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

Ladies and gentlemen, good day, and welcome to the Insecticides (India) Limited Q2 FY '21 Earnings Conference Call, hosted by Prabhudas Lilladher Pvt Ltd. Before we begin, I would like to mention that certain statements in this call could be forward-looking in nature and are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated. Such statements are based on the management's belief as well as assumptions made by information currently available to management. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Prashant Biyani from Prabhudas Lilladher Pvt Ltd. Thank you, and over to you, sir.

Hello, everyone. On behalf of Prabhudas Lilladher, I welcome you all to Q2 FY '21 earnings call of Insecticides (India) Limited. I would like to thank the management of Insecticides India for taking out time for today's con call. From the management side, we have Mr. Rajesh Aggarwal, the Managing Director; and Mr. Sandeep Aggarwal, the CFO. First, I will request Mr. Rajesh Aggarwalji to discuss about the company's results and key industry highlights for quarter 2. And then we can start with Q&A. Rajeshji, if you can take it forward?

Yes, sure. Thank you very much. I, Rajesh Aggarwal, MD, Insecticides (India) Limited, again, take this opportunity to welcome all the participants to this Q2 conference call. So as you know, friends, the country has seen very good rainfalls in the beginning of this Q2, and the expectations from kharif season were very, very high. But somehow it was a continuous rainfall and many of the areas of the country suffered, particularly the eastern zone due to heavy floods, particularly Eastern UP, Bihar, Assam and other northeastern states. And then there was, again, flood like situation in the dry crop areas of Central India, like many areas of MP, Maharashtra, they suffered due to excessive rainfalls. And this excessive rainfall continued firstly in North India and western part of the country, and then also in southern zone. So what happened was that many of the sprays, which were about to happen, they got missed. So despite of having good rainfall, the opportunity to use pesticides lowered a little. So we can say there was a loss, but still, it was a good season, I would say. Coming down to the company's performance in this quarter. A decent quarter, full of challenges because there was lack of movement of the people. The scare was there across. We had to face in the plants, in the fields because the people were not able to work the way they used to. The people who used to travel 5 days in a week, they were hardly traveling for 3, 4 hours. So they could not cover long distances and could not touch base with the customers. So there were challenges that we were not able to contact our retailers the way we do; somewhere, even the distributors. And of course, our ultimate customer, farmer, it was difficult to contract -- contact him all through. So we were using social media. We were trying to organize smaller meetings nearby to the headquarters of the people, but still, that was a challenge. But despite of such challenging situations, the boys have done a wonderful job. And we have registered a total sales of about INR 456 crores in Q2 of FY '21, which shows a decline of 9.4%. And if you look at the brand sales, there is an overall decline of about 15%, with Maharatna declining by 4% and other brand products by 25%. The institutional sale and export has increased a little by 9% and 5%. And if you look at the overall revenue, the primary focus of this season because, I believe, that this was -- this is not a normal year. This COVID situation has come for the first time actually, and it's not the highway to run on the full speed. So our focus was more on cash sales and higher collections. And I'm very, very thankful for my team that they took this challenge. In these difficult times when selling was difficult, collection was difficult, they have collected everything what they have sold. I mean to say, like we are working on cash-and-carry basis. We are trying to sell the product on small credit in certain areas. And despite of that, we are able to touch this 90%-plus type of sales in these difficult circumstances. If you look at the EBITDA, EBITDA is INR 58 crores with margin of about 12.7% and PAT margin has come to 41%, with the percentage is 9%. The profitability of this quarter is subdued due to the challenges which were there in the markets and also the challenging conditions of COVID. But despite of that, there are certain positive aspects, which I would like to highlight. So we focused on working capital management. And as a result, the overall cash conversion cycle has come -- reduced to 115 days in FY -- half 1 of FY '21 from 184 days in FY '20. I would repeat, the overall cash conversion cycle has come down to 115 days in the first half of the year in comparison to last year, which was 184 days. The company has generated robust cash from operations, which amounts to almost INR 156 crores. Our total debt has reduced by INR 128 crores in the first half -- in this -- and we have generated a cash surplus of about INR 80 crores in the end of September 2020. In light of these strong cash flows, the Board of Directors have also announced a dividend of about 20% in this year, interim dividend. So here, I would like to tell you that in my opinion, this was not the correct time to move very aggressively into the market, but rather, to strengthen our production capabilities and be ready for the time when the markets open up, and we are ready with the product. So with that in mind, we have about 10 new products, which are going to come into the next fiscal and in second half of this year. So we are not going to delay these launches. As we bag the registrations, we'll try to be ready for these products and would like to do the trial launch in this year itself, so that we start getting the advantages. So the plan was to do 10 launches, out of which 3 good launches have come in, which I would like to name in quarter 2 of FY '21. They are Master Stroke, Dominant and Mahir. So these new products have contributed about 10.6% -- INR 10.6 crores to the total sales. And Dominant is receiving a very good response from the farmer. This is a very good product for BPH in paddy and also for sucking pest in cotton. And we are very, very hopeful that this will multiply in the next year. So in the first half, we have launched about 5 products, and we are expecting to launch many more in the second half of this year. And we'll continue this spree because, I believe, with the movement of Make in India, we should be able to bag more registrations. And most of these products are very interesting products, which will be coming out of our R&D and through our Japanese partners. So we are very, very confident that we'll have many big products in the second half of this year. And particularly, within the first in the new fiscal. But I have devoted this time in setting up the plant and making -- like investing in the plants to make this -- for the synthesis as well as the formulation for the synthesis. [Foreign Language] So now I'd like to talk about Thimet, which is our flagship brand. And you are aware that we have not sold Thimet this year. But the good news is, I launched Lethal Granules this year. Lethal is another flagship brand, and we launched the granules. And we received a very, I would say, tremendous response for Lethal Granules in this fiscal. And looking at that, we'll be multiplying the sales of Lethal Granules in the second half of this year and, of course, the next year. And along with this, we are also planning to launch 2 new products, Tadaki. Tadaki is a product which is another granule and which will be coming from our partners over to Japan. We wanted to launch it early, but now it is coming on this Diwali. So in the month of November, we are bringing this product to the market, and I'm very, very hopeful to achieve a good success. And then there is one more product which is cleared by CIRC, but I'm preparing for the technical manufacture. First time, this technical will be manufactured in the country, and we'll be launching this product in the last quarter of this fiscal. So I mean to say, with 3 -- these, the Lethal, Tadaki, Supremo, we will be able to compensate Thimet in full in the coming fiscal itself. So next year itself, I believe, that we'll be able to make 100% whatever we have lost in Thimet, so that will be made good by these 3 products only, which -- out of which, one, Lethal is already launched. Tadaki will be launched in November. And the Supremo will come in the next 3 to 4 months' time. So the conclusion is that the commitment to drive the growth and profitability as we have strengthened our capital structure, we are now well positioned to launch new innovative molecules and improved product mix and head towards the era of growth and higher profitability. So the idea is like we are working on strengthening the manufacturing facilities in both the synthesis units at both the locations in Rajasthan and Gujarat. So we are trying to be ready that as we bag the registrations, we'll launch these products into the market, and we are also strengthening our formulation base at all the locations in Rajasthan, 2 locations; Gujarat, 2 locations, including SEZ. So we are trying to use this time, when we cannot move around in the market in a big way, in strengthening our plants. But I'm very, very hopeful that the second half of this year will also be very productive. And overall, during this year, we should be positive, both in terms of the top line growth and the bottom line growth. With this, I thank all the participants. And now I open the house for the questions, please.

[Operator Instructions] The first question is from the line of Rohit Nagraj from Sunidhi Securities.

Congrats on making the balance sheet debt-free. Sir, a question related to this that now, since the balance sheet is debt-free, how are we planning to use the cash flows, which will be generated over a period of time? So is that going to be CapEx focused or maybe a significant amount of this will go to R&D? Or what are the plans for the same for the next couple of years?

Yes, actually, continuously, the expansion is on our way. We have budgeted about INR 150 crores for 3 years, out of which about INR 40-odd crores for spend in the next year. And this year, again, there is a budget of spending INR 50 crores. And of course, we'll be improving our sales numbers. So we need the working capital also. So initially, most of the funds are going to go in CapEx and working capital. And R&D is my favorite subject, actually. I'm running all my R&D centers in good position, and we are spending decently in these R&D centers and also in the registrations. When I say registrations actually, because it's not easy, I can make a product, but I have to register that product in the country, and then I have to take this registration across the world. So due to this COVID in 4, 5 months, the expense reduced easily particularly on registration. But still, we have a long queue of products where we are working and we are trying to take them to the international markets and trying to register more and more products in the country. So my expense of R&D and registrations and also in, I would say, in developing these products will continue actually in all directions. So majorly, the expense will be here.

Okay. And sir, second question is in terms of the exports target. We've indicated that this year will be INR 100 crores, but probably, we may fall short of it. So what is the plan for FY '21? And how do we foresee for FY '22?

We have not reduced our plan for FY '21. It still stands at about INR 100 crores. We have a lot of orders pending in hand. The international scenario is continuously changing, actually. There is shortage of certain molecules, which I have to supply. I have got the confirmed order. So we are trying to arrange it actually, and we are trying to work. So I'm not going to reduce the targets for exports at this moment. So the target is to cross INR 100 crores, and we wish to grow continuously. So we have got the tasks. So let's look forward how we'll perform in this quarter actually, then we'll take a call. Otherwise, I don't want to reduce the targets at this juncture.

And sir, just last question on the guidance front. So last call, we have indicated for FY '21, we expect to cross INR 1,500 crores net sales, and we expect better bottom line as well. So how do you foresee after the first half is over?

I'll not talk about the number exactly, but I'll say that we'll be positive in top line and bottom line both. So year-on-year, you'll see the growth in the top line. Still, we are in growth despite of the decline in the quarter -- in this fiscal quarter, half yearly growth in terms of total sales. In terms of bottom line also because last year it was subdued, I'm very, very confident that there is no risk on that type this year actually, and we should be positive. So I'm still hopeful.

[Operator Instructions] The next question is from the line of Kunal Sabnis from VEC Investments.

Sir, I wanted to understand this new strategy on the sales -- case sales front, right? And so what does cash sales exactly mean? I mean does that mean absolutely no credit? Or is there cash discount for debtors to pay up? And if you could compare that with what was the policy last year, I mean, that will help me understand this strategy better?

Generally, there are distributors who will buy on cash, and there are distributors who buy on credit. So the people who buy on credit, sometimes they buy in 120 to 150 days. So the payment cycle goes big. So we -- this year, we have tried to control that payment cycle and tried to limit that within 120 days. And in many areas, we are pushing cash sales. So we are trying to move certain estates to cash-and-carry 100%. And we have collected very well across the markets, actually. And we have tried to curb the credit type of distributors. So at many places, we are not supplying material if they are not paying in time actually and if they are delaying more than 90 days, or somewhere, we have given our election up to 120 days, but we are trying to curb it. So I mean to say, we have brought down the credit days overall in our system. And we are trying to push the cash sales actually. Cash sales means cash-and-carry. Of course, when you get cash, you have to offer them the CD. So that CD always exists. But still, we are trying to convert the market into cash market. Last year, I wanted to be debt-free. But this year, the reason is in the COVID environment to collect late is very, very tough because many people are suffering from COVID, my distributors, my dealers, even in certain areas, the staff. So the risk is very, very high. So I didn't want to go -- take that type of big risk in the market. So to reduce the risk we have converted the market into cash-and-carry type.

Right. So as a proportion of your revenue, could you share that what proportion of your revenue could be on cash-and-carry? And how much would that be in the first half, here?

I can say, 50-50. 50% will be cash and carry, more than 50% or maybe 60%. Sandeep will be able to tell it later more better. But more than 50% of the business will be cash-and-carry in my opinion.

And that would be substantially higher than what was in last year, is it?

Yes, of course. It's all-time high.

Got it. And does that mean that your debtors going forward will basically trend lower as a proportion of sales based on this 50%, 60% on cash and carry?

Yes, like if I talk about the second half of the year, then in the second half, our collection is more than our sales. So if I follow that, yes, the debtors will be lower and our collections will be better.

Got it. If you could give a sense about margins going forward, now your this strategy definitely had impacted your margins a little bit. Now if we look for, let's say, next 4 to 6 quarters, do you expect to revert back to the similar strategy of higher credit and more higher margins? Or how should we look at the reduced margins in last couple of quarters to trend going forward?

I got your question, actually. We'll have to divide it into 2 parts. For this fiscal, I don't see any dramatic improvement in the margins actually. So they will remain at this level, and they'll grow a little bit. So last year, second half, there was a decline. So that decline is not going to happen. This will grow. So overall, this year, it will grow. If we're coming out -- if we're talking about the next year, like next fiscal, so for that, we are focusing to replace our product range. So it's a continuous effort to bring the innovative products to the market actually. And I wanted to bring a lot of them this season itself. But they got delayed. So I'm very, very confident to bag these registrations in the second half of this year. And once the registrations come in, so I'll be doing the trial launches in the market. And this means that our product will be ready for next year kharif. So if we are able to launch these products into the market, this will give a dramatic high to the company because we'll be taking these molecules to the farmer, actually new-generation products with higher margins, of course. So I'd see that despite of our policy of cash, our product -- the profitability will not shrink further, actually. It will show an improvement.

So 15% to 16% margin is possible in the following year? Or that would be a [indiscernible]?

I'll not give numbers. It will depend on the registrations we bag and the products we launch and the timing of the product. But it will start showing improvement. So I've not planned exact numbers for the next year yet. So it will be a little difficult, actually. Yes, I think by December, our planning to at least complete [indiscernible] will be planning. So post the festival, we'll start our planning, and we'll be able to share the numbers in the next call, actually, I believe, better.

Got it. And lastly, one data-keeping question. The Nuvan inventory, is it all over? Or it's still -- some of it is remaining?

My internal target is to finish everything in November. So we are just left with a small inventory. I think we should be able to finish it by November itself.

[Operator Instructions] The next question is from the line of Bhaskaran S, shareholder.

Yes. I think I'm audible?

Yes, you are audible, sir.

Yes. First of all, I would like to thank the management of the company for showing a very decent and very good performance compared to last quarter, number one. And I also have the benefit of hearing the management's version of what is going to be there in the future, as well, that a lot of positive things are going to happen in the future, also. So I'm very glad about the research as well as the plan of the company in future. But I have one -- two questions, which is related to the last quarter's results. In the last quarter results, there was a mention about fraud and the company has filed a police complaint against its own employees, and they've also provided an exceptional item of expense of INR 10 crores out of total receivable -- involved receivable of INR 20 crores, isn't it? So I would like to know what is the current status of those cases? Whether the company has recovered anything? And what is happening to the remaining INR 10 crores also? How the company is going to do it? And in such type of -- what is the control mechanism the company has implemented or being implemented to prevent such kinds of frauds in the future because INR 20 crores is a large amount, isn't it? Yes, this is my first question.

Okay. Yes, we had suffered a fraud actually, and the fraud happens when you have a lot of confidence. So this was the old team. I would say, the team of like the Head of Business, who was the major culprit actually. He was working with me for more than 20 years from the inception of the company. So I never believed that this person could do anything actually. And the heads and all the people were very, very old, including the distributors. So yes, this happened actually. I would say it was a one-off thing which happened with us. And we -- like we filed a case against these people. So the 3 people are still under arrest, including the 2 staff, who were the main culprits actually and 1 distributor. So there are -- the complaint was filed for about 16, 17 -- against 16, 17 people. And police is about to file the chargesheet. I have heard that they have filed the chargesheet yesterday, but we have not yet received the copy, but they have not arrested more than 3 people as of yet. Out of balance people, we have made 3 settlements so far, and the contracts are signed to get the money. They have issued us PDCs, and they are going to honor those PDCs or they are going to send the RTGS for those payments. So these agreements are signed for worth about -- this settlement is about INR 4 crores, I believe. And the discount, which we have given is to the tune of about INR 60 lakhs, INR 70 lakhs. So these 3 contracts are signed so far. And the people are there in court. The people are there in like the police cases files. So still the legal battle is on. And we are trying to do more settlements actually. So as the -- we get the opportunity, we'd like to settle the things as early as possible. So we are working on that. So we believe that there may be a hit. For that, we have taken a provision. But I think that we should be able to make better recovery out of this. So as the things progress, we'll keep posted, actually -- keep everybody posted.

And what is the systems you have introduced -- or being introduced to prevent such occurrence?

Okay. So we have done 2 things. One is like we have adopted a control mechanism, and we have strengthened our controls. I mean to say that we have stopped, number one, the credit period is limited -- we have reduced; credit limits, we have reduced; and there are multiple checks from finance and also from the auditors now. And auditors have given certain suggestions actually, which we are going to implement soon. So many things we are doing actually in this direction. Our internal auditors, our statutory auditors and our teams, all are working actually. We are trying to introduce more for -- maker-checker policy, like we are trying to strengthen our security systems, and also, the indulgence of finance department more into sales. I mean to say, the checking of papers and multiple checking of papers and LR verification because the problem that -- came in Chhattisgarh. And Chhattisgarh got an escape because this -- what is the system of the waybill was not there in Chhattisgarh. And from all other states, there is waybill actually. So they took the advantage of this situation actually, which we didn't realize. And we are working. And we are trying to -- like, so far, we were talking about -- we were telling about the balances of the party was there, invoice is raised. But now we are trying to build in a system wherein we'll be able to inform the party if the material is dispatched. So there will be multiple-level information to party through mail, through SMS. And there will be controls in the market actually. And we are trying to check these e-waybills and invoices multiple times actually, monthly on monthly basis. So the audit thing is also strengthened along with the marketing part. So we are trying to adopt the measures so that this type of fraud does not repeat.

Sir, I'm very much glad that we are taking the precautionary [indiscernible]. And it is loss of temptation and loss of money also.

Immediately, we filed -- complaint was filed, and the people were put behind bars. It was just to -- like the important part is monetary loss is there actually and it is the public money. But at the same time, the reputation is very, very important because we are always working across the country and extending so much credit to people. So one incident can lead to multiple incidents actually. But we had to set an example. So we have not taken any relaxation. And we have filed complaints against all the distributors. They are absconding today. Police is not able to arrest them, but we are working on that.