Thread by @ValueEducator

Detailed Analysis of India Pesticides Ltd - A high margin agrochemical company!!

CMP - ₹228

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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 CropChem.

B)INTERNATIONAL BUSINESS
• The international business is the export business of the company where it exports its technical products on a contract basis to customers in 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 this 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 contribution from the top 4 customers.

• 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 51.44% in FY23.

• 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 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 885 crore as of FY23.

• 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 FY23 period are the carry over 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. The company expects to consume their high cost inventory in Q1 and Q2 of FY24 as mentioned by them in their Q4FY23 concall.

• As seen from the chart, reasons for drop in EBITDA margins in FY23 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.

5. FUTURE OUTLOOK
• The company received a TEQ certification which is a certification for technical equivalence in the EU for their newly launched herbicide product. The company received the registration for their thiocarbamate herbicide product in the US through their customer

collaboration with whom the company was working for 3-4 years. Thiocarbamate herbicide is mostly used in rice and has a good potential in the US and Canadian markets. The company expects a ₹50 crore revenue potential for their thiocarbamate herbicide product.

The company expects to begin supply in August 2023 and a revenue of ₹15 crore in the first year of operations for this product. The company right now gets 3% of its revenues from the US market. They expect to get more business from the US market post the launch of this molecule

• 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.

• The company is in the final stages of collaboration with a Japanese MNC for a specialized intermediate which will have applications in pharmaceuticals. Recently, a delegate of 5 people from Tokyo visited the company and they have given a good response to the company.

• The company invested ₹68 crore for their Sandila unit expansion project in FY23. The company increased the capacity by 2500 MTPA to 24,000 MTPA during FY23 as part of the Sandila expansion project. The company bought some land near their Sandila unit and with a little

augmentation the company has decided to add 2 more blocks in their Sandila unit. The company plans to do a capex of ₹50 crore for the 2 new blocks which will include investment for plant and machinery, utilities and other required infrastructure. The blocks are expected to come

onstream in Q3FY24. The blocks will be dedicated to new molecules.

• The greenfield expansion project at Hamirpur which is overseen by the WOS Shalvis Specialty Chemicals Ltd is progressing as per plan. The company plans to do a capex of ₹60 crore for the Hamirpur project in

FY24. The operation of the 1st plant at Hamirpur is expected to commence in Q4FY24.

• The company expects additional revenues of ₹300 - 350 crores from the existing capacity as of FY23 at peak utilizations. The company expects to attain a turnover of ₹1100 - 1200 crores in

the next 2 years given the ongoing capacity expansion projects and product launches.

• The company’s main focus is towards R&D and developing new products from the Hamirpur plant. The company launched 14 products in FY23 out of which constituted 10 formulations, 3 technicals

and 1 intermediate. The new products which the company has launched in FY23 have contributed to the topline and the company has received a positive response from the market. The new products launched in FY23 contributed ₹120 crore to the total revenues in FY23.

The company expects a turnover of ₹175 crore in FY24 and more than ₹200 crore in FY25 from these products.

• The company will face stiff competition from China for their newly launched products as these products are import substitute products which were earlier imported

from China. The company does not see much competition from China for their existing products.

• As of now, a lot of fluorine based intermediates are finding use in agrochemicals. The company plans to cater to the agrochemical industry by targeting some of these intermediates.

The company is working on the development of the special arrangement which is required for fluorination chemistry. The company is expanding its chemistry capabilities by working on vapor phase reactions, nitration and hydrogenation chemistry.

The company is recruiting people with expertise in these specific areas thus, expanding their scope of operations.

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