PI Industries Management Q&A: Nov 2011

Management Q&A

1. PI INDUSTRIES HAVE GROWN SOLIDLY OVER THE LAST SEVERAL YEARS. LAST 5 YRS HAVE SEEN IT CLOCKING A COMPOUNDED ANNUAL GROWTH RATE (CAGR) OF 22% CLOCKING ~720 CR IN SALES IN FY11 FROM 318 CR IN FY07, WHILE PROFIT AFTER TAX HAS GROWN AT AN ASTOUNDING 5YR CAGR OF 73% TO TOUCH 64 CR IN FY11 FROM 7.19 CR IN FY07, OR 9X IN THE LAST 5 YEARS.

Kindly share with us this journey and the significant factors behind this seemingly extraordinary success. What will make this performance sustainable?

In the late 90s PI Industries had to make a strategic choice – between 2 divergent paths.

a) Continue with the emphasis on our Agrochemicals generics business – Invest in creating larger capacities, expand to other markets, and inevitably fight the MNCs with cheaper generics in most such markets, OR

b) Embark on an uncharted path – but one that’s a win-win with the MNC agrochemical players – identify gaps in the offerings in the Indian market, identify MNCs not present in India, strike up exclusive marketing rights with them, and leverage  our strength of marketing and distribution reach within the country.

The backdrop was like this. From the early 90s the EU region was seeing heightened awareness drives against agrochemical use side effects, contamination of water, toxicity, etc. At that time, there were some 900 or so Agrochemicals globally registered. Some 400 of these were on the hit-list and a fresh registration process was being initiated. Those products that manufacturers that thought they could defend/pass the new norms would be submitted for re-registration. Those that weren’t (resubmitted) would in-effect get banned. By mid 90s this movement had caught some momentum. The US was also seeing  EPA regulations coming in around the same time, with heightened awareness & similar restrictions being proposed.

We made a call – for better or worse – that the generics export business might meet with increasing roadblocks and further heavy investment in the business might prove counterproductive. And decided to go with option 2 – a shift in focus towards innovative agro-chemicals and a win-win partnership model with MNCs – something that is playing out nicely for us, now. The success has started reflecting in the numbers in the last 2 years or so.

Having said that we will be the first to admit, that the other approach also has worked out quite well. Some of the generics players from India have done much better than we expected and seen tremendous success over the years and have grown enormously. The progress on EPA in the US somehow was slower than we anticipated. But if you look at their balance sheet, the cost of that capacity creation has been rather heavy.

Now for the other business segment – Process Research. Even here the seeds were sown pretty early. Infact our first CSM contract was signed in 1997-98, and we are still the sole supplier for that client. 2005 was a landmark year for this business with India becoming a signatory to the WTO Patent & IPR treaty, and patent laws being framed in India.

Till 2005 the size of the projects would be small. MNC players were very cagey about their products because they knew without any patent protection laws, their registration and product data is open to all. But from 2006, we started seeing larger project enquiries. They had seen us over last 12-13 years, and our respect for confidential data and Intellectual property. We had not reverse-engineered a single molecule, though one can say we had enough opportunities.

They had much more confidence – on one hand in PI’s process research abilities, and on the other, PI’s respect for IPR. And this has reflected in our numbers steadily ramping up over the last few years. In FY 08 we had done 54 Cr from CSM, going onto 130 Cr, 192 Cr, and 240 Cr in FY11. And this year we may achieve 320-350 Cr from CSM segment.

But why did this MNC outsourcers look at PI? Why were they not looking at other players in Agro chemicals or say Pharma CSM/CRAMS players?

You cannot run both Pharma and Agrochemicals manufacturing from the same plant – because of regulatory aspects & plant size issues. If a company wants to target both Pharma and Agrochemicals CSM business it will have to set up separate dedicated plants for the same. In the Pharma space you can set up small plants – the dosages are small, you can have large volumes from small plant sizes, and the returns are sometimes a healthy 35-40%. In Agro chemicals you can not have such high returns. So existing Pharma players were unlikely to be attracted to the agro chemicals segment.

PI industries focused on process research business with following characteristics a) patented early-stage molecules b) complex chemistry c) sole or 2nd supplier status and d) geographical exclusivity. It was a bold decision to fund the process research business back then.

In our opinion, of the agrochemical companies in India then, a couple of players had complex chemistry capabilities. But they were already deriving upwards of 50-60% of business from exports competing directly with MNCs in those markets. Now it didn’t make sense for a patent holder to invite outsourcing from a generic competitor, does it?

  1. THE SHIFT IN FOCUS AWAY FROM REVERSE-ENGINEERED GENERIC CHEMICALS TO IN-LICENSING INNOVATOR COMPANY PRODUCTS SEEMS TO BE PAYING-OFF HANDSOMELY. THE CSM BUSINESS ROOTS TOO GO BACK MANY YEARS – SOME 14 YEARS ATLEAST, SO FAR WE COULD CHECK.

Kindly share the circumstances/strategic decision-making process within the company that made you focus on these 2 segments. It does seem that in both the segments you have an early-mover lead and there are fairly high entry barriers in place – Your comments, please.

The first part of your question – strategic decision-making, is covered in our discussion above.

Lets look at the Agri Inputs business – The contracts are signed for 10-12 years. Brands are in PI’s name. Registration is in PI’s name. And now we have moved on to giving other large players co-marketing rights for fully exploiting the potential of the brand and help in market development, as the scale required for adequate coverage is huge. Formulation manufacturing in India is only by PI. It’s a great win-win position to be in, because as you might have noticed we are being given co-marketing rights on some of their products, in exchange. We launched 2 MNC partner products recently in Q2.

And in CSM business – a) the contracts are signed for a term of 4-5 years usually b) the innovator customer needs to mention PI as the Active Ingredient (AI) supplier while registering in any country c) process efficiencies kick in campaign after campaign as the gap between theoretical norms and plant norms keep getting reduced. So the innovator has very little incentive to change his AI supplier and no one wants to rock a working combination as any change will set them back by a few years.

The 1978 diversification into mining and mineral processing and the energy metering business in 1980s were later hived off into separate companies. In Dec 2010 the (lower margin) Polymer compounding division was sold off to Rhodia.

The promoter family had 3 sons, in a joint family structure. The younger son is in charge of the family’s mining interests. The company saw potential in the large deposits of Calcium and Volestolite mines in Rajasthan and acquired the licenses. This company hived off as Wolkem India Ltd., today is the largest miner and producer of Volestolite in the World.

The youngest son looks after the Energy metering business. The promoters on a business trip abroad had found promise in PRI Ltd UK, and subsequently acquired it. The company supplies power and gas meters. Secure Meters is India’s largest energy metering company, today.

Today, all the companies are completely independent with no cross-holdings and independently managed. Mr Salil Singhal PI’s chairman continues to be non-executive chairman in other 2 companies.

Please share the company’s philosophy and thinking behind the decisions. In any business that you pursue, are there some key metrics that you look for? Is there now a single-minded focus, on Agri Chemcials and CSM business segments?

Well I would say the aim for all our business is to be a) in hi-tech areas – that should challenge us intellectually b) It should be inspiring us to strive for achieving greater heights c) there should be some synergies with existing businesses d) financially viable

If you look at the joint research centre with Sony, that’s a very prestigious, challenging and inspiring win for us. Sony came over to look at us on Hokkaido University, Japan’s recommendation that if you are looking for outsourcing, PI is the right partner for you. We were talking for over 1.5 years, and then they put us through a 6 month scrutiny, post which they were happy to sign up with us.

  1. NOMINEE GOLD – PRE-EMERGENCE HERBICIDE (APPLIED WHILE SOWING). STUPENDOUS SUCCESS SINCE ITS INTRODUCTION IN 2010. IN LESS THAN 2 YEARS IT HAS BECOME ONE OF THE LARGEST SELLING HERBICIDE BRANDS IN THE COUNTRY.

This is the fist major branding success story from PI Industries? What has contributed to such a stellar success? Any USPs compared to existing pre-emergence or post-emergence Herbicides in the market?

It’s not correct to say Nominee is PI’s first branding success. Bio-Vita is the largest plant nutrient brand in India at 15000 MT in granules and 6 lakh tonnes liquid form. And that’s not even 1% of the potential in India!

FORA-TOX, FOSMIT, ROKET, and CARINA are the largest brands in India in their generic category. KITAZINE is another Innovative molecule that’s a big brand.

As brands, all of them are as big as Nominee.

But is it correct to say that in terms of numbers Nominee Gold is your first blockbuster brand?

Certainly the success Nominee Gold has seen is manifold that of the others. But as individual brands they are all big.

Nominee Gold certainly had its USP. All post emergent herbicides present in the market could tackle much lesser number of weeds than what Nominee Gold brought to the table. You have to see this in the context of 20-30 weeds/grasses that usually grow around the rice plant in any one location. Nominee Gold was the first broad-spectrum Rice weedicide in Indian market – the reason for its wide acceptability is its effectiveness against 20-30 such weeds vis-a-vis at best 5-6 of competing products.

How much does Nominee Gold contribute to total Agro-Chemical sales today?

As stated before for business confidentiality/competitive reasons, we prefer not to answer this question at this stage.

Had you anticipated this kind of success while test-marketing/launching Nominee Gold? Was this a one-off case, or do you think some of your other in-licensed products under launch consideration, can match up to this performance?

Yes, this was certainly expected. The reason lies in the Rice transplantation practice in India because of the weeds problem. Just imagine the labour/water wastage for years in India. We knew farmers would jump at the solution/benefits Nominee brought to the table. And then we all know how NREGA (for all the social benefits it brings) has made labour scarce and more costly.

What is the market-share of Nominee Gold among Herbicides in the market today? What are the constraints on growing this share?

It is very difficult to quantify exact share. Likely to be slightly in excess of 20% or so of the Rice Herbicide segment.

We have seen supplying not coping up with the demand, in certain markets. Would you say the “marketing challenge” for Nominee Gold is over but Capacity constraint is the key challenge?

It might be true of certain pockets in the first season of product introduction. However we are not aware of any such situation in the current year.

How would you quantify Agro-chemical manufacturing capacity as on date? What are the plans for FY12 and FY13 on this front?

We follow a bottoms-up demand assessment approach. We have an excellent Business Intelligence (BI) tool sitting on SAP. This tool is in-house developed and used for our business planning requirements. We have divided the country into 140-150 territories.

The territory manager assesses demand from his territory based on a parameterised  form he fills up – e.g. total acreage, what crops , planting practices, products available in the market. He assessment is made assisted by his Regional/Zonal Manager. And then we have this aggregated data available on a regularly updated basis from all the territories – that is used as a vital input to our planning process.

We also get a broad sense of the demand/potential from our interactions with the farmer community at promotions and farnmer education programs. Based on all this, we assess at the beginning of the year full years demand, and schedule our imports with the manufacturers.

  1. NOMINEE GOLD (BISPYRIBAC SODIUM) IN-LICENSED FROM KUMIAI CHEMICALS. BAYER HAD ALSO IN-LICENSED THIS FROM KUMIAI CHEMICALS AND HAS REGISTRATIONS (ACTIVE 2009) FOR GREECE, ITALY, PORTUGAL, TURKEY, ROMANIA, BULGARIA, PHILLIPPINES, AND SEVERAL OTHER COUNTRIES.

Kindly explain the in-licensing arrangement/country registration process with Kumiai Chemicals, and validity/tenure of patents/trademarks/registrations for Nominee Gold.

We have signed a long-term excusive marketing and distribution contract with Kumiai chemicals. This gives us the right to use their trademark in India. PI has registered the Nominee Gold brand in India and is the owner of the brand.

Why do you think Bayer did not in-license this for Indian market, for itself? Is it correct to say they missed spotting the growing use of Herbicide trend in India catching on, something that PI spotted. And now Bayer has partnered with PI for Nominee in India? Kindly share the terms of this partnership, and what does PI get out of this – access to Bayer’s larger distribution network?

No one company can do everything. Not even the MNCs with all their resources – there are bound to be hits and misses. Bayer may not have undertaken that study in India. DuPont has introduced Renaxypyr – another molecule that has done exceedingly well.

PI has the rights for Nominee in India. Now its our wish whether we want to do it ourselves or consider it in our interest to share marketing rights with MNC/other partners. We have chosen the partnership route giving them co-marketing rights; manufacturing can only be done by PI. We have taken co-marketing rights from a leading MNC player for 2 of their innovative products in exchange.

India is a vast country. There is enough scope for 2-3 players to grow the brand. On our own we may have captured the potential in 10 years. The trade-off is, now this can be done in 5 years perhaps. Also reciprocity gives us a much larger product basket to operate with. Another leading MNC player has given us 3 products while there are talks ongoing for 2 more with another leading player. Everyone benefits form this win-win approach. There is more visibility to the product, more accessability and that can only spur higher growth.

Is it correct to say certain factors like Labour Shortage (increasing rural MNREGA led economy) has contributed significantly to growing Herbicide use in India and led to Nominee’s success.

Yes. Covered before.

Have your other Herbicide brands like Altrazine, Fenoxaprop, Pretilachlor, Thiobencarb seen similar growths? Have Monsanto’s Butachlor/Alachlor grown as well? If not, kindly explain why?

Application and efficacy against limited weeds variety are the reasons for not coming anywhere near Nominees stellar performance, as mentioned before.

Nominee Gold is aimed at the Rice crop – Please educate us on the annual Herbicide spend on Rice crop in India.

If you combine the farmer annual spend on pre and post emergent weedicide and manual weeding it is in the Rs. 2500-4000 range. On manual weeding alone he ends up spending Rs. 2500-3000.

Nominee Gold would have reached some 4-4.5% of the total acreage under rice crop in India, currently.

  1. CUSTOM SYNTHESIS BUSINESS (CSM) – SIZE OF OPPORTUNITY BEFORE PI. US$ 340 MILLION ORDER BOOK WITH TENURE OF EXECUTION RANGING FROM 2-4 YEARS. 14-16 PRODUCTS IN COMMERCIAL SCALE, WHILE SOME 24-26 PRODUCTS AT DEVELOPMENTAL PILOT & R&D STAGES.

Where do you see this business headed in the next 5 years? Do you anticipate some of the molecules to move from low volume (kgs) to full-blown CRAMS manufacturing (Tonnes) in the next 5 years? Post CSM commercialisation, typically how long is the growth life-cycle, and what is the total life cycle?

The CSM contracts are typically signed for 4-5 years. Unless we majorly goof up on something there is no reason why these contracts will not be renewed. The first CSM contract we signed in 1997-98, we are still the sole supplier to the client.

The patent life is 20 years. Typically the first 6-7 years are consumed in getting regulatory approvals and processes in place. So productive life cycle of a typical molecule is 12-13 years. The first 6-7 years are good growth years.

All our CSM manufacturing is commercial scale. We do not make any money during the process research and scale up stage, before it moves to commercial manufacturing.  We could have had some fee-based structure there, but we chose to treat that as the investment phase. During  process research stage the volumes is like 10 kg moving up to 1 tonne as scale-up happens. And then commercial scale manufacturing begins. Typical campaign size may move from 50 T to 100 T to 200 Tonnes.

What is the size of the opportunity before PI? And what are the challenges it faces in deepening the relationships with customers, while scaling on capacity and expertise?

The opportunity is huge. As mentioned before we are into CSM for patented molecules, where the manufacturer typically does not engage more than 2 sources. While the initial contract is for 4-5 years, the available life cycle is 12-13 years. In the early years the growth momentum is big. 1st year the manufacturer registeres in US, next year he registers in a couple of EU countries, the 3rd year he registers in Japan, 4th year adds more countries.

Then there are other verticals like Imaging chemicals, Pharma (early intermediates, pre API stage), Organic chemicals (the Sony JV). So the product basket is much more diversified today. The pipeline is more robust. Combined opportunity size before PI may be in excess of 10s of billions.

How significant is the competition globally? (Saltigo, Lonza, DSM, CABB (Kemfine)). Kindly share the main competitive challenges and how do you find PI positioned vis-à-vis competition?

Yes the names you mention are among the main competitors. Most of them are from Europe. Some in Japan, and China.

As far as we know, Patent Infringement is a big issue faced by Innovators in China. So the only outsourcing that happens there is in commodity chemicals and generics. And PI does not play in that space.

Now European players have their edge. They enjoy deep relationships with their clients and have had their confidence for several years. They are relatively more efficient in complex chemistry. But they have been in the business for 30-40-50 years. Asset Quality is now becoming a problem, as is ageing workforce with all their liabilities. If they have to expand to service a customers requirement, that expansion will come at European costs.

European players had the technology edge so far. But now if someone matches up to them on technology, then they have a difficult situation! We are also very clear that COST will not remain an edge forever in India. Along with our ability to meet complex chemistry requirements, PI’s edge, based on the feedback from our customers, is in process improvement. Customers are really happy at the response time and pace we bring in dealing with their requirements.

Who are your biggest customers? How much do your top 3 customers contribute to Sales? Does any one customer provide more than 10% of the CSM business? Kindly provide the geographical spread of customers between Europe, Japan, Americas.

We are unable to take any names. Our top 3-4 customers are contributing close to 60-65% of total revenues, with a couple of customers contributing more than 10% individually.

  1. AGRI CHEMICALS BUSINESS – SIZE OF THE OPPORTUNITY BEFORE PI

Is it correct to say much of the growth in this segment has hinged on the exemplary success of Nominee Gold?

We have covered this before. Apart from Nominee Gold PI has had very good successes with many of its brands. While Kitazine is another innovative molecule, FOSMIT, FORA-TOX, ROKET, and CARINA are generic brands but the largest in their segments.

What levels of organic growth do you expect from existing products in next 5 years – not factoring in any new product introductions?

See 55-60% of our Agri Inputs business comes from Generics. That segment typically grows at 8-10% depending on the monsoon too. Innovative molecules from our pipeline and co-marketed products of MNC products should grow at much higher rates. Overall we see 30-35% growth being achieved.

Most of the Agrochemical majors like BASF, Bayer, Monsanto, Dow are also Seed industry giants. Kindly elaborate on this seemingly symbiotic relationship. And does PI Industries have any plans on this front?

It is symbiotic because you cater to the same customer set and can leverage existing marketing set-ups. Plus there is a huge huge potential of seeds business in India.

PI has done some soft marketing of seeds 1.5 years back -with MNC products. We have some ideas for coming with our own variety of seeds, and evaluating a few options.

What impact does pesticides-resistant varieties like BT cotton have on PI Industries Agro Chemical Sales. Apart from BT Soya and BT maize, how far is BT wheat/rice away from commercial introduction in India? Monsanto’s Round up Ready going off-patent, would it mean a rush of generics in the Indian market, and will that impact any sales of PI.

To look at this clearly, we need to understand the difference between Food and non-Food BT varieties. So while BT cotton has caught on, I have serious doubts if any BT -food seed will catch on in India!

The reason is Indian Palette is vary different. Even different regions have their marked preferences. The South Indian does not prefer the North Indian Basmati favourite. And if a North Indian has the rice a South Indian loves, he will say this rice is not worth eating!

I have serious doubt even with BT Brinjal. The Bengali will definitely boycott the BT brinjal – if he doesn’t get that particular flavour of his favourite brinjal!

And this we were talking about urban India – which is more exposed to global influences. But imagine the Rural India palette. I don’t see BT food seeds getting accepted in India easily. Atleast not in the next 10-12 years.

  1. CUSTOM SYNTHESIS SEZ PROJECT  – JAMBUSAR, GUJARAT. 22.3 ACRE LAND ACQUIRED. A TOTAL INVESTMENT OF RS. 125 CRORE EARMARKED FOR THIS OF WHICH 55-60 CR IS ALREADY UTILIZED.

What is the progress on this front? Have you secured any funding for the same? What are the terms? Is the balance 65-70 Cr to be utilized in FY13 only?

We have negotiated an ECB $20 Mn Term loan in October at Libor+3%. Repayment is after 2 years. We have drawn some amounts in October and November in 2 or 3 tranches.

New CSM multi-product plant – Please give us an idea of the size/revenue generating capacity vis-à-vis existing CSM capacity

Typically we can derive 2 to 2.5x Asset Turnover from our kind of CSM plants, unless something dramatically changes in a product. So it can generate annual revenues in the range of 250-325 Cr.

Please indicate typical stabilisation timeframes post commissioning. And capacity utilization time-slate thereafter?

3-6 months are needed before stabilisation.

Is existing capacities of CSM fully utilized? At full utilization what could be the revenue generation of existing as well as new plant separately, on a full year basis?

Actually in CSM business process efficiency kicks in from campaign to campaign. To give you an example one circuit that was producing 1 MT/day in 2009, is now producing 1.8 MT/day in 1HFY11 from the next campaign. This is almost double; sometimes dramatic improvements can be achieved from process optimization and efficiencies achieved. There is tremendous scope improvements because we are dealing with early stage products.

Together the 2 plants should generate 600-650 Cr in annual revenues.

When do you expect the next cycle to begin? Is it FY15 or earlier?

This really depends on the product pipeline and urgency at customers end. If some product takes on large volumes, there well may be a case for fast-tracking capex.

  1. AGRO CHEMICALS – 2 NEW IN-LICENSED MOLECULES COMMERCIALLY LAUNCHED IN FY12 UNDER CO-BRANDING ARRANGEMENT WITH MNCS

Insecticide – co-branded with Bayer – Tea & chilly crops -what’s the Brand name? Fungicide – co-branded with ? Vegetable crop – brand name?

Brand “VOLTAGE” – Miticide (mites) – for tea, chilly, brinjal, okra

Brand “ CLUTCH”  – Fungicide – for potato, tomato, and other vegetables

Please elaborate on the co-branding strategy. Is this the likely road from here on for new introductions? Who gains what from the partnership? Who is the registered owner of the brands in India?

This has been covered at length in earlier part of this discussion.

Kindly educate us on the unique functionality/application that these will bring to the market.

These products are again kind of filling a gap, that exists. Basically these have completely different mode of action and control (on the pests attacking these plants or vegetables), than currently existing products in the market.

Do your market studies indicate as big a market size as Nominee Gold for these 2 products?

As indicated before these have substantial potential in the Indian market.

Do you expect any significant revenue contribution in FY12? Does your 40% Sales guidance for FY12 factor in any contribution from the same?

Yes, these are factored in. The deals do not happen overnight, it takes atleast 6 months to put these kind of deals through.

  1. AGRI CHEMICALS BUSINESS MIX – GENERICS VS INNOVATIVE PLAYS (60:40?). FOCUS ON INTRODUCING INNOVATIVE MOLECULES WHERE THERE ARE ONLY 1 OR 2 SOURCES WORLDWIDE. 7-8 INNOVATIVE MOLECULES UNDER ACTIVE SCRUTINY, REGISTRATION, TEST MARKETING.

Kindly educate us on the current business mix between generics & innovative molecules in this space. Given that you had substantial success with introducing blockbusters like Nominee Gold, is the focus shifting towards greater share of Innovative molecules?

Current mix is still 60:40 in favour of generics. But this is likely to change pretty fast in favour of Innovatives (in-licensed + co-branded products). We will be introducing new products. We will be launching 1 in-licensed molecule (a broad spectrum insecticide) in time for the next Kharif season, and as discussed there are many co-branded products under offer/discussion for introduction.

With the introduction of 2 new innovative molecules in Q2FY12, is this revenue mix strategised/foreseen to be changing significantly by FY13? Where will this mix be by FY2015?

We haven’t introduced any in-licensed molecules in this year. We introduced 2 co-branded products of MNCs. Yes the product mix should change decisively. Infact by FY13 you may see 70:30 in favour of Innovatives. FY15, difficult to tell…we want to reach 90:10 in favour of Innovatives, eventually.
  1. AGRI-BUSINESS – THE THREE DRIVERS – NORMAL MONSOON, HIGHER CROP ACREAGES, HIGH AGRI-PRODUCE PRICES. WE HAVE SEEN MARGINS AND VOLUME GROWTH AFFECTED IN Q2. CONTINUOUS RAINFALL CONDITIONS IN LATER PART OF Q2 LED TO A SUB-OPTIMAL OPTIMAL PRODUCT MIX.

Kindly explain the components of this sub-optimal product mix.

a) Because of continuous rains, the skys remained overcast and cloudy for over 15-20 days at a stretch in most months b) farmers were uncertain …whether to employ the costlier (but more effective) liquid products which might get washed away just after rains c) consequently product choice shifted to lower cost granules products d) we were not so prepared on the supply side with granules products

We heard farmers opted for granules, which accrue lower margins (instead of high-margin liquid products). Why does the farmer not always opt for lower cost granules? Does PI have granule based products in its portfolio?

Granules based products work on the plant from the roots/stem by capillary action. In rainy conditions the farmers are still okay with the granules dissolving in the water and acting on the roots. Sometimes Granules are the only choice for a particular pest/application (no foliar liquid products available for that application). Sometimes Granules and foliar products are both available for a particular application.  In such cases Granules are a poor second choice as they are nowhere near foliar liquid products (that act on the leaves and fruits and stem) in effectiveness.

Yes PI has some granules based products. BIO-Vita is available in both liquid and granular form. FOTO-TOX is available as granules, as are some of the other generic products in our product portfolio. Also Generics will not give us the margin expansions we seek.

See it depends on the way an agrochemical application works. At the time of registration itself you have to specify the application(s). You can’t just produce a granules version and manufacture/market it.

And your Nominee Gold – the flagship product? That is available only for foliar application?

Yes, Nominee Gold is not available for Granules application.

This may not be the first time PI has faced extended monsoon conditions! Could it have been better prepared?

Well the issue was of continuous overcast/cloudy conditions for more than 15-20 days at a stretch in most months. Our marketing guys were not prepared for it. It is very rare to have such conditions – No sun -for over 15-20 days at a stretch, in most months, at this time of the year. Besides, Punjab and Haryana had floods.

Some of the other pesticides companies like Insecticides and Dhanuka didn’t seem affected by the monsoon – they posted robust Q2 numbers. What do you think is different in their product mix/strategy?

Well we need to look at this from the right perspective. If you compare revenue growths in Q2, most have grown in between 15-25%. We have done better than that!

On the margins front, everyone has managed 13-15% EBITDA levels. Now for us Q1 was a super quarter and we did 21%. Our normalized levels are more like 18%, right. Now from 21% if you come down to 15%, it’s a big fall. But if you come down from 16-17% to 14-15% levels it is not seen as dramatic.

There was also one more reason. Q1 had seen unprecedented high take-offs of our products, because of preponement of onset of monsoons. People were afraid product may not be available later when they need them.

And as mentioned before we needed to invest in promoting newly launched products. That’s more a longer-term decision.

Do you see all drivers as favourable for H2FY12? Or are we more cautious now? And are we better prepared the next time similar conditions prevail?

The second crop season –water is always an issue. This time there is abundant water accumulation. Also the government is very keen to control supply side inflation.
All factors seem to indicate a better season ahead.

11. AGRI BUSINESS. IN-LICENSING VS CO-BRANDED INNOVATIVE MOLECULES.

You already have a pipeline of 7-8 co-branded products, is that correct? Any more co-branded planned to be launched in FY12? How many in FY13?

Yes, we should easily see some 7-8 co-branded products launched. We might be launching another co-branded product in next 2 months. FY13 should also see another 2-3 products launched.

You have indicated earlier share of innovative:generics likely to be 70:30 in FY13.

Well, it’s not fair to hold us to specific figures; these are very difficult to give. But we can certainly say direction will change. That the already launched and newly launched products will majorly drive the growth going forward. And if that is the case, then the change in product mix shifting towards Innovatives is inevitable. Now whether that will be 70:30, 65:35, or 60:40 in favour of Innovatives remains to be seen – how things play out.

Given that only 1 in-licensed product is likely to be launched per year, what is the likely share of co-branded vs own in-licensed in FY13?

Again this is difficult to predict. It depends on what volumes these products pick up. Percentages will depend on market acceptability and how the growth ramps up in specific products.

Kindly give us some indication on the margins front (co-branded vs own in-licensed). And vs generics.

All I can say is, it varies from product to product. And certainly there is some difference but it is not too much. But it is certainly much better than the generics.

Is Co-branding offered by PI only to MNCs? We understood that PI will offer co-branding only on a quid-pro-quo basis i.e. you also gain access to MNC innovative products. But we heard Rallis is also marketing Nominee Gold??

Yes, Rallis is also a Nominee Gold co-branding partner. And discussions are on for an innovative product from the company. Expanding distribution reach is certainly not the requirement, or objective.

12. CUSTOM SYNTHESIS BUSINESS – ORDERBOOK AT $325 MN AS ON SEP 30. 1 NEW MOLECULE INTRODUCED. GROWTH HAS COME MAINLY FROM RAMP UP OF EXISTING MOLECULES.

How’s the current outlook? Any slowdown in offtakes seen/expected from customers? Any impact seen from European customers?

You see the food situation is the same across the globe. We keep talking/meeting our customers every month/2 months. We have not seen any reflections/concerns in their demand slowing down, so far.

13. EBITDA MARGIN EXPANSION GUIDANCE OF 18.5% FOR FY12 (17+1.5). Q2 EBITDA @15% – PERFORMANCE HAS NOT MATCHED UP. HOWEVER, YOU HAVE MAINTAINED THE EBITDA GUIDANCE ON A FULL YEAR BASIS! AND COMBINED SALES OF RS 895 CR (575+320).

While you had guided for a 40% growth in Sales for FY12 in the Q1 conference call, it looks like the outlook has been tempered down to more like a 25% growth for the full year. On a reduced revenue base, how confident are you really of achieving the EBITDA guidance?

If we do an apples-to-apples comparison, we are very much there with a 40% plus growth performance. From the 720 Cr in FY11, if we take out the 65 Cr polymer revenue, that’s like 660 Cr. So with 900-925 Cr achievable this year, we are performing in line/better than the guidance.

And in terms of margins, if we see first half, we are already 1% up. So I would say we are in line to perform as per guidance.

Given that CSM business is more or less steady-state (ignoring the forex M2M for now), it would seem that you are pretty confident of the Agri-Chem sector outperforming in H2FY12. Please share the rationale for the confidence/optimism.

We have gone into the reasons before, and the need for looking at the numbers/growth on a like-to-like basis for the 2 years.

What, if any, could go wrong?

Not really. We are pretty hopeful of managing a decent year.

14. FOREX MANAGEMENT. FOREX MARK-TO-MARKET LOSS OF 8.85 CR IN Q2. HEDGED FOREX CONTRACTS OUTSTANDING AS ON 31MAR US $20 MN AND EURO 8 MN. HEDGED FOREIGN CURRENCY EXPOSURE AS ON 31ST MAR 2011 US$ 6.4 MN AND  EURO 0.4 MN. UNHEDGED FOREIGN CURRENCY EXPOSURE US$ 32.4 MN AND JAPANESE YEN 58 MN.

Please elaborate on Forex hedging policies followed. Do you hedge 100% of net Forex inflow?

We hedge for the operating period – 12 months forward – against firm order positions. The Net inflow is hedged.

How much do you hedge of the Net inflow? Partial or Full?

Closer to full

70-80%?

Yes, 70-80%

Please give us a break-up of the 8.85 Cr M2M loss in Q2.  Assuming you hedged at Rs.45 to US$, at 49 to US$, the M2M loss would be 4×20 ~8 Cr!

As on Sep 30 2011, we had outstanding forwards of $33 Mn. These were taken at 47+ levels (47, 47.25) while Rupee-US$ had gone up to 49+ levels (49.25, 49.5). The difference in these rates account for the 8.85 Cr, basically.

As on 30 Sep 2011, what is the quantum of firm contracts outstanding, and hedged contracts outstanding. How much is the net forex inflow expected? What is the hedged foreign currency exposure? Finally, Why do you need to hedge foreign currency – to mitigate foreign currency interest payout impact?

As mentioned before, as on 30 Sep firm orders on hand for 12 months forward is $95 Mn plus. Outstanding forward contracts taken is $33 Mn.

And this $33mn will be 70-80% of your net forex inflow for the period?

Yes, that’s right.

If the rupee keeps depreciating further, what can we expect? In Q2 Concall you have mentioned that being a net exporter, on a longer time horizon, PI stands to gain if rupee depreciates. Under current hedging policy/practice please explain how that would be achievable?

See in the short term – we expect things to balance out. But in the long term we should benefit. That’s because our CSM contracts are pass through –from campaign to campaign. At the end of the campaign we will be able to recover whatever gains/losses are booked.

But what about M2M losses?

These do not appear in the P&L.

But these M2M losses/gains have to be accounted for in the Balance Sheet, isn’t it?

Yes, you are right. But these need to be carried only till the time the campaign is executed. Once the orders are executed, the M2M gets neutralized.

Can you elaborate on this point, please.

See I can understand the concern if these forwards were speculative in nature (not backed by orders), then there can be big losses too. But when backed by firm orders, the M2M losses/gains are only notional … they will be neutralised, once the orders are executed. Its just a matter of time.

At worst, one can say that we did not gain (what we could have if left unhedged in current situation) but it is totally wrong to think we will make any losses!

15. ECB TERM LOAN EXPOSURE. YOU MIGHT HAVE TAKEN IT AT 49-50, BUT RUPEE IS ALREADY AT 52 TO A DOLLAR. YOU WILL HAVE TO REPRICE THE LOAN AND ACCOUNT FOR THIS (AS PER AS 30) IN Q3 AND Q4.

What is the Quantum of ECB loan? What are the Terms?

This is a long Term Loan. Total Loan amount negotiated is $20 Mn, at Libor+3% rates. Repayment is after 2 years. We have drawn some in 2-3 tranches in October and November 2011.

Are you planning to hedge this, capitalize this including forex till plant comes up? What are the risk mitigation measures contemplated, in view of rapidly depreciating rupee?

See this is a long term loan. As a company we follow AS-30 accounting standards. Till the time the M2M (loss) is not more than prevailing Indian interest rates, we can capitalize that. Depending on the situation at the accounting point of time, we will account for it accordingly.

Please understand this is a notional loss/gain over any accounting period and over the long term it may well even out. The amounts drawn so far have been taken above Rs. 50 to US$. So, we are not in favour of hedging this and taking additional costs on book.

16. JOINT RESEARCH CENTRE WITH SONY CORPORATION

Kindly comment on the progress, and revenue generation outlook? Has actual work on any molecules commenced? What is the visibility on revenue generation – FY13?

This is progressing well. 

How is the deal with Sony structured? How much is the company investing in the R&D with Sony? How much is Sony spending? Who owns the intellectual property (if any) that comes out of this research?

We have dedicated a complete lab to the Sony project. All hardware assets are invested by PI Industries. Software assets are joint property.

We get a fixed fee during the process research and scale up period. Once CSM manufacturing starts, it will shift to our normal contracts model.

Who owns the intellectual property (if any) that comes out of this research?

The IP belongs to Sony. But if PI makes any process improvements, then the IP is jointly owned.

Is that written down clearly in contractual terms?

Yes.

17. R&D TEAM – PROCESS RESEARCH STRENGTH MUST BE A KEY OPERATIONAL AREA FOR PI INDUSTRIES.

Please share what kind of team PI has built up today, qualifications & profile of lead scientists, chemists, etc. What’s the strength today, and what are the plans of scaling this up going forward? How easy/difficult is this in today’s market conditions?

We have a team of 100-110 people in R&D. Of these 22-23 are PHDs. And 15-20 hold Masters degrees. The rest are chemists.

18. CRAMS SCALE MANUFACTURING. WE UNDERSTAND TODAY’S MANUFACTURING SCALE IS AT KILO LABS SCALE, WITH THE FOCUS BEING ON CUSTOM SYNTHESIS AND MANUFACTURING OF NEWLY DISCOVERED MOLECULES FOR MNCS.

Given the current pipeline, how far are we from needing to scale up investment in capex and processes for CRAMS scale (Tonnes) manufacturing? Please explain the nature of investments that will be needed to scale up, should an opportunity arise. If everything goes well, how long does the relationship typically likely to extend to (10-15 yrs?), once you start commercial manufacturing (CSM) of a molecule?

See when you have 250-300 Cr in Assets, you typically need some 10 Cr in Maintenance Capex. Expansion capex is managed by adding 1 more circuit or 1 more reactor, and the like. And that is linked to volumes. If the demand is more than plant design, then we need to go for further capex.

The second part of your question has been discussed before. Typically 12- 13 years of productive life of a molecule once its starts getting commercially manufactured.


Disclosure(s)

Donald Francis: No Holdings in the Company; ;
: ; ;
: ; ;
: ; ;

Leave a Reply