NGL Fine-Chem Limited (524774) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Q1 FY '23 Earnings Conference Call of NGL Fine-Chem Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Pallavi Pednekar. Thank you, and over to you, ma'am.

Thank you, Michelle, good morning. Good morning, everybody, and a warm welcome to you all. My name is Pallavi Pednekar, Company Secretary, NGL Fine-Chem Limited. On behalf of the company, I would like to thank you all for participating in the company's earnings call for the first quarter for FY '22/'23. Before we begin, I would like to mention a short cautionary statement. Some of the statements made in today's conference call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made and information currently available to management. Audiences are cautioned not to place undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's conference call is purely to educate and bring awareness about the company's fundamental business and financial results for the quarter ended 30th of June 2022. I would now like to introduce you to the management participating with us on the call. We have with us Mr. Rahul Nachane, Managing Director of the company; and Mr. Rajesh Lawande, Whole Time Director and CFO of the company. Thank you, and over to you, sir.

Good morning. I am Rahul Nachane. I welcome all of you to the Investor/Analyst Call for Q1 2022/'23 for NGL Fine-Chem Limited. I will take you through the performance of the company for the current quarter. In Q1 '22/'23, we saw the sales decrease to INR 62.94 crores as compared to INR 75.91 crores in the same quarter last year, resulting in a decrease of 17% in sales. The profit after tax declined to INR 52 lakhs as compared to INR 19.35 crores in the same quarter last year, resulting in a decrease of 97%. Sales for veterinary API decreased to INR 55.41 crores in Q1 '22/'23 as compared to INR 57.51 crores in Q1 '21/'22, resulting in a decrease of 4% in sales of the veterinary API segment. Sales for human APIs decreased to INR 2.62 crores as compared to INR 3.26 crores in the earlier quarter, resulting in a decrease of 24%. Sales of intermediates and other items decreased to INR 1.94 crores as compared to INR 12.73 crores in the same quarter last year. Margins have decreased substantially, primarily as the gross material cost has risen from 41% in Q1 '21/'22 to 53% in Q1 '22/'23. This is primarily due to 2 significant factors. Firstly, the price of chemicals and commodities have appreciated significantly. The first increase was around July, August in 2021 after the easing of COVID restrictions and the subsequent demand surge. And the second increase in February, March 2022 are on account of the war between Russia and Ukraine. Secondly, we have a time lag between the price increase and it's passing on to customers. Furthermore, there are a few products where the price increase could only partially be passed on. Power and fuel costs have also gone up by over 1%, while other operating expenses have gone up due to normalization in operations post the lifting of COVID restrictions. EBITDA has hence decreased to about 12% in Q1 this year as compared to 31% in Q1 last year. Demand for our products has been subdued during the current quarter and the same trend continues in Q2 this year. Part of the reduction in demand is on account of high prices and part due to stock equalization being done by customers. We have, however, maintained the leadership position in our top 5 products, wherein we account for over 50% of sales, while in the next 5 products, we are the second largest suppliers. Pilot scale up of 2 products was achieved during Q1 '22/'23, taking our veterinary API product basket to 21 APIs, along with 2 human health APIs. We have also commenced manufacture of an ectoparasitic through our subsidiary, Macrotech, and commenced exports of this product. We anticipate exports of about INR 6 crores to INR 8 crores of this product during the current year. Current capacity utilization is only at about 70% after factoring the Macrotech expanded capacity available to us. The greenfield expansion at Tarapur is progressing with civil construction proceeding as per schedule. In terms of equipment ordering, we have slowed down the process in view of the high commodity prices prevailing currently. As per the schedule, equipment ordering should have commenced in May 2022, but has now been delayed to November 2022. We will have a relook on this schedule once we are closer to the date. Due to this decision, the greenfield expansion is now expected to be completed only early 2024. We are focused to continue investing and maintaining our market position by remaining cost competitive, reliable and, of course, high-quality solutions for all our customers. I have now completed my opening statement. We can now open the floor for discussions.

[Operator Instructions] The first question is from the line of Rahul Jain from Credence Wealth. [Operator Instructions]

Two things, sir. Just to understand with regards to the demand and the cost side of it. So you have mentioned in your presentation that the trend of price increase seems to be now easing and you expect the reduction to continue in the current quarter. So if you could share some more details in terms of the cost part. If possible, try to quantify it in terms of various cost pressures which have been faced earlier. How are they panning out now? Are you seeing -- what kind of reduction is being visible now? And what is the expectation going ahead? And sir, with regards to the demand part. Last time you had mentioned in your initial remarks also, you mentioned about cost price pass on. You had mentioned in the previous call that there was a, what you call, resistance from the customers in terms of the price increase. And thereby the demand also had suffered. So with regards to the demand, when do we see things improving now? Are customers still continuing to hold the demand? Or is there some change? And how do you look at the demand in the coming 2, 3 quarters?

Okay. Thank you, Rahul. Just to answer your questions, so it's broadly classified into 2 parts, the first being the demand and the second being the cost pressures. With regard to demand, high price increases have put a dampener on quite a few of our products. Demand -- customers are now -- what they are doing is they are basically using old inventory and trying to reduce their fresh line, so that they are not saddled with high cost inventories. Secondly, there is also a resistance on the market because we are in the end selling to companies which in the end sell to farmers. So the entire cycle is a B2B segment. And there is a pushback when it comes to higher prices from the farmers also. So all this has -- there has been a little bit of a lag in demand due to companies that are waiting and watching to see how the prices will behave and are keeping their fingers crossed that hopefully, prices will start easing a little bit and then demand will come back. The second part of demand is also because of challenges. China is a fairly good market for us. From close to about March to about June this year, there has been hardly any export to China. We have seen almost a 70% drop in sales, primarily because they again got closed down due to COVID restrictions. Shanghai and Beijing was closed and additional restrictions were imposed. And then we are seeing demand situations particularly in other markets also. So to your question about when do we expect demand to normalize, we expect this probably to take another 3 to 6 months for things to start regularizing. The current quarter also looks quite subdued. We hope to see a little bit of recovery probably in Q3. But I think the strong recovery will probably come more in Q4 this year. With regard to the cost pressures. Cost, it looks like they have peaked around July. We see that prices of chemicals and other commodity chemicals are slowly coming down. But the decrease is very, very slow right now. So it's not too rapid. So prices had almost doubled, and we have now seen probably a 10% to 15% reduction in pricing. But as it goes on, we hope that over the next 3 to 4 months, these prices will also come down. And that should lead to better recovery for us. Does that answer your question?

Sure, sir. That is quite helpful. Just one last bit. Can we say this could be among the worst quarter -- the quarter gone by could be the worst quarter? And things could be better off than the quarter gone by, maybe gradually and slowly? But do we feel that somewhere we have gone through the worst?

I think that the cycle is -- yes, we have seen the worst situation in the current quarter. It should definitely start improving as we go along. Because it was a double whammy. There were very high costs because in -- we have not seen these kind of prices which we saw in April, May this year. I've never seen those kind of prices for all these years, and a huge amount of pushback from customers. So yes, hopefully, this has been the worst quarter for us.

[Operator Instructions] The next question is from the line of Rajat Setiya from iThought PMS.

Sir, my first question is about the total capacity that we have at the moment. You mentioned 70% utilization. So my question is, what is the maximum achievable capacity? Is it 100%, less than that, or more than that?

At 100% capacity, we can probably reach a turnover of around INR 375 crores and INR 400 crores. We are trading at nearly 70% of that level currently.

So we can do 100%. It's possible practically?

Well, 100% theoretically is not workable. But we have reached close to 95%, 98% capacity utilization levels in our earlier years.

Okay. All right. And sir, the new CapEx that we are putting up now, there must be some cost overrun. So what's the overall estimate and what has been the cost overruns?

Earlier, the total cost were estimated at about INR 100 crores and then revised to INR 140 crores. And we saw that prices of steel were not coming down. So the prices are pretty high. So we'll probably end up with about INR 140 crores, INR 150 crores. And in view of surplus capacity available currently with us, we have sort of deferred investment by 6-month period. And we thought, let's take a chance to see whether prices can come down a little bit so that it will help us save some money in our investment.

Sure. So this INR 140 crores, INR 150 crores is purely cost overruns, like it's purely inflation and all, right?

That is right, yes.

Okay. And now we have delayed by 6 months. So any time during the next 6 months if we see the prices coming down, we may speed up our CapEx plan, right?

That is right, yes.

Okay. And you had also mentioned, I think, during the AGM that capacity will increase by 60% post the new CapEx. So let's say, with the current capacity, we can do INR 400 crores as the outer limit. So are you saying that the new capacity can do INR 240 crores to INR 250 crores of revenues?

Yes, definitely INR 200 crores more, yes.

Okay. All right. And sir, one final question. What has been the trend of us gaining market share over the last 12 months across products?

Well, we have maintained our leadership position in all the products which we have got. So we are #1 in 6 products right now, and we are #2 in another 4 or 5 products after that. So of the 21 products we have got, we have a fairly large leadership position in over 11 of them.

Okay. And the like top 5, you mentioned the next 5, you're saying you are #2 and the market share would range from to what to what, broadly?

It varies from product to product. So let me say that the total, probably the current basket which we are doing, total market potential should be close to about INR 1,500 crores.

Market potential, like market opportunity for those 5 products is INR 1,500 crores?

Of all the products which we are currently doing, the 22, 23 products which we are currently doing.

Okay. And can you also break it down into top 5, next 5 and the rest?

I don't have that data upfront to tell you right now.

No problem. But is this something that over the next call you can share?

Definitely.

The next question is from the line of Ankit Gupta from [ Bamboo Capital ].

Sir, I just wanted to understand the new 2 products that are being developed. What can be the revenue potential from these 2 products say for this year and from FY '24 onwards?

I was not able to hear you clearly. You are saying revenue potential of which product?

Sir, the 2 new products that we are doing under trial run. Are you able to hear me now?

Yes, I'm able to hear you. So yes, there are 3 products that we have done -- 2 products, sorry. They should be having a revenue potential -- related to world market, it should be in the range of about INR 60 crores to INR 80 crores.

Okay. Okay. Each, each product, yes? INR 60 crores to INR 80 crores from each product depending on the market size?

All put together.

All put together, okay. Okay. Okay. And sir, on the CapEx side. So you shared the revised limit. So when can we expect the new CapEx to be complete -- the greenfield CapEx to be completed?

If we start by the end of this year, the equipment ordering, we should be ready by about Jan, Feb 2024.

Okay. So Jan, Feb 2024. And we normally take at least 6 months for stability data and all to be ready. So let's say, we can expect the ramp-up from Q2 of FY '25?

That is right, yes.

[Operator Instructions] The next question is from the line of Dhwanil Desai from Turtle Capital.

Sir, the first question is, you said that in terms of cost pressure, Q1 may be the worst quarter. So do we expect our gross margin to normalize in the range of 55% to 58% in next couple of quarters?

I think within 2 quarters would be ambitious. It will probably take another 3 to 4 quarters to get to that level.

Okay, okay. And we have already taken price increase to cover what, 50%, 60% of the RM and other cost price increases? Or it's a little more or less than that? How much we are able to pass on to the customer?

We have been able to pass on roughly about 50%, 60%.

Okay. Okay. Got it. And sir, second question is on the poultry product. I think last time you mentioned that one of the products we discontinued and the other one is doing quite well. So how about scaling up that? And I think we were doing around INR 6 crores to INR 8 crores on that product. So how do we see the scale-up of that product?

Just give me a second. So that product is already scaled up. In the last complete financial year, we sold about 1.5 tonne of that product. In the current quarter, we have already sold 1,100 kilos. So it's doing quite well. We expect sales of between INR 8 crores and INR 10 crores from that product in the current year.

Got it. And sir, last question. So when you say the total market potential of all 23 products is INR 1,500 crores, that is the entire market, right? And then we will be getting certain market share out of that.

Yes. That is the world market and that will probably be shared between probably 25, 30 companies, which will participate in that market.

Okay. So INR 1,500 crores is the total market and we are vying for decent market share in that INR 1,500 crores?

Correct, yes.

[Operator Instructions] The next question is from the line of Rohit Balakrishnan from iThought PMS.

Sir, just on this demand scenario, I just wanted to understand, I mean, you mentioned that both cost -- I mean, largely cost has been a deterrent for the end customer and hence your customers as well. I mean, do you see that as a temporary phenomenon? Or assuming that the inflation is not increasing, but still if it does not decline, do you see this to persist, this demand scenario to sort of be weak? Or at some point of time, when the inventories will be over, they have to come around and increase the -- I mean, start buying your products? I mean, I just wanted to get your view.

Yes. So demand has been suppressed due to different factors. The largest, of course, has been the pricing. In a B2B business, there is a lot of pushback when it comes to increased pricing. The second has been in the Far East market because of restrictions in China, which has pulled down. So Shanghai port was shut lock and not taking any new shipments almost from March till about early June. And even today, it takes close to over 3 weeks to clear consignments from Shanghai. And that's the gateway to China for us. And then we have some other markets like Turkey, where they are facing very high inflation, almost 70% inflation going on right over there. So there have been these sort of pockets where in different markets there are different challenges which are creating these issues. And it's a cyclical thing which will probably take about a year for it to turn around and settle out completely. So this is probably the worst quarter. We expect the pressure to continue in the current quarter also and then start easing more towards Q3 of the current year.

Okay. And like if you were to think about some of these markets like China, Turkey, they are facing their own issues, some temporary, some more structural. So I mean, is it possible to probably share what kind of revenues in your view at this point of time where you can say these are the problematic markets where we are selling and what percentage of our sales would be coming from these markets? This is a rough estimate. I don't want the exact numbers, just to get a broad sense, if you have that?

Just one second. Well, Turkey has been accounting for almost about between 4% and 5% for sales for us, while China has been accounting for close to about 8% to 10% for sales for us.

Okay. Got it. Understood. Okay. And sir, slightly different question. I think a few quarters back, almost 6, 7 quarters back, you'd spoken about that you see immense opportunity in the business for at least next 8, 10 years. And you don't see any issue in terms of the overall market potential or dynamics from a structural point of view. Obviously, at that point of time, the situation was much different in the sense that demand was very strong and we were doing very, very well. So I just wanted to get your view. I mean, given that things have changed quite a lot in the last probably 3, 4 quarters. So I just wanted to get your view from your vantage point, as you see over the next, say, 4, 5 years, how do you see this playing out for your company?

Well, the veterinary pharma industry is pretty stable. And it's not really -- we don't see so much fluctuation in demand over a period of time. These patterns are constant. Farmers need to take care of their animals. So pharma is definitely not a discretionary spending. It's a necessity when it comes to spending. I would put this now more to the issues which we are facing right now in terms of economic issues which certain countries are facing, the demand supply problems which are going on right now, and which are creating big pressure on pricing. There are these issues like China coming back with COVID restrictions and very, very stringent restrictions around March to June this year. So these are more like localized issues, which are giving a cascading effect. And overall, I don't think there has been any shift in the basic demand or structure for the industry. That would still remain to be strong. Probably '22 is going to be a year which is not so great for the industry. But it will definitely rebound. I'm very, very optimistic about this industry.

Fine sir. And sir, just sort of taking queue from some of the questions that you answered for previous participants, you mentioned that about 25, 30 players are there in this entire product portfolio that you're working in. Given the strained situation that the market is in, I'm just curious to understand, I mean, we are in a much stronger position from a balance sheet point of view, but do you see any companies which can probably not sustain or not withstand these kind of challenges as per your knowledge and probably that can also open up opportunities for us to play in market share?

About 8 to 10 companies exist here in India, which work in the same products which we do. The rest of them are Chinese companies. I really do not know the structure for the Chinese. But in India, 3 of them are listed entities, the rest are nonlisted. So it's a little difficult to understand the financial strength of each company. So I'm unable to answer that question.

The next question is from the line of Alisha Mahawla from Envision Capital.

Sir, firstly, what is the volume growth in this quarter?

We have not seen any volume growth. In fact, we have seen volume decreasing, roughly about 3% more than the value decrease.

Okay. And this is Y-o-Y, right, we're comparing it to Q1 of last year?

Correct.

Okay. Understood. And just a clarification. You were mentioning to an earlier participant that the new capacity, the greenfield, is coming in FY '24 or FY '25?

'25.

It will come in FY...

Sorry, FY '24, between Jan and March of 2024. But it will get commercialized probably 6 months later. So the impact of that particular expansion would appear more in 2025.

Understood. And the CapEx of INR 140 crores that we're doing, this is still 80% debt, 40% internal accruals?

Just one second. It's being funded 2:1 ratio.

Okay, debt is 2?

Yes, debt 2 and equity -- internal accruals 1.

Okay. And in some earlier calls, you were mentioning that we do have a U.S. customer who purchases from us semi-annually. Any update on the demand currently from that customer? Or is that also going to be weak in H1?

No. We have one shipment for that customer which will go in the current quarter.

Okay. So that demand is on track?

Yes, he just buys twice a year, so it just depends on which quarter he's buying from. He didn't buy anything last quarter, he bought in the current quarter.

Current quarter means Q2?

Q2, yes.

Sure. And in a normal situation, you would say that the company can target a 20%, 25% volume growth and margins in the range of 18% to 24%, and we do understand the high spike has obviously made it unachievable. But is this the kind of target we have for FY '24? Or will it take longer to reach this kind of growth again?

Well, current year has been a pretty big surprise, and we never anticipated such depression in the demand. We have been interacting with our customers and they have also been complaining of difficulty in passing on price increases to their end customers. So this whole cycle is fairly recent. We have just seen about 4 to 5 months of this cycle coming. So I'm unable to comment whether this cycle will pan out in a 10-month period or in a 15-month period or an 18-month period, because we are still in the early part of the cycle. I might be able to answer your comment with a little more confidence probably 3 months from now.

Sure. And just one last question. Any other product launches we're targeting for this year. We did 2 in Q1.

Yes. In fact, there are 2 more being planned in Q3 this year. Two more in Q3 and one in Q4. So we plan to commercialize a total of 5 new products in the current year.

And these will all be animal APIs?

All animal APIs, yes.

The next question is from the line of Shivan Sarvaiya from JHP Securities Private Limited.

One question around the new CapEx. Sir, in the previous call, you had spoken about development of new APIs to fill in the new capacities. Sir, could you comment on the number of APIs that you are targeting to introduce at the new facility, the market size of those? And at what stage are we in their development? And are they in the same margins that we've been getting normally? In normal situation, that is about 55% to 60%. So sir, some color on that would be helpful.

Yes. So we are not waiting for new capacity to come in. We are trying to develop a product line because it takes a good 2 to 3 years for any new product launch to cover the market adequately. By the end of this year, we hope to take our total product basket to about 24 to 25 veterinary APIs. 24, 23 plus 1 human API, so we will have about 25 as against 21 which we have today. The second part of your question was on the margins. The margins are a mixed bag because some of them are -- but I think overall, the product mix is such that we should be able to get to a gross margin of about 55% definitely.

Okay. Okay. So sir, what I was trying to understand is that once we have this capacity up and running, what would be the total market size that we would be targeting in terms of the APIs that we would be having in our portfolio? So currently, it is INR 1,500 crores. Assuming we are in H2 of FY '25, what would we be looking at in terms of our addressable market opportunity?

Well, on the total product which we are looking at, there are 2 more products which we will plan this year, which are basically anthelmintics. And the market protection for those is fairly large. So we would probably be looking at an addressable market of close to about INR 2,200 crores, INR 2,500 crores. Just a word of caution, the Chinese are leaders in that product. We will be the first Indian manufacturers for these products, so it's going to be a challenging situation for us. We are going into a highly competitive market over there.

Okay. Sir, could you just repeat the product? I couldn't get it.

These are dewormers, anthelmintics.

Okay, sir. And they are having a similar gross profit margin, 55%, that is what you said, right?

Yes.

[Operator Instructions] There is a follow-up question from Rajat Setiya from iThought PMS.

Sir, question is regarding total market opportunity that you mentioned. At what rate that market is growing on a blended basis?

There are no public results which can give us any data about the rate of growth. But a large market growth is coming from better market penetration now. And I think you might be aware that market penetration in areas like Latin America, Africa, even here in India for veterinary products has been fairly shallow. And as the market penetration deepens, it will lead to greater volume growth and demand. But there is no published data which I can quote and tell you what it will be.

Okay. All right. And over the next 2 to 3 years, how many new products do you plan to launch? You mentioned 3, 4 in this year. How many new do you plan to launch over the next 2 to 3 years?

We have a plan prepared for getting to a total list of 30 APIs by 2024.

Okay. And the new products that we are launching in the next 2 years. So would you be able to share the market size for those products overall?

Give me some time to pull it because I don't have the numbers across readily with me. But probably I can answer that question at the next opportunity.

Sure. Sure. And the next question is around that you mentioned that there are 20, 25 players. So like we are adding capacity, would you have any idea if any other players are adding any capacity like us?

Oh, that's a rhetorical question. I'm sure everybody would be trying to add capacity. It's a highly competitive market. Every company has got its own plans of growth and would like to venture in. And as I said, there are 3 players which operate in the public space here in India. There is us, there is SeQuent Scientific, and there is Lasa Supergenerics. The rest of the other players are from the unlisted company sector. So I really do not have access to what their plans are.

Sure, sure. And sir, one final question. Like this INR 1,500 crore market and 20, 25 players. So from the outside -- and I can be completely absolutely wrong here, but from the outside, it seems too many players competing for this market. So how do you see yourself growing for the year onwards given this context that you shared?

Yes. So it looks like there are many players, but there are players which are -- some of them are pretty small companies. So they have limited capacities and they do limited products, probably just 1 or 2 products in which they might be competing with us. So for them, they go into the fragmented market where their market share is pretty small. If I have to say out of these how many significant players there are which can compete on a similar scale and size, I would say, on a worldwide basis, there will be probably just about 10 or 12 out of those 30 who would do that.

So historically, like we have gained market share, and that has been one of the main pillars for our revenue growth. So do you expect us to continue gaining market share from here onwards as well?

So on our top 5 products, I think I do not see us expanding any further market share, frankly, because we are already at a very large, over 50% market in those. And customers as a strategy prefer to have 2 to 3 suppliers for every product, so that they are not dependent on just one source. We probably have the potential of expanding our market share in the last 10 products which we have got and that's where we are focusing right now.

Sure. And sir, with the CapEx amount obviously shooting up because of the raw materials inflation and all. So do you expect us to continue making similar kind of return on capital that we used to make -- that we continue to make till date? Do you expect those kind of return ratios to continue? Or do you think that we might see a dip there? Or how are they going to look like?

So if we take any period, with a 3- to 5-year period and if I had to look at what sort of return we are getting, if you look on that basis, then I think I'm fairly certain that we'll deliver the same. It's quarter-to-quarter, which is a challenge, especially in these trying times.

Sure, sure. Yes, my question was also mainly with regards to the annual numbers and over a 2-, 3-year time period. Understood, sir. Much appreciate answering all the questions.

The next question is from the line of Ankit Gupta, which is a follow-up question, from [ Bamboo Capital ].

You said that the market size for our products will expand from INR 1,500 crores to INR 2,300 crores to INR 2,500 crores with the addition of 8, 10 products that we plan to add over the next 2 years?

No, no, no. With the products we have planned for the current year.

Okay. Okay. So the 3 new products...

In terms of market size, with all the 30 products which we do should be in the range of INR 3,000 crores plus.

Okay. Okay. So the 3 new products that we are adding, one for which the trial run is going on and the 2 which are under development. So these 3 products itself will increase our market size by INR 800 crores to INR 1,000 crores?

Yes, yes.

As there are no further questions, I would now like to hand the conference over to Ms. Pallavi Pednekar for closing comments.

Thank you. Thank you, Michelle. Thank you, ladies and gentlemen. On behalf of NGL Fine-Chem Limited that concludes this conference. Thank you for joining us and you may now disconnect your lines. Thank you, Michelle.

Thank you, ma'am.