Dhanuka Agritech Limited (507717) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Dhanuka Agritech Limited Conference Call, 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.

On behalf of Antique Stock Broking, a warm welcome to all the participants on the call of Dhanuka Agritech, to discuss agreement entered with Bayer AG to acquire international rights for active ingredients for -- of 2 products. Today, we have Mr. M.K. Dhanuka, Chairman; Mr. Harsh Dhanuka, Executive Director; and Mr. V.K. Bansal, CFO, on the call. Without further ado, I would like to hand over the call to Mr. Dhanuka for opening remarks, post which we will open the floor for Q&A. Thank you, and over to you, Mr. Dhanuka.

Thank you, Mr. Manish. Good afternoon, ladies and gentlemen. Myself, M.K. Dhanuka, Chairman of Dhanuka Agritech Limited. I welcome you all to this conference call of Dhanuka Agritech Limited on the acquisition of 2 Bayer products. I hope all of you are doing well and keeping safe. I have with me Mr. Harsh Dhanuka, Executive Director; and Mr. V.K. Bansal, CFO of the company. As you are aware that on 25th November 2024, the company announced the execution of a strategic acquisition agreement with Bayer AG for acquiring international rights to the active ingredients iprovalicarb and triadimenol to expand the company's global footprint. It was already informed that the company has signed an agreement to acquire international rights to the active ingredients, iprovalicarb and triadimenol. With the acquisition, Dhanuka plans to expand its footprint in more than 20 countries including the regions of LatAm that is Latin America, EMEA, Europe, the Middle East and Africa and Asia, including India. These products were invented by Bayer AG, a global leader in agriculture input solutions and farming innovation. This acquisition will enable Dhanuka to embark on a journey of global market expansion. Under this acquisition, Dhanuka Agritech Limited will get all the rights for manufacturing and sale of iprovalicarb in more than 20 countries. In this transaction, Dhanuka will acquire the global rights to the associated brands, Melody for the iprovalicarb with sub-brands like Melody Duo, Melody Compact, Melodika and others. As part of the agreement, the companies have agreed on a transition plan that allows Dhanuka to provide seamless service ensuring no disruption to growers and customers globally. Further, Dhanuka will be shifting the manufacturing of at least one of the products to India, leveraging the capabilities of its manufacturing unit at Dahej, Gujarat. The first product is iprovalicarb, which is a fungicide from the carboxylic acid amide class, used for disease management caused by oomycetes species in horticulture crops. And the second product is triadimenol, which is a well-established product used in seed treatment for cereals and cotton as a solo formulation and as a part of multiple treatment seasonal programs in coffee as a pre-mix. Triadimenol is a SBI Class 1 DMI triazole fungicide to control various diseases. The company has fulfilled our closing conditions and completed the payment of the consideration on 19th of December 2024. Thank you very much for your kind attention. We would now like to open the forum to take the questions. Thank you very much.

[Operator Instructions] Our first question comes from the line of Rohit Nagraj from B&K Securities (sic) [ Centrum Broking Limited ].

Congrats on the acquisition. Sir, first question is particularly -- was there any particular reason why Bayer wanted to sell this particular brand and business? And second, what is the kind of growth rate that it has experienced over the last few years? And what are our expectations once the brand comes to our kitty?

All right. So, Rohitji, first part of the question around Bayer divesting this product, the primary reason for them is both the products, one is almost a 20-year-old product, second is almost a 40-year-old product. So they wanted to divest these products as they have some other products, and it contributes small revenue to their global portfolio. So I believe that would have been their prime reason. With respect to the growth of the products over the years, till 2022, the products have been growing, and last couple of years with the Bayer's diluted focus on the products, the volumes have declined slightly, which is a mixture of volume and price impact. As Dhanuka takes over these products, we look forward to reviving the volumes of both the products going forward.

Sure. That's helpful. Sir, my second question is in terms of registrations, given that we have taken the brand now, so do we have to reregister the products across these geographies? And if we transfer manufacturing to our Dahej facility, in that case, again, some reregistration is required?

Yes. So reregistration for the current products will not be required. There will be transfer of ownership. So the current registrations are owned by Bayer, the same ownership will be transferred to Dhanuka name, that's the first part. The second part, around the active ingredient, so in the future, we'll be changing the source of active ingredient, which is currently one of them is from Germany and other is from a contract manufacturer in another country. So the Germany product, we will be shifting to India over a period of time, and that will require the regulatory approval for -- not for a reregistration, but for a source change.

[Operator Instructions] Our next question comes from Viraj from SiMPL.

Just a couple of questions. First is, if you look at the market for iprovalicarb, it's estimated to be around $13 million to $15 million market. And similarly for triadimenol, the market is above $100 million. But both these products are like very generic products. And as you said, one has been there for 20 years, other is for more than 40 years. So typically, the approach has been more towards specialty molecules. And even with Dahej, idea was to get increased exposure either in terms of AI or formulation of more and more specialty molecules. So what is the thinking behind us acquiring these products? And second question is, can you give some [indiscernible] on the scale of each of these product brands and acquisition value?

So, Virajji, I didn't catch the second question -- part of your question, but I'll come back to that. I'll first try to address your initial question around the reason for the acquisition. So Dhanuka, as you know, has been a domestic player and mostly focusing on the Indian market. Last couple of years, we've been trying to expand our international footprint through formulation exports. As part of our long-term vision, we wish to expand our global footprint. Even to empower the Dahej business, we want to expand our global footprint and establish customer base in different countries across the world. So these products already having an existing customer base, they are popularly used in the regions where they are sold. And depending on the product end market, they enjoy a good market share. So in order to fulfill the above objective of expanding to international markets, we decided to go ahead for the acquisition of these products. And another aspect of your question around these products being old versus new, so many products which we are selling in our portfolio are even now old, for example, Targa Super, which is one of our leading brands, is introduced in India almost 25 years ago and still enjoys a really good market share and brand presence because of the work that has been done about on the product promotion and brand building. So that's why it makes good sense to even have the product, which are older in the portfolio. These are not very large molecules as you already shared the estimated market size. So the generic competition is not very severe. In India, there is no generic player in the product. And globally also, the competition -- generic competition is limited.

Sir, what will be the scale of each of these 2 products under the purchase agreement and the acquisition value?

The acquisition value, and what is the second part?

This current scale of [Technical Difficulty].

Sorry to interrupt. Viraj sir, if you are using the speaker mode, may we request to use the handset mode, please? You're sounding muffled.

Is it better?

Yes.

Yes, I was just trying to understand what will be the sales of each of these 2 molecules and the acquisition -- purchase price play?

Yes. So the purchase price which we have paid is close to INR 165 crores and...

INR 165 crores, okay.

Yes, for both the products combined. And the revenue -- global revenue for both these products was roughly INR 220 crores in 2023. 2024 numbers, final numbers are still not available with us because the year for Bayer will be closed in December, but our estimate is there might be about 20% volume decline -- 15% to 20% decline in the revenues in 2024.

Okay. Just 2 questions if you can allow. One is on the unit economics for these 2 products. And second is on competitiveness and our capability. See, you talked about us having a global focus. But even there, we are still kind of in a very nascent stage in terms of scaling up the B2B piece for the formulation exports. Now I understand for trade, it's more of a B2B. But if we do iprovalicarb, it's more of a B2C product and which requires a lot of on-ground presence and the dynamics is quite different per se of a B2C approach vis-a-vis the B2B, which traditionally we have when it comes to exports. So just trying to understand what strength -- other than manufacturing may be shifting to India, what strength do you think you can add to this particular approach from Dhanuka point of view? That is one. And second is in terms of the margin structure, if I look at the India business, even in Gentech for us or others in the industry, players with a generic profile don't earn more than, say, 12%, 13% EBITDA margin. And if it's a very good brand, at max 15% kind of a margin structure. So do you think that post the transfer of business in the manufacturing to India you will be able to achieve that kind of a margin or it will be much better, any color you can give?

Right. So I'll request Bansalji to address the margin question.

You see, in terms of margin, we are expecting slightly -- in terms of gross margin level, it will be lower as per our overall margin. But in terms of EBITDA, we are hopeful we will maintain the same EBITDA level even after these 2 molecules.

Okay. So in terms of payback, it may be like a 5, 6-year kind of a payback.

Yes, if we only look -- there could be 2, 3 angles. If you look at the purely financial angle and one of the advantages is -- but yes, I think payback period must be in 5 years. It's most probably there. Yes, 5 years.

Okay. And on the first question.

Yes. On the first question, sir, this is -- for Dhanuka, it will not be B2C except in India because we do not intend to establish our direct channel in any of the countries. We are in discussion already with several local companies in these countries who already have an established distribution network, and we'll be giving the rights for the brand to these companies. The supply chain will be managed by Dhanuka, including the manufacturing of the product.

Okay. Understood. So the margin structure, which you alluded, that is despite the kind of competition you see, so in triadimenol, you have many Chinese players in the market. So even considering the kind of overcapacity you see post that as well, you will be maintaining this kind of a margin?

Yes. Correct.

Currently, we are expecting, yes, you're right. But time will tell in future. We are still very new.

[Operator Instructions] The next question comes from Riju Dalui from Antique Stock Broking.

So first question is on the market size. So can you just tell like what is the market size for these 2 products, global market size?

Yes. So for iprovalicarb, the global market price is close to USD 25 million. And for triadimenol, it is close to USD 75 million. These are 2-year-old numbers that I have.

So roughly it will be around INR 800 crores to INR 900 crores kind of market size globally, right?

Correct.

Yes. So in terms of the revenue that they will be having as on FY '24 or '23, so there is I think around 18%, 19% kind of market share globally. So who are the major players? And what is the market share, if you could share that?

There is some background noise coming from your line. Sorry, I couldn't understand your question clearly. Could you repeat, please?

Yes. So these 2 products, like Bayer is having market share of 20% kind of market share Bayer is having right now globally, right? So who are the other players? And what would be their market share globally?

So in iprovalicarb, the Bayer's market share is -- would be close to 50%, and the others are generics player based out of China, but their presence globally is not much. With respect to triadimenol, again, there is only Chinese players which are there, where the Bayer share is lower at around 20%, 25%, I believe. So the biggest advantage that we have in case of triadimenol is that we have access to Brazil market, where the other generics are not present. So that's the advantage. Brazil has significant entrance barriers. So for a new generic to enter the market, it requires a lot of registration investment and time as well.

Understood. And how much will be the Brazil market size?

Brazil market size for this product?

Yes. Yes.

For this product -- so this product's entire revenue is in Brazil only. For the portion which we have acquired, it's only for Brazil.

Okay. Okay. Okay. Understood. And one more question, like how much was the peak revenue for these 2 products? Like you have mentioned that these products were 20 and 40 years old, so like how was the peak revenue?

So the peak revenue as per information available with us was in 2022, which was INR 245 crores for both the products combined.

Understood. Understood. So that was the peak revenue, including your volumes and the realization, right?

The volumes and realization both combined. Correct.

Yes. Understood. And just for clarification purpose, like how much growth you were expecting going forward, like not for next 2 years, like I'm talking about the next 5 years or a bit long-term perspective because these 2 molecules are very old molecules? So what is your expectation in terms of volume growth?

Yes. So for next 5 years, we are looking at 10% to 15% CAGR.

Okay. So mostly from LatAm market, and like how it is?

Yes. So the -- as I mentioned earlier, triadimenol is only in LatAm, that is Brazil. And the iprovalicarb is divided between Asia, which is having the largest share, followed by Middle East and North Africa and Europe. So all these regions are expected to grow, especially because there is a new formulation between -- there are 2 formulations of iprovalicarb, which are there. And the second formulation is growing and also having some in pipeline registrations in different countries. So we believe this new combination for iprovalicarb will be growing.

Understood. And you said that like you will be shifting manufacturing base into Dahej. So how much, like how many years that will take like to shift the manufacturing base to Dahej for these products?

So these are iprovalicarb -- yes, iprovalicarb technical manufacturing, we are planning to do it in Dahej, which will take roughly 2 to 3 years' time from now.

Okay. And how will be the revenue recognition for Bayer -- for Dhanuka maybe in Q4 or maybe in H1 FY '26? So how will that work like the revenue recognition for these 2 products?

You see revenue recognition in Q4 of this financial year would be nil, because Bayer will do business as usual on behalf of Dhanuka. We will get the sort of royalty. Revenue will not come in our books in this financial year. However, revenue will start coming from the next financial year.

Okay. So that will start following from Q1 or maybe like it will take some time to kind of...

It depends on country by country, molecule by molecule. It may start in, say, for India in Q1, and for Q2, some more countries and one brand; and Q3, another brand; and Q4, almost for all the brands in all the countries.

Okay. Understood. So it will pick up gradually?

Yes.

The next question comes from Bhavya Gandhi from Dalal & Broacha Stock Broking.

Sir, you mentioned about some royalty payment. Can you throw some light on this? How is it? And what is it about?

See, royalty payment will come because Bayer will do business as usual as it was doing before our acquisition, right? So royalty means that, that should be transferred in terms of net economic benefit after the -- whatever the fees consideration is. Less all the cost of material and their margin, the differential will be transferred as a net economic benefit, which should be considered as royalty in our books of accounts.

Okay. That will be there for the transition phase you are trying to say, right? Or post transfer of the brands, are we supposed to pay any royalties?

[Foreign Language] We'll not pay. They will pay to us.

They will pay to you. Okay. Okay. Got it. Got it. And just one more thing on the product side, if you can throw some light which will be the nearest product in the market in the generic molecules if you were to compare?

There are many products in the similar categories. So there is one product dimethomorph from Bayer, but that product has been put under restricted list in EU. So that gives an advantage to iprovalicarb. And there is one more product from the similar class, which has also been put under restriction in EU. So that is why iprovalicarb will get advantage in EU on that account. There are other products also, like [ Melody Propineb ] is there, which is -- they're in similar class -- similar end usage of the crops and disease.

So basically, post -- I mean, Bayer will not have any similar products that we are acquiring, right, post the acquisition of these 2 brands?

Bayer would also have a similar product, but not in the same chemistry class. It will be different chemistry, newer chemistry.

It will be newer chemistry, you are saying?

Yes.

Okay. So how do we ensure that our acquisition that we've done succeeds on a longer-term basis? Because if they were to introduce because the brand, people will be -- farmers in those countries will be aware about that brand and their marketing agents will try and push the newer products.

Yes. So the farmers are aware about the brand, Melody brand, which is there along with this product. So the consumers continue to use the existing brand as well, especially when the product communication and presence is continued. If there is a break, then there would be a challenge. But because the product is continuously present in the market, so we can take the full advantage of the brand presence in the market.

Got it. And sir, just on the distribution side, how are we going to distribute these products?

In India, we will distribute it through our existing network. And outside of India, we are planning to establish local distributors in each country, so like Dhanuka is a national distributor for some of our Japanese partners. We will have a similar national distributor in the targeted markets.

So basically, we will create our own distributors or we will be relying on third-party distributors who will be marketing them?

We'll not be establishing our own distribution channel like we have in India. We will have one national distributor in one country.

Got it. And can you throw some light on the average realization of this product and under what brand names they are being sold currently?

Realization number, I cannot share with you right now because that is -- that varies for each country. And with respect to the -- what was the second part of your question?

Brand name.

Brand name is, for iprovalicarb, Melody and related brands like Melody Duo, Melody Compact, Melodika, similar names are there. And for triadimenol, the brand names are Baytan and Premier Plus. But Baytan and Premier Plus brands have not been purchased by Dhanuka, so we will have usage of these brand only for a transition period.

Okay. And can you just highlight what has led to fall in volumes? Okay, sir, I'll get back.

We'll take the next question from the line of Mr. Rohit Nagraj from B&K Securities (sic) [ Centrum Broking Limited ].

Sir, in terms of the products, there are individual products as well as combination molecules. So given that this is already an established product, from our acquisition perspective, was the underlying more important to get entry into other geographies where we are not currently present and we want to establish our presence? Is that the underlying? And alike question to that, you also mentioned that there are certain combinations which are currently maybe work in progress. So how will the transfer of that will happen over a period of time? So R&D is being done by Bayer, and once the R&D is over, will the product be transferred to us without any royalty payment or so?

Yes. So the current products, which are under registration, already in some of the countries, it has been registered, and some countries, it is under registration. So these under-registration products will also be transferred to Dhanuka over a period of time. And for these new registrations, we do not have to make any fresh payments to Bayer. It is part of the total consideration that we have already paid to Bayer.

Right. And basically to acquire these brands, I mean, generic brands, was our thought process to enter into the geographies? Or was there any other -- I mean, given that these are all generic brands and we will have to establish ourselves as Dhanuka as a company across geographies will take some amount of time?

Yes. So one is to get access to a number of countries. Through these 2 products, we will have presence in more than 20 countries across the globe. So with the established customer base of these products, we will be able to market some of our other products from the existing portfolio and future products, which we are developing out of Dahej. So these will be putting into the similar customer base and establishing the product in the newer market. So that is the primary base, as we mentioned, for the acquisition.

Sure. And second question, Bansalji, you told us that from Q1 onwards there will be no recognition of revenues, why is it so? Will the consolidation not happen from 1st April if all the other formalities are in place?

No, no. I told in the Q4 of this financial year, there will not be any revenue recognition in the books of Dhanuka Agritech. However, from Q1 of the next financial year, revenue recognition will start.

Okay. So consolidation will happen for FY '26 with whatever run rate, maybe INR 186 crores, INR 200 crores and whatever growth rate that happens next year. So entire revenue will be recognized in FY '26 as far as the sales are concerned, there will not be anything which a Bayer will be having control of.

No, no, no, not like that. You see Bayer is doing business as usual. The moment we will get the registration transfer and the permission is taken in our control, the revenue will start country by country. From India, it will start in the Q1; from some other country, in Q2; from some other country, in Q3. By the end of the financial year, we are expecting the entire control will come into Dhanuka's hands. Maybe some part of revenue will be recognized in the books Dhanuka Agritech in the next financial year and some in terms of reality. Yes, from '26, '27, we are expecting the entire revenue to come from Dhanuka's balance sheet.

The next question comes from S. Ramesh from Nirmal Bang Equities.

So if you look at your long-term vision for this acquisition, if you look at FY '28, given normal weather conditions and normalcy with -- is restored in terms of volume growth [Technical Difficulty] for these 2 molecules across the 20 countries and India [Technical Difficulty] what is the kind of...

We are losing your voice in between.

Yes. Basically, I was asking, what is the kind of growth we can expect in FY '28 from these 2 molecules? And what is the impact on your amortization on the acquisition cost because that's pretty much registration? So how much would it add to your depreciation and amortization over '26 and '27?

So on the revenue front, I can answer that we are planning to do 10% to 15% CAGR on the products for the next 5 years. That's our objective. And in terms of depreciation, Bansalji can answer the question.

Yes. We'll charge the depreciation as per the usual rate.

So on this INR 165 crores you have paid...

Yes. Yes. On the entire amount, yes, it will be applicable. Yes, that's right.

So can you say about 10% on this overall cost?

The appreciation rate is around 15%, if I'm not wrong.

15%. Okay. Okay. So the second part is now you mentioned about using the Dahej facility. So in terms of the supply chain sourcing for raw materials and intermediates for these molecules, will you use the existing supply chain that Bayer will transfer? Or will you have to arrange it separately? And secondly, after using the Dahej facility for these 2 molecules in Dahej, what is the balance capacity available for your other molecules? Can you give us some thoughts on that?

Yes. So I'll address the question. First part, around supply chain, as per the international registration, we need to maintain the same product quality, which is currently being manufactured by Bayer. If it requires us to use the same suppliers as Bayer, we will have to go with that. But if we can change some of the suppliers and still maintain the quality, then we will shift to our own suppliers. So that is the first part of the question. Second part regarding the capacity, the product involves complex chain of reactions. And for that, a significant portion of the existing capacity may be consumed, but we will still have fair capacity in the existing plant itself because the volumes are not very large for this product globally. So that is why we believe it should be possible, but we'll get to know in due course how much capacity exactly will be consumed by this product.

Okay. So one of the benefits from this acquisition, you mentioned about entry into these 20 countries. When you look at this 15% CAGR, that is just for the 2 molecules, right? So over and above that, what is the kind of additional growth you can expect for your India business and the international export business based on the access you have to these markets beyond these 2 molecules, say, over 5 years?

Right. So for India business, of course, this business gets added into our brand sales. And for the brand sales, we will continue to grow for the domestic market 10% to 15%, as has been our plans over the years. And for the International business, definitely, this will add significant revenue to our portfolio. And over the years, it will give us benefit in selling our other products also. At this moment, I will not be able to put a number to that.

Okay. So finally, in terms of your ROCE for the business, now on an INR 165 crores acquisition, given that these are generic molecules, if you look at your long-term expectations of ROCE, would it be similar ROCE on your current business? Because there's a working capital component involved, right? So how much of additional investment will you have to make on working capital? And to that extent, based on an asset turn and margin, will there be any -- some sacrifice on ROCE in the initial 1 or 2 years? And then, when will you actually be able to bring that ROCE back to your current blended ROCE? And in future, would you expect this to give you some incremental addition to your ROCE, wouldn't double your current blended ROCE?

So you see it is a little early to comment on ROCE. It will take some time. Until unless we'll take the entire control in our hands, it is difficult to comment. It will take some time.

In terms of working capital requirement, how much will it be? Say if you take the ramp-up to the full sale, how much will be the investment required? And...

In terms of working capital requirement, until and unless we'll take the entire control, we'll get to know how much volume requirement would be. So it is really a little early to comment as of now.

But ballpark, you would have made some assesment, right, based on your current number of days of receivables and inventory. What I'm trying to understand is would it incrementally increase the number of days of net working capital just in terms of direction.

NWC should be in line with -- currently, we are having, the NWC is around 112 days [indiscernible]. So overall, NWC should not see increase at all even by the introduction of these 2 molecules. Maybe little better improvement, but it will take time to tell us how many days we can improve with these 2 molecules. But overall, it should not be increased, right?

Ladies and gentlemen, we would take that as the last question for today. I now hand the conference over to the management for closing comments.

Friends, to conclude, I would like to thank all our investors for your support and confidence in Dhanuka. This acquisition will strengthen Dhanuka's market position by boosting both the top line and bottom line through the sale of its products in India and global markets. I reassure our stakeholders that we are committed to the task of transforming the landscape of agriculture in India, and we will play an integral role in rewriting the future of a better and new India. Wishing you all good health and safety, Merry Christmas and a Happy New Year. Thank you very much.

On behalf of Dhanuka Agritech Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.