Meghmani Organics Limited Q4 FY23 Earnings Conference Call Insights

Key highlights from Meghmani Organics Limited (MOL) Q4 FY23 Earnings Concall

Q&A Highlights:

• [00:08:16] Rahul Veera from Abakkus asked if the base can still grow in the Agrochemical division for MOL despite the recent sharp decrease in prices of 2,4-D. Ankit Patel CEO said that prices have dropped significantly across the chemical and agrochemical sector, including 2,4-D. However, raw material prices and logistic costs have also decreased. Realization has come down as well.

• [00:10:18] Rahul Veera of Abakkus asked if registrations and approvals will be required for Lambda and other products MOL is planning to start, or if technicals can be directly exported. Ankit Patel CEO said agrochemical products are regulated and require registration in different markets. The user has been generating data and registering new products in various markets. The new multipurpose plant will ramp up gradually, with expected revenue of 50% in the first year, 65% in the second year, and 75% or more from the third year onwards.

• [00:11:42] Rahul Veera of Abakkus asked about the exceptional item of INR 18 crores on the consolidated P&L. Ankit Patel CEO replied that the exceptional item pertains to pigment chemicals and is related to certain liabilities that were not crystallized at the time of takeover. The final amount paid was written back as an exceptional item.

• [00:13:30] Ayush Agarwal with Mittal Analytics asked how MOL plans to maintain the IRR on its TiO2 project despite the significant capex and the decrease in TiO2 prices. Ankit Patel CEO replied that MOL analyzed the number of titanium dioxide over the last 8-10 years and did not select the high-price time. MOL considered the delta between raw material and sales prices and are optimistic that there will not be any problem with the return from its plant.

• [00:16:21] Ayush Agarwal form Mittal Analytics asked about the progress of the trial run for MOL’s TiO2 plant and if there have been any issues with stabilizing it since it is an old plant. Ankit Patel CEO said that there are three phases for any chemical plant; stabilizing the process, getting the right quality of product and optimizing capacity and consumption norms. MOL is optimistic that the first phase will be cleared by May end and the second and third phases should be stabilized by June end.

• [00:18:03] Ayush Agarwal form Mittal Analytics queried about how MOL plans to navigate the next year in the agrochemicals industry given the decrease in prices across all products. Ankit Patel CEO replied that the current situation in the industry is not new and has happened before. MOL is using this time to offer new products to its customers and optimize operations. MOL considers this year as an improvisation and cleaning year and are optimistic about it.

• [00:20:34] Ayush Agarwal form Mittal Analytics asked if it will still be profitable to manufacture intermediates in-house given the dumping from China and the falling prices of intermediates. Ankit Patel CEO said that one period is not a decisive factor and their customers view them as a sustainable supplier. MOL must consistently operate its chemical plants and improve operations to remain sustainable. MOL cannot stop backward integration during tough times and start again in good times.

• [00:22:11]  Bajrang Bafna at Sunidhi Securities enquired about the sales forecast for the new unique molecules MOL is working on in the agrochemical side that have no domestic competition. Ankit Patel CEO clarified that they expect to generate revenue of INR 650-700 crore from the multipurpose plant, which includes all the new products such as Lambda, Cyfluthrin, Beta-cyfluthrin, Spiromesifen, Flubendiamide, and Ethiprole.

• [00:25:46] Bajrang Bafna of Sunidhi Securities asked when does MOL expects the inventory pile up to clear and restocking to occur. Ankit Patel CEO said by middle of next quarter the inventory should be clear.

• [00:26:11] Bajrang Bafna of Sunidhi Securities asked how will the pigment segment play out in FY24 considering current pricing and raw material prices. Ankit Patel CEO replied that despite a tough first quarter, corrective actions have been taken and FY24 should be better for the Pigment business than last year.

• [00:31:43] Bajrang Bafna of Sunidhi Securities queried that considering lower energy prices, easing supply chain issues and lower raw material prices, if the trend of sequential improvement continue into 1Q and 2Q. Ankit Patel CEO clarified Q1 for FY24 will be challenging. High-price inventory should clear by mid-2Q and things should improve from then on. Q3 and Q4 should be much better.

• [00:33:18] Naveen Gadia from Greenwood International asked if the softening energy market will improve MOL’s bottom line since the plants are highly energy intensive. Ankit Patel CEO replied that improving utility costs will help. MOL’s own captive power plant will drastically lower power and steam costs for its highly energy-intensive project.

• [00:36:22] Manikantha Garre of Franklin Templeton asked about MOL’s thoughts on the acceptance of nano urea by farmers given the increase in traditional urea sales. Ankit Patel CEO said marketing nano urea to farmers is challenging due to their long-term use of conventional urea. Field demonstrations and explanations are being used to show the benefits of nano urea and in the next 2-3 years farmers will shift to nano in a big way.

• [00:41:03] Manikantha Garre of Franklin Templeton asked would MOL be open to exploring other nano fertilizer opportunities like DAP and nano NPKs given the government’s ambition and the opportunity size. Ankit Patel CEO answered that Meghmani Crop Nutrition Limited will introduce many products in addition to nano urea in the coming years, making it a significant business.

• [00:41:58] Manikantha Garre of Franklin Templeton enquired how to correlate the difference in nitrogen content between a 500ml bottle of nano urea and a urea bag. Ankit Patel CEO replied nano urea is sprayed directly on the plant for faster absorption and only the required amount of nitrogen is absorbed. This helps the crop and the environment. The government is marketing it to replace 50% of conventional urea.

• [00:45:09] Dixit Doshi from Whitestone Financial asked about the current cost of debt. Ankit Patel CEO answered that MOL’s current cost of debt is 3.5% after taking on foreign currency and fixed rate term loans.

• [00:47:05] Karan Asli at Maximal Capital asked why is 4Q production in the Agrochemical segment down 10-11% YoY despite the new MPP plant coming online. Ankit Patel CEO clarified that it’s mainly due to the market demand being sluggish. Companies are reducing operations and clearing high-cost inventory.

• [00:48:03] Karan Asli at Maximal Capital enquired what are the expected utilization rates for Agrochemicals and Pigment division in 1H24 and FY24. Ankit Patel CEO said MOL is optimistic that the market will improve from 2Q and have better numbers in 2H. Utilization may be challenging for the year but should exceed 70%.

• [00:49:10] Pradeep Agarwal asked about the current and expected utilization of the MPP plant in 1Q with the MNC order. Ankit Patel CEO replied that MOL’s analysis shows that the annual utilization rate should be about 50%.

• [00:55:31] P Srihari from PCS Securities asked if barium sulfate can substitute titanium dioxide and what is the share and contribution of formulation in agrochemicals. Ankit Patel CEO clarified that titanium dioxide is widely used as a paint additive and is unlikely to be replaced by barium sulfate in a few years. Formulation business contributes 25-30% of MOL revenue.