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Edited Transcript of PIIND.NSE earnings conference call or presentation 24-Oct-19 9:30am GMT

Q2 2020 PI Industries Ltd Earnings Call

Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of PI Industries Ltd earnings conference call or presentation Thursday, October 24, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mayank Singhal

PI Industries Limited - Executive Vice-Chairman & MD

* Raman Ramachandran

PI Industries Limited - MD, CEO & Director

* Subhash Chnad Anand

PI Industries Limited - CFO

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Conference Call Participants

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* Abhijit R. Akella

IIFL Research - VP

* Aditya Jhawar

Investec Bank plc, Research Division - Analyst

* Bharat Gupta

Edelweiss Securities Ltd., Research Division - Research Analyst

* Bharat Shah

ASK Investment Managers Limited - Executive Director

* Chirag Dagli;HDFC Asset Management;Analyst

* Madanagopal Ramu

Sundaram Asset Management Company Ltd. - Head of Equity Research & Assistant Fund Manager

* Prashant Tiwari

SBICAP Securities Ltd., Research Division - Research Analyst

* Rajesh Kothari

AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director

* Ritesh Gupta

AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals

* Saurabh Jain

HSBC, Research Division - Analyst

* Vishnu Kumar A.S.

Spark Capital Advisors (India) Private Limited, Research Division - VP

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the PI Industries Q2 FY '20 Earnings Conference Call. (Operator Instructions)

I now hand the conference over to Mr. [Sudar Rangniker] from CDR India. Thank you, and over to you, sir.

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Unidentified Participant, [2]

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Thank you. Good afternoon, everyone, and thank you for joining us on PI Industries' Quarter 2 H1 FY '20 Earnings Conference Call. Joining us today are senior members of the management team including Dr. Raman Ramachandran, Managing Director and CEO; Sir Mayank Singhal, Executive Vice Chairman and Managing Director; Mr. Rajnish Sarna, Executive Director; and Mr. Subhash Anand, Chief Financial Officer.

We will begin with key talks from Mr. Mayank Singhal. Thereafter, we will have Mr. Subhash Anand sharing his views on the financial performance of the company. After the opening remarks from the management, the forum will be opened for any queries that you may have.

A cautionary note, before we begin, certain statements made or discussed during the call could be forward-looking statements and a disclaimer to this effect has been included in the press release shared with you earlier.

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

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [3]

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Yes. Good afternoon to everyone, and thank you once again and for joining us on this call today. I would first like to start with wishing you all a very Happy Diwali, which is just around the corner. So let me now take you through and share our performance for the quarter and the half yearly, the first half.

So once again, we report another great quarter backed by strong performance, which is backed by exports. In the Q2, we are reporting another robust 26% revenue gain and a 30% increase in its profits. And in the first half, it has delivered about 25% growth and a revenue of 27% in profitability, in line with our guidelines.

The export business continues to scale new heights. Our innovative customers have been enhancing their requirements for commercializing of new generation molecules, and on the other hand, it will also occur in this year 2 to 3 new molecules to be commercialized. We've been witnessing a healthy increase in the inquiries from our innovative partners and choose to engage with us because of our strength in our technological high-end chemistry, innovative process and a sustainable approach in manufacturing. On the other hand, the challenges of China have also given us a boost of inquiries, and we hope this will have a positive trajectory to this space.

Now let us focus towards the domestic branch business. While the monsoons have been very good, but there has been an uneven spread of monsoons which has created challenges for the agriculture economy, both from a productivity and from a user end of inputs, as this has actually delivered a softer number compared to the expectation for the agri industry. But given on the other hand, this is going to lead to certain advantages in the coming rabi season as the reservoir levels are highest in the last 5 years, good level of moisture and well spread out to the country. Therefore, rabi crops are expected to do well.

On the other hand, if weather continues to show its [destructive forms] in the rabi season it could pose further challenges for the industry. But for PI, we are very excited to have launched a new generation herbicide, which is working well with certain resistant weeds in the northern part of the country. It's in the early stages of its launch, and we still have to go through an experience of taking it to market to know how well the acceptance of a new generation product in the farmer's mind.

When we look at it, we have a robust product pipeline in the agri distribution, a strong rate of inquires and our partnership with the global innovators are moving ahead as per plans. Our domestic production (inaudible) has commenced and contributed further to the development of the Nominee brand which, again, showed its performance in terms of its acceptance of the quality and the standards of value delivery to the Indian farmer.

Our research in the area of new chemistries and technology is paramount for us as a company and it's progressing well to our satisfaction and we see this to play a critical role in the future strategies of PI.

The outlook of the current fiscal year is defined with the extreme momentum of exports, which has been very good in the quarter 1, and we expect to keep the momentum for the growth as indicated earlier, and the company is expected to deliver a 20-plus percent growth while [and all of those] positions are in a healthy plane. So we have yet to see with this a consistent, predictable work over the next fiscal year, as stated earlier.

With this, I will now hand this over to our CFO to continue to take this discussion forward. Thank you. Over to you, Subhash.

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Subhash Chnad Anand, PI Industries Limited - CFO [4]

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Thank you, Mayank, and good afternoon, everyone. Let me start with sharing financial highlights for second quarter FY '20. During Q2 FY '20, revenue was INR 907 crores, representing a growth of 26% on corresponding period of last year. This growth was driven by 52% improvement in exports, going up from INR 419 crores to INR 639 crores, while the domestic operations declined by 12% from INR 304 crores to INR 269 crores. EBITDA in Q2 came; it is INR 192 crores, higher by 43% over Q2 of last year, with margin holding at 21% despite softness in domestic market. Profit after tax improved by 30% to INR 123 crores during this quarter. Effective tax rate was at 27% due to changing SEZ contributions to the overall business.

Let me also quickly take you through the key performance highlights of H1 FY '20. In the first half of this fiscal year, we registered a strong revenue growth of 25% to INR 1,661 crores. EBITDA stood at INR 343 crores, translating to a margin of 21%. Profit after tax came at INR 224 crores, higher by 27% Y-o-Y basis.

Continued gain in the performance have led to strong operating cash position and a robust balance sheet for the company. Net debt to the equity ratio remains 0. Cash position at September 30 stood at INR 171 crores.

As highlighted in the past, we are seeing visible opportunities and therefore remain confident of delivering 20%-plus growth in the financial year 2020, with 50- to 100-basis point improvement in margin.

Our current order book position stands at 1.4 billion, and we have maintained a CapEx of INR 347 crores in FY '20 [until date]. We will be spending close to INR 450 crores for the full year FY '20.

That concludes my initial remarks, and I would now request the moderator to open the forum for Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Aditya Jhawar from Investec.

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Aditya Jhawar, Investec Bank plc, Research Division - Analyst [2]

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Congrats on very strong earnings. So it would be great if you can help us understand the split of revenue between revenue booked from the order book and the spot basis? And what has been the trend in the last couple of years?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [3]

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Well, to be very frank, we don't have the numbers on hand. It's not that we have -- we don't like that, but we look at majority of revenues driven by order book position in this business.

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Aditya Jhawar, Investec Bank plc, Research Division - Analyst [4]

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Okay. But you know, Mayank, you also made a comment that because of issues in China, we are seeing increase in revenue coming in. So are these revenue on spot basis? Or you are seeing increase in supply of existing molecules much higher than the agreed quantity?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [5]

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No. What I meant, there was not increase in revenue but we are seeing the inquiry increase. And as you know, the CSM business, the typical development time which takes about 1 year to 1.5 years before we get into commercial supply structure. So that's what I would say.

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Aditya Jhawar, Investec Bank plc, Research Division - Analyst [6]

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Okay. And one very fundamental question. Just what is the gap between order received and commencement of execution? And then how much time we will reach the peak? For instance, in June quarter, we added about 130 million new orders. So when would the execution commence and when would we reach the peak? What is the time gap?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [7]

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Well, I would say there's no linear answer to that because each product has a different time line cycle, conclusion and also build-out. Or also the quantities could be spilled over depending on what kind of product, what kind of structure, what kind of inquiry, what volumes and development phase of the regulatory market. So it's product to product, but that's the way we look at it. Typically, when we look at an order book position, we may be describing this as between a 3- to 5-year window for deliveries.

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Aditya Jhawar, Investec Bank plc, Research Division - Analyst [8]

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Okay. So the commencement would be minimum 3 year, to commence a new execution. Is that...

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [9]

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I said that could change from product to product, a needs to requirement basis.

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Aditya Jhawar, Investec Bank plc, Research Division - Analyst [10]

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Okay. And order book seems to have contracted on a Q-on-Q basis from 1.5 billion. That's about...

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Subhash Chnad Anand, PI Industries Limited - CFO [11]

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We continue to hold to a same level what we communicated last time.

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Aditya Jhawar, Investec Bank plc, Research Division - Analyst [12]

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Okay.

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [13]

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It's not changed.

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Subhash Chnad Anand, PI Industries Limited - CFO [14]

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Yes, it's not changed.

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Aditya Jhawar, Investec Bank plc, Research Division - Analyst [15]

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Okay. And the final question, since we -- the revenue momentum is pretty strong and we are seeing a very strong visibility, would you guys consider revising your guidance upwards for FY '20?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [16]

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As we've mentioned in the past, this business is not necessarily quarter-to-quarter based. You should look at the general base. It is based on certain deliveries and depends on the customer needs, their utilization plan, their computation plan, market situations, deliveries take place accordingly. So we may have a little heavier quarter and then we may have a (inaudible) quarter, but we would still keep our guidance as mentioned. That's about 20-plus percent on the revenue front.

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Raman Ramachandran, PI Industries Limited - MD, CEO & Director [17]

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And in any case, if you see, last fiscal second half was very healthy.

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Aditya Jhawar, Investec Bank plc, Research Division - Analyst [18]

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Yes.

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Raman Ramachandran, PI Industries Limited - MD, CEO & Director [19]

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So in that sense, the expectation of same product growth level of first half is not a realistic thing because in the second half, in any case, it will get normal.

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Aditya Jhawar, Investec Bank plc, Research Division - Analyst [20]

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Yes.

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [21]

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And capacity is also [critical] as mentioned earlier.

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Aditya Jhawar, Investec Bank plc, Research Division - Analyst [22]

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Okay, that's helpful. Finally, last question, for Subhash, what could be your effective tax rate for FY '20 and '21?

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Subhash Chnad Anand, PI Industries Limited - CFO [23]

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FY '20, we expect it -- or we expect to be around 24%. '21 will be a broadly similar number at this point of time.

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Operator [24]

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The next question is from the line of Saurabh Jain from HSBC.

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Saurabh Jain, HSBC, Research Division - Analyst [25]

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Congrats on a very good set of numbers. If you can help us understand what could be the impact of India's 116 in this quarter on the margins?

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Subhash Chnad Anand, PI Industries Limited - CFO [26]

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It's similar to what we had last quarter because its percentage remains the same. It's a consistent -- it won't change quarter-on-quarter. It's 0.5%, what we indicated earlier also.

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Saurabh Jain, HSBC, Research Division - Analyst [27]

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Okay. And also in the press release, you did mention that the domestic declined by 12%. But if I look at the Y-o-Y numbers, assuming a 52% growth in the export business, the domestic is showing a decline of only 8%. What is the right number, 12 or 8?

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Subhash Chnad Anand, PI Industries Limited - CFO [28]

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It's 12%. I communicated both absolute number as the last total, so it's 12%. But in case, since you have doubt, we can talk on the sidelines after the call and...

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Saurabh Jain, HSBC, Research Division - Analyst [29]

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Sure, no problem. I wanted to understand, like a few quarters back, we made a commentary that in our portfolio, only 5 to 6 molecules contribute about 50% of the overall sales in the export business. Is that mix changing now? How is it? Is it more bulky or more feathered now.

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [30]

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So these are cyclical in nature as new products are coming and the need for that is ramping up. The price is changing. So it's a hyperbolic pie, which keeps looking in different directions. And the time, obviously, the product portfolio is expanding, so [that every percentage loss is typical].

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Saurabh Jain, HSBC, Research Division - Analyst [31]

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So that is what I'm trying to make sense of, that whether the new molecules that we have commercialized over the last 2 or 3 years, are they forming major part of this growth? Or it's like the commercial portfolio itself is growing by a significant number?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [32]

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It's a mix of both. Because as you see, the life cycle of this business is about 10 to 12 years of growth rates for new molecules, and a minimum -- that's minimum, I would say, because it will take time to go to market and all the markets in this business continue to grow, and obviously the new and the old, both are competing together and growing.

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Saurabh Jain, HSBC, Research Division - Analyst [33]

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Okay. But the portfolio is more spread out now vis-à-vis how it would have been a few quarters back. Is that the right understanding?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [34]

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Yes.

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Operator [35]

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(Operator Instructions) We take the next question from the line of Bharat Gupta from Edelweiss.

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Bharat Gupta, Edelweiss Securities Ltd., Research Division - Research Analyst [36]

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Sir, this question pertains on CSM business only. That almost from 2 quarters, we are seeing a 50% sort of growth. That has definitely come after a very long time, a gap of almost 1.5 years in lull period. Just wanted to understand a little bit more. So generally the kind of business in which you are, that you have a very strong visibility of growth at least 12 months ahead of -- in advance. We had and we anticipated this kind of numbers and 50% sort of growth in the first half or a lot of business have just flown to us because of some lower inventories in the market and then ultimately you're going to normalize. So because our business is not like it can just jump into 1 quarter by 50%, and another quarter it can come down to 10%, so I wanted to understand more about that.

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [37]

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You're very right in what you're saying. And basically, we have capacity so we can produce deliveries subjective and sometimes a delivery can be taken up in a quarter earlier or quarter later. It changes the number. So it is pretty much predictable, therefore we still keep the guidance as we mentioned, 20-plus percent.

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Bharat Gupta, Edelweiss Securities Ltd., Research Division - Research Analyst [38]

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So is it like that, that more deliveries have been just made in the first half and then you are still guiding for a 20% growth only in the CSM business for full year while -- you've already achieved that number. Is it going to indicate that in the second half, we will have a flat growth?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [39]

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No, no. Nobody is saying that. It's not linear. But if you look at it, if you look at the growth, it has been there because, one, we didn't have -- last half year was less and the next half was very strong, so going over, as mentioned earlier, it is going to be pretty flat.

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Subhash Chnad Anand, PI Industries Limited - CFO [40]

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In fact, if you see H1 of last year, Bharat, export growth was roughly around 15%, 16%. So 15%, 16%, we have grown 52%, which is right because we added capacities. H2 was a 40% growth. And on 40%, no capacity has come. We are not adding any more that large capacity in H2. So we don't expect similar growth to come in H2. So it will be -- it will not be a similar growth. That's the reason we are continuing to hold our guidance for the full year.

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Bharat Gupta, Edelweiss Securities Ltd., Research Division - Research Analyst [41]

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Okay. And sir, also I want to understand that we must have utilized our plan very efficiently to meet this kind of growth number. I mean, 50%. I'm sure that our plan didn't have so much of idle capacity that we can meet a growth of 50%. So I just want to understand that currently the plan which we are operating, this is the maximum utilization you have achieved or there is still any room left? Or you are over utilizing your plant assets?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [42]

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Well, I think 2 tracks which are mentioned earlier. One was that we have expanded capacity in the last year, which is coming up and showing that performance in the first.

Second, there's not a linear plan because not a single product plant is a multiproduct plant. They are different value, different capacity. Therefore, they continue to play in that certain band. So I would not say that it's ramping up. [Utilization and] ABC is at the level. Sure, it's running at a satisfactory level of utilization, a good product mix, which has come up to give us this performance.

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Bharat Gupta, Edelweiss Securities Ltd., Research Division - Research Analyst [43]

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Okay. I'm sorry, still on -- sorry to once again help me on the same issue again. So you are talking about 20% growth on a last year number of roughly INR 1,858 crores revenue in CSM. If you [slide] that number, it means that the second half, we are guiding 0 growth. So just wanted to understand that are we just being a bit more conservative? Or you see that maybe in second half, there can be some challenges?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [44]

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No. Let me reiterate when we said 20% growth, we are talking blended growth, not system growth.

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Raman Ramachandran, PI Industries Limited - MD, CEO & Director [45]

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Company.

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [46]

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As a company.

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Bharat Gupta, Edelweiss Securities Ltd., Research Division - Research Analyst [47]

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Right. But the -- in initial remarks, you have been mentioning that it will be similar from domestic as well as the CSM boat.

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [48]

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Domestic is not shaping up. That was expected. And given that..

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Bharat Gupta, Edelweiss Securities Ltd., Research Division - Research Analyst [49]

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But I don't think the loss of domestic growth is now going to be compensated from the higher growth in CSM. And that's why maybe in second half, we can still see some growth in CSM in second half as well?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [50]

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Yes. Some growth, yes.

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Bharat Gupta, Edelweiss Securities Ltd., Research Division - Research Analyst [51]

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Okay. Sir just one more question and I'll come back in queue. Sir, when we operated our plan so efficiently and with a 50% revenue growth, isn't it that it should have also flown in higher margins? Because we would have benefited from the operating leverage, our margins must have gone up significantly. So just only by simple accounting principle and higher utilization level, but it's not reflected so...

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [52]

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Now you see the expanded margins obviously in the...

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Subhash Chnad Anand, PI Industries Limited - CFO [53]

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Yes, it's reflected in the -- if you see the results, yes, margin has gone up, and primarily we'll see the leveraging has come in since we have grown the...

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Bharat Gupta, Edelweiss Securities Ltd., Research Division - Research Analyst [54]

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Hello?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [55]

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Yes, if you see the last quarter, it was 18.6% EBITDA. This quarter, it's 21-odd percent, so obviously the margin expansion is reflected in that growth.

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Operator [56]

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(Operator Instructions) The next question is from the line of Bharat Shah from ASK Group.

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Bharat Shah, ASK Investment Managers Limited - Executive Director [57]

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Congratulations, Mayank [Foreign Language]. And Subhash, I have 2 questions. What has been the operational cash flow generated in the second quarter and for the first half? And secondly, what has been the return on capital employed for this quarter?

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Subhash Chnad Anand, PI Industries Limited - CFO [58]

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Bharat, I'll come back with you on the second question. On cash flow, if you see our -- positive cash flow or cumulative cash flow surplus is INR 171 crores. This is despite of CapEx of INR 347 crores. So definitely there is cash generation. This has happened in this quarter.

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Bharat Shah, ASK Investment Managers Limited - Executive Director [59]

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No, I understand that. What I meant was, what has been the cash flow generated from the operations?

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Subhash Chnad Anand, PI Industries Limited - CFO [60]

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Let me...

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [61]

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We'll just come back to you.

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Subhash Chnad Anand, PI Industries Limited - CFO [62]

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I'll come back to you, Bharat. [I will be checking on the number].

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Bharat Shah, ASK Investment Managers Limited - Executive Director [63]

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No problem.

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Operator [64]

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The next question is from the line of [Amal Morif] from AlfAccurate Advisors.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [65]

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Congratulations for a very good set of numbers, sir. So my question is primarily from the domestic outlook. Now given that the rabi looks different for other peers and there are 2 new products which will be launched, what is the outlook for domestic for the second half?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [66]

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The outlook, definitely given the weather situation, is a positive outlook compared to the first half. But again, it depends on the [scarcity] of the rainfall because if there's too much rain or there's too much of it to water down these crops, it's also what we've seen in the first half. But clearly we are positive that the -- we see a positive trend for rabi and given the Southern Peninsula of India, which is going to definitely give us some positive upticks. And on the other hand, we have also launched a new product in the northern markets, in the crops like wheat.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [67]

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Great. So this Rajesh Kothari here. My one more question is, with next 3 to 5 years in view, considering that we are doing significant CapEx, we've also acquired 1 [comp] recently, how do you see over next 3 to 5 years the entire story panning out from the innovators' perspective, from ramp-up perspective, number of molecules? You mentioned in your opening remarks that there are a number of molecules which are going for commercialization stage. So how big the opportunity can be?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [68]

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Well, definitely, as we have stated earlier, we are looking at a 20-plus percent growth over the next 3 years on a year-to-year basis. And this is definitely based by certain estimates of looking at our existing pipeline, various stages of commercialization. And in order to [explain] and then show that we can able to do that effectively, the acquisition of capacities, as you mentioned with agro, and other development investments are based on certain of these back -- dependencies on these backed-up orders and commitments that we see, we'll be able to move up. So we definitely see this growth rate of 20-plus percent over the next 3 years.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [69]

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So this 20% CAGR, what we are talking about, that assumes how much domestic SEZ and how much exports SEZ?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [70]

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Well, that will be depending on a year-to-year. Basically, we look at the CAGR on an equally split basis going forward from here. Obviously, in both the businesses, the season does have a role to play. One is the global seasonal patterns and the local seasonal patterns. And somewhere they do even up as from my experience of this business in the last 20-odd years in the mixed portfolio of exports and domestic markets, so that's why we've estimated that number.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [71]

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But don't you think the commercialization of the different molecules gives you more visibility in terms of CAGR? Generally speaking, it can't be [U&M], right? If it turns out to be than what it is, there's a different way to look at it. But from your business plan perspective, your CapEx perspective and your customers' innovation perspective, it has to be -- it can't be just matching 2020 for both these segments.

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [72]

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Yes. It's not 2020 for the [statement]. Even in distribution, obviously the scales of this business are different, but that's what we've done as an estimate in the business plan. I don't have the exact numbers for the next 3 years in front of me. But clearly what we have done is that the business will look at a 20% growth in its portfolio.

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Raman Ramachandran, PI Industries Limited - MD, CEO & Director [73]

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Basically, as a matter of fact, both these businesses -- large businesses or both these segments have almost equal opportunity, while in export business, it is clear visibility of order growth and the products getting commercialized. At the same time, we also have a pipeline of new registrations happening in domestic market and also the scale-up plans of the products, which we have already launched. So there are equal opportunities. I think the point being made is the risk. We have taken, on a blended basis, a growth objective of 20%-plus. Based on our past experience, we have always seen that our business model is helping us. If the domestic is not doing fine, we have seen that the export business has been able to make it up. That's what we are seeing in the first half, as we have seen. And we have also seen a few years where export was -- the supplies were not picking up and the domestic did well, and we could still manage the growth aspect. So that's what we are trying to explain, that given the visibility on both sides, we are pretty confident that we should be able to manage and maintain this 20% growth momentum.

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [74]

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And on the other hand, the domestic business is single geography-based and the export business, multi-geography-based. So that's how this all will come. I think on the domestic side, the variables that we deal with are much more. There is weather. There is the (inaudible) that is slanted. There is demand that comes up. It depends on weather and crop. And I think that is one factor to consider when you think about how we balance these 2 businesses.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [75]

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So from an innovation perspective, therefore, between domestic and exports, you'll be more focusing on export side?

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Raman Ramachandran, PI Industries Limited - MD, CEO & Director [76]

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No, no.

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [77]

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We're focusing on both sides. I didn't get your question, sorry.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [78]

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I think from the incremental CapEx perspective, the -- between 2 markets, between domestic and export market...

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [79]

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That is a partnership with distribution that has hardly (inaudible). The typical factors for both these businesses are very different. One is about product development, marketing, licensing the right product for Indian [government], whereas the other is all about putting the assets at the right time and selecting the assets and getting those...

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [80]

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Got it. And one last question from my side is, how do you see the raw material prices because China raw material prices are reducing significantly? That's what we understand. How do you see the trends on the raw materials side?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [81]

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Obviously, as you see the raw material side, there is volatility and availability challenges, but PI has taken a proactive stand over the last 2 years. (inaudible) itself by having alternative supply structures which have helped us to offer a sustainable supply position to our customers, and we've been able to develop vendors. Price volatility, there is this, but the reduction volatility is also a trend we are seeing. So we do not see that as a high risk today for the company, and we continue to manage that well.

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Operator [82]

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The next question is from the line of Abhijit Akella from IIFL.

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Abhijit R. Akella, IIFL Research - VP [83]

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Congratulations on a very good quarter. First, I just wanted to get your thoughts on the domestic business. You've probably registered a sales decline of somewhere around 12%-odd in the first half. How would you believe that compares with the industry's current performance and whether you believe you might have lost a little bit of market share?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [84]

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No, I wouldn't say that we've lost market share. But clearly, yes, our performance is definitely not among the top in the industry for this first half. We are at the bottom part of the pie, to be straight. But clearly, our focus areas of our 3 critical molecules, I would happily say that we've been able to regain. It can grow the market share. Obviously, some of the segments where we do play, there has been a severe weather impact, which has created an impact on our revenue there, followed with money cycles which we've been able to put together, which has given us a better cash out of the business and we've been in a better working capital situation, which is also giving us strength to leverage going into the next half.

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Subhash Chnad Anand, PI Industries Limited - CFO [85]

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So just to supplement, I think it is also, to some extent, the [conscious actual] because we realized that liquidity in the market is very tight, and hence our focus has been to be a little bit more careful about how we place booked products and focus more on the collections.

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [86]

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And ensure [POG].

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Subhash Chnad Anand, PI Industries Limited - CFO [87]

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Products [on ground].

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [88]

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Rather than just [their views].

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Abhijit R. Akella, IIFL Research - VP [89]

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Understood, sir. And in terms of those segments that you mentioned where you face some pressures, would examples like soybean be one example of that? Floods in Madhya Pradesh, et cetera.

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [90]

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Well, so soybeans is, okay, not a major focus crop. Rice and corn and fruits and vegetables tend to be our even more major focus crops, and cotton. And of course, rice. And overall, in the ag, what has happened is, one, that we have a delayed monsoon. And consequently, many farmers resorted to shorter duration kind of varieties in crops. And then you saw that there was continuous rain and this spilled over to September, which all generally reduced the [pest] pressure on crops as well. So the highlight has been one of our flagship products, as you know it's Nominee Gold. This has been under pressure from some of the generics, that are almost 50 brands. But in spite of that, we have actually been able to increase our product on ground and volume substantially. But of course, there was a little bit of price pressure on this because of the number of generics. And at this point, our focus is to retain the majority molecule share with our brand, and I believe we have achieved that, and we are very happy with that achievement. And in cotton, we have our flagship product, Osheen, which is another product which has actually marginally grown on a product-on-ground basis. So I would say these are the 2 positive things, which was specifically our goals for this current season.

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Abhijit R. Akella, IIFL Research - VP [91]

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I appreciate the color. I would love to get your thoughts on the opportunity for pyroxasulfone, the new herbicide you're launching. Any way to size up the overall opportunity size for that molecule?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [92]

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I would not venture to give you a guess about the opportunity size because it is a new molecule. It's a product that needs to be used very differently from what the farmers are used to. It's a versatile product. It's not an easy product to sell. We are launching it in [wheat], for one of the resistant [weed] control, so we will not be able to give you a good estimate at this point. Maybe in 3 or 4 months' time when we've had the first season, we'll be able to give you a better feel for what this product is likely to be for.

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Abhijit R. Akella, IIFL Research - VP [93]

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Got it. Just one last quick thing, and I'll come back. On the CSM side, we've seen -- the effective tax rate actually in 1H is about 26%. And we're talking about 24% for the full year. So does that mean that the CSM revenue mix will shift in the second half towards the SEZ? How do we decide which facility to use? Does it depend on available capacity or is there some other criterion that you use?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [94]

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So it's basically capacities, where we have the capacity and how we can leverage that around. And that's how the effective tax rate comes in. So this quarter, since overall revenue, it was more [outsized as it did], so the effective tax rate went up. So we see that to be getting normalized.

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Operator [95]

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The next question is from the line of Ritesh Gupta from AMBIT Capital.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [96]

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Just on the CSM, with the group of guidance that you're giving, probably more like flattish to probably a high single-digit to mid-single-digit sort of growth rate for the second half (inaudible) you are commissioning a new multipurpose plant and then the acquisition capacity, et cetera, also coming to picture in quarter 3. Plus I think in the last quarter, you had alluded that you have been facing some bit of (inaudible) as well. And I think if I remember it right, I think Mr. Singhal also made a comment that growth actually would be heavier on the second half side. So is there a change? What is that we are missing here? Because I think if capacities have been constrained in the first half and more capacities are coming up in the second half, I believe the growth should have been higher, right? And second half changes will be relatively heavy-based for you always. I think the same was there in FY '18 as well.

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [97]

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So let's me correct. Number one, capacities that kicked in the first half, it was the revenues in the second half last year. And therefore we cannot get any revenue in the first half. So the capacities therefore are continuing to deliver the revenue in the first half. So now the capacity which was there in the second half is the revenue which we got in the first half. Now in the second, we're commencing some additional capacity, but it doesn't mean it's going to give us any substantial revenue as this is a start-up. Secondly, the integration is still to happen. So that cannot -- we still add it as a capacity revenue. In any capacity which we do integrate, we'd like to turn it up. For it to get to work for us, it will take about 1 year to 1.5 years and that's really what it takes. So that's where we are.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [98]

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Okay, okay. And the new molecule commissioning, is it also giving you benefit only in the first half of next year?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [99]

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Well, I will not say first half of next year. It could take [2 different magnitude in] structures. But nothing just kickstarted. You would appreciate it in these large plants and products because the initial supplies and the scale-up take their own time, but that's just to get built up earlier.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [100]

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Got it. And is there any order book number that you shared earlier in the call?

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Subhash Chnad Anand, PI Industries Limited - CFO [101]

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We have maintained the same order book number that we have submitted last quarter.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [102]

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Okay. And just on the margin [bit], I think you said that margins had from the scale-up costs also built into it. I think (inaudible) again mentions that. Plus I think the gross margins have been under pressure. I think this quarter also, there has been a 50 bps decline. (inaudible) we've seen that CSM tends to benefit the gross margins overall. So is it that the China pressure is still kind of persisting on the gross margin side? Or do you think that gross margins are already normalized?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [103]

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Right, we're not linear to the China situation. As you know, we have passed on structure. So obviously, the cost of raw materials going up is not something that we're getting a higher margin for it. So therefore, the ratio can change but consistency in our run-up remains there. And always, the volatility is there, in the numbers you described.

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Subhash Chnad Anand, PI Industries Limited - CFO [104]

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And gross margins do change based on (inaudible) business mix and product mix, what we have.

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Raman Ramachandran, PI Industries Limited - MD, CEO & Director [105]

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So the operating margin benefit that you're looking at, he was explaining to the earlier participant. If you see, for example, for quarter 2, there is more than 2.5% of operating margin that's kicking in. And overall for the first half, it is almost more than 1% or so. So those benefits are certainly kicking in.

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Ritesh Gupta, AMBIT Capital Private Limited, Research Division - Analyst of Agro Chemicals [106]

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Got it, sir. Got it. And just the last bit, I think the global ag market continues to remain, let's say, in a not-so-buoyant mood, as such. And from that perspective, I think, when I see your growth rates, are they more driven by market share gains than, let's say, new molecules coming in to your side? Or is there some [underdeveloped] inventory (inaudible)? I think one of the earlier participants also alluded to. Is it something you're seeing because of new molecule introduction and market share gains? Or is it something to do more of an inventory catch-up and that piece is allowed, let's say, in a year or two?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [107]

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So if you look at the $85 billion global market, we are not significant enough to really get impacted by the large play. But on the other hand, areas that we've chosen to play do have a consistent performance of growth, both from a selection and play with the customer that we have. So therefore, at this scale and stage, it definitely gives us a consistency. And once we do get to -- we get to the pathway of contribution to percentage, that does have a play. And we're not (inaudible) we will always continue to grow. As geographies expand, regulatory administration takes place. And customers are always looking for better replacement for what's in place. So that's really [the use] of the consistency and sustainability.

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Operator [108]

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The next question is from the line of Vishnu Kumar from Spark Capital.

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Vishnu Kumar A.S., Spark Capital Advisors (India) Private Limited, Research Division - VP [109]

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This question is for Mr. Subhash. Sir, if you could just explain the capitalization in the first half [in your gross block]. It's only about 90...

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Subhash Chnad Anand, PI Industries Limited - CFO [110]

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Okay. Our capitalization for first half is INR 347 crores.

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Vishnu Kumar A.S., Spark Capital Advisors (India) Private Limited, Research Division - VP [111]

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CWIP shows about 250 and [About] India asset block looks like the only capital is INR 90-odd crores. But put together, what you're saying is right. But your only capital is INR 90-odd crores at the gross level.

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Subhash Chnad Anand, PI Industries Limited - CFO [112]

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Okay. You're talking capitalized -- the number which I say including CWIP because finally this has been put on the asset and capitalization. Commissioning yet to happen, but yes, investment has happened.

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Vishnu Kumar A.S., Spark Capital Advisors (India) Private Limited, Research Division - VP [113]

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Got it, sir. But in the first half of the calendar year, how many plants have we kind of started? Or is it likely to start this calendar year? And also, if you could let us know when we start the next couple of plants?

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Subhash Chnad Anand, PI Industries Limited - CFO [114]

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Okay. We have 1 plant, which is just about to start in Jambusar. And we expect one more plant to...

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Raman Ramachandran, PI Industries Limited - MD, CEO & Director [115]

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One more commissioned...

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Subhash Chnad Anand, PI Industries Limited - CFO [116]

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Okay, one was commissioned last year, fourth quarter. In Feb, that's where we completed. In this quarter (inaudible). So one we are expecting to start now any time, and we also expect one more plant sometime Q4 of this year.

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Vishnu Kumar A.S., Spark Capital Advisors (India) Private Limited, Research Division - VP [117]

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Okay. So one was started this quarter last year, that is December '18. The next one, we are going to start in this quarter. And the third one will start in March '20, third quarter?

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Raman Ramachandran, PI Industries Limited - MD, CEO & Director [118]

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The first one was in January, February. Not (inaudible)

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Subhash Chnad Anand, PI Industries Limited - CFO [119]

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Yes, February '19.

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Vishnu Kumar A.S., Spark Capital Advisors (India) Private Limited, Research Division - VP [120]

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Okay, January, February. Got it. Got it. And just wanted to understand the new set of plants that are coming up. Is there any other applications or product profile that can move into, say, specialty chemicals, pharma and not just agro? Or are we slightly diverging into or are we seeing more customers ask for slightly differentiated molecules?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [121]

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We are functioning in the same space for the moment, if we do see a good [pop-up] opportunity and would like to maintain the killer growth in that area while we are evaluating certain products at a smaller scale, the commercial scale in the other area of application, for which we would see in the next couple of years some potential to be visible.

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Raman Ramachandran, PI Industries Limited - MD, CEO & Director [122]

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Yes, one plant is in the building block of (inaudible) which will help us get into other area...

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [123]

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Of building capability to other products.

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Vishnu Kumar A.S., Spark Capital Advisors (India) Private Limited, Research Division - VP [124]

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Got it. So number two is the one that's going to start this quarter? The one that's going to start up now. Is that right?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [125]

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Yes, that's right, Vishnu.

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Vishnu Kumar A.S., Spark Capital Advisors (India) Private Limited, Research Division - VP [126]

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Got it. And if you just let us know the CapEx for next year, FY '21?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [127]

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It's about INR 300 crores to INR 400 crores. I think that's what we're looking at, right?

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Subhash Chnad Anand, PI Industries Limited - CFO [128]

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It will be in the range of 300 -- around INR 300 crores, I recall.

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Vishnu Kumar A.S., Spark Capital Advisors (India) Private Limited, Research Division - VP [129]

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Got it. And just one final question here. You had changed your accounting policy where we technically if we produce for a certain customer, we can technically account it even if it has not left the factory. Is the number pretty high this quarter or is it largely very negligible? If you could just give some color on that.

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Subhash Chnad Anand, PI Industries Limited - CFO [130]

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No, Vishnu, in fact, this number has remained broadly the same, quarter-on-quarter. In fact, there's not much variation what we have seen in March number, June number and even in September number. So it's broadly remaining at the same level.

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Vishnu Kumar A.S., Spark Capital Advisors (India) Private Limited, Research Division - VP [131]

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It should be around [30, 50 crores] less than that or...

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Subhash Chnad Anand, PI Industries Limited - CFO [132]

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Yes, broadly around in the same range, I recall it.

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Operator [133]

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The next question is from the line of Chirag Dagli from HDFC Asset Management.

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Chirag Dagli;HDFC Asset Management;Analyst, [134]

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This new CapEx that you're doing, does it have more sales potential because it's at the existing capacity? The rest of the infrastructure, et cetera, is just built in. So versus the current asset turns, will this CapEx deliver more sales?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [135]

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No, that's not -- it's not a linear way to look at it. And we don't -- I think it is just a mix of it because your building capacity is not (inaudible), but also infrastructure comes along with it, right?

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Chirag Dagli;HDFC Asset Management;Analyst, [136]

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Fair point, sir. And sir, just a very modern strategy. So you are guiding to a solid growth in CSM next few years. Once we reach $450 million, $500 million, we'll be amongst the largest custom synthesis in AgChem at least. Where do we go from there? And how should we think about growth post that number, or post to achieving that number because the action for that needs to be done today, right? So how are you thinking about post achieving that large number? How does one drive growth from there?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [137]

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Sorry, I'm supposed to answer that in a diplomatic way because the strategies need to be held close to the chest. This is the same question I remember coming to me 3 years ago, the market size opportunity is this, but as the pie and the pieces and the concepts are changing and the way we are working to look at other areas of technology block, I do not see a [shortening] in the AgChem space, which will be also shifting. And the opportunity that itself would become a larger play, and you can overall get that estimate if you get a better understanding of the global picture of this space. And clearly, in my view, this market will continue to expand at least in the next 5 to 7 years without a doubt, at the same pace. And on the other hand, PI is looking at some innovative approaches to continue with expansion growth, both from a revenue and technology -- revenue and by offering technological capabilities in other areas of application.

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Chirag Dagli;HDFC Asset Management;Analyst, [138]

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Nothing substantial needs to be done in the next 2 to 3 years to sort of...

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [139]

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We need to just execute our order book.

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Raman Ramachandran, PI Industries Limited - MD, CEO & Director [140]

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Just to add to this, in terms of -- what you mentioned is right, but as a matter of fact, for the last several years, we have been also working on technologies which will give us footprint in other verticals. So it takes time, but yes, in next 3 to 5 years as we reach to that stage, we will have certainly many other opportunities in other verticals other than AgChem.

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Operator [141]

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The next question is from the line of Madanagopal from Sundaram Mutual Fund.

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Madanagopal Ramu, Sundaram Asset Management Company Ltd. - Head of Equity Research & Assistant Fund Manager [142]

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Sir, just wanted some more clarity on the CapEx trend. So far, we have spent -- the capital work in progress is INR 450 crores. So for the plant, which is coming up in this quarter and for Q4, what is the pending CapEx?

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Subhash Chnad Anand, PI Industries Limited - CFO [143]

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Okay. This year's guidance, if you see, we'll be spending INR 450 crore-plus CapEx this year. Out of that, we already spent INR 347 crores. So balance we have to spend.

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Madanagopal Ramu, Sundaram Asset Management Company Ltd. - Head of Equity Research & Assistant Fund Manager [144]

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So it remains the same, the INR 450 crore target for the year. And you said next year, INR 300 crores CapEx. The run rate of cash generation in the first quarter, if I sort of look at the same for the second half -- first half, if I take it for the second half, then INR 800 crores would be probably close to cash generation from operation after tax. Next year, also, probably you might be closer to 900. So there will be a surplus of close to INR 400 crore to INR 500 crore getting generated, correct me if I'm wrong. Any -- what would be plans for it?

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Subhash Chnad Anand, PI Industries Limited - CFO [145]

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No, as you see, we are in investment mode. We are -- just acquired or announced an acquisition. So we are in investment and spending cash. So next few years, we know we'll generate cash, and we'll be deploying cash back in the business. So that's where we see ourselves at least for the next couple of years.

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Madanagopal Ramu, Sundaram Asset Management Company Ltd. - Head of Equity Research & Assistant Fund Manager [146]

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So the next year, INR 300 crores, you think there is a possibility of that going up or an acquisition sort of -- additional acquisition sort of...

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [147]

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But we have prevent -- quite preventive...

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Subhash Chnad Anand, PI Industries Limited - CFO [148]

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Forward looking. Forward looking...

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Madanagopal Ramu, Sundaram Asset Management Company Ltd. - Head of Equity Research & Assistant Fund Manager [149]

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So you're planning to deploy it back into the business...

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [150]

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[Mainly yes].

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Operator [151]

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The next question is from the line of [Tija Sid] from Nippon India.

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Unidentified Analyst, [152]

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Sir, just 1 question. On the opening remarks, you mentioned about increased number of inquiries because of the China issue. How different are these inquiries in terms of size, in terms of tenure, or in terms of chemistry? Are they very different? Are more [faith] now lies with the Indian manufacturers, whether global sourcing companies looking for a different output from the Indian manufacturers?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [153]

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So I would not put that in the Chinese -- China is the only call for outsourcing. Obviously, there are many strategic shifts which are taking place in the ag space, and one of them being the M&A status also which is happening. But clearly, the size, the chemistries and ABC, I think the message is very clear: Indian chemical industries look to be more sustainable. Indian governance structures from a government point and regulator is also pretty good. And I would say that from the environment point, the country has been strong, much strong, and is getting even stronger than before, which overall is very good. It is a little pain for the industry, but it's good to go through that as it has the positivity of creating sustainability in the chemical world, and we can get to become a chemical -- a large chemical player in this space. So looking at all this, they definitely see India as a positive playground for putting up chemical industry and partnering with chemical partners who have got the same value structures, which are fitting in. Because the couple of extra dollars here and there have been very clearly noted is not value proposition that large global companies are looking to put their risk of revenue and credibility.

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Unidentified Analyst, [154]

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Yes. Now we have a credible history of, let's say, 3, 4 years of delivering some large projects. Has the size of project or size of inquiries really increased multiple for a single molecule? Or are they still trying and testing us at the global level as a manufacturing hub or manufacturing company, for PI in specific?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [155]

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Well, you cannot define that by size, large scale. I think the complexities and the scale is dependent, and some of these molecules are at their early stage. Obviously, for us, we know the potentials and the only advantage PI has in this space compared to any of these companies is its understanding of the agri space, from (inaudible) business of distribution and how it works in the crop system. So we're definitely able to understand how some of these products that we look at in evaluation stage that makes sense going forward.

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Unidentified Analyst, [156]

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Okay, okay. So they are ready to give -- take more risk with us and replace China wherever it is possible, per se, in terms of size, at least? Because every time when we have this question, they say China has the scale and Indian manufacturers don't have the scale. But I just wanted to understand from that perspective.

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [157]

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I don't know about that statement because I don't know about the CSM space where China has a scale. But again, that's more -- I think what that statement will be coming is basically from the raw material space, not from the CSM or technology space, which is what the new generation of products is all about. Not about the raw material structures. If you look at the old generation products, they're dependent on large-scale raw materials and a couple of things. New generation is about 14, 15 processing steps until we get to the products.

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Operator [158]

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The next question is from the line of [Viran Subramaniam] from Samsung Asset Management Company.

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Unidentified Analyst, [159]

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Just one quick thing. There has been some news about some of the innovators like Bayer, et cetera, being in financial stress and they're talking about streamlining R&D budgets, et cetera. So do you think there is a long-term risk for your business? For instance, if innovators cut down on R&D spend meaningfully?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [160]

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Well, the large companies only survive on innovation. So cutting R&D to optimize it doesn't mean they're not going to innovate because their DNA is innovation. And with M&A, obviously the objective is to get more efficient and to come out of the bigger structures, to deliver greater value. So obviously I see there's an opportunity and having spent the money on acquisition of products, they will definitely look for partners who could support them and spend building up assets to deliver products. So I look at it in a different context lately.

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Unidentified Analyst, [161]

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Okay. And sir, you just spoke a while back about some other chemistries and some of their work which you have been doing, which will kind of give you long-term benefit, in 2 to 3 years. So if it's possible, could you provide some more qualitative details on the progress that has been done?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [162]

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No. Frankly, as you will understand, innovation and strategies need to be held close to the chest. But what I can say, [with a little bit of structure if you do], that we are looking at some innovative process technology capabilities we have been known for to support our customers by bringing some innovative solutions.

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Operator [163]

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The next question is from the line of [Varshit Shah] from Emkay Global.

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Unidentified Analyst, [164]

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Congrats to the management team for a great set of numbers and good execution. Sir, I wonder, my question is more of a follow-up with the previous question from other participants. So concerning the China factor, you mentioned that it was more heavy on the raw materials side. And now the new age is more on the -- more of about technology. So is it correct that this is one of the reasons why we see a higher input cost because -- since the raw material supply is more disruptive rather than the technology itself, and hence this is more of a permanent disruption rather than a cyclical or a temporary one. Is it the right way to assess it?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [165]

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Well, I don't know what you meant by disruption in raw materials and nondisruption in technology. But I guess now, if they have to move into the quality of raw material supplies, like anywhere else, including India, sustainability is going to be a key part and now this is going to put the bucket in terms of cost structures for those basic raw materials. And obviously raw materials have a higher cap. You would see as a fixed trend, where you would see a change in the base of the raw material prices.

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Raman Ramachandran, PI Industries Limited - MD, CEO & Director [166]

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Clarify on this point. Yes, the Chinese situation is generating a lot of opportunities in chemical manufacturing, from raw materials to [implementive] to AI. But PI is still continuing with this CSM business of being in high value, low volume contracts businesses and complex chemistry. Given this Chinese situation, we are not changing our business model, just to clarify.

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Unidentified Analyst, [167]

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So I actually understand that strategy of yours. What I'm trying to say is that due to this change at the China level, I think some of these raw materials, which you may not be using it all to the extent but may not be into that particular molecule. But the increase in prices, which has happened, although [they wouldn't have ordered them from peak], but I think those prices might not go back to historical levels.

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [168]

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Yes, that's what I said.

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Raman Ramachandran, PI Industries Limited - MD, CEO & Director [169]

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The overall environment management costs, transportation costs, labor costs have certainly increased, and the currency is also appreciating. So both these factors are getting [factored].

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Operator [170]

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The next question is from the line of Prashant Tiwari from SBI Capital.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [171]

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Congratulations on good numbers. What I wanted to understand is the difference in gross margin. So what I understood was that CSM business carries higher gross margin, considerably higher than the domestic business. And if CSM is expanding its share and growing faster...

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [172]

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Can't hear you well. Sorry.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [173]

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Yes, hello?

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [174]

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Yes.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [175]

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So what I was saying is, I want to understand the difference in the gross margins. The increase in the gross margins, the decline in gross margins, given that we have expanded our share of CSM revenue. Isn't CSM a higher gross margin business? And if that share is increased, the gross margins should have increased that way?

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Subhash Chnad Anand, PI Industries Limited - CFO [176]

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No. In fact, it's not the same way, and that's what we, in fact, communicated earlier also. Gross margin also has a dependence on product mix as well as the business mix, so it's not completely linear. If CSM is doing more, it will certainly give more margin. No, that's not the case. It has product mix as well as business mix as part of this. So both play an equal role and more...

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Raman Ramachandran, PI Industries Limited - MD, CEO & Director [177]

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There is a balance between the margin, capacity, capital efficiency and various factors have come together to create that.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [178]

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Even sequentially, we had an adverse raw material kind of push, but we made up by increasing our efficiencies, right?

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Raman Ramachandran, PI Industries Limited - MD, CEO & Director [179]

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You can say that because we have a difference. (inaudible) different products and for our raw material prices to get pushed up. We continue to maintain our margins of what we have (inaudible) in terms of the structures that we have in certain parts of it so...

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [180]

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Okay. And also on this export incentive, we typically have around INR 50 crores of MEIS incentives that we get in a year. Last year, we got INR 47 crores. So what are your thoughts on discontinuance of it in the coming year? Maybe after March, it will be discontinued also.

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [181]

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We need to understand that so far -- I think no policy on that. Government is still looking to, I'll say, incentivize export, and this is one of the large export incentive.

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Raman Ramachandran, PI Industries Limited - MD, CEO & Director [182]

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Export is product based. But we have, so far, I don't think we have heard of this incentive going away on the chemical industry or category of products. In fact, it's the other way around, that the -- and what we hear, that government is considering for additional incentives to boost the export.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [183]

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And what is the percentage rate for us? It is...

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Raman Ramachandran, PI Industries Limited - MD, CEO & Director [184]

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Pardon?

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [185]

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What is the percentage rate on exports that we get in terms of MEIS incentives?

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Subhash Chnad Anand, PI Industries Limited - CFO [186]

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Percentage is broadly seen...

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Raman Ramachandran, PI Industries Limited - MD, CEO & Director [187]

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2% in certain categories. Yes.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [188]

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2%. Okay.

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Operator [189]

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We'll just take that as the last question. I would now like to hand the conference back to the management team for closing comments.

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Mayank Singhal, PI Industries Limited - Executive Vice-Chairman & MD [190]

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Yes, thank you, everyone, for coming, and thank you all for your support. And once again, from PI side, we wish all of you a very Happy Diwali and a prosperous new year. And all the best to health, to you, yourself and family. Thank you.

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Operator [191]

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Thank you very much. On behalf of PI Industries, that concludes the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.