PI Industries Ltd (PIIND) Q3 FY23 Earnings Concall Transcript

PI Industries Ltd (NSE:PIIND) Q3 FY23 Earnings Concall dated Feb. 15, 2023.

Corporate Participants:

Mayank Singhal — Vice Chairman and Managing Director

Manikantan Viswanathan — Chief Financial Officer

Analysts:

Nishid Solanki — CDR India — Analyst

Abhijit Akella — Kotak Securities — Analyst

Vivek Rajamani — Morgan Stanley — Analyst

Aditya Jhawar — Investec — Analyst

Rohit Nagraj — Centrum Broking — Analyst

Vishnu Kumar A.S. — Avendus Spark — Analyst

Ankur Periwal — Axis Capital — Analyst

Sumant Kumar — Motilal Oswal — Analyst

Ramesh Sankaranarayanan — Nirmal Bang Equities — Analyst

Rohan Gupta — Edelweiss — Analyst

Noel Vaz — Union Asset Management — Analyst

Naushad Chaudhary — Aditya Birla Mutual Fund — Analyst

Nitin Agarwal — DAM Capital — Analyst

Dhruv Muchhal — HDFC Mutual Fund — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Q3 FY ’23 Earnings Conference Call of PI Industries Limited. [Operator Instructions]

I now hand the conference over to Mr. Nishid Solanki from CDR India. Thank you, and over to you, sir.

Nishid Solanki — CDR India — Analyst

Thank you. Good afternoon, everyone, and thank you for joining us on PI Industries’ Q3 FY ’23 earnings conference call.

Today, we are joined by senior members of the management team, including Mr. Mayank Singhal, Executive Vice Chairman and Managing Director; Mr. Rajnish Sarna, Joint Managing Director; Mr. Manikantan Viswanathan, Chief Financial Officer; Mr. Prashant Hegde, CEO, Domestic; and Mr. Atul Gupta, CEO, Exports. We will begin the call with three perspectives from Mr. Singhal. After that, we will have Mr. Manikantan sharing his views on the financial performance of the company. After that, the forum will be open for a question-and-answer session.

Before we begin, I would like to underline that certain statements made on today’s conference call could be forward-looking in nature and the disclaimer to this effect has been included in the investor presentation shared with you earlier and is also available on Stock Exchange website.

I would now like to request Mr. Singhal to share his perspectives. Thank you, and over to you, sir.

Mayank Singhal — Vice Chairman and Managing Director

Good afternoon, everyone. Thank you for being with us today on this call to discuss the third quarter performance. It gives me immense pleasure to share that PI has delivered another quarter of outperformance. Year-on-year, our revenue during Q3 came in 19%, with an EBITDA increase of 40% and a margin standing at 26%, supported by favorable product mix and operating leverage. Consequently, our profit during Q3 saw an expansion of 58%, further [Indecipherable] net working capital management has significantly improving free cash flow. In line with the superior performance, the Board of Directors has considered an interim dividend of INR4.5 per share for ’22-’23.

Our brand products for crops, including cotton rags, horticulture and row crops has performed well. With a portfolio of advanced brands, we have carved out the leadership in the respective categories. Further, we are recording attractive responses to the state of new brands that we have recently introduced in the domestic market, whereas the highest number of launches in the industry are branded integrated in corporate with best in category solutions for crop protections helping farmers prosper.

We have a sound solution for crop protection. Our pipeline of products of different stages of development continue to enhance our portfolio. The institutional sales remained subdued during the quarter due to higher channel inventory and protective in the overall domestic revenue growth. Further, we have improved efficiencies and increased realization and reduced working capital for the branded business. Governance within the global specialty chemicals are evolving to realize higher value propositions for our products from India, where we as a company stand both in terms of quality, process and technology, global carts are priced in diversification of source of India and even as a country develops to integrate value chain, the key chemistries.

Our order book position for the end of the quarter stood at around INR1.8 billion, indicating the confidence of the innovative response to our business and model of delivery with well established credentials. We are [Indecipherable] ability to partner with innovators at the global requirements. We have entered niche and proactive investments in city building and research in novel technologies and platforms. This needs for breakthrough innovations today, it’s very important, and technology will need to be scaled up more attractively and efficiently. Our ability to engage at a global level on long-term relationships basis our team of understanding complex chemistries and core advantages with companies and partners across the globe.

The share of non-agchem inquiries continue to grow. Commensurate that, we are also announcing our capacities in the non-agchem space. We augmented our look and rising customer relationship deeper, our research and innovation teams are continuously engaged in developing new generation offerings to replace realized 30-plus-percent growth. We will be backed by expansion in the business from commercialized molecules with better margin portfolios, sharper checks and costs, recently launched molecules continue to scale up and will continue to contribute strategically in the next few years.

We aim to commercialize four to five molecules every year and level the momentum and expect capacity expansion further in the coming year. I’m happy to say we have to commercialize new products with a high potential growth into the future. The model remains poised to scale up market and consumption of new pharma entity take shape. We continue to actively evaluate inorganic growth opportunities in pharma domestically and internationally and in line with our pharma strategy, initiative assortment dealership plan are ongoing and continuing to step up into this space.

I’m pleased to report and a pride moment for PI, we received the Golden Peacock Award for Sustainability of Corporate Social Responsibility for the year ’22. PI is committed to inclusive growth, aligning with the SDGs and create long-term sustainable solutions towards reimagining a healthier planet.

And with this, may I draw the opening remarks to a close and hand it over to our CFO, Mr. Manikantan, for the financial discussions. Thank you once again to all of you for joining this call.

Manikantan Viswanathan — Chief Financial Officer

Thank you. Good afternoon, everyone, and thank you for joining us on the call today. I will summarize the company’s financial highlights for the third quarter ended 31st December 2022. Please note that all comparisons are on a year-on-year basis and refer to consolidated performance of the company.

During quarter three FY ’23, we reported revenue of INR16,132 million, a growth of 19% over the same period last year. This was driven by growth in export revenues by 23% to INR13,286 million and 2% increase in domestic revenues to INR2,846 million. Export revenues growth of 23% was driven by volume growth of around 9% and price and currency of around 14%. New innovative agri brands launched recently also contributed to our growth.

Our gross margin increased by 73 basis points to 47%, partially due to cost pass-through and favorable product mix. EBITDA increased by 40% to INR4,156 million for the quarter, driven by operating leverage benefits and tight control on fixed overheads. Profit after tax increased by 58% to INR3,518 million attributable to EBITDA growth. Cash flow from operating activities during nine-month period was INR9,951 million. This was due to higher EBITDA and efficient management of net working capital. The trade working capital in terms of number of days of sales was reduced to 90 days vis-a-vis 103 days as of March 31, ’22.

Our balance sheet further strengthened during the quarter. Net profit increased to INR69,716 million. The capex for nine-month period stood at INR2,585 million and is in line with our plan. This year, we estimate a capex of around INR5,000 million. Inventory levels reduced in terms of days of sales to approximately 81 days to INR14,517 million, still serving higher revenue and adequate safety stock to our supply chain disruption. The company maintained its strong liquidity position and has recently repaid outstanding ACV loan of USD25.71 million.

That concludes my opening commentary. I will now request the moderator to open the forum for question-and-answer. Thank you.

Questions and Answers:

Operator

Thank you very much, sir. [Operator Instructions] First question is from the line of Abhijit Akella from Kotak Securities. Please go ahead.

Abhijit Akella — Kotak Securities — Analyst

Yeah. Good afternoon, sir. Thanks a lot for taking my questions. Two of them. First, on the capex side. The presentation talks about planning to intensify the capex in the future. So, while we are guiding about INR500 crores of capex for fiscal ’23, is there a number you could help us out with for ’24? Is it going to be substantially larger, and if so on which project? And the second part was just on the pharma side. I believe you’ve invested INR675 million into PI Health Sciences to kick start our organic initiatives on the pharma side. If you could please just elaborate a little bit about the plans out there. Thank you.

Mayank Singhal — Vice Chairman and Managing Director

Thanks, Abhijit. So, for the first question, this year, we had a plan of INR550 crores, INR600 crores capex, but some part of it will surely get rolled over as some of the multi-product plants, we are reworking on the design and some of the products have progressed well on commercialization, and we are redesigning some of these things. But for next year, as we mentioned in our presentation, we are expecting anywhere around INR800 crores to INR850-odd crores of total capex in the next financial year.

Abhijit Akella — Kotak Securities — Analyst

Got it, sir. And also, if you could just talk about the pharma investment into PI Health Sciences?

Mayank Singhal — Vice Chairman and Managing Director

Yes. So, about the pharma investment, this investment is basically for initial operating setup and our activities that we are intensifying and augmenting our resources in the pharma space. And this is where, towards this objective, we have capitalized this — our new organization to start these activities.

Abhijit Akella — Kotak Securities — Analyst

Fine. And just the last thing from my side was on the margins. Margins overall have been much stronger than perhaps you would have expected about 25.7% this quarter. So, any specific benefits this quarter in particular or is this a sustainable sort of run rate for the future?

Mayank Singhal — Vice Chairman and Managing Director

Well, this is majorly coming from two, three areas. One is that the product mix has been positive for us in this quarter. Certainly, the sheer operating leverage benefit is also kicking in because with this sustained 20%, 25% kind of growth, the operating leverage is certainly kicking in. And then, of course, we have had a very tight control on our fixed costs. So, all these are contributing to this margin level. And we are expecting this to — while there will be certainly some variation quarter-on-quarter basis depending on product mix, but on a year-on-year basis, I think we’ll be able to reasonably sustain these margin levels.

Abhijit Akella — Kotak Securities — Analyst

Thank you so much, sir. I’ll join back the queue for more.

Operator

Thank you. Our next question is from the line of Vivek Rajamani from Morgan Stanley. Please go ahead.

Vivek Rajamani — Morgan Stanley — Analyst

Good afternoon, sir. Thank you for taking my questions. Two questions from my side. Firstly, there has obviously been some concerns of slowdown in some pockets of agrochemicals both domestically and in the export market. Could you maybe provide some color on the trends that you’re seeing with respect to your products both for domestic and exports? That was the first question.

And secondly, on your point where you’re saying you’ll obviously be focusing more on capacity expansions going into next year, any indication on what kind of increase you’re envisioning there? I know that this is not a straightforward question with respect to your products, but some color would be very helpful. Thank you so much.

Mayank Singhal — Vice Chairman and Managing Director

So, if I get your first question right, you’re looking you still downward trend for agrochemical products or what was that? I mean, I didn’t get that clear.

Vivek Rajamani — Morgan Stanley — Analyst

Some trends that you’re seeing with respect to your products, sir?

Mayank Singhal — Vice Chairman and Managing Director

Okay. If I look at the product portfolio, I think that’s the unique part about PR. Both in the domestic business, as you’ve seen, we have done the highest [Indecipherable] innovative products. And heading to innovative products as soon as the good trajectory while the growth has been muted, and that’s been driven by efficiencies and driving and ensuring that we’ve not over-stacked up. But new products will continue to grow, and we see a good positive direction coming from the product portfolio that we have. And we’ll just soon see five to six brand new products in domestic business. And I’m pretty sure some of them will scale up to different height, favorable weather conditions will give some exceptional outcomes.

When I look at the global product portfolio that we are in, we again see positive trends. Some of the large products that we are in still need to be registered globally, and there is a positive trajectory of growth continuing to happen. At the same time, we have entered some interesting strategic products which have huge potential of growth in the global markets, and that’s quite exciting for us to see that we are poised to be in a comfortable position in terms of our product portfolio strategy. While there could be certain headwinds which could come in, but these will be pretty quite stronger ones which will take a good shape into the future.

Vivek Rajamani — Morgan Stanley — Analyst

Thank you, sir. So just to clarify, you’ve not really seen any significant slowdown with respect to your products, particularly on the export side, so that would that be a fair statement?

Mayank Singhal — Vice Chairman and Managing Director

Yes. I think I can say that. We already, as you know, we have put an order book position as well as demand that continues to happen. So that’s where we are right now.

Vivek Rajamani — Morgan Stanley — Analyst

Sure, sir. And on the capex — on the capacity expansion, any color would be really helpful. Thank you.

Mayank Singhal — Vice Chairman and Managing Director

I think that was answered. Obviously, one great job at the time, we’ve looked at about taking 12%-plus capacity to the existing assets by looking at various engineering and technological solutions. This further reduced the numerous growth trajectory that we have, and this have been postponed into new product mix that we have to happen in the capex going into the next year. And looking at the pipeline, the potential of getting the new platform and the technologies, we are looking at a total of INR600-plus crores extra capex for next year, and then we have [Indecipherable] capex in this current year. So that’s where we are.

Vivek Rajamani — Morgan Stanley — Analyst

Got it, sir. All the best.

Operator

Thank you. Our next question is from the line of Aditya Jhawar from Investec. Please go ahead.

Aditya Jhawar — Investec — Analyst

Yeah. Thanks for the opportunity. Sir, my first question is, one of a key molecule has seen a very strong growth in this quarter. So just wanted to understand that what could be the reason driving this growth? Are you seeing market a wider application of this product? Are farmers using this product as a substitute of Glyphosate, because I’m sure you would have also collected some market intelligence on what should be the growth for one of our key product?

Mayank Singhal — Vice Chairman and Managing Director

Well, as you know, these products are cyclical in demand. So it’s not that a consistency this is throughout; one, yes, and we’ll first look at the second part of the question. There has been product portfolio expansion. The company — global companies who are partners to expanding this product worldwide from what we understand, there are geographies, which are getting added, clearly application and acceptance is growing. So we do — we see a project trend [Phonetic] coming through this. And that is [Indecipherable] growth. And obviously, I would not like to talk which quarter up and which quarter down, it depends on supply chain, market situation and cost positioning. We’re taking to various part of the geographies.

Manikantan Viswanathan — Chief Financial Officer

Okay. That’s good to hear. So that essentially mean that growth that we have seen is a organic growth and it is not that the inventory gets filled up in the channel, and in the subsequent quarter, we see a significant slowdown.

Aditya Jhawar — Investec — Analyst

Yes. My next question is on the tax rate side. What should we expect tax rate on a full year basis?

Manikantan Viswanathan — Chief Financial Officer

The tax rate will be around — current quarter is 14%, for 9 months is 14.5%. So, the full year basis will be less than 15%.

Aditya Jhawar — Investec — Analyst

Sorry, less than 15%?

Manikantan Viswanathan — Chief Financial Officer

Yeah.

Aditya Jhawar — Investec — Analyst

Okay, okay. Yeah, I’ll fall back in queue.

Operator

Our next question is from the line of Rohit Nagraj from Centrum Broking. Please go ahead.

Rohit Nagraj — Centrum Broking — Analyst

Yeah, thanks for the opportunity and congrats on a good set of numbers. So, first question is on Slide number 9. We have mentioned that more than 60% products falling in green category. So, what exactly does this mean and how beneficial it is for us given that the sustainability is a criteria for global innovators? Thank you.

Mayank Singhal — Vice Chairman and Managing Director

Yeah. So, the product falling under the green category means the waste which is generated by [Indecipherable] international guideline. Basis which we decide which fall — which product fall in green category, yellow category and red category. So I think this international criteria which we have applied for our products, taken them on priority and then worked on systematically in development stage to reduce the waste. So that’s how we say that we will responsible.

Rohit Nagraj — Centrum Broking — Analyst

Right. Just a clarification. This is applicable for both CSM as well as domestic?

Mayank Singhal — Vice Chairman and Managing Director

Yes, it is for both.

Rohit Nagraj — Centrum Broking — Analyst

All right. Got it. Sir, second question after commercializing three products in CSM, what is the total number of products in CSM and any non-agro products in current landscape? And for next year, are there any non-agro products which will be commercialized in FY ’24? Thank you.

Mayank Singhal — Vice Chairman and Managing Director

Yeah. So we have already got four commercial products in the non-CSM scale. We’re looking to commercialize three in the next year. And obviously, we are in the early stage in this business, not substantial [Phonetic] by the revenue, but these investments just show the positive direction for growth and customer confidence with them.

Rohit Nagraj — Centrum Broking — Analyst

Thank you. Just total number right now, including these four products?

Mayank Singhal — Vice Chairman and Managing Director

We would not have a number on hand for the moment.

Rohit Nagraj — Centrum Broking — Analyst

Sure, sure. Thank you so much for that.

Operator

Thank you. Our next question is from the line of Vishnu Kumar A.S. from Avendus Spark. Please go ahead.

Vishnu Kumar A.S. — Avendus Spark — Analyst

Thanks for your time, and congrats for good numbers. Sir, this question is on margins. In the past, we understood that many of our contractual terms to the customers are that we will earn a fixed kilo per margin. And so, irrespective of the price movements, we learned — fixed price and higher pricing will still probably — or percentage margins will be lower. That is one. And second, as the production scales up for certain products, we were — at least what we understood was that we will have to transmit certain efficiency gains to the customer. But the current commentary seems to suggest that there is a change in the contractual terms, if you could slightly elaborate on this point.

Mayank Singhal — Vice Chairman and Managing Director

Yeah. So, you see, this is — as I explained earlier, this is majorly coming from change in product mix favorably for us. Every year, we are launching four, five products. Even in domestic, many new products have been added in the last two, three years. So, obviously the product mix is favorably changing. That is one. And secondly, the operating leverage benefits. So, the understanding generally that we have with our customers, and this is where — because we suffer in the initial periods with lesser utilization of these plant, investment and all, at a later stage when the operating leverage kicks in, that balances the earlier lower margin. So, right now, at this stage, I mean, some of these benefits are kicking in, and that is giving this reflection.

Vishnu Kumar A.S. — Avendus Spark — Analyst

Understood. Sir, in terms of new products on the export side, how much would be, let’s say, the last two, three years, if we have launched certain products, any rough contribution of revenue, if you could just help us understand? Last two years or three years, what would that proportion of your overall X revenue would be?

Mayank Singhal — Vice Chairman and Managing Director

We don’t have these numbers or tips. But I think, as I mentioned, I think in last call, some 17%, 18% is around that comes from products introduced in the last three years.

Vishnu Kumar A.S. — Avendus Spark — Analyst

Got it, sir. And on your comment, you said that domestic products also we are getting better margins. So, the margins that you’re currently earning would be higher in the domestic because of the new product launches? Is that the way also we can think — that you’re earning slightly better numbers from [Speech Overlap]?

Mayank Singhal — Vice Chairman and Managing Director

Demonstrating new products and new margins, the domestic business will [Indecipherable] the contribution level, we know that.

Vishnu Kumar A.S. — Avendus Spark — Analyst

Got it, sir. And just on the capex bit, you said we have spent about INR250 crore out of the INR600 crore, another INR350 crore is pending, plus about INR800 crore which you just mentioned. When should we expect these new plants to be coming up? Any rough commissioning dates that we are looking for?

Mayank Singhal — Vice Chairman and Managing Director

Yeah. So, just to clarify on it, as I mentioned that some of the capex which was planned in the current year is getting rolled over because of the plant design-related and implementation-related development. And that will also gets covered under this INR800-odd crores that we are indicating, okay? So this includes that rollover also, not that INR800 crores plus — whatever INR500 crore, INR400 crore and that we have been talking. So we have two multiproduct plants scheduled to get commissioned, maybe one at a later phase or second half of next year. And the other one also, we are monitoring, but that may go next to next year, which is ’25 –FY ’25. So this is currently the plan — tentative plan that we have.

Manikantan Viswanathan — Chief Financial Officer

And on the other hand, we changed the way we structure of formats how we are looking these plants with new technological capability and giving us better throughputs and efficiencies with the larger footprint for each plant.

Vishnu Kumar A.S. — Avendus Spark — Analyst

Got it, sir. I’m sorry, I’m just looking back on the margin, should we take the guidance to be at — probably at 23%, 24% from here on? Earlier it used to be 21%, 22%. So should we see a step up going forward over the next couple of years to be anywhere between 23%, 24%, or any thoughts?

Mayank Singhal — Vice Chairman and Managing Director

Yeah, 23%, 24% is what currently we are estimating.

Vishnu Kumar A.S. — Avendus Spark — Analyst

Okay, sir. Thank you. All the best.

Operator

Thank you. Next question is from the line of Ankur Periwal from Axis Capital. Please go ahead.

Ankur Periwal — Axis Capital — Analyst

Yeah. Hi, sir. Thanks for the opportunity, and congrats for a good set of numbers. Sorry, again, just checking on the capex side. So, on the — our earlier commentary was that we will be continuously focusing on improvising and improving the asset turns, which we have sort of displayed over the last few quarters. And at the same time, the capex number is also getting decreased. You also suggested to invest further into the pharma production there — pharma products there. So, is there — from your thought perspective, from a sustainable growth run rate in CSM business, are we looking at upwards of 25%-plus or maybe even higher rather than the 20%-plus mark that you typically comment on?

Mayank Singhal — Vice Chairman and Managing Director

No. In terms of growth, we are — still it’s sticking to 20%-plus growth rate on a sustainable basis. That’s what currently we are predicting. And we are continuing with that guideline.

Ankur Periwal — Axis Capital — Analyst

Sure. Where I was coming from was, typically it takes three to four years for a product to mature. And historically, we had launched newer products, which were probably margin accretive as well as higher potential ones. So, is there a faster growth coming in the near term there or probably it’s still a medium-term thought?

Mayank Singhal — Vice Chairman and Managing Director

No. Well, yes, I mean product takes three, four years to mature, but we have to also appreciate that the base is also growing. I mean, if you see last two, three, four years of growth, I mean, we have been 25%-plus kind of growth year-on-year. So the base is also growing. And therefore, we are guiding for 20%-plus kind of growth rate on a sustainable basis. Although there are opportunities, but this is where we are a bit cautious in guiding on growth.

Ankur Periwal — Axis Capital — Analyst

Sure. Sure, sir. And just second bit on the domestic side, one, if you can comment how the branded or the newer launch products are doing in terms of growth rate versus the slightly older portfolio? And secondly, your comment on the channel inventory, is it largely done or probably it will take some more quarters to settle?

Mayank Singhal — Vice Chairman and Managing Director

Yeah. So, as you rightly said, yes, the channel inventory because of lower-than-expected uptake in Kharif season or due to adverse weather conditions, the higher channel inventory built up. However, it is being consumed. So that is a good trend, I can say. On the — and again, here, the growth has mainly come from overall, you may see subdued, but growth has come from newer products. However, the generic products have suffered. So that is where overall growth is subdued.

Ankur Periwal — Axis Capital — Analyst

Sure. Sorry, just a clarification. So, on the channel inventory, so Q4 should be a normal quarter?

Mayank Singhal — Vice Chairman and Managing Director

It’s a very good question. But let me also tell you, Q4 is not a major consumption month. Industry usually prepare for Kharif through pre-placement effort. Hence, there is always a limitation on growth from — purely from the consumption point of view.

Ankur Periwal — Axis Capital — Analyst

Okay. Fair enough. That’s it from my side. Thank you.

Operator

Thank you. Next question is from the line of Sumant Kumar from Motilal Oswal. Please go ahead.

Sumant Kumar — Motilal Oswal — Analyst

Yeah. So, can you talk about the AWKIRA performance in the Rabi season?

Mayank Singhal — Vice Chairman and Managing Director

We normally do not talk about products — specific product performance, as you know. But generally, as Prashant indicated, the all new products that we have introduced in the last couple of years, they have been very well accepted by the farmers. The growth year-on-year has also been very good.

Sumant Kumar — Motilal Oswal — Analyst

Okay. And the second question is, in the other expense, is there any forex gain, and freight cost is also lower in this quarter Y-o-Y?

Mayank Singhal — Vice Chairman and Managing Director

Yeah, freight costs is lower basically this quarter, you are right. And on the forex, there are no major gains.

Sumant Kumar — Motilal Oswal — Analyst

Okay. And what is the tax rate for FY ’24-’25 guidance?

Mayank Singhal — Vice Chairman and Managing Director

Can you repeat, please?

Sumant Kumar — Motilal Oswal — Analyst

Tax rate for ’24-’25?

Mayank Singhal — Vice Chairman and Managing Director

It’s too early to predict for ’24-’25, my dear friend. The same guidance of — yeah, because too early, can we give guidance in the next quarter on ’24-’25, will that be okay?

Sumant Kumar — Motilal Oswal — Analyst

Okay. Thank you so much.

Operator

[Operator Instructions] The next question is from the line of S. Ramesh from Nirmal Bang Equities. Please go ahead.

Ramesh Sankaranarayanan — Nirmal Bang Equities — Analyst

Hello. Thank you very much. So, if you look at your domestic business on the kind of base you have this year, including the weak base in the third quarter, would you be able to do double-digit growth in FY ’24? What is your expectation considering the kind of launches you’ve done this year?

Manikantan Viswanathan — Chief Financial Officer

Yeah. So, yes, based on the launches we had last two years, definitely double-digit growth is what we are expecting.

Ramesh Sankaranarayanan — Nirmal Bang Equities — Analyst

And would that help you improve your margins as well, given that FY ’24 should be a more normal year in terms of at least the inventory overhang and with the input costs coming down and the freight costs coming down. Will that give you some increase in pricing power and margins?

Manikantan Viswanathan — Chief Financial Officer

Yeah. So, as I said earlier as well, as we start scaling up the new products, definitely margins in new products are better. And definitely it will improve overall margins for sure. And even on overall, basically ratio also should improve.

Ramesh Sankaranarayanan — Nirmal Bang Equities — Analyst

Okay. Now, on the CSM, when you look at the capex plan, it’s about INR1,200 crores over two years. So, how much of this is to increase your capacities and synthesis capabilities for the increase in the order book by about $400 million between first quarter and the second quarter? And how much of it is to build your capabilities to get the normal business as well as bid for new orders? Can you give us some indication of that?

Mayank Singhal — Vice Chairman and Managing Director

Well, I’m not too sure on several elements of your question, but let me try. So, yes, with these investments in last two years or even next year, including it will surely add to capacity to the tune of 25% to 28%. And apart from this, as we have been guiding for last few quarters that we are also working on improving efficiencies of our existing facilities, multiproduct plants and improving throughput. Last year, we improved throughput by more than 12%, 15%, this year, also close to 10%, 12%. So, apart from fresh investments in capacity expansion, we are also improving with technological improvement, the plant throughput of the existing capacity. And all this is certainly helping us get up capacity utilization and also improve capital efficiency, which is also clearly reflecting in the numbers that are there. And this is the whole objective. Being a capital-intensive business, our whole objective is to keep improving the capital efficiency.

Ramesh Sankaranarayanan — Nirmal Bang Equities — Analyst

Yeah, understood. So what I was trying to understand was, in terms of the increase in the order book, is any part of this capex intended to enhance your capacity to be in a position to deliver the increased order book?

Mayank Singhal — Vice Chairman and Managing Director

Yes, yes. I mean, a part of capacity expansion is certainly towards this increase in order book position. And also, some part of this expansion is towards many new products that are also coming through the R&D pipeline and commercialization of those markets.

Ramesh Sankaranarayanan — Nirmal Bang Equities — Analyst

Okay. Just one housekeeping question. Can you give us some insight into how the other income has gone up and how the interest expense has gone up?

Manikantan Viswanathan — Chief Financial Officer

Basically, you are aware that on ECB, there was an increase in paid labor as [Indecipherable]. That was one increase was there. And also, the exchange rate was also there. Both together have increased the overall interest expenses.

Ramesh Sankaranarayanan — Nirmal Bang Equities — Analyst

And on the other income?

Manikantan Viswanathan — Chief Financial Officer

On the other income, what’s the specific question?

Ramesh Sankaranarayanan — Nirmal Bang Equities — Analyst

What is the increase?

Manikantan Viswanathan — Chief Financial Officer

Normally, it pertains to the income from exchange gains will come in the other income.

Ramesh Sankaranarayanan — Nirmal Bang Equities — Analyst

Maybe you can clarify this on the sidelines?

Manikantan Viswanathan — Chief Financial Officer

Yeah, will do.

Ramesh Sankaranarayanan — Nirmal Bang Equities — Analyst

Okay.

Operator

Thank you. Our next question is from the line of Rohan Gupta from [Technical Issues]. Please go ahead.

Rohan Gupta — Edelweiss — Analyst

Yeah. Hi, sir. Good evening, and thanks for the opportunity. Congratulations on a good set of numbers. Sir, couple of questions. First is on — you had mentioned that there has been a significant surge in inquiries in non-agri product by roughly 25%. Sir, I understand that right now the revenue contribution from non-agro and non-pharma is still very less. So, just wanted to understand, when we talk about that continuous increase in inquiries, how well we are leveraged to use these capabilities — use our capabilities and scaling up the revenue from this segment? Where you see that over the next two to three years the business can be from non-agri non-pharma?

Mayank Singhal — Vice Chairman and Managing Director

Yes. Basically, these products that we’re seeing non-agro products, they have got a lifecycle approach. And right away from the banks to scale up and commercial scale, there is a gestation period for these molecules to [Technical Issues]. So as of now, as a real guide, there is a good amount of traction happening around vis-a-vis inquiries and development of this scale. And we foresee that in all this work, which is being done, will certify over a period time in terms of the non-agro and non-pharma.

Rohan Gupta — Edelweiss — Analyst

Sir, in terms of like three to four years where we see this business panning in? Will we be using our existing set of plant, machinaries only for the product development here or we need to have a fresh capex to capture the growth there?

Mayank Singhal — Vice Chairman and Managing Director

Yes. So, I mean, at commercial scale, broadly the existing type of plant — multiproduct plants are being used, okay, till the time the volumes go up with scale where you need a dedicated plant. At the development stage, most of the existing setup is what is getting leveraged. But yes, there are certain — specific quality-related requirements for the different specialty chemical areas for which we have already augmented our setups in R&D and further augmenting them and have plans in FY ’24.

Rohan Gupta — Edelweiss — Analyst

Sir, further, I still didn’t get what is your plan in three to four years, any guidance? Any target which the management is set for the coming [Speech Overlap]?

Mayank Singhal — Vice Chairman and Managing Director

Our aspiration — Rohan, our aspiration of getting non-agchem contribution close to 20-odd-percent in next four, five years. This is what we have also guided that over a period of time — four, five-year time, I mean, the contribution of non-agchem revenue should be to the tune of that percentage.

Rohan Gupta — Edelweiss — Analyst

Okay. So, as of now, so the revenue guidance which you are having is still maintaining 20%. I believe that we are still relying on agrochemical product only. And even in agro also, we had that one product contribute significantly to our exports, almost 50% of the volumes coming from the one single product. So, do we see that there is a risk in terms of our export revenues — sorry, our CSM revenues, and the 20% growth guidance which you’re talking about, if you are not able to scale up the other products?

Mayank Singhal — Vice Chairman and Managing Director

Not really. So, I’m not too sure on the percentile you’ve mentioned, but you think there are three, four points to keep in mind here. One that every year, we are commercializing five to six new products, okay. Today, if you look at our CSM export portfolio, there are 27, 28 products, every year four, five products getting commercialized. Just, I mean — and in the last question, we mentioned that four, five products from non-agchem are already at commercial scale. Next year, we are commercializing four, five non-agchem products. So, you see with these many numbers of new product launches as well as non-agchem products, the diversified portfolio is already there. It is no more dependent on one or two molecules. That is one aspect.

The second point is that even on the — if you look at the other side, on the domestic side as well, many new products are getting launched. So, if you look at the company level, blended level, the diversification is there in terms of broadening the product portfolio, even in domestic side beyond agchem, we are getting into biological — large range of products are already in play and many of them are at the development stages at different levels. So, this is how the product portfolio is getting diversified. So this is certainly not a scenario of dependence on one product per se. But as this model is, I mean, obviously, currently we would be dealing at — I mean, with close to, say, 15, 16 customers, okay, on these 27, 28 products. There are another 35 products, 40 products at R&D scale with addition of another 10, 12 customers. So, it’s a broad-based structure. Of course, products — each product will have its own life cycle and at different points in time, different products will peak. So, in next three, four, five years, the scenario will be completely different.

Rohan Gupta — Edelweiss — Analyst

Thank you, sir. Thanks a lot. Just if I’m allowed one more question I have. On pharma side, we have seen that in last one year, the profitability of many pharma companies have been impacted, and so as the valuations of these companies has also been impacted. We have been very value cautious, and I think that was also one of the deterrent that we were not able to back some good deal as far as the inorganic growth ambitions are concerned. Do we see that in last one year with the moderation and the valuation across the pharma companies, we are now more closer and the chances have increased significantly that we tap any value deal in pharma and we can hear something soon. If you can just give some more idea about that, sir.

Mayank Singhal — Vice Chairman and Managing Director

We are at an advanced stage of negotiations of few of these opportunities. And at an appropriate time as we materialize the gains, we will settle the — let the investors and markets know about it.

Operator

Thank you. We’ll take our next question from the line of Noel Vaz from Union Asset Management. Please go ahead.

Noel Vaz — Union Asset Management — Analyst

My questions have been answered. Thank you.

Operator

Thank you. Our next question is from the line of Naushad Chaudhary from Aditya Birla Mutual Fund. Please go ahead.

Naushad Chaudhary — Aditya Birla Mutual Fund — Analyst

Hi. Thanks for the opportunity, and congrats on a good set of numbers. Firstly, just a follow-up on the previous question. On the CSM business, the number of commercials which we did last year and this year, looking at the historical run rate, it seems really higher. So, firstly, on the growth guidance, if I look at the commercial numbers versus the growth guidance, do you see the guidance which we are giving is slightly conservative, looking at the number of launches? And secondly on this, any of these commercials, can it become a sizable in the next three to four years? Can it become to a similar size of your existing top two, three products?

Mayank Singhal — Vice Chairman and Managing Director

Frankly, it would be helpful if you can please repeat your question.

Naushad Chaudhary — Aditya Birla Mutual Fund — Analyst

Okay. So, the first piece of question was, in terms of your commercials in the CSM business last year and this year has been slightly higher than our historical run rate. So, going by the numbers of commercial, would it be fair to assume your growth guidance of 20% is slightly conservative? I’ll not say conservative. But yes, this is the guidance we are very confident. And we always remain cautious of the global markets. And in any case, we are seeing the kind of upswing which are happening in the global markets, whether it is European markets or American markets and many other things going on. So we have to be mindful of these uncertainties. And keeping those in mind, we always try and give a guideline which we are very confident. Okay. And secondly on this, from your new product basket, can we see any — or a few of them can be a sizable or similar to our existing top two, three products in next two to three years?

Mayank Singhal — Vice Chairman and Managing Director

Yes. This is the criteria of even deciding on which molecules we are working, be it domestic, be it export. When we decide to work on a molecule for our development, for domestic market or for export, we always keep these aspects in mind and screen those molecules on those parameters. And many of these molecules are for multi-products, not for single crop, not for a single crop segment. So, these are for multi-product segments, and therefore, they have potential to be a sizable molecule.

Naushad Chaudhary — Aditya Birla Mutual Fund — Analyst

Perfect. Thank you so much, and all the best, sir.

Operator

Thank you. Our next question is from the line of Abhijit Akella from Kotak Securities. Please go ahead.

Abhijit Akella — Kotak Securities — Analyst

Thank you for the follow-up, sir. Just to clarify, regarding the capex footprint, the asset footprint we have at this point. So we’ve mentioned in the presentation, we have 15 multipurpose plants. Are there certain dedicated plants also that are part of our infrastructure right now within these 15 or excluding them? And then, these two new plants that we are talking about over the next two years, are these primarily for the newer molecules that are getting commercialized or is there also some capacity expansion for the existing major products that we have?

Mayank Singhal — Vice Chairman and Managing Director

Yeah. So, out of the 15, there are three or four dedicated plants that are there, for which we have long-term contracts and volumes which are pretty high, okay, annual volumes. For the next two plants, yes, there are many new products that are getting scheduled there for commercialization. And again, these are all fungible plants. So, as the volumes of even existing products grow, I mean, we keep switching capacities from one to the other plant in order to meet the customer requirements and all. So that’s where these are very fungible plants — fungible assets.

Abhijit Akella — Kotak Securities — Analyst

Okay, sir. Thanks for the clarification. All the best.

Mayank Singhal — Vice Chairman and Managing Director

Thank you.

Operator

Thank you. Our next question is from the line of Aditya Jhawar from Investec. Please go ahead.

Aditya Jhawar — Investec — Analyst

Yeah. Thank you for the opportunity again. Sir, can you comment on the inventory situation in our key export market?

Mayank Singhal — Vice Chairman and Managing Director

You said inventory position?

Aditya Jhawar — Investec — Analyst

Yes. How is the channel inventory in a key export market?

Mayank Singhal — Vice Chairman and Managing Director

Well, there is a mixed kind of scenario. I mean, it varies from product to product, market to market. So in a few markets, yes, there is some sort of inventory pile up. But in others, we are [Technical Issues] scenario where there is challenges on supply and product on time as well. So there is a mixed scenario.

Manikantan Viswanathan — Chief Financial Officer

To put it in a bit of summary, with the uncertainty in China, [Technical Issues] generics are facing the pressure of this buildup at a global level, both of the new entries because they were secure uncapped [Phonetic]. On the other hand, supply is opening up. So that’s going to be something which is going to be under pressure in a generic play, yeah. And that’s the indicators, especially in the Western part of the world, and in certain markets, things are [Phonetic] good. So inventories are [Technical Issues] but yes, there will be certain staggering challenges for some of these areas in the coming year.

Aditya Jhawar — Investec — Analyst

Okay. That’s helpful. Sir, if you can just specifically talk about how is the inventory situation in North America, South America and Europe?

Mayank Singhal — Vice Chairman and Managing Director

Well, these are very well captured in global reports. If you see at a general level, yes, there are inventory buildups, but [Technical Issues], they should be aligned by America and Europe, so the uncertainties of the world have built it up. And our inventories [Indecipherable] to run, whether this could change then what happens in the next six months, but from a climatical point of view and from a logistics and other challenges, which could [Indecipherable]. But fortunately, for the kind of products that we are dealing in, we have not yet seen those kind of alarms.

Aditya Jhawar — Investec — Analyst

Okay. Okay. My final question is, typically, in agrochemicals patented products, so as compared to the total ASP of the product, what proportion is the active ingredient?

Mayank Singhal — Vice Chairman and Managing Director

What do you mean? I mean, in terms of proportion of the active ingredients?

Aditya Jhawar — Investec — Analyst

So, for example, if the product is selling at, say, $10, what would be the cost of active ingredient for a patented agrochem?

Mayank Singhal — Vice Chairman and Managing Director

Well, there is no standard formula. If you look at the API world, there’s not standard formula because cost is very different from the selling price. Selling price is determined by the affordability of the farmer and the value proposition to the farmer and what goes behind technologies, so it’s not just the cost of raw materials, which are driving the cost of sales. There’s also investments which companies have made over the last 10, 15 years, a little bit different for different products. It would range between $200 million to $700 million, $800 million. So that is not a cost that comes and cost of goods. So, depending on which lens you look at it today if you’re one product in one geography, then the cost of it is multiple costs, different cost, and if you’re registering different formulations in different costs and if you’re registering [Indecipherable] different requirement for toxicology requirement and whether if we register in a funding type different. So, cost of goods has nothing to do with the selling price of the goods, if I was to put that very clearly. The other costs, which may not be visible on the base of which is driven, but what is looked at, what can the farmer afford, there is value for him and how that can be derived. I hope that answers.

Aditya Jhawar — Investec — Analyst

Yeah, yeah. Thank you. That was very helpful.

Operator

Thank you. Our next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead.

Nitin Agarwal — DAM Capital — Analyst

My question is, on the pharma business plan that we have, like in agro, after predominantly our entire business is on [Indecipherable] products. In pharma, when we’re looking for acquisitions, are we looking for purely predicted products — predicted CDMO or are we looking at generic CDMO also?

Mayank Singhal — Vice Chairman and Managing Director

Well, let me answer both from a perfection and correction. I think when we look at the custom manufacturing business, it is a services which we provide in manufacturing — products obviously from above that. When you look at the domestic business, it’s purely products, yes, and crop solutions. When you look at the pharma business, we are obviously — eventually the products, but again, we started with the service of CRO/CDMO [Indecipherable]. Yeah, even if it’s coming into products, if we look at manufacturing some of those products, so then we become a product. In your eyes, [Technical Issues] manufacture.

Nitin Agarwal — DAM Capital — Analyst

I get them, but — so we are agnostic to whether it’s a generic or a permit product as far as pharma is concerned?

Mayank Singhal — Vice Chairman and Managing Director

Well, there will not be much of a CRO or CDMO work in generics, but it was more — in a way that’s pipe, that’s where we’ll be focusing. When we look at CRO or CDMO, which has started at the innovative side, when you work with innovative in early stage to commercial because regulatory framework is set. And the generics will be of value and a value-add, if it makes sense for the chemists [Indecipherable] point where we continue to add them, not from a CRO/CDMO product, yeah.

Nitin Agarwal — DAM Capital — Analyst

Okay. Thank you.

Operator

Thank you. Our next question is from the line of Dhruv Muchhal from HDFC Mutual Fund. Please go ahead.

Dhruv Muchhal — HDFC Mutual Fund — Analyst

Yeah, sir. Thank you so much. Sir, in your nine months for the export business, you mentioned that the favorable product mix…

Operator

Mr. Muchhal, could you speak a bit louder? We can’t hear you that well, sir.

Dhruv Muchhal — HDFC Mutual Fund — Analyst

Is this better?

Operator

Yes. Thank you.

Dhruv Muchhal — HDFC Mutual Fund — Analyst

Yeah. So, in the exports business, you mentioned that for the nine months, the product mix and currency is about 12% contribution. I just wanted to understand what we understand is that in the CSM business or the exports business, the price increase would largely be due to an RM price increase because that gets passed through is what our understanding is. And if that happens, generally the gross margin should decline, because your per kg remains broadly the same because you work on a contribution basis. But your gross margins are still improving or still steady. So, just wanted to understand, is there some change in the structure? And also, on currency, that also largely is a pass-through, if I’m not wrong, in your contract. So does currency always benefiting in your revenue? Does it also benefit in your EBITDA?

Mayank Singhal — Vice Chairman and Managing Director

Yeah. Just to explain, first of all, this notion is not correct that there is a per kg margin fixed thing, that is not the kind of business we are in. Yes, we work on a model where there is transparency on raw material costs and conversion costs and any increase or benefits they are shared with our partners, okay. So, the price increase, I mean, in last one year, 1.5 years, there is a significant increase both in terms of raw material prices and other inputs like fuel and other areas. The benefit that you are seeing here in reflecting in our numbers is, as I explained to the earlier participant also, that it is mainly coming from improved product mix, okay. If we have been launching, we have commercialized more than 10, 12 products in last 2.5 years, okay. So product mix is [Technical Issues]. The contribution of some of the existing products, which was different in last couple of years versus this year, so overall product mix change is favorable for us. That is one.

Secondly, the operating leverage benefit is also kicking in for us. Now obviously, we were also on the other side of operating leverage maybe few years back when the capacities were underutilized. But yes, this year, those benefits are kicking in for us. And that is what is reflecting in these numbers. So, I hope you understand that this is not a one product company and price is fixed per kg, and therefore, you’re not appreciating what is reflecting here.

Dhruv Muchhal — HDFC Mutual Fund — Analyst

Perfect, sir. Understood. At our basis, I understand the operating leverage benefit. But even on the contribution margin where it is largely DRM, if I’m not wrong, where it’s a transparent model, so you get to retain a decent part of the — it seems the efficiency gains or the benefit from higher volumes?

Mayank Singhal — Vice Chairman and Managing Director

Yeah. So that comes from product mix. Because if you look at the contribution level, I think 1-odd-percent is the increase in contribution level. So, that is kicking in from the favorable product mix.

Dhruv Muchhal — HDFC Mutual Fund — Analyst

Correct. So it’s primarily the product mix, which is helping us maintain gross margins despite the…

Mayank Singhal — Vice Chairman and Managing Director

Yes, yes, yes.

Dhruv Muchhal — HDFC Mutual Fund — Analyst

Perfect, sir. That makes sense. Thanks, and all the best.

Operator

Ladies and gentlemen, we take that as the last question. I now hand the floor back to the management for closing comments.

Mayank Singhal — Vice Chairman and Managing Director

So, once again, thank you for joining us on this call, and we look forward to hopefully a successful year, and thanks for all your support to PI. Good evening.

Operator

[Operator Closing Remarks]