Thread by @ValueEducator

India Pesticides Ltd - A company which has performed well in the generic agrochemical space:

CMP: ₹ 217

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1. COMPANY OVERVIEW:

India Pesticides Ltd was incorporated in 1984. The company is into agrochemical technicals and formulations and is among the top five manufacturers for few of their herbicide and fungicide products.

The company also manufactures some active pharmaceutical ingredients for the pharma industry.

2. BUSINESS VERTICALS:

The company has 2 main business divisions which are:

A) Pesticides
B) Bulk Drugs

-Under Pesticides, the company manufactures agrochemical technicals, intermediates and formulations which belong to the herbicides, insecticides and fungicides categories. The table below shows some of the key technicals and formulation products for the company:

- In the table for technicals, Thiamethoxam, Diafenthiuron and Pretilachlor were launched by the company in FY22.

- Under bulk drugs, the company manufactures 2 key active pharmaceutical ingredients which are used in dermatological applications.

-The company gets the majority of its revenues from pesticides. The chart in the image below shows the split between agrochemical technicals and formulations for the company.

3. OPERATIONS:

A) DOMESTIC BUSINESS:

-The domestic business of the company is purely branded formulations while some bulk formulations are exported to customers in various countries to the amount of 2-3%.

-The company has 20 sales depots, 20 company branches, 18 warehouses and 4712 dealers as part of its distribution network with presence in states such as Punjab, Haryana, Delhi, Rajasthan, Gujarat, Madhya Pradesh and others.

-The company plans to expand its presence to PAN India level for their formulation business.

-The branded formulations made by the company are supplied to clients in the domestic market like UPL and Sharda Crop Chem.

B) INTERNATIONAL BUSINESS:

-The international business is the export business of the company where it exports its technical products on contract basis to customers over 40 countries across the globe at regulated markets such as the US, Australia, Europe, South America & Asia.

-The company supplies technicals to global MNC players under long term contracts spanning 5-7 years and the raw material prices are checked every quarter.

-The company has a clause in its contracts where it can renegotiate any change in raw material prices every quarter or half year with their customers.
-The company selects the molecules which it wants to contract manufacture for its customers after getting the requisite agreement

from their customers. The company allocates 50% of their production capacity for a single customer and the remaining capacity is allocated for other customers. They enter into all their contracts based upon these criteria which they have been following for a very long time.

-The technicals made by the company are supplied to clients like Conquest, Syngenta, Stotras and Ascenza in the foreign markets.

-Now that we have seen the domestic and international business of the company let us now see the contribution from domestic and export business to the revenues of the company and the top 4 customer contribution for the company.

-The chart in the image above shows the revenue split between domestic and export business. As seen from the chart, the share of the exports business has grown over time from almost 39% in 2017 to 53.30% in 9MFY23.

-The chart in the image below shows the revenue contribution from the top 4 customers. As seen from the chart, the top 4 customers have consistently contributed to above 40% to the business of the company with the contribution coming down to 39% in FY22.

4. FINANCIALS:

-The chart in the image above shows the trends between Revenues, Gross Margins and EBITDA margins of the company. As seen from the chart, the revenues of the company have increased consistently from ₹248 crore in 2018 to ₹697 crore in 9MFY23.

-The gross margins have also risen consistently from 49.81% in 2018 to 56.82% in 2022 due to the focus of the company to enter high gross margin products and to make the product starting from very basic chemicals with complete backward integration for the given product.

-The reasons for drop in gross margins for the 9MFY23 period are the carryover of high-cost inventory and the increase in operating and fuel cost.

-The company expects it’s gross margins to stabilize at 50% in the next 2-3 quarters which was 48.5% in the 1st quarter and 43% in the 2nd quarter and 45.9% in the third quarter of FY23. The company does not expect further deterioration in their gross margins post the 43% level.

-As seen from the chart, reasons for drop in EBITDA margins in 9MFY23 are the logistics problems faced by the company, the increase in the price of raw materials which the company buys outside of India and in India.

-To avoid production loss, the company bought more raw material than it usually does and is now stuck with a high cost inventory for which it has not been able to pass the prices fully to it’s end customer.

-The green fuel rice husk which the company uses for it’s energy consumption has also seen a threefold rise in prices from ₹300 /quintal to ₹900 /quintal. Excluding the herbicide category, the company has been able to pass most of the price increase to it’s end customers.

In herbicide, they have been partially able to pass on the raw material increase.

The inventory amount is worth ₹225 crore as of Q3FY23 and by FY23 end the company plans to reduce the inventory amount by ₹25 crore.

5. FUTURE OUTLOOK:

-For the Sandila expansion, the company has spent ₹54 crore out of the total planned capex of ₹70 crore by 9M FY23. The company had planned a total capex of ₹140 crore crores over FY22- FY23 for Sandila Unit with an expected asset turnover of 2-2.5x.

-The capacity expansion project at Sandila is on schedule. As part of this capacity expansion project, the company recently commissioned a new herbicide which is Metribuzin with a capacity of 300 MTPA. It has a starting price of ₹ 3500/kg.

-The intermediate capacity is expected to come online in either March or April 2023. The total capacity added will be 4000 MTPA which will take the total capacity of technicals for Sandila unit from 21,400 MTPA to 25,400 MTPA.

-The new herbicide commissioned will primarily cater to the export market . The company has permission from the regulatory authorities to install a total 30,000 MTPA technical capacity at Sandila unit.

-The company has a plan to launch 14 molecules once the Sandila expansion is completed as mentioned in their Q2FY23 concall.

-Out of these 14 products, for around 5 products the company is backward integrated and in other products one of the key raw materials is being sourced from China which the company plans to mitigate by doing backward integration and developing its own technology.

-The company sources most of it’s raw materials locally and is backward integrated in most of it’s products. Almost 90% of the key raw materials required by the company are being sourced outside China.

-The raw material for their product Captan is mostly sourced locally and a miniscule amount is sourced from China. The company plans to go for backward integration for some of its products which will help them to reduce the raw material import dependency on China.

-The company imports around 35% of their total raw material purchase and 20% of the total raw material purchase is imported from China.

-The company’s strategy would be to try to reduce the dependency on imports as the intermediates required by the company are produced by nobody in India. The company plans to develop the technology required to produce these intermediates and reduce dependence on imports.

-The company as mentioned in their Q3FY23 concall won’t have much space in the Sandila facility once the capacity expansion project over there is completed. Any further expansions planned by the company will be done in Hamirpur site.

-The company has got environmental clearance for its Hamirpur project which will be a greenfield capex for the company. The capex spent till date is ₹ 10 crore and the company plans to spend ₹ 7-10 crores in the next 2 months.

-The company plans to spend ₹ 100 crore each for the next 4 years for the Hamirpur site with the first 2 units expected to come online by December 2023 or January 2024.

-Initially, the company will manufacture intermediates as they require less number of regulatory approvals as compared to technical grade products.

-The company plans to put 36,000 MTPA of technicals and intermediates and 29,200 MTPA of formulations with the focus being on new molecules and the production expected to commence by Q4FY24 and the full revenue potential to kick in by FY25.

-Post their IPO on 5 July 2021, the company has launched 7 new molecules out of which 6 are technicals and 1 is an intermediate. The intermediate which is part of this new product launch was earlier imported by the company however,

the company will now make this intermediate in-house and has planned an import substitution for this product. The company has backward integration for the 6 technicals mentioned earlier. -

-These new products are expected to bring a revenue of ₹ 250 crore by FY24 with the 9M FY23 contribution being at 12% .These products have a ₹ 1000 crore market size in India.

-The company is in discussions with customers in the US, Australia and Japan for its new products and it is simultaneously working on the registration of these new products

Given the capex plans and new product launches which will happen in this year,

the company plans to achieve a revenue of around ₹ 1000 crore by FY24. The company had clocked a revenue of ₹ 716 crore in FY22 hence, there is a high probability of achieving this target.

6. RISKS:

The company is exposed to the following risks:

A) The top 3 products of the company contribute in the range of 40-45 % to the overall topline of the company. Though, they are not banned in major geographies like Europe,

the US and LATAM ban on agrochemicals is nothing new and if a ban is imposed on these products, it would seriously affect the business of the company.

B)The top 4 customers have historically contributed more than 40% to the business of the company with the contribution coming down to 39% for FY22. A downturn in the business of any of these customers would affect the business of the company.

C)The business of agrochemicals is a hazardous business with a high probability of fire and explosions. Any such incident can lead to disruption in operations of the company.

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