Dhanuka Agritech Limited (507717) Earnings Call Transcript & Summary

And congratulations for a great show on numbers. I just follow-up on this expansion. How much of this -- of this INR 200 crores is towards land? Or is it fully towards machinery? That's question number one. And what is the tentative ILI zone you are looking for this kind of project?

The land was purchased by the company in the year 2012 or '13 so that is already in the books of the company. There is going to be no fresh investment in land. This will -- I'm talking that is ballpark only tentative figure. As Mr. Bansal has shared that we have -- the management has just shown the intent to enter into the backward integration. We have recently taken Mr. Vatse as the Vice President of the Project and once the things are finalized, then we will further share the details with you.

Sure. Sure. That's helpful. And secondly, you mentioned it will take approximately 2.5 to 3 years from now. So would we see any volumes coming in end of FY '22 or in somewhere in '23? Or it will be very negligible as per your plan as of today?

As we shared once the project report is there, only then we will be able to share the details. It is only in very basically infant stage, so once it starts maturing, then we will share the details, sir.

We have next question from the line of Rohan Gupta from Edelweiss Securities.

Sir, I think that after every quarter, you've been chased and asked on the same question that any intent on putting a plant or backward integration. And finally, we heard the announcement. So sir, you have repeatedly been saying that you have always been evaluating this option for manufacturing. But now you have finally decided on. And I understand that right now, it's at intent stage. So many things may not be clear. And as going forward, maybe next 6 months, you may come up with more plans. Sir, what I want to know that you have always mentioned and maintained that you don't want to only go into manufacturing for the sake of backward integration only to meet your own requirement. Until unless you see the bigger opportunities in exports primarily, you won't be comfortable putting a plant. Sir, as a company, Dhanuka has almost, I mean, a maximum number of relationship with a global player with -- almost 10-plus players, you have the relationship and has been sourcing and selling their products in India. Sir, before getting into manufacturing, did you discuss any of your -- this relationship, your intent? And did you get any kind of comfort or any assurance that you may get any manufacturing opportunities from them, and that can lead to some export opportunity for you going forward?

So Rohan, we are talking with definitely our Japanese partners, but nothing concrete. These are only at discussion stage. Once any concrete things takes place, then definitely, we'll let you know. But no, any agreement or no, any commitment as on today.

So as of now that your generic business, which is roughly 1/3 of your total revenues, it means that roughly INR 300 crores to INR 400 crores. For that only, you need probably all these material, which generally comes from China. And as of now, you plan to only put the plant for these generic materials and backward integration only. So that -- is that right to understand, sir?

I cannot comment right now. As I told you, once the project report is ready in next 6 months' time, then definitely, I will come out with the figure. At present I cannot basically make any comments on your queries.

Okay. So we'll wait for more quarters to get some more clarity on that. Other -- and sir, current quarter numbers, definitely, you have done a great job in 9 months, and every quarter has been -- has seen a strong growth at bottom line. Sir, but that a large portion of the bottom line has also come from the restricting your employee expenses and other expenditures. So we have seen that though your top line growth in 9 months have increased by almost 24%, your employee expense and other expenses has been curtailed almost at the last year level that led to margin expansion at EBITDA level. Sir, do you see that you have been cautiously cutting down on the expenses. And now with the top line growth coming back, all these expenses are going to increase at a sharper rate next year or they will have a growth in line with the top line growth, sir?

You see as far as other expenses is concerned, definitely, there will be a increase significantly in the next year. This year, the expenses were lower because of COVID. But as far as employee cost is concerned, that will not grow, I hope, more than say is around 10%, that rate.

Okay. So other expenses, you see that can increase much sharply next year, maybe even higher than the top line growth of 10% to 12%, which you are expecting, sir?

Yes, that is what you will have. Absolutely right.

So the -- we have not seen, sir, and the continuation of this question only. So we have not seen any significant expansion in gross margins this year, though we have seen that EBITDA growth was driven by below gross margin -- below gross profit expenditure so sir, you see that there is a pressure on margins next year, if we can't improve our gross margins in near future, sir? And with the rising price of inputs and raw material costs, do you see that there is any opportunity in expansion of gross margin?

I think you are saying is EBITDA margin is basically driven by the basically, the saving the employee cost or the other expenses. I am not convinced with your argument because the -- largely is driven by the expansion in the gross margin as well. And if you see the Q3 numbers, the expansion in the gross margin is 199 basis points. So that is a significant part.

Yes, sir. Sir, there has been a little bit improvement, but do you see that there is a further scope on gross margin expansion or it will remain at best in the current level only?

By seeing an improvement of 200 basis points is a little bit, then yes, if it is a little bit then it is little bit. I think it's very difficult to see, go beyond that and 200 basis points, we are very comfortable and are happy with this type of expansion margin.

Okay. Okay. Okay. That answers, sir. And we hope to hear more on our CapEx plans in upcoming quarters.

We have next question from the line of Somaiah V from Spark Capital.

And congrats on this new announcement, I was one person personally asking you every time on these investments. We sincerely hope that you go the CRAMS model and not do too much of generics, sir? That's just from my side, we just say that, and we'll wait to hear more somewhere in the next 6 months. So my question essentially is about the -- I mean, most of it has been answered. But from a next year standpoint, how do you see the -- I mean, any rough guidance because you are having a significant base effect that has already been there. How should we see the broad industry growth for us?

You see, basically, India is consuming one of the lowest pesticides in the world. And government is basically focusing on increasing the agriculture and the income of the farmers. The government is checking about doubling the farmers' income by 2022. Even in yesterday budget, Mrs. Nirmala Sitharaman has categorically said that they want that the farmers should get minimum 50% profit on its core crop produce. So that way, there is a lot of opportunity for India for export also. So the consumption of pesticide is also expected to increase in India. So that's why we are hopeful that Dhanuka will be able to deliver 10% to 12% growth, if the monsoon is normal.

Okay. 10% to 12% revenue growth is what you're highlighting, sir?

Yes, yes, yes.

Got it, sir. And how is the raw material scenario now from China? Any price improvements we are seeing? Any rough number that you can guide as in the rough average cost for you that has been reducing by what percentage or anything that you can guide on this?

The prices in China are increasing trend because of the 2, 3 reasons. One is the raw material used in manufacturing of intermediate and pesticide is very technical, they are increasing. Number two, because of the COVID, some of the factories in those provinces have been shut down. And thirdly because of loan availability of containers, the freight cost has tripled. Earlier 1 SPL of 20 feet was coming at $1,000 from China. Now the cost has gone to $3,000 per container. So because of these 3 reasons, the prices have increased in China for most of the raw materials. Let us hope that may possible, after 3 months, the prices stabilize and start coming down. But at present, the prices are on the rise.

On an average base, how much is it increased by is that like versus last year, last 2, couple of quarters to now? Any rough average that if you could give us?

In comparison to last quarter, maybe around 6%, 7% increase. It depends product to product. In some of the products are inclusive even up to 20% and some products are at par. Some products are 5% to 10%. So on an average, you can say, 6%, 7% increase.

Got it, sir. And just one final question. Because you're doing this CapEx now, would it be fair to say that we may not expect dividends in the fourth quarter or it will go ahead, sir?

Dhanuka has already rewarded its shareholders by doing a buyback of INR 100 crores at the rate of INR 1,000 per share. So dividend has -- we are giving dividend. So for the sake of dividend definitely we'll give dividend to a nominal expense but otherwise, apart from the CapEx, we have already rewarded the shareholders for FY '21.

We have next question from the line of Viraj Kacharia from Securities Investment Management.

Congratulations for good set of numbers. I just had a follow-up on the question on the CapEx part. In the past, we also -- one of the reasons also we should say, so we had this whole approach of focusing on formulation and having an asset-light model because the foreign partners used to have a more concentrated manufacturing and supply chain approach, and they were not willing to share the technology and hence we continually with this model as well. So now what is -- what are we -- when we are talking to them and when we have decided to go with this approach of CapEx and macro indication? What is the communication we are getting from them in terms of the technicals. Is there a change in thought process? Or if you can just elaborate a bit more on that?

As I shared earlier, that because of the China relationship with India as well as globally, the companies, the importers are giving preference to India in comparison to the China. And India is largely dependent on China for the generic product whether it is intermediate or technical grade pesticide. So there is a lot of opportunity for export of pesticides, technical grade pesticides from India. So considering the export opportunity as well as the demand in India because a lot of cat capital consumption is there in brand also by Dhanuka. So once Dhanuka has decided to go into the backward integration, so we will be captive consumption. Apart from the 3-day supply indigenously to other formulators, and we look for the export opportunity. So these will be 3 avenues for which we are seeing the future state approach, we have decided to enter into this deal.

But when it comes to, say, those specialty modules which we have through our partnership with the MNC partners. Is there a thought process in sourcing or localizing those as well, the AIs here? Is there a change in thought process of the partners? Or that is outside the ambit for now?

No, at present there is no basically tie up with any of the global partnership. But definitely, we are discussing with 1 or 2 Japanese company. Once any thing take shape, we will definitely share with you. But as of today, we have decided to enter into field with the generic products.

We have next question from the line of Hemang Khanna from Kotak Securities.

Sir, I just wanted to understand that we were indicating that even Chinese -- inputs from China has been on a rising trend. Sir, just to understand that from a gross margin perspective for the fourth quarter. Would it be fair to say that we did about 42.8% in the previous year in fourth quarter? Would there be a very sharp moderation from this as you indicated about 6% decline. 6% higher input and about 25% of the total comes from China. So should we still be comfortable somewhere at about 40%, 41% margin -- on a gross basis margin for the coming quarter?

Actually, question is not clear. Will you please repeat the question?

Sir, I was trying to get a sense of the gross margins as you look at for the next quarter. So in the fourth quarter, on a Y-o-Y basis, our gross margins were about 42.8%. Would it be fair to say that in the coming quarters, we should be able to be somewhere at about 40%, 41% on a gross margin basis? Or would the contraction in margins be sharper because of the China impact?

I think the gross margin in fourth quarter will be in line with the last year gross margin Q2, which should be similar to the last year.

Right, sir. And...

We are passing on to the customer. So that's why we will pass on whatever the price increase we are getting on the raw materials.

Got it, sir. Got it. And sir, just to get a sense. What would be our CapEx numbers when we look for FY '22, '23?

As I said it is only at infant stage. So presently, we cannot say that once we have decided to enter this field, definitely, it will be much higher in comparison to earlier years. So how much CapEx will be there in next financial year once the project report is ready, then we will be able to share with you.

We have next question from the line of Rohit Nagraj from Sunidhi Securities.

Sir, one question is about the Dahej land. So we have planned INR 200 crores of CapEx, how much more CapEx can be done at this particular facility?

As I shared, it's too early to basically comment. It's just a ballpark figure so basically before -- once the project report is ready by our Vice President and the Project In-charge, we will be able to share more details in next phone call.

Sorry. My question, I did not put it rightly. So on this particular land, how much entire CapEx can be done beyond INR 200 crores, I mean, the land bank can access a CapEx of INR 400 crores, INR 500 crores. That's what I meant.

So we have around 37 acres of land. So we will see how much land is being utilized for the first phase of the project. So in second phase, definitely, there is possibility to increase the CapEx, if we decide to go for the second phase. So -- but everything will be clear, once the report is ready, and we'll share more details by next year. There is huge possibility because the land area is 37 acres. So there is definitely more opportunity to have more CapEx and increase the number of molecules to be manufactured over there. So it will depend on all the -- on that, that how much capacity we will build over there.

Yes. And sir, second question, in terms of product pipeline. So we have already mentioned that for the next couple of years, we have around 8 to 10 products in the pipeline. Beyond that, whatever products we are currently working on, say, for the third, fourth, fifth year. So are we thinking of putting up the technical manufacturing at this particular new project from a long-term product pipeline perspective?

No. The new project for the backward integration is presently for the generic manufacturing only because there are a lot of exports for generic happening from India. And there is good consumption in how to buy the company in branches. So considering both these parameters opportunity for export, opportunity for the institutional sales as well as for self-consumption, we are going ahead with the manufacturing of generic products. And if anything matures with any of the Japanese partners, then definitely, we will come out and we'll share with the investors.

We have next question from the line of Resham Jain from DSP Investment Managers.

Yes. Sir, I have just 2 questions. So first is, as you mentioned in your opening remarks, that there has been some impact in the Southern India because of monsoon and the cyclonic impact. So what we have heard is that there has been doing, it has actually deferred. And we have seen a good improvement in the month of January. So is that something which will just got deferred and not fully got impacted, let's say in quarter 3?

You are absolutely right, Mr. Jain that the slowing has taken place in especially Andhra and Telangana. So both these cases have shown good growth in the month of January, and things are reviving. So we are hopeful that like January, February and March should also show good growth from South India. And last year, because of the lockdown, we have suffered sales in the last week of the March. So this year, last week of March will also give us a label field because the staff is basically to complete their target, they try to basically do the sales in the last week of March. So we hope that as per our earlier guidance, we will definitely able to achieve our targets this year.

Got it, sir. Sir, my second question is on competitive landscape. And you highlighted that in your second quarter call, that a lot of these smaller marginal players are seeing some impact earlier because of their factory is not running at good utilization. And now we are also hearing that because of this Chinese logistical issues, increasing costs and all. Again, some of the importers are facing a lot of challenges. So how do you see the overall competitive landscape in this context?

Yes, you are right, Mr. Jain that because of these -- the central insecticide both and the custom department has become very stricter and rigid on the documentation and the legality part. So the consignment, which is used to be imported in India from unauthorized process instead of the approved process, they have now stopped. So only where you have the authorized source registered with Central Insecticide Board, only those consignments are now being cleared by the custom. So some for information, number of consignment of various companies have been detailed that the customs, especially at Nhava Sheva port. So in future, we are expecting that it will have the impact on the studios and the basically duplicating manufacturer so this will basically give the benefit in the genuine manufacture. So we hope that this will also give a growth to the general manufacturers because the sales of the illegal manufacturers will be minimized.

We take the last question from the line of Himanshu Upadhyay from PGIM India.

I had a question on this Slide #7, which is on the innovation turnover index. If we look at it FY '16, '17, '18 and till '19, we were around 20% and 17%, okay? But which has fallen to 12% and 11%, okay? What would be the reason? Because we have launched a number of products in the last few years. But still the revenue from new molecules has a taper down quite significantly in the last 3 to 4 years. Can you elaborate on that?

Yes, yes, you're right. It is fall down 11%, 12% this year. It is mainly because of you see few products we see in a year, probably in '19, '20, we have not launched any new molecule -- sorry, '18, '19. So that is one reason. Secondly, few molecules we have launched, we could not make them every issue, big more issue. That is the reason. But however, I'm sure it will improve the net financial year, definitely.

And do we want to have a target? Or do we have a thought process that this much percentage of revenue we will want to have from new molecules means any thoughts do we have?

Yes. We have thought in our mind, it should be more than 15% plus.

We have one last question from the line of Dhruv from HDFC Fund.

Yes, sir. Sir, in the earlier question, you mentioned that the customers are restricting imports from unauthorized sources. What I used to understand is all imports have to be registered with the registration authority, the chemical registration authority. Is that not the case? I mean, they can also improve from unauthorized NOL identified sources also?

There are a number of cases. Some of the, you can say, spurious manufacturers, they are improving in the name of chemicals or intermediates for which there is no registration required. Chemicals are really credible and imported inputs, there is no registration. So we are importing in the name of chemical in instead of pesticide. For pesticide, technical grade also they basically were able to clear, just showing that the product is manufactured by that company. They were importing from the trader. But basically showing it as the manufacture by that authorized source. So they were creating some documents which is basically on the basis they were able to clear the consignment from customs. And customs who are basically not knowing the extractive CIB guideline. But now they have become very expected, and they are not delivering until and unless it is from, the consignment until less it is from the authorized source approved by the suntanned goal so because of this number of consignments has been withheld at Nhava Sheva port. So we do hope that this unauthorized import will be stopped in the future, and which will give a boost to the gene manufacturers.

Ladies and gentlemen, that was the last question. I'd now like to hand the conference over to Mr. Manish Mahawar from Antique Stock Broking for closing comments. Over to you, sir.

Yes. Thanks, Vikram. On behalf of Antique Stockbroking, I would like to thank the team of Dhanuka Agritech for providing us an opportunity to host the call. Dhanuka, would you like to make closing comments, sir?

I have already covered. And as Mr. Jain was talking that January in South India has shown good growth. So it is expected that probably March should also remain good as far as the season is concerned. So we are confident that Dhanuka will be able to perform very -- in the fourth quarter also. And this year will be a very good historic year for Dhanuka because we will be achieving the all-time recode top line as well as bottom line growth. Thank you very much.

Thank you very much, sir. Ladies and gentlemen, on behalf of Antique Stock Broking, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.