PI Industries Limited (523642) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '22 Earnings Conference Call of PI Industries Limited. [Operator Instructions] As a reminder, all participant lines will be in the listen-only mode. I would now like to hand the conference over to Mr. Nishid Solanki from CDR India. Thank you, and over to you.

Thank you. Good afternoon, everyone, and thank you for joining us on PI Industries Q1 FY '22 Earnings Conference Call. Today, we are joined by senior members of the management team, including Mr. Mayank Singhal, Executive Vice Chairman and Managing Director; Dr. Raman Ramachandran, Managing Director and CEO; Mr. Rajnish Sarna, Joint Managing Director; Dr. K.V.S. Ram Rao, Executive Director; and Mr. Manikantan Viswanathan, Chief Financial Officer. We will begin the call with key perspectives from Mr. Singhal. Thereafter, we will have Mr. Manikantan sharing his views on the financial performance of the company. After that, the forum will be open for question-and-answer session. Before I begin, I would like to underline that certain statements made on the conference call today may be forward-looking in nature. A disclaimer to this effect has been included in the investor presentation shared with you earlier and also available on the stock exchange website. I would now like to request Mr. Singhal to share his perspectives with you. Thank you, and over to you, sir.

Yes. Thanks. Thanks, Nishid. A very good afternoon to everyone. Again, once again, I'm very pleased to address you all and hope everyone and your families are keeping well and healthy in these challenging times. Now let me start with PI. And then I think PI yet again has delivered a strong improvement in performance in the first quarter for the year 2022, despite the significant COVID-related challenges that you all have been witnessing in this quarter, with revenue increased by 13%, EBITDA up by 8%, and this PAT depicted a growth of 29% over last year. Now coming to our CSM business. It's continued robust growth momentum with a 31% year-on-year growth. We are looking at 6 new molecules to be commercialized in the coming year, where in addition to the capacity is commissioned in the previous year, will be commissioned a new facility in the present quarter. The momentum inquiries in order book buildup has been encouraging, indicating a robust growth in the coming years from new commercialization. During the quarter, I'm again pleased to share that we have indicated new relationships with new customers in ag chem, electronics and other fine chemical, specialty chemical domains. Our existing portfolio has grown sizable and continued to ramp up further, in line with the requirement of the innovative partners, higher throughput creativity by us and continued CapEx. The domestic business, on the other hand, as growth was subdued due to the combined hybrids over the previous year, which has grown in the previous year by 50% year-on-year, delayed down to the monsoon in the key cropping regions, deadly spread at the corona -- COVID-19 during the quarter, particularly in the rural areas, which impacted the sentiment of farmer distributor channels. However, the COVID situation in essence improved and with the monsoon forecast coming to normal expected by the coming months, the remaining period, we see an improvement in the demand in the current quarters coming ahead. We have 3 new products lined up in Q3 with rice, cotton and horticulture portfolio. We have the strongest portfolio of horticulture in the country and are confident of having a strong growth. Q2 will see a product transitioning to new packaging that will add efficiency and mass branding in the customer mindset. And assimilation of Isagro's domestic operations into Jivagro has comprehensively enhanced our hold in -- within India in the horticulture brand. Current season will see PI lend its experience base, knowledge and agility on to the field through the application services where we, by design, will set up to address specific farming challenges. And such initiatives will incorporate novel technologies and methods of communication and more deeply to deliver efficiency, process [indiscernible] to our solution. It remains our stated objective to diversify technology basket. The new research facility, which we are developing, will further augment our efforts in this direction. I would like to share that we have made marked progress under our product research initiative as well as 2 promising leads have merged, one being a novel fungicide and other being a novel broad spectrum insecticide. We continue to allow the global innovators to tap [indiscernible] opportunity in these initiatives, making PI one of the first in this arena in the Indian landscape. Coming to other strategic initiatives. We're very pleased to share that last the week our Board approved the acquisition of the API and intermediate business of Ind-Swift Laboratories, in line with a long-term objective for diversifying into adjacencies and building the next level of -- next growth engines for the expectation. This acquisition will help us in building a differentiated platform in the pharma value chain. But combined a technological product pipeline and leveraging the competencies across the complex chemistry operation and commercial expanding the global research and large innovative partnerships developing solutions. As you see, the specialty chemicals has emerged a high-growth opportunity from Indian domestic companies, where this benefit of robust domestic consumption, large chemistry capabilities and favorable geographical scenarios, we are seeing growth momentum in the Indian industry, which has significant potential to improve the market share in the global opportunity. PI strategy and approach has matched the client aspirations and the development of both research and the [ power ] of manufacturing profile, that is compelled to the scaling up of our partnership with global innovator. This is [ evident ] predictability for upside in our approach, and we are in there for the long term. Our aspiration to develop a diversified business makes the target much large global opportunities in the fine and specialty chemical space with a differentiating technological approach so that we can sustain the growth momentum for long periods of time. Proposed acquisition is the first significant step in this direction. I have covered the key perspective that I want to bring to you, and now I would like to invite our new CFO, Mr. Manikantan Viswanathan, to lead the conversation with views on the delivery improvements and the financials. He brings to PI a long tenure of experience in the fields of finance having worked with groups like Reliance, Godrej and other large investment groups. And his journey to PI will strengthen our bandwidth efficiency management growth journey of PI. Thank you, and over to you, Mani.

Thank you, Mayank. Good afternoon, everyone, and thank you for joining the call today. I'm personally delighted to join PI leadership team. Just to give my background, I am a chartered accountant with 30 plus years of experience across large conglomerate. Prior to this, I was associated with Rossari Biotech as their group CFO. With my exposure and experience, I'm confident that I'll be able to contribute and be part of the growth journey -- PI's growth journey. I would like to share financial highlights for the fourth quarter of fiscal year 2021. All comparisons are on a year-on-year basis and consolidated. In Q1 FY '22, we registered 13% revenue growth at INR 1,194 crores, driven by robust 31% expansion in exports at INR 807 crores, supported by strong volume growth in key products. Domestic operations reported some moderation in performance due to higher base of the last year and delayed onset of monsoon. Domestic revenues stood at INR 387 crores in Q1 of FY '22. On the profitability front, gross margin increased by 1.7%, supported by favorable product mix in the domestic operations. EBITDA enhanced by 8% to INR 252 crores translating to an EBITDA margin of 21%. Moderation in margin was as a result of 26% increase in overhead cost relating to onetime expenses pertaining to COVID management as well as consulting team and other costs pertaining to several strategic initiatives and projects. Profit after tax improved by 29% year-on-year to INR 187 crores, led by reduced [indiscernible] during this quarter. Strong performance during the quarter further strengthened the balance sheet of our company. We generated operating cash flow of INR 250 crores in Q1 FY '22. Further, we tactically increased our inventory position to cover ourselves in case of any supply disruption due to COVID. Overall surplus cash net of debt stood at INR 2,193 crores. We look to fund the acquisitions of the API and intermediate business of Ind-Swift Laboratories Limited of INR 1,530 crores from the proceeds of completed QIP and internal accruals. Let me also share some details about our capital expenditure. Our CapEx [ outlay ] for Q1 FY '22 stood at INR 71 crores, and we remain committed of spending close to INR 350 crores in the current fiscal year to support our growth momentum. We remain positive on the robust outlook across our business verticals of domestic as well as exports backed by solid visibility to support the momentum and now pharma, which we look to integrate this year, subject to fulfillment of customary closing and [indiscernible]. We will also wish to maintain our original guidance of above 15% of revenue growth for FY '22. This concludes my opening remarks. Now may I request the moderator to open the forum for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Nitin Gosar from Invesco Mutual Fund.

Sir, a couple of questions. One, wanted to understand the acquisition that we have done, the sites belong to the northern part of India, while if one were to see most pharma API intermediate companies situated in Andhra Pradesh and then as well around Telangana. What gives you a strength or a scope of excitement to acquire [indiscernible] northern part of India?

Sorry, your voice is not coming clear, and I couldn't get your question because it's very muffled.

Sorry. I'll just repeat, sir. Considering the current acquisition that we have done, which is closer to the northern part of India, while if I were to see the API and Intermediate Industry, per se, they are largely situated in southern part of India, what kind of distinct advantage we are seeking while acquiring these assets, which is situated in northern part of India?

Yes. Thanks for this question. So for us, primarily, the criteria for identifying a stable target was based out of the quality of assets that this company has, the kind of regulatory approval that this company has, the product portfolio, the pipeline of products in R&D. And these kind of criteria is not necessarily that locationally where this company is. So we have found this after spending reasonably good time in evaluation of a number of options that we were evaluating. We found that these criteria or these requirements that we had were getting met by this particular option. And we were also kind of able to clearly assess that what kind of additional value that we can also create, what kind of synergies and additional values that we can create by combining our experience and portfolio and all. And we found all that getting met in this particular option, and that has been the clear basis for our decision.

Second question is pertaining to the Ind-Swift acquisition. How does that fit in the long-term plan of ours getting into pharma CRAMS kind of business? I believe Ind-Swift is largely still doing generic kind of business?

Yes. So current model is generic products, although they are in a leadership position in many of these products that they are dealing. But apart from that, they also have a relatively smaller CRAMS piece -- CRAMS business piece. And our idea is to gradually grow that business, look at opportunities that we have with PI in our pipeline and also exploit more opportunities that are in pipeline of ISLL in terms of CDMO. So yes, the longer-term objective will be to further grow and make that a sizable component of this overall business.

Okay. And strategically, so PI will use its R&D skill and Ind-Swift will provide the manufacturing platform. Is that the way to understand?

Can you repeat? Your voice is not very clear for us.

My bad, sir. Sir, if I were to understand, PI will provide the R&D-related skill set and Ind-Swift will provide the manufacturing platform, is there a -- is this the best way to understand the acquisition?

Well, Ind-Swift also -- ISLL also has their own R&D. There are more than 150 people [indiscernible]. They have a very good set of R&D setup. Our point is that with our technological capabilities and our strength in R&D, we will further strengthen this overall R&D in pharma and expedite the pipeline that both the companies has. And in addition, they have a good set of assets, more than 26, 27 manufacturing blocks and other capabilities. But there also, we will through -- and we can certainly leverage our operational excellence capabilities in chemical -- large chemical plants and scale up. And by combining these capabilities, we will be able to create much bigger value. That's the whole idea.

So if I was to add, if you were to look at the bucket, PI's strength is obviously in the capability and global business. There's the concepts in the areas of technology, chemistry and process capabilities coupled with the growth compliance and regulatory framework adding with the quantum of pharma, which obviously, which comes well with ISLL, highly accredited facility coming with all the regulatory approvals with no challenges on that front, good quality infrastructure; having demonstrated history and capability, which already exists; obviously, a child has come with the generic portfolio with certain pieces in CDMO. Clearly, PI's competent leadership backed with the pharma knowledge ability that we already accumulated with leadership in our organization and our technical capabilities, we plan to combine these 2 lever to create different level playing platform to differentiate ourselves in the pharma space in the next 3 to 4 years. And that's really where things are moving in that direction. Yes. And this is just a step to accelerate the process for us to make a larger impact in the pharma play.

Mr. Gosar, may we request you to come back in the queue for a follow-up, please. [Operator Instructions] The next question is from the line of Utsav Mehta from Edelweiss Asset Management.

Am I audible?

Yes.

So 2 very quick questions. One is that Ind-Swift, if you look at their current business, it's a business that's operating at extremely high working capital, almost [ 300-plus days ], very low asset terms as well. Also, there is also an element, if I'm not mistaken, where I think promoter-related entities own almost INR 290 crores, INR 300 crores of receivables through Ind-Swift. So could you just provide some sense on whether this working capital can come down back to some levels at which PI currently operates? And does the acquisition value also include the INR 300 crores to be returned back to Ind-Swift?

Thanks for your question. Yes, certainly, currently Ind-Swift is operating at a much higher working capital levels. As we all know, they were passing through financial stress, and they had their own reasons of operating at these levels. And obviously, once PI acquires, we will certainly be managing the business as per the normal working capital norms, which is certainly anywhere between 25%-plus or around that, 25% to 30% around that. And therefore, we will certainly, in a quick time, we'll be able to kind of bring down this working capital levels of this company to near optimal, okay? In terms of our consideration, yes, I mean, there is a normal working capital which is part of this consideration that we have indicated. And as usual, the acquisition size consists of the normal working capital, which is certainly not this old doubtful debt or receivables or related party items. But yes, there is a normal capital -- working capital level, which is part of the consideration.

Okay. So this money basically will be sort of considered written-offs when taking over the businesses, that's probably correct, right? It is just -- this won't be transferred?

Yes. Yes.

Okay. And my second question is, as you go about cleaning up some of this business, making it lower working capital, more profitable, do you believe that this Ind-Swift top line of INR 850 crores will need to be reduced and some of the more unprofitable business sort of need to be stopped before you can start growing the business again?

Well, whatever assessment that we have made, obviously, we'll be making a more detailed assessment, but this is our assessment so far. We see a lot of unexploited opportunities to even grow their existing products. Not -- maybe not all products, but many of their products, there are unexploited growth opportunity, which we will certainly kind of try and achieve by commercial excellence on one side. And on the other side, yes, we have also tried to articulate in our release that we will certainly strengthen this product portfolio by combining our own product pipeline that we have been able to build and identify over the last couple of years through our efforts in pharma space. So by combining these 2, yes, I mean, ultimately, the business has to run as per the financial parameters and other strategic parameters be it asset terms or working capital terms or improved margins and all, and these are going to be obviously the clear guidelines -- threshold for us to kind of grow this business from here.

The next question is from the line of Abhijit Akella from IIFL Securities.

First, just a question on the CSM revenues this quarter. They seem to have fallen on a sequential basis to about INR 800 crores compared to INR 1,000 crores last year -- last quarter, 4Q. So any color you could shed on what's driving that? And should we expect this to come back to the fourth quarter run rate starting next quarter?

Well, CSM, although not as seasonal as we see in domestic, but still, it is driven by the season -- global seasons. So it is not that revenues are distributed equally across all the 4 quarters. There is a price increase in the second half and particularly by the end of the year, given the inventory plans or business plans of the customer company. So yes, I mean, if you see year-on-year growth, there is a decent growth, more than 30%. And then we expect to end up -- on a year-on-year basis, we expect to still except we still achieved the growth in subsequent quarters, not necessarily on a sequential basis.

Okay. Got it, sir. And the other thing was just on the guidance that you have provided for fiscal '22, this 15%-plus growth guidance. Does that -- is that excluding the acquisition? Or how should we think about that?

Yes. That excludes acquisition. I mean this guideline was primarily for our organic growth.

The next question is from the line of Ritesh Gupta from Kotak Securities.

Congrats on a great set of -- great acquisition, actually. Just wanted to understand a bit in terms of how you see the opportunity in terms of your own pipeline? I mean, if you could just -- you have talked about your own pipeline, but let's say, what kind of areas that you are focusing on? Is it more on the intermediate side? Is it more on the -- on the APIs, which are turning generic in the near term? Or let's say, the focus is actually to go and cross-sell it more as we walk out. I think that's the question number one. And the second question is on the -- just wanted to check on the CFO resignation. I mean there have been a couple of them -- I mean not couple of them actually, but yes, I mean, we have seen multiple resignations over the last 6, 7 years. So could you just give us a sense on what's the thinking there? And why there have been so many changes?

Yes. So I think on the CFO front, obviously, the incumbent who was there had a certain work to relocate to Delhi, had certain locational challenges and also the expansion of work. So he decided -- as group CFO and he decided to step down. And Mani, in any case, was the part of the plan to join in, which has now been inducted and so we are in that process [indiscernible] Thank you.

Sure.

And coming to your first question, Ritesh. I mean, currently, we will not be in a position to give very specific answers, which are the kind of products that are in pipeline and what kind of growth that we would expect from them. But yes, alongside the closing of this transaction, we shall certainly come back with a very detailed commentary that what are the areas that we are focusing, which are the molecules or products, both on intermediate side as well as on API side from the combined entity that we will target in the next 2 to 3 years for scale up and to accelerate the revenues.

Yes. So probably to answer that we look at two-pronged strategy. What is that new comes in, and obviously, has a gestation period and already as you know, that some of the products that they already have strengthened, leveraging capability. How do we further strengthen them and bring them in our technology capabilities to really get leadership position from global level customers. That's the two-pronged strategy that we're working with short and the long, yes?

Sure. And I don't know if you've discussed this earlier in the first few minutes of the call. But on the -- you talked about 2 discovery stage molecules. So I mean, what's the plan there? How close it is to commercialization? Could it be many, many years ahead? And you have also talked about the innovator partnerships that you're looking at. So if you could just give us some sense there?

Yes. So I think this is [indiscernible] to the company in that years of years we've been talking about investment in R&D with the amount of investment in R&D. And today the company has been able to come out with 2 innovative molecules, which can be globalized. The first Indian company to bring innovative products to the world markets. Obviously, this is right now at an early stage of development. And we, again [indiscernible] given that partnership approach. I'm going to be looking at the co-development across the globe with global innovators and partners, who could support in the development activity across the world. And that's where we are. So it's a good moment -- moment of pride again, a good show of PI's ability in its research capability at the global level business [indiscernible].

The next question is from the line of Rohit Nagraj from Emkay Global.

Congrats on the acquisition. So the first question is, again, on the acquisition front. So in terms of the business, how are we looking at the integration benefits over the next maybe 2 to 3 years? And whether the same team will remain there and spearhead the business? And are there any performance-related payments on the acquisition?

Yes. What you mean by the clarity? Sorry, what do you mean by the same team remains there?

I mean do we integrate the current team? Or there will be some team which will we let go off because of the integration?

No, no, no. I think that's a separate world. because as a [indiscernible] pharma, the skills are there, so that currently continues to remain. Obviously, we will augment the team with more resources to develop the future strategies. As you know, the management, which is owner-driven, is stepping out. So we already are in the process. We've already got some. We'll be working to build a robust team to actually drive their business to the future. So we very much will integrate on the members of team which are there as a part of our play.

And this business is getting acquired along with the existing team. So they have some close to 1,500, 1,600 people on [indiscernible] basis, and they'll be part of this acquisition. So they obviously, they remain the part of this new entity and further strengthening will be done on different leadership levels to kind of drive the growth of this new entity.

Right. And any sizable integration benefits that we are looking at?

Well, as I said to the earlier participant that we are in the process of putting together -- there are obviously initial assessments done. But as part of this next couple of months exercise, we will be certainly kind of clearly defining these things. And alongside closing, we shall come out with more details on...

Also, please appreciate that there is a different business. It is not a synergy with the existing and pharma needs a different approach in management. So the more -- and the further we are investing to grow this business and develop. So the benefits would be more from learning capabilities, which for the larger general approaches which we have here and investing in that to build that business up. That's really where -- so don't see much of integrated benefits as there are different verticals, which will run in a different way because the business requirements are different because [indiscernible] pharma and most of them are regulator perspective.

All right. Got it. Sir, the second question is in terms of the QIP money. So we have invested about INR 1,500 crores in this acquisition, and we are still left with about INR 500 crores of money. So are we looking at another inorganic opportunity in the future?

Yes. So we will continue to kind of keep looking and evaluating more opportunity on technology side and on other areas that we have identified for ourselves which are in line with our long-term strategy. So yes, we'll keep evaluating and looking at opportunities. Besides this, we also have our organic growth plan. So yes, I mean, we will be looking at overall [indiscernible] both QIP and our internal accruals for these subsequent initiatives that will be taken...

Yes. I think the initiatives will be based on our strategic direction. And there anything which is fitting our competence capability to look at and in alignment to our business. This is how we look. And I think timing is critical based on where we are and what we are doing. So very clearly, growth is a clear-defined objective and [indiscernible] smart is the growth for us. So keeping those 2 in mind, this will obviously be a part of our plan.

The next question is from the line of Bharat Shah from ASK Investment Managers.

Yes. The first question on the acquisition. Philosophically, I would say an acquisition must meet with 3 criteria: one that it must create value of its own and its economics must make sense. Second, the company to be acquired, we should be able to add value so that it's more than what we've acquired. And third that what has been acquired should be able to add value to what we are doing in our existing business. So if you agree with these framework, I would like to have a feedback as to how you view this acquisition on these 3 parameters?

[indiscernible] take it. That's a very good question, and I think that's the right way of looking at things. But when I just look at the last question, certain characteristics which are there in pharma, which come from different platforms, which come into play from a competency building capability in terms of technology chemistry or nonchemistry base and [ dramatic for ] others. It's something which we believe we will be acquiring. And I think there's a crossover lever which would play there. Third, it is also opening a larger channel in the other part of the business. In the complementary strength what we already know well is chemistry and process. Fourth, it's a highly regulated and compliance-regulated environment, which PI is well versed with and works in that framework. So hence, for us to move up the value chain and handling that in the pharma is something we believe can be done well. Fifth, clearly, the growth path which we have been able to speak [indiscernible] is on my internal which has been on the work before even looking at the acquisition that's already at plan. So there is a synergy which comes, which is again complementary backed with our own capabilities in R&D. So looking at the 3, 4 pillars which integrate well, this the make the right acquisitions make a step and then to say how we can find other things to make them jump. So that's where we are right now.