Dhanuka Agritech Limited (507717) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to 3Q FY '20 Post Results Conference Call of Dhanuka Agritech, hosted by Antique Stock Broking. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Manish Mahawar from Antique Stock Broking. Thank you, and over to you, sir.

Yes. Thank you, Tanvi. On behalf of Antique Stock Broking, I would like to welcome all the participants in the earnings call of Dhanuka Agritech. From the management, we have Mr. M.K. Dhanuka, Managing Director; Mr. Rahul Dhanuka, Director, Marketing; and Mr. V.K. Bansal, CFO of the company. So without further delay, I would like to hand over the call to Mr. M.K. Dhanuka. Over to you, sir.

Thank you, Mr. Manish. Good evening, friends. Myself, M.K. Dhanuka, Managing Director of Dhanuka Agritech Limited; along with Mr. Rahul Dhanuka, Director, Marketing; and Mr. V.K. Bansal, CFO of the company, welcome all of you to share the unaudited financial results of the company for the quarter and 9 months ended December 31, 2019. As you know, Dhanuka is part of plant protection agrochemical industry. Agrochemicals work as plant nutrients and protectants from enemies like insects, pests, diseases and weeds that affect the crops. Dhanuka is a technology company that offers products to protect all major crops across all geographies of India. Dhanuka model is almost rural FMCG model. To service the diversity of Indian crops and needs of the farmers, the company has a wide range of products in its portfolio: over 80 brands, in packed sizes ranging from 2 grams to 200 liters. These products are in various forms: liquid, dust, powder and granules. Dhanuka has pan-India presence through our marketing offices in all major states across India. The 3 manufacturing units with 40 warehouses and network of over 14 branch offices across the Indian geography caters about 7,000 distributors and dealers, and approximately 80,000 retailers. Dhanuka have more than 1,500 techno-commercial staff, supported by a strong R&D division, and a robust distribution network which helps Dhanuka to reach out to approximately 10 million Indian farmers with its products and services. Dhanuka's R&D division has world-class NABL-accredited laboratories and has international collaboration with the world's 9 leading agrochemical companies from U.S., Japan and Europe, which helps Dhanuka to introduce the latest technology in Indian farmlands. Coming to the results. The company has registered turnover of INR 271.48 crores for the third quarter and INR 892.50 crores for the 9 months ended December 31, 2019 compared to INR 216.79 crores for the corresponding quarter and INR 813.12 crores for the corresponding 9 months in last year. Profit before tax for the quarter ended December 31, 2019, is INR 37.62 crores and INR 130.32 crores for 9 months, as against INR 22.14 crores for quarter and INR 117.85 crores for 9 months in comparison to corresponding last year. The EBITDA is INR 42.18 crores in -- for Q3 and INR 144 crores for 9 months ended on December 31, 2019, in comparison to INR 25.28 crores during the Q3 and INR 127.72 crores for 9 months in the corresponding last year. Dhanuka Agritech reported net profit of INR 27.67 crores for the quarter and INR 102.46 crores for 9 months ended December 31, 2019 compared to INR 14.60 crores for the quarter and INR 85.82 crores for 9 months ended December 31, 2018. I'm happy to inform that the Board of Directors have declared 600% interim dividend, that is INR 12 per equity share, having face value of INR 2 per share, which will absorb INR 68.83 crores inclusive of DDT. Coming to zone-wise percentage share of turnover for Q3 and 9 months ended December 31, 2019, the North has contributed 18% in quarter 3 and for 9 months, 24%. East zone contribution for quarter 3 is 13%, and for 9 months it is 11%. West zone contribution is 25% for Q3 and 36% for 9 months. And South zone contribution is highest in this quarter, which is 44%, and for 9 months, it is 29%. Product category-wise percentage share of turnover for Q3 and 9 months ended December 31, 2019 is: Insecticides for Q3 is 38% and for 9 months, it is 42%. Fungicides for Q3 is 15% and for 9 months, it is also 15%. Herbicides also similar for Q3, 32%, and for 9 months it is 32%; Others, Q3 is 15%, and for 9 months, it is 11%. As per latest information available on sowing of rabi crops, around 90% of the normal area under rabi crop has been sown up to December 27, 2019. Area sown under all rabi crops taken together has been reported 571.84 lakh hectare at all India level as compared to 536.35 lakh hectare in the corresponding period of last year and 554.66 lakh hectare normal area as on date. The Indian Meteorological Department has forecasted a normal monsoon for the coming monsoon season at 96% of long period average which has brought a smile on the faces of the farmers. So it will be the second continuous year for a good monsoon. Therefore, it is expected that the production of food gain expected to be much higher in the coming year also. Friends, thank you very much for your kind attention. Now you are welcome to ask question on the results of the company. Thank you.

[Operator Instructions] The first question is from the line of Prashant Biyani from Prabhudas Lilladher.

Sir, can you confirm whether North has grown by 5% only? Or the number is incorrect?

You want to know North's turnover share?

Yes, share I have got. So just -- I was back calculating. The rate of growth for Northern region is 5%. So actually, the query was that, I mean, despite we have seen decent acreage expansion, particularly in wheat, even then the share of growth in Northern India is only 5%. So what would be the reason for that?

So North India is one of the lowest consumer of agrochemicals in this quarter. So a lot of sales of December has actually moved into January for North India to that extent. So I won't say quarter-on-quarter, but December versus the movement has been -- the consumption has moved to January. This can be attributed to a lot of rainfall and a slight change in the consumption pattern of wheat weedicide.

Okay. So then Q4, again, we are likely to see sharp growth in herbicide sales for us?

Q4, at least North India wheat consumption has certainly gone up. Wheat herbicide consumption has certainly gone up, moved from December to January.

Right. And so which region contributed to 40% growth in herbicide sales in Q3?

[indiscernible] share of the South zone.

44% share of the South zone, which includes herbicides and others -- the rest of the portfolio as well.

Right. And for the longest time, we are now seeing gross margin contraction. And it has been quite a while that even the agrochemical prices from China are also declining. So despite that, we have still seen some bit of margin contraction this quarter. So some kind of visibility on when can this reverse and we can, again, see the trend of gross margin expansion. Some kind of light from your side would be very helpful.

Yes, you are absolutely right. The position has already changed, and the trend is already arrested. In Q3, negative is definitely there. But from December, things have changed significantly. So I will say, in Q4, the gross margin should be maintained at last year level.

Okay. And sir, do you also perceive this threat of Coronavirus to disrupt this or derail this reversal again? Or what would be your view on that?

So this is as unpredictable as anything else as of now. But certainly, the supply chain will have its impact. What we are seeing in last few days, a bit of China supply is opening up. But I think so the entire stabilization will take at least 1 to 2 weeks more.

Okay. And these cost control measures, should we expect this to continue in FY '21 as well? Or we can see some bit of relaxation there as the growth picks up?

Not as sharp as this year. See, that cannot be continued for year-on-year basis.

[Operator Instructions] The next question is from the line of Varshit Shah from Emkay Global.

Sir, congratulations for great show in the quarter. Sir, my question is more structural in nature. Going forward in FY '21, '22, '23, you must have planned having some internal, of course, plans to -- for the future. So to accelerate this revenue growth, provided the weather support, of course, I understand that. What will be the key driver? Will that be the -- solely driven by new product launches? Or just go for some market expansion, which can contribute to that growth?

So you would notice that a large part of the growth would certainly be driven by the new products that we launch and the new segments that we try to capture in the next year. However, we also have some other initiatives lined up to increase our reach and penetration in the market next year. In addition to that, I think so, it is our overall policies at Dhanuka, by virtue of which we are going to empower our channels and also empower our farmer to move on to higher-value products and new technology. So this is what we are going to do in 2021 to drive our business.

Right. Right, because you have already created a business and probably now you have to start laying the foundation or probably you're already doing that for the next level of growth, next -- new segments and newer services. So from that angle, one is your new product launches. Second is from a servicing angle. For example, there are a lot of competitors also coming up with, like, end-to-end solutions and consulting on their farm practices. And I've seen on my ground check that Dhanuka is also engaged in some of these. So could you elaborate your initiatives and -- on -- in that side?

As of now, I cannot really elaborate on those initiatives, but we are running some pilots. And we are looking at what kind of results are being thrown up from these pilots, and we'll be optimizing and then scaling up some of the pilots next year, while some would still continue at that stage.

Right. Right, because the strength of Dhanuka has been actually to replicate some -- whatever, others and new product launch or a new service, and Dhanuka has been successful in marketing the same across pan-India. And this is a strength of Dhanuka that their ability to take any new initiative and then commercialize it. So I think that -- I'm looking more color maybe in the next quarter on that angle if there is a new growth engine which you are preparing for the company?

Absolutely. Coming back with more soon. Thank you.

[Operator Instructions] The next question is from the line of Rajat Setiya from VRDDHI Capital.

Sir, in the last conference call, you had talked about launching a 9(4) molecule. Can you talk about that?

Yes. So we've already launched 2 products this year: Zapak, which is an insecticide; and Mycor, which is a plant nutrient, mycorrhiza-based. So these are the 2 products which we have already launched in Q3. Zapak is finding space in the dreaded fall armyworm with maize and as a general insecticide in other crops, whereas Mycor is finding space as mycorrhiza-based soil nutrient, which encourages plant growth in a very natural and almost an organic way.

What is the market opportunity for both the products?

Well, Zapak, since it finds space in the fall armyworm of maize, which is a good 8 million to 9 million hectares, that's where the Zapak can find space. And Mycor is a very versatile product finding opportunity in paddy, sugarcane and almost all fruits and vegetables.

Sure. Sir, it would be helpful to understand this in terms of crore, how much -- what -- how big is the market?

I'm not talking about numbers on the con call.

Okay. In terms of new products, how many have been launched into this year so far and what is the plan for next quarter as well as the next year?

This year, we primarily introduced 5 new products. First one being Apply, which is a paddy BPH product. Then another insecticide by the name Largo, which again was a insecticide and found opportunity in fall armyworm and thrips control of cotton, chili and various other crops. And Zapak and Mycor. And third one being Nissan Chemical's paddy herbicide by the name of Chempa.

All right. And going forward, how many products do we plan to launch?

Q1, we are looking at introducing 3 more products, Q1 next year. So one of them being soybean herbicide. Another is our new formulation in insecticide category. And third one, I'll have to confirm to you.

And when you say the new formulation in insecticide, you mean it will be 9(4)?

And a cotton herbicide. Yes, so all -- these 3 offerings are all 9(4) offerings.

Okay. And collectively, 5 products that we have launched in this year, can we say the collective market opportunity, not the revenue opportunity for us, but the market opportunity, market size of those 5 products, will be upwards of INR 500 crores?

Come again?

The 5 products that we have launched into this year, collective market size of those 5 products, will that be upwards of INR 500 crores or it will be less than that?

No, certainly much more than that.

More than that. And how is the competition in those products?

Competition is not significant in 2 products for sure, which is Zapak and Largo. However, Apply, which is a paddy herbicide product is relatively crowded. It is a BPH product, so that one is relatively crowded. Again, rice herbicide Chempa from Nissan which we have launched is a very unique solution that we are offering to the farmer. So that space is not crowded, and we have huge opportunity there.

The next question is from the line of [ Vihang Subramanian ] from Samsung Asset Management.

Sir, just broad -- on the industry, what I had -- the question I had was, like, when I look at 2013 to '17, it was like a great period for you where you saw good revenue growth along with margin expansion as well, to like almost 20% EBITDA margin. And now kind of like it's tapered off over the last 2 years to, like, the 15% level. So my question is basically, like, do you kind of see any -- like you had a very good quarter right now, so do you kind of see any structural change in the industry which is going to like drive this performance going ahead? Or do you just feel that this was like a very good quarter after a few bad quarters and that the industry overall is still in a lot of problems and a lot of stress, which will take time to solve? So -- like basically, how structural is this numbers that we are seeing today?

Well, you would see that at Dhanuka, our numbers have kind of followed the trend in terms of the monsoon's impact or the commodity prices' impact. But some of the other parameters at the back end are really very strong. For example, one of them being that we have been a debt-free company for a long period. And then with our asset-light model, we have been able to deliver this growth, which not only impacts the top line and the bottom line, but some other fundamentals and parameters. In addition to that, the way at Dhanuka we manage our account receivables and inventories is also very different as compared to what's happening out there. And we don't load our channel with the inventories and don't run the huge risk of heavy goods return, or front-loading the channel to meet the quarter. So these are some of the structural differences that at Dhanuka we have. When we talk of our industry, I think so the industry would probably face a challenge in terms of front-loading the channel and an inability to handle the price fluctuations as sharply and as deftly. So at Dhanuka we are able to handle the price fluctuation challenge really very deftly.

Okay. So -- but all these other indicators are there, right? Like, water levels are higher and equities are up, et cetera. So -- but this was not the case like in the last few quarters at least. So right now there's a lot of positive commentary around that. So do you think that this performance that you're seeing can like probably sustain onto the next kharif as well?

Of course. So the significant depend upon the moisture content, either through rainfalls or reservoir levels or groundwater. These -- water availability being favorable certainly ensures that the growth story remains favorable and positive very strongly. So while we are looking at Q4 to be really good in continuation to Q3, we are very hopeful of Q1 and Q2 next year also panning out really well with the reservoir water levels and groundwater level being good.

Okay. Sir, the water level has a lag impact then? Is it like that once it's high like then basically it means that the next 2, 3 quarters are -- automatically your availability issues are sorted out at least?

Absolutely.

Is that the right understanding?

Yes.

Sir, and other thing on products, like, I basically, like, a lot of the people I speak to in the industry, at least, they complain a lot about the price competition and how intensely competitive the domestic agrochem industry is. So do you see that for yourself as well? Or do you feel that your products are more differentiated?

Well, I cannot discount the price competition, and we have a relevant generic portfolio, which competes in the market at pricing level. However, with our field force of 1,500 Dhanuka doctors, we are able to educate the farmer on using our specialty products. We are continuously making an effort to move the farmer to a low environmental impact and high efficacy products, which we try and bring in from our multinational partners and Japanese collaborators. So there's a lot of education and goodwill generated at the farmer's level, whereby he prefers Dhanuka products over other choices. So while we compete in generics on price front, however, there is a brand pool created by the demand generation being done at the ground level, at the grassroot level.

So do you sort of see these farmers then like coming back to you then? Because if the goodwill is created, they should be coming back to you for the same product, right?

Absolutely. So not only he comes back for the same product, which is being advocated by our team, but then he expands his purchase with Dhanuka as in upward purchase and lateral purchase of other requirements as well.

Okay. Okay. Okay. And sir, lastly, just on the like raw materials side, like, I mean, there was a lot of gross margin pressure, I believe, from China over the last 1, 2 years again, like across the industry, not only for you. So -- but do you think that has kind of abated, and it will remain at low levels considering, obviously, that the virus has no role to play in this? But if the virus subsides and -- do you kind of see raw material prices that -- like that they have currently softened? And do you feel that whole period of having raw material inflation is behind you now?

I think so there will be a blip on the annual cycle of availability because of the logistics challenges that are going to be seen in China and likewise. We don't see the prices really going up at the back end, however, there could be a short-term jump because of delayed supplies.

The next question is from the line of Monica Joshi from Hornbill Capital.

I would really appreciate your views on the pesticide bill that has been tabled. Your thoughts on the individual parts of the bill would be appreciated on pricing, on restrictions in marketing, on packaging, whatever you know of the bill.

Well, this bill has been in offing for quite some time, and the government has had an initiative towards making it favorable for the farmer in many ways. So while on one side, the label leaflet guidelines are already notified to be changed so that farmer has easy readability, it increases compliance load on the organization. Now organizations like Dhanuka which were already compliant, it is not that challenging to tweak ourselves to, one, align with the act as well as to make it easier for the farmer. However, it puts a lot of load on the noncompliant or unregulated markets, which is favorable for us. Then we also fear that there is a lot of unregulated spurious material and misbranded material available in the market. With the enactment of the new law and its formal execution, I think so that would also be checked. And the spurious products and the misbranded products would probably reduce in the markets if the law is executed in its letter and its spirit, which will again favor organized players like Dhanuka. It's more so because we are reaching out to the farmer and educating him with our powerful new products, which are low environmental impact and low residue impact on the main crop. I think so the pesticide management bill is overall going to favor the regulated industry.

Sir, do you have views on pricing?

Come again?

There was some talk on putting some cap on pricing of the products?

So that has -- at some point of time, it was just a talk. And as of now, we are not aware if that is part of the pesticide management bill.

Okay, that's good to hear. Sir, any view -- because you don't disclose the balance sheet in December, but any color on the inventory and receivable days as of December 2019, and what was the comparable number in December 2018?

Yes. Inventory declined by around INR 13 crores as compared to December '18, which means the inventory is lower as compared to December '18. And debtor increased by around 7%, 8% as against the growth in the turnover is more than 25% in the Q3 and overall is around 10% in the 9 months.

Sir, the debtor days are lower, is that correct? Is that understanding correct?

Yes, you're absolutely right.

Okay. Sir, just a last question. When you outlined your product launches for the coming quarter and probably the coming years, if you could just give some color on what are your strategies in in-licensing products and you're expanding your pipeline across more MNCs and expanding that more than the 9 companies that you've already tied up with?

So we are in a continuous endeavor to bring in new technology and new products to the farmer because in the ever-changing landscape of agriculture, our farmer is faced with new challenges. And our effort is to help him deal with those challenges very cost-effectively with the least impact on the environment and with the lowest residue on the consumable. So in that direction, we are bringing in new products every year. And this year also 3 products are lined up, 2 of them being herbicide and 1 of them being insecticide. Then there are some segments which we feel farmer can benefit with our better offerings in future. So we are planning to go aggressively in some of these segments where we feel we are relatively weakly present. So that is going to be an effort. In-licensing products as well as new 9(3) products are there in pipeline. And as we see their -- better visibility, we'll be sharing on the con call too.

The next question is from the line of Madhav Marda from Fidelity Investments.

Sir, just wanted to understand -- so of course, we're seeing raw material price pressure having come off more recently from the last 2, 3 months. But we've also -- you're indicating that the cost control, which we've done in the previous year, might not be as tight as the sales growth picks up. So combining the effects of the 2, how much EBITDA margin can we expect in the coming years? Any broad expectations, at least for the first half, given where the raw material prices are and how the employee and other expense line items could move?

You see as far as gross margin is concerned, it is very difficult to mention. But we can say in the first half of the next financial year, there should be definitely improvement in the EBITDA margins as compared to the year '19/'20.

Okay. This is mostly led by decline in the raw material prices over the last year? That's the main driver?

Yes.

Okay. Okay. And how has the growth been so far in rabi? Is it proceeding well for us? I mean the fourth quarter, how is that going?

In Q4?

Yes, Q4.

Yes. Yes, we are expecting a good Q4 this year.

Okay. So momentum of Q3 is continuing basically for us?

So far, yes.

The next question is from the line of Saurabh Kapadia from AMSEC.

Congratulations on your good set of numbers. So first thing on your growth in the west zone. So if I'm looking -- you have grown about 46% in the west zone. So was it because of the co-marketing was allowed in Maharashtra?

I think so that was pretty late. Co-marketing opportunity opening up was pretty late. Nonetheless, I think so it's the rainfall and the overall opportunity in the market because of the rainfalls, which threw up Maharashtra and also Gujarat as a huge opportunity. In fact, co-marketing opening up was notified earlier, but eventually, it translated into revenues in January.

Okay. Sir, how much is the -- what's our revenue for co-marketing prior to this restriction, like, on an annual basis?

Our plans for Maharashtra -- so that would be around for Maharashtra alone or for all India basis?