PI Industries Limited (523642) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 FY '24 Earnings Conference Call of PI Industries Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nishid Solanki from CDR India. Thank you, and over to you.

Good afternoon, everyone, and thank you for joining us on PI Industries Q4 FY '24 Earnings Conference Call. Today, we are joined by senior members of the management team, including Mr. Mayank Singhal, Executive Vice Chairman and Managing Director; Mr. Rajnish Sarna, Joint Managing Director; Mr. Manikantan Viswanathan, Chief Financial Officer; Mr. Prashant Hegde, CEO Domestic; Mr. Atul Gupta, CEO Exports; and Mr. Anil Jain, MD, PI Health Sciences. We will begin the call with a few perspectives from Mr. Singhal. After that, we will have Mr. Manikantan sharing his views on the financial performance of the company. Thereafter, the forum will be open for a question-and-answer session. Before we begin, I would like to underline that certain statements made on today's conference call may be forward-looking, and a disclaimer to this effect has been included in the investor presentation shared with you earlier and also available on stock exchange website. I would now invite Mr. Singhal to share his perspectives with you. Thank you, and over to you, sir.

Good afternoon, and thank you for giving us your time today as we discuss the performance of PI Industries during the quarter 4 and the annual year '24. I will do use my remarks to share the strategic and operational updates around the business. I'm sure my voice is clear because I'm getting an echo. Is that okay on the other end?

Sir, you can go ahead, sir.

All right. Sorry. Okay. I will share my remarks in strategic and operational update around the business. Quarter 4 for the year has been another commendable performance from PI, yet again delivering broadly as to the guidance despite industry headwinds. Q4 revenue grew by 11% year-on-year. For the year, we had a growth of 18% of revenue. The improvement in the property stands even better at the PAT growth of quarter 4 and for the years upcoming from 32%, 37% respectively. The global industry has seen a performance pressure in the past 3 to 4 quarters, and the situation is yet to recover fully. The inventory destocking cycle is seemingly incomplete, and any material improvement in the demand and processing trends is projected to commence only in the later part of the current financial year. These trends chiefly impact generic products. PI has considerably stood apart being delivering above those trends in the last several quarters. Going forward, as on the ground situation changes, we will continue to do well, benefiting from the enhanced dimension of the industry. This has been possible due to differentiated business model and for portfolio of PI. Our growth is mainly driven by commercialization of new products in the early stage of the life cycle, these products have significantly growth potential and as and when the innovator progresses with the global execution, this gives us a future upside. The cycle continues, as we commercialize more new Ag molecules from these pipelines. What continues to attract global innovators to PI is our demonstrated capability in process development and innovation, efficient scaleup, complex molecules, project execution capabilities and our ESG standards above all with respect to IP. On the export front, including trend of commercialization of new molecules will only intensify. During the year, more than 70% of the growth has come from new products. Our pipeline of new molecules also remain robust. And here, the share of non-Agchem molecules of new inquiries stood at 50%. In the longer term, we anticipate an upside to 1/3 of new molecule commercialization to come from non-Agchem. As the technology and molecules mature, we see strong contribution to our growth rates. On the domestic side, we have seen some good performance owing to erratic monsoon and the El Nino condition, which led to long dry spells impacting insecticide and herbicide sales in certain geographies. Our emphasis has always been and will be on driving high-quality revenue. Our domestic portfolio comprises of in-licensed exclusive products that have significant growth potential. Over the past 2 years, we have stepped up our presence in the biological area. I'm very happy to share that our brand is gaining transaction with a 35% growth in Q4 and 29% for the year. Our Horticulture Specialist brand, Jivagro has also helped us in strengthening our position in these segments. And the recently launched products had seen an enthusiastic response of insecticide CLARET in paddy, herbicide EKETSU, the first-time three-way combination of rice; fungicide KADETT for seed treatment in soyabean and groundnut; and bio-fungicide PIILIN for grapes and chilies. Also, great response on CAMPANA insecticide or rice BPH and brinjal sucking pest. We continue getting new Ag molecules into India during '23, '24. We've introduced 7 new domestic brands, all of which have been received well. We have a range of brands which are always expanding and presenting the most advanced solutions in the crop protection to the farmer. The steady pace of the business introduced of such new brands contribute to the above broadening of the performance from us. The development pipeline include more than 20 products, including products in development and registration and underlines the visibility of growth for the business in the forthcoming year. I now turn my attention to the Pharma side of the business. We are right now in the process of building an integrated CRDMO market, which is offering and which is on its way. The initial upgrades to the research facility infrastructure upgrades, manufacturing facility, human-capital build-out process is progressing well. We are also augmenting our talent base by hiring global industry experts to implement best practices and intensify in the front of business development. R&D and pipeline inquiries have started shaping up to help achieve aspirational long-term growth of this segment. We are continuing to drive for the integrated research setup in the Agchem and once again, one-of-a-kind, single-site centre at Udaipur is crucial to our growth aspirations. The research center can render every technological process requirement from biological evaluations to chemical synthesis, product and process scale-up from bio and fermentation to various low-chemistry technologies. Our R&D set-up designed to global specification and world-class standards engages more than 700 scientists or 165 PhDs of which have delivered more than 170-odd patents so far. These teams are working to developed technology platform that gives us opportunity across the existing and new industry verticals. On the sustainability front, which is close to the heart of PI, we make great strides. At PI, it seems to be a culture of attributes to our business. PI has improved the S&P Global Sustainability Assessments ranking to the 95th percentile as we also well retained our gold medal in EcoVadis sustainable achievement with 98th percentile ranking. PI has also been featured in the S&P Global Sustainability Yearbook for 2024, thereby giving the distinction of ranking amongst the top ESG-rated companies globally. We have multiple programs around the ESG outcomes integrated with our business processes. As we shared earlier, PI continues evaluating inorganic opportunity in line with a long-term steady direction and growth aspirations, backed by strong science and technological capabilities. We in our outlook for the current fiscal year remain positive. On the domestic front, we will focus on portfolio diversification with high quality revenue from a newly introduced products as well as technology-based approaches to steer performance in the CSM business. The Pharma performance has gradually improved while we will make sure that year-end will come into an implementation for integrated CRDMO offering to go to the global customer. With this, I bring my remarks to an end, and will invite Manikantan to take this forward to discuss. Thank you once again for being a part of our growth and always being there to support us. With this, over to Mani to take the financials for the company.

Thank you, Mr. Singhal. Good afternoon, everyone on the call today. I will summarize the company's financial highlights for the fourth quarter ended March 31, 2024. Please note that all comparisons are year-on-year and refer to the consolidated performance of the company. As Mr. Singhal shared, our performance demonstrated a differentiated approach to doing business and a sharp focus on keeping operating parameters in line with our objectives. To share the performance highlights, during Q4 FY '24, we reported a revenue of INR 17,410 , a growth of 11% over the same period last year. This was driven by 15% growth in exports revenue to INR 14,701 million and around 5% decline in domestic revenues to INR 2,709 million. Gross margin and EBITDA improved mainly due to favorable product mix and operating leverage. Profit after tax increased by 32% to INR 3,695 million. Let me also cover the performance of the full year FY '24. Revenue was INR 76,658, a growth of 18% over the same period last year. This was driven by solid growth in export revenues by 25% to INR 62,970 million, which offset 6% decline in domestic revenues to INR 13,688 million. Profit after tax improved by 37% to INR 16,815 million. Effective tax rate for FY '24 is 11.3% with a one-off gain around 3% in our Pharma subsidiary PI Health Sciences. The ETR for FY '25 is expected to be around 24% due to tax exception of our second SEZ unit at Jambusar moving from 100% to 50%. Cash flow from operating activities increased to INR 20,359 million. This was due to higher EBITDA and efficient working capital management. The trade working capital in terms of number of days of sales reduced to 59 days vis-a-vis 79 days as on March 31, 2023. The inventory levels also reduced in terms of days of sales to approximately 62 days to INR 13,012 million. Our balance sheet further strengthened during the year. Network increased to INR 87,310 million. CapEx stood at INR 10,823 million, including Pharma acquired asset of INR 4,972 million. Surplus cash, net of debt, is INR 38,825 million as of 31 March, 2024. Our balance sheet and cash flows have stood robust in line with clear financial strategy and disciplined execution, thereby enabling a superlative performance. That concludes my opening commentary. I will now request the moderator to open the quorum for Q&A.

[Operator Instructions] We have the first question from the line of Abhijit Akella from Kotak Securities.

Just a couple from my side. One is on -- just to clarify the tax rate guidance. So we're not talking about 24% tax rate from fiscal '25 onwards, right? So that would be a continuing tax rate beyond that. Is that correct?

Yes, that will be the continuing income tax rate for FY '25 as of now and also FY '26. As long as we see deductions are available, we will be in that range.

Right. And Mani sir, this will be for 5 years now, right? And after 5 years, probably the entire tax holiday at Jambusar goes away, is that how it should be?

Yes. Currently, it looks like that, yes.

Okay. Got it. And the other one I just had, sir, was on the...

Sorry to interrupt, but your line is not very clear.

Okay. Is this better?

Yes, a little better. Please go ahead.

Yes. Okay. Just the other question I had was on the new product launches. So you mentioned that about 1/3 of the new products are going to come from non-Agro segments. If you could please just shed some color on what end-use industry these might be, whether it's electronic chemicals, semiconductors, et cetera? And then just one add on to this. What percentage of sales come from biologics in the domestic business? And if you could also possibly share the breakdown of the Pharma sales between Archimica and Therachem if possible?

Thank you, Abhijit, for your 10 questions in 2 questions, very smart. But let me try and answer some of them, as I remember. So your first question was regarding biological. Biological, we don't have breakup right away. But what we have kind of also communicated is that there is substantial growth in this quarter to the tune of 35-odd percent, and also if you look at our financial year numbers. So there is significant growth of 27% kind of growth over last year in biological side. The other question was about -- can you repeat your question, please?

Yes, yes. The non-Agchem sector, sir, which one would be the prominent ones we are looking at?

So new molecules that we were talking that 1/3 of the growth -- sorry, 1/3 of the new products are coming from non-Agchem space, yes. So this is about the kind of new inquiries, R&D pipeline, progressing, et cetera. So if we look at that pipeline, quite a significant number of products are from non-Agchem area. Some of the segments are, like you mentioned, these are electronic chemicals, semiconductors. Maybe Atul you can pitch in and briefly explain which are the other areas that we have.

Yes. There are other areas with respect to performance chemicals, advanced polymers which are used for the various applications apart from electronics and semiconductors.

Got it, sir. Yes, the last question I just had was whether it's possible to get the breakdown of Pharma between Archimica and the rest?

That may not be right now here, but we can provide you, Abhijit, from the sideline.

The next question is from the line of Rohit Nagraj from Centrum Broking.

Congrats on good set of numbers. So first question is on Pharma business. So the entire development spend, has it been completed in FY '24? And given that we have done CapEx of INR 132-odd crores, whether -- what is the kind of growth that we are looking in FY '25? And what kind of margins are we looking? And what could be the levers for the growth?

Well, this development process, it's still continuing, maybe for the next 1 year, 1.5 years, this cycle will continue. But yes, we will certainly be growing more than 25% in the next financial year, which is the current fiscal. In terms of margins, as I said, till the time we complete this cycle, development cycle, it is difficult to kind of clearly indicate the kind of margins. But yes, once we complete this development cycle maybe in next 1.5 years or so, then we will be getting to the normalized EBITDA margins.

Sure. And second question is on our overall consolidated business. So we have seen that there is a strong, almost 450 basis point expansion in gross margins during FY '24, and that has led to further EBITDA margin expansion. So how are we looking at it when we move to FY '25? What kind of EBITDA margins that are sustainable in FY '25 and onwards given that there could be some benefit from gross margins, which may taper down in FY '25?

We are presenting around the similar kind of margins, gross margins around 49%, 50% in FY '25, the EBITDA margins will also kind of normalize at this level as we are also kind of making a lot of development spend in some of the new segments.

The next question is from the line of Ankur Periwal from Axis Capital.

Congrats for a good set of numbers. First question, on the working capital side. Commendable job there in terms of reduction in inventory driving the working capital lower. How do you read this number going ahead, given where I'm coming from, this domestic business had been through in this year as well? And going ahead, hopefully, FY '25 onwards, things should improve. So will we see some increase in working capital led by inventory going ahead or these numbers should sustain?

So we will sustain these current levels. While there are some improvement opportunities, but we also believe that in some other areas, there are going to be continuous challenges. So more or less, we believe that we'll be able to sustain the current levels that we are operating at.

Great, sir. Secondly, on the overall revenue growth guidance that you have mentioned 15%. Is this at the company level? And how do you see the Agchem CSM part going here?

Yes. So this is at the company level. Of course, the domestic, as you all know, that loss will depend on how the overall season pans out. Yes, let me again repeat. Yes, this 15% guidance is at the company level. We all know that on domestic side, a lot depends on how the overall season will pan out. But going by the positive commentary as of now that is about monsoon and onset of monsoon, et cetera, we believe that we'll be able to kind of achieve this kind of growth on all businesses, domestic side, export side as well as on Pharma side.

Sure, sir. And lastly, if I may, just on the cash that we are sitting on, plus the incremental operating cash flow generation, will for the Pharma business scale up, are we still looking at the inorganic part or probably organic CapEx can see a significant uptick?

Right now, particularly in Pharma, we are focusing on settling this current development cycle, investment cycle, okay? But yes, we are also looking at several other opportunities and all winning opportunities, actively evaluating them. But in Pharma, particularly as your question is, we are more focusing on completing the current development.

The next question is from the line of Vivek Rajamani from Morgan Stanley.

Two questions. You mentioned in the presentation about 70% of the export growth has come from the new products. Would it be possible to share some color in terms of what is the absolute share of these new products in your CSM portfolio today? And where do you see the scaling up, say, in the next couple of years?

These percentages or absolute numbers won't be in front of us. But suffice to say that basically, we are diversifying this whole portfolio of CSM which is also kind of reflecting in the growth numbers that we are seeing. That's significant percentage of growth is coming from new molecules that we have commercialized in the last 3 years. And secondly, even the pipeline and the commercialization, more than 25%, 30% of the molecules are from non-Agchem base, basically diversifying the overall portfolio.

Sure, sir. And the second question was you've obviously mentioned that 1/3 of the new molecules will be non-Agchem and they will also ramp-up. Just wondering if these products will still be operated out of your existing speed of facilities? And at what point in time do you think you'll have to invest in new or dedicated capacities to cater to these new non-Agchem activities?

Currently, these are being managed from our existing site as well as existing multi-purpose plants, white spaces. But as the volumes will grow, we can certainly look at dedicated multiple plant. By the way, one of the plant which is in process, is a kind of a dedicated plant for some of these products.

The next question from the line of Rohan Gupta from Nuvama Institutional Equities.

First question is on the single line that on the new products you have mentioned in the presentation, roughly 6 new products and a large part of the growth in exports have come from -- 70% has come from the new products. I mean, not immediately in the near term, I mean, not FY '25, but I'm looking at over the next 3 years, how do you see that the revenue contribution coming in our export market will be from the new products in overall exposure and can you give some broader color on that?

It would be quite significant contribution. And if we see next 3 years, considering the kind of level that we have already achieved, I think more than 35% -- 30%, 35% of the contribution would be from these products. It would have been commercialized in last maybe 5 years or so. So yes, going forward, there is lot of focus put on commercializing new products, intensifying this whole development phase of many of these projects which are in the R&D phase today and they were in R&D phase in the last couple of years. But yes, I mean, many of these products are being commercialized and scaling up.

Okay. Sir, if you can give some sense on this Pharma piece where the margin profile is still, I mean, gross margin though is pretty decent at 65%. But at EBITDA level because of the overheads and all, so if you can give some sense of how the revenue ramp up will be there on the Pharma part of the business. And if we can expect that because you have initially guided that your EBITDA margin in the Pharma business also be aligned with the PI margin over the next 3 years. I think that almost 1.5 years already completed. So are we looking at that margin profile of Pharma realigning with the PIs and in what timeframe?

Yes. We have just completed one year of these acquisitions, as I was telling to the earlier participant that the development cycle as we see today will continue, the investment development cycle will continue for at least next 1.5 years or so. And we will surely see the normalized EBITDA margins post Ind-AS.

So we are still looking at in next 2 years EBITDA margins in Pharma business is aligned to 22%, 24% kind of numbers with the PI number. Is that a fair assumption?

Yes, it will surely be 20%-plus kind of level post 3 years of development.

And sir, after one year of acquisition of Pharma, so once again going back to the history when we were looking at that the Pharma piece should contribute roughly INR 1,500 crores kind of revenue over the next 3 years. So are we still looking at those numbers intact from the Pharma part?

No, I don't know INR 1,500 crores, but you see the point here is that in the next 3 years time -- 2, 3 years' time, we would surely complete this investment and development cycle, number one. Number two, the growth in revenues, as I was telling to the earlier participant will certainly continue during this period also in the development and investment scale. And our outlook for next 3 to 5 years kind of more than doubling these revenues of what we have acquired is certainly there, that will continue.

Okay. Sir, lastly from my side and then I'll come back in queue. In terms of the growth guidance, in terms of revenue, you are seeing roughly 15%. How are the new molecules launched in exports and also in biological in domestic? So -- and in that, we are still looking 15% growth, it is because on our base molecule, are we expecting some kind of deceleration there in growth or the revenue from growth will start declining? Are we expecting any of that growth at all while giving the revenue guidance of 15%?

Can you again please repeat? We were not able to clearly hear your question. The line is not very clear.

Sorry, sir. I was saying that we are still giving a 15% revenue growth guidance. However, the 6 new products launched in exports market where you see the significant ramp up along with the biological. So in our view, the growth guidance should be higher unless we are expecting our top contributing product, pyroxasulfone is seeing some degrowth. Are we reflecting any such possibility in -- while you are giving the guidance of 15%?

No, it's not the degrowth or the growth prospects of a particular product. You see, it is product mix, product portfolio, there are products which are quite stable, there are products which are over period degrowing, and there are products which are being launched which are early in their life cycle, and they are growing. So this is the kind of portfolio. And if you also look at our business model, the business model is also that every year, you keep continuously commercializing these new products which takes care of some of the products, old products which are kind of where the growth remains. So the simple point is that on balance basis, if we look at overall, we are confident that we will be in this kind of growth momentum, 15% -- around 15% kind of growth momentum. And mind you, the overall industry sentiment is not very positive. So keeping that in mind, I think this is quite reasonable.

Last bit from my side, if I'm allowed. On the CapEx front, you mentioned that actually INR 1,100 crores kind of CapEx which we have done for the current year and INR 500 crores in acquisition. So INR 600 crores kind of investment in existing business. However, I think you're guiding for roughly INR 800 crores investment for the current year. So if you can share the CapEx number for next year and is there any spillover CapEx we will be looking into next year and the current year?

So we are looking at close to INR 800 crores to INR 900 crores kind of CapEx in the current fiscal.

Okay. So there is no spillover impact like because I think that last year, we were still short of close to INR 200 crores in terms of CapEx. So INR 800 crores is a maintained number for this year also in terms of CapEx. We are increasing the CapEx guidance to INR 1,000 crores?

I mean, there is -- obviously, there is little higher plan, but when you end up with your actual spend and capitalization, et cetera, there is always a lead and lag. Keeping that in mind is what we are indicating INR 800 crores, INR 900 crores kind of number.

The next question is from the line of Sumant Kumar from Motilal Oswal.

So we have seen around 37% kind of degrowth for FY '24 in Pharma business. Sir, can you talk about what is the key factor and how things is going to shape up in FY '25, that should be a risk factor?

Anil, maybe you can briefly explain. Okay. It seems his line is not clear. So this is mainly because of development of some of the products that -- innovative our products that we have been supplying. That is the key reason for this.

Okay. So is there any realizing decline for the existing portfolio also?

Your line is not very clear.

So is there any realizing decline I'm talking about?

No realization decline. There's no price realization decline. This is supply deferment.

The next question is from the line of S. Ramesh from Nirmal Bang Equities.

So in the Pharma business, the development expenditure which you're talking about right now is routed through P&L. So can you give us some indication of what is the kind of development expenditure would incur, say, over FY '25, '26? And will it continue through the P&L or will you capitalize it after some time?

No, it will continue through P&L, and that is the reason we have explained this in our communication. However, we don't have in front of us the development plan for the next couple of years. But yes, as I said earlier, this cycle will continue for the next at least 1.5 years.

In terms of ramp-up in revenue from the post-Ind AS INR 300 crores. Can we expect, say, INR 500 crores by '26 and this pro forma EBITDA margin after -- before development spend of 12%, can that go to about 14%, 15% in the next 2 years?

Yes, that's what we are expecting.

And in terms of the order book execution that you have right now, that is presumably the CSM exports excluding Pharma, right, $1.75 billion?