Insecticides (India) Limited (532851) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Insecticides India Limited Q3 FY '20 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aniruddha Joshi from ICICI Securities. Thank you, and over to you sir.

Thanks, Aisha. On behalf of ICICI Securities, we welcome you all to Q3 FY '20 Results Conference Call of Insecticides India Limited. We have with us Mr. Rajesh Aggarwal, Managing Director, and Mr. Sandeep Aggarwal, Chief Finance Officer. Now I hand over the call to the management for the initial comments on the quarterly performance. Thank you, and over to you, sir.

Thank you very much. This is Rajesh Aggarwal, Managing Director, Insecticides India Limited. First of all, I take this opportunity to welcome all the participants to our conference call. Thank you very much for sparing your valuable time. So here, I would like to say that we'll be very, very truthful and transparent in whatever we say today, and we always try to be as transparent as possible in all of our results and all our deliveries to the market. So to start with, I would like to highlight about the climate change because there are challenges, which the markets are facing due to this continuous climate changes. There has been an extension of rainfall -- heavy rainfalls when they were required and also heavy rainfalls in the time when they were not required. Despite of that, there was a good season, I would say, good for the brand in many parts of the country due to our reach. We got extension of the Kharif season. And then we also saw this extension happening in the Rabi season. Though there were differences because some people were thinking that the demand will be low, so the institutional sales got impacted. But overall, I have seen a very good effect in the brand business in this total year, I would say. So as I told you that there has been a prolonged Rabi and prolonged Kharif season this year. So talking about our revenues. We have done a total revenue of about INR 263 crores in Q3, as you have seen, and we have registered a growth of revenue of about 22% on Y-o-Y basis. Here, I would like to mention that it has been a company strategy that we wish to focus around our brand sales, and I'm happy to tell you that this year, we are very much in line with our target where, in this quarter, particularly, we could grow our brand sale by about 70% Y-o-Y basis, and it has contributed about 75% of our total turnover. Here, there is one more important mention, that this year, we are moving ahead to cross INR 1,000 crore brand sales. So this is going to be a very big achievement for Insecticides India and the agrochemical industry. There has been a rough situation. Why rough? Because there has been a decline in export and also the decline in institutional business. Particularly due to the global disturbances, Pakistan, particularly for the Rabi season, one of big customer for us. Last year, it had contributed more than 50% of our total export revenues, particularly, the basis of -- the basic sales which we used to do is majorly for the wheat herbicide. So wheat, as you know, is sown in the Rabi season. So the major sales used to happen between September to December month, where we were exporting a lot of wheat herbicides to Pakistan. And this year, it came to a halt because of the policy -- Pakistan did not import anything. So there was abundance of this wheat herbicide, which we've prepared for Pakistan market. And the prices in Indian markets also fell. So there was an overall impact on our business, like, the exports went down. The -- also, along with the exports, the institutional business went down and there was an impact, but still, we could register this increase. It was possible only due to the brand sales. Overall, there is 1 more factor, which we are seeing and that factor is that despite we have increased our sales, the EBITDA margins as well as the PAT margins have [ shown the fall ]. The EBITDA margin is just INR 23 crores, with a decline of about 28%, whereas the PAT margin has come to INR 9 crores, with a decrease of 49%, which is a big number, I can understand. But here, I would like to point out the major reasons for that. So there are 2 major reasons. One is, yes, there has been an impact of export because export did not make any profit due to this impact and also the institutional sales, the profit declined. But along with these, the major impact has come due to the revaluation of the stocks. Because the international market, it was ruined since the prices were increasing for past 2 years, and the trade change in the middle of 2019, so we got -- we started getting the cheaper price for all our purchases in this quarter. So when we purchased the cheaper stocks, the -- due to the IFRS process, so the stocks were again revalued at a fair value. This means, that without impacting the financials, our stocks were revalued gain, and that registered the loss in the books of this quarter, actually. But you know the situation -- international situation is again bad. There has been a heavy coronavirus attack in China, which is, again, disturbing the demand and supply situation in the markets. And I see that the prices have already touched the bottom, and they have started going towards north. This means that these prices have started moving up again. This means that there will be a chance of revaluing these stocks, again, during this quarter itself, and there will be the disturbance in demand and supply situation, which will lead to increase in the prices, not only in the domestic markets, but also in the international markets, which means that our performance for Q4 in this year is going to improve a lot, and it is going to show good signs, actually. And we must be able to come out of the situation what it has come in quarter 3. Now I would also like to discuss about the new launches. We had a plan to launch about 10 new products during this fiscal, we launched about 8. But here, I would like to mention that some of the launches happened in last -- in Q3, particularly, Kunoichi, Chaperone and Bheema Super. Here, I would like to mention that Kunoichi and Chaperone are very promising products. And we hope that they are going to give good business during these 2, 3 months also. And in the next year, you will find a wonderful growth. Similarly here, I would like to mention about the products which we had launched in the last year. We've done a total business of about INR 70 crores, in the last year. This year, we have already crossed INR 86 crores, and this will -- again, in Q4, we are expecting good sales from these products. So this means that all our new launches are doing fine. And this was the year 2019, where we could not bag many registrations and they are lined up, and we are expecting a lot of registrations in Q1 of this year. So this means that this year is going to see a launch of many good, interesting products, which is going to give us the boost, not only into our brand sales, but also in the institutional sales. So I can say that we have a good future. And along with this, we are also starting some activities with Japan, which is also going to impact our international business because we'll be exporting some products to Japan. And once that also [ channelizes, ] then it also has the impact on our export business, immediately, from the beginning of the new fiscal. So I would say that we are fully geared up to face the challenges of the market. And you'll find that this -- we'll make our recovery in Q4. And 2020, is going to be quite -- 2021 is going to be very interesting for the company, wherein, we can, again, imagine, for a growth of about 10% in the top line and the bottom line growth, which we could not do this year, I believe, that in the next year, we should definitely do it. And for this year also, quarter 4, we are going to show a good recovery and from 0.5% degrowth, what PAT margin is showing, we should definitely show the signs of growth in -- for this full year also. Now I'd also like to talk about the 2 products, Thimet and Nuvan. Thimet, we have met last year's sales, and we are on the verge of finishing our entire inventory by March. So this means that Thimet from IIL will be over by March. Nuvan, again, we have met the last year's sales, and rather, there had been a growth in the last quarter. And we will definitely show a sign of growth in Nuvan and we will carry some inventory for the next year also, which should be good enough to last for about 6 to 7 months, in the next fiscal. So we have a target to finish all the Nuvan stocks by Diwali. But there is nothing to worry because these products while growing are going to give good revenues to the company. And we have already worked on alternate products, which are going to be launched in this fiscal itself, so that there is no loss in revenues. With this, I would like to hand over the line to the CFO to tell you more about the financials.

Yes, good afternoon, everyone, Sandeep Aggarwal, this side. As our MD has already discussed about the quarterly results, let me tell you about the [ financial segment ]. As you know the category wise sales, we had again 58% of the insecticide, 30% herbicides, 10% fungicides, and 2% PGRs, these are the combinations. And combination of B2B, B2C and exports. We will get 76% sales in B2C business, 21% of B2B, and 3% of exports. As far as technical in-house versus actual sales are concerned, the sales are around 45%, and the in-house consumption is around 55%. Then as far as category B2 -- in B2C sales, we'll get 50% around Maharatna products and 50% other products. So as far as you see the increase in the segment reporting, we had attained a 30% growth in B2C business, where there is a degrowth of around 16% in B2B business and around 38% degrowth in exports. Net sales in Maharatna category product had also increased by around 18%, though other products in B2C has increased by around 43%. So this is all about the segment sales from my side.

[Operator Instructions] The first question is from the line of [ Nitin Choudhary from Akash Ganga ].

Sir, my question is to Sandeep sir. Sir, I just wanted to understand, in respect of the fair valuation of inventory, it was on account of Thimet and Nuvan. Because I understand in respect of other products, even though the raw material prices have fallen, we were able to pass on the prices to the -- in the B2B -- B2C business, and hence, we were able to protect the margins on that side. In respect of the Thimet and Nuvan, they must have contributed to the decline in margins. Am I right on that side?

No. [ Here, ] I would like to say that the fair valuation of inventory is not on Thimet or Nuvan. As the prices has come down, we have to revalue our total stocks on the current prices. So whatever cheaper materials we had purchased, all those materials has been revalued on December 31, which booked a notional loss of around INR 10 crores in the books on the last day of this quarter. This is a notional loss because when we will sell these products, all these revenues will be recovered at the time of sales.

Here, I would also like to add that the prices of herbicides and some of insecticides were coming down actually, but they already started going up. This means that due to this coronavirus situation, because there was lot of supply and there was no demand. And now it is the reverse. So it has already started going up now.

Okay, sir. So what kind of margins can we expect in Q4 and financial year '21 onwards?

Like we always keep our target of about 10% to 15% growth is like 10% growth on the top line and 15% on the bottom line. For 2021, we'll continue with the same. Talking about 2020, we will see a recovery happening in quarter 4.

Okay, sir. And sir, one question on the KMP's remuneration. I think just -- we were just comparing it with our peer groups, which is around 3%, whereas our company -- in our group, it is around 6%. So any comments on that? 6% -- 3% of PBT.

So in this KMP's salary, have you included all those salary of directors and their commissions also?

Yes, sir. I have included [ Rajeev's sir ], and promoters -- basically, I have included the promoters' remuneration.

We have not seen the remuneration of other peer groups. But yes, what we are doing, we are paying remuneration to our promoters as compared to others, [ always gets lower than the higher grade ]. But yes, we have started paying some commissions to them since last [ 2 ] years. So I don't know whether -- what is the remuneration paid by my peer groups. But yes, we will compare the salaries of the other KMP. I think it will be in the line of -- with my peers only. Maybe due to the sales commission, it may increase. Or as our PBT base is low, so might be that percentage is sounding big as compared to the others.

Sir, can you expect, like, the remuneration to be around these levels? Or is there any further increase that is expected?

No, it will be around these levels only.

[Operator Instructions] The next question is from the line of Aniruddha Joshi from ICICI Securities.

Two questions from my side. Do you see that the entire inventory impact is now behind us. Or do you see any further write-down possibility in Q4 or maybe in FY '21 also. And lastly, where should we look at the tax rate for FY '21 and as well as the closing tax rate for FY '20?

You have asked many questions in one question, actually. To keep it specific and short. For FY '20, I don't see any further loss happening due to inventory sales because, as I already told you, that the prices have started rising already. So not only in domestic market but also in the international market. So whatever feedback we are getting from the international markets, the prices are going up for most of the products. Talking about next year, it will be difficult to say. But there is no -- I would say, because when you say it's a write-down, I mean to say, like there is no stocks which are going to go unsold, like, Thimet we're finishing in this year, and Nuvan will be finished by Diwali of next year, actually. So there is no write-downs that way. If that was the question. And the other question I've missed, actually. What was it -- as far as income tax rates are concerned, the rates of income tax will be somewhere around 24% to 25% during this year as well as in the coming years.

Sorry, sir. 25%...

Roughly about 25% plus/minus. We will decide that do we need to take some rebate or [ straight into ] 25% concept. We'll take our call according to our situation. We are putting up a new plant in SEZ area. So if we successfully do that and claim the exemption, then we'll go for the exemption route. Otherwise, we'll go straight [ vanilla ] 25%. So at the moment, you can estimate 25%. But definitely, we think we should be able to start our SEZ plant and we'll go for an exempted route.

[Operator Instructions] The next question is from the line of Rakshit Sethi from Fair Value Capital.

We joined the call a little late. So to start with, could you give a little more color on the reason for the sharp decrease in volumes during the quarter?

I think I very, very well explained that there is no technical decrease -- or I would say, it is just the technical decrease, because the stocks have been revalued, which has impacted the profitability. The profitability of our brand was good. But yes, the profitability from export declined because Pakistan was a major market for the wheat herbicide, which did not go a single kg to Pakistan because of their policy. They stopped purchasing from India, they put a ban and that ban is still in force. So that entire season finished. When that season finished, so we have the opportunity to sell it into the Indian market. In India, the prices declined because everybody knew that the stock is in excess. So in this quarter, in particular, there was -- the profit from the exports and also from the institutional business declined due to this negative aspect. Regarding the brand business, brand business is going very positive. There was no decline in the earnings from the brand. It was going very good -- it is going very good, actually. And now since the situation has already started reversing, so there is not a single chance of further decline, and we are going to make a recovery in Q4.

Okay. So can you please quantify how much was the impact on account of inventory revaluation during the quarter? And how much is the impact on account of margins for institutional sales?

The CFO already explained, about INR 10 crores was the impact of revaluation and about INR 7 crores to INR 8 crores was the impact of institutional business and export. So total about INR 18 crores.

Okay. And over the last couple of quarters, we've been consistently been getting guidance of doubling of exports from the management. So what we were told was that from the current levels of about INR 60 crores, one could expect to see a number of between INR 100 crore and 120 crores for FY '20. You don't seem to be anywhere close to that number as [ our ] date. So firstly, what has been the progress on the export business? And what are now our current estimates for how we intend to close FY '20 and FY '21?

Okay, I'll go step-by-step. Pakistan was the largest market last year, which contributed more than 50% of my total export. So since it is gone and it is dry now, so it is going to definitely give an impact to our business. We were trying to make the recovery from the other markets, but today I've reestimated. So our export would be in the range of INR 70 crores, we'll not be able to achieve our target of INR 100 crores. So export, in the complete year, is going to take a hit, and we'll end up with about INR 70 crores export business this year. Regarding the next year, next year, again, we'll keep the target of doubling our exports because we hope that Pakistan will reopen -- even if Pakistan don't open, then we have opened other customers, which we'll be working. And I also told that we are going to start our business with Japan. It has -- it got delayed a little. We are expecting some contribution in this quarter also. But now it is going to be minimal. But from next year, we expect that our business with Japan is also going to start, which will also boost our exports. So we'll maintain our target of doubling our exports in the year 2021. But yes, the base from 100 has come down to [ under ] 70. So we can say, at present, looking at the current situation, let's hope for a sale of over INR 150 crores. But if Pakistan opens up, then again, we can gear up for INR 200 crores.

Okay. Now shifting the focus to what's happening currently in China on account of corona. Could you give us a little more color on what percentage of our raw material is sourced from China? What is our current level of inventory? What kind of -- I mean, on margins, what kind of impact does the management foresee if this situation is to continue? And let's talk -- let's presume that this lockdown in China continues, well, till the end of February, maybe till March, what kind of a scenario you'll be looking at?

Okay. So let's keep your assumptions in mind because you have assumed that the situation is going to be worse till February and March. So what does that mean? That means that the goods from China will not be coming easily. And there are different governments, which are issuing different advisories. And even the Indian Government has issued the advisory that whatever comes from China, it has to be quarantined. China itself is quarantining its people, its material, this, that. So this means that there is going to be a tricky atmosphere for at least 2 months till the things settle down. This means that in these 2 months, there will be a huge shortage of products and whatever you are preparing for the next season, the prices are going to take a plunge because of demand and supply gaps. So in the short-term, I see the increase in prices, the resolution of all the stocks, whatever you have in hand, and you should be able to sell everything at a premium. That is my assumption for the short term. For the long-term, many new units have started already in China, but China is shutdown from almost middle of January, and the holidays are getting extended in many parts of the country. And particularly even if the people are trying to come to work, they are, again, put in quarantine for 2 weeks, which means that February at least units are not going to start. But once the unit starts full fledgedly and China is out of corona issue, then April, again, we can hope that with full-fledged production, the prices will -- may come down, but again, it will depend on demand and supply situations. So overall, next Kharif season is looking tough. And a reasonably good opportunity here because there will be no opportunity to hoard, means, you cannot bring -- get large volumes. So whatever you have, you have to sell that, at a good price.

[Operator Instructions] The next question is from the line of Chirag Dagli from HDFC AMC.

Sir, so when do you start procuring for kharif of 2020?

Actually, there is no set deadline. You have to see that what is the situation. And since we produce lot of AIs, we start selling -- I should use this word, yes, we start selling from the month of December. Because many companies start procuring because they have to make for January, or for -- and we also sell in first quarter because, particularly, the multinational companies, they have the calendar year closing, they start their purchases. And if there is a slightest of variations in the market, the other companies also start. So for us, we start making our agreements or buying the things in the month of October itself because October, there is the China [ Fair ], where we participate, and we sign many contracts and it starts from there. But again, February is a very important time where we have another exhibition, which got canceled this year, where whatever balance is there, we signed and try to cover the entire Kharif season. So today, I can say that I'm covered for at least Q1, but there is no coverage for Q2, and we have to see how much quantity of that coverage comes because due to the advisory issued by Indian government and also due to the advisory issued by the Chinese government, there are going to be logistics issues, which are creating some problem, and we have to see with the -- the time passing by that how it leads to the supplies and clearance of the goods which come.

So what percentage of our raw materials that we buy comes from China, sir?

If we talk about the value, the value is about 30-odd percent, CFO can make it correct. But the problem is that, they are the basic raw materials. Because all the other things are coming from India, the solvents are coming from other countries and some basic chemicals are coming locally. But if there are no basic chemicals, it is very difficult to manufacture many, many products where there is international dependence. Wherever we have crossed that international dependence and everything is Make in India, only those products we'll be able to make, once the supplies are not resumed from China in that case.

There is no substitute even at a higher price for these 30% [ by value ]?

Again, these are all tricky subjects actually. What has happened that in the past, China was supplying many products at a competitive price. So many companies stopped, but whenever there are such situations which arise, so a lot of local manufacturing also starts. So there will be something. But overall, yes, there will be pressure on supplies. So supplier pressure means price rise and shortage.

Fair point, sir. And you talked about these product launches in Japan. Can you give some more color around what these products are? Are these already generic opportunities? And how much have we spent for the registrations? What is the addressable market for these products?

I would like to keep it simple, actually. We have signed to supply 1 product to a company, and we are working on that and that supply should start soon.

So that partner is going to distribute the product?

Yes.

Okay. And this is a -- I presume this is a generic product, sir, is it right?

It's -- I'm doing a CrAMs activity for the other company. I'll not be able to throw more light till the business practically starts [ in a big way. ] So it will come into public review by April, I believe.

Okay, sir. This is an innovator company, sir? The partner?

Company is innovator. Yes.

Okay. And activities restricted to the Japanese market?

Yes. At the moment, yes. But later on, I'm going to register this product in India also.

Okay, fair point. And then you talked about -- you said, last year, new launches did INR 70 crores; for 9 months, you are doing INR 86 crores. This is products that you launched last year, correct sir?

Yes.

Over and above this, the ones that you've launched in this year, which is about 8 of them, will add to this...

Definitely, they are going to add. Actually, the progress has been very slow because many of these good products launch -- saw their launch in Q3. So, so far, the contribution is as little as INR 20 crores. We can hope to double it actually in this fiscal. But we can believe that next year, again, these products are also going to rise because the launch was very, very late for many of these products.

And sir, this -- historically, we've had a very solid -- very strong kharif and rabi has been slightly weakish. With all these new launches, how do you think this ratio, the 70-30 ratio, which is also an industry issue, but for IIL, specifically...

Difficult to -- yes, it's a tricky situation. Why again tricky, I'm using the word, because this year, the weather conditions have changed in totality. The Kharif season, which ends generally in August end, it lasted till October. The Rabi season, particularly for the herbicides, it ends in December end, it lasted till January end, rather in February also, I have sold some quantities of the herbicides, which is not our routine. So the seasons are taking the extension and now we have to evaluate this extension has happened only particularly for this year or the weather cycle is going to change. So it will depend how the weather behaves next year because this year, we have seen excessive rainfall. So due to the excessive rainfall, there was a tremendous demand for herbicides. And then also, some -- initially some of the insecticide sprays went out because there was no chance to spray. But later on, insecticides and fungicide sprays have come in, in many parts. So there is a complete change in weather cycle, and it will depend on the weather cycle, the exact situation. But yes, always the Kharif season will remain big. If not 70, then 2/3 is kharif, 1/3 is rabi, that situation is going to last.

[Operator Instructions] The next question is from the line of Rishab Bothra from Sharekhan.

Sir, just wanted to understand, the capacity for Thivan and Numet (sic) [ Thimet and Nuvan ], which will be released as we'll not be manufacturing those products. Where will these capacities be utilized?

Okay. The Nuvan plants are already shifted to other molecules because we were making the AI for Nuvan. We used to make DDVP Technical. So we are already adding the new products. And some of the capacities were already increased last year. There was a product shift. Regarding Thimet, some of the capacity are still ideal. We are waiting for some of our registration of granules, new granules. Last year, we started focusing around methyl granule, but we had to launch 2 more. So these 2 clearances, particularly for my 2 brands, I'm expecting now, though the expectation is March, April. So we're keeping our fingers crossed. So when we receive these registrations, we'll start manufacturing these 2 granules also in this fiscal and utilize the facility.

[ And then in ] tonnage terms, what will be our utilization as of now? And what would be the spare capacity?

Like -- in fact, CFO will be in a better position to give the exact percentages. But regarding the formulations, we are trying to use the facilities as much as possible, explore them. Granules, yes, I have got a spare capacity because Thimet has gone, which was giving the big numbers to us. So I can say that my granule capacity, if I total in terms of volume, I see, so we have come to half of the granules sales in this fiscal. So that way you can say, 50% is ideal in this year 2020. But 2021, I see an improvement in this utilization by launch of these new granules. Regarding the technical plants, since there has been the swipe from one technical to another technical, so, yes, the overall quantities are going to become low. But still CFO is in a better in a position to highlight. Sandeep, please, would you like to give the percentage now?

Sir, it is better if you want a special percent, then I have to check it [ product-wise ] and only then I'll be able to give it.

I just wanted to understand, sir, what could be the delta of revenue, incremental revenue, which could come in and by what time from these current capacity available to us? And since you mentioned you are expanding in SEZ zone. So by then will that plant come up and what is the revenue potential from that? And what is the CapEx will be incurred for that particular plant? So thus -- these 2 questions.

It contains many questions, actually. So regarding the formulations. Yes, we are putting up SEZ plant. So there, we are expanding in 2 phases. And the first phase should be completed by March, and we should start this plant. And the second phase is going to come in the next year, actually. So this is the situation of SEZ. The spend is about, Sandeep, INR 40 crores?