantly, but I think it wasn't answered. Could you please answer that question?

Rajesh, what can -- repeat here what exactly you want to know?

The top client of your company, you could generate revenues about INR 9.5 crore in this quarter versus about INR 23.6 crores a year ago. So there is a significant decline, it is more than halved. What are the reasons behind that significant decline, if I can know?

I don't know. The -- it's -- obviously, the demand is a little lower in a quarter-to-quarter basis.

On an annual basis, if we look at FY '19 or 9 months number if we look at, there would be, again, the similar picture, 9 months this year?

Sorry, can you repeat?

Of this fiscal year from April 2019 to December 2019. If you compare that with the previous year 9 months, is the picture quite similar?

Yes, it's quite similar.

Yes, then it is not quarter-to-quarter, right? It's 9 months...

Right.

Also the same picture. So there is some, obviously, some significant reasons behind such a significant fall.

There will be the reasons we don't know at this point of time, but that's what it is. So.

So someone hasn't given you any idea or why they are not picking up so much? I'm sure your marketing people are in interaction with them on a regular basis.

We can't comment on -- at this point of time, [ Rajesh ].

Okay. Okay. And secondly, INR 100 crore spend in R&D. Is that what you said over the next 3 years. So you mean you will be putting -- you will be spending the operating expenditure of R&D or capital expenditure of R&D?

Capital expenditure.

Okay. That's very significant. When I look at your total gross block of -- net block of INR 200 crores as of 9 months?

Yes.

So is that something very different you are trying to do than you were doing in the past?

What we said is we are going to continue on the same path.

But you had not invested INR 100 crores in R&D in the last...

That is why we are investing this time now, [ Rajesh ]. We did not do something which we should have been done -- doing.

The next question is from the line of Anupam Agarwal from Lucky Investment.

Just for a better understanding point of view. If you can just explain between the 3 segments that you are in, which segment has a better margin business or definitely your [ human element ] is much higher because you're reporting a better margin right now. 3 to 5 years down the line, you said the mix would change at roughly with 33%. So is the margin profile going to change significantly when the mix changes? Or just trying to understand which segment has a better margin profile.

Well, the margin profile depends on the product. And it also depends upon the mix. And we are changing the profiles, and we are changing the products. But as I said, our goals are to keep our margins at a high level as it is right now.

[Operator Instructions] The next question is from the line of [ Paritosh Chandra ], an individual investor.

My question is about the existing capacity utilization, like how -- is there any percentage which you can give us like how much capacity is being utilized right now for your existing infrastructure?

Well, it's difficult to measure, but we estimate about 50% at this point of time.

Okay. If it is 50 -- okay.

Sorry to interrupt, sir. Your voice is breaking up.

No, no, what I'm asking is this 50% utilization is your manufacturing units, units which manufacture different set of enzymes, right?

That's right.

Okay. So R&D, your existing R&D units are completely being utilized. Basically, they are the cost centers.

Exactly. The R&D, we have a very short space.

The next question is from the line of [ Manoj Sherof ], an individual investor.

I had a few basic questions. Maybe if you can't answer on the call, I'll take it offline. First, was the customer retention rate.

Sir, we are not able to hear you clearly.

Could you hear my question?

Sir, can you repeat your question for the benefit of the management and the participants?

Yes. My first question was, what is the customer retention rate?

[ Manoj ], [indiscernible].

Yes, sir. So what is the customer retention rate?

I cannot tell you exactly, but it should be very close to 95% or so.

Okay. Got it. And in terms of India market share, I think in the prospectus, it says that our India market share was 15%. So -- and if you can -- if you want to talk about the growth in the market since the prospectus. So have we outgrown the market. So at that time, they were forecasting market growth of 8%, 10%. So how has the market grown in the last few years? And have you grown ahead of the market in India? And what is our market share now?

Can you please repeat?

What would be our India market share?

Our India market share is roughly around about 55%.

Okay, okay, okay. India market share is 55%. Okay.

But in the area where we are present, right?

Right. Right. So -- okay. And the overall enzyme market, I believe, in the prospectus, it said our market share was 15%. So have you grown ahead of the market in the last few years in India?

Well, we are growing into the new segments. We are finding the new applications, and that is how our growth is coming. That's like we are ahead of the traditional market growth.

So what is the Indian growth market in the whole enzyme sector in the last [ 2 ] years?

[ Manoj ], as we are all aware of it. This is a global market, and things are changing dramatically from -- it is not a country, 1 country based anymore. Things are happening, whatever happens here also is reflecting into our market and vice versa. So a lot of different areas are coming to the forefront, and we are addressing those, and that's where the growth is coming.

Got it. So in the India market, how -- or if you can share some -- again, if it's not a relevant question, I can go to the next one. In terms of -- I just want to see how the -- how competition is out in the Novozymes and Biocon, how are we competing with them? Is it on a price competition, I would guess, no, the price would not be -- it's about solution. I guess, if you want to talk about something in how are we competing? And how will we gain market share? Is it in India we're going to gain market share? Or as you alluded, it's more of global market share that we're looking at?

See, the thing is -- you have a very interesting and valid question. The thing is the market is changing, the mix is changing and competition is always going to be there. So there is not a question of competition is not there. But market is changing also. Accordingly, we are very nimble and fast to change, and that is what our aim is, and that is what will -- this new facility also will give us the means and tools to change ourselves and take the opportunity what time permits us or give us. Okay?

Just a couple of more. What is the percentage of revenue coming from patented products, what is the percentage of sales?

These are not patented products, these are solutions-based products, not patented products.

Sure. So why I was asking because Novozymes gets around 90% of the sales from their patents. So I was just asking if we have a comparative thing.

No. Their business are a little bit different.

Model is a little different.

The model is different, business is a little different.

Got it. Sir, just last one. The #1 customer that we have in the U.S., which sector are they from? Are they from the oil and gas sector?

No, it is from the human -- human nutrition sector.

The next question is from the line of Praveen Kumar from Equitas Capital.

I have follow-up question on your growth plan over the next 3 to 5 years. What I wanted to understand was, if you look at it in terms of customer product and geography, how much of it do you expect from new products and new geography versus new products, but existing geography? That kind of a split, have you thought about it and what kind of -- what could you share on that front?

Well, we are still working on it. And I guess, it requires some more time for us to finalize the draft whenever.

Okay. But would it largely come from newer products or existing products, you would say?

At this point of time, both.

Both. Both. There's always going to be new line of products also. And at the same time, we are trying to expand the existing products also.

Thank you. The next question is from the line of [ Dinesh Kulkarni ], an individual investor.

Yes. I just wanted to know, you talked about revenues almost doubling from here to INR 900 crores in 3 to 5 years. So what is the visibility you see there?

Well, we are pretty confident or certain about what we are trying to do. And visibility is fairly decent.

Okay. That's great. And one more question on that. How do you see your working capital changing? Because I see there has been an increase over the last few years, working capital cycle days. So is it going to remain same? Or is it going to change -- increase rather?

It will probably remain the same.

It will remain same. And what is the number now, currently, if you know on the LTM basis, or if you are projecting for FY '20. What would be that number?

If you can hold.

Working capital is 106 right now.

106.

106.

Yes.

Okay. And sir, what's the FCF on LTM basis now, free cash flow?

Sorry, free cash flow? I think I can get back to you on that.

Ladies and gentlemen, that was the last question. I now hand the conference over to the management for their closing comments.

Thank you so much for your participation and asking some very probing questions. And we appreciate your support and cooperation throughout, and look forward to working with you. And thank you, all the shareholders, we really appreciate it.

Ladies and gentlemen, on behalf of Advanced Enzyme Technologies Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.