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

Ladies and gentlemen, good day and welcome to NGL Fine-Chem Limited Q2 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Mehra. Thank you. And over to you, sir.

Thank you, Nira. Good morning, everyone, and thank you for joining this Q2 FY '24 Earnings Conference Call of NGL Fine-Chem Limited. The results and investor updates have been uploaded on the stock exchanges. To take us through the results of this quarter and answer your questions, we have with us today Mr. Rahul Nachane, Managing Director; and Mr. Rajesh Lawande, Whole-time Director and Chief Financial Officer. We'll be starting the call with a brief overview of the financial performance, which will then be followed by the Q&A session. I want to remind you all that everything said in this call reflecting any outlook for the future which can be construed as a forward-looking statement must be viewed in conjunction with the uncertainties and risks that the company faces. These uncertainties and risks are included but not limited to what we mention in our annual reports, which you will find on our company website. With that said, I'll now hand over the call to Mr. Rahul. Over to you, sir.

Thank you, Abhishek. Good morning to all of you. I'm Rahul Nachane, Managing Director of NGL Fine-Chem. A very good day to you, and thank you for joining us today for the Q2 FY '24 Earnings Call of NGL Fine-Chem Limited. I trust this call finds each of you in the best of health and cheer, and I hope those celebrating had a safe and enjoyable Diwali season. I'm pleased to present to you the financial highlights and our company's performance for the Q2 FY '24. It has been a strong quarter for our company. Our revenue from operations showed a healthy increase, marking a 13.5% growth over the previous quarter and 18.4% growth year-on-year. Sales stood at INR 80.18 crores for Q2 FY '24. Our EBITDA margin recorded a significant improvement to INR 13.97 crores, reflecting a close to a 45% increase quarter-on-quarter and about 52% increase year-on-year. This performance positively impacted our EBITDA margins, which now stand at 17%, a 312 basis point improvement over Q1 FY '24 and a 347 basis point increase from Q2 FY '23. Profit after tax reached 40.48 crores (sic) [ INR 10.48 crores ], showcasing a 13% (sic) [ 23.13% ] growth since the last quarter and a 124% increase from the same quarter in the previous year. As we dug deeper into the performance of the quarter, it is evident that the strategic decisions made have borne fruit. Our operational performance has been robust, and we have successfully translated it into sustained growth even amidst economic uncertainties and global headwinds. This growth is especially significant, as it comes at a time when the industry-wide average realizations have seen a year-on-year decline. However, we have countered this with substantial volumetric growth, and we anticipate that this momentum should carry forward into the subsequent quarters. Our margins have recorded favorable shifts, thanks to a significant reduction in raw material costs. This has allowed us to bounce back to our standardized margin levels. Staying put to our prior guidance, we maintain that our business sustainable EBITDA margin profile will persist in the 17% to 22% band. While demand has shown signs of recovery, we remain vigilant of the persistent challenge. Issues such as currency availability in markets like Egypt, Pakistan and Turkey have adversely impacted demand. Although our direct exposure to African markets is minimum, the currency volatility in these regions has an indirect influence on our operations through its effects on our customer base. Our resilience during these challenging times was bolstered by our broad and diversified API offerings as well as the ongoing expansion of our portfolio. Our strategic choice not to be overly dependent on any single product, customer or geography has served us well, as we have seen a resurgence in demand for several of our long-standing products. On the capital expenditure front, we have maintained a measured execution pace. We are waiting for more definitive signs of demand recovery before we expedite our [ CapEx-led ] initiatives. Until then, we maintain committed -- we remain committed in funding our capital expenditures from the internal accruals generated from our business operations, thereby avoiding the need to leverage our balance sheet. Now as we look ahead, we do so with cautious optimism. The indicators are promising and the strategies we have in place are robust, but we are ever mindful of the fluctuating market dynamics. As I draw this opening address to a close, I must issue an important disclaimer. We have observed that competitors might have used the detailed information from our public disclosures to their advantage. Therefore, we will be exercising greater discretion in the details we share going forward. We request your understanding and cooperation in refraining from asking product-specific questions during this call, as such queries will not be entertained. This step is crucial to safeguard our strategic interests and maintain our competitive advantage in the marketplace. With that overview, I now open the floor to any questions you may have, keeping in mind the disclaimer I've shared. Thank you.

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

Congratulations to Rahul and the team. You have really done very well in the last 2, 3 quarters in spite of the environment being quite tough. So Rahul, with regards to your initial comments and your -- also the press release, first of all, on the gross margin side, we are back to our gross margins, the normalized gross margins, of around [ 15% to 25% ]%. And I understand from your initial commentary that currently the product prices or the relations are still lower, so 2 parts to it: One of -- one, is this sustainable going ahead? And also, is this largely due to the raw material price being favorable to us? Or is there some product mix change also? That is my first question.

Yes. Thanks for your interest and your call. With regard to your first question, whether this is sustainable, well, I would like to just give a cautious sort of note over here that this is the first quarter where we have seen the recovery coming out well. If you have seen quarter-on-quarter starting from early this year, that is Q4 of the last financial year, Q1 of this year and now Q2 of this year, it has slowly been improving. And I am quite optimistic now that our worst part is behind us. And going forward, we should be able to look at things with optimism, but I would just like to add a note of caution that there are too many changes now taking place in the geopolitical area. So there is a lot of political uncertainty coming in and this tends to impact business sooner or later, so I would be a little bit cautious probably for another 1 or 2 quarters before I commit how sustainable these margins are. Again I repeat, I'm cautiously optimistic. And your second question was, was this because of change in product mix or was it because of the raw material prices. So in this, I have to tell you that it's largely because of the raw material prices coming down because there has not been any drastic change in the product mix as such, but chemical prices which were at sort of a peak last year have more or less fallen down to not probably their pre-COVID levels yet. But they have retraced at least 60%, 70% of the gains which they had earlier.

Yes. And with regards to the product prices, for us, what is the trend like? The way you mentioned, the raw material prices have retraced. So on the product prices side, if you could share some details.

Well, on selling prices also we have seen a fall in our price realization. And prices have gone down. It varies from product to product and also depending on the depth of competition for each product, so we have seen products coming down, right, from 15%, going up to almost 40%, in terms of selling price.

Sure. And sir, with regards to the geography-wise and customers and product-wise, we have been observing for last 2, 3 quarters the product concentration as well as the [indiscernible] regards to the [ top 3 ] has been reducing, so -- and also on the geography side. So is this growth which is coming in now becoming like where you've entered some new markets and those new markets are giving us growth? And at the same time, the new customers are giving us growth.

I don't know. Geography-wise, there is hardly any change actually. It's more or less stable, but what you are saying with regard to product is definitely true. Our product concentration is coming down. So about a year ago, we had almost 75% coming from the top 10 products. Today, our sales -- that top 10 product contribute to only about 65% of our sales. So this is because the newer products which we have introduced have started gaining strength. And now it's a much wider basket, and therefore, reliability on any particular product is gradually coming down.

Yes. Last question is on the CapEx. You have mentioned that you have gone slow and typically utilize your internal accruals till now and not try to borrow funds at a time when the demand was not suitable to us, but with the current scenario, the demand increment has been there, so when do we expect the CapEx being accelerated in terms of the money being spent? And what kind of time lines we can see for the greenfield CapEx to come through.

Yes. I mean right now, as I said, we are a little cautiously optimistic. We'll probably wait for 1 more quarter to see how things go before we commit ourselves completely to this, so we will probably take our call early next year, next calendar year.

[Operator Instructions] Next question is from the line of Ankit Gupta from Bamboo Capital Partners.

Congratulations for the revival that we have seen in this quarter, Rahul and team. On product realization trend, Rahul, are we nearing the end of product prices correcting? Or do you still feel that the correction is left in the market? And your views on price realizations going down further from here. And how much has been the price realization fall on an average across our 25, 26 products?

Yes. So it's very difficult to predict whether we have reached the bottom and things will go up or not, but my personal feeling is we are more or less at the bottom of the bell curve right now. It should definitely go up from where we are right now in terms of realizations and pricing, but as to whether this will happen in the next 6 months or a year, that is a big question which I cannot answer, frankly, so we have to wait and watch and see how it goes. But I'm pretty hopeful we are more or less at the bottom of the bell curve.

Sure. And how much has been the fall, let's say, compared to last year? How much has been the fall in prices? And if we compare the prices, current prices, with, let's say, pre-COVID prices, are we near that prices? Or we have fallen below that as well.

As I said, meaning -- it varies from product to product. There are some products where we have seen a 15% drop in realization. There are some products where we have seen a 40% drop in realization, so it just varies over a wide margin. And it depends on the depth of competition for each product.

Okay. And for some products, have you seen prices below pre-COVID levels also? Or it's still higher than pre COVID for most of the products.

I have not put a thought to that actually, but let me think about it. I would say that we are more or less at the pre-COVID levels, yes.

Okay...

In some, we are probably lower than the pre-COVID levels also.

Okay, okay. My second question was on the current capacity utilization at our stand-alone and Macrotech level. How is the -- what is the current capacity utilization? And let's say we are at 80 crores quarterly run rate. At full capacity utilization, with some outsourcing that we used to do when things -- when the markets were buoyant, what kind of revenue can we do from the existing infrastructure given the price fall that we've seen in the products?

I think we will probably be able to do between 350 crores to 400 crores, along with a little bit of outsourcing, because we are doing very little outsourcing now. Everything is being done more or less either at NGL or at Macrotech. We will probably start outsourcing in the next 3 months so that we start building up capacity gradually as the markets come back.

And we were in -- like 2 years back, we were also looking to increase our outsourcing from, let's say, 5% to 15%. That also -- maybe in case you face some capacity constraints, hopefully, over the next 2, 3 quarters, we'll also be looking to increase that. And with that, can we touch, let's say, 450 crore kind of revenues from existing setup?

That will be a little ambitious. I will still go by -- let's say up to 400 crores is what I think we can do with current levels.

Okay, okay, okay. And Rahul...

Ankit, sorry to interrupt you. I'll request you to come back for a follow-up question.

Sure.

[Operator Instructions] The next question is from the line of Ayush Mittal from Mittal Analytics.

First of all, sir, it's a pleasure to see the company doing -- coming back to the normal runway given the challenges that we have still seen in the industry. So it's a good thing to see our performance and the resilience of our business model. Now coming to the question, sir, one thing which I'll just be giving, having flagged the company for so long, is that at one point we were at a point where we wanted to expand the capacity. And seeing the market condition, we have slowed down our plans quite a bit. Even now you said that maybe start of calendar year is where you'll take a call on that part. Can you share more of your thoughts on the expansion, where we are? And where we -- how do we want to proceed on that? And by when do we intend to complete the whole of the CapEx? And also on the product development side, which is something which would be very critical for us to grow from the levels we are to the next level if we have to.

Yes. So as I said, we are still a little bit cautious on doing more at our [ price ] investments, so we -- really I'm not sure whether the recovery is complete and we are -- the bell curve is completed and things will start going up. So we will probably take this call early next year, on the investments, but just to inform you: We have -- proceeding with the investment right now at a much lower speed, of course. Close to 90% of the civil work is already completed. And some equipment ordering in terms of long-delivery item is already started, but we are not fully committed to putting all the equipment in, machinery in. But once we decide, it shouldn't take us more than a month -- a year to 12, 15 months -- I mean between 12 and 15 months to complete the project right now. So we'll take this call early next year. So if we do that, then in '24 or '25, we should have the plant up and running.

Okay, okay. And what about the product development like -- because one thing which I feel is that the product basket we currently have is -- has its own limitations in terms of growth. So it is very important that we expand our product basket significantly so that we can tap new [ further figures ] and do the scale-up.

Product development is going on in a pretty -- right now we -- our total product range has gone to close to about 28 APIs now, so [ product range is ] going at a pretty good clip -- I did not understand the question. What was that?

No, no. I -- what I was trying to get insight is more on these new products, like the new product basket. If you are expanding product basket, how are we doing on that front? And if we are doing much more on that part, expanding this basket further. Like, from 28, do you -- are we on line to bring, keep adding 3, 4, 5 products every year that we intended...

Our target is to reach 35 APIs by '25. So we are very much on target with that.

[Operator Instructions] Next question is from the line of [ Debashish Neogi from Digital Investments ].

Sir, congratulations, first, for a very good set of number. So my question to you, sir, is given that we are the market leader in the top 5 products and also gaining market share in the next 5 -- and we also say that we have the chemistry skills. Now my question to you is that, if we have both, in this context, we should have pricing power. And you always said that we don't have pricing power, not even [ through rupees ], in some -- one of the con calls many quarters back. Why is it so, sir? Being a market leader and also having chemistry skills, you still don't have pricing power.

Yes. I would like to address that in 2 ways. Number one is that we are in a B2B business and pricing power normally comes from -- more from either IP or from brand power. Now brand power does not exist here because it's B2B and we are doing only generics. IP also does not exist because, again, we are doing generic products which are out of patent for a long time. So how do you get pricing power in a B2B business? It's generally not possible. That's the first. And the second part is that there's always competition. Now if we try to price products very high up, we -- it will be very easy to flood the market because people will immediately start entering the market as competitors. And competition goes up, so margins will come down sooner or later. Pricing power in a B2B business is very difficult.

So sir, then what is our edge? If we -- being the market leader and we have also chemistry skills and we are supplying to the top 5, 6 global animal API players, then what is our actual edge? I thought maintaining great quality and servicing on time. Our retention of customers has been 99%. These are edge, so should that not indirectly give us pricing power over the years with sticky customers?

No. See, in a B2B business, the buyer is always much well informed. And as a policy, no company keeps a monopolist supplier, so they always spread the risk by buying from multiple sources. Now having said that, even if I am the, let's say, lowest-cost supplier, no company will buy more than 60% of their requirement from me. 40% will still go to other 2 suppliers because they want to keep their supply chain intact. So pricing power does not work, not in a B2B business.

Okay, sir. My second question, sir, is we are getting into, every year, 2 to 3 products almost. And we target to getting to 35, but the opportunity size of each of these products is very small, so in the pipeline to 35, do we have anything -- you may not discuss in detail, like you said in the conference -- in the beginning of the conference, about specific strategy of the product itself, but do we have anything in pipeline to the buildup of 35 where the size of that particular product is huge with respect to either the product itself or where you're servicing with respect to geography?

Yes. So we have slightly changed our strategy, so in addition to some niche products, we are also doing some volume products now. And volume products have got a large potential, but at the same time, these are already existing products with multiple suppliers in place. What we are doing is we are targeting those products where there is -- there are only Chinese suppliers, so we will probably be the first from India to start manufacturing these products. So we are offering basically customers a China-plus-one alternative.

[Operator Instructions] Next follow-up question is from the line of Ankit Gupta from Bamboo Capital Partners.

Sir, in case -- earlier, we used to -- we had indicated that for the new greenfield CapEx our pilot plant will be ready before the entire -- the bigger plant comes on stream so that we will do the validation batches earlier; and save on that 3, 6 month of stability studies which we require for starting production from the new plant. So let's say if the new -- if the greenfield CapEx takes another 12 to 15 months from the time we decide to go ahead with installation of machineries and all, so -- will the pilot plant come into production earlier than the entire plant gets completed and we save on that 6 months of time?

Yes, yes, the pilot plant is scheduled to start by Q1 FY next year.

Okay, okay, so that is expected to start even if we -- let's say, if we delay the starting-off for the entire plant.

Correct. So that has not been stopped. Pilot plant work is going on right now.

Sure. And on product basket, we have been targeting to add 5 molecules every year, so as you have stated, that we have also started looking at higher volume and relatively bigger size of products -- so let's say, earlier, our target molecule size was generally in the range of around 20 crores to 50 crores. So the new products that we have already added or which we plan to add, are those products, let's say, their market size, bigger than what currently we have in our product basket?

Yes. 2 of the products which we are targeting have a much larger market size.

Okay. So that can be in, let's say, few hundreds of crores as well.

Yes.

Okay, okay. And thirdly, on the geography-wise split, sir, we -- like can you tell us like some of the geographies which are doing well for us, let's say, which have bounced back now and where the demand is good for veterinary products?

Which are geographies which have bounced back, you're asking.

Yes, yes. Which are doing well now and demand is back to...

Well, basically East Asia is bouncing back right now.

Okay, okay. And some of the new geographies which we are trying to penetrate and where we have got some success...

Yes. So East Asia has bounced back. Europe is doing well right now. Latin America is doing well. West Asia and Africa are still in trouble.

Okay, primarily because of the currency issues.

Because of money problems, yes.

Next question is from the line of Faisal Hawa from H. G. Hawa and Co.

Sir, going forward, that we are going to be in some kind of an expansion almost every year. What is the ROC and ROE that we are targeting which we will maintain given that we are a B2B business and pricing power will never come to us very easily? So will we maintain discipline on that?

I am unable to comment on that because we don't give forward guidance on our turnover or on our profits, but as I said, the long-term margins in our business are more like 17% to 22%. So we have just reached a lower level of that margin. We hope to take it to a little higher median going forward.

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

Sir, one clarification. In a previous participant, you said the pilot plant will start by quarter 1 of next year, so you're talking about calendar year. Or you're talking about the financial year...

Financial year.

Financial year, sure. And sir, if you may permit to ask a question with regards to the product registration in Europe: In the quarter 4 call, you had mentioned that, for 3 products, you expected to get approval by December. And you were to file for approval for further 3 products, so any details you can share on the same?

Yes. So we have filed for -- so there are 2 types of approvals in Europe one can take. One is on CEP. And the second is by filing DMFs. So we have filed for CEPs for 3 products. Unfortunately, it's taking much longer than we anticipated. Normally, pre COVID, they used to give approval within about 15 to 18 months. Unfortunately, right now it's been close to about 21 months since our filing and there are still queries being raised, so they are doing it at a far much slower pace, as compared to pre-COVID levels. So right now we think it might probably take another 6 months to get the approval. And in addition to that, we have also filed for 5 products. We have filed DMFs in various countries in the -- in Europe. So those are also under registration right now.

Sure. So this is 3 plus 5, total 8, right?

3 plus 5, correct.

Okay. And sir, further on the product side, in the previous March '23 call, we had mentioned that we had gone from -- we have added further 2 products. And also we were trying to do validation of further 2 products. So the commercialization of these 4 products has already started. The commercial sales has started...

Right now we have 28 products in commercial production. And so this was 6 months ago now which we have spoken, so yes, they are more or less now in commercial production, yes.

Sure. And sir, just one last thing. With regards to our greenfield CapEx, you had mentioned that we will go to the regulated markets with our greenfield CapEx coming on stream, once it comes on stream, so -- and also, our pilot plant, you expect to start by next year first quarter, so are we preparing the groundwork for the introduction of some of these products in the regulated markets from the greenfield facility?

No. The greenfield is being done primarily for the regulated markets only, with that in viewpoint, yes.

Sure. So basically, the groundwork, the preparation in terms of product site, we are at a somewhere advance stage of doing on the product site. Can that be a right assumption?

Yes.

[Operator Instructions] As there are no further questions, I will now hand the conference over to Mr. Rahul Nachane for closing comments.

Well, thank you, everyone, for participating in this call. If you have any additional questions or wish to engage with us further, please reach out to our investor relations partner, [ The Investment Lab ]. Their e-mail address can be found on the back of the investor presentation. We look forward to our next conversation again. Thank you very much.

Thank you very much. On behalf of NGL Fine-Chem Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.