Dharmaj Crop Guard Limited (DHARMAJ) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Dharmaj Crop Guard Limited Q4 and FY '24 Earnings Conference Call hosted by TIL Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sayam Pokharna from TIL Advisors. Thank you and over to you.

Thank you, Yashasree. Welcome everyone. Good morning and thanks for joining this Q4 and FY '24 earnings conference call of Dharmaj Crop Guard Limited. The Investor updates have already been uploaded on the stock exchange, on the company website, and have been e-mailed to you. In case anyone does not have a copy, please feel free to write to us and we will add you to our e-mail list. To take us through today's results, we have with us from the management team, Mr. Ramesh Talavia, Chairman and Managing Director, Mr. Jaman Talavia, Whole-Time Director; Mr. Vishal Domadia, Chief Executive Officer; and Mr. Vinay Joshi, Chief Financial Officer. We will start with brief opening remarks on the business performance from Ramesh sir, followed by opening remarks on financial performance by Vinay sir, and then open the floor for Q&A session. I would like to remind you all that anything and everything said on this call that represents any outlook for the future that can be construed as a forward-looking statement must be viewed in conjunction with the risks and uncertainties that we face. These risks and uncertainties have been mentioned in our prospectus and follow-up annual reports. With that said, I would like to hand over the call to Mr. Ramesh Talavia. Over to you, sir.

Yeah, Good Afternoon and welcome to Q4 and FY '24 earnings conference call of Dharmaj Crop Guard Limited. We appreciate your presence in this call and look forward to discussing our company's performance. First and foremost, since this is our first interaction since the commissioning of the Sayakha plant, I want to update you on the progress of this front. The Sayakha plant started manufacturing operations on January 22, and we commenced trial batch production immediately, which has been scaled up to commercial batches as of April. We have started with 7 to 8 products initially in phase 1, including 5 synthetic pyrethroids and 3 non-synthetic pyrethroid products. In all of these products, we have achieved desired purity levels as of May, and in the products which were commercialized earlier, we have also achieved desired yield, while we are in progress of optimizing yield for the recently launched product. This is a continuous process and we will continue to work on it and are confident of doing better on this front going forward. Based on the initial performance and after deliberations with our team, we are eyeing an average monthly production of 200 metric tons per month, which should mean around 30% capacity utilization in the first year itself. We are confident of reaching optimum utilization in 3 years of operations at this facility, that is FY '27. I am also pleased to update you that we have started export of technicals from this facility already in the Asian market and initial segment have been dispatched in April to May. As updated in earlier interactions, product registration in larger markets such as North and South America, Europe and Australia are ongoing and it is a time taking exercise. And we will significantly expand our export footprint in the coming 2 years as the product registrations are done. There is a notable progress in our core formulation business as well. We have tapped 4 new states in this year in the South India region, namely Odisha, Andhra Pradesh, Karnataka and Telangana, marking our presence in 24 states in the brand formulation business, which was 15 states in '21. Given that we have established almost pan India presence now, we don't foresee adding more markets in the near future, and the focus will be on scaling up the business from the 9 states we have added in the last 2 years. We see a lot of potential in this market and Dharmaj is fully prepared to create a space for itself in this market. Stock depot setup, in-building, and initial on-ground activity have been started and some more hirings are expected during the ongoing seasons. But more or less, we have made majority investment for our brand business as of Q1 FY '25 and don't foresee anything major in coming 2 years. The coming years look very promising to Dharmaj with a good rainfall forecast and expectations of a good sowing season. We expected to start the year on good note. Apart from that, we will witness contributions from Sayakha this year, and the recent price trend of many pyrethroid products are showing increasing trend as well. While export continues to be a challenging area of the overall industry, we are confident of doing well within our business verticals. Now I will hand over to Mr. Vinay Joshi for comments of financial performance.

Good afternoon, everyone, and welcome to our earning conference call. Before I discuss the financial performance, I want to clarify some restatement of financial statements for the previous year, that is FY '23. As you all know, last year we appointed MSKA & Associates as our statutory auditors, which is a firm affiliated with BDO, the global number 5 audit and assurance group. This financial year was the first full audit conducted by BDO, and as a part of certain recommendations by them, we restated certain items in the current and previous financial years. To begin with, there was a line item of INR 6.25 crores pertaining to FY '23, which was a one-time professional and consulting fee specific to the setup of Sayakha project, including technical consultants among other aspects. This was capitalized earlier given the nature of this item, but has now been charged to other expenses. This restatement has affected the profitability of FY '23. Secondly, we have changed the methodology for accounting of cash and quantity discounts which were mainly pertaining to our brand formulation businesses. While earlier, these cash and quantity discounts were reported as part of other expenses, they have been net off directly from the revenue from operations now. Accordingly, the revenue for last year has been restated by approximately INR 9 crores. Lastly, there has been some regrouping within current assets and other current assets and current liabilities and other current liabilities for FY '23, mainly pertaining to the line items for the Sayakha project. This is on the restatement front. Now coming to the Sayakha project, we have done a final capitalization of INR 275 crores, out of which INR 260 crores is the expenditure on physical assets and the rest has been capitalization of interest, consulting fee, intangible items, among others. Detailed breakup of this INR 275 crores can be referred in our financial statement and has also been given in our investor presentation. As mentioned earlier, part of the increase in our CapEx from INR 200 crores to INR 250 crores has been on account of cost overruns, while the rest was on account of certain changes in the specification of the multipurpose plant and shifting of the boiler plant to an adjacent land which was purchased during the year for operational efficiencies. Coming to the financial performance for the quarter, Q4 has witnessed a remarkable 69% sales growth year-on-year, although on a lower base, but in the context of the industry environment last year, the company has still managed to grow 25% in FY '24 as a whole, which is commendable. Profitability for Q4 was mainly impacted on account of higher depreciation, finance cost, and operational expenditure, such as employee benefit expense and other fixed overheads. While our cost structure will rebase in Q4, please note this is only for 68 days out of 90 days, as the plant was commissioned on January 22, and our cost structure will fully rebase in Q1 of current year, that is the first full quarter of operation in the Sayakha plant. Accordingly, our quarterly run rate for depreciation will be INR 3.7 crores, finance cost will be around INR 1.1 crores, and fixed overheads of INR 9 crores. Other than Q4, for the full FY '24, we have witnessed growth on all key parameters and the coming FY '25 looks to be good as well. Working capital cycles have been stressed over the last 2 years. One of the major reasons is credit pattern of these new states and is a part of strategic decision to establish a new market we are working on to bring this under control. While in the coming year, Sayakha plant will start contributing towards the top line, we are working to avoid any negative contribution from this plant at PBT level given the front-loaded expenses and lower capacity utilization in the first year. All in all, Dharmaj is on a strong footing with sustainable growth in its core formulation business. While having the ability to take short-term pains for achieving long-term strategic objectives such as technical plant, this plant will mark a pivotal milestone on the company's journey, and we are confident of reaping the benefit of this investment for many years to come. Thank you, and we are now open to questions.

[Operator Instructions] We'll take our first question from the line of Shreya Jain from Niveshaay.

Thank you for the opportunity and congratulations sir for a great year and great numbers, especially the top line. So [Foreign Language] Sayakha side, what are the fixed operating expenses [Foreign Language] what are the fixed operating expenses? [Foreign Language]?

So FY '24, we already mentioned that which started from January 22. So for FY '24 specifically, if you can see, around INR 10 crores was the overheads other than raw material, and going forward, as per our production plan is, what we are targeting is total INR 70 crores will be the overhead, which is fixed overheads plus -- so fixed will be around INR 33 crores, which comprises of employee cost, finance cost, depreciation, and other power, fuel, labor charges, and ETP, other variable overhead will be around INR 37 crores. So all in all, we are targeting around INR 70 crores overhead from this new Sayakha plant.

And what could be the breakeven sales in terms of [indiscernible]?

Like we mentioned in our opening remarks that in current year, we are targeting 30% utilization, but for breakeven, we are targeting around 40% capacity utilization, which will be around INR 200 crores to INR 220 crores will be breakeven sales.

So your target of 2,400 metric tons the annual volume from Sayakha? So we have included the captive consumption as well or this is just the sales we are doing outside?

Yes, captive also included.

So what would be the ratio, 30%?

Yes, 25% to 30% will be the captive consumption.

Sir, another question [Foreign Language] that our CFO to EBITDA is very less. So what could be the reason [Foreign Language] why isn't it coming in our CFO, cash flow from operations. [Foreign Language] over the last 4-5 years?

See like we are a growing company, and a lot of focus is on the growth. And mainly due to the working cycle extension, which is a major factor. Additionally, as we have already mentioned in the past, there will be lower cash generation compared to operating profit and EBITDA, because majority of capital is flowed back into the growing business. However, what we are thinking, we are going to improve the cash flow from operations in coming future. And this is because of growth trajectory what we are seeing, and our majority of the funds are being flowed back into the growing businesses.

We'll take our next question from the line of Jainam Ghelani from Svan Investments.

So overall, I just wanted some form of guidance at an industry level and at the company level, where do we see the agrochemical performance in FY '25 and FY '26? Should we see that the pricing has bottomed out and do we see demand upticks, or there still exists supply in the market?

So I think Ramesh sir will elaborate further. So overall, agrochemical industry now we are seeing, the prices are improving and the forecast of rainfall is also good. So we are thinking that going forward and this coming year will be a good year for the agrochemical industry.

In our agrochemical industry, the rainfall forecasting is good and the cropping pattern is also improving, so we expect this current year we can touch INR 900-around crores sales.

And sir, what could be the margin level for us?

Margin level more or less the same.

As Sayakha plant is operational, so initial phase, we will have to take the burden of the overhead, but going forward, the margins are going to improve.

And sir what is our export percentage target over the next 2-3 years? Like currently it's 9%. Where do you see it going?

It will be in the range of 10% to 15%.

We have our next question from the line of Gunit Singh from CCIPL.

I would like to understand, in the opening remarks you mentioned that we would be incurring fixed costs of the new plant and breakeven would be reached at 40% utilization. So by which quarter do we expect to reach breakeven? And since this would not be -- I mean, how do we expect to maintain margins despite the new cost coming in? And you said that we would be only reaching 30% utilization in FY '25. So I mean, according to your remarks, that is below the breakeven utilization. So how do you expect to maintain margins in FY '25?

Okay. So two things are there. So first, as I mentioned, on the Sayakha plant, in this current year, we are not going to see breakeven, because we are targeting 30% utilization. But simultaneously, we are also growing in the formulation business, and we have already expanded our business in the new states as well in B2C segment, which is a high-margin segment. So there we are going to compensate. So overall, there will be a profitability, but from our new plant, we are not seeing any breakeven in the current year.

Sir, in the first couple of quarters of production, we are seeing 30% utilization. So out of this production out of the new plant, how much would be captively consumed and how much would be sold outside?

Okay. So we already mentioned 30% is the captive consumption from this new plant.

All right. So this will help us improve margins of the existing operations by how much?

So margins, initially we are thinking just 1%, 1.5%, but going forward we are targeting margins will improve by 3% to 4% once we reach the optimum utilization level, which we are targeting by FY '27.

And sir, from the external sales, 70% of the production will be external sales. So what is the potential revenue from 70% of external sales?

Which is what we are targeting around INR 200 crores. For the first year in this current year, we are targeting INR 150 crores. And the next year, we will be targeting INR 200 crores to INR 220 plus crores.

I'm sorry sir, what did you mention? INR 106 crores this year?

INR 150 crores in this year we are targeting, which is excluding captive consumption.

All right, sir. Got it. So basically, you had given a guidance of about INR 900 crores and INR 65 crores PAT this year. So I mean, looking at the current conditions, do you think that we could perform better than that, because the onset of monsoon looks good and the season ahead looks good. So I mean, what are your expectations based on this? And you mentioned that the pricing is also improving.

So we are expecting better...

These all positive factors, we have taken this around 25% growth in our existing business, B2B and B2C.

[Operator Instructions] Next question is from the line of Dhwanil Desai from Turtle Capital.

Sir, [Foreign Language] so any particular reasons, and [Foreign Language]?

[Foreign Language].

[Foreign Language]?

Yes, yes, right.

[Foreign Language] currently we ended the year with INR 654 crores, so [Foreign Language] So that translates into 12% to 15% growth, but [Foreign Language]?

Technical plant, what we are saying, INR 150 crores and INR 850 crores, so around INR 800 crores we are saying from our formulation plant. So looking at the overall pricing factor and other aspects also, so we are targeting 20%, 25% growth, but in current year also, since volume growth was much higher, 50% volume growth was there, value growth was only 25%, so considering that and pricing thing, we are seeing overall formulation business will grow also by 20%, 25%, and INR 150 crores will be the technical.

[Foreign Language]?

Depending on the pricing pattern.

[Foreign Language]?

Yes, PBT level, but what we are saying, GP margin you are taking 30% conservatively, and of course the INR 70 crores what overhead we are targeting, there we are focusing to restrict those INR 70 crores to minimum, these are on higher side, conservatively we are taking, but we are hopeful that this much will not be the overhead for this. Overall, our INR 220 to INR 225 crores will be a breakeven sales what we have calculated internally.

[Foreign Language]?

Yes.

We have the next question from the line of Ankit Gupta from Bamboo Capital.

[Foreign Language]?

We can't give guidance on that, because you are right that technical is the first year. We have to see. May be after H1 we will have more clarity on the profitability front.

[Foreign Language]?

All the 3 segments, it was more or less same. Volume growth was there around 45% to 50% in all the 3 verticals, but overall value wise it is 25%. So more or less it is same in all the verticals.

[Foreign Language]?

So here like in technical, it will be around 30% and 2,400 metric tons will be there. And in this formulation side, again, there also we are targeting volume wise growth also around 30% to 35%. We are seeing the pricing improvements are visible in the market. So overall it will help in the value growth as well.

[Foreign Language]?

Formulations, we are targeting INR 800 crores.

[Foreign Language]?

Yes, it is excluding, INR 150 crores is excluding captive consumption.

[Foreign Language]?

[Foreign Language].

[Foreign Language]?

[Foreign Language].

[Operator Instructions] Next question is from the line of Gunit Singh from CCIPL.

I have a follow-up question. So how much loss at the EBITDA level are you looking just from the new plant in FY '25 at INR 150 crores share revenue?

Around INR 15 crores to INR 20 crores EBITDA loss we are looking from Sayakha plant, but subject to the pricing movement we have to see, that will vary, but as of now, INR 15 crores to INR 20 crores EBITDA loss we are seeing from this new plant.

All right, sir. And talking about the PAT guidance, do you have a PAT guidance for FY '25, because you mentioned that existing business should be around INR 800 crores and we would be improving margins on that, and EBITDA loss of around INR 15 crores to INR 20 crores from this. So do you have any internal projection of the consolidated EBITDA or PAT?

It will be as I mentioned in my earlier, I think I replied to one of the queries. So as of now, exact we can't say, because being the first year and looking at -- after H1, we will have more visibility on this margin side.

We will take our next question from the line of Ketan Athavale from RoboCapital.

Sir, what is your revenue and margin guidance for FY '26?

Again, as we mentioned, year-on-year also 25% to 30% we are targeting. So that will be again because here INR 900 crores we are targeting, so again 25% to 30% growth we are seeing in FY '26 as well.

And with improved margins, as 1%, 1.5% improved margins is possible?

Yes.

We will take our next question from the line of Saket Kapoor from Kapoor and Company.

[Foreign Language]?

INR 275 crores.

[Foreign Language].

Near at least 2-3 years, we don't have any CapEx plan. No major -- small, minor will be there, but no any major CapEx. All CapEx is done. At earlier calls also, we mentioned that because of this multipurpose plan, our original plan was for synthetic pyrethroid only. But looking at the market conditions and opportunities, we have decided to produce non-synthetic pyrethroid as well. So for that we have changed certain machineries and there is change in the structure as well. That caused higher CapEx, but now we are not seeing any major CapEx in near future.

And sir, the changes which we have done, what kind of incremental revenue and the margin profile will change from that CapEx? How much incremental CapEx we have done because of the modifications?

Incremental, we can say, earlier, like we have -- MPBD plant was planned. But now when looking at the market scenario, there we are not seeing much opportunity. So that is compensated by the other products. So revenue-wise, we are not seeing major improvement because of this, but it is compensating.

Sir, come again, sir. I missed your...

Initial plan, we have planned of MPBD plant. Now we are not seeing major opportunity in those products. So we have a plan for the other alternative products. And for that we have to incur additional CapEx, but initial first year, we can't see any major incremental revenue by this change in the production and this plant and machinery expenditure. But going forward, we are seeing there will be an incremental revenue from this new plant.

How much additional CapEx has happened because of the modification?

It will be around INR 5 crores to INR 8 crores.

INR 5 crores to INR 8 crores. And sir, for this year, what would be our current maturity?

Sorry, can you repeat?

[Foreign Language]?

Okay. So as of now, we have -- INR 84 crores is the loan outstanding we have, and by end of the year [Audio Gap].

Mr. Kapoor, does that answer your question?

Sir is answering. He has not yet answered.

Okay.

And sir lastly, [Foreign Language] in terms of the overhead cost, that is to the tune of INR 10 crores?

Yes.

Okay. And sir, this will remain for the second -- first quarter also [Foreign Language] on the P&L?

Please repeat your question.

Sir, since the plant is now operational, so for the first quarter, the incremental impact of this INR 10 crores would be lessened by the improved revenue for the first quarter?

Yes, it will be less.

[Foreign Language].

I will just let you know the exact figure.

We will take our next question from the line of Sanjay Ladha from Bastion Research.

Sir, just for clarification purpose I am asking again. [Foreign Language]?

Because as I mentioned, we started just from 22nd Jan onwards. So during Q4, it was just INR 2.6 crores only. And now in this current year, sales have started full-fledged.

So from Q1, it will be started?

Yes. [Foreign Language] April, already it is started.

[Foreign Language]?

Around INR 27 crores, we have already sold in these 2 months.

INR 27 crores. Okay sir. Sir, the other business which we are doing, the formulation, domestic and branded formulation and other formulation business, [Foreign Language] is the assumption right?

Yes, around 11% which is normally we are targeting, 11% EBITDA margin will be there.

11% EBITDA margin will be there. And sir, this will be offset by INR 16 crores of loss [Foreign Language]?

INR 15 crores to INR 20 crores depending on the actual expenditure.

[Foreign Language] sir how are we seeing on the working capital cycle?

So I think in past trend if you see, our cash conversion cycle was very less. In last 2 years, it has increased to 80 days. So coming to the last year, if you see that was an exceptional year and [Foreign Language] looking at the downward pricing trend, we took this opportunity to procure heavily on this and got the cash discount margins. [Foreign Language] and which resulted in the higher cash conversion cycle. Now, the technical plant is also operational. So [Foreign Language] credit periods are higher than the formulation businesses, because in formulation, normally 90 days is the credit period, but here it is around 120 days. So going forward, we are seeing that 85 to 90 days will be a normal working capital cycle for us. And cash from operations is going to improve. Now because as I mentioned, most of the amount we have invested in our internal expansion. So now going forward, this will be going to improve.

Another question would be, as you already mentioned that [Foreign Language] so now it would be the revenue which will be flowing and the other OpEx and operating costs will be lesser on that side. Is that thinking right, sir?

Exactly. Because FY '26, I think we are seeing FY '26 will be a turnaround here in all terms, because now there will not be any major CapEx and all the expenditures are already set and we are going to see revenue improvement in overall verticals.

We will take our next question from the line of Yogansh Jeswani from Mittal Analytics.

[Foreign Language]?

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Year-on-year, [Foreign Language].

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[Foreign Language].

We will take our next question from the line of Shikhar Mundra from Vivog Commercial Limited. Please go ahead.

[Foreign Language]?

[Foreign Language].

[Foreign Language] we are targeting around 30% volume growth for formulations, plus there will be some cost savings, because internally [Foreign Language] so what kind of EBITDA we are expecting just from formulation business this year?

Volume growth is 9.5% to 10%, so we are saying we are targeting at least additional 1%, so 11% will be the EBITDA margin from formulations business. And depending on that, now we are looking, the pricing Is improving, so that may vary, but as of now we are targeting 11% EBITDA margin.

So around INR 90 crores EBITDA from formulation we are expecting?

Yes.

So on EBITDA level, INR 15 crores to INR 20 crores loss we are expecting from Sayakha plant, so company level we are expecting around INR 70 crores, INR 75 crores EBITDA for next year?

Yes.

And [Foreign Language], how that is reflecting to the Sayakha?

So Sayakha plant [Foreign Language] total depreciation will be around INR 14.5 crores for whole year.

[Foreign Language] for next year?

Interest burden will be INR 6.39 crores, but just want to add that here we applied for the subsidy by the Gujarat government on the interest, so there we are going to save around INR 2.5 crores per year. So overall net-net interest expense will be around INR 4.4 crores.

We'll take our next question from the line of Nitin Gandhi from Inoquest Advisors.

In FY '27, what will be the optimal production coming from this Sayakha plant, and how much will be going for technical, and relatively, what will be the revenue from outside sales?

So as far as '27, we are targeting around INR 400 crores from this technical plant that will be outside sale, excluding the captive consumption.

So can you give me tonnage? How much tonnage will go for captive?

25% to 30% will be the captive consumption.

And the sale will be, what, 60%? Because you will be operating maximum 85%, right?

So 75% to 80% will be the maximum of our optimal utilization what we are seeing here.

Correct, okay. So we will be almost operating, 50% will be coming from the sale and 25%, 30% will be for captive, right?

Right.

And at that time, EBITDA margin would be somewhere close to the existing formulation business, which is 11%, 12% plus 3%, so 14%, right?

Yes.

Okay. And formulation, what is the risk of not able to grow beyond 25%? Do you think that you will continuously grow beyond 25%, 30% for the next 3 years, till '27?

Yes.

So there is any risk which you perceive, which can make you go wrong?

If any unfortunate, suppose monsoon and other factors like that, otherwise we maintained next 3 years 25% growth in formulation business.

And any chance of improving EBITDA from current 11%?

11% to 12%.

Overall, do you see in 3 years, can you improve that by 0.5% or anything or do you think that 10%-12% is a good bandwidth in which you will lie for formulation?

Yes.

We are targeting 2% to 3% additional EBITDA margin in the next 3 years.

That is for technical, or it is for formulation?

No, overall, I am saying of overall. Technical plant is optimum utilization, then we are saying overall EBITDA margin will improve by 3% to 4% in next 3 years.

That is because of the captive use of -- correct?

Exactly. And there are higher margins in the technical product.

Okay. So technical on itself will also reach 14% and this formulation will also gradually leave from 11% to 14% over 3 years. That is what you are saying, correct?

Yes.

[Operator Instructions] Next question is from the line of Saket Kapoor from Kapoor and Company.

Sir, at peak, [Foreign Language] and technical you mentioned INR 400 crores?

Yes, INR 400 crores to INR 450 crores will be the peak revenue.

[Foreign Language]?

INR 1,000 crores, around.

[Foreign Language]?

Yes, this year.

Sir, going ahead, [Foreign Language]?

Margins [Foreign Language].

[Foreign Language]?

Around INR 15 crores will be repaid in this current year.

We will take our next question from the line of Aditya Shah, an investor.

[Foreign Language] in terms of scaling up and doing the sales and utilization, [Foreign Language] then also we are planning to utilize in 2 years to 3 years [Foreign Language]?

[Foreign Language].

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[Foreign Language]?

Yes.

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We will take our next question from the line of Rohit from ithought PMS.

Sir, [Foreign Language]?

[Foreign Language].

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[Foreign Language].

Ladies and gentlemen, we will take that as the last question for today. I now hand the conference over to the management team for closing comments. Over to you, sir.

Thanks a lot for attending this conference call. And on behalf of Dharmaj, I would like to say that we are committed to grow further, and as the new plant is already operational, so we are seeing a good growth in margins from this new plant and for the company as a whole. Thank you very much again for this call.

Thank you. On behalf of TIL Advisors, that concludes this conference. Thank you for joining us and you may now disconnect your lines.