The harsh portfolio!

Yes, company also emailed me answers to my detailed questionaire as there were questions that couldnt take up during the AGM. I was impressed to see how detailed the answers were.

Congratulations for growing business in such a tough environment, with minimal loss of margins. I have the following questions

• In domestic branded crop business, companies report sales return item which is generally 10-20% of sales. I do not find this line item in the annual report. Instead, I see discounts given as a line item in two different places (other expenses, revenue from operations). Discount given: 2.14 + 6.14 cr. ~ 8.28 cr. (vs 1.7 + 5.82 ~ 7.52 cr. in FY22). Is this in relation to our branded B2C business? And what is the sales return we booked in FY23 and FY22?

We normally do not accept sales return except in the case of damaged or leakage due to mishandling. In case there is sales return we show sales as net of sales return. 2.14 cr. is discount received on procurements, 6.14 cr. is the discount given. Sales return was around 1.3% of sales in FY23 and 1.4% in FY22

• Despite such a tough macro environment, how are we able to grow our domestic branded and institutional business so well? What are we doing differently vs peers?

A key differentiating factor for Dharmaj in the last 8 years of our operations has been our absolute focus on demand generation and farmer engagement activity. This is a proactive function that runs through the entire organization. Further, this is supported by constantly refreshing our product portfolio to keep in line with the trends of the industry, not only we launch new products each year, but we are also able to generate sales out of them – as is reflected in our Product Innovation Index disclosed in the AR & Investor Decks. We have also significantly increase our sales and marketing team, which has nearly doubled from 109 people in FY22 to 186 in FY23 and ~220 in Q1FY24.

• Given that we are a late entrant in domestic market, have we managed to finish our product portfolio of generic molecules? Or are there still gaps within our product portfolio?

Being a generic formulator we have covered almost all type of generic molecules for all kind of crops. At present we have around 160 generic molecules in our product portfolio. We will be able to cover some of the identified gaps as we increase the scale of operations, our Active Ingredients expansion will also aid in this aspect.

• In our institutional segment, we talk about serving small formulators as a strategy. What % of our institutional business comes from small formulators vs larger companies?

80-85% to small formulators , rest from large formulators

• A lot of innovation happens in domestic business via differentiated 9(3) filings. Do we have any 9(3) molecule in our portfolio and in our pipeline? Have we inlicensed molecules from Japanese and European MNCs?

Don’t have any 9(3) filing or pipeline currently , no collaboration with Japanese/European innovators yet. We certainly have ambition for collaborating with foreign players, as we scale our operations, commission active ingredients plant, and mark our presence across the entire agrochemicals value chain; but that is a couple of years ahead of us.

Foreign innovator normally looks at production facilities, product portfolio, market reach, network of an Indian domestic company to partner with. Dharmaj is having world class facilities, experienced team, upcoming backward integration plant, we are introducing new products every year, have captured almost half of the country in B2C business and whole India in B2B business. In nutshell we are meeting all the required criteria to partner with Foreign Innovator.

• We talk very bullishly about public and animal health vertical. Can you talk more about this segment, its potential and our market positioning? Who are our large competitors in this segment?

Public health is a growing segment and current market size in India is 1300-1400 cr. out of which 45% is used in Private and 55% by Government and Public institutions like Hospitals, Railways, Military, CWC Godown (Grain Storage), Plywood Industries (for termite protection) etc.

There are 20 active players with cos like Bayer, Syngenta, UPL, Heranba, Sumitomo, Arbuda, Kilpest, etc. commanding good position. Dharmaj is a new entrant starting business in 2021 and currently has 14 products . As it is a high margin segment , we are targeting to scale up the business in this segment and building a team to capture a portion of the Indian market by building our own sales channels.

• What is our growth outlook for FY24? We talk about maintaining 25%+ sales growth for the foreseeable future, which is much higher than any of our peers. How will we manage to achieve this?

We have mentioned earlier that our presence currently is in Central, North and Western India with some portion of North East India. Last year we have marked our entry into 6 new sates, where sales potential is significant, and we have only scratched the surface. For us currently still entire South India market is untapped in branded business, and we are confident to penetrate Southern market in coming year. In export also we have ready customers who are waiting for our technical plant to start commercial production, further we have a decent product registration pipeline that should open new markets for us in the coming years. Public Health is another division where we can foresee lot of potential and hence, we have deployed a fresh team having experience in similar segment. All of these factors put together give us the confidence of doubling our topline every 3 years (or as you said 25%+ growth).

• Board should consider paying dividend, given that we raised a lot of money during IPO and our core business generates good amount of cash. Even a small 5% payout shows management intent of sharing wealth with minority shareholders

Will declare dividends once capex gets completed in Q3FY24. They believe in paying dividends out of internal accruals over IPO money which was raised for a different objective.

• We should also do an investor meet every 6 months to be better updated with company activities

Yes we have already planned half yearly investor call instead of quarterly to keep our investors updated on companies activities.

Other points

• Manage inventory on a month-to-month business and according to crop cycle
• 10% of inventory comes back at year end
• Focus a lot on marketing via social media for demand generation
• Expect technical plant to run at full utilization in FY27 (3 years from commercialization)

Margins (thanks to @nirvana_laha for sharing this)

Due to sluggish performance post November of FY’23 our EBITDA margins remains at 9% which normally in the range of 10% to 11%. If we compare with normal EBITDA percentage the improvement will be around 300 to 400 basis points. We are expecting our Technical plant scale up and runs at optimum level by FY 27 i.e. 3 full years of commercial operations, since in FY24 the plant will only be available for one quarter. However, yes the margins will improve from 2% to 3% in first 2 years in our existing business and it will improve up to 400 to 500 basis point from current level once it reached at full capacity utilization. Further we expect much better margins in our standalone Technical sales to 3rd party, which will further aid overall margins.

I can buy around book value. If it reaches share price of 1000 in near term, I will be depressed!