Godrej Agrovet Limited (GODREJAGRO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Godrej Agrovet Limited's Q2 FY'24 Earnings Conference Call hosted by Equirus Securities. [Operator Instructions] This conference is being now recorded. I now hand the conference over to Mr. Siddharth Gadekar from Equirus Securities. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and thank you for joining us on the Godrej Agrovet Q2 and H1 FY'24 Earnings Conference Call. From the company, we have with us Mr. Nadir Godrej, Chairman of the Company; Mr. Balram S. Yadav, the Managing Director; Mr. S. Varadaraj, the Chief Financial Officer; and Mr. Anurag Roy, the Chief Executive Officer of Astec LifeSciences. We would like to begin the call with a brief opening remarks from the management, following which we will have the forum open for an interactive question-and-answer session. Before we start, I would like to point out that some statements made in today's call may be forward-looking and a disclaimer to this effect has been included in the earnings presentation shared with you earlier. I would now like to invite Mr. Nadir Godrej to make the initial remarks. Over to you, sir.

Good afternoon, everyone. I welcome you all to the Godrej Agrovet's earnings call. I hope you are doing well. Godrej Agrovet continued to deliver a robust improvement in profitability as profit before tax grew by 53% year-on-year in quarter 2 fiscal year '24. While revenues grew by 5% year-on-year, EBITDA margins improved by 183 basis points in quarter 2 fiscal year '24 as compared to quarter 2 fiscal year '23. Except for Astec LifeSciences, all the segments delivered growth in profitability. The domestic Crop Protection business maintained consistent good performance in the second quarter on the back of good volume growth and realizations in the in-licensed portfolio. Our food business continued to deliver healthy volume growth in branded products along with sustainable margin expansion. The poultry business recorded exceptional profitability, while the dairy business achieved a good breakeven in quarter 2 fiscal year '24. In the feed segment, cattle feed and aqua feed categories maintained strong volume growth. In the vegetable oil business, low-end product prices -- lower end product prices were more than offset by growth in volume of fresh food punches. However, Astec LifeSciences continue to witness an extremely challenging external end-market environment. Now coming to the key financial and business highlights of each of our business segments. The Animal Feed business recorded 16% year-on-year growth in segment results in quarter 2. The cattle feed category continued to gain market share and maintained growth momentum with 16% year-on-year growth in volume. The aqua feed category also registered 15% year-on-year volume growth on account of higher fish feed sales. Softening commodity prices and higher realizations in the capital and fish feed category led to significant improvement in segment margins in quarter 2. In the Vegetable Oil segment, a strong volume growth in fresh fruit bunches by 17% year-on-year was more than adequate to offset the lower crude palm oil prices and marginal decline in the oil extraction ratio. Crude palm oil and palm kernel oil prices were lower by 16% and 24% year-on-year, respectively. The stand-alone Crop Protection segment continued to deliver an outstanding performance in the second quarter as well. Growth in quarter 2 was primarily led by the in-licensed portfolio and product mix rationalization. Segment results grew by 149% year-on-year with segment margin of 29.7% in quarter 2. In October '23, an in-licensed insecticides from Nissan Chemicals Corporation Rashinban was launched. This was a global launch for the first time in India. Rashinban will provide effective protection against a wide range of pests in the chili crop. Along with Hanabi and Gracia, the addition of Rashinban will enable us to serve the entire value chain of the chili crop. In Astec LifeSciences, revenues and margins were impacted due to continued price erosion and sluggish demand for enterprise products. High levels of channel inventories in export markets and continued industry-wide destocking have further delayed recovery. However, the contract manufacturing segment maintained robust performance on account of a new product. The CMO category revenues in quarter 2 fiscal year '24 were 3.5x vis-à-vis quarter 2 fiscal year '23. The dairy business maintained positive momentum in quarter 2 as well and turned EBIT positive. Value-added product revenues grew by 19% year-on-year. With this, the salience of value-added products increased to 37% of total sales in H1 fiscal year '24 from 34% a year ago. A higher gross margin coupled with operational efficiencies translated into significant improvement in the EBITDA margin of 412 basis points (sic) [ 410 basis points ]. Godrej Tyson delivered another quarter of remarkable performance in quarter 2 fiscal year '24. The Live Bird category achieved better-than-expected results on the back of improved cost efficiency and realization. This is despite quarter 2 being a seasonally weak quarter. The branded business reported healthy volume growth of 14% year-on-year. Our joint venture in Bangladesh, ACI Godrej, recorded a revenue growth of 13% year-on-year on a local currency basis in quarter 2 fiscal year '24. This was mainly driven by higher volumes as compared to quarter 2 fiscal year '23. That concludes our business and financial performance update for the quarter. With this, I close my opening remarks. We will now be happy to take your questions. Thank you.

[Operator Instructions] The first question is from the line of Abhijit Akella from Kotak Securities.

Congratulations on a good set of results. Just a few broad topics I wanted to understand. First, on the market share gains in animal feed, especially cattle and aqua, if you could please just help us understand what exactly is the reason for this continued market share gain and whether this would -- you would expect to continue this across all the animal feed categories going forward. And the other one was just with regard to Astec LifeSciences. Given that -- is there some sort of discomfort that we might be encountering from customers with regard to our own domestic business when we sort of pitch for contract manufacturing tie-ups with them? Is that sort of a hurdle that we need to cross and if so, how do we overcome that hurdle?

Thank you for your question. So I'll answer the animal feed question, and Mr. Anurag will take the Astec LifeSciences questions. So two reasons why we have improved market share in fish feed and cattle feed. In fish feed, we commissioned a plant in UP last year, which came into full capacity this year. So it is mainly because of geographical expense that our market share gain is increasing. Now we are present in UP, Bihar, Madhya Pradesh, Chhattisgarh as well as Assam, and we are improving our presence in West Bengal. As far as capacity is concerned, again, I think our dominant position in Maharashtra is further strengthened, because we commissioned one more plant of 10,000 plus per month capacity in June this year. And Maharashtra, we have more than 20% growth over last year in Q2 because of that new capacity. So we believe that we will continuously increase our market share in cattle feeds and in fish feed category.

Anurag here. For your question on Astec LifeSciences, I would assume you mean that our domestic sales coming from CPB and B2C versus the Astec CMO business, right? That's what you were trying to ask whether there is a...

Yes. So just to clarify what I meant was that given that we have a domestic branded business as well, is that a source of discomfort for potential customers with whom we might be engaged in negotiations and discussions?

So just from being our -- CPB has been our base business right from the start and Astec also been positioned within the fungicide things and having our relationship with the innovator. We do not see any conflict when it comes to getting more CDMO business for Astec LifeSciences, primarily because our way of working with the innovators are completely based on relationships, complete transparency, also leveraging the unique sets of technology platforms, which Astec has. So we have been very clear in those communications right upfront with our customers, giving very clear indication on what CPB brings to the table and what Astec brings to the table. And as most of us are aware, we are a separate listed company. In a lot of cases, we have very clear firewalls also invite wherein there has been no exchange of information. And in a few of the cases, our contracts are also set in such a way, where we have very clear clause that there will be no conflicts going from B2B to B2C unless and until approved by the customer. So as of now, we haven't seen any of those as a thing. And I think our approach would be to work with transparency with the innovators and highlight all our strengths in both the businesses areas and then move forward.

The next question of Lokesh Maru from Nippon India Mutual Fund.

So I have a few questions from the feed segment. To start with, what is the EBITDA per kg at this point for the segment? And what is the outlook going forward into Q3 and Q4 on margin front?

EBITDA per kg?

Yes, sir.

So this quarter, EBITDA per kg was -- EBIT per kg was about INR 1,531 per tonne. So normally, we have seen in H2, our EBITDA is about 10% to 12% per tonne higher than H1. So we believe that we may average anything between INR 1,650 to INR 1700 per tonne in H2.

Sure, sir. Understood. And sir, cattle feed segment, obviously, is doing quite good consecutively, right, for the last 2 years. But what's happening in the broiler and layer feed segment, which is dragging the performance of this?

Cattle feed, I think one thing which is happening is, which also is reflected in our Creamline Dairy businesses, number of cattle increase, which was not the case for last 2 years. That is why you saw secular increase in milk prices. The second thing is that milk prices are still okay and remunerative, that is why there is a lot of category conversion. Apart from that, our new capacity in Maharashtra has also added to our market share. As far as poultry is concerned, I must tell you broiler keeps on going up and down, and you know that the market is also shrinking because of increased integration, but we used to have very dominant position in layer feed. We still have dominant position in layer feed, but once in 2, 3 years, it happens when the egg prices go down, there is excessive culling of layers. So we suffered because of that, and that is why you will see a 17% degrowth in layer. It is not that people have stopped eating eggs. It is just that there is a gap in production right now. My sense is that within this quarter itself, you will see our volume growth in the layer feed happening. So worry is only broiler feeds and for other segments, we are okay.

Last question from my side is on the oil palm segment. Our volumes have been up 17%, but average realization has been down equally. But still if you see the segment results, they have been positive, right, 10%. So what is the -- what is -- where is the disparity in these two numbers? I mean the decline in realization is enough to offset the gross volumes. So how are we still growing 5% on topline and 10% within palm oil?

So for us, the realization came down by almost 16% per metric ton in CPO and about 24% per metric ton in PKO, but segment revenue has grown by 10.5% because of increase in FFB volumes by 17%. That is point number one. Point number two, we had some leftover inventory from Q1, which was disposed off in this quarter and about small part has been contributed by -- now we are not a CPO, crude palm oil player. We are a refiner now to get slightly better realization from the output of refining CPO, which is steering only in [ FB FA ].

So this segment should continue to post better results as we have started refining now, right?

Yes. So one thing, which I must tell you that what refining has done for us is that every year, we used to have a lot of discount on CPO because of FFA because the demand would be very patchy. When we carried the oil in our tank for some time, the FFA increased, and there used to be a discount for higher FFAs. So there is no discount this year. So that is point number one. And point number two is also that the number of customers for olein, et cetera, much more than number of customers we had for CPO. So that is one advantage, so the price realization and price discoveries is better.

[Operator Instructions] The next question is from the line of Rikin Shah from Omkara Capital.

My question is for Anurag. I wanted to understand what the inventory positioning was as of March '23 versus now? So we had INR 295 crores of inventory as of March '23 and INR 214 crores now. So I wanted to understand how much was high-cost inventory back then and how much remains now?

Yes. So from quarter 1, as you would have seen, there's been almost INR 85 crores to INR 90 crores of depletion in the inventory levels, which we have seen. And at a very broad level without getting into the specifics, I would say almost 40% to 50% depletion has happened for the high-cost inventory, and the remaining is for CDMO inventories, which we were carrying. So that's the overall picture from the inventory perspective.

Okay. Got it. And in terms of spreads for the enterprise molecules now so have the -- are the RMs currently suitable to make a good EBITDA margin at current pricing?

Clearly, the RM prices on most of these enterprise products have also come down significantly. So if we look at the domestic market based on the existing RM prices, you could still make a single-digit contribution margin, assuming that the players are vertically integrated to a particular degree. But on export markets, still the RM prices are not low enough to make positive contributions. So that's the situation right now on some of these enterprise products.

The next question is from the line of Aejas Lakhani from Unifi Capital.

My first question is for Anurag. Anurag, could you just call out what exactly is happening at end customer level from a stocking/restocking/destocking perspective, please?

See, I think this has been a very common question, which we are getting from the last 2, 2.5 quarters. And we are also accumulating a lot of information based on our primary research with the customers or what we are hearing from the market. So as we see right now, we still see some amount of destocking happening in the global markets. Seems like September, October, at least on the price front, the bottom has been reached out. In Latin, primarily in Brazil, which has been the root cause for all these destocking from a year or so it seems like it should even out and that's again based on some of the customers we have been talking in some of the industry players that by, say, end of this quarter or early next quarter, as the demand starts picking up, destocking or the exit stock in the market, at least for the Latin followed by the Europe market should be more or less evened out. U.S., we are getting mixed response from our end customers as well. In a few of the cases, they are still not coming back with the 100% level of the volumes they were historically buying from us with ranging anywhere from 30% to 50%. So just based on our limited customer profile, it's giving us an indication that the destocking or the inventory levels, at least in the U.S. market might take at least 2 more quarters to even out. So that's how the situation is on the destocking level, demand, there has been a positive signs on demand potentially coming back, say, December, Jan, one, the season for these markets. And obviously, it's been muted for almost the entire previous season. So there's an expectation that demand is likely to come back. But we would still see significant pressure on the prices. So that's how the things are on the supply-demand side, the destocking by various regions and what we are picking up from the customer.

Got it. That's helpful. And secondly, the run rate that you have seen on the CMO side, can we expect the run rate to go into the second half? Because typically, second half is better than your first half. So your comments on that. And then going into '25, how should we think about the CMO business? And at what sizes reach capacity that you'll require additional capacity to grow there on?

So our goal, as we get into H2, is at least to get to our H1 numbers for CDMO, because on H1 as well, we have really pushed the pedal on CDMO. So we are expecting that we do H2 as good as H1 as we get into this year. But as we have indicated in our previous calls as well, our focus is heavily on CDMO. There is a good amount of pipeline business, which we have generated now based on our new R&D center as well. So we continue to maintain these growth rates. Obviously, we have been doubling our CDMO business over the last 2 years. It was from a smaller base. So as we move forward, anywhere say in between 25% to 40% year-on-year growth is what we expect on the CDMO side of the business. And in terms of the bottlenecks, we have been realigning our existing asset footprint, which we have primarily in Mahad to bring out as much CDMO as possible with new investments in the herbicide plant. But clearly, we would need more investment in greenfield, which we have announced or spoken about in the previous investor calls as well. And as we move forward over the next year or so, we would definitely need to commercialize some of our greenfield investments. So that's how we see the CDMO business growing 25% to 35% year-on-year. That's our target and investments then when we keep scaling up the business year-on-year.

Got it. Balram sir, my next question is for you. One is just a data point, if you could speak about what is the OER today? And since you've been gaining market shares in cattle feed and vegetable oil is on a good footing with the outlook quite clear in terms of FFBs and the refinery. And the traditional Crop Protection business is in good stead today. I want to speak to you about capital allocation on your dairy and the Tyson Food business. So as you are aware that it's been employing a lot of capital and not generating returns. And the trajectory that you've exhibited is quite -- you're following that path. But when can we expect the segmental improvement so that the capital employed is justified there?

So first question was about OER. So quarter 2 FY'23 OER was 18.41%. Quarter 2 FY'24, that is current year is 17.91%. And if you remember in my last call, I said that there's erratic rainfall. It started early, then there was a gap, then it happened affects OER. But I must also say that there is a very smart recovery month-on-month, and we crossed 19% in October. In October, we crossed 20%. In September, we crossed 19%, and we are holding above 20%. And the good news is that it is, again, rained in some of our plantation areas. And if this continues for another 3, 4 days more, we're likely to have more FFB and better OER in whatever season is remaining. So that's point number one. Point number two, you asked me about capital employed and capital allocation. INR 246 crores been capitalized this year. We have made investments, of that major chunks have gone into oil palm plantation and in the Astec LifeSciences business with a new herbicide plant. And as Anurag said that we would need this capacity once we grow CDMO business, which is just around the corner, and we are very confident that we will utilize it. In the oil palm, we did it in refinery and solvent extraction plant. And I told you earlier about the benefits we are getting in terms of better price, no discount because of FFA, et cetera. And we believe that these investments will pay much faster than we had envisaged because the efficiencies are very good. Lastly, the dairy business. The dairy business, I must say, EBIT positive -- EBITDA positive in Q2. And there is a major improvement largely because of efficiency improvement. If you want some number I can give it to you that last year, our contribution in H1 was INR 54 crores -- INR 55 crores, and we have gone to about INR 92 crores this year. Half of it has come from definitely reduced milk prices, but also the other half has come from volume growth and debt efficiency improvement and product mix. I must also say that we are taking help of consultant for the last 7, 8 months to improve efficiency and it is only with efficiency of about INR 15 crores, INR 16 crores have come only from August onwards when the project has been implemented. My view is that not only we will turn profitable this year -- breakeven this year, but we'll also turn profitable. However, the focus will always remain on value-added products, and that is where you will get maximum bang for the buck. And we are glad to say that as compared to last year, our salience in the first half has gone from 34% to 37% in spite of the fact that it has not been a very good year for beverages because of erratic rainfall. It rained when the season is on its peak. So it affects all the months. So we are very conscious about capital allocation. I can definitely say that no further investment is planned in both the food businesses, animal feed business, aqua feed business. Only the focus is oil palm plantation and Astec. And Astec, definitely, we believe that we -- once we -- the kind of traction we are getting in the CDMO business, we will continuously invest in capacities in the future, because that is more insulated and more sustainable than the enterprise business. So that salience has to go up here in the year.

Got it. And sir, just one last question on the traditional crop protection side. See, you have now the portfolio of Gracia, the new product that you launched, Rashinban. So is it the same sales channel? Or are you expanding the sales channel as well? And is it the same dealer network? Or are there different sort of distribution touchpoints?

Well, I must tell you that both have happened. One is because of these wonderful products, our quality of distribution has definitely improved. And of course, quality looks good because we suffered last year. And after that, we have put lot of controls in the business. So we are ready to suffer loss of scale but not create toxic inventories and better. So that is the motto we are going with. But I must also tell you that because of Gracia and now Rashinban, which are coming, these are insecticides which are for vegetable crops and we got label claims for chili already, which consume 10% of the total insecticide -- pesticide sales in this country. So we are making forays into vegetable crops, which was a big area for us. So I think in those areas, we have increased our distribution in numbers also. I'll tell you that I think it has taken us some time to get registrations, et cetera. COVID, too, had taken a toll on a lot of our hygiene issues, but all this is behind us. And there's a decent pipeline of products we have right now. So we have almost 6 products to be launched in the next 3 years.

So this is in license, right, incrementally?

Yes. So some are announced also, which are the mixes and some are in license, yes.

And sir, you mentioned that the quality of distribution has been enhanced. Could you give me some color on what that really means?

Quality means that the size of the distributor is very important then. Because if you really ask me, in business agri distributor is also the bank account.

The next question is from the line of Viraj from SIMPL.

Just a couple of questions on the Astec part of the business. Especially -- so on Tebuconazole and Propiconazole what you talked about in the contribution margin, which you are earning right now. So in the past, we talked about 3, 4 major players from China, which usually drive the overall market dynamics. So if you can just probably give some color in terms of overall capacity, are you seeing any further addition in these 2 molecules and generally also in terms of -- and any signs into the market adjustment you've seen? So if you can comment on that.

Right. So I can talk broadly, not specific to these two products, but in terms of those market segment, clearly, we do not see more capacities coming in the market. In fact, over the last couple of quarters, we have seen reduction on -- in terms of closure of some of the plants or the capacities because of the reduced demand over the destocking that has been happening in the industry. So there has been muted demand on one of these old products which you talked about, wherein the demand has not come for the last 3 quarters. The swing is almost 60% to 80% in terms of demand uptake. On the other product, or I would say, in some of these old products, you still have demand that has come back, but there's an overcapacity situation from China. And China, particularly in the export market has completely detected the price point. So just to take out more volume. So that has also led to a lot of these companies not able to sell into the export market or sell at margins, which are even less than their production cost or even at negative contribution. So I think the entire fungicide segment, if you would see the current growth scenario now, they are the worst case. The domestic market had some green shoots, but the first season has not kind of pushed the fungicide market too much. The second -- the coming season, there has been some good hope that there could be some green shoots coming in within this segment or the whole segment from the domestic market. And as the season open up for Latin, North America and Europe, we might see some demand evening out, but prices might take a little bit longer to still come back to the previous level. So extremely challenging market conditions which we are facing in Vegetable Oil segment. So -- and it might take another quarter or a couple of quarters for us to get back on the margins, which these products were fetching us historically.

So you talked about the overall -- you say in last couple of quarters, you already received amount of capacity adjustment happening. Still you're kind of seeing your current prices -- players not making any money at the contribution level in exports. So what is the level of overcapacity you are seeing in the marketplace? And other than China, I say, in last 3, 4 years, have you seen any other capacity? Or have you seen increase in number of players in the overall zones, space?

I think that's the biggest question which all of the companies are toying with, how much amount of excess capacities are there in the market? And that's why the destocking, which we are seeing. So I think we also got the assumptions wrong as we got into this year. We were thinking excess capacities could be 20%, 30% of the total global market. But what we are finding out is we are almost at 60%, 70% and still we are talking about destocking. So it would lead me to believe that almost 1 year, 1.5 years long of stocking has happened with the onset of COVID period and due to the supply-demand shock over the last year, 1.5 years. But again, these are just based on our analysis or our position right now and very difficult to comment anything beyond this.

Okay. Just two more questions. Again, there's no -- other than the Chinese players, there's no change in the number of players, neither from India or outside India or China, and the sorts. Do you see any -- is it more new players have entered the space in the last 3, 4 years? Or they're the same players with maybe the expanded capacity from existing players?

Those new player, we can confidently say at least in this segment, China -- January when they came on board, there's been increase in their capacities, particularly for the export market because I think they came up with a strategy that they have to just flood these markets on whatever demand that is out there by slashing the price point. So they've increased the capacity start time because historically, a lot of these China plants are running at tower utilization. But after that, I think what we have also picked up is a lot of these companies have also cut down or curtailed on their capacities now. So slowly and steadily with the destocking happening, the supply and demand situations are returning back to the original position as we have seen historically.

And the enterprise CDMO mix, if you can just give for H1 on this quarter. And in CDMO if you can just give some more color in terms of how many molecules and how many customers we currently cater to, existing, what we have -- what else we have?

I think, historically, what guidance we have given is 3 or 4 new molecules every year is what we kind of work with the target. With the new R&D center coming, have bumped up to the new molecule target to almost double, and that's the goal which we are working on right now. So we plan to have 6 to 8 at least molecules at any point of time. So that 20% to 30% of that, we could easily commercialize year-on-year basis. So that's the goal or the plan which we are working on.

CDMO enterprise. And also in terms of the existing business, which we already cater to, how is it spread in terms of the number of molecules or customer base?

Yes. So we could even connect offline for more details or discussions on this. On the existing one, as you clearly know, we have had authentic molecules, which are in different stages of scaling up. So there are a couple which are almost at the stage of commercialization. There are others which are almost getting to the stage of commercialization over the next 1, 2 years. But we can take this offline in more detail.

[Operator Instructions] The next question is from the line of [ Jagadish Sharma ].

This is [ Jagadish ]. I have one doubt on Astec new plant. What is the timeline for getting it commissioned? And what is the peak capacity, which we can do? And what is the topline and EBITDA margin we can get there? Can you please clarify that?

Yes, on herbicide plant, the second herbicide plant has been -- from the capacity, size perspective, it is exactly the same as the first one. And our guidance remains the same as we had put it for the first herbicide plant that we would fully utilize this plant in 2.5 to 3 years with an asset turn of 1.6 to 1.8. So we stick to those guidelines as we commercialize this second herbicide plant. And we are working -- our teams are doing a great job on commercializing or bringing it to potential commercial levels over the next 3 to 4 months. So we still keep that indication that by end of this financial year, we should be able to commercialize our second herbicide plant.

So what is the topline margin that you can generate?

We normally do not get into those details. But as I mentioned, if you are bringing in INR 100 crores, INR 120 crores of investment, if you look at the asset turn of 1.6 to 1.8 and CDMO business roughly 5% to 7% higher contributions as compared to enterprise. So you could do the math yourself there. That's how we kind of look at it at a very broad level. But obviously, our goal is to bring in the molecules wherein we could have maximum asset turn coming from our plants and, obviously, fetch the maximum margins and utilization. But that's the baseline these people got.

Yes. Last question, you have mentioned that you are expecting CDMO business to grow 25% to 45% year-on-year. This is what we can -- like can we take this for the next 3, 4 years or 5 years? Or you are mentioning it for the next 2, 3 years?

See, at least for the next 2, 3 years because you will also appreciate we were growing from a very small base. Two, 3 years back our numbers were in only 2 digits less than INR 50 crores, INR 40 crores. So initially, you could easily double it up and you could grow at 40%, 50%. But then from that base, we get to higher than the industry growth rate numbers. So we can now see it's growing at 10% or 12%. We'll aim to grow at 15% or so. That's how we see it from the growth perspective.

The next question is from the line of Rikin Shah from Omkara Capital.

So I just wanted to ask on the CDMO end, what kind of molecules are we now being able to target with the new R&D coming in? And earlier, we were targeting $10 million to $15 million proprietary generic molecules. So now in terms of the current basket and the new one coming in, like how -- does that change?

Sorry, I missed out the last part. You mentioned earlier, we were targeting $10 million to $15 million?

Sized proprietary generic molecules. And now with the new R&D coming in, does that change, the size of the molecule that you are targeting?

Okay. See, one is on the size of the business or the size of molecule, yes, historically, we have been -- we haven't had a proven molecule or a CDMO project, wherein we have looked into large volumes, scaling up to, say, thousands of metric tons. So now with the new R&D center, we definitely are in that position to even focus or target those molecules. And that's at top of our list, to get some of those molecules in our kitty. So that's to answer your later part of the question. Your first part of the question was what kind of CDMO business? At a very broad level, there are three components of CDMO business which we are targeting based on our new R&D centers. One is with the innovators starting with the contract development, holding their hand, right up to commercial phase. So that's one innovative pipeline business, which we are targeting. The second one are some of these enterprise products or generic products, which are to be licensed out by the innovator. We could be either exclusive partners or one of the few partners from these innovators. So that's the second pillar of our CDMO business. And then third is one-off unique chemistry business coming in from innovator either in the enterprise space or could be the innovator space. So I think those are the 3 different categories of CDMO business, which we are targeting across the innovators. Historically, Astec has done a good job in developing relationships in Japan. We have further deep dive into it. We have recently increased our foot strength in Japan as well to get closer to our customers in Japan with a local presence. And then we have also actively started working on CDMO players in the western geographies, in U.S. and Europe markets.

The next question is from the line of [ Manish ].

First of all, congratulations for a good set of numbers. Sir, my question is to Balram sir. Sir, can you tell me how much growth can we expect in the oil palm business in terms of mature plantations, if in acreage, you can tell?

So there'll be two phases of growth if you talk more long-term. So we will have close to about 8%, 9% organic growth in FFB arrival and about 2%, 3% added to it because of our productivity improvement initiatives through our one-stop shop called Samadhan, proper fertilization, proper management. So next 3 to 4 years, you will see a 12% to 14% CAGR as well as FFB arrival. With the start of NMEOOP scheme last year, we have upped our game in terms of area coverage. In FY'23, we were covering 3,500 to 4,000 acres -- hectares net, and from this year onwards, we'll be covering 10,000 to 12,000 hectares net because we got more allocation in Telangana and Northeast. And to give you a flavor is that our industry capacity in the first half of '23 was about 1.2 million. And today, it is about 3.2 million seedlings. So you will see a growth -- big growth coming in when these plantations come into production 5 years from now. So 12%, 13% will come to 17%, 18% in 4, 5 years.

And sir, how much area is matured? Just a flavor of that. How much area is exactly generating revenue?

So about 60% of our area is mature and about 20% is between 4 to 8 years and about 18%, 19% in 0 to 4. But this segment of 0 to 4 will grow in a big way from next year on -- from this year onwards, actually, FY'24 onwards.

And sir, Crop Protection business is doing quite well. I'm just concerned if margins are sustainable. Do the margins which are showing right now, are these margins sustainable for the coming quarters also here?

I think it also depends on season. I must say that we had very good season for our in-house product, particularly Hitweed and Hitweed Maxx, and we broke all records. I think one of the reasons is that it rained on time and it did not rain on time also. Because plenty of rain, we used to have a problem that ended not raining on time. And then it rained, it rained a lot so that the harvest could not go for spring. So we were a bit lucky here. So we had a very minimal return. The other big thing happened was this s Gracia proved to be a blockbuster product. We were left with 0 inventory at the end of the season. And most of the sales was either on cash or on very control credit. So I think a lot of things have gone right. We would like to believe that with the introduction of new molecules, year-on-year we will be able to probably keep the ballpark margin same in time to come. Having said that, I must also use a caveat that it is also dependent on weather.

For next half, can you just tell me how much the business is spreaded in first half and the second half of the year, like for last 2 quarters?

Yes. Just hold on. First half used to be 3/4 of the business. With 2 more molecules, first half will be subsidy like 60%. And second half will be about 40%. And my sense is that in case Rashinban gets full -- we get more label claims and we get to full potential, it might become 50-50.

Last, the direct procurement, what is the percentage there? Have we increased some percentage in direct procurement of the milk there or not, sir?

Yes, yes. Yes. Just hold on here. We can give you exact projection. So in H1 FY'23, direct procurement was 19%. In H1 '24, it is 28%. But this is focused, I'm telling you. Most probably next year H1, it will be more than 40%. I won't be surprised if it touches 50% also.

Are -- according to our gross margins, according to our peers in the particularly dairy business, sir, or there is something left in?

So there are 2 things which we should keep in mind. One is the level of value addition and scale. So if people will compare with our Hatsun, Heritage and Dodla, all of us are bigger in scale as far as we are concerned and Hatsun has a decent amount of value addition. To just to give you a flavor that Hatsun is about 29% gross margin. Heritage is about 18% gross margin. Heritage gross margin has dropped because they sold some bulk also. So maybe they will be at 22%, 23%. And Godrej is about 22%. And this quarter, that is Q2, we have reached about 21.2%, which is a 5.3% jump over the same quarter last year. In my calculation, there's efficiency benefits coming in. I think on a year -- overall year basis, we will finish between 23% to 24%. And I think next terms of improvement will come from increased salience because most of the efficiency benefits will factor in, in this year.

Firstly, our dairy plants are working right now. So we have enough capacity to cater this demand, sir? Or do we need to put some more capital into the business?

No, no, no. I think that all we did, and I answered all the questions you asked on capital allocation also that time. So we have adequate capacity in both value-added products and in milk. And whatever capacity is needed for some short shelf-life products, hardly cost anything, maybe INR 2 crores, INR 3 crores a year, that's all.

Can you just give some guidance for the top line and PBT margin, sir?

So one thing I must tell you, with our efficiency improvement drive, we have dropped some volumes also in milk and non-remunerative geographies where we were stretched in terms of supply. Now milk cost are very, very, I would say, benign. It was a profitable business for us, but no longer with milk costs and logistic costs both going up. So my sense is that this year, we might grow about 11% to 12% in topline and we will cross breakeven most probably easily by January or February.

Coverage level, the consolidated guidance, if you can provide any on the PBT margin on a consolidated chunk?

If you tell me -- because PBT, I don't think the black box we have with us at LifeSciences. And most of our assumptions have gone wrong in terms of estimates of what kind of inventory over and we have. So I would refrain from making any guidance here because I think what we assume for Astec will be just conjecture. But let me just tell you one thing is that significantly better than last year.

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

Thank you. I hope we have been able to answer all your questions. If you have any further questions or would like to know more about the company, we will be happy to be of assistance. Stay safe and stay healthy. Thank you once again for taking the time to join us on this call.

On behalf of Equirus Securities Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.