Insecticide (India) Limited Q3 FY2020 Earnings Conference


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Insecticide (India) Limited Q3 FY2020 Earnings Conference Call
February 10, 2020

ANALYST:

MR. ANIRUDDHA JOSHI - ICICI SECURITIES

MANAGEMENT: MR. RAJESH AGGARWAL – MANAGING DIRECTOR MR. SANDEEP AGGARWAL – CHIEF FINANCIAL OFFICER

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Moderator:
Aniruddha Joshi: Rajesh Aggarwal:

Insecticide (India) Limited February 10, 2020
Ladies and gentlemen, good day and welcome to the Insecticides India Limited Q3 FY2020 earning conference call, hosted by ICICI Securities Limited. As a reminder all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing “*” and then “0” on your touchtone telephone. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Aniruddha Joshifrom ICICISecurities. Thank you and over to Sir!
On behalf of ICICI Securities, we welcome you all to Q3 FY2020 results conference call of Insecticides India Limited. We have with us, Mr. Rajesh Aggarwal, Managing Director and Mr. Sandeep Aggarwal, Chief Finance Officer. Now I will handover the call to the management for initial comments on the quarterly performance. Thank you and over to Sir!
Thank you very much. This is Rajesh Aggarwal, Managing Director, Insecticides India Limited. First of all, I take this opportunity to welcome all the participants to our conference call. Thank you very much for sparing your valuable time.
Here I would like to say that we will be very, very truthful and transparent in whatever we say today and we always try to be as transparent as possible in all our results and all our deliveries to the market.
To start with I would like to highlight the climate changesas there are challenges which the markets are facing continuously. There has been extension of rainfall, there were heavy rainfalls when they were required, and also heavy rain falls in the time when they were not required, despite of that it was a good season, I would say, good for the brand in many of parts of the country due to our reach. We got extension of the Kharif season and then we also saw this extension happening in the Rabi season, though there were differencesas some people were thinking that the demands will be low so the institutional sales got impacted but overall I have seen a very good effect in the brand business in this total year.
As I told you that there has been a prolonged Rabi and prolonged Kharif season this year, so talking about our revenues, we have done total revenue of about Rs. 263 Crores in Q3 FY20 and we have registered growth of revenue of about 22% on Y-O-Y basis. Here I would like to mention that it has been our company strategy that we wish to focus around our brand sales and I am happy to tell you that this year we are very much in line with our target, in this quarter particularly we could grow our brand sales by about 70% YOY basis and it has contributed about 75% of our total turnover. Here there is one more important thing to mention, that this year we are moving ahead to cross Rs. 1,000 Crores of brand sales and this is going to be a very big achievement for Insecticides India in the agrochemical industry.
There has been a situation where in there has been a decline in export and also decline in institutional business, particularly due to the global disturbances and in Pakistan particularly for this Rabi season, one of the customer for us.Last year it had contributed more than 50% of our
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Insecticide (India) Limited February 10, 2020
total export revenues and the basic sales which we used to do is majorly for the wheat herbicide. So, wheat as you know is sown in the Rabi season and the major sales used to happen between September and December month, where we were exporting a lot of wheat herbicides to Pakistan and this year it came to a halt because of the policy. Pakistan did not import anything so there was abundance of this wheat herbicide which we prepared for Pakistan market and the prices in Indian markets also fell. So, there was an overall impact on our business - the exports went down, also the institutional business went down and there was an impact but still we could register an increase which was possible only due to brand sales.
Overall, there is one more factor which we are seeing and that despite we have increasein our sales, the EBITDA margins as well as the PAT margins has shown the fall. The EBITDA is just Rs. 23 Crores with a decline of about 28% whereas the PAT has come to Rs. 9 Crores with a decrease of 49% which is a big number,you can understand, but here I would like to point out the major reasons for that.
There are two major reasons, one,yes there has been an impact of export because export did not make any profit due to this impact and also the institutional sales profit declined but along with these, the major impact has come due to the revaluation of the stocks because the international market was growing and the prices were increasing for the past two years but the trend changed in the middle of 2019, so we started getting the cheaper price for all our purchases in this quarter and when we purchased the cheaper stocks due to the IFRS process,the stocks were again revalued at a fair value. This means that without impacting the financials, our stock were revalued again and that registered the loss in the books of this quarter.
As you know the international situation is again bad and there has been a heavy Coronavirus attack in China which is disturbing the demand and supply situation in the markets and I see that the prices have already touched the bottom and they have started going towards north. This means that the prices have started moving up again and that there will be chance of revaluing this stocks again during this quarter itself and this demand supply situation which will lead to increase in the prices not only in the domestic markets but also in the international markets, which means that our performance for Q4 in this fiscal year is going to improve a lot and it is going to show good signs and we must be able to come out of the situation what it has been in Q3.
Now I would also like to discuss about the new launches. We had a plan to launch about 10 new products during this fiscal. We launched 8 products so far and here I would like to mention that some of the launches happened in Q3 only particularly Kunoichi, Chaperone, Bhimma Super. Here I would like to mention that Kunoichi and Chaperone are very promising products and we hope that they are going to give good business during these two to three months also and in the next year you will find a wonderful growth.
Similarly, here I would like to mention about the products which we are launched in the last year. We have done a total business of about Rs. 70 Crores in the last year. This year we have already crossed Rs. 86 Crores and again in Q4 we are expecting good sales from these products, so all
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Sandeep Aggarwal: Moderator:

Insecticide (India) Limited February 10, 2020
our new launches are doing fine and in the year 2019 we could not get many registrations and they are lined up and we are expecting a lot of registrations in Q1 of this year so this year is going to see a launch of many good interesting products which is going to give us the boost not only into our brand sales but also in the institutional sales. So, I can say that we have a good future and along with this we are also starting some activities in Japan which is also going to impact our international business because we will be exporting some products to Japan and once that also channelizes, then it also has the impact on our export business immediately from the beginning of the new fiscal.
I would say that we are fully geared up to face the challenges of the market and you will find that this probably will make a recovery in Q4 and FY2021 is going to be very interesting for the company wherein we can again imagine for a growth of about 10% in the topline and the bottomline growth which we could not do this year, I believe that in the next year we should definitely do it.In Q4 of this year also we are going to show a good recovery and from 0.5% degrowth in PAT margin,it should definitely show the signs of growth in this full year also.
Now I would also like to talk about the two products, Thimet and Nuvan. For Thimet, we have met the last year sales and we are on the verge of finishing our entire inventory by March, so this means that Thimet from IIL will be over by March. For Nuvan again, we have met the last year sales and there had been a growth in the last quarter and we will definitely show a sign of growth in Nuvan and we will carry some inventory for the next year also, which should be good enough to last for about 6 to 7 months in the next fiscal.So we have a target to finish all Nuvan stocks by Diwali but there is nothing to worry because these products while going are going to give good revenues to the company and we have already worked on alternate products which are going to be launched in this fiscal itself, so that there is no loss in revenues.
With this I would like to hand over the line to the CFO to tell you more about the financials.
Good afternoon everyone, Sandeep Aggarwal this side. As Managing Director has already discussed the quarterly results, let me tell you about segment reporting. As per category wise sales, we had 58% of the insecticide, 30% herbicides, 10% fungicide 2% PGR. These are combination and combination B2B and B2C and exports, we received 76% sales from B2Cbusiness, 21% from B2B and 3% from exports.
As far as technical and in-house actual sales are concerned, the sales are around 45% and inhouse consumption is around 55%. In B2C sales we get around 50% revenue from Maharatna products and 50% from other products.In the segment reporting,you can see we had attained 30% growth in B2C business whereas there is a degrowth of around 16% in B2B business and around 38% degrowth in exports. Net sales in Maharatna category products also increased by around 18% though other products in B2C have increased by around 43%.
Thank you. We will now begin the question and answer session. We will take the first question is from the line of Nitin Chaudharyfrom Akash Ganga. Please go ahead.

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Nitin Chaudhary:
Sandeep Aggarwal:
Rajesh Aggarwal: Nitin Chaudhary: Rajesh Aggarwal: Nitin Chaudhary: Sandeep Aggarwal: Nitin Chaudhary: Sandeep Aggarwal:
Nitin Chaudhary: Sandeep Aggarwal:

Insecticide (India) Limited February 10, 2020
My question is for Sandeep Sir. I just wanted to understand in respect of fair valuation of inventory,was it on account of Thimet and Nuvan, because I understand in respect of other products even the raw material prices have fallen, we were able to pass on the prices in the B2C business and hence we were able to protect the margins on that side, in respect of the Thimet and Nuvan, we must have contributed to the decline in margins, am I right on that side?
Here I would like to say that the fair valuation inventory is lower on Thimet and Nuvan as the price have come down we have to revalue our total stocks on the current prices, so whatever cheaper materials we had purchased all those material has been revalued on December 31, 2019 which booked a notional loss of around Rs. 10 Crores in the books this quarter. This is a notional loss because when we sell all these products, all these revenues will be recovered at the time of sales.
Here I would also like to add that the prices of herbicide and some of the insecticides were coming down,but now they have already started going up. This means that due to the Coronavirus situation there was lot of supply, there was no demand and now it is the reverse so it has already started going up now.
What kind of margins can we expect in Q4 and financial year 2021 onwards?
Like we always keep our target of about 10 and 15% growth- 10% on topline and 15% on the bottomline. For 2021 we will continue with the same. Talking about 2020, we will see a recovery happening in Q4.
One question on the KMP’sremuneration, we were just comparing it with our peer groups which is around 3% whereas in our group it is around 6%, any comments on it?
In this KMP salary have they included all those salary of directors and executives also?
Yes, I have included Mr. Rajesh and promoters salary. Basically,I have included promoter’s remuneration.
Okay, we have not seen the remuneration of other peer groups, but yes what we is believe is that we are paying remuneration to our promoters as compared to others only, it is not on the higher side, but we have started paying some commissions to them since last two years.So, I do not know whether there are remuneration paid by my peer groups, but if you compare the salaries of the other KMPs,I think it will be in line of my peers only,also it maybe due to the sales commission or as our PBT base is low, so it might be that the percentage is coming out big as compared to others.
Can we expect the remuneration to be around these levels or is there any further increase that is expected?
No, it will be around these levels only.

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Nitin Chaudhary: Moderator: Aniruddha Joshi: Rajesh Aggarwal:
Sandeep Aggarwal: Rajesh Aggarwal:
Aniruddha Joshi: Moderator: Rakshit AD: Rajesh Aggarwal:

Thanks. That is all from my side.

Insecticide (India) Limited February 10, 2020

Thank you. The next question is from the line of Aniruddha Joshifrom ICICI Securities. Please go ahead.

Two questions from my side. Do you see that the entire inventory impact is now behind us or do you see any further write down possibility in Q3 or may be in FY2021 also and lastly where should we look in the tax rate for FY2021 and as well as the closing tax rate for FY2020?

To keep it specific and short, for FY2020, I do not see any further loss happening due to inventory because as I already told you that the prices have started rising, not only in the domestic market but also in the international market, so whatever feedback we are getting from the international markets, the prices are going up for most of the products. Talking about next year, it would be difficult to say because when you say it is a write down, I mean to say,there is no stocks which are going to go unsold, like Thimet we are finishing this year and Nuvan will be finishing by Diwali of next year,so there is no write downs that way, if that was the question.

As far as income tax rates are concerned, the rates of income tax will be somewhere around 24% to 25%during this year as well as in the coming year.

Roughly about 25%, we will decide whether we need to take some rebate or stay at 25% concept and we will take our call according to the situation. We are putting up a new plant in SEZ area so we successfully do that and claim the exemption and then will go for exemption route otherwise we will go straight vanilla 25%. So, at the moment you can assume 25% but definitely we think we should be able to start our SEZ plant and we will go for an exemption route.

Thank you.

Thank you. The next question is from the line of Rakshit AD from Fair Value Capital. Please go ahead.

Good evening gentlemen. We joined the call a little late,so to start with could you give a little more color on the reason for the sharp decrease in margins duringthe quarter?

I would say it is just the technical decrease because the stocks have been revalued which has impacted the profitability. The profitability of our brand business was good but the profitability from export declined because Pakistan was the major market for the wheat herbicide which did not go a single kilogram to Pakistan because of their policy. They stopped purchasing from India. They put a ban and that ban is still in force so that an entire season finished. When the season finished so we had the opportunity to sell it into the Indian market, in India the prices declined because everybody knew there the stock is in excess, so in this quarter in particular the profit from the exports and also from the institutional business declined due to this negative aspect. Regarding the brand business, brand business is going very positive, there was no decline in the earnings from the brand, it is going very good actually and now since the situation has already

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Rakshit AD: Rajesh Aggarwal: Rakshit AD: Rajesh Aggarwal:
Rakshit AD: Rajesh Aggarwal:

Insecticide (India) Limited February 10, 2020
started reversing so there is not a single chance of further decline and we are going to make a recovery in Q4.
Can you please quantify how much was the impact of on account of inventory revaluation during the quarter and how much was the impact on account of margins for institutional sales?
The CFO had already explained about Rs. 10 Crores was the impact of revaluation and about Rs. 7 Crores to 8 Crores was the impact of institutional business and export, so a total of about Rs. 18 Crores.
Over the last couple of quarters we have been consistently been getting guidance of doubling of exports from the management. What we were told was that from the current levels of about Rs. 60 Crores, one could expect to see a number between Rs. 100 Crores and Rs. 120 Crores for FY2020, you do not seem to be anywhere close to that number as on date, so firstly what has been the progress on the export business and what are now our current estimates for how we intend to close FY2020 and FY2021?
I will explain step by step. Pakistan was the largest market last year, which contributed more than 50% of my total export, so since it has gone and it is dry now, so it is going to definitely give an impact to our business. We were trying to make the recovery from the other markets but today I have re-estimated and our export would be in the range of Rs. 70 Crores. We will not be able to achieve our target of Rs. 100 Crores. So,export in the complete year is going to take a hit and we will end up with about Rs. 70 Crores export business this year. Regarding the next year, we will keep the target of doubling our exports because we hope that Pakistan will reopen, even if Pakistan do not open, then we have added other customers which will be working and I also told that we are going to start our business in Japan, it got delayed a little, we are expecting some contribution in this quarter also but now it is going to be minimal but from next year we expect that our business in Japan is also going to start which will also boost our exports, so we maintain our target of doubling our exports in the year 2021 but yes the base from Rs. 100 has come down to Rs. 70, so we can say looking at the current situation let us hope for a sale of about Rs. 150 Crores, but if Pakistan opens up then again we can gear up for Rs. 200 Crores.
Now shifting focus to what is happening currently in China on account of Coronavirus, could you give us a little more color on what percentage of our raw material is sourced from China. What is our current level inventory? What kind of margin impact does the management foresee? Is this situation to continue and let us presume that this lock down in China continues well to the end of February, maybe till March, what kind of scenario you have been looking at?
Keep your assumptions in mind because you have assumed that the situation is going to be worst till February and March so That means that the goods from China will not be coming easily and there are different governments which are issuing different advisories and even the Indian Government has issued the advisory that whatever comes from Chinahas to be quarantined. China itself is quarantining its people, its material, this and that so this means that there is going to be a tricky atmosphere for at least two months till the things settle down. In these two months
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Rajesh Aggarwal:
Moderator: Chirag Dagli: Rajesh Aggarwal:
Chirag Dagli: Rajesh Aggarwal:

Insecticide (India) Limited February 10, 2020
there will be acute shortage of products and whatever we are preparing for the next season the prices are going to take a plunge, because of demand and supply gaps. So, in the short term I see the increase in prices revaluation of all these stocks whatever you have in hand and you should be able to sell everything at a premium. That is my assumption for the short-term.
For the long-term many new units are started already in China, but China has shutdown from almost middle of January and the holidays are getting extended in many parts of the country and particularly, even if the people are trying to come to work they again put in quarantine for two weeks which means that till February the units are not going to start but once the unit starts fullfledged and China is out of Corona issue then from April again we can hope that with full fledged production the prices may come down but again it will depend on demand and supply situations, so overall next Kharif season is looking tough and reasonably good opportunity because you cannot bring get large volumes so whatever you have you have sell that at a good price.
Thank you. The next question is from the line of Chirag Daglifrom HDFC AMC. Please go ahead.
Thank you for the opportunity. When do you start procuring for Kharif of 2020?
Actually, there is no such deadline.You have to see what is the situation and since we produce lot of AIs we start selling from the month of December, because many companies they start procuring because they have to make for January and we also sell in first quarter because particularly the multinational companies they have the calendar year closing, they start their purchases and if there is a slightest of the reasons in the market, the other companies also start.So for us we start making our agreements or buying the things in the month of October itself because in October there is Chinafair where we participate and we sign many contracts and start from there but again February is a very important time where we have another exhibition which got canceled this year, here whatever balance is there we sign and try to cover the entire Kharif season so today I can say that I am covered for at least Q1, but there is no coverage for Q2 and we have to see how much quantity of that coverage comes because due to the advisory issued by Indian Government and also due to advisory issued by the Chinese government there are going to be logistics issue which are creating some problem and we have to see with the time passing by, that how it leads to the supplies and clearance of the goods which come.
What percentage of our raw materials that we buy, comes from China Sir?
If we talk about the value, the value is about 30% odd. CFO can make it correct, but the problem is that they are the basic raw material because all the other things are coming from India, the solvents are coming from other countries and some basic chemicals are coming locally, but if there are no basic chemicals it is very difficult manufacture many, many products hence there is international dependence. Wherever we have crossed that international dependence everything is Make in India only those products will be able to make once the supplies are not reaching from China in that case.
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Chirag Dagli: Rajesh Aggarwal:
Chirag Dagli:
Rajesh Aggarwal: Chirag Dagli: Rajesh Aggarwal: Chirag Dagli: Rajesh Aggarwal: Chirag Dagli: Rajesh Aggarwal: Chirag Dagli: Rajesh Aggarwal: Chirag Dagli: Rajesh Aggarwal: Chirag Dagli: Rajesh Aggarwal:

Insecticide (India) Limited February 10, 2020
There is no substitute even at a higher price for this 30% by value?
Again, these are all tricky subjects. What has happened in the past is that China was supplying many products at a competitive price, so many companies stopped but whenever such situations arises,a lot of local manufactures also starts again, so there will be something but overall there will be pressure on supplies, so supply pressure means price and shortage.
Fair point Sir. You talked about this product launches in Japan, can you give some more color around what these products are? Are these already generic opportunities and how much have we spent for the registrations or what is the addressable market for these products?
I would like to keep it simple, actually we have signed to supply one product to our company and we are working on that and that supplies should start soon.
So that partner is going to distribute the product?
Yes.
I presume this is a generic product, is it right?
I am doing a CRAMS activity for the other company. I will not be able to throw more light till the business practically starts in a big way, so it will come into public domain by April, I believe.
Okay sir, this is an innovator company Sir, your partner?
Company is inventor, yes.
Activities restricted to the Japanese market?
At the moment yes, but later on I am going to register this product in India also.
Then you talked about, you said last year new launches doing at Rs. 70 Crores for nine months you are doing at Rs. 86 Crores. This is products that you launched last year, correct?
Yes.
Over and above these, the ones that you launched in this year, which is about 8 of them will add to this?
Definitely, they are going to add, actually the progress has been very slow because many of these good product saw their launching in Q3, so far, the contribution is as little as Rs. 20 Crores, we can hope to double it actually in this fiscal but we can believe that next year again these products are also going to rise because the launch was very, very late for many of these products.

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Chirag Dagli: Rajesh Aggarwal:
Chirag Dagli: Moderator: Rushab Bothra: Rajesh Aggarwal:
Rushab Bothra: Rajesh Aggarwal:

Insecticide (India) Limited February 10, 2020
And sir,historically we have had a very strong Kharif and Rabi has been slightly weakfish. With all these new launches how do you think this ratio, 70:30 ratio which is also an industry issue but for IIL specifically?
It is a tricky situation. Again,tricky I am using the word, because this year the weather conditions have changed in totality. The Kharif season which ends generally in August end,it lasted till October, the Rabi season particularly for the herbicides it ends in December and it lasted till January and rather in February also I have sold some quantities of the herbicides, which is not a routine so the seasons are taking the extensions.Now we have to evaluate this extension has happened only particularly for this year or the weather cycle is going to change, so it will depend how the weather behaves next year, because this year we have seen excessive rainfall so due to the excessive rainfall there was a tremendous demand for herbicides and then also initially some of the insecticide sprays went out because there was no chance to spray but later on insecticide sprays have come in many parts.So there is a complete change in weather cycle and it will depend on the weather cycle the exact situation but yes always the Kharif season will remain big, it is not 70s and two-thirds is Kharif one-third is Rabi, that situation is going to last.
Thank you so much Sir.
Thank you. The next question is from the line of Rushab Bothrafrom Sharekhan. Please go ahead.
Just wanted to understand the capacity for Thimet and Nuvan which will be released as we will not be manufacturing those products, where these capacities would be utilized?
The Nuvan plant already shifted to other molecules, because we were making the AI for Nuvan. We used to make the technical. So,we are already adding the new products and some of the capacities were already increased last year, there was a product shift. Regarding Thimet, some of the capacities are still ideal, we are waiting for our registrations of the some of the new granules. Last year we started focusing around methyl granule but we had to launch two more,so theclearances particularly for my two brands I am expecting now, so expectation is March, April so we are keeping our fingers crossed, so we will receive these registrations we will start manufacturing these two granules also in this fiscal and utilize the facility.
In terms of volume tonnage terms, what would be our utilization as of now and what would be the spare capacity?
CFO will be in a better position to give the exact percentages, but regarding the formulations we are trying to use the facilities as much as possible, exploit them. Granules I have quite a spare capacity because Thimet has gone which was giving the big numbers to us, so I can say my granules capacity if I total it in terms of volume, so we have come to half of the granules sales in this fiscal, so that way you can say 50% is ideal in this year 2020 but 2021 is going to see improvement in this utilization due to launch of these new granules.Regarding the technical

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Insecticide (India) Limited Q3 FY2020 Earnings Conference