Punjab Chemicals and Crop Protection Limited (506618) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Punjab Chemicals and Crop Protection Limited Q2 and H1 FY '26 Post Results Conference Call hosted by Antique Stockbroking Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Riju Dalui from Antique Stockbroking. Thank you, and over to you, sir.

Thank you, Sarthak. On behalf of Antique Stockbroking, I would like to welcome all the participants on the call of Punjab Chemical and Crop Protection. On the management side, we have Mr. Shalil Shroff, Managing Director, Mr. Vinod Gupta, CEO, on the call. Without further delay, I would like to hand over the call to Mr. Gupta for his opening remarks, post which we will open the floor for Q&A. Thank you, and over to you, sir.

Thanks. So good afternoon, everyone, and thank you for joining the call today. It is my pleasure to extend a warm welcome to all the participants in this Q2 and H1 FY '26 earnings conference call. We sincerely value your time and continued interest in our company's performance. I trust you have reviewed the financial results and investor presentation, which is now available on the stock exchange. In call with me today, we have Mr. Shalil Shroff, our Managing Director; and Mr. Bishan Singh, who is our Finance Head. In our industry -- so overall, first, I'll begin with the industrial scenario. The overall industry continues to show signs of recovery after a prolonged period of correction. Inventory levels across the key markets are normalizing and pricing trends have begun to stabilize, supported by gradual pickup in demand across each user segment. The global chemical industry has also witnessed improvement during the quarter, aided by easing supply chain pressure, stable raw material costs and revival in industrial consumption. I'm pleased to share that Punjab Chemicals delivered a steady and positive performance this quarter. Revenue from operations stood at INR 255.2 crores, reflecting a 5.4% year-on-year growth. This performance was driven by consistent momentum across both domestic and export markets. Gross margin stood at 39.5% and EBITDA at INR 26.2 crores, representing 2.5% year-on-year growth. We had -- as all of you are aware, that Punjab was hit by heavy floods during the last quarter, and our EBITDA margin took a hit of about 1% due to a sudden jump in fuel prices as the fuel became scarce and supply was short. Our focus on operational excellence, product quality and cost management continues to strengthen our competitiveness in an environment where supply capacities remain elevated. During the quarter, we continue to reinforce customer relationship, enhance research and development initiatives and invest in technical capabilities to support long-term growth. We are in advanced stages of developing several new molecules across both Agro Performance Chemicals and Specialty segments, which are expected to be commercialized over the next few quarters. The new molecules introduced over the last few quarters are gaining strong traction both in domestic and international markets. Their contribution to overall revenue is steadily increasing, and we expect their value addition to strengthen further in coming quarters. The CapEx plan announced last quarter to build new manufacturing block is progressing well. This investment will cater to a rising demand of existing products and support new product pipeline and also enable faster commercialization of upcoming molecules when operations commence. At the same time, we continue to invest in asset renewal. So, our asset renewal exercise continues on a regular basis. Last quarter, we had taken up a revamp of 1 production block. And in this quarter, we have taken up revamp of 2 more production blocks. Additionally, we are evaluating a new site to support our medium- to long-term growth trajectory. This will further diversify our manufacturing base, enhance supply resilience and provide scale benefit as we ramp up production of new products. Our business development team continue to pursue new opportunities through deeper customer engagement and strategic collaborations. The company remains committed to advancing innovation and expanding its chemistry portfolio and capturing value in niche high-growth segment of specialty chemicals. We remain confident in our strategic direction and continue to focus on delivering sustainable value to all our stakeholders. Our core principle of innovation, quality and customer centricity remain integral to everything that we do. Now I move on to Q2 and H1 FY '26 financials. Starting with quarterly highlights. For the quarter, revenue from operations stood at INR 255.2 crores, representing a 5.4% year-on-year growth. The domestic market contributed to INR 115 crores, while the export accounted for INR 140 crores sales. Gross margin for the quarter stood at 39.5%, while the EBITDA came in at 26.2%, reflecting a 2.5% growth year-on-year. EBITDA margin stood at 10.3% compared to 10.6% in the same period last year. As I mentioned earlier, there was a hit of about 1% because of sudden fuel prices shock we saw in the last year -- sorry, last quarter. Profit after tax for the quarter was INR 18.5 crores with PAT margin of 7.3%. Now moving to half year highlights. Revenue from operation in H1 FY '26 reached INR 574.7 crores, representing an 18.6% year-on-year growth. The domestic market contributed to INR 313 crores, while the exported accounted for INR 262 crores. Gross margin for the period stood at 35.9%, while EBITDA came in at INR 60.6 crores, reflecting a 13.1% growth year-on-year. EBITDA margin stood at 10.5% compared to 11.1% in the same period last year. Profit after tax for the quarter was INR 39.2 crores with a PAT margin of 6.8%. Capacity utilization level remains healthy across all the sites. Our Derabassi division capacity utilization was 77%, whereas Lalru division utilization was 62% and Industrial Chemical division at Pune continued to operate at usual utilization level. With this, I conclude my opening remarks and open the floor to question-and-answer session. Thank you once again for your time and continued support.

[Operator Instructions] Our first question is from the line of Rahul Jain from Credence Wealth.

Am I audible, sir?

Yes, yes. We can hear you.

Sir, with regards to -- my first question is with regards to the industry environment. So, we understand for last 3, 4 quarters, in general, the commentary from our side and also the industry has been the export markets, the destocking is almost done and volume growth has been visible. But on the pricing front, there seems to be no change, or the prices have become stable at the lower end. So just to understand, sir, on the pricing front, are you seeing any kind of changes in terms of the pricing part where probably some product prices have started moving up, some of them are still stable? Anything on that side?

I think -- so, Mr. Rahul, I think at the moment, overall pricing remains stable, except in some occasional cases where there are certain supply shocks or something. But mostly, the prices are stable. So, for this year, we expect prices to be stable. And maybe because there are -- from time to time, we see a possibility to increase prices for certain products. So maybe in a couple of quarters, we will see improvement in the pricing and the margins for the industry as a whole and for our company also.

My second question is with regards to our bifurcation of sales between exports and domestic. So, exports has done exceptionally well for us for the last 2 quarters. In fact, the current quarter exports are almost at a 10-quarter high. And -- so what are the drivers for this growth, which you are seeing in exports? And how sustainable do we look at this number of INR 140 crores, INR 150 crores? What kind of growth from here are we looking in exports?

I think what you are seeing a revival in export demand is consummating with the commentary that we are having that global inventories are at lower levels. Hence, whatever product that we sell mainly to Europe, U.S. and Japan markets, those demand is good, and hence, our sales have increased. There is one more variable, which I think from time to time that comes in, which we highlighted last quarter also, where in some cases, customer takes the material in India. That's why it gets counted as a domestic sale, whereas actually the material is for export. So overall, if you see from quarter-to-quarter, our export and domestic market share has been close to 50%, 50% each. Only it's mainly because of the accounting or when the customer takes on the FOB basis, that gets accounted for domestic sales. But yes, overall, export demand is healthy. And all the products where -- which is based on export, those plants are running full scale, and we are seeing very good demand this year.

So, what kind of volume growth we have seen in this quarter, say, year-on-year?

So, year-on-year, we have already seen about -- for export market, about 10% growth if I put all the products together.

And what is the new product share in this -- within this in first year -- first half of the current year?

Probably -- so overall, I think last year, we had closed at about 12% contribution coming -- 12% revenue coming from new products. For the first half year, we are at about 16%, and this share is increasing slowly.

Sure. Sir, last question. On the domestic front, this quarter is almost again at the lower end of last 5, 6 quarters at INR 115 crores. So how much of it is due to kind of seasonality, some sales which happened in quarter two? And are there any sales return in this quarter? And how do we look at the domestic sales going ahead?

Okay. So I think what -- so, broadly, domestic sales market demand has been quite stable. We saw one particular product where there was a seasonality and that's where we saw a drop, which is not a long-term phenomenon. It's a short-term phenomenon of 1 or 2 quarters. So, we see domestic demand being healthy. We are a B2B business. I mean, you just said about the sales return. We don't have sales return because we are into a technical market only. So, we are not into formulation where there are sales return. It's only some seasonal demand, which sort of has gone down. And also, this year, this excessive rain has impacted some of the product local material movement. Otherwise, long-term trend is healthy and growing.

[Operator Instructions] Our next question comes from the line of Jainam Ghelani from Svan Investments.

Sir, as you mentioned in your opening remarks that you are evaluating a new site for further growth. So, sir, what is the quantum of this CapEx that we are planning? And when can we expect this? Because I believe that we've been looking, over the last 4, 5 quarters, we've been looking for new opportunities for a greenfield CapEx, but that is not capitalized. So, when can we expect one, please?

So overall, I think we have been looking. I think you're right that we have been sort of looking for a site for the last 4, 5 quarters. And we have consciously not concluded this because we were sort of seeing signs -- we were waiting for signs of revival for the industry demand, and we wanted to time it according to the demand revival. That's where you will see that we have announced the CapEx for new production blocks because we believe that it will be rightly timed to the product commercialization that is happening for our product portfolio. And for this new site, we basically are very -- we are already in discussion with a couple of potential candidates. And we hope to conclude this in the next 2 quarters, this whole deal. And over a period of 3 years, the site CapEx will be about INR 350 crores.

Okay. And sir, in the presentation, we mentioned that we've signed 3 new MOUs. So, what could be the revenue potential from these 3 for the export-oriented products?

See, that we mentioned last quarter, each of these products is about INR 50 crores once the product fully matures and stabilizes. So, we are expecting a sale of anywhere between INR 125 crores to INR 150 crores over a -- I think -- so it will -- because you know the cycle which is there for agrochemical products, which starts with sample approval to pipe batch analysis to product registration. So, there is a slightly longer gestation period. But once that happens, steady-state sales will be anywhere between INR 125 crores to INR 150 crores from these 3 MOUs.

Okay. And sir, last question from my side. Sir, do we maintain the guidance that we had given in the last con call that INR 1,200 crores to INR 1,400 crores revenue in FY '27 and 16% to 18% margins?

So, I think what we had given for FY '27, just around INR 1,200 crores to -- I mean, so what we have given guidance was about 15% to 20% year-on-year growth. That's the first guidance we had given that we maintain. And second growth, we had maintained that eventually over a period of time, we are targeting an EBITDA margin of 16% to 18%. I think we didn't mention specific to FY '27. But in long run, over a period of time, we are looking at increasing our EBITDA margin to 16% to 18%.

Also, just to add, as Vinod said, that some of these products have their own registration and which takes time. We are in close contact with our customers, and we believe that once this come in, it will be a robustic way forward in terms of revenue.

[Operator Instructions] Our next question comes from the line of Rudraksh Raheja from ithought Financial Consulting.

Can you give us an outlook on EBITDA margins for this year? Like 16% to 18% you said for the long-term, we should expect. How should we end this year?

So, I think for this year, we will maintain steady EBITDA margins of around 12%. So, it should be anywhere between 11.5% to 12.5% is what we will look at this year and then gradually improving from next year onwards.

And sir, could you throw more light on the levers we have for margin expansion, the bridge that is there from, let's say, from 13% to 16%, the incremental 3%, 4%, what are the levers we have that will kick in and help us attain that level?

So, there are 2, 3 levers that we are focusing upon. One is obviously the new product introduction, which we believe will give us higher EBITDA margins and the share of these products gradually will improve. That will be the biggest contributor to improvement in our EBITDA margins. Second lever is our aggressive effort on making sure that either we improve our efficiency of processes or we are also looking at some backward integration so that we can improve our competitiveness and margins. And lastly, obviously, this is more dependent on the market. We are finally believing that maybe the worst period for the market is slowly getting over. And over the next 1 or 2 years, market will go back to normal conditions, hence our ability to charge better prices or normal prices, I'll say, for our -- most of the products will be much better. So, I think with these 3 components, we believe that we should be able to reach that EBITDA margins of targeted EBITDA margins.

Got it. And sir, when you say that we are looking a bit on the backward integration side also, would that come in with our new greenfield CapEx or it would be separate from that?

So, it will be -- basically, what we are trying to do is to map various assets. So, I mean, it's not very specific to whether it will be part of a new greenfield or the brownfield expansion. It is more around looking strategically to certain key raw materials and seeing whether we can make it in-house or we can develop a process where our cost is lower than what we procure from the market.

Understood, sir. And sir, you touched upon the industry trends with respect to prices coming back and all of that. How is the performance of our legacy molecules like Metamitron or Metconazole in the first half of FY '26, both on pricing and volumes front?

So I think I will not comment product specific. Overall, I'll say that demand is healthy, and our volumes are steady, in fact, maybe higher than what we have done in last 2 years. On the pricing front, we have not seen much improvement in the pricing this year, but volumes are much better. So that's where you will see a momentum picking up there. And as the market sort of demand stabilizes and the capacities get full, we believe that over the next 2 years, our traditional molecule like Metconazole or Metamitron or Ethofumesate, our profitability will improve because we have worked very aggressively on these products to also improve our cost. So once the market improves, our profitability will be quite healthy.

[Operator Instructions] Our next question comes from the line of Ankit Gupta from Bamboo Capital.

Sir, harping back on the point of decline in revenues in the domestic market. So, this has been our -- like over the past 6 years -- past 6 quarters, this has been our lowest revenue in domestic market. And we have seen performance and commentary of some of the formulation players for this quarter -- for Q2 where they have highlighted the challenges in the market because of lower infestation and unseasonal rains. So, if you can comment on that? And how do you see the domestic market playing out for the second half of this year, given we have seen some unseasonal rains in October month also in some of the geographies.

So, I think overall in the domestic market, what you hear from the market is right that there has been, because of unseasonal rains all across India, there has been an impact on the demand for this particular season. And that's where you have seen some impact, but we have been able to significantly make up for that from our export sales. Now we expect the domestic demand to pick up, maybe not to the same level not fully, but we are quite confident that we'll make up for any shortfall in the domestic sales within exports. So that's in the overall product portfolio, that's how it is now shaping us for us.

Do you see this challenging scenario continuing in second half also given the rains we have seen in October?

Some spillover impact will definitely be there because finally, if the season is not good, some impact will be there. And that's where we believe our export demand, which is looking quite healthy, will mostly compensate for it and maybe even we will still be able to maintain our original projection of about 15% to 20% growth in this year.

Some of the formulation players have highlighted that October has seen a significant decline in the market in Rabi also has started on a very weak note. So have you also observed that?

Yes, I think we are in the same industry. So finally, we'll see the same impact. But again, I repeat that overall, our product mix right now is looking such that we have increased export sales and overall demand if there is any shortfall of domestic, we'll cope up for or make up for that -- more than make up for that from our export sales.

Sure. Sir, second question on the margins front. So like given higher proportion of export sales in the quarter and despite that, we haven't seen much improvement in our EBITDA margins. So like have the margins in the domestic and export market largely in line with each other? Or how does it work?

I think I will not like to qualify based on the market. Overall, what I will -- basically, I'll make 2, 3 points. One, obviously, we saw a hit of about 1% to 1.2% in the last quarter on account of unseasonal rains and fuel -- and I mean, obviously, along with fuel because of the rains, there were a lot of power outages, which also resulted into a lot of inefficiencies in operation. So that's one factor. And the second factor is mostly our traditional products, margins have started improving. They have not reached the healthy levels, but new product margins are healthy. I think that's a broad comment I would like to make on this particular point.

[Operator Instructions] Our next question is from the line of Deepak Poddar from Sapphire Capital.

Am I audible, sir?

Yes, we can hear you.

Sir, just first up, I wanted to understand your tax rate. I mean, this quarter, our tax rate was very low. So how should one look at tax rate going forward?

Our tax rate is -- we have opted the lower rate that is 22%. But during this quarter, we had received the one order, which is in favor of the company from ITAT, and the excess provision of around INR 2 crores was written back in the reserve.

So on an annual basis, we should look at 22%, right?

Yes, 22% is the base rate, but including the [indiscernible] and all these things, the rate – effective rate is 25.168%.

Okay. Okay. Understood. And what about the other income? I think last 2 quarters, we are seeing some other income. So, can you throw some light on the nature of it and how sustainable are those other income?

I think other income mainly is on account of foreign exchange gains. That is basically mark-to-market. So that keeps on happening from quarter-to-quarter. As you have seen, rupee has depreciated in the last 6 months, euro has appreciated significantly. And that's where we have seen those other income, mainly on account of foreign exchange.

Okay. So our 40% plus exports, right, right now, so which country would dominate that? From which countries would be getting majority of our exports?

So mainly our exports are Europe, Japan and U.S. I think these are the 3 geographies. Majority is contributed by Europe, but that does not mean that all the transactions are in euro. Even if you sell it to Europe, transaction can be in dollar or euro, depending on the customer and our agreements with the customers.

Understood. And and any impact from the tariff?

We have had some impact, but negligible so far, mainly because the customer in U.S. has still continued to buy the material because it looks like the cost of any tariff will be borne by U.S. customer. But long-term impact is yet to be become very clear. At the moment, we have not seen any significant impact on our business.

Understood. And any CapEx figure we have for this year and next year, FY '26, what sort of CapEx we are planning?

I think we have already announced. So basically, year-on-year, we do about INR 20 crores to INR 25 crores on asset renewal. That's what is the -- that number remains for this year and next year. And for the new blocks, we have already announced that we will invest about INR 60 crores in the new production blocks. And then new site as and when it comes, in phased manner, there will be a capital outlay for that project.

Okay. And sir, I was just trying to understand the CapEx plan for this year specific and next year separately. Is that...

This year, I think we will be -- we will end it for asset renewal, about INR 25 crores for the existing asset renewal, some CapEx for some capacity expansion. So total CapEx may be about INR 35 crores to INR 40 crores for capacity expansion and for asset sales. And maybe this year, another INR 10 crores to INR 15 crores for the new blocks that we have -- that construction that we have started with majority of capital outflow for the new blocks will happen in Q1, Q2 of next year.