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

Ladies and gentlemen, good day, and welcome to the Insecticides (India) Limited Q3 FY '21 Earnings Conference Call hosted by Asian Markets Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Saurabh Kapadia from Asian Markets Securities Private Limited. And over to you, sir.

Thank you. Good evening, everyone. On behalf of Asian Markets Securities, we welcome you all for Q3 FY '21 earnings conference call of Insecticides (India) Limited. We have with us today Mr. Rajesh Aggarwal, Managing Director of the company; and Mr. Sandeep Aggarwal, Chief Financial Officer. Now I would like to hand over the call to Mr. Rajesh Aggarwal for his opening remarks. Over to you, Rajesh.

Thank you very much. Good evening, friends. Welcome, everyone, to this earnings call of the third quarter of Insecticides (India) Limited. This is Rajesh Aggarwal, MD, Insecticides (India) Limited. I would like to wish everyone a very happy new year, and hope you and your loved ones are staying safe and healthy. So first of all, I will apprise you to the industry scenario. Agriculture in this third quarter of the fiscal year had multiple factors in play. While the sector saw a healthy demand in major crops, there were some unseasonal rains and extended monsoon, which impacted the sales in certain crops in certain states. The raw material availability was very, very tight, and the cost is going up. There are challenges of packaging material. As you know that the plastics, the metals, everywhere, the prices are going up. And also there is a heavy increase in the cost of logistics, number one, due to the international container shortage. Number two, the domestic logistic prices also saw some surge during this period, so which created some pressure over the business. Now coming to the company performance. Company recorded the revenue of INR 299 crores in Q3 of FY '21 with a growth of about 13.8% on a Y-o-Y basis. Total brand sales had declined by 3.7% Y-o-Y. In Maharatna, there was a slight increase of about 6.8% and other branded products increasing by about 1.4%. Institutionals sales saw a jump of about 58%, with export declining by 1.2%. So overall revenue growth was supported by brand sales, institutional segment, but we observed and focused on few aspects in this quarter. Cash sales and higher collection was the major criteria of this year because this is a COVID year, and we didn't want to extend too much credit to the market. So we were focusing around the cash sales always, which means there was lot of sales on generic products or our popular products. And some of the products, which are the specific target for us for Maharatna, their sales is going little slower relative. The marketing teams were not able to move into the market. The regional sales team had limited interaction with the market, which means that, at the ground level, they were not able to contact the farmer. They were not able to contact the dealer the way they used to do in the past. I mean to say that people are not traveling. They are just moving from their house and coming by, by the evening. This means they get only half they are working, whereas they are heavy loaded of working for 12 hours, 10 hours and staying overnight at different places and start the working early morning next day and meeting with the distributor in the evening, which elaborates or extends their contact with the market. And ultimately, it turns out to the -- or increases the sales of our stressed molecules, which is not happening this year. The third quarter EBITDA margin was impacted. The EBITDA is only INR 15 crores, and the margin has come down to 5%, with the net profit of INR 6 crores, which is just 2% of the turnover. The profitability during this period was impacted by various sectors. Number one is the unfavorable product mix. As I was telling you that the higher sales was coming for the demand products and not for the strategic products, so this has impacted because of lack of movement of our team into the market contact, with the farmer contact for the dealer. Both have come down actually, which has impacted the sale of certain of these products. Then also the increase in the prices of raw material and the packaging materials has impacted the profitability. This year, we had a plan to launch 10 new products, out of which we have achieved various products. Like 7 were already introduced, and this month, in this last quarter, we have introduced 2 more products. Though the contribution of INR 5.8 crores has come from these 2 products in this quarter, from the new products in totality, INR 5.8 crores is the total contribution from the new products. But I would say, number one, the registrations of the stressed products still are awaited with key products, and they are in the final stages, which means that we are getting ready for the next year -- for their performance. And the products which have come also, they had a mild beginning because of the lack of travel of the people. So we remain focused for our long-term plan. Development of our 2 manufacturing plants at Gujarat and Rajasthan remains on track. So a little slow, I would say, because my target was to establish them by March. But there may be a delay of about one quarter. Some portions, we are going to start in this quarter and other portions, they will be fully started in Q1 of next fiscal, actually. So I would say that they are laying a concrete background for our backward integration, strengthening the manufacture and doing the -- like bringing the high-value products and improvement of our product mix. And also simultaneously, we are expanding a chiller for export. And this year, yes, a lot of exports are impacted because of lack of availability of containers, the material which is ready is not moving, the orders have slowed. Overall, the world is disturbed. So lot of impacts, but I believe that exports also should behave well in the next fiscal, and we should be able to see a good increase from this segment also, though we have a lot of orders in hand, and they are awaiting dispatches. Somewhere there are product shortages. We are suffering due to that. But still, I think the export will also show a positive result in this fiscal, but though we will not achieve the desired targets, but I believe that export will also grow with our total business in the next fiscal. In the end, I would like to state that 2021 was a challenging period due to COVID-19 as it disrupted operations, supply chain, and there was a delay in receiving new product registrations. Combination of these factors have impacted company's performance, but I would like to assure you that in the fiscal year ahead, we'll overcome these temporary setbacks. And with our renewed focus on new product development, we'll deliver profitable growth during -- going forward. So here, I would like to add that Nuvan will be another big product, which is moving out of our segment, and we were under pressure because we had to finish the entire stocks by December 2020. And I'm glad to say that we could finish the stock. But in the end, we had to sell some stocks on discount sales. So we could not get the desired profitability, but there is INR 100 crores to our sales, which has come out of Nuvan. So this, we have to take care in the next year. So here, I would like to tell you that as a strategy from our existing products, which are already launched by 2021, the strategy is that we'll grow the sales of these products by almost INR 200 crores, or minimum 10% to 12% growth will be coming from these products, which will take care of the loss of sales, which is going to happen due to Nuvan. So this means that Nuvan and Thimet, the 2 products which have moved out of our portfolio, we have taken enough care to bring the compensatory products and bringing the other products as the star products to take care of their position. And along with this, there will be many new launches, which are expected in this year actually because many registrations are in the final phases and will get the registration, and our plants are getting ready to manufacture these products. So the expectation from the year '22 will be very, very positive, and I believe that it will be not only the top line but also the bottom line of the company because all the entire focus of growth is going to be around these new products, actually, which are introduced in the last 5, 6 years, which are belong to Maharatna range and also to the new products, which are going to come from here because the products, which will be the new launches in '21, '22. From there also, we target minimum 10% growth for the company total. And these will be all, I would say, strategic products coming out of collaboration and from our R&D center. So I'm very, very positive on the coming year. With this, I thank you very much for attending, and I open the house for questions, please.

[Operator Instructions] The first question is from the line of [ Shanti Patel ] from Shanti Patel Investment Advisers.

When you told that next year, our plants -- new plants will launch at full stream, so what is the impact [indiscernible] to turnover of the company for the accounting year '21, '22? And first the return on equity employed and the nonequity as on March 31, 2022?

Can you clarify the second question again, please?

What will be the return on capital and return on equity after these 2 plants going full stream? Second question, March '22, what we're expecting as far as the return on capital is concerned as well as on equity is concerned?

Okay. So to answer your first question, the new plants will be coming into manufacturing by June. So in the next fiscal, we have targeted a growth of about 15%. And in this 15% growth, 10% will be coming from the new products, which we are going to manufacture. So they will be coming from the new plants itself. And even the -- some of the older products, they will get manufactured in a better way in the new plants because we are doing backward integration. And in the backward integration, we are making certain basic chemicals, which we were not making in the past. And at certain places, we are improving our production capacity. So overall, I can say, there will be a growth of about 20% plus. But in this 20%, 25% growth will be like missing out Nuvan, the INR 100 crores sales, which amounts to about 8%. So in totality, we are targeting 15% growth in the next fiscal. About the contribution, that I'll inform later basically. But yes, the target is to bring the new generation molecules. So the contribute ROE and ROCE will be good because I don't have the exact number handy. So I'm not commenting here, but we'll give this in writing.

Sir, will it be exceeding 20%?

Definitely, it should. But still, I would not like to comment on this at this stage.

Our EBITDA, that will go up as compared to the current year.

Yes. Definitely, it has to go up actually. It is extraordinary. This was a very difficult year actually of corona, where we are not able to sell the desired products, which we wanted because the products which were launched in last 4, 5 years, which are the part of Maharatna. They have not seen any surge of sales basically. There are many products, which are trailing around 50% of the target actually, so that's a very difficult situation for me to explain. But it is happening in reality. So we have to bring this target above 75%, 80% to reach the next level of growth actually. So that is where in division, and we'll do -- we should be able to do it in next year.

So sir, how I will be able to know whether capital -- return on capital, return on equity...

We will submit that in writing. We'll give it in writing, actually.

No. But -- how I will be able to get it?

You'll get it when we put it in this remark itself. You'll get it automatically. And then the -- for -- particularly for you, the agency can route the -- your mail ID. We can give you a specific reply also for your questions. So I've noted down your question on ROE and growth, so we'll give it on the expansion.

[Operator Instructions] The next question is from the line of [ Rahul Sachdev ] from SEB.

I wanted to learn the policy for appointing the Independent Directors. And why not even a single Independent Director is part of the KMP, key managerial person? Secondly...

Second question, please? Not a part of?

KMP, key managerial person. And secondly, sir, there is a lot of churning before the results, so we -- there is a lot of portion on the integrity of the company. And what are the management steps to improve the investor communication basically? And one more, last suggestion, sir. You are a big company. A lot of these companies either do these calls independently, not through a broker. So I will suggest you to do the calls because not even -- because there are no analyst report in the market. There are no research reports about the company. So if you do a call with one broker, the other brokers don't follow you. If you do it all with JPMorgan or Citi Bank, then maybe DSP, Merrill Lynch or GM Financial or Motilal also will not follow you. So do the calls independently. That is my suggestion as a small investor, sir. And there is a lot of churning in the stock before the result, a lot of people give rewards about that. So is there any insider trading practices? What are the company's policies related to that, sir?

I can just tell you that there are no insider tradings. And regarding the KMP given to Directors, I'll have to see because then somebody can raise the question that it is all internal team, which is becoming the Independent Director, and I'm not sure about this. So since you have highlighted, I'll look at this policy actually, what is the law of the land. And according to the law of the land, we'll decide. So it is possible actually to appoint the Independent Director from the internal KMP. Then you have said that there are -- so your questions are a little tricky actually because for investor communication, how we can go better because, generally, we don't believe in giving false statements to the market or giving any statements actually. And regarding the analyst and research reports, I think that a lot of research reports are in process, but what is the best practice? You can suggest us. And accordingly, we'll see. Since you say that we should not host our calls through the -- so I can have my individual call. That is not a problem basically, but I must understand. So I'll discuss with our IR consultant what is the best practice actually. And since it has been highlighted, I'll take care of these points actually, how to go ahead. And if you have certain suggestions, you are free to give me those suggestions, please.

[Operator Instructions] The next question is from the line of Deepak Kohle from B&K Securities. Mr. Kohle, we are not able to you hear you. Please increase the volume of your phone.

Hello? Is it audible now?

Yes.

Yes. Sir, I have 2 to 3 questions. First question is, sir, we have launched 7 products in the 9 months, and another 3 products is expected to be launched...

Sorry to interrupt you, Mr. Kohle. Can you please speak a little bit louder? We are not able to hear you, sir.

Is it audible now?

Yes. Better, much better.

Yes. Sir, in the past, recently, we have launched 7 products in the 9 months, and another 3 products are expected to be launched in the coming months. Sir, can you please give us the -- out of this, which product is expected to do well and have a great potential?

Are you going to ask all questions together or this is done?

I will -- you can just -- you can go ahead on this question, sir. After that, I will ask another question.

Okay, okay. So essentially, we have launched a product called Tadaki. The expectation from that is very good. And before Tadaki, we have launched a product called Dominant. The expectation from that product also is very good. So these are the 2 key products, which I can recollect from the launches of this year. The rest, I'll have to see what are the other product launches, basically, which are what -- 7 includes Dominant, Avone, Master Strok, Tadaki, Mahir, Milstim Max, Hakama Super, okay. So these are the 2 key launches of this year actually. Because registrations were not coming, there were some other launches. But Avone we might have to change the brand name. But this product is also going to do good because I'm going to make the technical by myself, so I may have to launch it by another name. But yes, the expectation from this product is also very good.

Okay. And sir, what is the net cash position and working capital situation as on 9 months FY '21?

For this, I'll give to the CFO to give you the exact position, but we had become debt-free, and we are keeping the cash in -- means the cash balance in bank. So he can comment net cash flow.

Yes. The net cash flow, basically, for these 9 months, as balance sheet is not required to be published. So -- but otherwise, I will tell you. The net cash position, we are using some working capital limits for minimum utilization compulsion. But against those limits, we are keeping FDR in the bank. So net cash position is around INR 35 crores minus, means we have a [ total ] INR 35 crores in our bank accounts.

Okay. And about, sir, working capital situation, like data days, inventory days and creditor days.

Data day -- overall working capital days are around 115 days. And if you'll see the data days, I think it is around 80, 82 days. And now it is 76 days. The creditor days are around 90 days. And the stocks are around 120, 122 days.

Okay. And sir, my final -- last question is, sir, what is our status on the backward integration?

What is it about? So backward integration, for the backward integration, we are putting up the plant. We are going to manufacture starter [ intervals ], which we were importing in the past. So I think the plant should be ready by June. So we'll come into manufacture for this.

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

Just 2 questions. First one is continuing the previous question, what kind of benefits you're envisaging from the backward integration? What percentage is present and is getting imported? And what are the cost savings which you expect? So maybe what we can see effectively margin push because of this strategy. And second question was this -- some of the products, which didn't do desired performance, they are operating at a lower level, as you indicated, maybe somewhere around [ 50, 55 ]. So what are the strategies which you are taking going forward? And when do you think they can start performing 75%, 80%, by next season or it will take more time or it's likely to not come to the expectation and you should rely on some of the new products?

Okay. I'll answer question one by one. First, the backward integration thing, like by doing the backward integration, you save about 10% to 15% in certain cases because the market is fluctuating. At certain point, the savings can be a little more than that actually. So in the cost of the raw material, and the more important factor is dependency because your dependency on the outside world goes down, and you are continuously producing. That itself gives you the advantage in the market. So for this, we are doing the backward integration because that is the law of the land. India wants to establish Make in India and Atmanirbhar. So based on that Atmanirbhar, we are doing this actually. And the ideology is that we should be self-brand in certain of our key products, so that we are fully backward integrated. We can manufacture, despite of whatever is the international situation. And I see that challenge coming from the international market that someday, the raw materials can be very, very tight. And if we don't do this, then we will be under a trap. To answer your second question, yes, we have already identified that some of our key molecules have not done good actually. These were the stress products, which are now in the last 3, 4 years, actually. So these required a lot of work by the market increase in the sales team. Since the team was not able to move in the market, that I have already identified, that these gaps have come. And in the next fiscal itself, we are going to make a recovery. So in the next 2 quarters, first quarter and second quarter of '21, '22, that will be evident that we are performing well in these products. So I'm very, very confident that this will come. And as regard to products which are not performing, it's a regular process in our company that we are following a tail cutting policy also because I'm not launching 10 products every year and not withdrawing the products. So whenever the products are not performing, we are withdrawing them simultaneously actually, and this includes the older generic products also because wherever we are establishing the newer solutions, we are removing them. And if some by chance, some new product also is not performing, then we do the trial market and we remove that product. So like this year, we have introduced several products already. So out of 7, I can decide. Yes, there might be 2 products which will not continue for the long run. So that is also a regular process because, sometimes, you feel that the child is going to do good, but all the figures are not similar. So at certain places, you may not get a similar result. So we remove those products, actually. We don't get attached to those products. So this is from my side.

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

A few questions. So firstly, of course, the last couple of quarters have been quite disappointing, Rajesh, as you've been trying to explain to us why that has happened. What is the -- how is the current quarter panning out so, Q4?

Like our business is a cyclic business, where Q1 and Q2 are the best actually, followed by Q3 and Q4. And Q4, our -- let me -- you have asked the question, let me reply actually. If you intervene in between, I'll not be able to satisfy anybody, neither you nor anybody else. So first, let me complete, then I'll listen to you. So during the last quarter, I believe that we should be able to match last year figures in terms of top line. Bottom line should be improved because last year, it was a negative bottom line. This year, it should be positive. So overall, giving a reasonable thing to this. So it's not only my performance. We have to look the situation of COVID. I have to run the complete plant. There are more than 1,300 people on our roles, and there are equal number of people on third-party roles who are working for the company. I have to take care of everything. Then there is the market. In market, I give credit to distributors, more than 5,000 distributors, 60,000 retailers. I have to see how is the current situation, 1 year performance, 1 quarter performance. It is only for your market, not for me. Now for the working of my company, actually, I have to see the overall sustainability of the company out of our situation. So I didn't press any staff to move into the market. I didn't press any team to work more than the desired hours. So wherever people want to leave, wherever there were those people have taken leaves, we have done this working with just 70%, 80% total manpower working. So we appreciate it. The top line is positive. It has to be appreciated. But yes, some of my competition has given very good bottom lines actually that I have to appreciate, and I really appreciate that in such difficult circumstances, some of my competition has better -- performed better than us. So that is an example, which is in front of my eyes, and we are taking to take a recovery. So far, we have been the fastest-growing company in this sector, and I want to maintain that actually. And I have to like perform better in the next year. So the target is in front of my eyes, and we are working on that, that how we can surpass the competition and, again, take the title of the fastest growing company. So that is my reason also. And in '22, I'm very, very confident that I should be able to show it. Yes, please.

When you say '22, you mean FY '22 or calendar year '22?

FY '21, '22, whatever it is, actually. [Foreign Language]. I'll talk about first quarter of next year.

Okay. And what is -- currently, as we speak, what is the scenario with regards to raw materials coming in? And is there still tightness in the market? What is the scenario with packaging?

This is -- you are aware that the prices of everything, all things were going up. Since after the budget, they have stabilized. Certain products have come down a little, little as 2%, 3%. They increased by 50%. Things have come down by 5%, hardly matters. All plastics, LGP, PET, all metals, as a matter of fact, crude, everything has gone up, so it has impacted all the products. Itself, this year, the availability of raw material is badly impacted, and we had to depend on import. Like this year, which was a unique year, my imports are going to increase by 30% to 40% because a lot of things, which were available locally, this year, we could not get the supplies, and we had to depend on heavy imports for many of the products, which we are buying locally. So the situation has changed, but I had to satisfy the market. I had to fulfill the requirement of the market. For that, I was used to import. So it has been a unique year actually, where we have performed in very negative circumstances, where China was fully negative. Nobody wants to trade with China. Nobody wants to talk about China. But still China is an important raw material supplier as when it comes to chemicals. So we have very high dependence on China and many other countries of the world. So we had to do that. But somehow, we are maintaining reasonably actually and under these difficult circumstances also we...

It was slightly more forward looking in the sense of what has happened until now is okay. But going forward, what I wanted to get a sense was that with the situation currently there, how do you see the stress? Is this status quo? What was the stress? Has it become better? And the new capacities that you are coming up with, to what extent will they reduce your dependence on imports percentage-wise?

Like we do about 20 AIs or 18 AIs, and we'll be adding another 5, 6 in this year. So the backward integration will be just for 2 products actually out of this. So the backward integration is not going to support me a lot. But yes, it will make me self-dependent in at least 2 products, so which will give us a boost and which will give us a -- show us a way that going forward, we can do backward integration for more and more products. Yes, I would say that since I'm purchasing, I'm looking, so we will have the inventories to catch up the season. And since the cost is not only going up for me, for the competition also, so it will be recoverable from the market. So things look positive, and I believe that the first quarter itself...