Notes from Q2FY23 concall dated 17th Nov (link)
Current performance:
• Margins are subdued, will come back to normal levels once demand picks-up. Observing encouraging signs.
• Some customers have started with new inquiry. Few still have high inventory which will get depleted by Q3 or Q4. Pricing has been under pressure. Prices have started softening.
• Have not lost market share.
• Reduction in logistic cost, demand to improve by Q4’23. Freight cost impact. Had been in the range of ~1200 – 1400 TFC went up to ~10000 – 10500 TFU. Now to 3500 to 4000 dollars.
Growth Levers:
• Further growth rate for top 5 products – 20% drop in volume for those, hopeful that this will revive next year. Drop in top 5 -due to stocking last year and de-stocking now. Also, demand has come down due to price inflation RM price going up. Farmers typically cut down consumption due to high price.
• Normalized growth for Top 5 – will normalize but will take couple of years. 8 – 10% guidance. Volume de-growth of 20% in H1 FY22.
• New launch: Total 5 products for this FY, 2 earlier, 2 in last quarter and 1 between Dec-March. Commercial only 6+ months after production. Sales potential of 40 crs from the products during 2nd full year. Market size for those products is ~700 Crs. – 800 Crs.
• New products takes time to gain market share since current incumbent has entrenched relationship.
• Have 13 step processes for one of the new products.
• Is very price sensitive market considering B2B. will take time to strengthen position.
CapEX:
• Greenfield capex – have re-started procurement, civil construction is 60%. Will reassess capex amount in next few days. Will have firm numbers by Q3 call.
• New capex operationalization time, FY24. Civil construction will be over by June23. Machinery by Jan-Feb next year. Expected to be Q4’FY24.
• Product basket – Top 10, how much further headroom we may have since they are already close to 300 crs? Demand was subdued from 35% to 27%. Sales from top 10 though has been stable. Broad basing the product basket has helped tide over the tough times. Top 3 are matured products hence not much incremental growth can be there. Larger growth will come from new products.
• Customers are eager and willing and encouraging us to come up with product development. They are looking at supplier diversification.
• As part of the capex, production selection is beyond current top 5. Will be for new products + to meet demand growth for rest 10 products.
• We want to expand to 25 products. Another 5 can go by next year. Objective is to have 30 product from current 20. New environment clearance filing to be done for some of the new products.
Misc:
• Right to win for new products – price or complexity of process: Looking at products where supplier are China only. Also, chemistry skills for efficient production. Finally on pricing front.
• Out of 22 API – split between farm/poultry. Currently farm animal only. Poultry only 1product. Distribution chain between farm vs. companion animals. In EU, market is well segregated between the two however in rest of the markets, not well demarcated.
• Most sales is direct to formulator not to the distributors.
• Supply to top 5 producers in animal APIs.
• Anti-microbial resistance – EU has mandated reduction of 70% of antibiotics. Starting from 2016 for 7 years window. Total market has gone down. We don’t make antibiotics (Penicillin based) and we are also not in EU.
• Capacity Utilizatio is ~70%.
• Spare capacity for next 2 years. Margin may be under pressure to fill the capacity.
• Contracts in USD, forex impact to financials. M2M was ~2% loss, Q2 was 7% loss (of sales).
• Peak revenue potential of 360 – 400 Crs from current capacity.
Disc: Invested
Tarun
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