Nath Bio-Genes (India) Limited (NATHBIOGEN) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and a very warm welcome to the Nath Bio-Genes Limited Q1 FY '22 Earnings Conference Call hosted by Go India Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Niharika from Go India Advisors. Thank you, and over to you, ma'am.

Thank you, Ali. Good morning, everyone, and welcome to the Nath Bio-Genes' earnings call to discuss the Q1 FY '22 results. We have on the call with us today, Mr. Devinder Khurana, CFO; and Mr. V. N. Kulkarni from Research. We must remind you that the discussion on today's call may include certain forward-looking statements and must be, therefore, viewed in conjunction with the risks that the company faces. I will now hand over to Mr. Khurana for his opening remarks.

Good morning, ladies and gentlemen, and thank you for joining us today. I hope you have seen our earnings presentation, which was released yesterday. You will remember our strategic shift towards derisking our business model and diversifying our business model, which is now currently working. In the first quarter, Q1 FY '22, the non-cotton and non-paddy portfolio has contributed to around 22% of our revenue. Cotton and paddy volumes have grown at 8.5% and 8%, respectively. Other crops have grown by a much higher 27.5%. I'm pleased to say that we have surpassed FY '21 cotton sales in the first quarter only. Cotton sales provision has appropriately been made, which is likely to be reduced in this quarter. As you heard from our Managing Director in the Q4 FY '21 call, we are augmenting our product line constantly, and new products have also been launched in our PMS segment, that is Plant Nutrient Supplement. We are gearing up for the upcoming rabi season. Vegetable sales have lined up. Mustard and wheat have been stopped. Win-Chi-Win, as always, is a lovely product, and we have added 2 more products in the same segment. While the second wave did not impact much at a company level, the kharif sowing was certainly hampered due to the second wave of COVID-19. Company took extra efforts to normalize processing and logistics. The cotton seed industry continues to face a major headwind, a record high of 60 lakh to 70 lakh of illegal cotton seeds have been sold in the season. Industry lobbies are demanding strict action from government in this area as illegal cotton seeds have negative environmental consequences. We are also working with various government bodies and regulators to overcome these menace. I will now briefly talk about the financial performance. Our top line has grown by about 11% and EBITDA by 10% on Y-o-Y basis. PAT had also increased by about 9%. In terms of working capital, the inventory levels have reduced pursuant to the sales. Debtors have increased pursuant to the sales and are being realized. This is regular for the first quarter year after year. Before I open the floor for questions, I would like to discuss the FY '22 outlook. We expect to deliver a top line growth of around 18% to 20% in FY '22. We will maintain our EBITDA, PAT and contribution margins in the same range. With this, I will now open the floor for questions. Thank you. Thank you very much.

[Operator Instructions] The first question is from the line of [ Preeti Singh ] from [ Value Investments ].

Sir, I have a couple of questions from my end. Sir, could you shed some light on the working capital situation? Like the inventory has improved, but when do you foresee your positive cash flow?

Ma'am, I'm Khurana, of course. Let me handle this. Our working capital, like it was also clarified in the last 2 or 3 meetings -- con calls, the working capital inventory always goes down in the first quarter because of sales and the debtors go up because of the sales, which they get realized before H1. So as a result, we have been giving positive cash flow last year, year before that also. And this year also, we are very sure of positive cash flows. The fund situation, like I clarified last time also, becomes definitely more liquid once the H1 closes.

Okay. And then my other question is, what is your opinion on the upcoming rabi season?

What happens is in rabi season, we go for field crops like mustard, beans, some part of cotton, some part of paddy; then, mostly the sales come from vegetable and our nutrient supplement segment. Vegetable vertical is performing reasonably well. We expect around 30% growth in these both segments this year as compared to last year. So we are geared up for rabi. Although that will start after about 3 months, we are still closing the H1, that is, the kharif season returns and realizations. But we are confident about rabi also. No problems in that.

The next question is from the line of Nitin Awasthi from InCred Research.

Sir, couple of questions from my side. Firstly, would just like to understand what has been the growth in the cotton segment for the industry? If you can give a rough percentage because you have grown by 8.5 percentage, which seems to be a very good number given that the infiltration by illegal seeds is very high this time around?

As far as cotton growth in industry is concerned, I would request Dr. Kulkarni to enlighten you on that. He is the chief.

In fact, the cotton growth of [indiscernible] industry because at some places, the cotton planting has been reduced and the illegal cotton has been encroached into legal sector. Some of the major companies, which have got into it are because of this illegal cotton. But we are not into it because our area of operation and our product segments were at a different place. So the major companies have got really big at it, but we are not into that because just we are not into that space, where this illegal has encroached. So our growth is in line with industry, but when compared to some major companies which are not grown up, you may have [indiscernible].

Okay, sir. Sir, second question would be on the accounting front. Although there has been a revenue growth of 11%, there has been a decline -- or not a decline, there is -- gross profit could not keep up to that rate because of the gross profit margin reduction. If you could just comment on why is that happening in spite of the mix changing towards non-cotton, which should be more margin accretive?

See, when I said non-cotton, we always meant like this -- so I'll have to continue to reiterate at least for 3, 4 more con calls that we are stabilizing in cotton, we are not expecting exponential growth in cotton. Now when we're talking of non-cotton and non-paddy products, the field crops are growing. They come with a reasonable margin. The major margins come from vegetable and from PNS, which comes in H2. So when you compare our overall GP margin of the whole year, that will be better than last year. But if you compare in this quarter, definitely because we are talking of reasonable margin products and not high-margin products, that is why there is a slight fall in the GP margin. But it's not -- it's natural and it's regular.

I'm comparing with the Q1 of last year.

Yes, I agree with you. See what happens is that certain costs have gone up, certain production areas have been enhanced. So that takes away a little more. Then certain old inventory has been used, it might have come at a higher cost. But overall, we are always confident, and I keep maintaining that the GP margin at year-end will always be around 52% plus.

Okay, sir. Noted. Because this seems to be a big hit because if that was not the case, your PAT would have been substantially higher.

Yes and no, but then it is what it is.

[Operator Instructions] The next question is from the line of [ Priya Shera ] from -- an individual investor.

I'd just like to get your comments on the fact that you have loans and advances of roundabout INR 150 crores on the balance sheet. Could you just let us know that what are these loans and advances?

See what happens is, there was a time when seed industry used to purchase on delayed credit and sell with advances. The trend got reversed few years back. Today, the seed industry has to give advances to ensure that the production takes place on time every time. Now these advances are given to a string of growers and farmers who are taking our production on behalf of the company. Today, no company can ensure the production and quality production to that matter, without giving advances to people who grow cotton, paddy and all the crops for that matter. So these advances will grow, if we want to grow the top line in the coming years. We need to take production this year for next year's sales. So advances go to ensure that the production takes place for the company. These advances will be realized against goods taken back as -- production taken back from the growers and the farmers, and they will be adjusted against that. So giving advances is normal. That protects my business for the future.

So in some instances, we should look upon these as a core component of working capital?

It is definitely a part of working capital.

Okay. That helps a lot. Second question, most of your end markets, the crop markets are not really growing that fast. If I look at rice or cotton, annual growth rates of 3%, 4% are roundabout as good as it gets. In a market like this, how is it that you grow? I mean what is it that you have to do in order to gain market share because the market itself has limited growth?

Let me partially answer this, and I will request Dr. Kulkarni to let you know more on that. See, basically, what happens in seed market is that only the product calls. If you have a good product, which gives a good realization or a good yield to the farmer, catering or countering the disease effects, then invariably you can continue to -- it's like iPhone still growing in a declining mobile market. But anyway, more to that from Dr. Kulkarni, please.

In Nath Bio-Genes, we have -- in the last 2 years, we have separated product development department, earlier which was associated with R&D only. With that what has happened, our introduction of product after light evaluation at 8 stages of crop evaluation, we are releasing now, meaning that the kind of products we are releasing going to realize more value and volume in the coming days. So as Khuranaji said that is product which makes it. So whatever products we are having, we are now putting in the market. In fact, there are some traditional products which are not even going to decline because of their high added value in the farming community and the society, especially in the rice and even a few cotton hybrids are there. So this is a function of that, and it is going to improve with a period of time.

So basically, new product introduction is key to keeping sales growth going?

Yes. Yes. It is always the same growth.

So do we have a framework where we say that these -- this is a cotton seed. These are its 5 closest competitors. These are the 4 or 5 parameters on which we've benchmarked to our competition. And then you know where you stand with regards to people who are competing for that market, is that kind of framework used?

Yes. There is All India Coordinated Cotton Improvement project that conducts the trial of all BT cotton hybrids, and they will rank upon based on the yield levels observed across the locations. These Indian Council of Agricultural Research trials are conducted by the government people. And I'm very happy to note that for the past 2 years, we have been either first or second or third rank in the trials. That means to say we are in the top position. But these hybrids, which to enter market, to enter the production chain, after the evaluation, it takes 3 years to enter into that, means if 2020, the result has been declared, 2021, we are going to multiply the seed, again test market it, again volume building process happens. If we take out the R&D of coordinated project reports, we are very safe. And state-wise and national-wise, we got -- Nath Bio-Genes from the past 2 years has been substantially very high compared to any other competitor in India.

[Operator Instructions] The next question is from the line of [ Abhilash N ], an individual investor.

A few questions from my side. You have said you have made a provision of around 20% to 25%. Is it 20% or 25% seed with us?

See, when I say 20% to 25%, it means like that because there are certain crops will take 20%; certain, I will take 22.5%; certain crops will take 25%...

Okay, all crops included. BT cotton how much? Any probable figure?

Around 22%, 23%.

Okay. And one more question, why the production costs have gone up significantly, earlier comparison, INR 50 crores [Foreign Language] INR 100 crores [Foreign Language]. Is there any particular thing that...

Your question is not clear. [Foreign Language], please?

Production cost, it has gone up from INR 50 crores, which was earlier, now this quarter, you have shown around INR 101 crores.

Production cost?

Production expenses.

Production expenses?

Yes.

Just give me a second. Yes, of course, it is. See, what happens is there are 2 things happening. One is production is non-provisioned. It is taken in full.

Sorry? Hello?

Production has taken place for growth of volume for this year, right? Last year, the sales returns were more. So that good which were put into production last year have also moved in this year. So the production technically goes up. That is why somebody raised an issue that the gross margin is reduced in this year -- in the quarter, sorry. Again, I would like to request all the analysts, my request is that Q1 is a quarter in which we have to make provisions, which are based on certain thought process, which changes by H1 closing. By the time we reach September end, all this will look actual and normal.

Okay. Will there be any chance like that reduction if the sales return -- seed return comes less than what you have expected?

It's always there. It could be more also.

And with my last question, coming to the PNS segment, you have said it is growing, but actual [Foreign Language] last year and that previous year comparison, there is no such growth actually, INR 29 crores to INR 30 crores. PNS...

See, PNS is a product with a potential. It needs special efforts, the vertical was created last year. People have been recruited only to sell PNS and nothing else. And the effort that is expected on this will give us the growth, and please understand that the margin for this product is quite high. So it is in our interest also that if we want to improve the gross margin, we sell more PNS. So special effort is being laid on PNS and vegetable as compared to cotton and paddy.

My last suggestion as we are having our portfolio diversified into all the different segments, but the thing every year happening is that some other segment is killing the growth of some other segment. See that it is not happening. It goes in a consistent basis.

That's a good suggestion.

Because it is eating up somebody's growth. If paddy is growing, cotton is getting down. If cotton is growing, then PNS is not growing. Then finally, the result becomes the same growth. It should be an enhanced growth when compared to the larger players because of our small base.

I appreciate that line. What we are contemplating is that we continue to grow cotton and paddy at a reasonable rate so that we do not emphasize extra effort on these established crops. Then, we lay more emphasis on vegetable and PNS and other crops. The question is only of laying effort. Now what happens is, in my presentation, we have also said that cotton and paddy, which in this quarter was around 73% or 78% of the total sales revenue, by the end of the year, it goes down to around 60% or 55%. Our target is to bring this to around 50%, 55% so that better margin crops give us better bottom line. We're working towards that.

[Operator Instructions] The next question is from the line of [ Anil Sharma ] from [ AB Capital ].

Sir, first, in terms of the illegal cotton seed, I wanted to check what's the solution that we are looking from the government because just making it illegal is actually not working? So what is the solution that we are looking?

Yes. Dr. Kulkarni, you answer that.

There were 2 national seed associations, which have clubbed together and combined now to make it officially release the herbicide-tolerant cotton. So there are efforts going on at government level, lobbying is going on so that officially, these cottons are released so the players which are on organized sector will also have an opportunity to market these -- that. And to that, we have already licensed with then Monsanto, now Bayer. We have also converted our all lines into herbicide tolerant. The moment it gets released, we are also into the market next day. So in the sense then we are unable to prevent illegal cotton, then we have to make it official so that everybody will come into the picture. Probably, you might be knowing that the same thing happened when the BT cotton released. BT cotton when -- before it get released, the illegal BT cotton sales was very, very high. When government realized that, then they immediately released the BT cotton. Then the illegal BT cotton sales drastically came down because farmers believed in the approved brands. So the same thing might repeat in this also. There are a lot of efforts which are going on even though our Managing Director is also putting a lot of efforts on that. And probably, by next year, we might listen some good news for all the organized sector.

Okay. Sir, another thing on the cotton sales about the company. So we have grown at about 8%. But our full year guidance is roundabout 20%. So keeping in mind that most of the sales happened largely in Q1 only. So if you can just brief it up for me, sum it up, how does this number match up?

You see what happened is certain areas, the goods have also gone in by end of June or the 1st of July -- in the first week of July, so which may not have been captured in this quarter. Secondly, I have provisioned for around 22%, 23% of sales within cotton, which last to last year was only 11%. So we are hoping that I'm being conservative, and the next quarter H1 rather will give us a clear picture. The cotton sales are likely to even go further from this one. That's what my personal belief is. Let's wait and watch.

So you are quite confident on the 20%?

Finance people are always conservative, not confident.

Okay. And lastly, just one thing on your export plan, sir. What's the situation in Philippines? And if you can shed some light on the export plans of the company?

Yes. So Dr. Kulkarni is also heading our export line, so he will let you know all on this, please.

We have had good news from Philippines, but not with cotton crop. It was release of GMO brinjal and also golden rice. We are also lobbying there to get it released. And we will get an import permit for shipping there. In addition to that, we were expecting already in Sudan, our cotton release there. However, the governments are working slow there. There are 2 types of releases that are going to happen, we are expecting. One meeting is already scheduled in Sudan, and the other is going to be scheduled. By next year, we will be ready for there to ship good quantities. Myanmar, we have already done good placement. However, you know the situation of Myanmar. We are unable to get the total dynamics of the market there just because movement of the people into the areas have been restricted because of the COVID. Also, we are very happy that last month, we have established a Nath Bio-Genes Central Asia company based at Uzbekistan, Samarkand. And this will take another 3 years to bring revenues with that kind of experiments and product development that we do.

[Operator Instructions] The next question is from the line of [ Anurag Jain ], shareholder.

Sir, my question is related to the main markets of Nath Bio and what were the market conditions? Like which are your most important states that you operate in, in terms of your revenue contribution? And in these states, what were the growth drivers? Because your growth in cotton segment is very good. And in these particular states, how was the quarter affected by the erratic monsoons? Were the monsoon good, bad -- good or bad? And what was the impact of second wave of COVID in these particular different markets of yours?

Let me tell you the market strategy that we normally use. I call it a territorial basket strategy. We give -- we have almost about 250-odd territories, and each territory has their territory manager. And I always say that Nath Bio-Genes is a pan-India, pan-product company. So when you say where we are in India, I would say we are everywhere in India. We have 16 branches in 16 states, who are handling the entire operations. We have 250 territories, those territories are taken care of by a territory manager, who has a basket of products, which are chosen based on the agro-climatic condition of that particular territory. So we are everywhere. Advantage, even if there are vagaries of monsoon, even if there are certain things that go wrong somewhere, other places are able to help us to build the top line. So since I'm everywhere, something sells somewhere. Disadvantage, my inventory levels get stretched. And my debtor level gets stretched. But if these 2 get stretched and I'm able to manage it, my top line is always protected and my bottom line is always protected. Now my choice is either I put my goods only in certain areas, be a very good working capital company and make a top line and bottom line growth reduced; or we spread ourselves thin like butter on your bread and then we take everywhere, and we do. So marketing strategy basically is to be present in all the places where we sell. We sell cotton down south, we sell cotton in Gujarat, we sell paddy in Northeast, or that Patna and Bihar and UP and all that. We sell mustard up north, we sell wheat up north. So -- and we sell vegetables all over the country. We sell PNS everywhere around the country. So that is our strategy. It has been bearing fruit for last 3 years now, and we continue to stay with that.

All right, sir. Then I would ask that what was the impact of second wave of COVID on an aggregate level in all the 250 territories? And what was the impact of monsoons in -- on an aggregate level in these 250 territories?

See, like I said, monsoon, 250 territories [Foreign Language] equally effect [Foreign Language]. Somewhere more, somewhere less. So where the monsoon has been errant, the sales will go down. Where the monsoon has been good, the sales will continue to meet our targets. So as a result, monsoon gets evenized because of our presence everywhere. As far as COVID is concerned...

So basically, at the aggregate level, there is no impact of monsoon then?

Hardly any. Hardly any, okay? As far as COVID is concerned, COVID has been everywhere and nowhere. The threat of COVID is that people don't venture out, the government doesn't allow them to venture out, they're unable to go to the fields. Luckily, second wave has not been as detrimental in rural areas as in the urban areas. As a result of COVID, like I put in my presentation, COVID affected my processing, COVID affected my transportation, logistics, but not production, and technically, definitely, not sales to that effect. If my transport is not available and I'm unable to send the goods, the COVID effects. But we have been able to mitigate. We -- it's not that we have not been affected by cotton, but we have not been affected in a major way.

[Operator Instructions] The next question is from the line of [ Preeti Singh ] from [ Value Investments ].

Sir, my question is about the PNS segment. What kind of products have been launched? And what is the market size? And what revenue are we looking at?

The products launched were from soil amendments. As you know that the government has stressed a lot on soil health card and soil other kind of things. And there is a growing awareness on the farmer side because not only nitrogen, phosphorous and potassium fertilizers, there are other factors which are going to add value to the farming community. So we have released 2 soil amendments and which are into a shiny ball kind of thing, which is very attractive. And we are booking very good sales of it. And this market is growing also. Soil amendment market is growing.

We had -- let me add a little to that. We had made a statement that we want to grow the PNS segment by adding more products, okay? Our major product has been Win-Chi-Win, which is a foliar spray. Foliar spray means it is sprayed on the leaves of the plant, and the things -- it takes nutrition through the process of photosynthesis. Now the other 2 products are ground products. They will be adhered to the root, and they will give nutrition right from the root level upwards. This gives us a variation in the PNS segment. We are also contemplating trying out more products. We want this product -- this segment to grow at whatever percentage is and have a good bottom line because it gives us good bottom line, good margins.

So just a follow-up. So the new products will have the same margin as Win-Chi-Win?

No, ma'am, they will be lesser.

Okay. And what kind of -- okay. And my next question is about the buyback. So what's the status on the buying back currently?

We have already taken up the case with [ an old banker ]. And we have said that we want to do it. Maybe it will be discussed in the -- because there is -- the next consortium meeting is going to happen this month or maybe next month beginning. And then they will take up to their committee to see if it is approved. So it is in process. The dividend, as declared, will be taken care of once AGM is completed, and AGM has been announced for 27th of August this month.

That was the last question in queue. I now hand the conference over to Mr. Khurana for closing comments.

Thank you. Thank you very much, ladies and gentlemen. At the outset, I'm always impressed by the interest that is taken by the investor and the analytical people in the country in our company. We want to be known as a diversified pan-product, pan-India company currently, then maybe globally also because a lot of efforts were being taken in Uzbekistan, Azerbaijan and those areas. We're also putting in efforts in the African segment through Sudan. And of course, in any case, we have been exporting to Myanmar, Egypt and all that. Pakistan has taken a backseat because of the relationship, maybe somewhere down the line that will also improve. So we continue to try and maintain our guidance. We are stabilizing keeping working capital in view because if I stretch it further, everybody gets panicky, but I would like to tell you that everything currently is on path, in thought process with what we have been deciding and working for. Thank you, and thank you very much.

Thank you. Ladies and gentlemen, on behalf of Go India Advisors, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.